Notes to the Consolidated Financial Statements
21
Dar Al-Maal Al-Islami Trust
Annual Report 2013
in the consolidated statement
of income, except where hedge
accounting is applied.
Translation differences on non-
monetary items, such as equities
held at fair value through profit or
loss, are reported as part of their
fair value gain or loss. Translation
differences on non-monetary items,
such as equities classified as
available-for-sale financial assets,
are included in the consolidated
statement of comprehensive
income.
(c) Group companies
The results and financial position
of all group entities (none of
which has the currency of a hyper
inflationary economy) that have a
functional currency different from the
presentation currency are translated
into the presentation currency as
follows:
(i) assets and liabilities for each
statement of financial position
presented are translated at the
closing rate at the date of that
statement of financial position;
(ii) income and expenses for
each statement of income are
translated at average exchange
rates (unless this average is not
a reasonable approximation of
the cumulative effect of the rates
prevailing on the transaction
dates, in which case income
and expenses are translated at
the dates of the transactions);
and
(iii) all resulting exchange
differences are recognised as
a separate component in the
statement of comprehensive
income.
Exchange differences arising
from the translation of the net
investment in foreign entities, and
of borrowings and other currency
instruments designated as hedges
of such investments, are taken to the
statement of comprehensive income
on consolidation. When a foreign
operation is sold, such exchange
differences are recognised in the
consolidated statement of income
as part of the gain or loss on sale.
Goodwill and fair value adjustments
arising on the acquisition of a
foreign entity are treated as assets
and liabilities of the foreign entity
and translated at the closing rate.
Derivative financial
instruments and hedging
Derivative financial instruments
including foreign exchange
contracts, equity options and equity
futures are initially recognised
in the consolidated statement of
financial position at fair value and
subsequently remeasured at their
fair value. Fair values are obtained
from quoted market prices in active
markets, discounted cash flow
models, and options pricing models
as appropriate. All derivatives are
carried as assets when fair value is
positive and as liabilities when fair
value is negative.
Changes in the fair value of
derivatives held for trading are
included in trading income.
On the date a derivative contract is
entered into, the Group designates
derivatives as either (a) a hedge
of fair value of a recognised asset
or liability (fair value hedge); or
(b) a hedge of highly probable
future cash flows attributable to
a recognised asset or liability,
a forecast transaction or a firm
commitment (cash flow hedge). At
present the Group does not hedge
future cash flows. Hedge accounting
is used for derivatives provided
certain criteria are met.
The Group’s criteria for a derivative
instrument to be accounted for as a
hedge include:
(a) Formal documentation of the
hedging instrument, hedged item,
hedging objective, strategy and
relationship is prepared before
hedge accounting is applied; (b) the
hedge is documented showing that
it is expected to be highly effective in
offsetting the risk in the hedged item
throughout the reporting period; and
(c) the hedge is highly effective on
an ongoing basis.
Changes in the fair value of the
effective portions of derivatives that
are designated and qualify as fair
value hedges and that prove to be
highly effective in relation to hedged
risk, are recorded in the consolidated
statement of income, along with the
corresponding change in fair value
of the hedged asset or liability that is
attributable to that specific hedged
risk.
If the fair value hedge no longer meets
the criteria for hedge accounting, an
adjustment to the carrying amount
of a hedged financial instrument
is amortised in the consolidated
statement of income over the period
to maturity. The adjustment to
the carrying amount of a hedged
equity security remains in retained
earnings until the disposal of the
equity security.
Certain derivative transactions, while
providing effective economic hedges
under the Group’s risk management
policies, do not qualify for hedge
accounting under the specific rules
in IAS 39 and are therefore treated
as derivatives held for trading with
fair value gains and losses reported
in the consolidated statement of
income.
Income from investments
with Islamic institutions and
investments in financings
Income from investments with
Islamic institutions and investments
in financings, which are included
in the IAS 39 category “Loans and
Receivables”, are both contractually
determined and quantifiable at the
commencement of the transaction,
are accrued on the effective return
method basis over the period of
the transaction. Where income is
not contractually determined or
quantifiable, it is recognised when
reasonably certain of realisation
or when realised. Once a financial
asset or a group of similar financial
assets has been written down as a
result of an impairment loss, income
is thereafter recognised using the
rate of return used to discount the
future cash flows for the purpose of
measuring the impairment loss.
Fee and commission income
Fees and commissions are generally
recognised as income when earned.
Origination fees for financings which
are probable of being drawn down,
are deferred and recognised over
the term of the financing as an
adjustment to the effective yield.
