23 / 87
Notes to the Consolidated Financial Statements
21
Dar Al-Maal Al-Islami Trust
Annual Report 2014
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 on-going 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.
Structuring fees, commission and
fees arising from negotiating or
participating in the negotiation of an
Islamic transaction for a third party,
are recognised on completion of the
underlying transaction.
Asset management fees related to
investment funds are recognised over
the period the service is provided and
are recorded in fund management
and services income when capable
of being reliably measured.
Management advisory and technical
service fees are recognised based on
applicable service contracts usually
on a time-apportioned basis and are
recorded in other income.
Distribution to Massaref
account holders
Massaref accounts are included
in the IAS 39 category of “Other
Financial Liabilities” which are
measured at amortised cost and
the resulting expense charged
to the consolidated statement of
income as a distribution to Massaref
account holders represents the
share of the Group’s income from all
sources which is due to customers
of the Group under contractual
arrangements in force.
Sale and repurchase
agreements
Securities sold subject to a linked
repurchase agreement (repos) are
recognised in the consolidated
statement of financial position
and are measured in accordance
with related accounting policies for
trading or investment securities. The
counterparty liability for amounts
received under these agreements
is included in customer investment
accounts. The difference between
the sale and repurchase value
is accrued over the period of the
contract and recorded as expense
in the consolidated statement of
income.
Securities purchased under
agreement to resell (reverse
repos) are not recognised in the
consolidated statement of financial
position, as theGroupdoes not obtain
control over the assets. Amounts