21. Hedge accounting

Fair value hedge accounting

The Group applies fair value hedge accounting. The interest rate risk is the only type of risk hedged for which hedge accounting is applied.

At the end of each month, the Group evaluates effectiveness of the applied hedging by carrying out analysis of changes in fair value of the hedged and hedging instruments in respect of the hedged risk.

Description of the hedging relation

The Group hedges against the risk of change in fair value:

  • a part of the portfolio of mortgage loans for a fixed interest rate granted by foreign branch of mBank in Czech Republic. The hedged risk results from changes in interest rates,
  • fixed interest rate Eurobonds issued by mFinance France S.A. (mFF), subsidiary of mBank. The hedged risk results from changes in interest rates.

Hedged items

The hedged items are:

  • a part of the portfolio of mortgage loans for a fixed interest rate denominated in CZK and granted by foreign branch of mBank in Czech Republic,
  • two tranches of fixed interest rate Eurobonds issued by mFF with a total nominal value of EUR 1 000 000 thousand,
  • fixed interest rate Eurobonds issued by mFF with a nominal value of CHF 200 000 thousand,
  • fixed interest rate Eurobonds issued by mFF with a nominal value of CZK 500 000 thousand,

Hedging instruments

IRS is the hedging instrument swapping the fixed interest rate for a variable interest rate.

Presentation of the result from hedged and hedging transactions

Fair value adjustment of the hedged assets and liabilities as well as valuation of the hedging instruments are recognised in the income statement as the income from trading operation.

The total results of fair value hedge accounting in 2014 and 2013

 

 
  31.12.2014 31.12.2013
Interest income on derivatives concluded under the fair value hedge (Note 6) 18 429 181
Net profit on hedged items (Note 9) (108 241) 7 101
Net profit on fair value hedging instruments (Note 9) 137 300 899
The total results of fair value hedge accounting 47 488 8 181
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Cash flow hedge accounting

Starting from the third quarter of 2014, the Group applies cash flow hedge accounting of the part of loans at a variable interest rate indexed to the market rate, granted by the Bank. An Interest Rate Swap is the hedging instrument changing the variable interest rate to a fixed interest rate. The interest rate risk is the hedged risk within applied by the Group cash flow hedge accounting. The ineffective portion of the gains or losses on the hedging instrument is presented in Note 9 " Other net trading income and result on hedge accounting". Portion of the gains or losses on the hedging instrument that is an effective hedge, is presented in the statement of comprehensive income as “Cash flow hedges (net)”.

The following note presents other comprehensive income due to cash flow hedges as at 31 December 2014.

 

 
  31.12.2014
Other comprehensive income from cash flow hedge at the beginning of the period -
Gains/losses rocognised in comprehensive income during the reporting period (gross) 6 746
Amount included as interest income in income statement during the reporting period 1 400
Ineffective portion of cash flow hedge recognized in the income statement 5 346
Accumulated other comprehensive income at the end of the reporting period (gross) 5 008
Deferred tax (952)
Accumulated net other comprehensive income at the end of the reporting period 4 056
Impact on other comprehensive income in the reporting period (gross) 5 008
Deferred tax on cash flow hedges (952)
Impact on other comprehensive income in the reporting period (net) 4 056
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Below is presented impact of cash flow hedge accounting recognised in the income statement in 2014 and 2013

 

 
  31.12.2014 31.12.2013
Interest income on derivatives concluded under the cash flow hedge (Note 6) 1 400 -
Ineffective portion of cash flow hedge (Note 9) 338 -
The total results of cash flow hedge accounting 1 738 -
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The period from January 2015 to September 2017 is the period in which the cash flows are expected, and when they are expected to have an impact on the result.

Below is given the timetable prepared as at 31 December 2014, presenting the periods in which the cash flows from loans secured under the cash flow hedge accounting are expected and their impact on the profit and loss account.

 

 
Cash flows from loans secured under the cash flow hedge accounting (PLN 000's)
up to 3 months period from 3 months to 1 year period from 1 year to 5 years
10,303 24,038 35,501
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The fair value equal to book value of derivatives hedging was presented in Note 20 "Derivative Financial Instruments".