Page 131 - Suncorp_Review

Suncorp Group Limited Annual Report 2010/11 129

(c) Available-for-sale fnancial assets

Available-for-sale fnancial assets consist of debt and equity securities which are intended to be held for an indefnite period of time, but which may be sold in response to a need for liquidity or changes in interest rates or exchange rates. They are initially recognised on trade date at fair value plus any directly attributable transaction costs and are measured at fair value at each reporting date. Fair value gains and losses, other than foreign exchange gains and losses on debt securities, are recognised directly in other comprehensive income until impaired or derecognised, whereupon the cumulative gains and losses previously recognised in other comprehensive income are transferred to proft or loss. Foreign exchange gains and losses on debt securities are recognised in proft or loss. The Suncorp Group’s available-for-sale fnancial assets include investment securities. (d) Derecognition of fnancial assets

Financial assets are derecognised when the rights to receive future cash fows from the assets have expired, or have been transferred, and the Suncorp Group has transferred substantially all risk and rewards of ownership. (e) Repurchase agreements

When the Suncorp Group sells a fnancial asset and simultaneously enters into an agreement to repurchase the asset at a fxed price on a future date (repurchase agreement), the fnancial assets sold under such agreement continue to be recognised as a fnancial asset and the obligation to repurchase recognised as a liability.

33.1.11 Derivative fnancial instruments

The Suncorp Group holds derivative fnancial instruments to hedge the Suncorp Group’s assets and liabilities or as part of the Suncorp Group’s trading and investment activities. Derivatives include foreign exchange contracts, forward rate agreements and interest rate, currency and equity futures. All derivatives are initially recognised at fair value on trade date and transaction costs are recognised in proft or loss as incurred. Fair values are determined from quoted market prices where available; where quoted market prices are not available, discounted cash fow models, broker and dealer price quotations or option pricing models are used as appropriate. Derivatives are classifed and accounted for as held for trading fnancial assets at fair value through proft or loss (note 33.1.10 (a)) unless they qualify as a hedging instrument in an effective hedge relationship under hedge accounting (note 33.1.12).

Embedded derivatives

Where a derivative is embedded in another fnancial instrument, the economic characteristics and risks of the derivative are not closely related to those of the host contract and the host contract is not carried at fair value, the embedded derivative is separated from the host contract and carried at fair value through proft or loss. Otherwise, the embedded derivative is accounted for on the same basis as the host contract.

33.1.12 Hedge accounting

The Suncorp Group applies hedge accounting to offset the effects on proft or loss of changes in the fair values of the hedging instrument and the hedged item. On entering into a hedging relationship, the Suncorp Group formally designates and documents the hedge relationship and the risk management objective and strategy for undertaking the hedge. The documentation includes identifcation of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Suncorp Group will assess the hedging instrument’s effectiveness. On an ongoing basis, hedges are assessed for whether they are highly effective in achieving offsetting changes in fair values or cash fows of hedged items. A hedge is considered highly effective when the actual results of the hedge are within a range of 80–125 percent. (a) Cash fow hedges

A cash fow hedge is a hedge of the exposure to variability of cash fows that:

–– is attributable to a particular risk associated with a recognised asset or liability (such as future interest payments on variable rate debt) or a highly probable forecast transaction; and –– could affect proft or loss.

Changes in the fair value associated with the effective portion of a hedging instrument designated as a cash fow hedge are recognised in the hedging reserve within equity as the lesser of the cumulative fair value gain or loss on the hedging instrument and the cumulative change in fair value on the hedged item from the inception of the hedge. Ineffective portions are immediately recognised in the proft or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the hedge relationship is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction affects proft or loss. When a forecast transaction is no longer expected to occur, the amounts accumulated in equity are released to proft or loss immediately. In other cases the cumulative gain or loss previously recognised in equity is transferred to proft or loss in the same period that the hedged item affects proft or loss.