How should interest income & interest expense on derivatives (hedge accounting) be presented in Table 2 ? (i) Linked basis: Reported in Interest Income (row 070) if the derivative is hedging an asset item and Reported in Interest Expense (row 130) if the derivative is hedging a liablity item OR (ii) Gross basis: Hedge accounting derivatives resulting in Interest Income should be reported in row 070 and hedge accounting derivatives resulting in Interest Expense should be reported in row 130.
The guidance notes state :” They shall be reported as interest income and expenses on a gross basis, to present correct interest income and expenses from the hedged items to which they are linked” The meaning of this sentence is not clear to us in particular the phrasing of “gross basis”. It would appear that the guidance requires that derivative interest should be presented in the interest or expense items according to the hedged item to which they relate(“are linked”), which would also be consistent with our statutory reporting treatment under IFRS, but the narrative also suggests gross and we note there is a “non-blocking” validation which also appears to discourage or prevent reporting on a linked basis.
According to part 2 paragraphs 31 and 35 of Annex V of the Regulation (EU)n°680/2014 (ITS on Supervisory Reporting), interest income or expense of hedging derivatives classified as hedge accounting may be reported following two options under FINREP template F02.00 (Statement of profit and loss). Those two options should be applied consistently by institutions :
Where the clean price is used
The related interest income/expense of the derivatives shall be reported separately from other gains or losses and provided on a gross basis (ie not netted out with those interest income/expense of the hedged instrument) and reported on the same side of profit or expense as the hedged item even in case of opposite value. In other words, if a hedged instrument generates interest income, and the related hedging derivative interest expenses, the interest expense of the derivative instrument shall be reported as a negative amount under row 070 Interest income – derivatives – hedge accounting, interest rate risk.
Where the dirty price is used
Interest income/expense of the hedging derivative shall be recognized as part of the gains and losses of the hedged instruments.
See also Q&A 2014_1203.