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Allianz Annual Report 2013

Annual Report 2013    Allianz Group136 Securities borrowing transactions generally require the ­Allianz Grouptodepositcashwiththesecurity’slender.Feespaidarereported as interest expenses. Impairment of available-for-sale and held-to-maturity investments as well as loans and advances to banks and customers A held-to-maturity or available-for-sale debt security, as well as a loan, is impaired if there is objective evidence that a loss event has occurred after initial recognition of the security and up to the rele- vant date of the ­Allianz Group’s consolidated balance sheet, and that loss event has negatively affected the estimated future cash flows, i.e. amounts due according to the contractual terms of the security are not considered collectible. For available-for-sale debt securities, the cumulative loss recognized in the other comprehensive income is reclassified to profit or loss. The cumulative loss corresponds to the difference between amortized cost and the current fair value of the investment. Further declines in fair value are recognized in other comprehensive income unless there is further objective evidence that such declines are due to a credit-related loss event. If in subse- quent periods objective evidence results in a fair value increase after the impairment loss was recognized, the impairment loss is reversed through the income statement. The reversal is measured as the less- er of the full original impairment loss previously recognized in the income statement and the subsequent increase in fair value. For held-to-maturity investments and loans, the impairment loss is mea- sured as the difference between the amortized cost and the expected future cash flows using the original effective interest rate. If the amount of the impairment of a held-to-maturity debt security or a loan subsequently increases or decreases due to an event occurring after the initial measurement of impairment, the change is recorded in the income statement. For banking entities, valuation allowances of their loan book are reported as loan loss allowances. For all non-banking entities, loans to banks and customers have investment character and valuation allowances are reported as ‘impairments of investments’. For the loanlossallowancereportedbybankingentities,pleaserefertonotes 10 and 36. Allowances for loans to banks and customers by non-ban- king entities are reported in note 37. Anavailable-for-saleequitysecurityisconsideredtobeimpaired if there is objective evidence that the cost may not be recovered. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. The ­Allianz Group’s policy consid- ers a decline to be significant if the fair value is below the weighted average cost by more than 20 %. A decline is considered to be pro- longed if the fair value is below the weighted average cost for a period of more than nine months. If an available-for-sale equity security is impaired, any further declines in the fair value at subsequent report- ing dates are recognized as impairments. Therefore, at each reporting period, for an equity security that was determined to be impaired, additional impairments are recognized for the difference between the fair value and the original cost basis, less any previously recog- nized impairment. Reversals of impairments of available-for-sale equity securities are not recorded through the income statement but recycled out of other comprehensive income when sold. Please refer to note 3, where the processes and controls for ensuring an appropriate use of estimates and assumptions are explained. Hedge accounting For derivative financial instruments used in hedge transactions that meet the criteria for hedge accounting, the ­Allianz Group designates thederivativeasahedginginstrumentinafairvaluehedge,cashflow hedge, or hedge of a net investment in a foreign entity. The ­Allianz Group documents the hedge relationship, as well as its risk manage- ment objective and strategy for entering into the hedge transaction. The ­Allianz Group assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative financial instruments that are used for hedging transactions are highly effective in offsetting chang- es in fair values or cash flows of the hedged items. Fair value hedges are hedges of a change in the fair value of a recognized financial asset or liability or a firm commitment due to a specified risk. Changes in the fair value of a derivative financial instrument, together with the change in fair value of the hedged item attributable to the hedged risk, are recognized in income from finan- cial assets and liabilities carried at fair value through income (net). Cash flow hedges offset the exposure to variability in expected future cash flows that is attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction. Changes in the fair value of a derivative financial instrument that represent an effective hedge are recorded in unrealized gains and losses (net) in other comprehensive income, and are transferred to the consolidated income statement when the offsetting gain or loss associated with the hedged item is recognized. Any ineffectiveness of the cash flow hedge is recognized directly in income from financial assets and liabilities carried at fair value through income (net). Furthermore, hedge accounting may be applied to derivative financial instruments used to hedge the foreign currency risk associ- ated with a net investment in a foreign entity. The effective propor- tion of gains or losses arising from the valuation of the derivative financial instrument is recognized in foreign currency translation adjustments in other comprehensive income, while any ineffective- ness is recognized directly in income from financial assets and liabil- ities carried at fair value through income (net). Derivative financial instruments that meet the criteria for hedge accounting are included in other assets or other liabilities. The ­Allianz Group discontinues hedge accounting prospectively when the hedge is no longer highly effective, when the derivative financialinstrumentorthehedgeditemexpires,orissold,terminated

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