Consolidated Financial Statements 2022 · Page 115

Public Investment Fund and its subsidiaries 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
(All amounts in million SAR unless otherwise stated) 
Classification: External Confidential 
112 
 
14. DERIVATIVES 
 
 
 
 
Significant accounting policies that apply to derivative financial instruments and hedge accounting 
Derivative financial instruments including foreign exchange contracts, interest rate futures, forward rate agreements, currency and 
effective interest rate swaps, swaptions, currency and interest rate options (both written and purchased) are measured at fair value. Fair 
values are obtained by reference to quoted market prices and/or valuation models as appropriate. 
 
(a) 
Derivatives held for trading 
Any changes in the fair value of derivatives that are held for trading purposes are taken directly to the consolidated statement of profit 
or loss for the year and are included in Revenue from banking and financing operations. Derivatives held for trading also include those 
derivatives, which do not qualify for hedge accounting as described below. 
 
(b) 
Hedge accounting  
The Group designates certain derivatives as hedging instruments in qualifying hedging relationships to manage exposures to interest 
rate, foreign currency and credit risks, including exposures arising from highly probable forecast transactions and firm commitments. In 
order to manage particular risk, the Group applies hedge accounting for transactions that meet specific criteria. As permitted by IFRS 9, 
the Group has elected to continue to apply the hedge accounting requirements of IAS 39. 
 
For the purpose of hedge accounting, hedges are classified into two categories: 
• 
Fair value hedges which hedge the exposure to changes in the fair value of a recognized asset or liability, or an unrecognized 
firm commitment or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk 
and could affect the reported net gain or loss; and 
• 
Cash flow hedges which hedge exposure to variability in cash flows that is either attributable to a particular risk associated with 
a recognized asset or liability or to a highly probable forecasted transaction that will affect the reported net gain or loss. 
 
In order to qualify for hedge accounting, the hedge should be expected to be "highly effective", i.e. the changes in fair value or cash flows 
of the hedging instrument should effectively offset corresponding changes in the hedged item and should be reliably measurable. At 
inception of the hedge, the risk management objective and strategy are documented including the identification of the hedging 
instrument, the related hedged item, the nature of risk being hedged, and how the Group will assess the effectiveness of the hedging 
relationship. Subsequently, the hedge is required to be assessed and determined to be an effective hedge on an ongoing basis. 
 
At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a prospective basis and 
demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. A 
formal assessment is undertaken by comparing the hedging instrument’s effectiveness in offsetting the changes in fair value or cash 
flows attributable to the hedged risk in the hedged item, both at inception and at each quarter end on an ongoing basis. 
 
A hedge is expected to be highl