Macquarie Group Limited and its subsidiaries  2014 Annual Financial Report  macquarie.com.au  Notes to the financial statements  for the financial year ended 31 March 2014  continued  Trading portfolio assets (long positions) comprise debt  and equity securities, bank bills, treasury notes, bullion  and commodities purchased with the intent of being actively  traded. Trading portfolio liabilities (short positions) comprise  obligations to deliver assets across the same trading  categories, which the Consolidated Entity has short-sold and  are actively traded.  Assets and liabilities included in the trading portfolio are  carried at fair value (see note 39). Realised gains and losses,  and unrealised gains and losses arising from changes in the  fair value of the trading portfolio are recognised as net trading  income in the income statement in the period in which they  arise. Dividend income or expense on the trading portfolio is  recognised in the income statement as net trading income.  The Consolidated Entity uses trade date accounting when  recording regular way purchases and sales of financial assets.  At the date the transaction is entered into (trade date), the  Consolidated Entity recognises the resulting financial asset or  liability and any subsequent unrealised profits or losses arising from  revaluing that contract to fair value in the income statement. When  the Consolidated Entity becomes party to a sale contract of a  financial asset, it derecognises the asset and recognises a trade  receivable from trade date until settlement date.  Derivative instruments entered into by the Consolidated Entity  include futures, forwards and forward rate agreements, swaps  and options in the interest rate, foreign exchange, commodity  and equity markets. These derivative instruments are principally  used for the risk management of existing financial assets and  financial liabilities.  All derivatives, including those used for statement of financial  position hedging purposes, are recognised on the statement  of financial position and are disclosed as an asset where they  have a positive fair value at balance date or as a liability where  the fair value at balance date is negative.  Derivatives are initially recognised at fair value on the date  a derivative contract is entered into and subsequently re-measured to their fair value. Fair values are obtained  from quoted market prices in active markets including  recent market transactions, and valuation techniques  including discounted cash flow models and option pricing  models, as appropriate. Movements in the fair values  of derivatives are recognised in the income statement in net  trading income, unless the derivative meets the requirements  for hedge accounting.  The best evidence of a derivative’s fair value at initial recognition  is its transaction price, unless its fair value is evidenced by  comparison with other observable current market transactions  in the same instrument, or based on a valuation technique for  which variables include only data from observable markets.  Where such alternative evidence exists, the Consolidated Entity  recognises profits or losses immediately when the derivative is  recognised.  The Consolidated Entity designates certain derivatives or  financial instruments as hedging instruments in qualifying  hedge relationships. On initial designation of the hedge,  the Consolidated Entity documents the hedge relationship  between hedging instruments and hedged items, as well as  its risk management objectives and strategies. The  Consolidated Entity also documents its assessment, both at  hedge inception and on an ongoing basis, of whether hedging  relationships have been and will continue to be highly effective.  Derivatives or financial instruments can be designated in one of  three types of hedge relationships.  For a derivative or financial instrument designated as hedging  the variability in cash flows attributable to a particular risk  associated with a recognised asset or liability (or a highly  probable forecast transaction), the gain or loss on the derivative  or financial instrument associated with the effective portion of  the hedge is initially recognised in OCI in the cash flow hedging  reserve and subsequently released to the income statement  when the hedged item affects the income statement. The  gain or loss relating to the ineffective portion of the hedge  is recognised immediately in the income statement. For a derivative or financial instrument designated as hedging  the change in fair value of a recognised asset or liability (or an  unrecognised firm commitment), the gain or loss on the  derivative or financial instrument is recognised in the income  statement immediately, together with the loss or gain on the  hedged asset or liability that is attributable to the hedged risk. For a derivative or borrowing designated as hedging a net  investment in a foreign operation, the gain or loss on revaluing  the derivative or borrowing associated with the effective portion  of the hedge is recognised in the foreign currency translation  reserve and subsequently released to the income statement  when the foreign operation is disposed of. The ineffective  portion is recognised in the income statement immediately.  The fair values of various financial instruments used for hedging  purposes are disclosed in note 39. Movements in the cash flow  hedging reserve in equity are shown in note 29.  With the exception of trading portfolio assets and derivatives,  which are classified separately in the statement of financial  position, the remaining investments in financial assets are  classified into the following categories: loans and receivables,  other financial assets at fair value through profit or loss and  investment securities available for sale. The classification  depends on the purpose for which the financial asset was  acquired, which is determined at initial recognition and, except  for other financial assets at fair value through profit or loss, is re- evaluated at each balance date.  108  (xii) Investments and other financial assets  Fair value hedges Net investment hedges  (x) Derivative instruments Note 1  Summary of significant accounting policies  continued (ix) Trading portfolio assets and liabilities  (xi) Hedge accounting  Cash flow hedges 