ALLIANZ GROUP 120 Hedges of a net investment in a foreign entity Hedge accounting may be applied to a hedge of a net investment in a foreign entity. Fi- nancial instruments are used to hedge currency risk. The proportion of gains or losses arising from the valuation of the hedging instru- ment that qualifies as an effective hedge is recognized in sharehold- ers’ equity, while the ineffective part is recognized in the income statement.  Pursuant to IAS 39, the Allianz Group documents the hedge re- lationship, as well as its risk management objective and strategy for entering into various hedge transactions. The Allianz Group also as- sesses, both at the hedge’s inception and on an on-going basis, whether the derivatives that are used for hedging transactions are, as required by IAS 39, highly effective in offsetting changes in fair val- ues or cash flows of the hedged items.  sued and for hedges of a net investment in a foreign entity, the hedge instrument is included in other assets or other liabilities. Loans and advances to banks and customers originated by the Group are generally carried at their outstanding unpaid principal balance net of the allowance for loan losses, deferred fees and costs on orig- ination, and unamortized premiums or discounts. Interest revenues are accrued on the unpaid principal balance. Net deferred fees and premiums or discounts computed by using the effective interest method are recognized as interest income/interest expense over the lives of the related loans. Included in loans and advances to banks and customers are out- standing reverse repurchase (“repo”) transactions. A reverse repo transaction involves the purchase of securities with the simultaneous obligation to sell these securities at a future date at an agreed-upon price. If control of the securities remains with the Allianz Group over the entire lifetime of the transaction, the securities concerned are in- cluded in the Allianz Group’s consolidated balance sheet and are val- ued in accordance with the accounting principles for trading assets or investments. Interest income on reverse repo agreements is, as a rule, reported as trading income in the Allianz Group’s consolidated in- come statement. The Allianz Group discontinues hedge accounting when it is de- termined that the derivative is no longer highly effective, the deriva- tive or the hedged item expires, or is sold, terminated or exercised, or when management determines that the designation of the deriv- ative as a hedging instrument is no longer appropriate. When a fair value hedge is discontinued, the Allianz Group continues to carry the derivative on the balance sheet at its fair value, and no longer adjusts the hedged item for changes in fair value. The adjustment of the car- rying amount of the hedged item is accounted for in the same man- ner as other components of the carrying amount of that item. When hedge accounting for a cash flow hedge is discontinued, the Allianz Group continues to carry the derivative on the balance sheet at its fair value and any net unrealized gains and losses accumulated in share- holders’ equity are recognized immediately in net income. When a hedge of a net investment in a foreign entity is discontinued, the Al- lianz Group continues to carry the derivative on the balance sheet at its fair value and any net unrealized gains or losses accumulated in shareholders’ equity remain in shareholders’ until the disposal of the foreign entity. Pursuant to IAS 39, derivative financial instruments that do not meet the criteria for hedge accounting are reported at fair value as financial assets or liabilities held for trading. Gains or losses on these instruments arising from valuation at fair value are, on principle, in- cluded in the Allianz Group’s consolidated income statement under trading income. This treatment is applicable to derivatives used in- dependently, not in connection with hedge transactions, and for sep- arated embedded derivatives of a hybrid financial instrument. In con- trast, derivatives used in hedge transactions are recognized and clas- sified as follows: For fair value and cash flow hedges of investment securities or loans, the hedge instrument is classified in the same balance sheet category as the hedged item when the hedge instrument has a pos- itive fair value, and in other liabilities when the hedge instrument has a negative fair value. For fair value and cash flow hedges of debt is- Allowance for loan losses, loan impairments and provisions Impaired loans are loans for which, based upon current information and events, it is probable that the Allianz Group will not be able to collect all interest and principal amounts due in accordance with the contractual terms of the loan agreements. Non-accrual loans consist of loans on which interest income is no longer recognized on an accrued basis, and loans for which a spe- cific provision is recorded for the entire amount of accrued interest re- ceivable. Loans are placed on non-accrual status when management determines that the payment of principal or interest is doubtful. Man- agement’s judgement is applied based on its credit assessment of the borrower. When a loan is placed on non-accrual status, any accrued but unpaid interest previously recorded is reversed against current period interest revenues. Loans can only be restored to accrual sta- tus when interest and principal payments are made current (in ac- cordance with the contractual terms), and in management’s judge- ment, future payments in accordance with those terms are rea- sonably assured. When there is a doubt regarding the ultimate col- lectibility of the principal of a loan placed in non-accrual status, all cash receipts are applied as reductions of principal amount of the loan is reduced to zero, future cash receipts are recognized as inter- est income. Loans and advances to banks and customers