WM CGU The recoverable amount of the WM CGU was based on fair value less cost to sell using a discounted cash flow method. Cash flows are projected based on forecast results of the business for a five-year period, adjusted to approximate the market considerations of a prospective buyer. Beyond five years, cash flows are assumed to increase at a terminal growth rate of 3.7% (3.8% in 2022 ) based on management’s expectations of real GDP growth and inflation rates. Forecast cash flows are disc ounted at a rate of 12.0% (12.5% in 2022). MX and NL CGUs The recoverable amount of these CGUs was based on their value in use in the current and comparative period. We calculate value in use using a discounted cash flow method. Cash flows are projected based on forecast results of the business for a five-year period including the regulatory capital required to support future cash flows. Key drivers of cash flows include net interest margins and average interest-earning assets. Beyond five years, cash flows are assumed to increase at a terminal growth rate of 3.7% (3.8% in 2022 ) based on management’s expectations of real GDP growth and inflation rates. Forecast cash flows are discounted at pre-tax rates ranging from 17.8% to 18.0% (19.3% to 19.6% in 2022).
The key assumptions described above may change as economic and market conditions change. We estimate that reasonable possible changes in these assumptions are not expected to cause the recoverable amounts of the cash-generating units to decline below the carrying amounts.
No impairment losses on goodwill or intangible assets were identified during 2023 or 2022.
10. DERIVATIVE FINANCIAL INSTRUMENTS Derivative instruments are entered into for risk management purposes in accordance with our asset liability management policies. It is our policy not to utilize derivative financial instruments for trading or speculative purposes. Interest rate swaps and floors are primarily used to reduce the impact of fluctuating interest rates. Equity swaps are used to reduce earnings volatility related to restricted share units and deferred share units linked to our common share price. Bond forward contracts are used to manage interest rate risk related to our participation in the NHA MBS program. Foreign exchange contracts are used for the purposes of meeting the needs of clients, day- to-day business and liquidity management.
USE OF DERIVATIVES
We enter into derivative financial instruments for risk management purposes. Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity or commodity instrument or index.
Derivative financial instruments primarily used by us include:
• Interest rate swaps, which are agreements where two counterparties exchange a series of payments based on different interest rates applied to a notional amount; • Bond forward contracts, which are a contractual obligation to purchase or sell a bond at a predetermined future date; • Foreign exchange forwards and futures, which are contractual obligations to exchange one currency for another at a specified price for settlement at a predetermined future date; and, • Equity swaps, which are agreements where CWB makes periodic interest payments to a counterparty and receives the capital gain or loss plus dividends of a notional CWB common share. EMBEDDED DERIVATIVES When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments. If the host contract is a financial asset within the scope of IFRS 9, the classification and measurement criteria are applied to the entire hybrid instrument and there is no separation of the embedded derivative. If the host contract is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are treated as separate derivatives when their economic characteristics and risk are not closely related to those of the host contract, unless an election is made to measure the contract at fair value. Identified embedded derivatives that are separated from the host contract are recorded at fair value. FAIR VALUE Derivative financial instruments are recorded on the balance sheet at fair value. Changes in fair value related to the effective portion of cash flow interest rate hedges are recorded in other comprehensive income, net of tax, and changes in fair value interest rate hedges are recorded in net interest income. Changes in fair value related to the ineffective portion of a designated accounting hedge, a derivative not designated as an accounting hedge, and all other derivative financial instruments are reported in non- interest income on the consolidated statements of income. DESIGNATED ACCOUNTING HEDGES Under IAS 39, when designated as accounting hedges by us, certain derivative financial instruments are designated as either a hedge of the fair value of recognized assets, liabilities or firm commitments (fair value hedges), or a hedge of highly probable future cash flows attributable to a recognized asset or liability or a forecast transaction (cash flow hedges). On an ongoing basis, the derivatives used in hedging transactions are assessed to determine whether they are effective in offsetting changes in fair values or cash flows of the hedged items. If a hedging transaction becomes ineffective or if the derivative is not designated as a cash flow hedge, any subsequent change in the fair value of the hedging instrument is recognized in net income.
86 | CWB Financial Group 2023 Annual Report
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