Deferred Tax Assets and Liabilities related to the fair value reserves connected to gains or losses on cash flow hedges

Article 33(1)(a) of Regulation (EU) No 575/2013 (CRR) requires that institutions shall not include in own funds the fair value reserves related to gains and losses on cash flow hedges of financial instruments that are not valued at fair value, including projected cash flows. The purpose of this requirement is to neutralise the impact of the cash flow hedges on the own funds of institutions. The value of the cash flow hedging instrument could increase or decrease, (for example, depending on the evolution of the reference interest rate in the case of interest rate hedges). This will have an impact on the cash flow hedge reserve. This will also have a fiscal effect; either a deferred tax liability or a deferred tax asset will be created. In order to properly neutralise the impact of the cash flow hedge on own funds, the fiscal effect has to be neutralised as well. Therefore, any gains or losses arising from the changes in value of the cash flow hedges, and their associated deferred tax assets (DTAs) or deferred tax liabilities (DTLs) should be filtered from the own funds calculation under Article 33(1)(a).  See also Q&A 720 which states that prudential filters should be applied net of tax. The DTAs and DTLs neutralised in that way should be excluded for the purposes of Articles 36(1)(c), 38(3) and 40 of the CRR. The DTAs that are filtered out in accordance with Article 33(1)(a) do not need to be considered among the deductions of Article 36 of the CRR and, consequently, also in the calculation provided for by Article 48 of the CRR. Conversely, the DTLs that are filtered out in accordance with Article 33(1)(a) should not be used to reduce amounts of DTAs to be deducted under Article 38(3).