BPCE_REGISTRATION_DOCUMENT_2017

5 FINANCIAL REPORT

IFRS Consolidated Financial Statements of BPCE SA group as at December 31, 2017

Embeddedderivativeswill no longer be recognizedseparatelyto their host contract when these are financial assets, such that the entire hybrid instrumentmust be recognizedat fair value through profit or loss. For financial liabilities, the classificationand measurementrules set out in IAS 39 are carried forward to IFRS 9 unchanged, with the exception of those applicable to financial liabilities that the entity chooses to record at fair value through profit or loss (fair value option), for which revaluationadjustmentsrelated to changes in own credit risk will be recordedunder gains and losses recognizeddirectly in equity, without being subsequently reclassified through profit or loss. The provisionsof IAS 39 on the derecognitionof financial assets and liabilitiesremain unchanged in IFRS 9. IMPAIRMENT Debt instrumentsclassifiedas financialassets at amortizedcost or at fair value through other comprehensive income, loan commitments and financial guarantee contracts that are not recognized at fair value through profit or loss, as well as lease receivablesand business loans, shall be systematicallyimpaired or covered by a provision for expected credit losses (ECL). For financial instrumentswhich have not been individuallysubject to objective evidence of loss, impairment or a provision for expected credit losses will be recorded based on observed past losses but also on reasonable and justifiable discounted future cash flow forecasts. This more forward-looking credit risk approach is already partially factored in when collective provisions are recognized on similar financial asset portfolios pursuant to IAS 39. These financial assets will be divided into three categories depending on the gradual increase in credit risk observed since their initial recognition. Impairment shall be recognized on outstanding amounts in each category, as follows: Stage 1 there is no significant deterioration in credit risk; ● the impairment or the provision for credit risk will be recorded in ● the amountof 12-month expected credit losses; interest income will be recognizedthrough profit or loss using the ● effectiveinterest rate method applied to the gross carrying amount of the asset before impairment. Stage 2 in the event of a significant increase in credit risk since initial ● recognition, the financial asset will be transferred to this category; impairment or the provision for credit risk will be determined on ● the basisof the instrument’s lifetimeexpected credit losses; interest income will be recognizedthrough profit or loss using the ● effectiveinterest rate method applied to the gross carrying amount of the asset before impairment. Stage 3 there is objective evidence of impairment loss due to an event ● which represents a counterparty risk occurring after the initial recognition of the asset in question. This category corresponds to the individuallyimpaired outstandings scope under IAS 39;

impairment or the provision for credit risk will continue to be ● calculated based on the instrument’s lifetime expected credit losses; interest income will be recognized through profit or loss based on ● the effectiveinterestmethod applied to the net carryingamount of the asset after impairment. Moreover, the standard makes the distinction between purchased or originated credit impaired (POCI) assets, which correspond to financial assets purchased or created and impaired for credit risk at their initial recognition. At initial recognition, an adjusted effective interest rate is calculatedwhich includes estimated recoverablecash flows. Subsequent impairment will be calculated by re-estimating recoverablecash flows, as the restated effectiveinterest rate is fixed. A gain may be recognizedin income if the revised cash flow estimate exceeds recoverable cash flows. HEDGE ACCOUNTING IFRS 9 introduces an amended hedge accountingmodel to be better alignedwith risk managementactivities. Implementation work Since 2015, the steering of the IFRS 9 plan is organized around a Strategic Committee which is cross-divisionalbetween the Risk and Financedepartments.This committeemeets four times a year and the majority of its members also sit on the Executive Management of BPCE. The StrategicCommitteesettles on guidelines,makes decisions, and defines the schedule for implementing and consolidating the plan’s budget. The IFRS 9 plan also includes a meeting, five times a year, of a SteeringCommitteemade up of the companydirectorsof Caisse d’Epargne and Banque Populaire banks as well as their main subsidiaries (Crédit Foncier, Natixis). The Steering Committee settles on guidelines and operational decisions relating to the implementationof the standard.The Steering Committeealso reports on the progress of work monitored to the Finance, Risk, Information Systems and Change Management department committees which meet once every six weeks. At the same time, a complete review of the implementationof the standard (progress, guidelines and options taken) was presented and discussed during BPCE’s Audit Committee meeting. Challenges relating to the standard were also presented to members of the Supervisory Board of BPCE and its main subsidiaries. Work during the second half of 2017 mainly focused on finalizing functional testing on the various projects, general testing, the preparationof the opening balance sheet (first-timeapplication),the final calibrationof models, measuringthe impact of impairment,the completionof documentation,and the adaptationof processesunder a changemanagementprogram. CLASSIFICATION AND MEASUREMENT The “Classification and Measurement” work completed so far has concluded that most financial assets that were measured at amortizedcost under IAS 39 will continue to meet the conditionsfor measurement at amortized cost under IFRS 9. Similarly, most financial assets measured at fair value under IAS 39 (available-for-salefinancial assets and financial assets at fair value through profit or loss) will continue to be measured at fair value under IFRS9.

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Registration document 2017