BPCE - 2018 Registration document

FINANCIAL REPORT IFRS Consolidated Financial Statements of Groupe BPCE as at December 31, 2018

As defined under IFRS 16, leases shall identify an asset and convey the right to use this asset for a period of time. Control is established if the lessee holds the following two rights throughout the period of use: the right to obtain almost all of the economic benefits arising from ● use of the asset; the right to decide how the asset is used. ● From the lessor’s perspective, the impact is expected to be limited, as the provisions will not change substantially in relation to the current IAS 17. Under the current IAS 17, operating leases are not recognized on the balance sheet, only the corresponding rental income is recorded in income. In contrast, for lessees, IFRS 16 requires that leases be recorded in the balance sheet such that they convey the right to use the leased asset presented, as the case may be, among property, plant and equipment or investment property, and a lease liability. The lease liability corresponds to the discounted value of lease payments that have not yet been paid. The Group has decided to opt for the exception included in the standard of not modifying the accounting method for short-term leases (less than 12 months) or leases related to low value underlying assets. The right to use the asset will be amortized on a straight-line basis and the lease liability will be calculated on an actuarial basis over the term of the lease. The expense on the lease debt will thus be included in interest income under net banking income and the amortization expense on the right to use the asset will be recognized in operating expenses. The Group began to analyze the impact of the application of this new standard following its publication by the IASB at the start of 2016. This work continued in 2018. Structural choices were made in terms of organization and information systems during the first half of the year. In the second half, work focused on the operational implementation, which is currently being finalized ahead of the rollout planned in early 2019. Regarding Groupe BPCE’s activities, the implementation of IFRS 16 will mainly affect real estate assets leased for operational purposes as offices and sales branches. A material impact is therefore expected on “Property, plant & equipment” without modifying in itself the relatively limited contribution of this item to total assets. For the first-time application of this standard, the Group has chosen the modified retrospective approach. This method involves assessing the amount of lease liabilities based on remaining lease payments using the present value applicable to the remaining term of the contracts. The Group has elected not to recognize leases with a remaining term of less than 12 months on the balance sheet as of January 1, 2019. Right of use will be measured using the amount of lease liabilities determined at that date. At the date of initial recognition of the right of use and the lease liability, no deferred tax will be recognized if the value of the asset equals the value of the liability. Any net temporary differences arising from subsequent changes in the right of use and lease liability will result in recognition of deferred tax. IFRS 17 IFRS 17 “Insurance Contracts” was published by the IASB on May 18, 2017 and will replace IFRS 4 “Insurance Contracts”. Initially applicable on January 1, 2021, with a comparison at January 1, 2020, this standard is only expected to come into force from January 1, 2022. At its meeting on November 14, 2018, the IASB decided to

defer its application by a year, as clarifications still need to be given regarding key aspects of the standard. It also decided to defer the expiry of insurance companies’ temporary exemption from IFRS 9 to January 1, 2022, to align it with the application of IFRS 17. IFRS 17 establishes the principles of recognition, measurement, presentation and disclosure for the insurance contracts and investment contracts with discretionary profit sharing provisions that fall within its scope. Liabilities under these contracts, which are currently valued at historical cost, will have to be recognized at present value under IFRS 17. As such, insurance contracts will be valued based on their future cash flows, including a risk margin in order to factor in the uncertainty relating to these cash flows. IFRS 17 also introduces the concept of contractual service margin. This represents the insurer’s unearned profit and will be released over time as the services are rendered to the insured. The standard demands a more detailed level of granularity in calculations as it requires estimates by group of contracts. These accounting changes could modify the profile of insurance income (in particular for life insurance) and also introduce greater volatility in income. Given the scale of the changes made by IFRS 17, and despite the uncertainties still surrounding the standard, Groupe BPCE’s insurance entities have, or will soon have, completed the scoping phase aimed at defining their road maps and the cost of implementation. They set up project structures in 2018 that will allow them, within the various working groups, to understand the standard in all of its aspects, including modeling, the adaptation of systems and organizational structures, the production of financial statements and the transition strategy, financial communication and change management. IFRIC 23 IAS 12 “Income taxes” gave no particular details on how to account for uncertainties in income taxes, and was clarified by IFRIC 23 “Uncertainty over Income Tax Treatments”, which was published in June 2017. This interpretation allows companies to take into consideration uncertainties about their tax position when calculating and recognizing taxes payable and deferred taxes. The European Commission adopted this interpretation on October 23, 2018 and it applies from January 1, 2019. The Group has begun to consider how it will identify and document uncertainties and fiscal risk, but it is not currently able to anticipate the impact. 2.3 Preparation of the financial statements requires Management to make estimates and assumptions in certain areas with regard to uncertain future events. These estimates are based on the judgment of the individuals preparing these financial statements and the information available at the balance sheet date. Actual future results may differ from these estimates. With respect to the financial statements for the period ended December 31, 2018 in particular, accounting estimates requiring assumptions were mainly used for the following measurements: the fair value of financial instruments determined on the basis of ● valuation models (Note 10); the amount of expected credit losses on financial instruments as ● well as on loan and guarantee commitments (Note 7.1); USE OF ESTIMATES AND JUDGMENTS

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Registration document 2018