BPCE - 2018 Registration document

5 FINANCIAL REPORT

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

9.1

NOTES TO THE BALANCE SHEET

Accounting principles The “Insurance business investments” line on the assets side of the balance sheet includes insurance business assets representative of: financial investments ( i.e. in financial instruments) including ● advances to policyholders; financial investments in unit-linked products; ● derivatives; ● revaluation differences on interest rate risk-hedged portfolios. ● The other balances related to the insurance business are aggregated with the balances related to the other balance sheet items by type. Accounting principles Loans and receivables due from credit institutions and customers and certain securities not listed in an active market are recorded in “Insurance business investments”. Loans and receivables are initially recorded at fair value plus any costs directly related to their issuance, less any proceeds directly attributable to issuance. On subsequent balance sheet dates, they are measured at amortized cost using the Effective Interest Method. The effective interest rate is the rate that exactly discounts estimated future cash flows (payments or receipts) to the value of the loan at inception. This rate includes any discounts recorded in respect of loans granted at below-market rates, as well as any external transaction income or costs directly related to the issue of the loans, which are treated as an adjustment to the effective yield on the loan. No internal cost is included in the calculation of amortized cost. When loans are extended under conditions that are less favorable than market conditions, a discount corresponding to the difference between the nominal value of the loan and the sum of future cash flows discounted at the market interest rate is deducted from the nominal value of the loan. The market interest rate is the rate applied by the vast majority of local financial institutions at a given time for instruments and counterparties with similar characteristics. A discount is applied to loans restructured following a loss event as defined by IAS 39, to reflect the difference between the present value of the contractual cash flows at inception and the present value of expected principal and interest repayments after restructuring. The discount rate used is the original effective interest rate. This discount is expensed to “Cost of credit risk” (for the insurer’s net share) in the income statement and offset against the corresponding outstanding on the balance sheet. It is written back to net interest income in the income statement over the life of the loan using an actuarial method. The restructured loan is reclassified as performing based on expert opinion when no uncertainty remains as to the borrower’s capacity to honor the commitment. External costs consist primarily of commissions paid to third parties in connection with the arrangement of loans. They essentially comprise commissions paid to business providers. Insurance business investments

On the liabilities side of the balance sheet, the “Liabilities related to insurance policies” line consists of: the technical reserves of insurance companies (as defined in ● Appendix A to IFRS 4); insurance and reinsurance liabilities, including amounts due to ● policyholders; insurance-related derivatives; ● shares of the revaluation of interest rate risk-hedged portfolios; ● the deferred profit-sharing liability. ●

9.1.1

Income directly attributable to the issuance of new loans principally comprises set-up fees charged to customers, rebilled costs and commitment fees (if it is more probable than improbable that the loan will be drawn down). Commitment fees received that will not result in any drawdowns are apportioned on a straight-line basis over the life of the commitment. Expenses and income arising on loans with a term of less than one year at inception are deferred on a pro rata basis with no recalculation of the effective interest rate. For floating or adjustable rate loans, the effective interest rate is adjusted at each rate refixing date. Securities recorded as assets are classified into four categories as defined by IAS 39: financial assets at fair value through profit or loss; ● held-to-maturity financial assets; ● loans and receivables; ● available-for-sale financial assets. ● Impairment of securities An impairment loss is recognized on an individual basis against securities, with the exception of securities classified as financial assets at fair value through profit or loss, when there is objective evidence of impairment resulting from one or more loss events having occurred since the initial recognition of the asset and where the impact of these events on estimated future cash flows can be reliably measured. Different rules are used for the impairment of equity instruments and debt instruments. For equity instruments, a lasting decline or a significant decrease in value are objective indicators of impairment. A decline of over 50% or lasting for over 36 months in the value of a security by comparison with its historical cost is an objective indicator of permanent impairment, leading to the recognition of an impairment loss in income. In addition, these impairment criteria are also supplemented by a line-by-line review of the assets that have recorded a decline of over 30% or for more than six months in their value by comparison with their historical cost or if events occur that are liable to represent a material or prolonged decline. An impairment charge is

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Registration document 2018