AFD_REGISTRATION_DOCUMENT_2017

AFD’S ANNUAL FINANCIAL STATEMENTS Accounting principles and assessment methods

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7.2.9 Forward financial instruments Off-balance sheet assets for financial instruments result entirely from outright transactionsb– interest-rate swaps and cross- currency swapsb– made over-the-counter. These instruments are managed primarily as part of transactions for micro-hedging debt and loans. In accordance with ANC Regulation 2014-07 (1) , the par value of these contracts is recorded off balance sheet, while symmetry in relation to the hedged item results in income or expenses recorded as interest and related income or expenses for hedged items. Such income and expenses are not offset. 7.2.10 Provisions This item covers provisions meant to hedge risks and expenses that past or ongoing events have rendered likely to occur, and whose purpose is clearly specified. Provisions for sovereign outstandings The agreement “on the reserve account (2) ” signed on 8bJune 2015bbetween AFD and the French State for an indefinite term, determines the mechanism for creating provisions for hedging the sovereign risk and the principles for using the provisions recognised thereby. This reserve account is intended to (i) fund the provisions that AFD would have to recognise in case a sovereign borrower defaults, (ii) serve normal unpaid interest and (iii) more generally, help compensate AFD in the event of debt cancellation for sovereign loans. The balance of this account cannot be less than the amount required by banking regulations applicable to collective provisions on performing or restructured loans. This lower regulatory limit is calculated using estimated losses expected across the sovereign loan portfolio (losses at one year, losses at termination, regulatory requirements on provisions or any other data available to AFD that can be used to anticipate the sovereign loan portfolio’s risk profile). Doubtful sovereign debts are provisioned. Furthermore, this depreciation is neutralised by deduction from the reserve account. Net provisions for reversals of provisions are recorded in Net Banking Income. Collective provisions of non-sovereign outstandings The portfolio of loans written down on a collective basis consists of all non-sovereign loans in foreign countries that are not written down on an individual basis. The provisions are calculated based on a homogeneous portfolio of counterparties determined by quantitative and qualitative [analysis looking at the macroeconomic situation and the estimated residual loss (ERL)]. At 31bDecember 2017, the portfolio is presented with a segmentation based on three

sectors: public goods and services, financial sector and private goods and services. Based on the same principle, guarantees granted are also provisioned on a collective basis. AFD may also recognise an additional provision for specific events impacting its area of operations. Collective provision allocations for performing non-sovereign loans in foreign countries impacted positively on the cost of risk in the amount of €46.7M. The reversal amount takes account of the refining of the sub-participation loan portfolio in 2017. At 31bDecember 2017, the loan loss reserve ratio for these outstandings was 5%. Provisions for subsidiary risk This item is intended to cover the cost to AFD of the takeover and liquidation of Soderag, which was decided in 1998, and to cover AFD’s risk of loss on loans issued to Sodema, Sodega and Sofideg to buy Soderag’s portfolio. These loans were transferred to Sofiag. Provisions for miscellaneous risk This item covers miscellaneous risks and litigation for which resources are likely to be withdrawn. Provisions for foreign-exchange risk This item is intended to cover exchange rate differences (assets) on interests in foreign currencies. Provisions for employee benefits Defined benefit plans Retirement and early retirement commitments Immediate retirement and early retirement commitments are all transferred to an external insurance company. Deferred retirement and early retirement commitments are kept by AFD and covered by specific insurance policies. They are valued in accordance with the provisions of contracts signed by AFD and the insurer. The assumptions used for the valuations are as follows: P discount rate: 0.50%; P retirement age: 63bfor non-executive level employees and 65bfor executive level employees; P annual increase in salary: 2.00%. Commitments for end-of-career payments and financing of the health insurance plan AFD pays retirement bonuses (IFC) to its employees. It also contributes to the cost of its retired employees’ health insurance plans. The assumptions used for the valuations are as follows: P discount rate: 2.00%; P annual increase in salary: 2.00%;

(1) BookbII, Titleb5, of ANC Regulationb2014-07 concerning forward financial instruments, which repeals and replaces CRBF Regulationb90-15 as amended by CRBFb92-04. (2) The signature of this agreement precludes the agreement “on recording provisions for sovereign loans granted by AFD on its own behalf” of 30bDecember 2010bbetween the State and AFD.

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REGISTRATION DOCUMENT 2017

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