AFD - 2018 Registration document

AFD’S ANNUAL FINANCIALS STATEMENTS Accounting principles and assessment methods

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 (1) ” signed on 8 June 2015 between 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. The reserve account is used to (i) top up the provisions built up by AFD in case of sovereign default, (ii) pay interest outstanding, and (iii) help offset debt write-offs pertaining to 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 AND COMMITMENTS GIVEN Loans amortised collectively comprise all non-sovereign loans in countries outside France and in the French Overseas Departments and Collectivities not amortised individually, as well as guarantee commitments given and financing commitments given for amounts to be disbursed under signed lending agreements. With regard to credit risk, the change in accounting method to French standards as applied according to the provisions of standard IFRS 9 for the Group’s consolidated financial statements, complies with applicable company standard texts: P Article 121–4 of ANC Regulation 2014-03 lays down the principle of caution, which in itself warrants provisions, including for unexpected losses; P Article 1121-3 of ANC Regulation 2014-07 on provisions for liabilities allows provisions on the basis of “recent or current events” for loans whose credit risk or risk factors have worsened significantly;

P Article 2231-1 of ANC Regulation 2014-07 on credit risk relating to forward financial instruments states that likely losses from off-balance sheet commitments must be recorded as a liability under provisions; P Article 323–6 of ANC Regulation 2014-03 on measuring liabilities allows for “future events” to be taken into account when estimating provisions. Thus, IFRS principles for estimating provisions to IFRS are applied to AFD’s individual financial statements. General principle Assets are sorted into 3 categories, or “stages”, according to how the related credit risks change since loan origination. The method used to calculate the provision differs according to which of the 3 stages an asset belongs to. This is defined as follows: P Stage 1: groups “performing” assets for which the counterparty risk has not increased since they were granted. The provision calculation is based on expected losses within the following 12 months; P Stage 2: groups performing assets for which a significant increase in credit risk has been observed since they were first entered in the accounts. The provision calculation is statistically based on expected losses on maturity; P Stage 3: is for assets for which there is an objective impairment indicator (identical to the notion of default currently used by the Group to assess the existence of objective evidence of impairment). The provision calculation is based on expected losses on maturity (see section 7.2.3 Loans to credit institutions and customers). Significant increase in credit risk The significant increase in credit risk can be measured individually or collectively. The Group examines all the information at its disposal (internal and external, including historic data, information about the current economic climate, reliable forecasts about future events and economic conditions). The impairment model is based on the expected loss, which must reflect the best information available at the year-end, adopting a forward looking approach. To measure the significant increase in credit risk of a financial asset since its entry into the balance sheet, which involves it moving from stage 1 to stage 2 and then to stage 1, the Group has created a methodological framework which sets out the rules for measuring the deterioration of the credit risk category. The methodology selected is based on several criteria, including internal ratings, inclusion on a watchlist and the refutable presumption of significant deterioration because of monies outstanding for more than 30 days.

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(1) The signature of this agreement precludes the agreement “on recording provisions for sovereign loans granted by AFD on its own behalf” of 30 December 2010 between the State and AFD.

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REGISTRATION DOCUMENT 2018