AFD - 2019 Universal registration document

AFD’S ANNUAL FINANCIAL STATEMENTS Statutory auditors’ report on the financial statements

Identi fi cation and assessment of credit risk RISK IDENTIFIED The Agence Française de Développement Group is exposed to credit and counterparty risks. These risks are defined as the probability that a debtor will be unable to handle the repayment of the financing granted. A default by a counterparty can have a material impact on the results of AFD or its subsidiaries. Your Agency is booking provisions to cover those risks on non-sovereign loans. These are estimated as follows: P since January Ǿ 1, 2018, the provision calculation for performing and nonperforming non-sovereign exposure has been based on an anticipated loss model which, in addition to the outstandings, now takes into account the performing commitments signed and the undisbursed balances of the corresponding loans. This method involves calculating expected losses based on changes in credit risk since the outset and using a model which incorporates several parameters (probability of default, loss rate in the event of default, exposure in default, rating). P AFD also calculates impairments on exposures in default. These are calculated individually and correspond to the difference between the book value of the asset and the discounted value of future cash flows recoverable on maturity after guarantees have come into play. They are determined individually on the basis of assumptions such as the counterparty’s financial position, the corresponding country risk, the valuation of any guarantees, and expected future cash flows. We consider that the credit risk assessment and the impairment/provisions calculation are a key audit matter as they correspond to significant accounting estimates, as they require Management to exercise its judgement when making the assumptions and classifying the exposure. As a result, there is a risk that the bases for provisions identified are not exhaustive and the impairment/provisions created do not adequately cover the credit risk of the portfolio. As at December Ǿ 31, 2019, AFD’s annual financial statements include €539 Ǿ million for impairment of assets and €362 Ǿ million in provisions for liabilities as indicated in Notes Ǿ 2.3, 2.10, 3.3, 3.4, 3.15, 3.28 and 3.29 to the annual financial statements. AUDIT PROCEDURES IMPLEMENTED IN RESPONSE TO RISKS IDENTIFIED To assess the reasonableness of the provisions booked, we: P reviewed provision evaluation process and the internal control procedures governing them; P reviewed the governance of the provisioning processes; P verified the consistency of data between the risk management with the accounting data; P assessed the consistency of changes in provisions, receivables and cost of risk. When the provision was calculated on a collective basis, we put in place the following substantive procedures: P checking the bases are exhaustive and the classification rules have been correctly applied; P checking the consistency of the parameters applied in the calculation method and any updates in line with the methodology principles validated; P verification of the arithmetical accuracy of the calculations made; When the provision was determined on an individual basis, our work consisted of: P testing the underlying assumptions and data used by Management to estimate impairments using credit file samples; P verifying the correct implementation of the decisions made during Risk Committee meetings. P ensuring that the downgrading rules for outstandings were not changed compared to the previous financial year. We also made sure that the downgrading rules for doubtful receivables were not changed compared to the previous year and were correctly applied throughout the financial year. Valuation of equity stakes RISK IDENTIFIED The Agence Française de Développement holds equity stakes as detailed in Notes Ǿ 2.5, 3.5, 3.6, 3.8, 3.28 and 3.30 to the annual financial statements. These securities are recorded at their acquisition cost. These assets are impaired when the estimated value, assessed according to the company’s net position and its prospects (which are estimated based on economic and financial information gathered on the company particularly on conditions in its country) or its stock market valuation, as the case may be, is lower than the acquisition cost.

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UNIVERSAL REGISTRATION DOCUMENT 2019