BPCE - 2019 Universal Registration Document

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FINANCIAL REPORT

STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS

Level 2 and 3 financial instruments under IFRS 13

Risk identified and main judgments

Our response

The Groupe BPCE holds a substantive part of financial instruments which are recognized in the balance sheet at fair value. They are allocated to three levels defined by IFRS 13 depending on the fair value measurement method used. Market value is determined according to different approaches depending on the nature and complexity of the instruments: use of listed prices observable on the market (level 1 financial instruments in the fair value hierarchy), use of valuation models based on significant inputs observable on the market (level 2 financial instruments) and use of valuation models based on significant inputs unobservable in the market (level 3 financial instruments). The valuation of levels 2 and 3 financial instruments at fair value relies on valuation techniques that use significant judgment regarding the choice of methodologies used: determination of valuation inputs unobservable on the market; • use of internal valuation models; • Additional valuation adjustments made, to reflect certain • market, counterparty or liquidity risks. We deemed the valuation of complex financial instruments, especially financial instruments classified in levels 2 and 3 to be a key audit matter due to significant expositions and judgment in the determination of fair value.

We reviewed the internal control procedures relating to the determination, valuation and recording of complex financial instruments classified at fair value in levels 2 and 3. We interviewed the Risk, Compliance and Permanent Control division and we acknowledge reporting and memos of Committees from this department (in conjunction with our Audit team at Natixis which is the main contributor to this topic). We tested the controls that we deemed relevant to our audit, including those relating to: the approval and regular review by Management of the risks • of the valuation models; the independent verification of the valuation inputs; • the determination of value adjustments as well as corrections • added in the value; the approval and regular review of observability criteria used in • the classification of each operation as observable/unobservable; the classification of financial instruments according to the fair • value hierarchy. We performed these procedures with the assistance of our valuation experts, with whom we also made counter valuation work. Based on sampling, our experts analyzed the relevance of the assumptions; inputs and models used to determine the main adjustments to valuation. We also analyzed the differences on existing collateral calls and gain or losses in case of sale of instruments allowing to contribute to the review of appropriateness of valuations. Finally, we examined the disclosures relating to the valuation of financial instruments published in the notes to the consolidated financial statements.

For more details on accounting principles and fair value hierarchy of financial instruments, see note 10 to the consolidated financial statements.

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE

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