BPCE - 2020 Universal Registration Document

5

FINANCIAL REPORT

IFRS CONSOLIDATED FINANCIAL STATEMENTS OF BPCE SA GROUP AS AT DECEMBER 31, 2020

9.1.1

INSURANCE BUSINESS INVESTMENTS

Accounting principles Loans and receivables due from banks and customers and certain securitiesnot listed in an activemarket are recordedin “Insurance business investments”. Loans and receivables are initially recorded at fair value plus any costs directly related to their issuance, less any proceeds directly attributableto issuance.On subsequentbalancesheet dates, they are measuredat amortizedcost 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 includesany discounts recordedin respect of loans grantedat below-marketrates, as well as any external transaction income or costs directly related to the issue of the loans, which are treated as an adjustmentto 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 correspondingto the differencebetween 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 instrumentsand counterparties with similar characteristics. A discount is applied to loans restructured following a loss event as defined by IAS 39, to reflect the differencebetween the present value of the contractual cash flows at inception and the present value of expected principal and interest repaymentsafter restructuring.The discount rate used is the original effective interest rate. This discount is expensed to “Cost of credit risk” (for the insurer’snet 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 commissionspaid to third parties in connection with the arrangement of loans. They essentially comprise commissions paid to business providers. 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. Expensesand incomearisingon loanswith a termof less than one year at inceptionare 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 ain dividual basis against securities, with the exception of securities classified as financial assets at fair value throughprofit 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 comparisonwith its historic 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 declineof over 30%or for more than six months in their value by comparisonwith their historic cost or if events occur that are liable to represent a material or prolonged decline. An impairmentcharge is recorded in the income statement if the Group determines that the value of the asset will not be recovered in its entirety. For unlisted equity instruments, a qualitative analysis of their situation is carried out. Impairment losses recognizedon equity instrumentsmay not be reversed and nor may they be written back to income. Losses are recorded under “Net income from insurance businesses”. A subsequent increase in value is taken to “Gains and losses recognizeddirectly in other comprehensive income” until disposal of the securities. Impairment losses are recognized on debt instruments such as bonds or securitized transactions (ABS, CMBS, RMBS, cash CDOs) when there is a known counterparty risk. The Group uses the same impairment indicators for debt securities as those used for individually assessing the impairment risk on loans and receivables, irrespective of the portfolio to which the debt securities are ultimately designated.For perpetual deeply subordinatednotes (TSSDI), particular attention is also paid if, under certain conditions,the issuer may be unable to pay the coupon or extend the issue beyond the scheduled redemption date. In the event of an improvement in the issuer’s financial position, impairment losses taken on debt instrumentsmust be written back to the income statement. Impairment losses and write-backs are recorded in “Cost of credit risk” (for the insurer’s net share).

470

UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

www.groupebpce.com