BPCE_REGISTRATION_DOCUMENT_2017

FINANCIAL REPORT IFRS Consolidated Financial Statements of Groupe BPCE as at December 31, 2017

reclassified as a trading derivative, and changes in its fair value are recognized inincome. Documentation as fair value hedges Some of the Group’s institutions document their macro-hedgingof interest rate risk as fair value hedges by applying the so-called carve-out arrangements under IAS 39 as adopted by the European Union. The versionof IAS 39 adoptedfor use by the EuropeanUnion does not include certain hedge accountingprovisionsthat appear incompatible with the strategies implemented by European banks to reduce their overall exposure to interest rate risk. In particular, this “carve-out” allows the Group to make use of hedge accounting for interbank interest rate risk on customer transactions at fixed rates (loans, savings accounts and demand deposits). The Group mainly uses plain vanilla interest rate swaps designated at inception as fair value hedges of fixed-ratedepositsor loans. Macro-hedgingderivatives are accounted for in the same manner as derivatives used to hedge the fair value of specific transactions (micro-hedging). In a macro-hedgingrelationship,gains and losses on the revaluation of the hedged item are recorded in “Revaluation differences on interest rate risk-hedged portfolios”, under balance sheet assets for hedges of a portfolio of financial assets and under balance sheet liabilitiesfor hedges of aportfolioof financial liabilities. The hedges are deemed effective if the derivativesoffset the interest rate risk on the underlyingfixed-rateportfolio.The ineffectiveportion relating to the dual-curve valuation of collateralized derivatives is taken into account. Effectivenessis tested intwo ways: asset-basedtesting: for plain vanilla swaps designated as hedging ● instruments at inception, the Group verifies prospectively at the date the instrumentis designatedas a hedge and retrospectivelyat each balancesheet datethat noexcess hedging exists; quantitativetesting: for other swaps, the change in the fair value ● of the actual swap must offset the changes in the fair value of a hypotheticalinstrumentthat exactly reflects the underlyinghedged item. These tests are conducted prospectively at the date the instrument is designated as a hedge and retrospectively at each balance sheet date. If a hedging relationship ceases, the revaluation adjustment is amortized on a straight-line basis over the remaining term of the initial hedge, if the hedged item has not been derecognized. It is taken directly to income if the hedged item is no longer recorded in the balance sheet. In particular, derivatives used for macro-hedging may be disqualifiedfor hedge accountingpurposeswhen the notional amount of the hedged items falls below the nominal amount of the hedging instruments, for example in the case of the prepayment of loans or the withdrawal of deposits. HEDGING OF A NET INVESTMENT IN A FOREIGN CURRENCY The net investment in a foreign operation is the amount of the investment held by the consolidatingentity in the net assets of the operation. The purpose of a net investment hedge in a foreign currency is to minimizethe foreign exchangeeffect for a consolidatingentity of an

investment in an entity whose functional currency is different from the presentation currency of the consolidating entity’s financial statements. Net investment hedges are accounted for in the same manner ascash flow hedges. Unrealizedgains and losses initially recognizedin equity are taken to income when the net investment is sold in full or in part (or when partially sold with loss of control). General principles The fair value of an instrumentis the price that would be received to sell an asset or paid to transfer a liability in a standard arm’s length transaction betweenmarketparticipants at the measurement date. Fair valueis therefore determinedusing the exit price. On first recognition,fair value is usually the transactionprice and is thus the price paid to purchase the asset or the price received to assume theliability. In subsequentmeasurements,the estimated fair value of assets and liabilities must be based primarily on observable market data, while ensuring that all inputs used in the fair value calculation are consistent with the price that market participants would use in a transaction. In this case, fair value consists of a mid-marketprice and additional valuation adjustments determined according to the instruments in question and the associated risks. The mid-marketprice is obtained based on: the instrument’s quoted price, if the instrument is quoted on an ● active market. A financial instrument is regarded as quoted on an active market if quoted prices are readily and regularly available from an exchange,dealer, broker, industry group, pricing service or regulatory agency, and these prices represent actual and regularly occurring transactions on the principal market or, failing that, on the mostfavorablemarket,on an arm’s length basis; if the market for a financial instrument is not active, fair value is ● established using valuation techniques. The techniques used must maximize the use of relevant observable entry data and minimize the use of non-observableentry data. They may refer to observable data from recent transactions,the fair value of similar instruments, discounted cash flow analysis and option pricing models, proprietary models in the case of hybrid instruments or non-observable data when no pricingor marketdata are available. Additional valuation adjustmentsinclude factors related to valuation uncertainties, such as market, credit and liquidity risks, in order to recognize the costs incurred by a divestment transaction on the primary market. Likewise, an adjustment (Funding Valuation Adjustment – FVA) forusing assumptions to recognize costs related to the financing costs of future cash flows of uncollateralized or partially collateralized derivatives is also recognized. The mainadditionaladjustments areas follows: BID/ASK ADJUSTMENT – LIQUIDITY RISK This adjustment is the difference between the bid price and the ask price correspondingto the selling costs. It reflects the cost requested by a market player in respect of the risk of acquiring a position or of selling at aprice proposed by another market player. Determination of fair value 4.1.6

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Registration document 2017