2020 Universal registration document and annual financial report - BNP PARIBAS496

6 information on the Parent ComPany finanCial statements at 31 deCemBer 2020

6

Notes to the parent company financial statements

Notes to the parent company financial statements

Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES APPLIED BY BNP PARIBAS SA

The coronavirus epidemic, recognised as a pandemic by the World Health Organization on 11 March 2020, and the various measures taken by governments and regulatory bodies to combat its spread, have affected the global supply chain as well as demand for goods and services and therefore have had a significant impact on global growth. At the same time, fiscal and monetary policies have been relaxed to support the economy.

BNP Paribas parent company financial statements are prepared on a going concern basis. The impacts of this epidemic, mitigated by the range of countercyclical measures including the support measures of the authorities and the economic activity recovery plans benefiting customers, mainly concern the provisioning and valuation of assets. These impacts were estimated in a context of uncertainty regarding the extent of the consequences of this epidemic on both local and global economies.

BNP Paribas SA s financial statements have been prepared in accordance with generally accepted accounting principles applied to credit institutions in France, set out in ANC (French Accounting Standards Authority) regulation 2014-07 of 26 November 2014 and its amending regulations since that date.

AMOUNTS DUE FROM CREDIT INSTITUTIONS AND CUSTOMERS Amounts due from credit institutions include all subordinated and unsubordinated loans made in connection with banking transactions with credit institutions, with the exception of debt securities. They also include assets purchased under resale agreements, whatever the type of assets concerned, and receivables corresponding to securities sold under collateralised repurchase agreements. They are broken down between demand loans and deposits, and term loans and time deposits.

Amounts due from customers include loans to customers other than credit institutions, with the exception of loans represented by debt securities issued by customers, assets purchased under resale agreements, whatever the type of assets concerned, and receivables corresponding to securities sold under collateralised repurchase agreements. They are broken down between commercial loans, customer debit accounts, and other loans.

Amounts due from credit institutions and customers are recorded in the balance sheet at nominal value plus accrued interest not yet due.

Outstanding loans and confirmed credit facilities are broken down into sound loans, including sound restructured loans, and doubtful loans. The same analysis is performed for credit risks attached to forward financial instruments whose present value represents an asset for the Group.

Credit risks are monitored using BNP Paribas SA s internal credit risk rating system. This system is based on two key parameters: the probability of default by the counterparty, expressed as a rating, and the overall recovery rate determined by reference to the type of transaction. There are twelve counterparty ratings: ten covering sound loans and two covering doubtful loans and loans classified as irrecoverable.

Doubtful loans are defined as loans where the Bank considers that there is a risk that the borrowers will be unable to honour all or part of their commitments. The definition of default is consistent with the Basle definition, which takes into account the EBA guidelines of 28 September 2016, in particular the applicable thresholds for overdue amounts and probationary periods. Loans overdue for more than 90 days, as well as loans subject to litigation are considered as doubtful. When a loan is classified as doubtful, all other loans and commitments to the debtor are automatically assigned the same classification.

The Bank recognises an impairment for doubtful accounts on these loans, in an amount corresponding to the difference between the total loan value and current value of the future cash flows (from principal, interest, and any realised guarantees) that are deemed recoverable, using a discount rate equal to the original effective interest rate (for fixed-rate loans), or the most recent contractual interest rate (for floating-rate loans). The guarantees considered here include mortgages and pledges on assets, as well as credit derivatives acquired by the Bank as a protection against credit losses in the loan book.

These impairments are determined on an individual or collective basis based on statistical models for loan portfolios with similar risks and not impaired individually.

If a loan is restructured because the borrower is facing financial difficulties, the Bank calculates a discount equal to the difference in present value between the old and new repayment terms. These discounts are recognised as a deduction to assets and reversed through income on an actuarial basis over the remaining term of the loan. If any instalments on a restructured loan are not paid, the loan is reclassified as irrecoverable regardless of the terms of the restructuring.

In the case of doubtful loans where the borrower has resumed making regular payments in accordance with the original repayment schedule, the loan is reclassified as sound. Similarly, doubtful loans that have been restructured are also reclassified as sound, provided that the restructuring terms are satisfied.

Irrecoverable loans include loans to borrowers whose credit standing is such that after a reasonable time classified as doubtful loans, no reclassification as a sound loan is foreseeable, loans where an event of default has occurred, almost all restructured loans where the borrower has once again defaulted, and loans classified as doubtful for more than