2020 Universal registration document and annual financial report - BNP PARIBAS 501

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

6

Notes to the parent company financial statements

Derivatives held for hedging purposes

Income and expenses related to forward derivative financial instruments held for hedging purposes and designated to one instrument or a group of homogeneous instruments are recognised in income symmetrically with the income and expenses on the underlying instrument, and under the same accounting heading.

Income and expenses related to forward financial instruments used to hedge overall interest rate risk are recognised in income on a prorata basis.

Derivatives held for trading purposes

Derivatives held for trading purposes can be traded on organised markets or over-the-counter.

Derivatives held within a trading book are valued at market value on the balance sheet date. The corresponding gains or losses (realised and unrealised) are recognised in income. They are recognised in income under Gains (losses) on trading account securities .

The market value is determined from either:

■ the listed price, if one is available;

■ a valuation method using recognised financial models and theories with parameters calculated from transaction prices observed on active markets, or from statistical or other quantitative methods.

In both cases, BNP Paribas SA makes conservative value adjustments to account for modelling, counterparty, and liquidity risks.

Some complex derivatives, which are typically custom-made from combined instruments and highly illiquid, are valued using models where certain parameters are not observable on an active market.

Until 31 December 2004, the Bank recognised gains from trading these complex derivatives immediately in income.

However, as from 1 January 2005, the Bank began recognising these gains in income over the period during which the valuation parameters are expected to be unobservable. When parameters that were originally non-observable become observable, or when the valuation can be substantiated in comparison with recent similar transactions in an active market, the unrecognised portion of the day one profit is released to the profit and loss account.

Derivatives held within an isolated open position

Depending on the nature of the instruments, gains and losses on contracts representing isolated open positions are recognised in income when the contracts are settled or on a prorata basis. Derivatives are measured at market value on the balance sheet date and a provision for unrealised losses is recognised for each group of homogeneous contracts.

CORPORATE INCOME TAX A charge for corporate income tax is taken in the period in which the related taxable income and expenses are booked, regardless of the period in which the tax is actually paid. When the period in which the income and expenses are booked differs from that in which the income is taxed and expenses deducted, BNP Paribas SA recognises a deferred tax, whose amount is calculated according to the liability method, with the basis taken to be all temporary differences between the book value and tax basis of balance sheet items, and applying applicable future tax rates once these have been approved. Deferred tax assets are recognised in accordance with the likelihood of their being recovered.

EMPLOYEE PROFIT-SHARING As required by French law, BNP Paribas SA recognises employee profit- sharing in the year in which the employee entitlement arises. The amount is reported under Salaries and employee benefit expenses in the profit and loss account.

EMPLOYEE BENEFITS BNP Paribas SA employees receive each of the following four types of benefits:

■ termination benefits, payable primarily in the case of early termination of an employment contract;

■ short-term benefits, such as salary, annual leave, incentive plans, profit-sharing and additional payments;

■ long-term benefits, including compensated leaves of absence, long- service awards, and other types of cash-based deferred remuneration;

■ post-employment benefits, consisting mainly in France of supplementary pension benefits paid by the BNP Paribas SA pension funds and end- of-career bonuses, and in other countries by pension plans, some of which are funded by pension funds.

Termination benefits

Termination benefits are employee benefits payable as a result of a decision by BNP Paribas SA to terminate a contract of employment before the legal retirement age or by an employee to accept voluntary redundancy in exchange for a benefit. Termination benefits due more than 12 months after the balance sheet date are discounted.

Short-term benefits

The Group recognises an expense when it has used services rendered by employees in exchange for employee benefits.

Long-term benefits

Long-term benefits are benefits (other than post-employment benefits and termination benefits) which do not fall wholly due within 12 months after the end of the period in which the employee renders the associated services. The actuarial techniques used are similar to those used for