2020 Universal registration document and annual financial report - BNP PARIBAS534

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

6

Statutory Auditors report on the financial statements

Valuation of financial instruments (See Notes 1, 2.d, 3.c, 3.h, 3.i, 6.c to the financial statements)

Description of risk How our audit addressed this risk

As part of its trading activities, BNP Paribas holds financial instruments (assets and liabilities) which are recognised in the balance sheet at market value.

Market value is determined according to different approaches, depending on the type of instrument and its complexity: (i) using directly observable quoted prices; (ii) using valuation models whose main inputs are observable; and (iii) using valuation models whose main inputs are unobservable.

The valuations obtained may be subject to additional value adjustments to take into account certain specific trading, liquidity or counterparty risks.

The techniques adopted by management to measure these instruments may therefore involve significant judgement as regards the models and data used.

At 31 December 2020, the market value of trading securities represented EUR 99,252 million, the bank s positive net position on firm transactions was valued at EUR 10,052 million and the market value of the bank s net short position on conditional transactions was valued at EUR 846 million.

In light of the materiality of the outstandings and the judgement used to determine market value, we deemed the measurement of financial instruments to be a key audit matter, in particular the measurement of instruments requiring the use of unobservable inputs.

Assisted by our valuation experts, we verified that the key controls used by BNP Paribas with respect to the valuation of financial instruments function properly, in particular 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.

Based on a sample, our valuation experts:

■ analysed the relevance of the assumptions and inputs used;

■ analysed the results of the independent review of the inputs by BNP Paribas;

■ performed independent counter valuations using our own models.

We also analysed, on a sample basis, any differences between the valuations obtained and collateral calls with counterparties.

In addition, we examined the disclosures in the notes to the financial statements with respect to the valuation of financial instruments.

Measurement of equity investments, other equity securities held for long-term investment and investments in subsidiaries and affiliates (See Notes 1, 3.c and 3.e to the financial statements)

Description of risk How our audit addressed this risk

Equity investments, other equity securities held for long-term investment and investments in subsidiaries and affiliates are recognised on the balance sheet at a carrying amount of EUR 65,058 million.

They are measured individually at the of lower cost or value in use.

Value in use is determined, for each investment, using a valuation approach based on available information including discounted future cash flows, net asset value and the related multiples commonly used to assess future yields.

When their carrying amount exceeds value in use, an impairment loss is recognised for the difference.

Given their relative weight in the balance sheet and the sensitivity of the models used to the assumptions underlying the estimated values, particularly in the context of the Covid-19 pandemic, we deemed the measurement of these investments to be a key audit matter.

Our audit work consisted in:

■ assessing, using sampling techniques, the justification for the valuation methods and data used by management to estimate values in use. In this respect, we paid particular attention to taking into account the impacts of the Covid-19 crisis in the methods and assumptions used;

■ testing, using sampling techniques, the accuracy of the calculation of values in use used by the company.

Lastly, we reviewed the disclosures on equity investments, other equity securities held for long-term investment and investments in subsidiaries and affiliates in the notes to the financial statements.