2019 Universal registration document and annual financial report - BNP PARIBAS 159

4Consolidated finanCial statements for the year ended 31 deCemBer 2019

4

Notes to the financial statements

■ In September 2019, the IASB issued amendments to IAS 39 and IFRS 7, modifying specific hedge accounting requirements to allow hedge accounting to continue for hedges affected by the reform during the period of uncertainty before the hedged items or hedging instruments are amended to incorporate the reformed benchmark rates. These amendments, endorsed by the European Commission on 15 January 2020 are mandatorily applicable for annual reporting periods beginning on or after 1 January 2020, however early application is possible and is the option chosen by the Group, for its existing hedge accounting relationships to continue.

Fair value and cash flow hedge relationships documented by the Group are in regard of the benchmark rates in the scope of the reform, mainly the Eonia, Euribor, and Libor rates. For these hedging relationships, hedged items and hedging derivatives will progressively be amended to incorporate the new benchmark rates. The Group considers that the amendments to IAS 39 and IFRS 7 are applicable when there is uncertainty about future cash flows. It is the case when the contractual terms of the hedged instruments or of the hedging instruments have not yet been amended (for instance with the inclusion of a fallback clause), or, if they were amended, if the terms and date of the transition to the new benchmark rates have not been clearly specified.

The Group put in place a Group-wide IBORs transition program mid- 2018 involving all BNP Paribas business lines and functions.

This program is in charge of framing and implementing the transition from legacy IBOR rates (mostly LIBORs and EONIA) to the new risk-free rates in all relevant jurisdictions and currencies, whilst managing the various risks resulting from this transition, and meeting deadlines set by relevant authorities. Group representatives contribute to most industry working groups established in conjunction with the various central banks and financial regulators.

The notional amount of the hedging instruments involved in the hedging relationships impacted by the interest rate benchmark reform is the sum of notional amounts disclosed in note 5b Derivatives used for hedging purposes .

The introduction of other standards, amendments and interpretations which are mandatory as of 1 January 2019 did not have an effect on the 2019 financial statements.

Except for the IFRS 9, IAS 39 and IFRS 7 amendments mentioned above, the Group did not anticipate the application of the new standards, amendments, and interpretations adopted by the European Union, when the application in 2019 was optional.

1.a.2 New major accounting standards, published but not yet applicable

IFRS 17 Insurance Contracts , issued in May 2017, will replace IFRS 4 Insurance Contracts and will become mandatory for annual periods beginning on or after 1 January 2021(1), after its adoption by the European Union for application in Europe.

The analysis of the standard and the identification of its effects are going on.

1.b CONSOLIDATION

1.b.1 Scope of consolidation

The consolidated financial statements of BNP Paribas include entities that are controlled by the Group, jointly controlled, and under significant influence, with the exception of those entities whose consolidation is regarded as immaterial to the Group. Companies that hold shares in consolidated companies are also consolidated.

Subsidiaries are consolidated from the date on which the Group obtains effective control. Entities under temporary control are included in the consolidated financial statements until the date of disposal.

1.b.2 Consolidation methods

Exclusive control Controlled enterprises are fully consolidated. The Group controls a subsidiary when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

For entities governed by voting rights, the Group generally controls the entity if it holds, directly or indirectly, the majority of the voting rights (and if there are no contractual provisions that alter the power of these voting rights) or if the power to direct the relevant activities of the entity is conferred on it by contractual agreements.

Structured entities are entities established so that they are not governed by voting rights, for instance when those voting rights relate to administrative tasks only, whereas the relevant activities are directed by means of contractual arrangements. They often have the following features or attributes: restricted activities, a narrow and well-defined objective and insufficient equity to permit them to finance their activities without subordinated financial support.

For these entities, the analysis of control shall consider the purpose and design of the entity, the risks to which the entity is designed to be exposed and to what extent the Group absorbs the related variability. The assessment of control shall consider all facts and circumstances able to determine the Group s practical ability to make decisions that could significantly affect its returns, even if such decisions are contingent on uncertain future events or circumstances.

In assessing whether it has power, the Group considers only substantive rights which it holds or which are held by third parties. For a right to be substantive, the holder must have the practical ability to exercise that right when decisions about the relevant activities of the entity need to be made.

Control shall be reassessed if facts and circumstances indicate that there are changes to one or more of the elements of control.

(1) On 26 June 2019, the IASB published an exposure draft Amendments to IFRS 17 including in particular the deferral of the mandatory initial application of IFRS 17 to 1 January 2022.