2019 Universal registration document and annual financial report - BNP PARIBAS172

4 Consolidated finanCial statements for the year ended 31 deCemBer 2019

4

Notes to the financial statements

Impairment losses recognised when there is objective evidence of impairment related to an event subsequent to the acquisition of the asset are presented under Cost of risk .

Held-to-maturity financial assets

Held-to-maturity financial assets include debt securities, with fixed maturity, that the Group has the intention and ability to hold until maturity.

Securities classified in this category are recognised at amortised cost using the effective interest method.

Income received on these securities is presented under Net income from insurance activities and under sub-heading Net gain on financial instruments at amortised cost . Impairment losses recognised when there is objective evidence of impairment related to an event subsequent to the acquisition of the asset are presented under Cost of risk .

Available-for-sale financial assets

The category Available-for-sale financial assets includes debt or equity securities that do not fall within the previous three categories.

Assets included in the available-for-sale category are initially recorded at fair value, plus transaction costs where material. At the end of the reporting period, they are valued at their fair value and the changes in the latter, excluding accrued income, are presented under a specific heading of equity. On disposal of the securities, these unrealised gains or losses previously recognised in equity are reclassified in the income statement under the heading Net income from insurance activities .

Income recognised using the effective interest method on debt securities, dividends received and impairment (in the event of a significant or lasting decline in the value of the securities) of equity securities are presented under Net income from insurance activities and under section Net gain on available-for-sale financial assets . Impairment losses on debt securities are presented under Cost of risk .

Investment property Investment property corresponds to buildings held directly by insurance companies and property companies controlled.

Investment property, except for those used for unit-linked contracts, is recognised at cost and follows the accounting methods of the assets described elsewhere.

Investment property, held in respect of unit-linked contracts, is valued at fair value or equivalent, with changes in value recognised in the income statement.

Equity method investments Investments in entities or real estate funds over which the Group exercises significant influence or joint control and for which the equity method is applied are recognised in the line Equity method investments .

1.f.3 Technical reserves and other insurance liabilities

The item Technical reserves and other insurance liabilities includes:

■ commitments to policyholders and beneficiaries of contracts, which include technical reserves for insurance contracts subject to significant insurance hazard (mortality, longevity, disability, incapacity...) and technical liabilities of investment contracts with a discretionary profit- sharing feature, falling within IFRS 4. The discretionary participation clause grants life insurance policyholders the right to receive, in addition to the guaranteed remuneration, a share of the financial results achieved;

■ other insurance liabilities related to unit-linked contracts that fall within the scope of IAS 39 (i.e. investment contracts with no discretionary participating features);

■ policyholders surplus reserve;

■ liabilities arising from insurance and reinsurance operations, including liabilities due to policyholders;

■ financial derivative instruments of insurance activities carried at fair value through profit or loss, the fair value of which is negative. Group insurance entities underwrite derivative instruments for hedging purposes.

Financial liabilities that are not insurance liabilities (e.g. subordinated debt) fall under IAS 39. They are presented in Financial liabilities at amortised cost .

Insurance and reinsurance contracts and investment contracts with discretionary participating features Life insurance guarantees cover mainly death risk (term life insurance, annuities, repayment of loans or guaranteed minimum on unit-linked contracts) and, regarding borrowers insurance, to disability, incapacity and unemployment risks.

For life insurance, technical reserves consist mainly of mathematical reserves that corresponds as a minimum, to the surrender value of contracts and surplus reserve.

The policyholders surplus reserve also includes amounts resulting from the application of shadow accounting representing the interest of policyholders, mainly within French life insurance subsidiaries, in unrealised gains and losses on assets where the benefit paid under the policy is linked to the return on those assets. This interest is an average derived from stochastic analyses of unrealised gains and losses attributable to policyholders in various scenarios.

A capitalisation reserve is set up in individual statutory accounts of French life-insurance companies on the sale of amortisable securities in order to defer part of the net realised gain and hence maintain the yield to maturity on the portfolio of admissible assets. In the consolidated financial statements, this reserve is reclassified into Policyholders surplus on the liabilities side of the consolidated balance sheet, to the extent that it is highly probable it will be used.