2019 Universal registration document and annual financial report - BNP PARIBAS 261

4Consolidated finanCial statements for the year ended 31 deCemBer 2019

4

Statutory Auditors report on the consolidated financial statements

Valuation of financial instruments (See Notes 1.e.2, 1.e.7, 1.e.10, 1.o, 3.a, 3.c, 3.d, 5.a, 5.b, 5.c and 5.d to the consolidated 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 (instruments classified in level 1 of the fair value hierarchy); (ii) using valuation models whose main inputs are observable (instruments classified in level 2); and (iii) using valuation models whose main inputs are unobservable (instruments classified in level 3).

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 2019, financial instruments represented EUR 641 billion (of which EUR 11 billion for level 3 instruments) under assets and EUR 596 billion (of which EUR 28.1 billion for level 3 instruments) under liabilities.

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 level 3 instruments given 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 verification 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 consolidated financial statements with respect to the valuation of financial instruments.

Goodwill impairment (See Notes 1.b.4 and 5.o to the consolidated financial statements)

Description of risk How our audit addressed this risk

When recognising acquisitions, BNP Paribas records goodwill under assets, corresponding to the excess of the acquisition price of the shares over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date. At 31 December 2019, goodwill amounted to EUR 7.8 billion.

Goodwill is tested for impairment at least once a year or more frequently if there is an indication of impairment. Comparing the carrying amount of the cash-generating units to which goodwill is allocated with their recoverable amount is a key step in the process of determining if an impairment charge should be recorded.

We deemed goodwill impairment to be a key audit matter because management is required to exercise judgement to measure the recoverable amount of the cash-generating units, which involves making assumptions as regards the future earnings of acquirees and the discount rates applied to projected cash flows.

Our audit approach consisted in assessing the procedures implemented within BNP Paribas to test goodwill for impairment as well as the controls designed to identify indications of goodwill impairment. Assisted by our valuation experts, our work on the goodwill balances at 31 December 2019 consisted primarily in:

■ analysing the methods adopted by BNP Paribas; ■ critically assessing the business plans approved by Executive Management to ensure the reasonableness of the future cash flow estimates set out therein (in particular when projections do not match past performance);

■ critically analysing the main assumptions and inputs used (growth rate, cost of capital and discount rate) with respect to available external information;

■ assessing the analyses of the sensitivity of estimates to key inputs (in particular when the recoverable amount approximates the carrying amount).

Lastly, we verified the appropriateness of the disclosures in the notes to the consolidated financial statements with respect to the results of impairment and sensitivity tests.