2018 Registration document and annual fi nancial report - BNP PARIBAS 159

4CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4

Notes to the fi nancial statements

The Group did not anticipate the application of the new standards, amendments, and interpretations adopted by the European Union, when the application in 2018 was optional, except for the amendment to IFRS 9 Prepayment Features with Negative Compensation .

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

IFRS 16 Leases IFRS 16 Leases , issued in January 2016, will supersede IAS 17 Leases and the interpretations relating to the accounting of such contracts. The new defi nition of leases relies on both the identifi cation of an asset and the control of the right to use the identifi ed asset by the lessee.

From the lessor s point of view, the expected impact should be limited, as the requirements of IFRS 16 remain mostly unchanged from the current IAS 17.

For the lessee, IFRS 16 will require recognition in the balance sheet of all leases, in the form of a right-of-use on the leased asset presented under fi xed assets, along with the recognition of a fi nancial liability for the rent and other payments to be made over the leasing period. The right-of- use assets will be amortised on a straight-line basis and the fi nancial liabilities will be amortised on an actuarial basis over the lease period. The main change induced by this new standard is related to contracts which, under IAS 17, met the defi nition of operating leases, and as such, did not require recognition of the leased assets in the balance sheet .

Adopted by the European Union on 31 October 2017, IFRS 16 will become mandatory for annual periods beginning on or after 1 January 2019.

For the fi rst application of IFRS 16, the Group decided to apply the simplifi ed retrospective transition requirements.

The discount rate applicable for the measurement of both the right-of-use and the lease liability is the incremental borrowing rate at the date of the initial application of IFRS 16, based on the residual maturity of the contract at that date.

Most of the lease contracts identifi ed are property leases, and to a lesser extent computer and banking equipment leases and vehicles leases. Property leases encompass either commercial agencies from retail banking, or offi ce buildings serving as head offi ces or operating offi ces in France or abroad.

The key hypotheses used by the Group for the measurement of rights- of-use and lease liabilities will be the following:

■ the lease term will correspond to the non-cancellable period, together with periods covered by an extension option if the Group is reasonably certain to exercise this option. In France, the standard commercial lease contract is the so-called three, six, nine contract for which the maximum period of use is of nine years, with a fi rst non-cancellable period of three years followed by two optional extension periods of three years each;

■ the discount rates used for measuring the right-of-use and the lease liability will be assessed for each contract, based on the incremental borrowing rate at the date of signature.

The Group will use both exemptions to the application of IFRS 16 requirements permitted by the standard, i.e. relating to leases whose term is shorter than or equal to 12 months, and to leases whose individual underlying asset value is below or equal to EUR 5,000 or USD 5,000 before tax.

The Group made the choice not to apply the exemption to the accounting of initial deferred tax assets (DTA) and deferred tax liabilities (DTL) permitted by paragraphs 15 and 24 of IAS 12 Income Taxes . Consequently, distinct deferred tax assets and deferred tax liabilities will be accounted for with regards to the balance-sheet amounts of rights- of-use and lease liabilities of the lessee.

The main impacts expected from the application of IFRS 16 will be, on the balance-sheet:

■ an increase of the fi xed assets and the recognition of lease liabilities;

■ an increase of deferred tax assets and deferred tax liabilities.

The main impact expected in the profi t and loss account after the fi rst application of the standard will be to replace rental expenses previously accounted for on a linear basis in operating expenses by additional interest expenses in Net Banking Income (NBI) in relation with lease liabilities, and to recognise additional amortizing expenses in relation with rights-of-use.

Following analysis performed on the standard, its principles and its interpretation, lease contracts have been inventoried and data collected in order to identify the impacts of the application of the new accounting model.

At this stage of the project, the estimation of the impacts of the fi rst application of IFRS 16 is being fi nalized. The expected impact on the Group fi nancial statements is not signifi cant.

IFRS 17 Insurance Contracts 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 identifi cation of its effects continued in 2018.

1.b CONSOLIDATION

1.b.1 Scope of consolidation

The consolidated fi nancial statements of BNP Paribas include entities that are controlled by the Group, jointly controlled, and under signifi cant infl uence, 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 fi nancial statements until the date of disposal.

(1) At its 14 November 2018 Board meeting, the IASB decided to propose an amendment to IFRS 17 that would defer the mandatory initial application of IFRS 17 until 1 January 2022.