2018 Registration document and annual fi nancial report - BNP PARIBAS168

4 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4

Notes to the fi nancial statements

The existence of a signifi cant increase in credit risk for the fi nancial instrument is then assessed by comparing the risk of default after the restructuring (under the revised contractual terms) and the risk of default at the initial recognition date (under the original contractual terms). In order to demonstrate that the criteria for recognising lifetime expected credit losses are no longer met, good quality payment behaviour will have to be observed over a certain period of time.

When the restructuring consists of a partial or total exchange against other substantially different assets (for example, the exchange of a debt instrument against an equity instrument), it results in the extinction of the original asset and the recognition of the assets remitted in exchange, measured at their fair value at the date of exchange. The difference in value is recorded in the income statement in Cost of risk .

Modifi cations of fi nancial assets that are not due to the borrower s financial difficulties (i.e. commercial renegotiations) are generally analysed as the early prepayment of the former fi nancial asset, which is then derecognised, followed by the set-up of a new fi nancial asset at market conditions.

1.e.6 Cost of risk

Cost of risk includes the following items of income:

■ impairment gains and losses resulting from the accounting of loss allowances for 12-month expected credit losses and lifetime expected credit losses ( stage 1 and stage 2 ) relating to debt instruments measured at amortised cost or at fair value through shareholders equity, loan commitments and fi nancial guarantee contracts that are not recognised at fair value as well as lease receivables, contract assets and trade receivables;

■ impairment gains and losses resulting from the accounting of loss allowances relating to fi nancial assets for which there is objective evidence of impairment ( stage 3 ), write-offs on irrecoverable loans and amounts recovered on loans written-off;

■ impairment gains and losses relating to fi xed-income securities of insurance entities that are individually impaired (which fall under IAS 39).

It also includes expenses relating to fraud and to disputes inherent to the fi nancing activity.

1.e.7 Financial instruments at fair value through profit or loss

Trading portfolio and other financial assets measured at fair value through profit or loss The trading portfolio includes instruments held for trading (trading transactions), including derivatives.

Other fi nancial assets measured at fair value through profi t or loss include debt instruments that do not meet the collect or collect and sale business model criterion or that do not meet the cash-fl ow criterion, as well as equity instruments for which the fair value through shareholders equity option has not been retained.

All those fi nancial instruments are measured at fair value at initial recognition, with transaction costs directly posted in profi t or loss. At reporting date, they are measured at fair value, with changes presented in Net gain/loss on fi nancial instruments at fair value through profi t

or loss . Income, dividends, and realised gains and losses on disposal related to held- for- trading transactions are accounted for in the same profi t or loss account.

Financial liabilities designated as at fair value through profit or loss Financial liabilities are recognised under option in this category in the two following situations:

■ for hybrid fi nancial instruments containing one or more embedded derivatives which otherwise would have been separated and accounted for separately. An embedded derivative is such that its economic characteristics and risks are not closely related to those of the host contract;

■ when using the option enables the entity to eliminate or signifi cantly reduce a mismatch in the measurement and accounting treatment of assets and liabilities that would otherwise arise if they were to be classifi ed in separate categories.

Changes in fair value due to the own credit risk are recognised under a specifi c heading of shareholders equity.

1.e.8 Financial liabilities and equity instruments

A fi nancial instrument issued or its various components are classifi ed as a fi nancial liability or equity instrument, in accordance with the economic substance of the legal contract.

Financial instruments issued by the Group are qualified as debt instruments if the entity in the Group issuing the instruments has a contractual obligation to deliver cash or another fi nancial asset to the holder of the instrument. The same applies if the Group is required to exchange fi nancial assets or fi nancial liabilities with another entity under conditions that are potentially unfavourable to the Group, or to deliver a variable number of the Group s own equity instruments.

Equity instruments result from contracts evidencing a residual interest in an entity s assets after deducting all of its liabilities.

Debt securities and subordinated debt Debt securities and subordinated debt are measured at amortised cost unless they are recognised at fair value through profi t or loss.

Debt securities are initially recognised at the issue value including transaction costs, and are subsequently measured at amortised cost using the effective interest method.

Bonds redeemable or convertible into own equity are hybrid instruments that may contain a debt component and an equity component, determined upon initial recognition of the transaction.

Equity instruments The term own equity instruments refers to shares issued by the parent company (BNP Paribas SA) and by its fully consolidated subsidiaries. External costs that are directly attributable to an issue of new shares are deducted from equity net of all related taxes.

Own equity instruments held by the Group, also known as treasury shares, are deducted from consolidated shareholders equity irrespective of the purpose for which they are held. Gains and losses arising on such instruments are eliminated from the consolidated profi t and loss account.