2018 Registration document and annual fi nancial report - BNP PARIBAS170

4 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4

Notes to the fi nancial statements

rate risk hedged fi xed-income portfolios, the adjustment is amortised on a straight-line basis over the remainder of the original term of the hedge. If the hedged item no longer appears in the balance sheet, in particular due to prepayments, the adjustment is taken to the profi t and loss account immediately.

In a cash flow hedging relationship, the derivative is measured at fair value in the balance sheet, with changes in fair value taken to shareholders equity on a separate line, Changes in fair value recognised directly in equity . The amounts taken to shareholders equity over the life of the hedge are transferred to the profi t and loss account under Net interest income as and when the cash fl ows from the hedged item impact profi t or loss. The hedged items continue to be accounted for using the treatment specifi c to the category to which they belong.

If the hedging relationship ceases or no longer fulfi ls the effectiveness criteria, the cumulative amounts recognised in shareholders equity as a result of the remeasurement of the hedging instrument remain in equity until the hedged transaction itself impacts profi t or loss, or until it becomes clear that the transaction will not occur, at which point they are transferred to the profi t and loss account.

If the hedged item ceases to exist, the cumulative amounts recognised in shareholders equity are immediately taken to the profi t and loss account.

Whatever the hedging strategy used, any ineffective portion of the hedge is recognised in the profi t and loss account under Net gain/loss on fi nancial instruments at fair value through profi t or loss .

Hedges of net foreign currency investments in subsidiaries and branches are accounted for in the same way as cash flow hedges. Hedging instruments may be foreign exchange derivatives or any other non- derivative fi nancial instrument.

1.e.10 Determination of fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or most advantageous market, at the measurement date.

The Group determines the fair value of fi nancial instruments either by using prices obtained directly from external data or by using valuation techniques. These valuation techniques are primarily market and income approaches encompassing generally accepted models (e.g. discounted cash flows, Black-Scholes model, and interpolation techniques). They maximize the use of observable inputs and minimize the use of unobservable inputs. They are calibrated to reflect current market conditions and valuation adjustments are applied as appropriate, when some factors such as model, liquidity and credit risks are not captured by the models or their underlying inputs but are nevertheless considered by market participants when setting the exit price.

The unit of measurement is generally the individual fi nancial asset or fi nancial liability but a portfolio-based measurement can be elected, subject to certain conditions. Accordingly, the Group retains this portfolio- based measurement exception to determine the fair value when some group of fi nancial assets and fi nancial liabilities and other contracts within the scope of the standard relating to financial instruments with substantially similar and offsetting market risks or credit risks are managed on the basis of a net exposure, in accordance with the documented risk management strategy.

Assets and liabilities measured or disclosed at fair value are categorised into the three following levels of the fair value hierarchy:

■ Level 1: fair values are determined using directly quoted prices in active markets for identical assets and liabilities. Characteristics of an active market include the existence of a suffi cient frequency and volume of activity and of readily available prices.

■ Level 2: fair values are determined based on valuation techniques for which signifi cant inputs are observable market data, either directly or indirectly. These techniques are regularly calibrated and the inputs are corroborated with information from active markets.

■ Level 3: fair values are determined using valuation techniques for which signifi cant inputs are unobservable or cannot be corroborated by market-based observations, due for instance to illiquidity of the instrument and signifi cant model risk. An unobservable input is a parameter for which there are no market data available and that is therefore derived from proprietary assumptions about what other market participants would consider when assessing fair value. The assessment of whether a product is illiquid or subject to signifi cant model risks is a matter of judgment.

The level in the fair value hierarchy within which the asset or liability is categorised in its entirety is based upon the lowest level input that is signifi cant to the entire fair value.

For fi nancial instruments disclosed in Level 3 of the fair value hierarchy, a difference between the transaction price and the fair value may arise at initial recognition. This Day One Profi t is deferred and released to the profi t and loss account over the period during which the valuation parameters are expected to remain non-observable. When parameters that were originally non-observable become observable, or when the valuation can be substantiated in comparison with recent similar transactions in an active market, the unrecognised portion of the day one profi t is released to the profi t and loss account.

1.e.11 Derecognition of financial assets and financial liabilities

Derecognition of financial assets The Group derecognises all or part of a fi nancial asset either when the contractual rights to the cash fl ows from the asset expire or when the Group transfers the contractual rights to the cash fl ows from the asset and substantially all the risks and rewards of ownership of the asset. Unless these conditions are fulfi lled, the Group retains the asset in its balance sheet and recognises a liability for the obligation created as a result of the transfer of the asset.

Derecognition of financial liabilities The Group derecognises all or part of a fi nancial liability when the liability is extinguished in full or in part.

Repurchase agreements and securities lending/borrowing Securities temporarily sold under repurchase agreements continue to be recognised in the Group s balance sheet in the category of securities to which they belong. The corresponding liability is recognised at amortised cost under the appropriate Financial liabilities at amortised cost category on the balance sheet, except in the case of repurchase agreements contracted for trading purposes, for which the corresponding liability is recognised in Financial liabilities at fair value through profi t or loss .