2018 REGISTRATION DOCUMENT AND ANNUAL FINANCIAL REPORT

2018 Registration document and annual fi nancial report - BNP PARIBAS468

6 INFORMATION ON THE PARENT COMPANY FINANCIAL STATEMENTS 31 DECEMBER 2018

Notes to the parent company fi nancial statements

Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES APPLIED BY BNP PARIBAS SA

BNP Paribas SA s fi nancial statements have been prepared in accordance with generally accepted accounting principles applied to credit institutions in France, set out in ANC (French Accounting Standards Authority) regulation 2014-07 of 26 November 2014 and its amending regulations since that date.

AMOUNTS DUE FROM CREDIT INSTITUTIONS AND CUSTOMERS Amounts due from credit institutions include all subordinated and unsubordinated loans made in connection with banking transactions with credit institutions, with the exception of debt securities. They also include assets purchased under resale agreements, whatever the type of assets concerned, and receivables corresponding to securities sold under collateralised repurchase agreements. They are broken down between demand loans and deposits, and term loans and time deposits.

Amounts due from customers include loans to customers other than credit institutions, with the exception of loans represented by debt securities issued by customers, assets purchased under resale agreements, whatever the type of assets concerned, and receivables corresponding to securities sold under collateralised repurchase agreements. They are broken down between commercial loans, customer debit accounts, and other loans.

Amounts due from credit institutions and customers are recorded in the balance sheet at nominal value plus accrued interest not yet due.

Outstanding loans and confi rmed credit facilities are broken down into sound loans, including sound restructured loans, and doubtful loans. The same analysis is performed for credit risks attached to forward fi nancial instruments whose present value represents an asset for the Group.

Credit risks are monitored using BNP Paribas SA s internal credit risk rating system. This system is based on two key parameters: the probability of default by the counterparty, expressed as a rating, and the overall recovery rate determined by reference to the type of transaction. There are twelve counterparty ratings: ten covering sound loans and two covering doubtful loans and loans classifi ed as irrecoverable.

Doubtful loans are defi ned as loans where the Bank considers that there is a risk that the borrowers will be unable to honour all or part of their commitments. Loans on which one or more instalments are more than three months overdue as well as loans for which legal procedures have been initiated are considered doubtful. When a loan is

classifi ed as doubtful, all other loans and commitments to the debtor are automatically assigned the same classifi cation.

The Bank recognises an impairment for doubtful accounts on these loans, in an amount corresponding to the difference between the total loan value and current value of the future cash fl ows (from principal, interest, and any realised guarantees) that are deemed recoverable, using a discount rate equal to the original effective interest rate (for fi xed-rate loans), or the most recent contractual interest rate (for fl oating-rate loans). The guarantees considered here include mortgages and pledges on assets, as well as credit derivatives acquired by the Bank as a protection against credit losses in the loan book.

If a loan is restructured because the borrower is facing financial diffi culties, the Bank calculates a discount equal to the difference in present value between the old and new repayment terms. These discounts are recognised as a deduction to assets and reversed through income on an actuarial basis over the remaining term of the loan. If any instalments on a restructured loan are not paid, the loan is reclassifi ed as irrecoverable regardless of the terms of the restructuring.

In the case of doubtful loans where the borrower has resumed making regular payments in accordance with the original repayment schedule, the loan is reclassifi ed as sound. Similarly, doubtful loans that have been restructured are also reclassifi ed as sound, provided that the restructuring terms are satisfi ed.

Irrecoverable loans include loans to borrowers whose credit standing is such that after a reasonable time classifi ed as doubtful loans, no reclassifi cation as a sound loan is foreseeable, loans where an event of default has occurred, almost all restructured loans where the borrower has once again defaulted, and loans classifi ed as doubtful for more than one year that are in default and are not secured by guarantees covering a substantial portion of the amount due.

Impairments for credit risks on assets are deducted from the carrying amount of the assets. Provisions recorded under liabilities include provisions related to off-balance sheet commitments, loss provisions relating to interests in real-estate development programmes, provisions for claims and litigation, and provisions for unforeseeable industry risks.

Additions to and recoveries of provisions and impairment, losses on irrecoverable loans, recoveries on loans covered by provisions and discounts calculated on restructured loans are recorded in the profi t and loss account under Cost of risk .