2018 Registration document and annual fi nancial report - BNP PARIBAS 505

6INFORMATION ON THE PARENT COMPANY FINANCIAL STATEMENTS 31 DECEMBER 2018

6

Statutory Auditors report on the fi nancial statements

Valuation of fi nancial instruments (See Notes 1, 3.c, 3.h, 3.i and 6.c to the fi nancial statements)

Description of risk How our audit addressed this risk

As part of its trading activities, BNP Paribas holds fi nancial 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; (ii) using valuation models whose main inputs are observable; and (iii) using valuation models whose main inputs are unobservable. The valuations obtained may be subject to additional value adjustments to take into account certain specifi c trading, liquidity or counterparty risks. The techniques adopted by management to measure these instruments may therefore involve signifi cant judgement as regards the models and data used. At 31 December 2018, the market value of trading securities represented EUR 148,482 million, the bank s positive net position on fi rm transactions was valued at EUR 9,749 million and the market value of the bank s net long position on conditional transactions was valued at EUR 3,467 million. In light of the materiality of the outstandings and the judgement used to determine market value, we deemed the measurement of fi nancial instruments to be a key audit matter, in particular the measurement of instruments requiring the use of unobservable inputs.

Assisted by our valuation experts, we verifi ed that the key controls used by BNP Paribas with respect to the valuation of fi nancial instruments function properly, in particular those relating to:

■ the approval and regular review by management of the risks of the valuation models;

■ the independent verifi cation 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 review 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 fi nancial statements with respect to the valuation of fi nancial instruments.

Measurement of equity securities held for long-term investment and investments in subsidiaries and affiliates (See Notes 1, 3.c and 3.e to the fi nancial statements)

Description of risk How our audit addressed this risk

Equity securities held for long-term investment and investments in subsidiaries and affi liates are recognised on the balance sheet at a carrying amount of EUR 66.8 billion. They are measured individually at the lower of cost or value in use. Value in use is determined on the basis of available information using a multi-criteria valuation approach, including discounted future cash fl ows, sum-of-the-digits and net asset value methods as well as an analysis of ratios commonly used to assess future yields and exit opportunities for each line of securities. When their carrying amount exceeds value in use, an impairment loss is recognised for the difference. Given the materiality of investments in the balance sheet and the sensitivity of the models used to changes in the data and assumptions underlying the estimated values, we deemed the measurement of these investments to be a key audit matter.

Our audit work consisted in:

■ assessing, using sampling techniques, the justifi cation for the valuation methods and data used by management to estimate values in use;

■ testing, using sampling techniques, the accuracy of the calculation of values in use used by the company.

Lastly, we reviewed the disclosures on equity securities held for long-term investment and investments in subsidiaries and affi liates in the notes to the fi nancial statements.