CFM INDOSUEZ Wealth Management - 2019 annual report

The classification as a “restructured loan” is temporary. As of the restructuring operation, the exposure will maintain this “restructured” status for a period of at least two years if it was deemed to be performing at the time of restructuring or three years if the exposure was in default at the time of restructuring. These periods are extended in the case of certain events, provided for by the Group’s standards (new incidents, for example). As restructured loans are not derecognised, the reduction in future cash flows due from the counterparty or the deferral of these flows over a longer period as part of the restructuring results in the recording of a discount in the cost of risk. The restructuring discount is equal to the difference between: • The book value of the receivable; • And the sum of theoretical future cash flows from the restructured loan, discounted at the original effective interest rate (set when the loan was granted); If part of the principal is written off, this amount is a loss to be recorded directly in cost of risk. When the discount is reversed, the portion arising from the effect of the passage of time is recorded in net banking income. Irrecoverable loans When a receivable is deemed to be irrecoverable, that is to say that there is more hope of recovering all or part of it, it is derecognised on the balance sheet and the amount deemed irrecoverable is written off as a loss. The assessment of the period after which it is recorded as a loss is based on expert judgement. Each entity must therefore establish this period based on its activity. Before any loss is recorded, a provision should have been recorded in Bucket 3 (with the exception of assets measured at fair value through profit or loss). For loans recognised at amortised cost or at fair value through other comprehensive income recyclable to income, the principal amount written off is recorded in cost of risk, while interest is recorded in net banking income. Derivative financial instruments Classification and measurement Derivatives are financial assets or financial liabilities classified by default as derivatives held for trading unless they can be classified as hedging derivatives. They are recorded on the balance sheet for their initial fair value at the trading date. They are subsequently valued at fair value. At each reporting date, changes in the fair value of derivatives in the balance sheet are recorded: • In income, for derivatives held for trading or fair value hedges; • In other comprehensive income, for cash flow hedges or net investments in foreign operations, for the effective portion of the hedge. Hedge accounting General framework As determined by its parent company, CFM Indosuez Wealth Group does not apply the hedge accounting component of IFRS 9, in accordance with the option offered by the standard. All hedging relationships are therefore documented in accordance with IAS 39 until at the latest the date of application of the text on macro fair value hedges when it is adopted by the European Union. However, the eligibility of financial instruments for hedge accounting under IAS 39 takes into account the principles of classification and measurement of financial instruments under IFRS 9. Under IFRS 9, and taking into account IAS 39 hedging principles, debt instruments at amortised cost and at fair value through other comprehensive income recyclable to income are eligible for fair value hedging and cash flow hedging. Documentation Hedging relationships must adhere to the following principles: • The purpose of a fair value hedge is to hedge against an exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment attributable to the hedged risk(s) and which may affect the profit/loss (for example, hedging of all or part of changes in fair value due to the interest rate risk on a fixed rate loan); • The purpose of a cash flow hedge is to hedge against an exposure to changes in the future cash flows of a recognised asset or liability or a highly likely future transaction attributable to the risk(s) hedged and that can or may (in the event of a planned but unrealised transaction) affect the profit/loss (for example, hedging of changes in all or part of future interest payments on variable rate debt). In the event of a hedging intention, the following conditions must also be met to apply hedge accounting: • Both the hedging instrument and the hedged instrument must be eligible; • Documentation must be formalised from the outset, including in particular the individual designation and characteristics of the hedged item, the hedging instrument, the nature of the hedging relationship and the nature of the hedged risk; • The effectiveness of the hedge must be demonstrated from inception and retrospectively, through tests performed at each balance sheet date. For interest rate risk hedges of a portfolio of financial assets or financial liabilities, CFM Indosuez Wealth Group applies fair value hedge documentation as permitted by IAS 39 adopted by the European Union (the so-called carve out version). In particular: • The Group documents these hedging relationships on the basis of a gross position of derivatives and hedged items; • The effectiveness of these hedging relationships is justified using schedules. Assessment Revaluations of derivatives at fair value are recorded as follows: • fair value hedges: the revaluation of the derivative and of the hedged item up to the hedged risk are recorded in the same manner in the income statement. Only the ineffective portion of the hedge, if any, is recorded for its net amount in income; • cash flow hedges: the revaluation of the derivative is recognised in the balance sheet in a specific gain and loss account recognised directly in other comprehensive income recyclable to income for the effective portion, while the ineffective portion of the hedge is, where appropriate, recorded in income. Gains or losses on the derivative accumulated in other comprehensive income are then recycled to income when the hedged flows are realised. When the conditions for hedge accounting are no longer met, the following accounting treatment must be applied prospectively: • fair value hedges: only the hedging instrument continues to be revalued through income. The hedged item is fully recognised in accordance with its classification. For debt instruments at fair value through other comprehensive income recyclable to income, changes in fair value after the termination of the hedging relationship are fully 65 Annual Financial Statements 2019