2012 Registration document and annual financial report - BNP Paribas

CONSOLIDATED FINANCIAL STATEMENTS - YEAR ENDED 31 DECEMBER 2012Notes to the financial statements4Issues of debt securities are initially recognised at the issue valueincluding transaction costs, and are subsequently measured at amortisedcost using the effective interest method.Bonds redeemable for or convertible into equity instruments of the Groupare accounted for as hybrid instruments with a debt component and anequity component, determined on initial recognition.1.c.8Own equity instruments and own equityinstrument derivativesThe term “own equity instruments” refers to shares issued by the parentcompany (BNP Paribas SA) or by its fully consolidated subsidiaries.Own equity instruments held by the Group, also known as treasuryshares, are deducted from consolidated shareholders’ equity irrespectiveof the purpose for which they are held. Gains and losses arising on suchinstruments are eliminated from the consolidated profit and loss account.When the Group acquires equity instruments issued by subsidiariesunder the exclusive control of BNP Paribas, the difference between theacquisition price and the share of net assets acquired is recorded inretained earnings attributable to BNP Paribas shareholders. Similarly, theliability corresponding to put options granted to minority shareholdersin such subsidiaries, and changes in the value of that liability, are offsetinitially against minority interests, with any surplus offset against retainedearnings attributable to BNP Paribas shareholders. Until these optionshave been exercised, the portion of net income attributable to minorityinterests is allocated to minority interests in the profit and loss account.A decrease in the Group’s interest in a fully consolidated subsidiary isrecognised in the Group’s accounts as a change in shareholders’ equity.Own equity instrument derivatives are treated as follows, depending onthe method of settlement:■ as equity instruments if they are settled by physical delivery of a fixednumber of own equity instruments for a fixed amount of cash or otherfinancial asset. Such instruments are not revalued;■ as derivatives if they are settled in cash, or by choice, depending onwhether they are settled by physical delivery of the shares or in cash.Changes in value of such instruments are taken to the profit and lossaccount.If the contract includes an obligation, whether contingent or not, for thebank to repurchase its own shares, the bank must recognise the presentvalue of the debt with an offsetting entry in equity.1.c.9Derivative instruments and hedgeaccountingAll derivative instruments are recognised in the balance sheet on thetrade date at the transaction price, and are remeasured to fair value onthe balance sheet date.Derivatives held for trading purposesDerivatives held for trading purposes are recognised in the balance sheetin “Financial assets at fair value through profit or loss” when their fairvalue is positive, and in “Financial liabilities at fair value through profitor loss” when their fair value is negative.Realised and unrealised gains and losses are recognised in the profit andloss account on the line “Net gain/loss on financial instruments at fairvalue through profit or loss”.Derivatives and hedge accountingDerivatives contracted as part of a hedging relationship are designatedaccording to the purpose of the hedge.Fair value hedges are particularly used to hedge interest rate risk onfixed rate assets and liabilities, both for identified financial instruments(securities, debt issues, loans, borrowings) and for portfolios of financialinstruments (in particular, demand deposits and fixed rate loans).Cash flow hedges are particularly used to hedge interest rate risk onfloating-rate assets and liabilities, including rollovers, and foreignexchange risks on highly probable forecast foreign currency revenues.At the inception of the hedge, the Group prepares formal documentationwhich details the hedging relationship, identifying the instrument, orportion of the instrument, or portion of risk that is being hedged, thehedging strategy and the type of risk hedged, the hedging instrument, andthe methods used to assess the effectiveness of the hedging relationship.On inception and at least quarterly, the Group assesses, in consistencywith the original documentation, the actual (retrospective) and expected(prospective) effectiveness of the hedging relationship. Retrospectiveeffectiveness tests are designed to assess whether the ratio of actualchanges in the fair value or cash flows of the hedging instrument tothose in the hedged item is within a range of 80% to 125%. Prospectiveeffectiveness tests are designed to ensure that expected changes in thefair value or cash flows of the derivative over the residual life of the hedgeadequately offset those of the hedged item. For highly probable forecasttransactions, effectiveness is assessed largely on the basis of historicaldata for similar transactions.Under IAS 39 as adopted by the European Union, which excludes certainprovisions on portfolio hedging, interest rate risk hedging relationshipsbased on portfolios of assets or liabilities qualify for fair value hedgeaccounting as follows:■ the risk designated as being hedged is the interest rate risk associatedwith the interbank rate component of interest rates on commercialbanking transactions (loans to customers, savings accounts anddemand deposits);■ the instruments designated as being hedged correspond, for eachmaturity band, to a portion of the interest rate gap associated withthe hedged underlyings;■ the hedging instruments used consist exclusively of “plain vanilla”swaps;■ prospective hedge effectiveness is established by the fact that allderivatives must, on inception, have the effect of reducing interestrate risk in the portfolio of hedged underlyings. Retrospectively, a hedgewill be disqualified from hedge accounting once a shortfall arises in theunderlyings specifically associated with that hedge for each maturityband (due to prepayment of loans or withdrawals of deposits).42012 Registration document and annual financial report - BNP PARIBAS 117