2012 Registration document and annual financial report - BNP Paribas

CONSOLIDATED FINANCIAL STATEMENTS - YEAR ENDED 31 DECEMBER 2012Notes to the financial statements4The margin generated when these financial instruments are traded istaken to the profit and loss account immediately.Other illiquid complex financial instruments are valued using internallydevelopedtechniques, that are based on data which are entirely or partlynot observable in active markets.In the absence of observable inputs, these instruments are measured oninitial recognition in a way that reflects the transaction price, regardedas the best indication of fair value. Valuations derived from these modelsare adjusted for liquidity risk and credit risk.The margin generated when these complex financial instrumentsare traded (day one profit) is deferred and taken to the profit andloss account over the period during which the valuation parametersare expected to remain non-observable. When parameters that wereoriginally non-observable become observable, or when the valuation canbe substantiated in comparison with recent similar transactions in anactive market, the unrecognised portion of the day one profit is releasedto the profit and loss account.Lastly, the fair value of unlisted equity securities is measured incomparison with recent transactions in the equity of the companyin question carried out with an independent third party on an arm’slength basis. If no such points of reference are available, the valuation isdetermined either on the basis of generally accepted practices (EBIT orEBITDA multiples) or of the Group’s share of net assets calculated usingthe most recent information available.1.c.11 Financial assets and liabilitiesdesignated at fair value through profitor loss (fair value option)Financial assets or financial liabilities may be designated on initialrecognition as at fair value through profit or loss, in the following cases:■ hybrid financial instruments containing one or more embeddedderivatives which otherwise would have been separated and accountedfor separately;■ where using the option enables the entity to eliminate or significantlyreduce a mismatch in the measurement and accounting treatment ofassets and liabilities that would arise if they were to be classified inseparate categories;■ when a group of financial assets and/or financial liabilities is managedand measured on the basis of fair value, in accordance with adocumented risk management and investment strategy.1.c.12 Income and expenses arising fromfinancial assets and financial liabilitiesIncome and expenses arising from financial instruments measured atamortised cost and from fixed-income securities classified in “Availablefor-salefinancial assets” are recognised in the profit and loss accountusing the effective interest method.The effective interest rate is the rate that exactly discounts estimatedfuture cash flows through the expected life of the financial instrumentor, when appropriate, a shorter period, to the net carrying amount ofthe asset or liability in the balance sheet. The effective interest ratecalculation takes into account all fees received or paid that are an integralpart of the effective interest rate of the contract, transaction costs, andpremiums and discounts.The method used by the Group to recognise service-related commissionincome and expenses depends on the nature of the service. Commissiontreated as an additional component of interest is included in the effectiveinterest rate, and is recognised in the profit and loss account in “Netinterest income”. Commission payable or receivable on execution of asignificant transaction is recognised in the profit and loss account infull on execution of the transaction, under “Commission income andexpense”. Commission payable or receivable for recurring services isrecognised over the term of the service, also under “Commission incomeand expense”.Commission received in respect of financial guarantee commitments isregarded as representing the fair value of the commitment. The resultingliability is subsequently amortised over the term of the commitment,under commission income in Revenues.External costs that are directly attributable to an issue of new shares arededucted from equity net of all related taxes.1.c.13 Cost of riskCost of risk includes movements in provisions for impairment of fixedincomesecurities and loans and receivables due from customers andcredit institutions, movements in financing and guarantee commitmentsgiven, losses on irrecoverable loans and amounts recovered on loanswritten off. This caption also includes impairment losses recorded withrespect to default risk incurred on counterparties for over-the-counterfinancial instruments, as well as expenses relating to fraud and todisputes inherent to the financing business.1.c.14 Derecognition of financial assets andfinancial liabilitiesThe Group derecognises all or part of a financial asset either when thecontractual rights to the cash flows from the asset expire or when theGroup transfers the contractual rights to the cash flows from the assetand substantially all the risks and rewards of ownership of the asset.Unless these conditions are fulfilled, the Group retains the asset in itsbalance sheet and recognises a liability for the obligation created as aresult of the transfer of the asset.The Group derecognises all or part of a financial liability when the liabilityis extinguished in full or in part.1.c.15 Offsetting financial assets and financialliabilitiesA financial asset and a financial liability are offset and the net amountpresented in the balance sheet if, and only if, the Group has a legallyenforceable right to set off the recognised amounts, and intends eitherto settle on a net basis, or to realise the asset and settle the liabilitysimultaneously.Repurchase agreements and derivatives traded with clearing houses thatmeet the two criteria set out in the accounting standard are offset in thebalance sheet.42012 Registration document and annual financial report - BNP PARIBAS 119