2012 Registration document and annual financial report - BNP Paribas

6INFORMATIONON THE PARENT COMPANY FINANCIAL STATEMENTSNotes to the parent company financial statementsNotes to the parent company financial statementsNote 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES APPLIEDBY BNP PARIBAS SA6BNP Paribas SA’s financial statements have been prepared in accordancewith the accounting principles applied to credit institutions in France.AMOUNTS DUE FROM CREDIT INSTITUTIONSAND CUSTOMERSAmounts due from credit institutions include all subordinated andunsubordinated loans made in connection with banking transactionswith credit institutions, with the exception of debt securities. They alsoinclude assets purchased under resale agreements, whatever the type ofassets concerned, and receivables corresponding to securities sold undercollateralised repurchase agreements. They are broken down betweendemand loans and deposits, and term loans and time deposits.Amounts due from customers include loans to customers other than creditinstitutions, with the exception of loans represented by debt securitiesissued by customers, assets purchased under resale agreements,whatever the type of assets concerned, and receivables correspondingto securities sold under collateralised repurchase agreements. They arebroken down between commercial loans, customer debit accounts, andother loans.Amounts due from credit institutions and customers are recorded in thebalance sheet at nominal value plus accrued interest not yet due.Outstanding loans and confirmed credit facilities are classified intosound loans, including sound restructured loans, and doubtful loans. Thesame analysis is performed for credit risks attached to forward financialinstruments whose present value represents an asset for the Group.Credit risks on outstanding loans and confirmed credit facilities aremonitored with an internal rating system 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 oftransaction. There are 12 counterparty ratings, ten covering sound loansand two covering doubtful loans and loans classified as irrecoverable.Doubtful loans are defined as loans where the Bank considers thatthere is a risk that the borrowers will be unable to honour all or partof their commitments. This is the case for all loans on which one ormore instalments are more than three months overdue (six months inthe case of real estate loans or loans to local governments), as well asloans for which legal procedures have been launched. When a loan isclassified as doubtful, all other loans and commitments to the debtorare automatically assigned the same classification.The Bank recognises an impairment for doubtful accounts on these loans,in an amount corresponding to the difference between the total loan valueand current value of the future cash flows (from principal, interest, andany realised guarantees) that are deemed recoverable, using a discountrate equal to the original effective interest rate (for fixed-rate loans), orthe most recent contractual interest rate (for floating-rate loans). Theguarantees considered here include mortgages and pledges on assets,as well as credit derivatives acquired by the Bank as a protection againstcredit losses in the loan book.If a loan is restructured because the borrower is facing financialdifficulties, the Bank calculates a discount at the current value of thedifference between the old and new repayment terms. These discountsare recognised as a deduction to assets and reversed through income onan actuarial basis over the remaining term of the loan. If any instalmentson a restructured loan are not paid, the loan is permanently reclassifiedas irrecoverable regardless of the terms of the restructuring.In the case of doubtful loans where the borrower has resumed makingregular payments in accordance with the original repayment schedule, theloan is reclassified as sound. Doubtful loans that have been restructuredare also reclassified as sound, provided that the restructuring termsare met.Irrecoverable loans include loans to borrowers whose credit standingis such that after a reasonable time recorded in doubtful loans noreclassification as a sound loan is foreseeable, loans where an event ofdefault has occurred, almost all restructured loans where the borrowerhas once again defaulted, and loans classified as doubtful for more thanone year that are in default and are not secured by guarantees coveringa substantial portion of the amount due.Impairments for credit risks on assets are deducted from the carryingamount of the assets. Provisions recorded under liabilities includeprovisions related to off-balance sheet commitments, loss provisionsrelating to interests in real-estate development programmes, provisionsfor claims and litigation, provisions for unidentified contingencies andprovisions for unforeseeable industry risks.Additions to and recoveries of provisions and impairment, losses onirrecoverable loans, recoveries on loans covered by provisions anddiscounts calculated on restructured loans are recorded in the profitand loss account under “Cost of risk”.The interest received from the repayment of the carrying amount of loansthat have been written-down, as well as the reversals of discountingeffects and the discount on restructured loans, are recognised under“Interest income”.3362012 Registration document and annual financial report - BNP PARIBAS