CFM INDOSUEZ Wealth Management - 2019 annual report

Measurement of financial assets and liabilities: Initial valuation On initial recognition, financial assets and liabilities are measured at fair value as defined by IFRS 13. Fair value as defined in IFRS 13 is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, in the main market or the most advantageous market, at the measurement date. Subsequent valuation After initial recognition, financial assets and liabilities are valued according to their classification either at amortised cost or at their fair value as defined by IFRS 13. Derivatives are always valued at fair value. Amortised cost is the amount at which the financial asset or financial liability is measured on initial recognition. CFM Indosuez does not apply the rule of incorporating transaction costs directly attributable to their acquisition or issue, less principal repayments, plus or minus accumulated amortisation of any difference (discount or premium) between the initial amount and the amount at maturity calculated using the effective interest rate method, since the amount is non-material (materiality study conducted on a quarterly basis). The amount recognised for financial assets is adjusted for any impairment losses, if necessary. Financial assets Classification and measurement of financial assets Non-derivative financial assets (debt or equity instruments) are recorded in the balance sheet in accounting categories that determine their accounting treatment and subsequent measurement. These financial assets are classified in one of three categories: • financial assets at fair value through profit or loss; • financial assets at amortised cost; • financial assets at fair value through other comprehensive income. The criteria for classifying and measuring financial assets depend on the type of asset, whether it is qualified as: • a debt instrument (i.e. loans and securities with fixed or determinable interest payments); or • an equity instrument (i.e. equities). Debt instruments The classification and measurement of a debt instrument depends on two combined criteria: the business model applied to the portfolio and an analysis of the contractual features of the instrument, unless the fair value option is applied. The three business models: The business model reflects the strategy applied by CFM Indosuez Wealth Group for the management of its financial assets in order to achieve its objectives. The business model is specified for a portfolio of assets and does not represent a case-by-case approach for individual financial assets. There are three business models: • The Hold to Collect model, the objective of which is to receive contractual cash flows over the lifetime of the assets. This business model does not necessarily involve holding all the assets until they mature, however the sale of such assets is strictly regulated; • The Hold to Collect and Sell model, the objective of which is to both collect the contractual cash flows and sell the financial asset. The selling of financial assets and the collecting of cash are both essential in this business model; and • The Other/Sell model, the main objective of which is to sell the assets. This mostly concerns portfolios of instruments held to collect cash flows by selling the assets, portfolios whose performance is measured on the basis of their fair value, and portfolios of financial assets held for trading. When the management strategy applied to the financial assets does not correspond to the Hold to Collect or the Hold to Collect and Sell business models, the financial assets are considered to be managed under an “Other/Sell” business model. This mostly concerns portfolios of instruments held to collect cash flows by selling the assets, portfolios whose performance is measured on the basis of their fair value, and portfolios of financial assets held for trading. Contractual characteristics (the Solely Payments of Principal & Interest (SPPI) test): The SPPI test includes a set of criteria, examined cumulatively, applied to establish whether the contractual cash flows fulfil the characteristics of a simple financial asset (principal repayments and interest payments on the principal amount outstanding). The test is passed when the loan is eligible only for the repayment of principal and when the payment of interest reflects the time value of money, the credit risk associated with the instrument, the other costs and risks of a conventional loan agreement and a reasonable margin, whether the interest rate is fixed or variable. In a simple loan agreement, interest is the consideration for the cost of time, the price of credit and liquidity risk over the period, and other components related to the cost of carrying the asset (e.g. administrative costs). In some cases, when a qualitative analysis is not conclusive, a quantitative analysis (or Benchmark test) is carried out. This additional analysis consists of comparing the contractual cash flows of the assets under review with the cash flows of a benchmark asset. If the difference between the cash flows of the financial asset and the benchmark asset is deemed insignificant, the asset is considered to be an SPPI asset. The method of accounting for debt instruments resulting from determining the business model and performing the SPPI test can be presented in the form of the diagram below: 60 CFM Indosuez Wealth Management