CFM INDOSUEZ Wealth Management - 2020 Annual Report

63 Financial liabilities Classification and measurement of financial liabilities On the balance sheet, financial liabilities are classified into two accounting categories: • financial liabilities at fair value through profit or loss, either by default or as an option; • financial liabilities at amortised cost. Financial liabilities at fair value through profit or loss, by default Financial instruments issued primarily for the purpose of being redeemed in the short term, instruments that are part of a portfolio of identified financial instruments that are managed together and which show indications of a recent short-termprofit-takingprofile, andderivatives (with the exception of certain hedging derivatives) are measured at fair value by default. Changes in the fair value of this portfolio are recognised in profit or loss. Financial liabilities measured at amortised cost All other liabilities that canbedefinedas a financial liability (excluding derivatives) aremeasured at amortised cost. This portfolio is initially recorded at fair value (including income and transaction costs) and is subsequently recognised at amortised cost. Income on client assets Income on client assets is recognised in the category Financial liabilities at amortised cost – Amounts due to clients. The initial measurement is made at fair value and the subsequent measurement, at amortised cost. Reclassification of financial liabilities The initial classification of financial liabilities is irrevocable. No subsequent reclassification is permitted. Distinction between debt and equity instruments The distinction between debt instruments and equity instruments is based on an analysis of the economic substance of the contractual arrangements. A financial liability is a debt instrument if it includes a contractual obligation: • to provide another entity with cash, another financial asset or a variable number of equity instruments; or • to exchange financial assets and liabilities with another entity on potentially unfavourable terms. An equity instrument is a non-redeemable financial instrument that provides discretionary compensation representing a residual interest in a company after deducting all of its financial liabilities (net assets) and is not considered a debt instrument. Derecognition and modification of financial liabilities A financial liability is derecognised in whole or in part: • upon expiration; or • when quantitative or qualitative analyses conclude that it has been substantially modified in the event of restructuring. A substantial change in an existing financial liability is recorded as an expiration of the original financial liability and the recognition of a new financial liability (novation). Any difference between the book value of the expired liabilities and the new liabilities will be recognised immediately in the income statement. Impairment / Provisioning for credit risk Scope of application In accordance with IFRS 9, CFM Indosuez Wealth Group recognises impairment for expected credit losses (ECL) on the following exposures: • financial assets in the form of debt instruments carried at amortised cost or at fair value through other comprehensive income recyclable to income (loans and receivables, debt securities); • financing commitments that are not measured at fair value through profit or loss; • guarantee commitments under IFRS 9 that are not measured at fair value through profit or loss; • trade receivables generated by transactions under IFRS 15. Equity instruments (at fair value through profit or loss or at fair value through other comprehensive income not recyclable to income) are not affected by impairment provisions. Credit risk and impairment/provisioning stages Credit risk is defined as the risk of loss arising from the default of a counterparty resulting in its inability tomeet its commitments to the Group. The credit risk provisioning process follows a three stage model (the three bucket model): • 1st stage (Bucket 1): upon initial recognition of the financial instrument (loan, debt security, guarantee, etc.), the entity recognises the expected credit losses over 12 months; • 2nd stage (Bucket 2): if the credit quality of a given transaction or portfolio deteriorates significantly, the entity recognises lifetime expected credit losses; • 3rd stage (Bucket 3): when one ormore default events involving the transaction or counterparty occur and adversely affect estimated futurecash flows, theentity recognises a lifetime credit loss. Subsequently, if the conditions for classifying financial instruments in Bucket 3 are no longer met, the financial instruments are reclassified to Bucket 2 and then Bucket 1 according to subsequent improvements in the quality of the credit risk.