78 If there is no derecognition related to this type of event, the reduction in future flows granted to the counterparty or the postponement of these flows to amoredistant horizonduring the restructuring gives rise to the recording of a discount in cost of risk. This represents the loss of future cash flow, discounted at the original effective rate. It is equal to the difference observed between: - The book value of the loan; - And the sum of theoretical future cash flow from the “restructured” loan, discounted at the original effective interest rate (defined at the financing commitment date). In the event of a waiver of part of the share capital, this amount shall constitute a loss to be recorded immediately in cost of risk. The discount recognised when a loan is restructured is accounted for under cost of risk. Upon reversal of the discount, the portion due to the passage of time is recorded in Net Banking Income. Bad debts When a loan is deemed uncollectible, i.e. when there is no longer any hope of it being recovered in full or in part, the amount deemed uncollectible should be derecognised from the balance sheet and written off. The decision as towhen towrite off a loan is based on expert opinion. This must therefore be established by each entity with its Risk Management Department, based on its knowledge of its own business. Before any loss is recorded, a depreciation should have been recorded in Stage 3 (with the exception of assetsmeasured at fair value through profit or loss). For loans at amortised cost or fair value through other comprehensive income on items that may be reclassified, the amount written off is recorded under cost of risk (nominal amount) and Net Banking Income (interest). Derivative financial instruments Classification and measurement Derivative instruments are financial assets or liabilities classified by default as derivative instruments held-fortrading, unless they canbedeemed tobehedgingderivatives. They are recorded on the balance sheet at their initial fair value at the trade date. They are subsequently recognised at their fair value. At each reportingdate, changes in the fair valueof derivatives in the balance sheet are recorded: • In income, for derivatives held for trading or fair value hedges; • In equity, for cash flow hedges or net investments in foreign operations, for the effective portion of the hedge. Hedge accounting General framework In accordancewith theGroup decision, CFM IndosuezWealth Group opts not to apply the “hedge accounting” component of IFRS 9, as permitted by the standard. All hedging relationships continue to be documented in accordance with the IAS 39 rules until, at the latest, the date on which the regulatory text on macro-hedging is adopted by the European Union. However, the eligibility of financial instruments for hedge accounting under IAS 39 takes into account the principles of classification and measurement of financial instruments under IFRS 9. Under IFRS9, and takingaccount of IAS39hedgingprinciples, debt instruments at amortised cost or at fair value through other comprehensive income (items thatmay be reclassified) are eligible for fair value hedging and cash flow hedging. Documentation Hedging relationshipmust adhere to the following principles: • The purpose of a fair value hedge is to hedge against an exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment attributable to the hedged risk(s) and which may affect the profit/loss (for example, hedging of all or part of changes in fair value due to the interest rate risk on a fixed rate loan); • The purpose of a cash flow hedge is to hedge against an exposure to changes in the future cash flows of a recognised asset or liability or a highly likely future transaction attributable to the risk(s) hedged and that can or may (in the event of a planned but unrealised transaction) affect the profit/loss (for example, hedging of changes in all or part of future interest payments on variable rate debt). In the event of a hedging intention, the following conditions must also be met to apply hedge accounting: • Both the hedging instrument and the hedged instrument must be eligible; • Documentation must be formalised from the outset, including in particular the individual designation and characteristics of the hedged item, the hedging instrument, the nature of the hedging relationship and the nature of the hedged risk; • The effectiveness of the hedge must be demonstrated from inception and retrospectively, through tests performed at each balance sheet date. For interest rate risk hedges of a portfolio of financial assets or financial liabilities, CFM Indosuez Wealth Group favours fair value hedge documentation as permitted by IAS 39 adopted by the European Union (the so-called carve out version). Notamment: • The Group documents these hedging relationships on the basis of a gross position of derivatives and hedged items; • The effectiveness of these hedging relationships is justified using schedules.
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