CFM Indosuez Wealth Management Annual Report 2022 66 Conventions for valuing financial assets and liabilities Initial valuation For their initial recognition, financial assets and liabilities are measured at fair value as defined by IFRS 13. As defined by IFRS 13, fair value corresponds to the price that would be received on the sale of an asset or paid to transfer a liability in an ordinary transaction between market participants, on the main or most advantageous market at the valuation date. Subsequent valuation After initial recognition, financial assets and liabilities are measured according to their classification either at amortised cost, using the effective interest rate method (EIR) for debt instruments, or at fair value as defined by IFRS 13. Derivatives are always valued at fair value. Amortised cost corresponds to the amount at which the financial asset or liability is valued during its initial recognition, including transaction costs directly attributable to its acquisition or issue, less repayments of principal, increased or reduced by cumulative amortisation calculated by the effective interest rate method (EIR) on any difference (discount or premium) between the initial amount and the amount at maturity. The amount may be adjusted if necessary for impairment in the case of a financial asset at amortised cost or fair value through recyclable equity. The effective interest rate (EIR) is the rate that exactly discounts the future cash payments or receipts estimated over the expected life of the financial instrument or, when appropriate, over a shorter period, to obtain the net book value for the financial asset or financial liability. Financial assets Classification and valuation of financial assets Non-derivative financial assets (debt or equity instruments) are classified on the balance sheet in accounting categories that determine their accounting treatment and their subsequent valuation method. The criteria for classifying and evaluating financial assets depends on the nature of the financial asset, whether it is qualified as: - debt instruments (i.e. loans and fixed or determinable income securities); or - an equity instrument (e.g. shares). These financial assets are classified in one of three categories: - financial assets at fair value through profit or loss; - financial assets at amortised cost (debt instruments only); - financial assets at fair value through equity (recyclable for debt instruments, non-recyclable for equity instruments). Debt instruments The classification and valuation of a debt instrument depends on the combination of two criteria: the business model defined at portfolio level and the analysis of the contractual terms determined by debt instrument, unless the fair value option is used. 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 constitute a case-by-case intention for an isolated financial asset. 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 concerns, in particular, portfolios where the aim is to collect cash flows via sales, portfolios whose performance is assessed based on fair value and portfolios of financial assets held for trading. When management’s strategy for managing financial assets does not correspond to either the collect model or the collect and sell model, these financial assets are classified in a portfolio whose management model is other/sell. Contractual characteristics (“Solely Payments of Principal & Interests” or SPPI test): SPPI testing combines a set of criteria, examined cumulatively, to establish whether contractual cash flows match the characteristics of simple financing (principal repayments and interest payments on the remaining amount of principal due). 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 this form of qualitative analysis does not allow a conclusion to be drawn, quantitative analysis (or Benchmark testing) is carried out. This additional analysis consists of comparing the contractual cash flows of the asset under review
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