69 financial liability (excluding derivatives) are valued at amortised cost. These liabilities are initially measured at fair value (including transaction income and costs) and subsequently recognised at amortised cost using the effective interest rate method. Reclassification of financial liabilities The initial classification of financial liabilities is irrevocable. No subsequent reclassification is allowed. Distinction between debt and equity The distinction between debt instruments and equity instruments is based on analysis of the substance of the contractual terms. 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 which offers a discretionary return representing a residual interest in a business after deduction of all its financial liabilities (net assets) and which is not qualified as 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 to an existing financial liability must be recorded as an extinction of an initial financial liability and the recognition of a new financial liability (novation). Any differential between the book value of the extinct liability and the new liability will be recognised immediately in the Income Statement. If the financial liability is not derecognised, the original EIR is maintained. A discount/premium is recognised immediately in the Income Statement on the date of modification and is then spread, using the original EIR, over the instrument's remaining lifetime. Negative interest on financial assets and liabilities In accordance with the IFRS IC decision of January 2015, negative interest income (expense) on financial assets that do not meet the definition of income under IFRS 15 is recognised as interest expense in the income statement, not as a reduction of interest income. The same applies to negative interest expense (income) on financial liabilities. Impairment / provisions 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; - lease receivables under IFRS 16; and - trade receivables generated by transactions under IFRS 15. Equity instruments (at fair value through profit or loss or through other comprehensive income on items that may not be reclassified) are not affected by impairment provisions. Derivatives and other financial instruments measured at fair value through profit or loss are subject to a counterparty risk calculation that is not covered by the ECL model. Credit risk and impairment/ provisioning stages Credit risk is defined as the risk of losses related to default by a counterparty leading to its inability to meet its commitments to the Group. The credit risk provisioning process follows a threestage model: • First stage (Stage 1): upon initial recognition of the financial instrument (loan, debt security, guarantee, etc.), CFM Indosuez Wealth recognises the expected credit losses over 12 months • Second stage (Stage 2): if the credit quality of a given transaction or portfolio deteriorates significantly, CFM Indosuez Wealth recognises lifetime expected credit losses; - Third stage (Stage 3): when one or more default events involving the transaction or counterparty occur and adversely affect estimated future cash flows, CFM Indosuez Wealth recognises a lifetime credit loss. Subsequently, if the conditions for classifying financial instruments in stage 3 are no longer met, the financial instruments are reclassified to stage 2 and then stage 1 according to subsequent improvements in the quality of the credit risk. Default definition The definition of default for the purposes of ECL provisioning is identical to that used in management and to calculate regulatory ratios. Thus, a borrower is considered to have defaulted when at least one of the following two conditions is met: - where payments are significantly past due by more than ninety days, unless special circumstances show that the arrears are due to events unrelated to the debtor’s situation;
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