CFM Indosuez Wealth Management Annual Report 2022 72 fully repay another debt for which he cannot meet the contractual conditions due to his financial situation. The restructuring of a loan (performing or in default) assumes that there is a known risk of loss (Stage 3). The need to recognise impairment on the restructured exposure must therefore be analysed accordingly (restructuring does not automatically result in the recognition of impairment for proven losses or classification as default). The classification as a “restructured loan” is temporary. Once the restructuring operation, as defined by the EBA, has been completed, exposure retains this “restructured” status for a minimum period of 2 years, if the exposure was healthy at the time of restructuring, or a minimum period of 3 years if the exposure was in default at the time of restructuring. These periods are extended if certain events occur, (e.g. further incidents). 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 a more distant horizon during 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 receivable is deemed to be irrecoverable, that is to say that there is more hope of recovering all or part of it, it is derecognised on the balance sheet and the amount deemed irrecoverable is written off as a loss. The assessment of the period after which it is recorded as a loss is based on an expert judgement. 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 assets measured 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 (NBI) for interest. DERIVATIVE FINANCIAL INSTRUMENTS Classification and measurement Derivative instruments are financial assets or liabilities classified by default as derivative instruments held-for-trading, unless they can be deemed to be hedging derivatives. 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 reporting date, changes in the fair value of derivatives in the balance sheet are recorded: - In income, for derivatives held for trading or fair value hedges; - In recyclable equity, for cash flow hedges or net investments in foreign operations, for the effective portion of the hedge. Hedge accounting General framework In accordance with the Group decision, CFM Indosuez Wealth 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 IFRS 9, and taking account of IAS 39 hedging principles, debt instruments at amortised cost or at fair value through other comprehensive income (items that may be reclassified) are eligible for fair value hedging and cash flow hedging. Documentation Hedging relationship must 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). - Net investment hedges in foreign operations are intended to provide protection against the risk of adverse changes in fair value associated with the foreign exchange risk of an investment
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