Significant accounting policies

Basis of preparation

The consolidated annual accounts (the ‘annual accounts’) have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as endorsed by the European Union and with Part 9 of Book 2 of the Dutch Civil Code for the financial period ended on December 31, 2018. These annual accounts are based on the ‘going concern’ principle.

The consolidated annual accounts are measured at historical cost except for:

• Equity investments, money market funds, commercial paper and all derivative instruments that are measured at fair value;

• A part of the loans to the private sector which is measured at fair value as of January 1, 2018;

• The carrying value of debt issued that is qualified for hedge accounting, is adjusted for changes in fair value related to the hedged risk;

• For all financial instruments measured at fair value settlement date accounting is applied by FMO;

• Investments in associates are accounted for under the equity method.

Loans to the private sector and private equity investments are recognized when funds are transferred to the customers’ account. Other financial assets and liabilities are recognized on the same day that FMO becomes a party to the contractual terms and conditions of the financial instrument.

Reclassification

Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year.

Adoption of new standards, interpretations and amendments

Adopted

The following standards, amendments to published standards and interpretations were adopted in the current year.

IFRS 9 Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments, which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. EU has endorsed IFRS 9 in November 2016. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory.

FMO has applied IFRS 9 as issued in July 2014 and endorsed by the EU in November 2016. For FMO the effective date of application is from January 1, 2018.

Comparative periods have not been restated. The IFRS 9 standard covers concepts and methods, which are significantly different from accounting standards applied before January 1, 2018. Therefore, it is highly complex to apply the IFRS 9 standard on retrospective basis for 2017. The information presented in for 2017 does not reflect the requirements of IFRS 9 and is therefore not comparable to the information presented for 2018 under IFRS 9. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in Other reserves and further distributed to Contractual reserve and Undistributed profit as at January 1, 2018.

Changes to classification and measurement

From a classification and measurement perspective, the new IFRS 9 standard requires all financial assets, except for equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow characteristics. IFRS 9 also requires that derivatives embedded in host contracts, where the host is a financial asset in the scope of IFRS 9, are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification. The IAS 39 measurement categories are replaced by: Fair Value through Profit or Loss (FVPL), Fair Value through Other Comprehensive Income (FVOCI) and amortized cost (AC).

The following table and the accompanying notes set out the impact on financial assets and liabilities on adopting IFRS 9. Furthermore reference is made to the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of FMO’s financial assets and liabilities.

• a As of January 1, 2018, FMO has classified the interest-bearing securities which had previously been classified as AFS at AC. These instruments pass the SPPI test and are held for liquidity purposes with no intention to routinely sell. The fair value of these instruments that FMO still held at December 31, 2017 was €364,905. The reclassification from AFS to AC has resulted in a measurement change of €3,563 which is equal to the cumulative fair value changes. This has been released against the carrying value which also resulted in a release of the AFS reserve.
• b Certain loans and equity investments have embedded derivatives that were separated under IAS 39. As a result of IFRS 9, the loans and equity investments, together with the embedded derivatives which were previously separated, have been reclassified as FVPL at January 1, 2018. The total amount of derivative financial assets that have been reclassified to loans and to equity investments is €3,176 of which €2,746 has been reclassified to the loan portfolio and €430 has been reclassified to equity.
• c A significant part (€3,615,101) of the Loans to the private sector and Loans guaranteed by the State that was classified as loans and receivables and measured at AC under IAS 39 will also be measured at AC under IFRS 9. The remaining part with a carrying amount of €585,847 does not fully reflect payments of principal and interest and is measured at FVPL under IFRS 9, resulting in a remeasurement of €17,648 which includes an amount of €75 related to other receivables.
• d As of January 1, 2018, FMO has chosen to classify a part of the equity investments (€1,425,035) that was classified as AFS under IAS 39 as FVPL under IFRS The AFS reserve of these investments (€379,944 net of tax) has been transferred to other reserves as per January 1, 2018. However, some of the equity investments with a carrying amount of €77,798 at January 1, 2018 are held for long-term strategic purposes and are designated as at FVOCI. The AFS reserve of these strategic investments (€18,074) has been transferred to a fair value reserve.
• e The IFRS 9 impairment requirements have resulted in an ECL remeasurement of €4,899 on financial assets, mainly related to loans to the private sector at AC and €8,778 on financial liabilities related to loan commitments and financial guarantees. For more details, see the impairment section.
• f The IFRS 9 impairment requirements related to the calculation of interest income on a net-basis for loans in Stage 3 has resulted in a remeasurement of the accrued interest of these loans of €8,586.
• g Based on business model & SPPI test FMO has decided to value these instruments on AC.

The following table summarizes the impact of the adoption of IFRS 9 on the opening balance of FMO’s equity at January 1, 2018.

• a The reclassification of interest-bearing securities from AFS to AC has resulted in a release of the AFS reserve of €3,566 with a deferred tax impact of €897.
• b The AFS reserve of €385,984 with a deferred tax impact of €6,040 related to the equity investments that were reclassified from AFS to FVPL, has been transferred to the Other reserves, Contractual reserve and Undistributed profit as per January 1, 2018.
• c The AFS reserve of €20,819 with a deferred tax impact of €2,745 has been transferred to the fair value reserve.
• d The changes related to the reclassification of financial assets from AC to FVPL, the recognition of the ECL and the correction of the accrued income were recorded in Other reserves, Contractual reserve and Undistributed profit which had a deferred tax impact of €5,589.

Changes to the impairment calculation

IFRS 9 also fundamentally changes the loan loss impairment methodology. The standard replaces IAS 39’s incurred loss approach with a forward-looking expected loss (ECL) approach. IFRS 9 requires to record an allowance for ECLs for loans and other debt instruments not held at FVPL, together with off balance items such as loan commitments and financial guarantee contracts.

The following table reconciles the aggregate opening loan loss provision allowances under IAS 39 and under IAS 37 to the ECL allowances under IFRS 9.

All interest-bearing securities (credit quality of AA+ or higher) and banks (credit quality of BBB- or higher) are classified as Stage 1. An amount of €45 is calculated for the ECL of both asset classes as per January 1, 2018. 

The following table shows the credit quality and the exposure to credit risk of the loans to the private sector at AC at January 1, 2018.

The following table shows the credit quality and the exposure to credit risk of the loan commitments at January 1, 2018.

The following table shows the credit quality and the exposure to credit risk of the financial guarantees at January 1, 2018.

Changes related to hedge accounting

With respect to hedge accounting FMO has elected to adopt the new general hedge accounting model in IFRS 9. This requires FMO to ensure that hedge accounting relationships are aligned with its risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. FMO only applies micro fair value hedge accounting on the funding portfolio. The impact of hedge accounting under IFRS 9 is therefore insignificant for FMO compared to IAS 39.

Other standards adopted in 2018

IFRS 15 Revenue Contracts with Customers

In May 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’. The standard is effective for annual periods beginning on or after January 1, 2018. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognizing revenue as and when the agreed performance obligations are satisfied. This standard has superseded all previous revenue recognition requirements under IFRS. This standard has been adopted by FMO using the modified retrospective method, if applicable, and has no significant financial impact on Net Result and/or shareholders Equity. For the adoption of IFRS 15, FMO did not apply any of the available optional practical expedients. Remuneration for services rendered are further disclosed in the section 'Segment Information'.

Amendments to IFRS 2 Share-based payment – Classification and measurements of share-based payment transactions

In June 2016, the IASB issued amendments to IFRS 2 containing the clarification and amendments of accounting for cashsettle share-based payment transactions that include a performance condition, accounting of share-based payment transactions with net settlement features and accounting for modifications of share-based payment transactions from cashsettled to equity-settled. The amendments do not have impact on FMO.

Amendments to IAS 40 Investments property – Transfers of investment property

These amendments provide guidance and include criteria for transfers of property to, or from, investment property in accordance with IAS 40. This amendment is effective for annual reporting periods beginning on or after January 1, 2018 and has no impact on FMO.

Annual Improvements 2014-2016 Cycle

Amendments regarding IFRS 1 First time adoption of IFRS, IFRS 12 Disclosure of interest in other entities and IAS 28 Investments in associates and joint ventures. These amendments mainly comprise additional guidance and clarification and have no impact on FMO.

IFRIC Interpretation 22 Foreign currency transactions and advance consideration

The interpretation provides clarifications on the transaction date for the purpose of determining the exchange rate with respect to the recognition of the non-monetary prepayment asset or deferred income liability and that a date of transaction is established for each payment or receipt in case of multiple advanced payments or receipts. IFRIC 22 is effective for annual reporting periods beginning on or after January 1, 2018. The interpretation has a minor impact on FMO.

Issued but not yet adopted standards

The standards issued and endorsed by the European Union, effective for annual periods beginning after January 1, 2019, which have not yet been applied by FMO in preparing these consolidated annual accounts, are listed below.

Amendments to IAS 1 and IAS 8

The IASB has issued amendments of IAS 1 and IAS 8 to clarify the definition of material, specifically explaining obscuring, reasonable influence and primary users. The effective date for these amendments is for annual reporting periods beginning on January 1, 2020. FMO has adopted IFRS 9 Financial instruments in 2018 and has used various material estimates for that matter based on the current definition of material. In 2019 FMO will assess and incorporate the amendments to material into the valuation of all financial instruments. The amendment is not expected to have impact on FMO.

IFRS 16 Leases

The new standard IFRS 16 ‘Leases’ was issued in January 2016 by the IASB and requires lessees to recognize assets and liabilities for most leases. For lessors, there is little change to the existing accounting in IAS 17 Leases. The standard will be effective for annual periods beginning on or after January 1, 2019. The impact of this standard is limited to the building and cars we are renting/leasing. On the adoption as per January 1, 2019, the impact of these changes on equity is between approximately 0 and 2 million.

IFRIC Interpretation 23 – Uncertainty over Income Tax Treatments

The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The interpretation has no impact on FMO.

Amendments to IFRS 9 – Prepayment Features with Negative Compensation

Under the current IFRS 9 requirements, the SPPI condition is not met if the lender has to make a settlement payment in the event of termination by the borrower. In October 2017 the IASB amended the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at AC (or, depending on the business model, at FVOCI) even in the case of negative compensation payments in case of early repayment of loans. This amendment is effective for annual reporting periods beginning on or after January 1, 2019 and does not have impact for FMO.

Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures

The amendment clarifies that IFRS 9 is applicable to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. Furthermore, the paragraph regarding interests in associates or joint ventures that do not constitute part of the net investment has been deleted. The amendment is expected to be effective starting from January 1, 2019. These amendments will have minor impact on FMO.

Amendments to IAS 19 – Plan amendment, Curtailment or Settlement

In case of plan amendment, curtailment or settlement, it is now mandatory that the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for remeasurement. Also these amendments include clarification of the effect of plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. This IAS 19 amendment will have a minor impact when a plan amendment occurs.

Annual Improvements 2015-2017 Cycle

Amendments regarding (1) IFRS 3/ IFRS 11 with respect to obtaining control over a joint operation business, (2) IAS 12 Income taxes connected to income tax consequences of dividends when a liability to par the dividend is recognized and (3) IAS 23 Borrowing costs that clarifies any specific borrowing that remains outstanding after related asset (ready for use or sale) will become part of the general borrowing of that entity. These amendments mainly comprise additional guidance and clarification and will have no impact on FMO.

Other significant standards issued, but not yet endorsed by the European Union and not yet effective up to the date of issuance of FMO’s Annual Accounts 2018, are listed below.

Amendments to References to the Conceptual Framework in IFRS Standards

On March 28, 2018 IASB presented the revised Conceptual Framework for Financial Reporting. The Conceptual Framework is not a standard itself but can be used as general guidance for transactions / events where specific IFRS standards are not available. Main improvements in the revised Conceptual Framework contains the introduction of concepts for measurement and presentation & disclosures, guidance for derecognition of assets and liabilities. In addition definitions of an asset & liability and criteria for recognition have been updated. These amendments will have minor impact on FMO.

Amendments to IFRS 3 Business Combinations

On October 22, 2018 The IASB has issued narrow-scope amendments to IFRS 3 Business Combinations to improve the definition of a business. The amendments will help companies determine whether an acquisition made is a business or a group of assets. The amendments are effective for business combinations for which the acquisition date is on or after the first annual reporting period beginning 2020. This amendment will have impact on future business acquisitions from FMO.

IFRS 17 Insurance Contracts

IFRS 17 was issued in May 2017 and is to ensure that an entity provides relevant information that faithfully represents such contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flow. The standard is expected to be effective on or after January 1, 2021. This standard does not have impact on FMO.

Significant estimates, assumptions and judgements

In preparing the annual accounts in conformity with IFRS, management is required to make estimates and assumptions affecting reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgment is inherent to the formation of estimates. Although these estimates are based on management’s best knowledge of current events and actions, actual results could differ from such estimates and the differences may be material to the annual accounts. For FMO the most relevant estimates and assumptions relate to:

• The determination of the fair value of financial instruments based on generally accepted modeled valuation techniques;

• The determination of the ECL allowance (applicable from January 1, 2018);

• The determination of the counterparty-specific and group-specific value adjustments (applicable before January 1, 2018);

• The pension liabilities and determination of tax (applicable from January 1, 2018 and before).

Information about judgements made in applying accounting policies are related to the following:

• Classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial assets are solely payments of principal and interest (applicable from January 1, 2018);

• The inputs and calibration of the ECL model which include the various formulas and the choice of inputs, aging criteria and forward-looking information (applicable from January 1, 2018);

• The inputs and calibration of the model for group-specific value adjustments including the criteria for the identification of (country/regional) risks and economic data. The methodology and assumptions are reviewed regularly in the context of loss experience (applicable before January 1, 2018).

Financial assets – Classification

Policy applicable from January 1, 2018

On initial recognition, a financial asset is classified as measured at AC, FVOCI or FVPL.

A financial asset is measured at AC if it meets both of the following conditions and is not designated as at FVPL:

• It is held within a business model whose objective is to hold assets to collect contractual cash flows; and

• Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVPL:

• It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

• Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

For equity investments that are not held for trading an irrevocable election exists (on an instrument-by-instrument basis) to present subsequent changes in fair value in OCI.

All financial assets not classified as measured at AC or FVOCI as described above are measured at FVPL. In addition, on initial recognition FMO may irrevocably designate a financial asset that otherwise meets the requirements to be measured at AC or at FVOCI as at FVPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Transaction costs related to financial assets, not measured at FVPL, are directly added to its fair value for initial recognition and therefore attributed directly to its acquisition.

Business model assessment

FMO has made an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information that is considered includes:

• How the performance of the portfolio is evaluated and reported to management of FMO;

• The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;

• The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how FMO’s stated objective for managing the financial assets is achieved and how cash flows are realized.

Financial assets whose performance is based on a fair value basis are measured at FVPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

Contractual cash flow assessment

For the purpose of the contractual cash flow assessment, related to solely payments of principal and interest (SPPI), ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, FMO has considered the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, FMO has considered among others:

• Contingent events that would change the amount and timing of cash flows – e.g. prepayment and extension features, loans with performance related cash flows;

• Features that modify the consideration for the time value of money – e.g. regulated interest rates, periodic reset of interest rates;

• Loans with convertibility and prepayment features;

• Terms that limit FMO’s claim to cash flows from specified assets – e.g. non-recourse assets;

• Contractually linked instruments.

Reclassification

Financial assets can be only reclassified after initial recognition in very infrequent instances. This happens if the business model for managing financial assets has changed and this change is significant to FMO operations.

Policy applicable before January 1, 2018

FMO classified its financial assets into one of the following categories:

• Loans and receivables;

• Available for sale; and

• At FVPL, and within this category as:

• • Held for trading; or

  • Designated as at FVPL.

FMO had no financial assets that were classified as held to maturity as allowed under IAS 39.

Financial assets – Impairment

Policy applicable from January 1, 2018

FMO estimates an allowance for expected credit losses for the following financial assets:

• Banks;

• Interest-bearing securities;

• Loans to the private sector;

• Loan commitments and financial guarantee contracts issued.

No impairment loss is recognized on equity investments. Specific provisions on loans guaranteed by the State are accounted for by FMO but can be eligible for reimbursement.

Impairment stages loans to the private sector

FMO groups its loans into Stage 1, Stage 2 and Stage 3, based on the applied impairment methodology, as described below:

• Stage 1 – Performing loans: when loans are first recognized, an allowance is recognized based on a 12-month expected credit loss;

• Stage 2 – Underperforming loans: when a loan shows a significant increase in credit risk, an allowance is recorded for the lifetime expected credit loss;

• Stage 3 –Credit-impaired loans: a lifetime expected credit loss is recognized for these loans. In addition, in Stage 3, interest income is accrued on the AC of the loan net of allowances.

ECL measurement

FMO’s ECL model is primarily an expert based model and this model is frequently benchmarked with other external sources if possible.

ECL measurement Stage 1 and Stage 2

IFRS 9 ECL allowance reflects unbiased, probability-weighted estimates based on loss expectations resulting from default events over either a maximum 12-month period from the reporting date or the remaining life of a financial instrument. The method used to calculate the ECL allowances for Stage 1 and Stage 2 assets are based on the following parameters:

• PD: the Probability of Default is an estimate of the likelihood of default over a given time horizon. FMO’s uses an scorecard model based on quantitative and qualitative indicators to assess current and future clients and determine PDs. The output of the scorecard model is mapped to the Moody’s PD master scale based on idealized default rates. For IFRS 9 a point in time adjustment is made to these PDs using a z-factor approach to account for the business cycle;

• EAD: the Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, scheduled by contract or otherwise, expected drawdowns and accrued interest from missed payments;

• LGD: the Loss Given Default is an estimate of FMO’s loss arising in the case of a default at a given time. It is based on the difference between the contractual cash flows due and any future cashflows or collateral that the FMO would expect to receive;

• Z-factor: the z-factor is a correction factor to adjust the client PDs for current and expected future conditions. The z-factor adjusts the current PD and PD two years into the future. GDP growth rates per country from the IMF, both current and forecasted, are used as the macro-economic driver to determine where each country is in the business cycle. Client PDs are subsequently adjusted upward or downward based on the country where they are operating.

Macro economic scenarios in PD estimates

In addition to the country-specific z-factor adjustments to PD, FMO applies probability-weighed scenarios to calculate final PD estimates in the ECL model. The scenarios are applied globally, and are based on the vulnerability of emerging markets to prolonged economic downturn. The scenarios and their impact are based on IMF data and research along with historical default data in emerging markets.

The three scenarios applied are:

• Positive scenario: Reduced vulnerability to an emerging market economic downturn;

• Base scenario: Vulnerability and accompanying losses based on FMO’s best estimate from risk models;

• Downturn scenario: Elevated vulnerability to an emerging market economic downturn.

Management overlay

In determining the final ECL, FMO management has evaluated a range of possible outcomes, taking into account past events, current conditions and the economic outlook. The quantified outcome of the ECL model serves as a key starting point. Additional considerations are being assessed through the application of management overlay. This incorporates
considerations such as (1) individual loss assessments and (2) observed data & model limitations.

ECL measurement Stage 3

The calculation of the expected loss for Stage 3 is different from the approach for Stage 1 and 2 loans. Reason for this is that loan-specific impairments provide a better estimate for Stage 3 loans in FMO’s diversified loan portfolio. To determine the specific impairment, the following steps are taken:

• Calculate probability weighted expected loss based on multiple scenarios including return to performing (and projected cash flows), restructuring, and write-off or sale;

• Apply the impairment matrix (based on LGD, arrears and client rating);

• Take expected cash flows from collateral and “firm offers” into account. The cashflows from collateral and "firm offers" serve as a cap for the provision (or a floor for the value of the loan).

Based on these inputs the IRC decides on the specific impairment.

Staging criteria and triggers

Financial instruments classified as low credit risk

FMO considers all financial instruments with an investment grade rating (BBB- or better on the S&P scale or F10 or better on FMO’s internal scale) to be classified as low credit risk. For these instruments, the low credit risk exemption is applied and irrespective of the change of credit risk (as long as it remains investment grade) a lifetime expected credit loss will not be recognized. This exemption lowers the monitoring requirements and reduces operational costs. 

No material significant increase in credit risk since origination (Stage 1)

All loans which have not had a significant increase in credit risk since contract origination are allocated to Stage 1 with an ECL allowance recognized equal to the expected credit loss over the next 12 months.

Significant increase in credit risk (Stage 2)

IFRS 9 requires financial assets to be classified in Stage 2 when their credit risk has increased significantly since their initial recognition. For these assets, a loss allowance needs to be recognized based on their lifetime ECLs. FMO considers whether there has been a significant increase in credit risk of an asset by comparing the lifetime probability of default upon initial recognition of the asset against the risk of a default occurring on the asset as at the end of each reporting period. This assessment is based on either one of the following items:

• The change in internal credit risk grade with a certain number of notches (see diagram below) compared to the internal rating at origination; 

• The fact that the financial asset is 30 days past due; 

• The application of forbearance. 

Credit-impaired financial assets (Stage 3)

A financial asset is transferred to Stage 3 when FMO’s IRC has decided that credit risk deterioration has occurred and decides to apply a specific impairment. The triggers for deciding on specific impairments include among others bankruptcy, distressed restructuring, days of past due or central bank intervention.

Definition of default

 A financial asset is considered as default when:

• The client is past due more than 90 days;

• When FMO judges that the client is unlikely to pay its credit obligation to FMO and the IRC decides on a specific impairment (Stage 3 transfer). 

FMO has opted not to align the definition of default to Stage 3 as there are cases of clients being more than 90 days past due, where the IRC judges that the client will likely pay and therefore do not require a specific impairment

Written-off financial assets

A write-off is made when all claim is deemed uncollectible, when FMO has no reasonable prospects of recovery after among others enforcement of collateral or legal enforcement with means of lawsuits. Furthermore, a write-off is performed when the loan is being forgiven by FMO. Write-offs are charged against previously booked impairments. If no Stage 3 impairment is recorded, the write-off is included directly in the profit and loss account under ‘Impairments’.

The following diagram provides a high level overview of the IFRS 9 impairment approach at FMO.

Value adjustments on loans

Policy applicable before January 1, 2018

At each reporting date FMO assesses the necessity for value adjustments on loans. Value adjustments are recorded if there is objective evidence that FMO will be unable to collect all amounts due according to the original contractual terms or the equivalent value. The value adjustments are evaluated at a counterparty-specific and group-specific level based on the following principles:

1. Counterparty-specific:
   Individual credit exposures are evaluated based on the borrower’s characteristics, overall financial condition, resources and payment record, original contractual term, exit possibilities and, where applicable, the realizable value of the underlying collateral. The estimated recoverable amount is the present value of expected future cash flows, which may result from restructuring or liquidation. In case of a loan restructuring, the estimated recoverable amount as well as the value adjustments are measured by using the original effective interest rates before the modification of the terms.
   Value adjustments for credit losses are established for the difference between the carrying amount and the estimated recoverable amount.

2. Group-specific:
   All loans that have no counterparty-specific value adjustment are divided in groups of financial assets with similar credit risk characteristics and are collectively assessed for value adjustments. The credit exposures are evaluated based on local political and economic developments and probabilities of default (based on country ratings) and loss given defaults, and taking into consideration the nature of the exposures based on product/country combined risk assessment. The probabilities of default and the loss given defaults are periodically assessed as part of FMO’s financial risk control framework.

A value adjustment is reported as a reduction of the asset’s carrying value on the balance sheet. All loans are reviewed and analyzed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared to prior estimates will result in a change in the value adjustments and will be charged or credited to the profit and loss account. A value adjustment is reversed only when the credit quality has improved to the extent that reasonable assurance of timely collection of principal and interest is in accordance with the original or revised contractual terms.

Modification of financial assets

Policy applicable before and from January 1, 2018

The contractual terms of a loan may be modified which may include extending the maturity, changing interest margin and changing the timing of interest payments. If the terms of financial assets are modified, FMO evaluates whether the cash flows of the modified assets are different. If the cash flows are substantially different, having a net present value of more than 10 percent from the original contract, then the contractual rights to cash flows from the original financial assets are deemed to have expired. In this case, the original financial asset is derecognized, and a new financial asset is recognized. If the cash flows of the modified financial asset carried at AC are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, FMO recalculates the gross carrying amount of the financial asset and recognizes the amount arising from adjusting the gross carrying amount as a modification gain or loss. If such a modification is carried out because of financial difficulties of the borrower amongst others delay in contractual payments, central bank intervention or bankruptcy prospects, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income.

Impairments of equity investments

Policy applicable before January 1, 2018

All equity investments are reviewed and analyzed at least semi-annually. An equity investment is considered impaired if its carrying value exceeds the recoverable amount by an amount considered significant or for a period considered prolonged. FMO treats “significant” generally as 25% and “prolonged” generally as greater than 1 year. If an equity investment is determined to be impaired, the impairment is recognized in the profit and loss account as a value adjustment. The impairment loss includes any unrealized loss previously recognized in shareholders’ equity. The impairment losses shall not be reversed through the profit and loss account except upon realization. Accordingly, any subsequent unrealized gains for impaired equity investments are reported through shareholders’ equity in the available for sale reserve.

Fair value of financial instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the fair value of an instrument is measured by using the quoted price in an active market for that instrument. If there is no quoted price in an active market, valuation techniques are used that maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

Amortized cost and gross carrying amount

The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance (or value adjustment before January 1, 2018).

The gross carrying amount of a financial assets is the amortized cost of a financial asset before adjusting for any expected credit loss allowance.

Group accounting and consolidation

The company accounts of FMO and the company accounts of the subsidiaries Nuevo Banco Comercial Holding B.V., Asia Participations B.V., FMO Investment Management B.V., FMO Medu II Investment Trust Ltd. and Equis DFI Feeder L.P. and Nedlinx B.V. are consolidated in these annual accounts.

FMO has a 63% stake in Equis DFI Feeder L.P. and all other subsidiaries are 100% owned by FMO.

Segment reporting

The operating segments are reported in a manner consistent with internal reporting to FMO’s chief operating decision maker. The chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board. As of January 2018 FMO has decided to present its operating segments based on servicing unit instead of strategic sector to be more aligned with internal reporting towards the Management Board. The comparative figures have been adjusted accordingly. Reference is made to the section 'Segment Information' for more details on operating segments.

Fiscal unity

FMO forms a fiscal unity for corporate income tax purposes with its fully-owned Dutch subsidiaries Nuevo Banco Comercial Holding B.V., Asia Participations B.V. and FMO Investment Management B.V. As a consequence, FMO is severally liable for all income tax liabilities for these subsidiaries.

Foreign currency translation

FMO uses the euro as the unit for presenting its annual accounts. All amounts are denominated in thousands of euros unless stated otherwise. In accordance with IAS 21, foreign currency transactions are translated to euro at the exchange rate prevailing on the date of the transaction. At the balance sheet date, monetary assets and liabilities and non-monetary assets that are not valued at cost denominated in foreign currencies are reported using the closing exchange rate.
Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities, are recognized in the profit and loss account under ‘results from financial transactions’.

Unrealized exchange differences on non-monetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. For non-monetary financial assets, exchange differences are recorded directly in shareholders’ equity.

When preparing the annual accounts, assets and liabilities of foreign subsidiaries and FMO’s share in associates are translated at the exchange rates at the balance sheet date, while income and expense items are translated at weighted average rates for the period. Differences resulting from the use of closing and weighted average exchange rates, and from revaluation of a foreign entity’s opening net asset value at closing rate, are recognized directly in the translation reserve within shareholders’ equity. These translation differences are maintained in the translation reserves until disposal of the subsidiary and/or associate.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and when there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

Derivative instruments

Derivative financial instruments are initially recognized at fair value on the date FMO enters into a derivative contract and are subsequently remeasured at its fair value. Changes in the fair value of these derivative instruments are recognized immediately in profit and loss. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

Embedded derivatives

Part of the derivatives related to the asset portfolio concerns derivatives that are embedded in other financial instruments. Such combinations are known as hybrid instruments and arise predominantly from providing mezzanine loans and equity investments.

Policy applicable from January 1, 2018

Derivatives embedded in host contracts, where the host is a financial asset in the scope of IFRS 9, are not separated. Instead, the whole hybrid financial instrument as a whole is assessed for classification as set out in the section 'Financial assets- Classification'.

Policy applicable before January 1, 2018

Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract. These derivatives are measured at fair value with changes in fair value recognized in profit and loss.

Hedge accounting

FMO uses derivative financial instruments as part of its asset and liability management to manage exposures to interest rates and foreign currencies. FMO applies prospective micro fair value hedge accounting when transactions meet the specified criteria. When a financial instrument is designated as a hedge, FMO formally documents the relationship between the hedging instrument(s) and hedged item(s). Documentation includes its risk management objectives and its strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. FMO only applies micro fair value hedge accounting on the funding portfolio. Changes in the fair value of these derivatives are recorded in the profit and loss account under results of financial transactions. Any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are also recorded in the profit and loss account. If a hedge relationship is terminated for reasons other than the derecognition of the hedged item, the difference between the carrying value of the hedged item at that point and the value at which it would have been carried had the hedge never existed (the ‘unamortized fair value adjustment’) is amortized and included in net profit and loss over the remaining term of the original hedge. If the hedge item is derecognized, e.g. sold or repaid, the unamortized fair value adjustment is recognized immediately in profit and loss.

Definition Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the statement of profit or loss, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest- bearing instruments, amortized through the statement of profit or loss over the remaining term of the original hedge or recognized directly when the hedged item is recognized. For non-interest-bearing instruments, the cumulative adjustment of the hedged item is recognized in the statement of profit or loss only when the hedged item is recognized.

Derivatives

Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently
measured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions and valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.

Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profit or loss, and if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognized in the statement of profit or loss. An assessment is carried out when FMO first becomes party to the contract. A reassessment is carried out only when there is a change in the terms of the contract that significantly modifies the expected cash flows.

The method of recognizing the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Bank designates certain derivatives as hedges of the fair value of recognized assets or liabilities or firm commitments.  Hedge accounting is used for derivatives designated in this way provided certain criteria are met. At the inception of the transaction FMO documents the relationship between hedging instruments and hedged items, its risk management objective, together with the methods selected to assess hedge effectiveness. The Bank also documents its assessment, at hedge inception, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.

Policy applicable before January 1, 2018

In order to qualify for hedge accounting, a hedge relationship shall be highly effective on a prospective basis. A hedge is considered effective if the changes in fair value attributable to the hedged risk are expected to be offset by the hedging instrument in a range of 80% to 125%. It is also necessary to assess, retrospectively, whether the hedge was highly effective over the previous reporting period.

FMO discontinues hedge accounting when it is determined that:

• A derivative is not, or ceased to be, highly effective as a hedge;

• The derivative has expired, or is sold, terminated or exercised; or

• The hedged item has matured, is sold or is repaid.

Policy applicable from January 1, 2018

FMO only applies micro-hedging strategies, hence at hedge inception the prospective test is conducted.

A hedging relationship qualifies for hedge accounting, if it meets all of the below effective requirements:

• There is an economic relationship between the hedged item and the hedging instrument, Economic relationship means that the hedging instrument and the hedged item must be expected to move in opposite directions as a result of a change in the hedged risk;

• The effect of credit risk does not dominate the value changes that result from that economic relationship. In other words, credit risk that can arise on both the hedging instrument and the hedged item in the form of counterparty’s credit risk or the entity’s own credit risk does not have a very significant effect on the fair value of the hedged item or the hedging instrument;

• The hedge ratio defined as the ratio between the amount of hedged item and the amount of hedging instrument shall not reflect an imbalance that would create hedge ineffectiveness. For a perfectly match of the underlying of the hedging instrument with the designated hedged risk, the hedge ratio would be 1:1 or less. The level of the hedge will be discussed by Treasury and Risk Management.

Hedge accounting shall be discontinued if the qualification criteria are not met. The scenarios are as follows:

Further reference is made to sections 'Derivative instruments' in Note 4.

Rebalancing

Rebalancing is applicable when there is basis risk between the hedged item and the hedging instrument. Rebalancing only affects the expected relative sensitivity between the hedged item and the hedging instrument going forward, as ineffectiveness from past changes in the sensitivity will have already been recognized in profit or loss. FMO will rebalance a hedging relationship if that relationship still has an unchanged risk management objective but no longer meets the hedge effectiveness requirements regarding the hedge ratio.

For more details on hedge accounting we refer to Note 4 Derivative financial instruments and hedge accounting.

Policy applicable before January 1, 2018

A valid hedge relationship exists when a specific relationship can be identified between financial instruments in which the change in value of one instrument, the ‘hedge instrument’, is correlated highly negatively to the change in value of the other, the ‘hedged item’. To qualify for hedge accounting, this correlation must be within 80% to 125%, with any ineffectiveness recognized in the profit and loss account.

Interest income and expense

Interest income and expense are recognized in the profit and loss account for all interest-bearing instruments on an accrual basis using the ‘effective interest’ method based on the fair value at inception. Interest income and expense also include amortized discounts, premiums on financial instruments and interest related to derivatives.

Policy applicable from January 1, 2018

When a financial asset becomes credit-impaired and is, therefore, regarded as Stage 3, interest income is calculated by applying the effective interest rate to the net AC of the financial asset. If the financial asset is no longer credit-impaired, the calculation of interest income reverts to the gross basis.

Policy applicable before January 1, 2018

When collection of loans becomes doubtful, value adjustments are recorded for the difference between the carrying values and recoverable amounts. Interest income is thereafter recognized based on the original effective yield that was used to discount the future cash flows for the purpose of measuring the recoverable amount.

Fee and commission income and expense

FMO earns fees from a diverse range of services. The revenue recognition for financial service fees depends on the purpose for which the fees are charged and the basis of accounting for the associated financial instrument. Fees that are part of a financial instrument carried at fair value are recognized in the profit and loss account. Fee income that is part of a financial instrument carried at AC can be divided into three categories:

1. Fees that are an integral part of the effective interest rate of a financial instrument (IFRS 9)
   These fees (such as front-end fees) are generally treated as an adjustment to the effective interest rate. When the facility is not used and the commitment period expires, the fee is recognized at the moment of expiration. However, when the financial instrument is to be measured at fair value subsequent to its initial recognition, the fees are recognized as interest-income;
   

2. Fees earned when services are provided (IFRS 15)
   Fees charged by FMO for servicing a loan (such as administration fees and agency fees) are recognized as revenue when the services are provided. Portfolio and other management advisory and service fees are recognized in line with the periods and the agreed services of the applicable service contracts;
   

3. Fees that are earned on the execution of a significant act (IFRS 15)
   These fees (such as arrangement fees) are recognized as revenue when the significant act has been completed.
   

Dividend income

Dividends are recognized in dividend income when a dividend is declared. The dividend receivable is recorded at declaration date.

Cash and cash equivalents

Cash and cash equivalents consist of banks and short-term deposits that usually mature in less than three months from the date of acquisition. Short-term deposits are all measured at AC with the exception of money market funds and commercial paper which are valued at FVPL. These financial instruments are very liquid with high credit rating and which are subject to an insignificant risk of changes in fair value. There is no restriction on these financial instruments and FMO has on demand full access to the carrying amounts. Unrealized gains or losses on the money market funds & commercial loan portfolio (including foreign exchange results) are reported in the results from financial transactions.

Loans to the private sector

Loans originated by FMO include:

• Loans to the private sector in developing countries for the account and risk of FMO;

• Loans provided by FMO and, to a certain level, guaranteed by the State.

Policy applicable from January 1, 2018

Loans to the private sector on the balance sheet of FMO include:

• Loans measured at AC which comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. These loans are initially measured at cost, which is the fair value of the consideration paid plus incremental direct transaction costs incurred. Subsequently, the loans are measured at AC using the effective interest rate method;

• Loans mandatorily measured at FVPL which do not comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. These are measured at fair value with changes recognized in profit and loss.

Policy applicable before January 1, 2018

Loans are recognized as assets when cash is advanced to borrowers. Loans are classified as Loans and receivables and initially measured at cost, which is the fair value of the consideration paid, net of transaction costs incurred. Subsequently, the loans are measured at amortized cost using the effective interest rate method.

Interest on loans is included in interest income and is recognized on an accrual basis using the effective interest rate method. Fees relating to loan origination and re-financing are deferred and amortized to interest income over the life of the loan using the effective interest rate method.

Interest-bearing securities

Policy applicable from January 1, 2018

Interest-bearing securities include bonds which are held for long-term liquidity purposes. These securities are measured at AC since they comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. The securities are initially measured at cost, which is the fair value of the consideration paid, net of transaction costs incurred. Subsequently, they are measured at AC using the effective interest rate method. For the interest-bearing securities an allowance for ECL is estimated. For more details we refer to the section 'Financial assets – Impairment'.

Policy applicable before January 1, 2018

Interest-bearing securities include bonds and loans and are classified as available for sale investments. The interest-bearing securities are carried at fair value. The determination of fair values of interest-bearing securities is based on quoted market prices or dealer price quotations from active markets. Unrealized revaluations due to movements in market prices net of applicable income taxes, are reported in the AFS reserve under the shareholders’ equity except for foreign currency exchange results which are recorded under the results from financial transactions in the profit and loss accounts. Value adjustments and realized results on disposal or redemption are recognized in profit or loss. Interest accrued on interest-bearing securities is included in interest income.

For the interest-bearing securities an assessment is performed on each reporting date to assess whether there is objective evidence that an investment is impaired.

Equity investments

Policy applicable from January 1, 2018

Equity investments on the balance sheet of FMO include investments in which FMO has no significant influence and are classified as:

• Equity investments are measured at FVPL. FMO has a long-term view on these equity investments, usually selling its stake within a period of 5 to 10 years. Therefore these investments are not held for trading and are measured at fair value with changes recognized in profit and loss;

• Equity investments designated as at FVOCI. The designation is made, since these are held for long-term strategic purposes. These investments are measured at fair value. Dividends are recognized as income in profit and loss unless the dividend clearly represents a recovery part of the cost of the investment. Other net gains and losses are recognized in the fair value reserve (OCI) and are never reclassified to profit and loss.

Policy applicable before January 1, 2018

Equity investments in which FMO has no significant influence are classified as AFS assets and are measured at fair value. Unrealized gains or losses are reported in the AFS reserve net of applicable income taxes until such investments are sold, collected or otherwise disposed of, or until such investment is determined to be impaired. Foreign exchange differences are reported as part of the fair value change in shareholders’ equity. On disposal of the AFS investment, the accumulated unrealized gain or loss included in shareholders’ equity is transferred to profit and loss.

Investments in associates

Equity investments in companies in which FMO has significant influence (‘associates’) are accounted for under the equity accounting method. Significant influence is normally evidenced when FMO has from 20% to 50% of a company’s voting rights unless:

• FMO is not involved in the company’s operational and/or strategic management by participation in its Management, Supervisory Board or Investment Committee; and

• There are no material transactions between FMO and the company; and

• FMO makes no essential technical assistance available.

Investments in associates are initially recorded at cost and the carrying amount is increased or decreased after the date of acquisition to recognize FMO’s share of the investee’s results or other results directly recorded in the equity of associates.

Property, plant and equipment (PP&E)

ICT equipment

Expenditures directly associated with identifiable and unique software products controlled by FMO and likely to generate economic benefits exceeding costs beyond one year, are recognized as PP&E assets. These assets include staff costs incurred to make these software products operable in the way management intended for these software products. Costs associated with maintaining software programs are recognized in the profit and loss account as incurred. Expenditure that enhances or extends the performance of software programs beyond their original specifications is recognized as a capital improvement and added to the original cost of the software.

Furniture and leasehold improvements (PP&E)

Furniture and leasehold improvements are stated at historical cost less accumulated depreciation.

Depreciation

Depreciation is calculated using the straight-line method to write down the cost of such assets to their residual values over their estimated useful lives as follows:

PP&E assets are reviewed for impairment whenever triggering events indicate that the carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are reported in operating profit. Repairs and renewals are charged to the profit and loss account when the expenditure is incurred.

Debentures and notes

Debentures and notes consist of medium-term notes under FMO’s Debt Issuance Programme or other public issues. Furthermore a subordinated note is also included in the Debentures and Notes. Under IFRS this note is classified as financial liability, but for regulatory purposes it is considered as Tier 2 capital.

Debentures and notes can be divided into:

• Notes qualifying for hedge accounting (measured at AC and adjusted for the fair value of the hedged risk);

• Notes that do not qualify for hedge accounting (valued at AC).

Debentures and notes measured at amortized cost

Debentures and notes are initially measured at cost, which is the fair value of the consideration received, net of transaction costs incurred. Subsequent measurement is AC, using the effective interest rate method to amortize the cost at inception to the redemption value over the life of the debt.

Debentures and notes eligible for hedge accounting

When hedge accounting is applied to debentures and notes, the carrying value of debt issued is adjusted for changes in fair value related to the hedged risk. The fair value changes are recorded in the profit and loss account. Further reference is made to sections ‘Derivative instruments’ and ‘Hedge accounting’.

Provisions

Provisions are recognized when:

• FMO has a present legal or constructive obligation as a result of past events; and

• It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

• A reliable estimate of the amount of the obligation can be made.

A provision is made for the liability for retirement benefits, loan commitments, guarantees and severance arrangements. Further reference is made to section ‘Retirement benefits’.

Leases

FMO has operational leases. The total payments due under operating leases are charged to the profit and loss account on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.

Guarantees

Policy applicable from January 1, 2018

Issued financial guarantee contracts are measured at the higher of:

• The IFRS 9 ECL allowance (as of January 1, 2018) or the amount of the provision under the contract; and

• The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies as set out in sections ‘Interest income’ and ‘Fee and commission income’. These fees are recognized as revenue on an accrual basis over the period commitment.

Provisions resulting from guarantees are included in ‘Provisions’.

FMO applies the same methodology as loans to private sector for measurement of ECL allowance of guarantees. Refer to policies above.

Policy applicable before January 1, 2018

Issued financial guarantee contracts are measured at the higher of:

• The amount of the provision under the contract according to IAS 37 – Provisions, Contingent Liabilities and Contingent Assets;

• The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies as set out in sections ‘Interest income’ and ‘Fee and commission income’. These fees are recognized as revenue on an accrual basis over the period commitment.

Provisions resulting from guarantees are included in ‘Provisions’.

Received financial guarantee contracts are unfunded risk participation agreements (guarantor shares credit risk, but do not participate in the funding of the transaction). In case clients fail to fulfill their payment obligations the guarantor will make corresponding payments to FMO.

Retirement benefits

FMO provides all employees with retirement benefits that are categorized as a defined benefit. A defined benefit plan is a pension plan defining the amount of pension benefit to be provided, as a function of one or more factors such as age, years of service or compensation. Starting from January 1, 2018 employees are entitled to retirement benefits based on the average salary, on attainment of the retirement age of 68 (2017: 67).

This scheme is funded through payments to an insurance company determined by periodic actuarial calculations. The principal actuarial assumptions are set out in Note 17. All actuarial gains and losses are reported in shareholders’ equity, net of applicable income taxes and are permanently excluded from profit and loss.

The net defined benefit liability or asset is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets, together with adjustments for unrecognized actuarial gains/losses and past service costs. Independent actuaries perform an annual calculation of the defined benefit obligation using the projected unit credit method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using, in accordance with IAS 19, interest rates of high-quality corporate bonds, which have terms to maturity approximating the terms of the related liability. FMO has a contract with a well-established insurer, in which all nominal pension obligations are guaranteed and the downside risk of pension assets is mitigated.

When the fair value of the plan’s assets exceeds the present value of the defined benefit obligations, a gain (asset) is recognized if this difference can be fully recovered through refunds or reductions in future contributions. No gain or loss is recognized solely as a result of an actuarial gain or loss, or past service cost, in the current period.

FMO recognizes the following changes in the net defined benefit obligations under staff costs:

• Service costs comprising current service costs, past-service costs (like gains and losses on curtailments and plan amendments);

• Net interest expense or income.

Past-service costs are recognized in profit and loss on the earlier of:

• The date of the plan amendment or curtailment; and

• The date that FMO recognizes restructuring-related costs.

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset.

Taxation

Income tax profits is based on the applicable tax laws in each jurisdiction and recognized as an expense in the period in which profits arise. The tax effects of income tax losses, available for carry-forward, are recognized as a deferred tax asset if it is probable that future taxable profit will be available against which those losses can be utilized. Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and their amounts as measured for tax purposes, which will result in taxable amounts in future periods using the liability method. Deferred tax assets are recognized for temporary differences, resulting in deductible amounts in future periods, but only when it is probable that sufficient taxable profits will be available against which these differences can be utilized. The main temporary differences arise from the post-retirement benefits provision and the fair value movements on equity investments accounted for at FVOCI.

Shareholders’ equity

Contractual reserve

The contractual reserve consists of the cumulative part of the annual net results that FMO is obliged to reserve under the Agreement State-FMO of November 16, 1998. This reserve is not freely distributable.

Development fund

This special purpose reserve contains the allocations of risk capital provided by the State to finance the portfolio of loans and equity investments.

Available for sale reserve (AFS reserve)

Policy applicable before January 1, 2018

The AFS reserve includes net revaluations of financial instruments classified as AFS that have not been reported through the profit and loss account.

Fair value reserve

Policy applicable from January 1, 2018

The fair value reserve includes gains and losses of equity investments designated as at FVOCI. Gains and losses on such equity investments are never reclassified to profit or loss. Cumulative gains and losses recognized in this reserve are transferred to Other reserves on disposal of an investment.

Translation reserve

The assets, liabilities, income and expenses of foreign subsidiaries and associates are translated using the closing and weighted average exchange rates. Differences resulting from the translation are recognized in the translation reserve.

Actuarial result pensions

The unrealized actuarial gains and losses related to the defined benefit plans are included in the Actuarial result pensions. The movements in this reserve are not reclassified to the profit and loss account.

Other reserves

The other reserves include the cumulative distributable net profits. Dividends are deducted from other reserves in the period in which they are declared.

Undistributed profit

The undistributed profit consists of the part of the annual result that FMO is not obliged to reserve under the Agreement State-FMO of November 16, 1998.

Non-controlling interests

The non-controlling interest in 2017 and 2018 was related to the investment in Equis DFI Feeder L.P. held by other investors.