2 Basis of preparation and changes to accounting policies

2.1 Basis of preparation

The condensed consolidated interim accounts as at June 30, 2021 are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). These 2021 condensed consolidated interim accounts have been prepared in accordance with IAS 34 Interim Financial Reporting.

The accounting policies, presentation and methods of computation are consistent with those applied in the preparation of FMO’s consolidated financial statements for the year ended December 31, 2020. The consolidated interim accounts do not include all the information and disclosures that are required for the consolidated annual accounts and should be read in conjunction with FMO’s consolidated annual accounts as at December 31, 2020.

2.2 Group accounting and consolidation

The company accounts of FMO and the company accounts of the subsidiaries Asia Participations B.V., FMO Investment Management B.V.,Equis DFI Feeder L.P.,Nuevo Banco Comercial Holding B.V. and Nedlinx B.V. are consolidated in these interim accounts. During first half of 2021, FMO Medu II Investment Trust Ltd. was liquidated and is no longer part of the consolidation structure of FMO consolidated accounts. The subsidiary was 100% owned by FMO. The event of liquidation of this entity does not have a material impact on FMO's balance sheet or FMO's current business activities.

The activities of Asia Participations B.V., Nuevo Banco Comercial Holding B.V. and Equis DFI Feeder L.P. consist of providing equity capital to companies in developing countries. FMO Investment Management B.V. carries out portfolio management activities for third party investment funds, which are invested in FMO’s transactions in emerging and developing markets. Nedlinx B.V. is incorporated to finance Dutch companies with activities in developing countries. FMO has a 63% stake in Equis DFI Feeder L.P. and all other subsidiaries are 100% owned by FMO.

2.3 Foreign currency translation

FMO uses the euro as the unit for presenting its annual accounts and interim reports. All amounts are denominated in thousands of euros unless stated otherwise. FMO uses the Euro as the functional currency.

2.4 Adoption of new standards, interpretations and amendments

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of FMO’s annual consolidated financial statements for the year ended 31 December 2020, except for the adoption of new standards effective as of January 1, 2021. FMO has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The following standards, amendments to published standards and interpretations were adopted in the current year.

Interest Rate Benchmark - Reform Phase 2 - Amendments to IFRS 9, IAS 39 and IFRS 7

These amendments, mandatory and effective from 1 January 2021, provide reliefs and practical expedients on issues that affect financial reporting when an existing interest rate benchmark is replaced with a RFR. No early adoption of Phase 2 amendments is implemented by FMO. The main IBOR rate used by FMO is USD LIBOR for pricing of loans to private sector, derivatives and debentures and notes (funding). FMO is managing the transition in the form of a project and has planned the transition is various working streams. FMO is currently preparing to originate new loans, derivatives and funding with new reference rates as from the fourth quarter of 2021. FMO will use SOFR as the successor base rate for USD LIBOR. Transition of existing loans and existing derivatives to the new reference rates is planned from 2022 onwards and is expected to last up to the first half-year of 2023.

USD libor is applied currently in around 45% of the total loan portfolio, 50% of the derivatives and about 10% of FMO's funding portfolio. Considering the transition in 2020 from EONIA to ESTR discounting and from FedFunds to SOFR discounting did not have a material impact from a financial perspective, the effect of the transition further is expected to be immaterial. The impact related to the operational aspect is considered as medium. The table below summarizes the maximum amount of exposures per financial instrument category impacted by IBOR reform as per June 30, 2021.

Covid-19-Related Rent Concessions and Covid-19-Related Rent Concessions beyond June 30, 2021 – Amendments to IFRS 16

IFRS 16 Leases has been amended to make it easier for lessees to account for covid-19-related rent concessions such as rent holidays and temporary rent reductions. The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the covid-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to Covid-19-related rent concessions that reduce lease payments due on or before June 30, 2021.  The amendment was effective from June 1, 2020.

In March 2021, the Board amended IFRS 16 to extend the availability of the practical expedient by one year (2021 amendment). The practical expedient in the 2021 amendment applies to rent concessions for which any reduction in lease payments affects only payments originally due on or before June 30, 2022, provided the other conditions for applying the practical expedient are met. The amendment applies to annual reporting periods beginning on or after April 1, 2021. 

FMO has not made use of any rent concessions.

2.5 Standards issued but not yet effective

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 Interim Report 2021, are listed below.

IFRS 17 Insurance Contracts

In May 2017, the IASB issued IFRS 17, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts. In June 2020 IFRS 17 was amended whereby the effective date was extended to financial periods beginning on or after January 1, 2023. This standard does not have an impact on FMO.

Amendments to IAS 1 - Classification of Liabilities as Current or Non-Current

These amendments affect the presentation of liabilities in the statement of financial position. They clarify the considerations that determine whether a liability should be classified as current or non-current. The amendments are not expected to have a material impact on how FMO classifies liabilities in the statement of financial position. The amendments are effective from 1 January 2023 and are applied retrospectively.

Disclosure of Accounting Policies - Amendments to IAS 1 and IFRS Practice Statement 2

Amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements (the PS), provide guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that are more useful. The amendments are effective for annual periods beginning on or after January 1, 2023. The amendments are not expected to change the way FMO applies materiality judgements. 

Definition of Accounting Estimates - Amendments to IAS 8

In February 2021, the IASB issued amendments to IAS 8, in which it introduces a new definition of ‘accounting estimates’. The amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors. The amendments are effective for annual periods beginning on or after January 1, 2023. The amendments are not expected to have a material impact on FMO and will be considered for judgement purposes, when changes are to be applied in a reporting period.

Amendments to IFRS 3 - Reference to the Conceptual Framework

The amendments to IFRS 3 update the reference to the 2018 Conceptual Framework, as well as making reference to IAS 37 when determining whether a present obligation exists as a part of an acquisition. In addition, IFRS 3 now explicitly states contingent assets acquired in a business combination are not recognised. The amendments are effective for business combinations entered into on or after 1 January 2022. They are not expected to have a material impact on FMO's treatment of business combinations.

Amendments to IAS 16 - Property, Plant and Equipment - Proceeds before Intended Use

The amendments prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced before that asset is available for use. The amendments are effective for annual periods beginning on or after 1 January 2022 and are applied retrospectively. Given the nature of FMO's property, plant and equipment, this amendment is not expected to have an impact on the accounting treatment of these items.

Amendments to IAS 37 - Onerous Contracts

The amendments provide clarity on which costs an entity considers in assessing whether a contract is onerous. The amendments are effective for annual periods beginning on or after 1 January 2022 and to contracts for which the entity has not yet fulfilled all its obligations at the beginning of the annual reporting period in which the entity first applies the amendments. There are currently no contracts which FMO believes will be impacted by the amendments.

Annual Improvements 2018-2020

Subsidiary as a First-Time Adopter (IFRS 1)

IFRS 1 allows subsidiaries that become a first-time adopter later than its parent to measure its assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements. The amendment extends this relief to the cumulative translation differences for foreign operations. The amendment is effective for annual periods beginning on or after 1 January 2022. The amendment will not have an impact on the consolidated financial statements of FMO.

Fees in the ‘10 per cent’ Test for Derecognition of Financial Liabilities (IFRS 9)

When considering the derecognition of a financial liability, IFRS 9 indicates that the terms of the instrument are deemed to be substantially different (and therefore qualify for derecognition) if the discounted present value of the remaining cash flows under the new terms are at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability (‘10 per cent’ test). The amendment clarifies which fees an entity should include when applying the ‘10 per cent’ test. The amendment is effective for annual periods beginning on or after 1 January 2022 and is not expected to have a material impact on the accounting treatment for derecognition of financial liabilities.

Lease Incentives (IFRS 16)

The amendment removes an illustrative example on the reimbursement of leasehold improvements and has no impact on the accounting treatment for leases.

2.6 Estimates and assumptions

In preparing the condensed consolidated interim accounts in conformity with IAS 34, management is required to make estimates and assumptions affected reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. The same methods for making estimates and assumptions have been followed in the condensed consolidated interim accounts as were applied in the preparation of FMO’s consolidated annual accounts as at December 31, 2020.

In the first half of 2020, a management overlay was introduced to reflect the impact of significant increases in credit risk on certain exposures of the loan portfolio, as a consequence of COVID-19. The overlay was derived by changing the country cap ('country crisis override') applied when assessing the client's credit rating as a part of calculating the expected credit losses (‘ECL’). During the second half of 2020 FMO unwound the manual overrides on exposures where more relevant and up-to-date customer information become available for use in the regular ECL calculation process. The overall impact of the country crisis override in the financial results for the year ending December 2020 was an increase in impairments of EUR 34 million. During the first half of 2021, FMO has continued to substitute credit ratings previously overwritten as a part of the country crisis override as new relevant information becomes available. Updated information is available for most customers as at this reporting date, thereby negating the need for manually overwritten client ratings. After taking into account updated individual client ratings, there has been a release of Stage 1 and Stage 2 allowances of approximately EUR 11 million for the current loan portfolio. The remaining impact of the 2020 overlay is mainly released due to a high amount of prepayments during first half of 2021 or is embedded in the updated individual client ratings. The details and impact of the above item is presented in the 'Risk Developments' section, in the 'Credit Risk' paragraph.

2.7 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. FMO presents its operating segments based on servicing unit. Reference is made to the Segment Information note for more details on operating segments.