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 31 December 2017. These annual accounts are based on the ‘going concern’ principle.
The consolidated annual accounts are prepared under the historical cost convention except for:
equity investments, interest-bearing securities, short-term deposits and all derivative instruments that are measured at fair value.
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 guaranteed by the State) and private equity investments are recognized when funds are transferred to the customers’ account. Other financial assets and liabilities are initially recognized on the trade date, i.e., the date that FMO becomes a party to the contractual provisions of the instruments.
Adoption of new standards, interpretations and amendments
The following standards, amendments to published standards and interpretations were adopted in the current year.
Amendments to IAS 7 Statement of Cash Flows – Disclosure initiative
In January 2016, the IASB issued amendments to IAS 7 Statement of Cash Flows with the intention to improve disclosures of financing activities and help users to better understand the reporting entities’ liquidity positions. Under the new requirements, entities will need to disclose changes in their financial liabilities as a result of financing activities such as changes from cash flows and non-cash items (e.g., gains and losses due to foreign currency movements). The amendment is currently not yet endorsed by IASB although initial effective date is set at 1 January 2017. The Bank is currently evaluating the impact.
Amendments to IAS 12 Income Taxes – Recognition of deferred tax assets for unrealized losses
In January 2016, through issuing amendments to IAS 12, the IASB clarified the accounting treatment of deferred tax assets of debt instruments measured at fair value for accounting, but measured at cost for tax purposes. The amendment is currently not yet endorsed by IASB although initial effective date is set at 1 January 2017. FMO is currently evaluating the impact, but does not anticipate that adopting the amendments would have a material impact on its financial statements.
Not effective, not adopted
The standards issued and endorsed by the European Union, but not yet effective up to the date of issuance of FMO financial statements, are listed below.
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 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory.
FMO will apply IFRS 9 as issued in July 2014 and endorsed by the EU in November 2016. For FMO the effective date of application is from 1 January 2018. Starting from 2016 FMO set up a multidisciplinary implementation team with members from Risk Management, Finance and other operational teams to prepare for IFRS 9 implementation. All the required changes have been implemented successfully as of January 2018. Based on the completed assessment, the total adjustment of the adoption of IFRS 9 on the opening balance of FMO’s equity at 1 January 2018 is limited.
Classification and measurement
From a classification and measurement perspective, the new 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. The IAS 39 measurement categories will be replaced by: Fair Value through Profit or Loss (FVPL), Fair Value through Other Comprehensive Income (FVOCI), and amortized cost.
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:
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 financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL:
it is held within a business model whose objective is achieved by both collecting contractual cashﬂows and selling financial assets;and
its contractual terms give rise on specified dates to cash ﬂows that are solely payments of principal and interest on the principal amount outstanding.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. In addition, on initial recognition FMO may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
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. 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.
FMO's financial liabilities is not impacted by IFRS 9.
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.
Contractual cash flow assessment
For the purposes of this assessment, ‘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 cashflows;
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
The standard will affect the classification and measurement of financial assets held as at 1 January 2018 as follows:
Banks that are classified as loans and receivables and measured at amortised cost under IAS 39 will in general also be measured at amortised cost under IFRS 9.
Short-term deposits that are designated as at FVTPL under IAS 39 will in general continue to be measured at FVTPL under IFRS 9.
Interest bearing securities that are classified as available for sale under IAS 39 are measured at amortised cost under IFRS 9.
Derivative financial instruments which are classified as held for trading and measured at FVTPL under IAS 39, will also be measured at FVTPL under IFRS 9.
A significant part of the Loans to the private sector and Loans guaranteed by the State that is classified as loans and receivables and measured at amortised cost under IAS 39 will also be measured at amortised cost under IFRS 9. The remaining part does not fully reflect payments of principal and interest and will therefore be measured at FVTPL under IFRS 9.
The majority of the equity investments that are classified as available for sale under IAS 39 will be measured at FVTPL under IFRS 9. The available for sale reserve of these investments (approximately €380 million) have been transferred to other reserves as per 1 January 2018. However, some of the equity investments are held for long-term strategic purposes and will be designated as at FVOCI on 1 January 2018. The available for sale reserve of these strategic investments (approximately €18 million) has been transferred to a fair value reserve.
On the adoption of IFRS 9 at 1 January 2018, the impact of these changes is limited.
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. FMO estimates allowance for expected losses for the following financial assets:
Interest bearing securities;
Loans to the private sector and loans guaranteed by the State;
Loan commitments and financial guarantee contracts issued.
To calculate the ECL, FMO estimates the risk of a default occurring on the financial instrument during its expected life. ECLs are estimated based on the present value of all cash shortfalls over the remaining expected life of the financial asset, i.e., the difference between: the contractual cash flows that are due to FMO under the contract, and the cash flows that FMO expects to receive, discounted at the effective interest rate of the loan.
Definition of default
Under IFRS 9, FMO will consider a financial asset to be in default when:
The client is past due more than 90 days on any material credit obligation;
A loan is credit-impaired (stage 3);
FMO judges that the client is unlikely to pay its credit obligation to FMO.
This definition is largely consistent with the definition that is being used for regulatory purposes. However, for IFRS 9, a client can be more than 90 days past due but deemed not in default because FMO has reasonable and supportable information to corroborate a more lagging default criterion. This can result in some loans being automatically labelled in default due to the regulatory definition but remaining in Stage 2 and not labelled in default due to reasonable and supportable information about the specific loan.
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 12-month expected credit losses.
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 – Impaired loans: a lifetime expected credit loss is recognised for these loans. In addition, in Stage 3, interest income is accrued on the amortised cost of the loan net of allowances.
Significant increase in credit risk
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 recognised 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 compared to the internal rating at origination;
The fact that the financial asset is 30 days past due, unless there is reasonable and supportable information that there is no increase in credit risk since origination;
The application of forbearance.
Credit-impaired financial assets
Financial assets will be included in Stage 3 when there is objective evidence that the loan is credit impaired. The criteria of such objective evidence are the same as under the current IAS 39 methodology explained in the section ‘Value adjustments on loans’ of the Accounting policies and in Note 9. Accordingly, the population is the same under both standards.
Forward looking information
FMO incorporates forward-looking information in both the assessment of significant increase in credit risk and in the measurement of the ECL. Forward-looking information such as macro-economic factors and economic forecasts are considered. FMO has formulated a ‘base case’ scenario which represents the more likely outcome resulting from FMO’s normal financial planning and budgeting process.
On the adoption of IFRS 9, the impact of the new impairment requirements is limited.
With respect to hedge accounting IFRS 9 allows to continue with the hedge accounting under IAS 39. FMO applies IFRS 9 in its entirety. The impact is insignificant for FMO compared to IAS 39.
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 amortised cost (or, depending on the business model, at fair value through other comprehensive income) 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 1 January 2019 and does not have impact for FMO.
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 1 January 2018. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue as and when the agreed performance obligations are satisfied. The standard should in principle be applied retrospectively, with certain exceptions. This standard will not have significant 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 financial statements, are listed below.
IFRS 16 Leases
The new standard IFRS 16 ‘Leases’ has been issued in January 2016 by the IASB and requires lessees to recognise 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 1 January 2019, but is not yet endorsed by the EU. Based on our preliminary assessment impact of this standard is limited to the building and cars we are renting/ leasing.
IFRS 17 Insurance Contracts
IFRS 17 was issued in May 2017 and is to ensure that an entity provides relevant information that faithfully represents those 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 cashflow. The standards is expected to be effective on or after 1 January 2021. This standard does not have impact on FMO.
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 cash-settle 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 cash-settled to equity-settled. The amendments do not have impact on FMO.
Amendments to IFRS 4 Insurance contracts – Applying IFRS 9 Financial instruments with IFRS 4 Insurance contracts
The amendments provide two options for entities that issue contracts within the scope of IFRS 4 and will have no impact on FMO. The amendment is expected to be effective starting from 1 January 2018.
Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. The effective date of this amendment has been postponed indefinitely pending the outcome of the IASB research project on the equity method of accounting. These amendments will have minor impact on FMO.
Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures
The amendment clarifies that IFRS 9 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 1 January 2019. These amendments will have minor impact on FMO.
Amendments to IAS 40 Investments property – Transfers of investment property
These amendments provide guideance 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 1 January 2018 and will have 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 a minor 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 establisched 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 1 January 2018.The interpretation has a minor impact on FMO.
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 lossess, 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 1 January 2019. The interpretation has minor impact on FMO.
Estimates and assumptions
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 of our equity investments and the determination of the counterparty-specific and group-specific value adjustments. Estimates and assumptions are also used for the pension liabilities and determination of tax and others.
FMO’s impairment methodology for the loan portfolio results in the recording of provisions for:
Counterparty specific value adjustments and
Group-specific value adjustments.
The detailed approach for each category is further explained in the accounting policy for “loans to the private sector” and includes elements of management’s judgement, in particular the estimation of the amount and timing of future cash flows when determining the counterparty specific value adjustments. These estimates are driven by a number of factors, the
changing of which can result in different levels of the counterparty specific value adjustments.
Additionally, judgements are applied around 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.
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.
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.
The activities of Nuevo Banco Comercial Holding B.V., Asia Participations B.V., FMO Medu II Investment Trust Ltd. and Equis DFI Feeder L.P. consist of providing equity capital to companies in developing countries. FMO Investment Management B.V. carries out certain portfolio management activities for third party investment funds which are invested FMO’s own transactions in emerging and developing markets. Nedlinx B.V was incorporated in November 2017 and will focus on financing activities to Dutch SME companies investing abroad.
FMO has a 63% stake in Equis DFI Feeder L.P. and all other subsidiaries are 100% owned by FMO.
In June 2017 we have updated the FMO corporate strategy to align with the Sustainability Development Goals, and increase focus and impact in our activities. The sectors where we can have the biggest impact and will have our focus are Financial Institutions, Energy and Agribusiness. We have decided to stop our debt offering in the Infrastructure, Manufacturing and Services sector as we no longer consider this to be our focus sector. We will still manage our assets in the Infrastructure, Manufacturing and Services sector. As a result FMO is active in the following sectors:
Infrastructure, Manufacturing and Services
The business sectors are included in the segment reporting. In addition to these sectors, fund investments without a specific operating sector have been identified separately as Multi-Sector Fund Investments, since these are a substantial part of FMO’s business. In 2017 there were no transactions between the operating segments.
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, which are classified as available for sale, unrealized exchange differences are recorded directly in shareholders’ equity until the asset is sold.
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 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.
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. These 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.
FMO uses derivative financial instruments as part of its asset and liability management to manage exposures to interest rates and foreign currencies. FMO applies 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.
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.
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.
FMO only applies fair value hedge accounting on the funding portfolio. Changes in the fair value of these derivatives are recorded in the profit and loss account. 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 treated as follows:
In case of interest-bearing instruments, that amount is amortized and included in net profit and loss over the remaining term of the original hedge;
In case of non-interest-bearing instruments, that amount is immediately recognized in profit and loss.
If the hedge item is derecognized, e.g. sold or repaid, the unamortized fair value adjustment is recognized immediately in profit and loss.
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.
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 amortized cost can be divided into three categories:
Fees that are an integral part of the effective interest rate of a financial instrument
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 in revenue as part of the interest.
Fees earned when services are provided
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.
Fees that are earned on the execution of a significant act
These fees (such as arrangement fees) are recognized as revenue when the significant act has been completed.
Dividends are recognized in dividend income when a dividend is declared. The dividend receivable is recorded at declaration date, taking the uncertainties of collection into account.
Cash and cash equivalents
Cash and cash equivalents consist of banks (assets and liabilities) and short-term deposits that mature in less than three months from the date of acquisition. Short-term deposits are designated at fair value. Unrealized gains or losses of these short-term deposits (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.
Loans are recognized as assets when cash is advanced to borrowers. Loans are initially measured at cost, which is the fair value of the consideration paid, net of transaction costs incurred. Subsequently, the loans are valued 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.
Value adjustments on loans
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:
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.
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.
A write-off is made when all or part of a claim is deemed uncollectible or forgiven. Write-offs are charged against previously recorded value adjustments. If no value adjustment is recorded, the write-off is included directly in the profit and loss account under the line item ‘value adjustments’.
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 available for sale 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 in which FMO has no significant influence are classified as available for sale assets and are measured at fair value. Unrealized gains or losses are reported in the available for sale 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 available for sale investment, the accumulated unrealized gain or loss included in shareholders’ equity is transferred to profit and loss.
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.
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)
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 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 (valued at amortized cost and adjusted for the fair value of the hedged risk);
Notes that do not qualify for hedge accounting (valued at amortized cost).
Debentures and notes valued 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 amortized cost, 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 ‘derivative instruments’ and ‘hedge accounting’.
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 and severance arrangements. Further reference is made to ‘retirement benefits’.
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.
Provisions and obligations resulting from issued financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of:
The amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and
The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies as set out in ‘interest income’ and ‘fee and commission income’. These fees are recognized as revenue on an accrual basis over the period commitment.
Provisions and obligations resulting from guarantees are included in ‘other liabilities’.
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.
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. Employees are entitled to retirement benefits based on the average salary, on attainment of the retirement age of 67. Starting from January 1, 2018 this retirement age has been adjusted to 68.
This scheme is funded through payments to an insurance company determined by periodic actuarial calculations. The principal actuarial assumptions are set out in note 19. 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.
Income tax on profits is recognized as an expense based on the applicable tax laws in each jurisdiction 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 interest-bearing securities and equity investments.
Deferred tax assets and liabilities are measured at the tax rates expected to apply in the period in which the asset will be realized or the liability will be settled. Current and deferred taxes are recognized as income tax benefit or expense except for unrealized gains or losses on available for sale investments and actuarial results related to the defined benefit obligation, which are recorded net of taxes directly in shareholders’ equity.
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.
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)
The available for sale reserve includes net revaluations of financial instruments classified as available for sale that have not been reported through the profit and loss account.
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.
The other reserves include the cumulative distributable net profits and actuarial gains on defined benefit plans. Dividends are deducted from other reserves in the period in which they are declared.
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.
The non-controlling interest in 2016 and 2017 was related to the investment in Equis DFI Feeder L.P. held by other investors.