BRD – Groupe Société Générale S.A.

CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Prepared in Accordance with

International Financial Reporting Standards as adopted by the European Union

DECEMBER 31, 2021

		Group		Bank
	Note	December 31,  2021	December 31,  2020	December 31,  2021	December 31,  2020
ASSETS
Cash in hand	5,36	1,894,448	1,889,556	1,894,415	1,889,552
Due from Central Bank	6	4,311,908	5,223,833	4,311,908	5,223,833
Due from banks	7	4,537,941	5,516,842	4,521,357	5,499,644
Derivatives and other financial instruments held for trading	8	2,274,924	2,400,365	2,274,924	2,400,365
Loans and advances to customers	9	32,913,875	29,642,998	32,183,856	28,873,021
Finance lease receivables	10	1,222,595	1,066,899	-	-
Financial assets at fair value through profit and loss	11	6,947	85,240	6,947	58,384
Financial assets at fair value through other comprehensive income	12	19,863,825	15,943,470	19,863,825	15,943,470
Investments in subsidiaries, associates and joint ventures	13	107,205	99,114	158,916	158,916
Property, plant and equipment	14	1,072,099	1,065,856	1,051,254	1,052,585
Investment property		16,312	17,798	16,312	17,798
Goodwill	15	50,130	50,130	50,130	50,130
Intangible assets	16	321,063	247,379	319,656	244,299
Current tax assets	22	7,484	48,019	7,484	48,013
Deferred tax asset	22	180,089	10,287	166,173	-
Other assets	17	271,256	249,959	176,910	174,575
Non-current assets held for sale		11,196	-	11,196	-
Total assets		69,063,297	63,557,745	67,015,263	61,634,585
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks	18	156,810	199,011	156,810	199,011
Due to customers	19	52,683,581	49,957,754	52,917,886	50,152,126
Borrowed funds	20	4,056,470	1,742,352	2,230,572	6,765
Subordinated debt	21	495,022	0	495,022	0
Derivatives and other financial instruments held for trading	8	498,651	599,669	498,651	599,669
Current tax liability	22	83,963	2,069	79,979	-
Deferred tax liability	22	0	37,907	0	37,907
Provisions	23	383,185	442,100	374,745	435,588
Other liabilities	24	826,710	804,818	722,260	731,376
Total liabilities		59,184,392	53,785,680	57,475,925	52,162,442
Share capital	25	2,515,622	2,515,622	2,515,622	2,515,622
Other reserves		-385,380	804,442	-385,380	804,442
Retained earnings and capital reserves		7,690,955	6,403,510	7,409,096	6,152,079
Non-controlling interest		57,708	48,491	-	-
Total equity		9,878,905	9,772,065	9,539,338	9,472,143
Total liabilities and equity		69,063,297	63,557,745	67,015,263	61,634,585

The financial statements have been authorized by the Group’s management on March 14, 2022 and are signed on the Group’s behalf by:
Giovanni Luca Soma            Chairman of the Board of Directors		François Bloch                                   Chief Executive Officer
Stephane Fortin Deputy Chief Executive Officer		Etienne Loulergue Chief Financial Officer

		Group		Bank
	Note	2021	2020	2021	2020
Interest and similar income	26	2,234,229	2,261,411	2,085,527	2,105,552
Interest and similar expense	27	-150,042	-174,483	-132,419	-148,899
Net interest income		2,084,187	2,086,928	1,953,108	1,956,653
Fees and commission income	28	1,064,987	950,380	1,018,273	907,046
Fees and commission expense	28	-300,208	-238,964	-291,678	-232,757
Fees and commissions, net		764,779	711,416	726,595	674,289
Gain on derivative, other financial instruments held for trading and foreign exchange	29	245,298	272,295	244,316	270,818
Gain from financial instruments at fair value through other comprehensive income		11,960	12,375	11,960	12,375
Gain from financial instruments at fair value through profit and loss		7,747	14,150	7,411	12,773
Net (loss)/Income from associates and joint ventures		11,441	-5,204	3,349	6,191
Other income/(expense) from banking activities	30	-7,723	-3,954	3,700	-6,567
Net banking income		3,117,689	3,088,006	2,950,439	2,926,532
Personnel expenses	32	-828,692	-833,621	-765,270	-779,220
Depreciation, amortisation and impairment on tangible and intangible assets	33	-238,946	-245,315	-230,458	-236,482
Contribution to Guarantee Scheme and Resolution Fund	31	-49,384	-43,296	-49,384	-43,296
Other operating expenses	34	-500,560	-465,775	-469,496	-422,374
Total operating expenses		-1,617,582	-1,588,007	-1,514,608	-1,481,372
Gross operating profit		1,500,107	1,499,999	1,435,831	1,445,160
Cost of risk	35	145,656	-352,651	159,233	-312,900
Operating profit		1,645,763	1,147,348	1,595,064	1,132,260
Profit before income tax		1,645,763	1,147,348	1,595,064	1,132,260
Current tax expense	22	-313,574	-186,987	-298,892	-178,746
Deferred tax (expense) / income	22	-13,286	2,496	-16,916	-1,949
Total income tax		-326,860	-184,491	-315,808	-180,695
Profit for the period		1,318,903	962,857	1,279,256	951,565
Profit attributable to equity holders of the parent		1,309,686	962,055	-	-
Profit attributable to non-controlling interests		9,217	802	-	-
Basic earnings per share (in RON)	41	1.8793	1.3805	1.8356	1.3654

		Group		Bank
	Note	2021	2020	2021	2020
Profit for the period		1,318,903	962,857	1,279,256	951,565
Other comprehensive income
Net comprehensive income that may be reclassified to profit and loss in subsequent periods		-1,190,632	629,411	-1,190,632	629,411
Net gain/(loss) on financial assets at fair value through other comprehensive income		-1,190,632	629,411	-1,190,632	629,411
Reclassifications to profit and loss during the period		11,596	12,210	11,596	12,210
Revaluation differences		-1,429,084	737,057	-1,429,084	737,057
Income tax		226,856	-119,856	226,856	-119,856
Net comprehensive income not to be reclassified to profit and loss in subsequent periods		810	-4,121	810	-4,121
(Loss) on defined pension plan	24	965	-4,906	965	-4,906
Income tax relating to defined pension plan	22	-155	785	-155	785
Other comprehensive income for the period, net of tax		-1,189,822	625,290	-1,189,822	625,290
Total comprehensive income for the period, net of tax		129,081	1,588,147	89,434	1,576,855
Attributable to:
Equity holders of the parent		119,864	1,587,345		-
Non-controlling interest		9,217	802		-

Group

	Attributable to equity holders of the parent				Non-controlling interest	Total equity
		Other reserves
	Issued capital	Reserves from financial assets at fair value through other comprehensive income	Reserves from defined pension plan	Retained earnings and capital reserves
December 31, 2019	2,515,622	159,619	19,533	5,441,455	47,689	8,183,918
Total comprehensive income	-	629,411	-4,121	962,055	802	1,588,147
Net Profit for the period	-	-	-	962,055	802	962,857
Other comprehensive income	-	629,411	-4,121	-	-	625,290
December 31, 2020	2,515,622	789,030	15,412	6,403,510	48,491	9,772,065

	Attributable to equity holders of the parent				Non-controlling interest	Total equity
		Other reserves
	Issued capital	Reserves from financial assets at fair value through other comprehensive income	Reserves from defined pension plan	Retained earnings and capital reserves
December 31, 2020	2,515,622	789,030	15,412	6,403,510	48,491	9,772,065
Total comprehensive income	-	-1,190,632	810	1,309,686	9,217	129,081
Net Profit for the period	-	-	-	1,309,686	9,217	1,318,903
Other comprehensive income	-	-1,190,632	810	-	-	-1,189,822
Adjustments	0	0	0	29,959	0	29,959
Equity dividends	-	-	-	-52,198	-	-52,198
December 31, 2021	2,515,622	-401,602	16,222	7,690,955	57,708	9,878,905

Bank

Following the IFRIC clarification approach adopted by IASB in May 2021 concerning IAS19 standard on post-employment benefits liability calculation, the Group decided to revise the accounting policy for liability and expense calculation of the concerned plans starting 2020. The accounting balances were adjusted for the impact of new IFRIC as at 1 January 2021

IFRIC’s clarification approach consists of allocating the cost of the benefit over the period preceding retirement age that allows the employee to obtain the maximum benefit. The BRD retirement indemnity plan includes a capped entitlement and therefore falls within the scope of this IFRIC clarification. The decrease in liability amount is recorded in correspondence with retained earnings in amount of 35,665, as well as the increase of deferred tax asset amount of 5,706.

		Group		Bank
	Note	2021	2020	2021	2020
Cash flows from operating activities
Profit before tax		1,645,763	1,147,348	1,595,064	1,132,260
Adjustments for:
Depreciation and amortization expense	33	238,946	245,315	230,458	236,482
Loss from investment in associates and joint ventures	13	-8,092	11,395	-	-
Loss/ (Gain) from revaluation of assets at fair value through profit and loss	11	-7,255	-9,680	-6,919	-8,377
Impairment adjustments and provisions	35	106,330	527,724	78,404	468,202
Adjusted profit		1,975,692	1,922,102	1,897,007	1,828,567
Changes in operating assets and liabilities
Due from Central Bank		911,925	-458,560	911,925	-458,560
Accounts and deposits with banks		16,220	2,782	15,609	2,167
Sales of financial assets at fair value through profit and loss	11	85,548	37,564	58,356	37,564
Acquisition of financial assets at fair value through profit and loss	11	0	-5,070	-	-196
Financial assets at fair value through other comprehensive income		-5,110,987	-2,364,188	-5,110,987	-2,364,188
Loans and advances to customers		-3,291,196	188,327	-3,319,394	163,949
Lease receivables		-171,721	-87,746	-	-
Other assets including trading		-224,854	-1,109,177	-191,953	-1,106,795
Due to banks		-42,201	-222,101	-42,201	-222,101
Due to customers		2,725,827	4,059,003	2,765,760	4,112,477
Other liabilities		-96,340	369,028	-134,361	376,867
Total changes in operating assets and liabilities		-5,197,779	409,862	-5,047,246	541,184
Income tax paid		-191,151	-199,251	-178,384	-195,089
Cash flow from operating activities		-3,413,238	2,132,713	-3,328,623	2,174,662
Investing activities
Acquisition of investments in associates and joint ventures	13	-	-24,935	-	-24,934
Acquisition of tangible and intangible assets	14,16	-211,730	-197,882	-211,275	-195,984
Proceeds from sale of tangible and intangible assets		850	36,420	850	36,420
Cash flow from investing activities		-210,880	-186,397	-210,425	-184,498
Financing activities
Proceeds from borrowings		25,000,329	13,052,731	23,724,457	12,001,386
Repayment of borrowings		-22,191,189	-13,006,874	-21,005,628	-12,004,988
Repayment of principal lease liabilities	14	-90,612	-69,960	-85,398	-64,320
Dividends paid		-52,198	-	-52,198	-
Net cash from financing activities		2,666,330	-24,103	2,581,233	-67,922
Net movements in cash and cash equivalents		-957,788	1,922,213	-957,815	1,922,242
Cash and cash equivalents at beginning of the period	36	7,259,266	5,337,053	7,259,261	5,337,018
Cash and cash equivalents at the end of the period	36	6,301,478	7,259,266	6,301,445	7,259,261

Operational cash flows from interest and dividends
		Group		Bank
		2021	2020	2021	2020
Interest paid		153,570	181,846	136,880	152,216
Interest received		2,242,909	2,225,735	2,107,487	2,069,637
Dividends received		3,349	6,191	19,315	6,191

The amount of undrawn borrowing facilities that may be available for future operating activities is 0 (December 31, 2020: 486,940) and represents a stand by line concluded with the parent for contingency funding purposes as requested by the Romanian banking regulations on liquidity management. The stand by line with the parent was closed in May 2021.

1.     Corporate information

BRD – Groupe Société Générale (the “Bank” or “BRD”) is a joint stock company incorporated in Romania. The Bank commenced business as a state owned credit institution in 1990 by acquiring assets and liabilities of the former Banca de Investitii. The Bank headquarters and registered office is 1-7 Ion Mihalache Blvd, Bucharest.

BRD together with its subsidiaries (the “Group’) offers a wide range of banking and financial services to corporates and individuals, as allowed by law. The Group accepts deposits from the public and grants loans and leases, carries out funds transfer in Romania and abroad, exchanges currencies and provides other financial services for its commercial and retail customers.

The ultimate parent is Société Générale S.A. as at December 31, 2021 (the “Parent”or “SG”).

The Bank has as at December 31, 2021 499 units throughout the country (December 31, 2020: 584).

The average number of active employees of the Group during first semester was 6,620 (2020: 7,063), and the number of active employees of the Group as of the period-end was 6,408 (December 31, 2020: 6,860).

The average number of active employees of the Bank during first semester was 6,156 (2020: 6,528), and the number of active employees of the Bank as of the period-end was 5,974 (December 31, 2020: 6,357).

The active employees are the full time employees (excluding maternity leave and long-term sick leave).

BRD – Groupe Société Générale has been quoted on Bucharest Stock Exchange (“BVB”) since January 15, 2001.

The shareholding structure of the Bank is as follows:

           

2.     Basis of preparation

a)     Basis of preparation

In accordance with European Regulation 1606/2002 of July 19, 2002 on the application of International Accounting Standards, and Order of the National Bank of Romania Governor no. 27/2010 with subsequent amendments, BRD prepared the consolidated and separate financial statements for the year ended December 31, 2021 in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (“EU”).

The consolidated financial statements include the consolidated statement of financial position, the consolidated profit or loss, the consolidated statement of comprehensive income, the consolidated statement of changes in shareholders’ equity, the consolidated cash flow statement, and consolidated notes.

The separate financial statements include the separate statement of financial position, the separate profit or loss, the separate statement of comprehensive income, the separate statement of changes in shareholders’ equity, the separate cash flow statement, and separate notes.

The consolidated and separate financial statements are presented in Romanian lei (“RON”), which is the Group’s and its subsidiaries’ functional and presentation currency, rounded to the nearest thousand, except when otherwise indicated. The consolidated and separate financial statements has been prepared on a historical cost basis, except for financial assets at fair  value through profit and loss, financial assets through other comprehensive income, derivative financial instruments, other financial assets and liabilities held for trading, which have all been measured at fair value.

The Group and Bank’s management has made an assessment of the Group and Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the consolidated and separate financial statements are prepared on the going concern basis.

b)    Basis for consolidation

The consolidated financial statements comprise the financial statements of the credit institution and its subsidiaries as at December 31, 2021. The financial statements of the subsidiaries are prepared for the same reporting period, using consistent accounting policies.

A subsidiary is an entity over which the Bank exercises control. An investor controls an investee when it is exposed, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The consolidated financial statements include the financial statements of BRD – Groupe Société Générale S.A. and the following subsidiaries: BRD Sogelease IFN S.A. (99.98% ownership, 2020: 99.98%), BRD Finance IFN S.A (49% ownership, 2020: 49%) and BRD Asset Management SAI SA (99.98% ownership, 2020: 99.98%).

According to IFRS 12 9(b), the Group controls BRD Finance IFN S.A even though it holds less than half of the voting rights, through the power to govern the financial and operating policies of the entity under various agreements. All intercompany transactions, balances and unrealized gains and losses on transactions between consolidated entities are eliminated on consolidation.

2.     Basis of preparation

b)    Basis for consolidation (continued)

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Bank obtains control, and continue to be consolidated until the date such control ceases.

Equity and net income attributable to non-controlling interest are shown separately in the statement of financial position, statement of comprehensive income, statement of changes in equity and statement of comprehensive income, respectively.

The Bank is accounting the investments in subsidiaries, associates and joint ventures in the separate financial statements at cost less impairment adjustment.

2.     Basis of preparation (continued)

c)     Changes in accounting policies and adoption of revised/amended IFRS

The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Group/Bank as of 1 January 2021.

The impact of the application of these new and revised IFRSs has been reflected in the financial statements and was estimated as not being material, except disclosures already presented in the Notes.

·       Interest Rate Benchmark Reform – Phase 2 – IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16  (Amendments)

In August 2020, the IASB published Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16, completing its work in response to IBOR reform. The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR). In particular, the amendments provide for a practical expedient when accounting for changes in the basis for determining the contractual cash flows of financial assets and liabilities, to require the effective interest rate to be adjusted, equivalent to a movement in a market rate of interest. Also, the amendments introduce reliefs from discontinuing hedge relationships including a temporary relief from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component. There are also amendments to IFRS 7 Financial Instruments: Disclosures to enable users of financial statements to understand the effect of interest rate benchmark reform on an entity’s financial instruments and risk management strategy. While application is retrospective, an entity is not required to restate prior periods.

·       IFRS 16 Leases-Cοvid 19 Related Rent Concessions (Amendment)

The amendment applies, retrospectively, to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted, including in financial statements not yet authorized for issue at 28 May 2020. IASB amended the standard to provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the covid-19 pandemic. The amendment provides a practical expedient for the lessee to account for any change in lease payments resulting from the covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change was not a lease modification, only if all of the following conditions are met:

Ø  The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change.

Ø  Any reduction in lease payments affects only payments originally due on or before 30 June 2021.

Ø  There is no substantive change to other terms and conditions of the lease.

d)    Standards and Interpretations that are issued but have not yet come into effect

·       Amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment

2.     Basis of preparation (continued)

d)    Standards and Interpretations that are issued but have not yet come into effect (continued)

indefinitely pending the outcome of its research project on the equity method of accounting. The amendments have not yet been endorsed by the EU.

·       IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current (Amendments)

The amendments were initially effective for annual reporting periods beginning on or after January 1, 2022 with earlier application permitted. However, in response to the covid-19 pandemic, the Board has deferred the effective date by one year, i.e. 1 January 2023, to provide companies with more time to implement any classification changes resulting from the amendments. The amendments aim to promote consistency in applying the requirements by helping companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current or non-current. The amendments affect the presentation of liabilities in the statement of financial position and do not change existing requirements around measurement or timing of recognition of any asset, liability, income or expenses, nor the information that entities disclose about those items. Also, the amendments clarify the classification requirements for debt which may be settled by the company issuing own equity instruments.

In November 2021, the Board issued an exposure draft (ED), which clarifies how to treat liabilities that are subject to covenants to be complied with, at a date subsequent to the reporting period. In particular, the Board proposes narrow scope amendments to IAS 1 which effectively reverse the 2020 amendments requiring entities to classify as current, liabilities subject to covenants that must only be complied with within the next twelve months after the reporting period, if those covenants are not met at the end of the reporting period. Instead, the proposals would require entities to present separately all non-current liabilities subject to covenants to be complied with only within twelve months after the reporting period. Furthermore, if entities do not comply with such future covenants at the end of the reporting period, additional disclosures will be required. The proposals will become effective for annual reporting periods beginning on or after 1 January 2024 and will need be applied retrospectively in accordance with IAS 8, while early adoption is permitted. The Board has also proposed to delay the effective date of the 2020 amendments accordingly, such that entities will not be required to change current practice before the proposed amendments come into effect. These Amendments, including ED proposals, have not yet been endorsed by the EU.

·       IFRS 3 Business Combinations; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets as well as Annual Improvements 2018-2020 (Amendments)

The amendments are effective for annual periods beginning on or after 1 January 2022 with earlier application permitted. The IASB has issued narrow-scope amendments to the IFRS Standards as follows:

Ø  IFRS 3 Business Combinations (Amendments) update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations.

Ø  IAS 16 Property, Plant and Equipment (Amendments) prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.

Ø  IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendments) specify which costs a company includes in determining the cost of fulfilling a contract for the purpose of assessing whether a contract is onerous.

2.     Basis of preparation (continued)

d)    Standards and Interpretations that are issued but have not yet come into effect (continued)

Ø  Annual Improvements 2018-2020 make minor amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples accompanying IFRS 16 Leases.

·       IFRS 16 Leases-Cοvid 19 Related Rent Concessions beyond 30 June 2021 (Amendment)

The Amendment applies to annual reporting periods beginning on or after 1 April 2021, with earlier application permitted, including in financial statements not yet authorized for issue at the date the amendment is issued. In March 2021, the Board amended the conditions of the practical expedient in IFRS 16 that provides relief to lessees from applying the IFRS 16 guidance on lease modifications to rent concessions arising as a direct consequence of the covid-19 pandemic. Following the amendment, the practical expedient now applies to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022, provided the other conditions for applying the practical expedient are met.

·       IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies (Amendments)

The Amendments are effective for annual periods beginning on or after January 1, 2023 with earlier application permitted. The amendments provide guidance on the application of materiality judgements to accounting policy disclosures. In particular, the amendments to IAS 1 replace the requirement to disclose ‘significant’ accounting policies with a requirement to disclose ‘material’ accounting policies. Also, guidance and illustrative examples are added in the Practice Statement to assist in the application of the materiality concept when making judgements about accounting policy disclosures. The Amendments have not yet been endorsed by the EU.

·       IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates (Amendments)

The amendments become effective for annual reporting periods beginning on or after January 1, 2023 with earlier application permitted and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period. The amendments introduce a new definition of accounting estimates, defined as monetary amounts in financial statements that are subject to measurement uncertainty. Also, the amendments clarify what changes in accounting estimates are and how these differ from changes in accounting policies and corrections of errors. The Amendments have not yet been endorsed by the EU.

·       IAS 12 Income taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments)

The amendments are effective for annual periods beginning on or after January 1, 2023 with earlier application permitted. In May 2021, the Board issued amendments to IAS 12, which narrow the scope of the initial recognition exception under IAS 12 and specify how companies should account for deferred tax on transactions such as leases and decommissioning obligations. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal. The Amendments have not yet been endorsed by the EU.

2.     Basis of preparation (continued)

e)     Significant accounting judgments and estimates

In the process of applying the Group and Bank’s accounting policies, management is required to use its judgments and make estimates in determining the amounts recognized in the consolidated and separate financial statements. The most significant use of judgments and estimates are as follows: 

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset backed securities. The valuation of financial instruments is described in more detail in Note 44.

Expected credit losses on financial assets at amortised cost and FVOCI

The measurement of impairment losses across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank reviews its loans and advances to customers at each reporting date to assess whether there is any objective evidence of impairment. The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days, whether a severe alteration in the counterparty’s financial standing is observed, entailing a high probability that the debtor will not be able to fully meet its credit obligations, whether concessions in the form of restructuring were consented under the circumstances of financial hardship experienced by the debtor, whether legal procedures were initiated or the debtor was transferred to specialized recovery structures (regardless of the number of days past due).

The Bank’s expected credit loss model (ECL) relies on several underlying assumptions regarding the choice of variable inputs and their interdependencies, which affect the level of allowances:

·       The internal credit grating model, which assigns  probabilities of default (PDs) to the individual grades

·       The criteria defined (both in relative and absolute terms) for the assessment of significant increase in credit risk since initial recognition and consequently the computation of allowances based on life time expected credit loss (LTECL)

·       The grouping of financial assets when their ECL is measured on a collective basis

·       The development of ECL model, including the various formulas and the choice of inputs

·       The macroeconomic scenarios and their probability weightings based on which ECL is derived

·       The inputs and models used for calculating ECL may not always capture all characteristics of the market at the date of the financial statements. To reflect this, the Bank assesses the need/opportunity for additional amounts of provisions in the form of overlays, in order to address:

-          Sector of activity specific risks (adjustment of ECL on sectors that have a different default behavior from the whole calibration segment)

-          Visible macroeconomic threat impossible to be captured by the models (typically, when the predicted stress did not occur in the observed past serving as a base for models)

·       For individually significant loans and advances, the Group and Bank identify and quantify the expected future cash flows to be used for a total or partial reimbursement of the obligations, based on the capacity of the client/business to generate revenues, proceeds resulting from sale of collaterals and other clearly identified sources of repayment. The individual assessment threshold is defined in between 500 -1,500 thousands EUR, depending on the client type and customers’ management departments.

2.     Basis of preparation (continued)

e)     Significant accounting judgments and estimates (continued)

COVID - 19

The outbreak of the COVID-19 pandemic has prompted rapid social and economic responses worldwide. Within the EU, Member States have implemented a broad range of support measures aimed at minimizing the medium- and long-term economic impacts of the pandemic. The response included some forms of moratorium on payments of credit obligations (with the aim of supporting the operational and liquidity challenges faced by borrowers), introduced either jurisdiction-wide (legislative moratorium) or voluntary industry-wide or individual initiatives by institutions (non-legislative moratorium). In Romania, the moratorium reflects a combination of statewide legislation (GEO 37/2020, and GEO 227/2021) doubled by various initiatives of the banking system.

In addition to legislative moratorium provisions, the Bank has also designed internal deferral programs in order to support its debtors under the temporary distress. These measures fall into the non-legislative category.

For the eligible debtors the moratorium-related changes to the contract are not automatically considered forbearance measures, hence no automatically default trigger. 

2.     Basis of preparation (continued)

e)     Significant accounting judgments and estimates (continued)

Provisions for other risks and charges

The Bank operates in a regulatory and legal environment that, by nature has a heightened element of litigation risk inherent to its operations and, as a result it is involved in various litigations or is subject to various obligations arising from legislation in force.

When the Bank can reliably measure the outflow of economic benefits in relation to a specific case and considers such outflows to be probable, the Bank records a provision against the case, as mentioned in this note.  Where the probability of outflow is considered to be remote, or probable, but a reliable estimate cannot be made, a contingent liability is disclosed.

Generally, the first step is to establish the existence of the present obligation followed by the estimation of the amount needed to settle that obligation taking into account a number of factors including legal advice, the stage of the matter and historical evidence from similar incidents. Significant judgment is required to conclude on these estimates.

In case of litigations:

i. For a single individual litigation the Bank assess whether there is more likely than not to have an unfavourable court decision considering the factors mentioned above; then it estimates the amount at risk; in case there are several scenarios possible with different outcomes, the amount at risk is the weighted average of the amounts at risk for each scenario using the probability distribution for all scenarios (100% is allocated to the possible scenarios) and  provisions 100% of the estimated amount;

ii. For multiple litigations, the assessment of “more likely than not” could be substantiated for the entire population using statistics and provision computation to be made at pool level.

In case of obligations arising from various legislation, the bank assesses first if there is no realistic alternative of settling that obligation, and if not, it estimates the amount needed to settle that obligation (using similar approach as above) and books provisions representing 100% of the estimated amount.

Please refer to note 24 and note 40 for more details.

f)      Segment information

A segment is a component of the Group and Bank:

-          That engages in business activity from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity);

-          Whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and;

-          For which distinct financial information is available;

The Group and Bank’s segment reporting is based on the following segments: Retail including Individuals and Small Business, Non-retail including Small and medium enterprises (“SMEs”) and Large corporate and Corporate Center including: treasury activities, ALM and other categories unallocated to the business lines mentioned above (fixed assets, taxes, equity investments, etc.).

3.     Summary of significant accounting policies

a)     Recognition of income and expenses

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the benefits can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

i)                 Interest and similar income

For all financial instruments measured at amortized cost and interest bearing financial instruments classified as FVOCI, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. The effective interest is applied to the gross carrying amount for assets classified in Stage 1 or 2 and to all financial liabilities. For financial assets classified as Stage 3 or POCI the effective interest rate is applied to the net carrying amount.

The calculation takes into account all contractual terms of the financial instrument and includes any origination fees and incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate. The net carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

ii)                Fee and commission income

The Group and Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

(i) Fee income earned from services that are provided over a certain period of time are accrued over that period. These fees include asset management, custody and other management and advisory fees.

(ii) Fee income from providing transaction services: Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses. These fees are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria.

iii)              Dividend income

Revenue is recognized when the Group and Bank’s right to receive the payment is established, generally when the shareholders approve the dividend.

iv)               Net trading income

Net trading income comprises gains less losses related to assets and liabilities held for trading and derivatives and includes all realised and unrealised fair value changes, interest, dividends and foreign exchange differences. Interest income from all interest bearing trading financial assets required to be measured at FVPL is recognised part of the net trading income.

3.     Summary of significant accounting policies (continued)

a)     Recognition of income and expenses  (continued)

v)                 Levies

IFRIC 21 “Levies” clarifies the accounting for a liability to pay a levy. For an entity, the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. The liability to pay a levy is recognised progressively if the obligating event occurs over a period of time. Furthermore, if an obligation to pay a levy is triggered when a minimum activity threshold is reached, the corresponding liability is recognised when that minimum activity threshold is reached.

The main related taxes which fall under the provisions of IFRIC 21 are as follows:

·       The Bank annual contribution to Deposit Guarantee Scheme is fully recognised in the income statement at 1st January of the year in which the payment is made.

·       The Bank annual contribution to the Single Resolution Fund, is fully recognised in the income statement at 1st January of the year in which the payment is made.

b)    Financial instruments - recognition

i)        Initial recognition and date of recognition

The Group applies settlement date accounting policy for all financial assets and financial liabilities (the financial assets / liabilities are initially recognized on the date of the transfer of funds). Between trade date and settlement date The Group recognizes off balance sheet commitments.

ii)       Measurement categories of financial assets and liabilities

Financial instruments are initially recognised at their fair value including arrangements costs. Trade receivables are measured at the transaction price.

Starting 1 January 2018, in accordance with IFRS 9 classification, the Group classifies financial assets in the following measurement categories:

·       Fair value through profit and loss (FVPL);

·       Fair value through other comprehensive income (FVOCI); or

·       Amortised cost.

3.     Summary of significant accounting policies (continued)

b)    Financial instruments – recognition (continued)

Classification and subsequent measurement of financial assets is generally based on the Group business model to manage the assets and the cash flow characteristics of the assets.

The Group and the Bank classify and measure the financial liabilities at amortised cost.

The Bank classifies and measures its derivative and trading portfolio as FVPL.

Starting 1 January 2018, Group measures the equity instruments at fair value through profit and loss. Gains and losses on equity investments measured at fair value through profit and loss are included in the line “Net gains on financial assets measured at fair value through profit and loss” in the statement of profit and loss.

In the Bank’s Separate Financial Statement, the equity instruments representing investment in associates and subsidiaries continue to be measured at cost in accordance to IAS 27 “Separate financial statements”.

c)     Financial instruments – classification and measurement

Starting 1 January 2018 the Group classifies its financial assets into one of the following categories based on the assessment of business model and SPPI characteristics, as follows:

·       Financial assets that are held for collection of contractual cash flows and cash flows represent solely payments of capital and interest (SPPI) are classified and measured at amortised cost. In this category the Group includes the loans granted to customers, deposits placed with banks, corporate bonds and repurchase transactions part of banking book portfolio.

·       Financial assets that are held for collection of contractual cash flows and for selling the assets and the contractual cash flows represent solely payments of capital and interest are measured at fair value through other comprehensive income. Treasury bonds in banking book portfolio are classified and measured at fair value through other comprehensive income.

·       Financial assets that are held for trading, regardless of the cash flow characteristics are measured at fair value through profit and loss. In this category the Group includes the sub-portfolio of treasury bonds, placements made to banks and repurchase transaction held for trading.

1)     Business model assessment

The business model assessment is one of the two steps to classify financial assets.

The Group’s business model reflects how it manages its financial assets in order to generate cash flows; the business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

The business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. Accordingly, this condition is not an instrument-by-instrument approach to classification and should be determined on a higher level of aggregation.

The business model assessment is performed on the basis of scenarios that the Group reasonably expects to occur, without taking ‘worst case’ or ‘stress case’ scenarios. The Group assesses the business model for newly originated financial assets, considering information about how cash flows were realized in the past (namely before the date of the origination of new assets) for that specific portfolio of assets, along with all other relevant information. This means that there is no 'tainting' concept, but if there is a change in the way that cash flows are realized then this will affect the classification of assets originated after the date of that change.

3.     Summary of significant accounting policies (continued)

c)     Financial instruments – classification and measurement  (continued)

In some circumstances, the Bank separates a portfolio of financial assets into sub-portfolios to reflect how an entity manages them. Those portfolios are split and treated as separate portfolios, provided the assets belonging to each sub-portfolio are separately defined.

2)     SPPI test

As a second step of its classification process the Group performs the assessment of the characteristics of the contractual cash flows aiming to identify whether the contractual cash flows are “solely payments of principal and interest on the principal amount outstanding” – SPPI test. The SPPI assessment is a one-off exercise and is performed at the initial recognition of the financial asset.

The principal for the purpose of applying SPPI test is “the fair value of the asset at initial recognition” and it may change over the life of the financial asset (e.g. if there are repayments of principal).

The most significant elements of interest are typically the consideration for the time value of money and credit risk. Interest can also include consideration for other basic lending risks (for example, liquidity risk) and costs (for example, administrative costs) associated with holding the financial asset for a particular period of time. In addition, interest can include a profit margin that is consistent with a basic lending arrangement.

To make the SPPI assessment, the Group applies judgements and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set.

3)     Debt instruments at FVOCI

These instruments largely comprise of treasury bonds.

After initial recognition FVOCI financial assets are measured at fair value with gains or losses being recognized as OCI until the investment is derecognized. The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market bid prices at the close of business on the statement of financial position date. Interest income and foreign exchange gains and losses are recognised in profit and loss.

The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit and loss upon derecognition of the assets.

3.     Summary of significant accounting policies (continued)

c)     Financial instruments – classification and measurement (continued)

4)     Derivatives that are not designated accounting hedging instruments

The Group uses derivative financial instruments such as forward currency contracts, currency swaps, currency options, swaps and cross currency swaps on interest rate, as products offered to its clients but also to hedge its risks associated with interest rate, liquidity and exchange rate. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value.

Derivatives are carried as assets when their fair value is positive and as liabilities when fair value is negative. Any gains or losses arising from changes in fair value of derivatives that are not designated as hedge accounting instruments are taken directly to profit or loss for the year. 

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest swap contracts is determined by reference to market values of similar instruments.

5)     Derivatives that are designated accounting hedging instruments

As a policy choice, the Group has also elected to continue to apply the hedge accounting requirements in accordance with IAS 39. The Group and Bank designates certain derivatives held for risk management as hedging instruments in qualifying accounting hedging relationships. The Group and Bank formally documents the relationship between the hedging instruments and hedged item, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship.

The Group and Bank makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value during the period for which the hedge is designated. The actual results of the hedge as recommended by IAS 39 should be in the range of 80-125 percent, but the Group and Bank uses a more prudent approach and the range considered is 88-114 percent.

The Group and Bank use fair value hedges. When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognized asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognized immediately in profit and loss together with changes in the fair value of the hedged item that are attributable to the hedged risk.

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.

6)     Financial assets and financial liabilities held for trading

The Bank classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value.

3.     Summary of significant accounting policies (continued)

c)     Financial instruments – classification and measurement (continued)

Changes in fair value are recognised in net trading income. Interest income or expense is recorded in net trading income according to the terms of the contract, or when the right to payment has been established.

Included in this classification are debt securities, repurchase transactions and short positions acquired principally for the purpose of selling or repurchasing in the near term.

7)     Repurchase agreements

Securities sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognized in the statement of financial position as securities and are measured in accordance with the applicable accounting policies. The liability for amounts received under these agreements from banking book portfolio is included in customers’ or interbank deposits. The difference between sale and repurchase price is treated as interest expense using the effective yield method. Assets acquired with a corresponding commitment to resell at a specified future date (reverse repos) from the banking book portfolio are recorded as loans and advances.

8)     Borrowings

Borrowings are initially recognized at the fair value of the consideration received less directly attributable transaction costs. Subsequently borrowings are stated at amortized cost using the effective interest rate method. Any discount or premium is integral part of the effective interest rate.

9)     Financial guarantees, letter of credits and loan commitments

In the ordinary course of business, the Group and Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances and performance guarantees.

Financial guarantees are presented in ‘Other liabilities’ line with the amount of the premium received being the instruments’ fair value. The financial guarantee are subsequently measured at the higher of the amount initially recognised less the cumulative amortisation recognised in the income statement and an ECL.

Any increase in the liability relating to financial guarantees is taken to the income statement in ‘Credit loss expense’. The premium received is recognized in the income statement in ‘Net fees and commission income’ on a straight line basis over the life of the guarantee.

Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer. Similar to financial guarantee contracts, from 1 January 2018, these contracts are in the scope of the ECL requirements.

The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded on in the statement of financial position. The nominal values of these instruments together with the corresponding ECLs are disclosed in Note 44 and in Note 24.

3.     Summary of significant accounting policies (continued)

d)    Financial assets - derecognition

The Group derecognizes a portfolio of financial assets, a financial asset or a part of a financial asset (herein after called „financial asset“) when and only when one of the following conditions is fulfilled:

·       The contractual rights to the cash flows expire;

·       It transfers the financial asset and the transfer qualifies for derecognition;

·       Voluntarily renounces its rights over the financial asset due to the asset being considered irrecoverable or in order to grant a concession to the debtor;

·       Significant modification of a financial asset that generate the extinguishment of the existing financial asset and recognition of a new financial asset.

Derecognition due to substantial modification of terms and conditions

In certain circumstances, the Group renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering both quantitative and qualitative factors that are substantially changing the size or the nature of lender’s risks associated with the pre-existing loan contract.

If the new terms are substantially different, the Group derecognises the original financial assets and recognises a “new” financial asset. The new financial asset is initially recognized at fair value and the classification and subsequent measurement is reassessed considering the new business model and the contractual cash flows characteristics. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes. All financial assets that are impaired at the date of initial recognition (first origination or re-origination due to significant changes) are classified as purchased or originated credit impaired (POCI).

On initial recognition the difference between transaction price and fair value of new financial asset is recognised in P&L for loans where the fair value is calculated based on observable inputs (loans not impaired at the date of modification).

When assessing the new terms in order to establish if they are significantly modified, the Group considers if the change is made in order to increase recoverability of the pre-existing loan. The renegotiation or modification of the contractual cash flow of an existing financial asset can generate derecognition of the financial asset and the recognition of a new financial asset if the respective changes to the financial asset are significant. Changes made for the purpose of increasing the received cash flows and which are not considered significant change of the contractual characteristics do not generate derecognition.

The following modifications are considered significant contractual changes:

Quantitative criteria:

·       interest rate margin modification for floating interest rate and interest rate modification for fixed interest rate higher than 3% over a 12 month period; the threshold is subject to review depending on the market conditions;

·       tenor prolongation or reduction for non-revolving financial assets for more than 24 months or over 50% from initial (prior to modification) remaining tenor.

3.     Summary of significant accounting policies (continued)

d)    Financial assets - derecognition  (continued)

Qualitative criteria refer to contractual modifications that are substantially changing the size or the nature of lender’s risks associated with the pre-existing loan contract and are applicable to all financial assets:

·       change of the denomination currency;

·       change of the type of interest (variable or fixed) for performing loans (commercial renegotiation);

·       contract changed obligor / counterparty;

·       consolidation of two or more loans to one loan (many to 1);

·       split of one loan to two or more loans (1 to many);

·       modification of an SPPI compliant contract by introducing a features that is non-SPPI or  modification of a non-SPPI contract by removing the features that are non-SPPI through commercial renegotiation; 

·       change of a commercial product or use of the same product but from updated bank commercial offer available at the change date for performing loans (commercial renegotiation);

·       renewal of a performing revolving loan (regardless of new tenor) if a substantive risk analysis is performed.

Derecognition other than for substantial modification

A financial asset is derecognized where either:

·       The rights to receive cash flows from the assets have expired;

·       The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

·       The Group has transferred its rights to receive cash flows from the asset and either a) has transferred substantially all the risks and rewards of the asset, or b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially changed, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts are recognized in profit or loss.

Write-offs

A write-off is performed when the entire loan is deemed uncollectible (very high uncertainty regarding recoverable amount and timeframe). Write-off is not conditioned by the closure of the legal procedures, nor does it imply the forfeit of the bank’s claims to the receivables / financial asset. A write-off is performed only where the chances of recoveries are remote.

The Bank performs permanent write-offs (derecognition) under certain situations, such as:

·       the financial assets are considered immaterial, thus do not justify the initiation of the recovery process;

·       the collaterals which cover the receivables have a recovery value deemed immaterial and no other recovery sources could be identified;

·       exhaustion of all legal means;

·       end of the statute of limitation period for enforcement rights, etc.

Any recoveries of previously written-off loans and receivables are recognized as income.

3.     Summary of significant accounting policies (continued)

e)     Impairment model of financial assets

The Group assesses on a forward-looking basis the expected credit losses (“ECL”)  for the following categories of financial assets: loans and placed deposits measured at amortised cost, debt instruments measured at fair value to other comprehensive income,  loan commitments and financial guarantee contracts, contract assets and trade receivables.

The group recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects:

·       An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

·       The time value of money;

·       Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

The ECL calculation considers both the number of days past due recorded by the receivables and the credit risk analysis performed for clients with granted loans.

For contract assets and trade receivables the Group applies the simplified approach for measuring the expected credit losses and recognizes lifetime expected credit losses in accordance to the provisions of IFRS 9 “Financial Instruments”. Based on an assessment of historical information the Bank recognizes expected credit loss for contract assets and the trade receivables with more than 90 days past due for the entire exposure amount.

Overview of the ECL principles

The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss (12mECL). The ECL is computed from the time of origination.

Consequently, financial assets subject to loss allowances can be classified in Stage 1, Stage 2, Stage 3 or POCI, as described below:

·       Stage 1 when there is insignificant or no impairment of credit quality since initial recognition; Loss allowance shall be equal to 12mECL.

·       Stage 2 when a financial asset shown significant increase in credit risk since initial recognition, though not impaired; Loss allowance shall be equal to LTECL.

·       Stage 3 financial assets classified as impaired; Loss allowance is represented by LTECL.

·       POCI financial assets that are credit impaired on initial recognition. Loss allowance shall be equal to LTECL. ECLs are only recognized or released to the extent that there is a subsequent change in the expected credit losses.

The expected credit loss may be calculated either individually or collectively in accordance with IFRS 9 perspective. The Bank model for computing the expected credit losses is:

·       Individual or collective assessment for clients in Stage 3;

·       Collective assessment for clients in Stage 2 or Stage 1.

3.     Summary of significant accounting policies (continued)

e)     Impairment model of financial assets (continued)

Staging criteria

The Bank has established criteria to perform the assessment of significant increase in credit risk since initial recognition on a monthly basis, considering both relative and absolute thresholds.

·       For Non Retail portfolio (Corporate and Public Authorities), the staging criteria are:

Stage 3: criteria as provided by EBA default definition as presented below.

Stage 2: assessment of

Relative threshold : Doubling of the lifetime PD since origination and the absolute increase exceeds a pre-defined quantitative threshold

Absolute thresholds: Clients rated with the last three risk classes in term of risk, Clients with expired ratings for more than three months, Clients not rated as of reporting date, Healthy clients with restructured facilities in probation and DPD < 30, Clients with DPD > 30

Stage 1: include all clients not classified in Stage 2 or Stage 3 based on the above conditions

·       For Small Business, the staging criteria are:

Stage 3: criteria as provided by EBA default definition as presented below

Stage 2: assessment of

Relative threshold: Doubling of the lifetime PD since origination and the absolute increase exceeds a pre-defined quantitative threshold

Absolute thresholds: Clients rated with the last three risk classes in term of risk, Healthy clients with restructured facilities in probation and DPD < 30, Clients with DPD > 30

Stage 1: include all clients not classified in Stage 2 or Stage 3 based on the above conditions

·       For Individuals and Professionals , the staging criteria are:

Stage 3: criteria as provided by EBA default definition as presented below

Stage 2: assessment of

Relative threshold: Doubling of the lifetime PD since origination and the absolute increase exceeds a pre-defined quantitative threshold

Absolute thresholds: Clients rated with the last two risk classes in term of risk, Healthy clients with restructured facilities in probation and DPD < 30, Clients with DPD > 30

Stage 1: include all clients not classified in Stage 2 or Stage 3 based on the above conditions

In accordance with EBA default definition, the main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days, whether a severe alteration in the counterparty’s financial standing is observed, entailing a high probability that the debtor will not be able to fully meet its credit obligations, whether concessions in the form of restructuring were consented under the circumstances of financial hardship experienced by the debtor, whether legal procedures were initiated or the debtor was transferred to specialized recovery structures (regardless of the number of days past due).

3.     Summary of significant accounting policies (continued)

e)     Impairment model of financial assets (continued)

ECL calculation techniques:

The key elements of ECL calculation are outlined below:

·           PD       Probability of Default models are based on a two-step approach: building of the through-the-cycle (TTC) marginal PD curve and Adjustment of the TTC curve to incorporate point in time and forward looking information;

·           LGD     Loss Given Default model takes into account cashbacks, portfolio sales and collateral recoveries;

·           EAD     Exposure at default estimation at each time step is based on internally modelled Credit Conversion Factor (“CCF”).

·           Point in time and forward looking transformation for ECL parameters.

Forward-looking information

Expected losses are computed based on three macroeconomic scenarios: optimistic, base and stress scenario. Consequently, expected credit losses are influenced both by changes in portfolio quality as well as changes in macroeconomic projections. Macroeconomic models are sensitive to GDP, RON/EUR exchange rate and unemployment rate. Final ECL is derived using the weighted average of the three scenarios (based on their probabilities of occurrence).

The inputs and models used for calculating ECL may not always capture all characteristics of the market at the date of the financial statements. To reflect this, the Bank assesses the need/opportunity for additional amounts of provisions in the form of overlays, in order to address:

·           Sector of activity specific risks (adjustment of ECL on sectors that have a different default behaviour from the whole calibration segment)

·           Visible macroeconomic threat impossible to be captured by the models (typically, when the predicted stress did not occur in the observed past serving as a base for models)

Impairment/default principles

Impairment and recoverability are assessed, measured and recognized individually for loans and receivables that are individually significant, and on a portfolio basis for impaired loans and receivables that are not individually significant. Loans and receivables for which an objective evidence of impairment was not identified, regardless the loans are individually significant or not, are included in a portfolio for collective impairment assessment. The carrying amount of the asset is reduced to its estimated recoverable amount through the use of an allowance account. The loss amount is recognised into profit and loss. If the amount of the impairment subsequently decreases due to an event occurring after the impairment, the release of the allowance is credited to the income statement.

The Group implemented the definition of the default status according to the criteria set by EBA. All the PD curves used as input elements in the ECL calculation were calibrated by applying the EBA definition retroactively, in order to ensure the consistency regarding the entry into default status at the time of calibration.

3.     Summary of significant accounting policies (continued)

e)     Impairment model of financial assets (continued)

Collateral valuation

To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible. The collateral comes in various forms, such as cash, letters of guarantees, real estate, etc.

Real estate collaterals are regularly valuated. Their market value is estimated by certified evaluators that can be either external or internal valuators. Depending on the collateral type, revaluation is performed:

·           Yearly, for commercial / industrial / agricultural real-estate, plots of land

·           At least once every 3 years, for residential real estate or with higher frequency if the real estate market displays a significant negative evolution.

The value of collateral affects the calculation of ECLs through LGD parameter, which is an estimate of the loss arising in the case where a default occurs at a given time, taking into account all the cash flows collected from the client, as well as the recovery value of collaterals (net of any cost and additional losses), by incorporating the effect of time value of money. The recovery value of a collateral is determined by applying discount coefficients to its market value when computing the provisions on individual assessment basis.

f)      Foreign currency translation

Transactions in foreign currencies are initially recorded using the functional currency rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the statement of financial position date. All differences are taken to the profit and loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as of the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The exchange rates of the currencies with the most significant impact on the Group and Bank’s consolidated and separate financial statements as of December 31, 2021 and 2020 were as follows:

g)     Cash and cash equivalents

For the purpose of the cash flow statements, cash and cash equivalents comprise cash in hand, current accounts and short-term placements at other banks, excluding amounts in transit and loans to banks with more than 90 days maturity from the date of acquistion. The Group and Bank did not include in cash and cash equivalents the amounts representing minimum compulsory reserve held at National Bank of Romania.

3.     Summary of significant accounting policies (continued)

h)    Leases

The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Group as a lessor

Finance leases are those which transfer to the lessee substantially all the risks and benefits incidental to ownership of the leased item and are recognized as assets at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are allocated both to the principal and the interest income on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease.

A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Group as a lessee

The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. For short-term leases or leases for which the underlying asset is of low value, the related lease payments are recognized as an expense on a straight-line basis over the lease term (please see Note 34).

Right-of-use assets

The Group recognizes right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date. Right-of-use assets are depreciated on a straight-line basis over the lease term. The right-of-use assets are presented within Note 14.

Lease liabilities

At the commencement date of the lease, the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments can include fixed payments, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments can also include payments of penalties for terminating the lease.

3.     Summary of significant accounting policies (continued)

i)      Investment in associates and joint ventures

An associate is an enterprise in which the Group and Bank exercises significant influence and is neither a subsidiary nor a joint venture.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. The Group and Bank recognizes its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates.

Associates and joint venture are accounted using the equity method for consolidation purposes and cost method for separate financial statements.

Under the equity method, an investment in an associate and joint venture is carried in the statement of financial position at cost plus post-acquisition changes in the Group and Bank’s share of net assets of the associate or joint venture. Goodwill relating to an associate or joint venture is included in the carrying amount of the investment and is not amortized. The Group and Bank does an assessment of any additional impairment loss with respect to the net investment in associate or joint venture.

The income statement reflects the share of the results of operations of associates and joint ventures. Where there has been a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share of any changes and discloses this, when applicable, in the statement of changes in equity.

The reporting dates of associates and joint venture and the Group are identical and the associates’ or joint ventures’ major accounting policies conform to those used by the Group for like transactions and similar events in similar circumstances.

j)      Tangible assets

The cost of tangible asset is recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the Group; and (b) the cost of the item can be measured reliably.

Buildings and other tangible assets are stated at cost less accumulated depreciation and any impairment loss.

In accordance with IAS 29 “Reporting in Hyperinflationary Economies”, tangible assets have been restated, as appropriate, by applying the change in the consumer price index from the date of acquisition through December 31, 2003.

Depreciation is computed on a straight-line basis over the estimated useful life of the asset, as stated below:

Land is not depreciated. Construction-in-progress is not depreciated until used. Expenses for repairs and maintenance are charged to operating expenses as incurred. Subsequent expenditure on property and equipment is recognized as an asset under the same general recognition principle used at initial recognition.

3.     Summary of significant accounting policies (continued)

j)      Tangible assets (continued)

The carrying amount of tangible assets is reviewed for impairment at each statement of financial position date or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Where the carrying amount of a tangible asset is greater than the estimated recoverable amount, it is written down to its recoverable amount.

Tangible assets are derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognized.

k)    Investment properties

Assets are classified as investment property if the property (land or a building - or part of a building - or both) is held (by the Bank or Group as owner) to earn rentals or for capital appreciation or both, rather than for: use in the production or for administrative purposes; or sale in the ordinary course of business.

Investment properties are measured initially at cost including transaction costs. Subsequent to initial recognition, investment properties are carried at cost less any accumulated depreciation and any accumulated impairment losses.

Investment properties are derecognized when either they have been disposed-off or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal.

Any gains or losses on the retirement or disposal of an investment property are recognized in the income statement in the year of retirement or disposal.

Transfers are made to investment property when and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party, or ending of construction or development. Transfers are made from investment property when and only when, there is a change in use evidenced by commencement of owner-occupation or commencement of development with a view to sale. The depreciation of buildings included in investment properties is computed using the linear method over the useful lives as presented in note 3.j).

l)      Non-current assets held for sale

Non-current assets for which the carrying amount is estimated to be recovered principally through a sale transaction rather than continuing use are classified as held for sale.

Assets held for sale are initially and subsequently measured at the lower of the carrying amount and the fair value at the date of the measurement. For any decrease of the fair value below the carrying amount, impairment is recognised into profit and loss accounts. The increase of the fair value of a held for sale asset is accounted for as an impairment release. Fair value increase is recognised up to the level of the initial carrying amount of the asset.

On the period an asset is classified as held for sale no depreciation charged is recognised. An asset that ceases to be classified as held for sale is measured at the lower of the carrying amount before the asset was classified as held for sale adjusted by the depreciation that would have been recognised had the asset was not classified as held for sale and its recoverable amount.

3.     Summary of significant accounting policies (continued)

m)   Goodwill

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group and Bank's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill is reviewed for impairment at each reporting date or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of cash-generating unit is less than the carrying amount, an impairment loss is recognized.

n)    Intangible assets

Intangible assets are measured initially at cost. Following initial recognition intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. All intangible assets of the Group and Bank carried as of December 31, 2021 and 2020 have finite useful lives and are amortized on a straight-line basis over the estimated useful life of up to 5 years. The amortization period and the amortization method are reviewed at least at each financial year end.

At each statement of financial position date or whenever events or changes in circumstances indicate the carrying value may not be recoverable, intangibles are reviewed for impairment. Where the carrying amount of an asset is greater than the estimated recoverable amount, it is written down to its recoverable amount by recognising impairment. An intangible asset is derecognized upon disposal (i.e., at the date the recipient obtains control) or when no future economic benefits are expected from its use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of profit or loss.

o)     Employee benefits

Short-term employee benefits:

Short-term employee benefits include wages, salaries and social security contributions. Short-term employee benefits are recognized as expense when services are rendered.

Social Security Contributions:

The Group and its subsidiaries as well as its employees are legally obliged to make contributions described in the financial statements as social security contributions to the National Pension Fund, managed by the Romanian State Social Security (a defined contribution plan financed on a pay-as-you-go basis). The Group and Bank has no legal or constructive obligation to pay future benefits. Its only obligation is to pay the contributions as they fall due. If the members of the Romanian State Social Security plan cease to be employed by either the Group or its subsidiary, there will be no obligation on the Group to pay the benefits earned by these employees in previous years. The Group and Bank’s contributions are included in salaries and related expenses.

Post-employment benefits:

The Group and Bank has a contractual obligation to pay to retiring employees a benefit calculated taking into account the salary at the date of retirement and the number of years served by the individual. The cost of providing benefits under defined benefit plans is estimated annually using the projected unit credit actuarial valuation method and is recognized to the income statement on an accruals basis. Differences arising from changes in calculation assumptions (early retirements, discount rates, etc.) or differences between actuarial assumptions and real performance are recognized as actuarial gains and losses.