2007 REGISTRATION DOCUMENT

CONSOLIDATED FINANCIAL STATEMENTS5Notes to the financial s tatements p repared in accordance with I nternational Financial Reporting S tandards as adopted by the European Union< Contents >1.c.11 Income and e xpenses a rising f romf inancial a ssets and f inancial l iabilitiesIncome and expenses arising from financial instruments measured atamortised cost and from fixed-income securities classified in “Availablefor-salefinancial assets” are recognised in the profit and loss accountusing the effective interest method.The effective interest rate is the rate that exactly discounts estimatedfuture cash flows through the expected life of the financial instrumentor, when appropriate, a shorter period to the net carrying amount ofthe asset or liability in the balance sheet. The effective interest ratecalculation takes account of (i) all fees received or paid that are anintegral part of the effective interest rate of the contract, (ii) transactioncosts, and (iii) premiums and discounts.The method used by the Group to recognise service-related commissionincome and expenses depends upon the nature of the service. Commissiontreated as an additional component of interest is included in the effectiveinterest rate, and is recognised in the profit and loss account in “Netinterest income”. Commission payable or receivable on execution of asignificant transaction is recognised in the profit and loss account infull on execution of the transaction, under “Net commission income”.Commission payable or receivable for recurring services is recognisedover the term of the service, also under “Net commission income”.Commission received in respect of financial guarantee commitments isregarded as representing the fair value of the commitment. The resultingliability is subsequently amortised over the term of the commitment,under commission income in net banking income.External costs that are directly attributable to an issue of new sharesare deducted from equity net of all related taxes.1.c.12 Cost of r iskCost of risk includes movements in provisions for impairment of fixedincomesecurities and loans and receivables due from customers andcredit institutions, movements in financing and guarantee commitmentsgiven, losses on irrecoverable loans and amounts recovered on loanswritten off. This caption also includes impairment losses recorded inrespect of default risk incurred on counterparties for over-the-counterfinancial instruments, as well as expenses relating to fraud and todisputes inherent to the financing business.1.c.13 Derecognition of f inancial a ssetsand f inancial l iabilitiesThe Group derecognises all or part of a financial asset either (i) when thecontractual rights to the cash flows from the asset expire or (ii) whenthe Group transfers the contractual rights to the cash flows from theasset and substantially all the risks and rewards of ownership of theasset. Unless these conditions are fulfilled, the Group retains the assetin its balance sheet and recognises a liability for the obligation createdas a result of the transfer of the asset.The Group derecognises all or part of a financial liability when the liabilityis extinguished in full or in part.1.c.14 Netting of f inancial a ssetsand f inancial l iabilitiesA financial asset and a financial liability are offset and the net amountpresented in the balance sheet if, and only if, the Group has a legallyenforceable right to set off the recognised amounts, and intends eitherto settle on a net basis, or to realise the asset and settle the liabilitysimultaneously.1.d INSURANCEThe specific accounting policies relating to assets and liabilities generatedby insurance contracts and financial contracts with a discretionaryparticipation feature written by fully-consolidated insurance companiesare retained for the purposes of the consolidated financial statements.These policies comply with IFRS 4.All other insurance company assets and liabilities are accounted for usingthe policies applied to the Group’s assets and liabilities generally, andare included in the relevant balance sheet and profit and loss accountheadings in the consolidated financial statements.1.d.1AssetsFinancial assets and non-current assets are accounted for using thepolicies described elsewhere in this note. The only exceptions are sharesin civil property companies (SCIs) held in unit-linked insurance contractportfolios, which are measured at fair value on the balance sheet datewith changes in fair value taken to profit or loss.Financial assets representing technical provisions related to unit-linkedbusiness are shown in “Financial assets at fair value through profit orloss”, and are stated at the realisable value of the underlying assets atthe balance sheet date.1.d.2LiabilitiesThe Group’s obligations to policyholders and beneficiaries are shownin “Technical reserves of insurance companies” and comprise liabilitiesrelating to insurance contracts carrying a significant insurance risk (e.g.,mortality or disability) and to financial contracts with a discretionaryparticipation feature, which are covered by IFRS 4. A discretionaryparticipation feature is one which gives life policyholders the rightto receive, as a supplement to guaranteed benefits, a share of actualprofits.Liabilities relating to other financial contracts, which are covered byIAS 39, are shown in “Due to customers”.Unit-linked contract liabilities are measured by reference to the fair valueof the underlying assets at the balance sheet date.The technical reserves of life insurance subsidiaries consist primarily ofmathematical reserves, which generally correspond to the surrendervalue of the contract.The benefits offered relate mainly to the risk of death (term lifeinsurance, annuities, loan repayment, guaranteed minimum on unitlinkedcontracts) and, for borrowers insurance, to disability, incapacityand unemployment risks. These types of risks are controlled by the12345678910112007 Registration document - BNP PARIBAS 123