Accounting policies

Basis of preparation

The accounting policies selected and applied by the fund manager are to a large extent in line with IFRS. The main exceptions to IFRS standards are related to a limitation in disclosure of balance sheet and profit and loss items. The annual accounts are prepared under the historical cost convention, except for:

  • Equity investments, short-term deposits, and all derivative instruments that are measured at fair value;

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

Adoption of new standards, interpretations and amendments

Adopted

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

IFRS 9 Financial Instruments

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

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

Comparative periods have not been restated. The IFRS 9 standard covers concepts and methods, which are significantly different from accounting standards applied before January 1, 2018. Therefore, it is highly complex to apply the IFRS 9 standard on retrospective basis for 2017. The information presented in for 2017 does not reflect the requirements of IFRS 9 and is therefore not comparable to the information presented for 2018 under IFRS 9. 

Changes to classification and measurement

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

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

Transition table

       
  

Classification and Measurement

Impairment

  
 

IAS 39
December 31, 2017

Classification change Equity Investments (AFS to FVPL)

Impact loans and other debt instruments at FVPL

Termination unamortized fees for loans FVPL

ECL impact

Total Changes

IFRS 9
January 1, 2018

Assets

       

Banks

8,918

-

-

-

-

-

8,918

Loan portfolio

32,966

-

559

14

-1,001

-428

32,538

Equity investments

42,612

-

-

-

-

-

42,612

Other receivables

227

-

-

-

-

-

227

Accrued income

440

-

-

-

-

-

440

Total assets

85,163

-

559

14

-1,001

-428

84,735

        

Liabilities

       

Current account with FMO

39

-

-

-

-

-

39

Accrued liabilities

26

-

-

-

-

-

26

Provisions

-

-

-

-

222

222

222

Total liabilities

65

-

-

-

222

222

287

        

Fund capital

       

Contribution DGIS previous years

53,319

-

-

-

-

-

53,319

Contribution DGIS current year

17,561

-

-

-

-

-

17,561

Total contribution DGIS

70,880

-

-

-

-

-

70,880

        

Available for sale reserve

8,142

-8,142

-

-

-

-8,142

-

Other reserves

-

8,142

559

14

-1,223

7,492

7,492

Undistributed results previous years

14,165

-

-

-

-

-

14,165

Net profit

-2,316

-

-

-

-

-

-2,316

Grants

-4,787

-

-

-

-

-

-4,787

Evaluation costs

-986

-

-

-

-

-

-986

Total fund capital

85,098

-

559

14

-1,223

-650

84,448

        

Total liabilities and shareholders' equity

85,163

-

559

14

-1,001

-428

84,735

Changes to the impairment calculation

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

Estimates and assumptions and judgements

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

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

  • The determination of the Expected Credit Loss allowance (applicable from January 1, 2018);

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

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

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

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

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

Financial assets – Classification

Policy applicable from January 1, 2018

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

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

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

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

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

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

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

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

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

A financial asset is initially measured at fair value plus, for an item not at FVPL, transaction costs that are directly attributable to its acquisition.

Business model assessment

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

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

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

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

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

Contractual cashflow assessment

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

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

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

  • Loans with convertibility and prepayment features;

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

  • Contractually linked instruments.

Reclassification

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

Policy applicable before January 1, 2018

The Fund classified its financial assets into one of the following categories:

  • Loans and receivables;

  • Available for sale; and

  • At FVPL, and within this category as:

    • Held for trading; or

    • Designated as at FVPL

The Fund has no financial assets that were classified as held to maturity as allowed under IAS 39.

Financial assets – Impairment

Policy applicable from January 1, 2018

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

  • Banks;

  • Loans;

  • Loan commitments and financial guarantee contracts issued.

No impairment loss is recognized on equity investments.

Impairment stages loans and banks

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

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

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

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

ECL measurement

The Funds ECL model is primarily an expert based model and this model is frequently benchmarked with other external sources if possible.

ECL measurement Stage 1 and Stage 2

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

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

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

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

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

Macro economic scenarios in PD estimates

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

The three scenarios applied are:

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

  • Base scenario: Vulnerability and accompanying losses based on The Funds best estimate from risk models;

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

ECL measurement Stage 3

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

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

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

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

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

Staging criteria and triggers

Financial instruments classified as low credit risk

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

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

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

Significant increase in credit risk (Stage 2)

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

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

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

  • The application of forbearance.

Credit-impaired financial assets (Stage 3)

A financial asset is transferred to Stage 3 when the Funds Investment Review Committee has decided that credit risk deterioration has occurred and decides to apply a specific impairment. The criteria for these impairments are the same as under the current IAS 39 methodology explained in the section ‘Value adjustments on loans’ of the Accounting policies. Accordingly, the population is the same under both standards. 

Definition of default

A financial asset is considered as default when: 

  • The client is past due more than 90 days on any material credit obligation (above certain threshold) to the Fund;

  • When the Fund judges that the client is unlikely to pay its credit obligation to the Fund and the IRC decides on a specific impairment (Stage 3 transfer). We refer to the Risk Management chapter for more details on unlikely to pay triggers. 

The Fund has opted not to align the definition of default to Stage 3 as there are cases of clients being more than 90 days past due, who the IRC judges to be still likely to pay and therefore not require a specific provisioning.

Written-off financial assets

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

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

Value adjustments on loans

Policy applicable before January 1, 2018

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

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

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

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

Modification of financial assets

Policy applicable before and from January 1, 2018

The contractual terms of a loan may be modified for a number of reasons, which may include extending the maturity, changing interest margin and changing the timing of interest payments. If the terms of financial assets are modified, the Fund evaluates whether the cash flows of the modified assets are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial assets are deemed to have expired. In this case, the original financial asset is derecognized, and a new financial asset is recognized. If the cash flows of the modified financial asset carried at amortized cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Fund recalculates the gross carrying amount of the financial asset and recognizes the amount arising from adjusting the gross carrying amount as a modification gain or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income.

Impairments of equity investments

Policy applicable before January 1, 2018

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

Fair value of financial instruments

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

Amortized cost and gross carrying amount

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

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

Foreign Currency translation

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

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

Offsetting financial instruments

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

Derivative instruments

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

Embedded derivatives

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

Policy applicable from January 1, 2018

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

Policy applicable before January 1, 2018

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

Interest income and expense

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

Policy applicable from January 1, 2018

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

Policy applicable before January 1, 2018

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

Fee and commission income and expense

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

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

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

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

Dividend income

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

Cash and cash equivalents

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

Loans

Loans originated by the Fund include loans to the private sector in developing countries for the account and risk of the Fund.

Policy applicable from January 1, 2018

Loans on the balance sheet of the Fund include:

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

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

Policy applicable before January 1, 2018

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

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

Equity investments

Policy applicable from January 1, 2018

Equity investments on the balance sheet of the Fund include:

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

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

Policy applicable before January 1, 2018

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

Investment in associates

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

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

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

  • The Fund makes no essential technical assistance available.

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

Available for sale reserve (AFS reserve)

Policy applicable before January 1, 2018

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

Undistributed results previous years

The undistributed results consists of the part of the annual results that the Fund is accumulating to maintain the revolvability of the Fund.