Significant accounting policies

Basis of preparation

The consolidated financial statements (the ‘financial statements’) have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as endorsed by the European Union and with Part 9 of Book 2 of the Dutch Civil Code for the financial period ended on December 31, 2022. These financial statements are based on the ‘going concern’ principle.

The consolidated financial statements are measured at historical cost except for:

• Money market funds, commercial paper and all derivative instruments that are mandatory measured at fair value;

• Equity investments which are measured mandatory at fair value through profit and loss (FVPL) or fair value through other comprehensive income (FVOCI);

• The part of loans to the private sector which is measured (mandatory) at fair value (refer to business model assessment and contractual cash flow assessment in this chapter below)

• The carrying value of debt issued that qualifies for hedge accounting, is adjusted for changes in fair value related to the hedged risk;

• The provision for defined benefit pension obligations is calculated using the present value of the defined benefit obligation at the statement of financial position date minus the fair value of plan assets, after adjusting for unrecognized actuarial gains/losses and past service costs.

• Other financial liabilities designated at FVPL to significantly reduce an accounting mismatch with related financial assets

Loans to the private sector and private equity investments (including FVOCI) are recognized on the statement of financial position when funds are transferred to  customer accounts. Other financial assets and liabilities are recognized on the same day that FMO becomes a party to the contractual terms and conditions of the financial instrument.

Group accounting and consolidation

The company accounts of FMO and the company accounts of the subsidiaries Asia Participations B.V., FMO Investment Management B.V., Equis DFI Feeder L.P., FMO Representative Office LAC Limitada and the FMO Ventures Program are consolidated in these financial statements. FMO Representative Office LAC Limitada was incorporated during first half of 2022 and is FMO's representative entity in Costa Rica. This subsidiary is 100 percent owned by FMO. The consolidation of this entity does not have a material impact on FMO's statement of financial position. During the first half of 2022, Nedlinx B.V. was liquidated and is no longer part of the consolidation structure of FMO's consolidated accounts. The subsidiary was 100 percent owned by FMO. This liquidation does not have a material impact on FMO's statement of financial position or FMO's current business activities.

Asia Participations B.V. and Equis DFI Feeder L.P. provide equity capital to companies in developing economies. FMO Investment Management B.V. carries out portfolio management activities for third party investment funds, which are invested in FMO’s transactions in emerging markets and developing economies. FMO has a 63 percent stake in Equis DFI Feeder L.P. and all other entities except FMO Ventures Program are 100 percent owned by FMO.

The FMO Ventures Program is an effort between FMO, the Dutch State and European Commission that facilitates investments in young start ups and scale ups. The FMO Ventures Program is a structured entity that has been designed so that voting or similar rights are not a dominant factor in deciding who controls the entity and relevant activities are directed by means of contractual arrangements. For the FMO Ventures Program, FMO has control over direct relevant investment decisions and returns. Therefore, FMO consolidated the FMO Ventures program on FMO’s statement of financial position starting from 2022. The State Funds’ share of the program is not used by FMO to generate returns.

Fiscal Unity

FMO forms a fiscal unity for corporate income tax purposes with its fully-owned Dutch subsidiaries Asia Participations B.V. and FMO Investment Management B.V. As a consequence, FMO is liable for all income tax liabilities for these subsidiaries.

Adoption of new standards, interpretations and amendments

There are no new standards, interpretations or amendments adopted that have an impact on FMO.

Issued but not yet adopted standards

FMO has assessed the amendments and new standards and does not expect them to have a significant impact on the consolidated financial statements.

Significant estimates, assumptions and judgments

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

• The determination of the fair value of loans to private sector, derivative financial instruments and equity investments based on generally accepted modeled valuation techniques;

• The determination of the ECL allowance for loans to private sector, loans commitments, guarantees given, interest bearing securities;

• The estimation of pension liabilities.

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;

• The inputs and calibration of the ECL models which include the various formulas and the choice of inputs, aging criteria and forward-looking information.

• Assessment of risks, rewards and control, when considering the recognition and derecognition of assets or liabilities and the consolidation or deconsolidation of structures.

Foreign currency translation

The consolidated financial statements are stated in euros, which is the presentation and functional currency of FMO. 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 statement of financial position date, monetary assets and liabilities are reported using the closing exchange rate. Non-monetary assets that are not measured at cost denominated in foreign currencies are reported using the exchange rate that existed when fair values were determined.

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 statement of profit or loss 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. When a gain or loss for non-monetary financial asset is recognized through fair value through other comprehensive income (FVOCI), any foreign exchange component of the gain or loss is also recognized through FVOCI.

When preparing the financial statements, assets and liabilities of foreign subsidiaries and FMO’s share in associates are translated at the exchange rates at the statement of financial position date, while income and expense items are translated at weighted average rates for the period. Differences resulting from the use of closing and weighted average exchange rates, and from revaluation of a foreign entity’s opening net asset value at closing rate, are recognized directly in the translation reserve within shareholders’ equity. These translation differences are maintained in the translation reserves until disposal of the subsidiary and/or associate.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and when there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. FMO only applies offsetting on derivatives with a master netting agreement.

Fair value of financial instruments

Fair value is the price that would be received for 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 amortized cost 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. 

Gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any expected credit loss allowance.

Assets

Financial assets - classification

On initial recognition, a financial asset is classified as measured at amortized cost (AC), fair value through profit and loss (FVPL) or fair value through other comprehensive income (FVOCI).

A financial asset is measured at AC if it meets both of the following conditions and is not classified 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 measured 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.

Derivatives are mandatorily held at FVPL.

All financial assets not classified as measured at AC or FVOCI as described above are measured at FVPL. In addition, on initial recognition FMO 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.

Transaction costs related to financial assets, not measured at FVPL, are directly added to its fair value for initial recognition and therefore attributed directly to its acquisition.

Business model assessment

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

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

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

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

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

Contractual cash flow 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, FMO has considered the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, FMO has considered among others:

• Contingent events that would change the amount and timing of cash flows – e.g. prepayment and extension features, loans with performance related 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 FMO’s claim to cash flows from specified assets – e.g. non-recourse assets;

• Contractually linked instruments.

Reclassification

In rare circumstances, financial assets can be reclassified but only after initial recognition. This happens if the business model for managing financial assets has changed and this change is significant to FMO's operations.

Cash and cash equivalents (banks and short-term deposits)

Cash and cash equivalents consist of banks and short-term deposits which 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 measured at FVPL. These financial instruments are highly liquid with a high credit rating and are subject to an insignificant risk of changes in fair value. There is no restriction on these financial instruments and FMO has on demand full access to the carrying amounts. Unrealized gains or losses on the money market funds and commercial loan portfolio (including foreign exchange results) are reported in the results from financial transactions.

Interest-bearing securities

Interest bearing securities include bonds which are held for long-term liquidity purposes. These securities are measured at AC since they comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. The securities are initially measured at fair value of the consideration paid, including transaction costs incurred. Subsequently, they are measured at AC using the effective interest rate method. For the interest-bearing securities an ECL allowance is estimated. For more details on ECL allowance, please refer to the section 'Financial assets – Impairment'.

Loans to the private sector

Loans originated by FMO include:

• Loans to the private sector in developing economies for the account and risk of FMO;

• Loans provided by FMO and to a certain level, guaranteed by the Dutch Government.

Loans to the private sector on the statement of financial position of FMO 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 fair value of the consideration paid including incremental direct transaction costs incurred. Subsequently, the loans are measured at AC using the effective interest rate method;

• Loans mandatorily measured at FVPL that 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 in the statement of profit or loss.

Equity investments

Equity investments on the statement of financial position of FMO include investments in which FMO has no significant influence:

• Equity investments are measured at FVPL. FMO 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 mandatorily at fair value with changes recognized in the statement of profit or loss;

• Equity investments designated as at FVOCI. The designation is made for investments held for long-term strategic purposes and not for trading. These investments are measured at fair value. Dividends are recognized as income in the statement of profit or 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 the statement of profit or loss.

Investments in associates

Measurement and criteria

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

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

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

• FMO makes no essential technical assistance available.

Investments in associates are initially recorded at cost and the carrying amount is increased or decreased after the date of acquisition to recognize FMO’s share of the investee’s profit or loss. Distributions received from the investee reduce the carrying amount of the investment.

Impairment of investments in associates

Investments in associates are reviewed and analyzed at least on a semi - annual basis. A net investment in an associate is impaired or impairment losses occur where there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the net investment and the loss event has an impact on the estimated future cash flows from the net investment that can be reliably estimated. A significant or prolonged decline in the fair value of an investment in an associate below its cost is considered as the primary objective evidence of impairment, in addition to other observable loss events. FMO considers more than 10 percent difference between fair value and its cost as significant and greater than one year as prolonged. When FMO decides to take an impairment on one of these investments, the impairment is recognized in the statement of profit or loss under 'Share in the results on associates'. 

Property plant and equipment

Property plant and equipment (PP&E) includes tangible assets such as buildings, vehicles, furniture, and office equipment. 

Furniture and leasehold improvements

Furniture and leasehold improvements are stated at historical cost less accumulated depreciation.

Depreciation of furniture and leasehold improvements

Depreciation for furniture and leasehold improvement is calculated using the straight-line method to write down the cost of such assets to their residual values over their estimated useful lives.

Useful life for:

• Furniture - 5 years

• Leasehold improvements - 5 to 10 years

These assets are reviewed for impairment whenever triggering events indicate that the carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are reported in operating profit. 

IFRS 16 leases: right-of-use assets and lease liabilities

FMO records the right-of-use assets for its operational leases according to IFRS 16. These assets consist of buildings, lease vehicles and office equipment. 

FMO assesses whether a contract is or contains a lease, at inception of a contract. FMO recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for leases of low value assets (value below €5,000). For these leases, FMO recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease.

FMO 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 less any lease incentives received. The recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment testing.

Useful life for:

• Buildings - 10 years

• Vehicles - 5 years

• Office equipment - 3 to 5 years

At the commencement date of the lease FMO recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable and amounts expected to be paid under residual value guarantees. In calculating the present value of lease payments, FMO uses the incremental borrowing rate at the lease commencement date as the interest rates implicit in the lease agreements are not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest expenses on IFRS 16 leases are recognized under a separate line under net interest income. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, such as a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying value of the right-of-use asset.

Intangible assets

Software products

Expenditures directly associated with identifiable and unique software products or internally developed software, controlled by FMO and likely to generate economic benefits are recognized as assets. These assets include staff costs incurred to make these software products operable in the way management intended. These assets are recognized at cost less accumulated amortization and accumulated impairment losses.

Useful life for software ranges between 3 - 5 years. 

Costs associated with maintaining software programs are recognized in the statement of profit or loss as it is incurred. Expenditure that enhances or extends the performance of software programs beyond their original specifications is recognized as a capital improvement and added to the original cost of the software.

Amortization and impairment

Internally developed software is amortized on the basis of the useful life on a straight-line basis. Furthermore, these assets are tested for impairment when there is an indication of impairment, or annually in the case of software that is not yet ready for use. In case an asset is no longer in use, the asset is impaired. 

Financial assets – impairment

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

• Banks;

• Interest bearing securities;

• Loans to the private sector;

• Loan commitments and financial guarantee contracts issued (off balance items).

No impairment loss is recognized on equity investments. Specific impairment on loans guaranteed by the Dutch Government are taken by FMO for unguaranteed amounts. However, these unguaranteed amounts can be eligible for compensation in specific cases. 

Impairment stages loans to the private sector

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

• Stage 1 – Performing loans: when loans are first recognized, an allowance is recognized based on 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 – a lifetime expected credit loss is recognized for these loans. In addition, interest income is accrued on the AC of the loan net of allowances.

ECL measurement

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

ECL measurement Stage 1 and Stage 2

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. FMO uses a scorecard model based on quantitative and qualitative indicators to assess current and future customers and determine PDs. The output of the scorecard model is mapped to the Moody’s PD master scale based on idealized default rates. For accounting purposes 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. Guarantees due to Unfunded Risk Participants are deducted from the Exposure at Default to an obligor for ECL measurement;

• LGD: the Loss Given Default is an estimate of FMO’s 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 that FMO would expect to receive;

• Z-factor: the Z-factor is a correction factor to adjust the customer 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. Customer 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, FMO 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 FMO’s 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 Stage 1 and Stage 2 calculation, because loan-specific impairments provide a better estimate for Stage 3 loans in FMO’s diversified loan portfolio. The following steps serve as the input for the Investment Review Committee (IRC) to decide about the specific impairment level:

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

• Based on these probability weights, a discount curve is generated and the discounted cashflow (DCF) model is used to determine the percentage to be applied on the outstanding amount of a loan;

• Take expected cash flows arising from liquidation processes, unfunded risk participations and firm offers into account. The cashflows from unfunded risk participations and firm offers serve as a cap for the provision (or a floor for the value of the loan).

Staging criteria and triggers

Financial instruments classified as low credit risk

FMO considers all financial instruments with an investment grade rating (BBB- or better on the S&P scale or F10 or better on FMO’s 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. This exemption is applied for interest-bearing securities, banks and current accounts with subsidiaries and state funds.

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

All loans that 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. The interest revenue of these assets is based on the gross amount.

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. FMO considers whether there has been a significant increase in credit risk of an asset by comparing the lifetime probability of default upon initial recognition of the asset against the risk of a default occurring on the asset as at the end of each reporting period. Interest revenue for these financial assets is based on the gross amount. This assessment is based on either one of the following items:

• The fact that an early warning signal has triggered financial difficulty following a transfer to the watchlist;

• The fact that the financial asset is 30 days or more past due on any material obligation to FMO, including fees and excluding on-charge expenses (unless reasonable and supportable information is available demonstrating that the customer can service its debt).

Definition of default  - Stage 3 financial assets

 A financial asset is considered in default when any of the following occurs:

• The customer is 90 days or more past due on any material obligation to FMO, including fees (but excluding on-charged expenses);

• FMO judges that the customer is unlikely to pay its credit obligation to FMO due to occurrence of credit risk deterioration and the IRC decides on a specific impairment on an individual basis. The triggers for deciding on specific impairment include bankruptcy, days of past due, central bank intervention, distressed restructuring or any material adverse change or development that is likely to result in a diminished recovery of debt;

The following diagram provides a high level overview of IFRS 9 staging triggers at FMO:

Reversed staging

Reversed staging relates to criteria that trigger a transfer to Stage 1 for loans that are in Stage 2 or Stage 3. The following conditions must apply for a transfer to stages representing lower risk:

• Loans in Stage 2 will only revert to Stage 1 when there is no indication of financial difficulty and the exposure is removed from the watchlist, the regulatory forbearance probation period of minimum two years has passed and no material amounts are past due for more than 30 days.

• Loans in Stage 3 will revert to Stage 2 when the specific impairment is released by the IRC and there are no obligations past due for more than 90 days.

Written-off financial assets

A write-off is made when a claim is deemed non-collectible, 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 FMO. There are no automatic triggers, which would lead to a write-off of the loan; specific impaired loans are assessed on individual basis depending on their circumstances. Generally when the impairment percentage exceeds 95 percent , the IRC is advised to consider a write-off. 

Write-offs are charged against previously booked impairments. If no specific impairment is recorded on the basis of an IRC decision from the past, the write-off is included directly in the statement of profit or loss account under ‘Impairments’. 

Modification of financial assets

FMO has defined specific event-based triggers, related to the type of restructuring being carried out in order to determine whether a specific change in contractual terms gives rise to derecognition or modification, instead of relying on a quantitative threshold only related to differences in net present value (NPV). 

Modification of contractual cashflows and terms and conditions, arise from lending operations where FMO enters into arrangements with their customers, which implies modifications to existing contractual cash flows or terms and conditions. Such arrangements are usually initiated by FMO when financial difficulty occurs or is expected with a borrower. The purpose of such an arrangement is usually to collect original debt over different terms and conditions from the borrower. Modifications may include extending the tenor, changing interest rate percentages or their timing, or changing of interest margin.

During the modification assessment, FMO will evaluate whether the modification event leads to a derecognition of the asset or to a modification accounting treatment. Generally loans that are sold to a third party or are written off lead to a derecognition. When existing debt is converted into equity, a derecognition of the debt will occur and recognized again on the statement of financial position as equity. For modifications in interest percentages or tenor changes of existing amortized cost loans that do not pass the SPPI test, the loan will also be derecognized and will be recognized as new loans on FMO's statement of financial position according to the new classification.

When modification measures relate to changes in interest percentages or extensions of tenors and the loan is at amortized cost, FMO will recalculate the gross carrying amount of the financial asset. It will do so by discounting the modified expected cash flows using the original effective interest rate and by recognizing the difference in the gross carrying amount as a modification gain or loss in the statement of profit or loss. However when the NPV of the original loan is substantially different than the NPV of the modified loan, the original loan is derecognized and re-recognized on the statement of financial position. FMO considers a variance of greater than 10 percent as substantially different.

Modification of contractual terms versus forbearance

Forbearance is not an IFRS term but relates to arrangements with customers that imply modifications to cashflows or existing terms and conditions due to financial difficulties of the customer, such as prospects of bankruptcy or central bank intervention. Forbearance must include concessions to the borrower such as release of securities or changes in payment covenants that implies giving away payment rights. Forbearance measures do not necessarily lead to changes in contractual cash flows (e.g., waiver of specific covenant breaches).

Theoretically the modification of contractual cash flows or terms and conditions, does not necessarily apply to customers in financial difficulty. However, at FMO, a modification of the contractual terms is usually initiated when financial difficulty occurs or is expected. Therefore only in exceptional cases, changes in modifications of contractual terms not following from credit risk related triggers, will not lead to forbearance e.g. in case of an environmental covenant breach. At FMO, generally, modifications will follow from financial difficulties of the borrower and will be classified as forborne assets.

Derivative instruments

Derivative financial instruments are initially recognized at fair value on the date FMO enters into a derivative contract and are subsequently remeasured at fair value. Changes in the fair value of these derivative instruments are recognized immediately in the statement of profit or loss. All derivatives are classified 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.

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 as set out in the section 'Financial assets- classification'.

Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profit or loss and if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognized in the statement of profit or loss. An assessment is carried out when FMO first becomes party to the contract. When there is a change in the terms of the contract that significantly modifies the expected cash flows, the modification results in derecognition of the original instrument and leads to  recognition of a new instrument again on the statement of financial position.

Treasury derivatives

FMO uses derivative financial instruments as part of its asset and liability management to manage exposures to interest rates and foreign currencies. FMO applies micro fair value hedge accounting to the funding portfolio with the purpose of mitigating exposure to interest rate risk (please refer to the 'Hedge accounting' paragraph in this section).

Furthermore, economic hedges are conducted to hedge items that do not fulfill the criteria of hedge accounting and are presented as 'Derivatives other than hedge accounting derivatives'. Changes of market value for these derivatives are immediately recognized in the statement of profit or loss. 

Definition fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the statement of profit or loss, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest- bearing instruments, amortized through the statement of profit or loss over the remaining term of the original hedge or recognized directly when the hedged item is derecognized. For non-interest-bearing instruments, the cumulative adjustment of the hedged item is recognized in the statement of profit or loss only when the hedged item is derecognized.

Hedge accounting 

FMO applies micro fair value hedge accounting when transactions meet the specified criteria. When a financial instrument is designated as a hedge, FMO formally documents the relationship between the hedging instrument(s) and hedged item(s). Documentation includes its risk management objectives and its strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. FMO only applies micro fair value hedge accounting on the funding portfolio. Changes in the fair value of these derivatives are recorded in the statement of profit or loss under results of financial transactions. Any changes in the fair value of the hedged liability that are attributable to the hedged risk are also recorded in the statement of profit or loss. If a hedge relationship is terminated for reasons other than the derecognition of the hedged item, the difference between the carrying value of the hedged item at that point and the value at which it would have been carried had the hedge never existed (the ‘unamortized fair value adjustment’) is amortized and included in the statement of profit or loss over the remaining term of the original hedge. If the hedge item is derecognized, e.g. sold or repaid, the unamortized fair value adjustment is recognized immediately in the statement of profit or loss.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the statement of profit or loss, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, amortized through the statement of profit or loss over the remaining term of the original hedge or recognized directly when the hedged item is derecognized. 

FMO only applies micro-hedging strategies to a part of the fixed rate funding portfolio, which is why the prospective test is conducted at hedge inception.

A hedging relationship qualifies for hedge accounting, if it meets all of the requirements below:

• There is an economic relationship between the hedged item and the hedging instrument, Economic relationship means that the hedging instrument and the hedged item must be expected to move in opposite directions as a result of a change in the hedged risk;

• The effect of credit risk does not dominate the value changes that result from that economic relationship. In other words, credit risk that can arise on both the hedging instrument and the hedged item in the form of counterparty’s credit risk or the entity’s own credit risk does not have a very significant effect on the fair value of the hedged item or the hedging instrument;

• The critical terms of the hedged item and hedging instrument have a match. In case the critical terms of the hedge do not match, the hedge ratio is assessed. The hedge ratio defined as the ratio between the amount of hedged item and the amount of hedging instrument shall not reflect an imbalance that would create hedge ineffectiveness. For a perfect match of the underlying terms of the hedging instrument with the designated hedged risk, the hedge ratio would be 1:1 or less. The level of the hedge will be discussed by Treasury and Risk Management.

Hedge accounting shall be discontinued if the qualification criteria are not met. The scenarios are as follows:

Further reference is made to Note 'Derivative financial instruments and hedge accounting'.

Rebalancing

Rebalancing aligns accounting with what has happened in the actual basis relationship, between the hedged item and hedging instrument by altering  either one of them. Rebalancing only affects the expected relative sensitivity between the hedged item and the hedging instrument going forward, as ineffectiveness from past changes in the sensitivity will have already been recognized in the statement of profit or loss. FMO will rebalance a hedging relationship if that relationship still has an unchanged risk management objective but no longer meets the hedge effectiveness requirements regarding the hedge ratio.

For more details on hedge accounting we refer to Note 'Derivative financial instruments and hedge accounting'.

Guarantees

Issued financial guarantee contracts are measured at the higher of:

• ECL allowance or the amount of the provision under the contract; and

• The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies as set out in sections ‘Interest income’ and ‘Fee and commission income’. These fees are recognized as revenue on an accrual basis over the period commitment.

FMO applies the same methodology as loans to the private sector for measurement of ECL allowance of guarantees. Refer to chapter 'Financial assets - impairment' in this section. Provisions resulting from guarantees are included in line item "Provisions" on the statement of financial position.

Financial liabilities

Debentures and notes

Debentures and notes consist of medium-term notes under FMO’s Debt Issuance Program or other public issues. Furthermore, a subordinated note is also included in the Debentures and Notes. Under IFRS this note is classified as financial liability, but for regulatory purposes it is considered as Tier 2 capital.

Debentures and notes can be divided into:

• Notes qualifying for hedge accounting (measured at AC and adjusted for the fair value of the hedged risk);

• Notes that do not qualify for hedge accounting (valued at AC).

Debentures and notes measured at amortized cost

Debentures and notes are initially measured at cost, which is the fair value of the consideration received, net of transaction costs incurred. Subsequent measurement is AC, using the effective interest rate method to amortize the cost at inception to the redemption value over the life of the debt.

Debentures and notes eligible for hedge accounting

When hedge accounting is applied to debentures and notes, the carrying value of debt issued is adjusted for changes in fair value related to the hedged risk. The fair value changes are recorded in the statement of profit or loss. Further reference is made to sections ‘Derivative instruments’ and ‘Hedge accounting’ of this chapter.

Other financial liabilities

Other financial liabilities reflect the Dutch State's investment in the Ventures Program (refer to the Group accounting and consolidation section of this chapter). These financial liabilities are designated at fair value through profit or loss to significantly reduce an accounting mismatch related to financial assets. The underlying equity investments (financial assets) in the Ventures Program are measured mandatorily at FVPL and the valuation of these assets form the basis of the value attributable to the program's co-investors. In order to significantly reduce the accounting mismatch in returns generated on the underlying assets versus the financial liabilities that represent the amounts attributable to the co-investors, the related financial liabilities are carried at FVPL. Refer to the 'Fair value of financial assets and liabilities' note for the description of the valuation technique applied to these financial liabilities.

Revaluation of other financial liabilities is reported under 'Results from financial transactions'.

Provisions

Provisions are recognized when:

• FMO has a present legal or constructive obligation as a result of past events; and

• It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

• A reliable estimate of the amount of the obligation can be made.

A provision is made for the liability for retirement benefits, loan commitments, guarantees, legal events and severance arrangements. Further reference is made to the ‘Retirement benefits’ section below.

Retirement benefits

In the past FMO provided all employees, up until 31 December 2021, with a defined benefit retirement plan. This is a pension plan defining the amount of pension benefit to be provided, as a function of one or more factors such as age, years of service or compensation. 

This scheme is funded through payments to an insurance company determined by periodic actuarial calculations. The principal actuarial assumptions are set out in Note 19. All actuarial gains and losses are reported in shareholders’ equity, net of applicable income taxes and are permanently excluded from the statement of profit or loss.

The net defined benefit liability or asset is the present value of the defined benefit obligation at the statement of financial position date minus the fair value of plan assets, together with adjustments for unrecognized actuarial gains/losses and past service costs. Independent actuaries perform an annual calculation of the defined benefit obligation using the projected unit credit method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using, in accordance with IAS 19, interest rates of high-quality corporate bonds, which have terms to maturity approximating the terms of the related liability. FMO has a contract with a well-established insurer, in which all nominal pension obligations are guaranteed and the downside risk of pension assets is mitigated.

When the fair value of the plan’s assets exceeds the present value of the defined benefit obligations, a gain (asset) is recognized if this difference can be fully recovered through refunds or reductions in future contributions. No gain or loss is recognized solely as a result of an actuarial gain or loss, or past service cost, in the current period.

FMO recognizes the following changes in the net defined benefit obligations under staff costs:

• Service costs comprising current service costs, past-service costs (like gains and losses on curtailments and plan amendments);

• Net interest expense or income.

Past service costs are recognized in the statement of profit or loss on the earlier of:

• The date of the plan amendment or curtailment; and

• The date that FMO recognizes restructuring-related costs.

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset.

During 2021, FMO curtailed the defined benefit plan and introduced a defined contribution plan that is effective from 1 January 2022 onwards. The details of the amendment are described in the 'Pension schemes' section within the Provisions note.

The contributions to the defined contribution plan are expensed in the statement of profit or loss and a liability (expense accrual) is recognized in the statement of financial position.

Taxation

Taxable income, based on the applicable tax laws in each jurisdiction, is used to calculate a tax expense. The tax expense is recognized in the period in which the taxable income arose. The tax effects of income tax losses, available for carry-forward, are recognized as a deferred tax asset if it is probable that future taxable profit will be available against which those losses can be utilized. Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and their amounts as measured for tax purposes, which will result in taxable amounts in future periods using the liability method. Deferred tax assets are recognized for temporary differences, resulting in deductible amounts in future periods, but only when it is probable that sufficient taxable profits will be available against which these differences can be utilized.

The main temporary differences arise from the post-retirement benefits provision and the fair value movements on equity investments accounted for at FVOCI.

Shareholders’ equity

Contractual reserve

The contractual reserve consists of the cumulative part of the annual net results that FMO is obliged to reserve under the Agreement State-FMO of November 16, 1998. This reserve cannot be freely distributed.

Development fund

This special purpose reserve contains the allocations of risk capital provided by the Dutch Government to finance the portfolio of loans and equity investments.

Fair value reserve

The fair value reserve includes gains and losses of equity investments designated as at FVOCI. Gains and losses on such equity investments are never reclassified to the statement of profit or loss. Cumulative gains and losses recognized in this reserve are transferred to 'Other reserves' on disposal of an investment.

Translation reserve

The assets, liabilities, income and expenses of foreign subsidiaries and associates are translated using the closing and weighted average exchange rates. Differences resulting from the translation are recognized in the translation reserve.

Actuarial result pensions

The unrealized actuarial gains and losses related to the defined benefit plans are included in the 'Actuarial result pensions'. The movements in this reserve are not reclassified to the statement of profit or loss.

Other reserves

The other reserves include the cumulative distributable net profits. Dividends are deducted from other reserves in the period in which they are declared.

Undistributed result

The undistributed result consists of the part of the annual result that FMO is not obliged to distribute under the Agreement Dutch State-FMO of November 16, 1998.

Non-controlling interests

The non-controlling interest is related to the investment in Equis DFI Feeder L.P. held by other investors.

Profit and loss

Net interest income: interest income and interest expenses

Interest income and interest expenses from financial instruments measured at AC are recognized in the statement of profit or loss for all interest-bearing financial instruments on an accrual basis using the effective interest method based on the amortized cost at inception. Interest income and interest expenses also include amortized discounts, premiums on financial instruments and interest related to derivatives. When a financial asset measured at AC is credit-impaired and 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.

Interest income and interest expenses from financial instruments measured at FVPL reflect fair value gains and losses mainly related to the derivatives portfolio. Interest on derivatives related to loans to the private sector is classified as interest income and interest on derivatives related to debentures and notes is classified as interest expense. Moreover, interest income from loans measured at FVPL are also recognized under 'Interest income from financial instruments measured at FVPL'.

Furthermore, interest expenses on IFRS 16 leases are recognized under the interest expenses separately.

Fee and commission income and expense

FMO earns fees from a diverse range of services. The revenue recognition for financial service fees depends on the purpose for which the fees are charged and the basis of accounting for the associated financial instrument. Fees that are part of a financial instrument carried at fair value are recognized in the statement of profit or loss. 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 as interest-income;

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

• Fees that are earned on the execution of a significant act (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.

Results from equity investments

Gains and losses in valuation of FMO's equity investment portfolio are recognized under 'Results from equity investments'. These gains and losses include foreign exchange results of equity investments that are measured at fair value. As mentioned earlier, the foreign exchange results for equity investments, measured at fair value through OCI are recognized in the shareholder's equity.

Results from financial transactions

Results from financial transactions include foreign exchange translation results (excluding foreign exchange results related to equity investments measured at fair value), valuation gains and losses related to derivatives, driven by changes in the market. Furthermore, the valuation gains and losses related to loans and other financial liabilities measured at fair value are recognized in the statement of profit or loss under 'Results from financial transactions'.

Remuneration for services rendered

Remuneration for services rendered relate to fees that FMO receives from the Dutch and UK Government to manage subsidized programs on their behalf. These fees are recognized in accordance with IFRS 15. The performance obligations arising out of the program agreements are established at the inception of the agreement. The performance obligations are satisfied over the course of the year.

Fee income is recognized at an amount that represents the consideration to which FMO is entitled in return for the program's management services. Fees are calculated quarterly based on a fixed rate and the value of the respective program's committed portfolio at the end of the quarter. The income relating to the fees is recognized at the end of each quarter.

Other operating income

Other operating income relates to any other income that is not related to loans to the private sector, equity investments and treasury instruments. 

Impairments

Financial assets of FMO and off-balance items are subject to impairments. For impairment methodologies and criteria, refer to 'Financial assets' paragraph in this section above.

Reimbursement of staff costs

FMO receives reimbursements of its staff costs for the time spent on various government initiated activities. These reimbursements are deemed to be government grants related to income in accordance with IAS 20. Based on the presentation options available in IAS 20 FMO has elected to present the reimbursements as a deduction against the expense line-items to which the grants relate. Given FMO receives the amounts as compensation for the staff costs incurred on the program, the amount is presented as a reduction against staff costs.

Segment reporting

The operating segments are reported in a manner consistent with internal reporting to FMO’s chief operating decision maker. The chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board. FMO presents its operating segments based on servicing units instead of strategic sector to be more aligned with internal reporting towards the Management Board. Reference is made to the section 'Segment information' for more details on operating segments