Note 1
The Group’s interim financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) adopted by the EU as of 31.12.2017. The interim report has been prepared in accordance with IAS 34 Interim Financial Reporting.

The financial statements are presented in Norwegian kroner (NOK), which is also the Parent Bank's and subsidiaries' functional currency.

The interim report is prepared in accordance with the accounting principles and measurement methods used in the annual financial statements for 2016. There have been no significant changes or new standards in 2017. Please refer to the annual report for 2016 for a more detailed description of these accounting principles.

IFRS 9 is effective from 1.1.2018. IFRS 9 introduces a business-oriented model for classification and measurement of financial assets, an expected loss model for impairments and a new general model for hedge accounting. The standard will replace the current standard IAS 39.

For the Sparebanken Møre Group, the transition to IFRS 9 will have implications for accounting of value changes on shares being classified as ‘held available for sale’ under IAS 39, for accounting of the Group’s value changes on basis swaps, included in hedge accounting, and for the calculation of the Group’s impairments.

The measurement category of ‘shares held available for sale’ with value changes reported through other comprehensive income ceases to exist from 1.1.2018. The Group’s value changes on shares and equity instruments will be recognised in ordinary profit and loss from this date.

The value change on the Group’s basis swaps, included in hedge accounting, has been recognised in ordinary profit and loss up to 31.12.2017. As of 1.1.2018, value changes on basis swaps due to changes in basis spreads will be recognised in other comprehensive income as cost of hedging.

Under IAS 39, impairments were based on objective evidence of impairment (an accrued loss model). Impairments according to IFRS 9 will as of 1.1.2018 be based on expected credit loss (ECL). Sparebanken Møre has developed an ECL model based on the Group’s IRB parameters. Estimated expected losses for the Sparebanken Møre Group as of 1.1.2018 show an increase in total impairments of NOK 6 million.

The Group’s equity will 1.1.2018 be charged with NOK 5 million after tax as a result of the implementation of IFRS 9.

The implementation of IFRS 9 will have no effect on the Group’s primary capital, as expected loss according to the capital adequacy requirements already exceeds the expected losses according to IFRS 9. Sparebanken Møre will therefore have no need to apply the transitional rule.

A note with tables specifying transition effects as a result of the implementation of IFRS 9, including effects on both classification and measurement, will be presented in the 2017 annual report.

Financial assets and financial liabilities are recognised in the balance sheet at the date when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or the company transfers the financial asset in such a way that risk and profit potential of the financial asset is substantially transferred. Financial liabilities are derecognised from the date when the rights to the contractual provisions have been extinguished, cancelled or expired.  

CLASSIFICATION
The Group’s portfolio of financial instruments is at initial recognition classified in accordance with IAS 39. The bank’s classes of financial instruments and the measurement basis for these are the following:

• Financial assets and derivatives held for trading (trading portfolio)

• Financial assets and liabilities assessed at fair value, any changes in value recognised through profit or loss

• Instruments held as available for sale, assessed at fair value, any changes in value recognised in other comprehensive income

• Loans and receivables

• Financial liabilities assessed at amortised cost

Financial assets and derivatives held for trading
Financial derivatives are contracts signed to mitigate an existing interest rate or currency risk incurred by the bank. Financial derivatives are recognized at fair value through profit or loss and recognized gross pr. contract as an asset or liability.

The Group's criteria for classification of the trading portfolio are the following:

• Positions in financial instruments held for the Group’s own account for the purpose of selling and/or financial instruments acquired by the Group in order to take advantage on a short-term basis of any actual and/or expected differences between purchase- and sale prices or any other price- and interest rate fluctuations.

• Positions held by the Group in order to hedge other parts of the trading portfolio

• Other commitments which are related to positions which form part of the trading portfolio

The Group’s trading portfolio of shares is defined within this group and is assessed at fair value through profit or loss.

Financial assets and liabilities assessed at fair value, any changes in value recognised through profit or loss
The Group's portfolio of bonds in the liquidity portfolio is classified at fair value through profit or loss as this portfolio is managed based on fair value. The Group’s portfolio of fixed interest rate loans and deposits are classified to avoid accounting mismatch in relation to the underlying interest rate swaps.

Losses and gains as a result of value changes of those assets and liabilities which are assessed at fair value, with any value changes being recognised in the profit and loss account, are included in the accounts during the period in which they occur.

Instruments held as available for sale, assessed at fair value, any changes in value recognised in other comprehensive income
The Group’s portfolio of shares, which are not classified as held for trading, are classified as available for sale, with any value changes shown in other comprehensive income. Realised gains and losses, as well as impairment below cost, are recognised in the profit and loss account during the period in which they occur.

Loans and receivables
All loans and receivables, including leasing, but with the exception of fixed interest rate loans, are assessed at amortised cost, based on expected cash flows. The difference between the issue cost of the securities and the settlement amount at maturity, is amortised over the lifetime of the loan.

Financial liabilities assessed at amortised cost
Debt securities, including debt securities included in fair value hedging, loans and deposits from credit institutions and deposits from customers without agreed maturity, are valued at amortised cost based on expected cash flows. The portfolio of own bonds is shown in the accounts as a reduction of the debt.

LEVELS IN THE VALUATION HIERARCHY
Financial instruments are classified into different levels based on the quality of market data for each type of instrument.

Level 1 – Valuation based on prices in an active market
Level 1 comprises financial instruments valued by using quoted prices in active markets for identical assets or liabilities. This category includes listed shares and mutual funds, as well as bonds and certificates traded in active markets.

Level 2 – Valuation based on observable market data
Level 2 comprises financial instruments valued by using information which is not quoted prices, but where prices are directly or indirectly observable for assets or liabilities, including quoted prices in inactive markets for identical assets or liabilities. This category mainly includes debt securities issued, derivatives and bonds which are not included in level 1.

Level 3 – Valuation based on other than observable market data 
Level 3 comprises financial instruments which can not be valued based on directly or indirectly observable prices. This category mainly includes loans to and deposits from customers, as well as shares.