1.1 GENERAL INFORMATION
Sparebanken Møre, which is the Parent company of the Group, is a savings bank registered in Norway. The bank’s Equity Certificates (ECs) are listed on the Oslo Stock Exchange.
The Group consists of Sparebanken Møre (the Parent Bank) and its subsidiaries Møre Boligkreditt AS, Møre Eiendomsmegling AS and Sparebankeiendom AS.
The Sparebanken Møre Group provides banking services for retail and corporate customers and real estate brokerage through a large network of branches within Møre og Romsdal, this region being defined as the bank’s geographic home market.
The company’s Head Office is located at Keiser Wilhelmsgt. 29/33, P.O.Box 121 Sentrum, 6001 Ålesund, Norway.
The preliminary annual accounts were approved for publication by the Board of Directors on 23 January 2019. The final annual accounts were presented by the Board of Directors on 20 February 2019.
The Group’s operations are described in note 17.
1.2 ACCOUNTING PRINCIPLES
The Group’s annual accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS), which have been stipulated by the International Accounting Standards Board, and implemented by the EU as at 31 December 2018.
How to read the Group`s accounting principles:
Sparebanken Møre describes the accounting principles in conjunction with each note. See the table below for an overview the various principles and the notes in which they are described, as well as reference to relevant and important IFRS standards.
|Impairments||Note 6 Losses on loans and guarantees||IFRS 9, IFRS 7|
|Financial guarantees and uncertain liabilities||Note 8 Liabilities||IFRS 9, IAS 37|
|Financial derivatives||Note 10.3 Financial derivatives||IFRS 9, IFRS 7, IFRS 13|
|Hedging||Note 12 Debt securities||IFRS 9, IFRS 7|
|Classification of financial instruments||Note 13 Classification of financial instruments||IFRS 9, IFRS 7|
|Amortised cost||Note 14 Financial instruments at amortised cost||IFRS 9, IFRS 7|
|Fair value||Note 15 Financial instruments at fair value||IFRS 9, IFRS 13, IFRS 7|
|Operating segments||Note 17 Operating segments||IFRS 8|
|Revenue recognition||Note 18 Other operating income||IFRS 15, IFRS 9|
|Leases||Note 20 Leases||IAS 17|
|Pensions||Note 22 Pension costs and liabilities||IAS 19|
|Fixed assets||Note 23 Fixed assets||IAS 16, IAS 36|
|Intangible assets||Note 24 Other intangible assets||IAS 38, IAS 36|
|Tax||Note 26 Tax||IAS 12|
|Equity||Note 29 ECs and ownership structure||IAS 1|
|Events after the reporting period||Note 30 Events after the reporting period||IAS 10|
The consolidated financial statements comprise Sparebanken Møre and all companies in which Sparebanken Møre has control through ownership. An entity is controlled when the owner is exposed to or has rights to returns from the entity and has the opportunity to influence these returns through its influence over the entity. This applies to subsidiaries mentioned in note 16.
Companies which are bought or sold during the year are included in the Group accounts from the time at which control is obtained and until control ceases.
The Group accounts are prepared as if the Group is one financial unit.
All transactions between companies in the Group, have been eliminated in the consolidated financial statements. Uniform accounting principles have been applied for all companies in the Group. In the Parent Bank’s accounts, investments in subsidiaries are valued at cost. The acquisition method is applied when recognising acquired units/entities. The acquisition cost relating to an acquisition is assessed as the fair value of the items involved, such as assets, equity instruments issued and liabilities taken over. Identifiable assets bought, liabilities taken over and debt obligations are assessed at fair value at the time of the acquisition. Any acquisition cost in excess of fair value of the Group’s equity stake of identifiable net assets is, according to IFRS 3, incorporated as goodwill. Transaction costs related to acquisitions are recognised in the income statement as incurred.
Temporary acquired shares in connection with securing commitments are not consolidated, but are treated as equity investment valued at fair value.
Changes in accounting principles and presentation (classifications)
There are no material changes in accounting policies for 2018.
New or amended standards
The Group has implemented one new standard in 2018, IFRS 9 Financial instruments, replacing IAS 39 from 1 January 2018. See following notes for additional information:
- Changes in equity: implementation effect on equity by transition to IFRS 9
- Note 6 Losses on loans and guarantees: information and specifications related to the effect of the implementation on expected credit losses
- Note 13 Classification of financial instruments: the effect on classification and assessment
- Note 10.3 Financial derivatives: changed principles for hedge accounting
The implementation of IFRS 9 had no impact on primary capital of the Group or the Parent Bank, as expected losses according to the capital adequacy requirements already exceeded losses according to IFRS 9. Sparebanken Møre therefore had no need to apply the transitional rule.
In addition, IFRS 15 was implemented in 2018, but this standard has not resulted in changes in the Group’s recognition of income.
Standards and interpretations which are issued up to the date of issuance of the consolidated financial statements, but not yet effective, are disclosed below. The Group’s intention is to adopt the relevant new and amended standards and interpretations when they become effective, provided that the EU approves the changes prior to issuing the consolidated financial statements.
The following new standard with future effective date will not have significant relevance for the Sparebanken Møre Group:
• IFRS 16 Leases
This standard replaces existing standard, IAS 17 Leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, ie the customer (“lessee”) and the supplier (“lessor”). The new leases standard requires lessees to recognise assets and liabilities for most leases, which is a significant change from current requirements. Accounting requirements for lessor is unchanged. The new standard is effective for fiscal years beginning 1 January 2019 or later. Early adoption is permitted. Sparebanken Møre has not used the possibility of early adoption. The new standard will affect the Group's accounting for lease of property This will affect the Group’s balance sheet by the implementation on 1 January 2019, by recognizing assets related to rights of use with NOK 90 million and corresponding liabilities related to lease obligations are recognised at NOK 90 million. For the Parent Bank, the corresponding figures will be NOK 202 million. The implementation will not have any impact on the Group’s equity. Annual depreciation and interest cost according to IFRS 16 will not materially deviate from the current rental cost in accordance with IAS 17.
Minor changes have been made in a number of standards during IASB`s annual improvement projects. None of these changes are considered to have significant impact on the financial position or performance of the Sparebanken Møre Group.
1.3 FOREIGN EXCHANGE
The Group presents its accounts in Norwegian kroner (NOK). The functional currency for the Parent Bank and its subsidiaries is NOK. All monetary items in foreign currencies have been recalculated into the bank’s functional currency (NOK) according to foreign exchange rates provided by Norges Bank as at 31.12.2018.
Current income and costs have been translated into NOK at the foreign exchange rates ruling at the time of the transactions, and the effects of changes in foreign exchange rates have been included in the income statement on an ongoing basis during the accounting period.
1.4 JUDGMENTS IN APPLYING ACCOUNTING PRINCIPLES
Financial assets and liabilities are allocated to the different categories in IFRS 9, which subsequently determine the measurement in the statement of financial position. The bank has clear procedures for the categorisation, and the process normally requires only limited use of judgment.
1.5 USE OF ESTIMATES AND JUDGMENT IN THE PREPARATION OF THE ANNUAL FINANCIAL STATEMENTS
Preparation of the annual accounts in accordance with certain IFRS accounting standards means that in certain cases management has to use best estimates and assumptions. The assessments are based on historical experience and assumptions deemed to be reasonable and sensible by management. The estimates and assumptions on which the abovementioned preparation is based, affect the reported amounts of assets, liabilities and off-balance sheet items, as well as income and costs in the submitted annual accounts. There is a risk that actual results may later, to a certain extent, deviate from the estimates and assumptions on which the abovementioned preparation is based.
Certain accounting principles are regarded as particularly important in order to illustrate the Group’s financial position, due to the fact that management is required to make difficult or subjective assessments, applying estimates which mainly relate to matters which are initially uncertain.
The executive management team makes assessments when choosing and applying accounting policies. The company's financial assets and liabilities are allocated to different categories in accordance with IFRS 9. Little discretionary judgment is normally exercised in this context. Please refer to note 13 for the measurement policies.
In the opinion of the management, the most important areas which involve critical estimates and assumptions are as follows:
Impairment on loans and guarantees
Measurement of ECL (Expected Credit Loss) according to IFRS 9 requires an assessment when it comes to significant increase in credit risk and determining the level of impairment, particularly with regard to estimates of amounts and timing of future cash flows and colleteral. These estimates are driven by a number of factors, where changes can result in different levels of provisions.
Sparebanken Møre has developed an ECL-model based on IRB parameters in the Group.. ECL-calculations are output from complex models with several underlying prerequisites related to the choice of variable inputs and the dependency ratio.
Elements of the ECL-model containing assessments and estimates include:
- The internal credit model, which specifies PDs (PD = Probability of Default)
- The crieria assessing whether there’s been a significant increase in credit risk, so that lifetime ECL (ECL = Expected Credit Loss) is calculated
- The development of the ECL-model, including variours formulas and choice of inputs
- Choice of connection between macroeconomic scenarios and economic inputs, such as unemployment level and value of collateral, and the effect on PD, EAD (Exposure at Default) and LGD (Loss Given Default)
- Choice of future-oriented macroeconomic scenarios and weighting of probability
Fair value of financial instruments – including derivatives
For financial instruments which are not traded in active markets, various evaluation methods are applied in order to ascertain fair value. Further information and a description of the techniques used may be found in note 15. Reference is also made to notes 9-14, dealing with financial instruments.
The present value of pension liabilities depends on several factors that are determined using a number of actuarial assumptions. Any change in these assumptions would affect the amount of the pension liabilities shown in the balance sheet. The rate of interest to be applied when discounting is decided at the end of the year. This is the rate of interest which is applied in order to calculate the present value of future necessary payments to cover the pension liabilities. The discount rate is based on the Norwegian market for covered bonds, and swap rates in the interbank market for the extrapolation of the curvature over 10 years, enabling us to arrive at an approximately similar maturity as that which applies to the pension liability. Other basic assumptions for the pension liabilities are partly based on actual market conditions. Mortality and death trend assumptions are based on standardized assumptions and other demographic factors. Please refer to note 22 for additional information.