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 in Nordvestlandet, 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.
Figures are presented in MNOK unless otherwise stated.
The preliminary annual accounts were approved for publication by the Board of Directors on 29 January 2020. The final annual accounts were presented by the Board of Directors on 26 February 2020.
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 2019.
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 Guarantees, credit facilities and collateral||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||IFRS 16|
|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 calculation basis for preparing the financial statements is historical cost, with the exception of the following items (AC = Amortised Cost. FVPL= Fair Value through Profit and Loss).
|Cash and claims on Norges Bank||AC|
|Loans to and receivables from credit institutions||AC|
|Loans to and receivables from customers||AC/FVPL|
|Certificates, bonds and other interest-bearing securities||FVPL|
|Shares and other securities assessed at fair value through P/L||FVPL|
|Loans and deposits from credit institutions||AC|
|Deposits from customers||AC|
|Subordinated loan capital||AC|
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.
Changes in accounting principles and presentation (classifications)
Apart from the implementation of IFRS 16 and the change in IAS 12 described below, there are no significant changes in accounting principles for 2019.
New or amended standards
The Group has implemented IFRS 16 Leases in 2019. The new standard affects the Group's accounting for lease of property.
IFRS 16 Leases replaces 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 essentially unchanged.
Sparebanken Møre has decided to use modified retrospective method when implementing IFRS 16. This implies that comparative figures for 2018 are not restated. It is primarily the Group’s ordinary rental agreements that are covered by IFRS 16. Sparebanken Møre has taken advantage of the opportunity not to capitalise leases related to low-value assets and/or assets with short lifetimes (less than 1 year). These include, for example, office machines and coffee makers. The discount rate used is equivalent to the bank’s marginal loan rate and amounts to 2.04. Right-of-use assets are presented in the Statement of financial position under the accounting line “Fixed assets”, while the related lease liabilities are presented under the accounting line “Other liabilities”.
When implementing IFRS 16 as of 1 January 2019, the right-of-use assets and the associated lease liabilities were included in the balance sheet with NOK 78 million in the Group and NOK 197 million in the Parent Bank. The implementation led to a reduction in CET1 capital of 0.04 percentage points for the Group and 0.09 percentage points for the Parent Bank.
As a consequence of the new rules, the rental expense in the Group is reduced by NOK 13.6 million in 2019, while interest expense has increased by NOK 1.4 million and depreciation has increased by NOK 12.5 million. The transition to IFRS 16 has given a marginal increase in cost for the Group of NOK 0.3 million at 31.12.2019. In the Parent Bank, rental expense is reduced by NOK 27.0 million in 2019, while interest expense has increased by NOK 3.7 million and depreciation has increased by NOK 24.6 million. The transition to IFRS 16 has given a marginal increase in cost for the Parent Bank of NOK 1.3 million at 31.12.2019.
In 2019, the Group also implemented the change in IAS 12 that states that the tax effect of paid interest on hybrid Tier 1 capital classified as equity must be recognised through profit or loss. This change came into effect on 1 January 2019 and required the restatement of comparable figures. This means that the Group’s tax cost for 2018 has been reduced by NOK 4 million, from NOK 203 million to NOK 199 million (from NOK 146 million to NOK 142 million for the Parent Bank) and that the result allocated to holders of hybrid Tier 1 capital has been increased correspondingly by NOK 4 million, i.e. from NOK 11 million to NOK 15 million. The result allocated to holders of hybrid Tier 1 capital thus matches the actual interest paid before tax for both 2018 and 2019.
At the time of issuance of the consolidated financial statements, no standards or interpretations, with future date of entry into force, having material impact on the financial position or the profit for the Sparebanken Møre Group, have been adopted.
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 31.12.2019. 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. Reference is made to note 13 for measurement principles. The Group makes no significant judgement regarding to the use of accounting principles.
1.5 USE OF ESTIMATES AND JUDGMENT IN THE PREPARATION OF THE ANNUAL FINANCIAL STATEMENTS
The preparation of the annual accounts in accordance with certain IFRS accounting standards implies that, the management, to some extent, uses best estimates and assumptions. The assessments are based on historical experience and assumptions deemed to be reasonable and sensible by the 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 presented in the 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.
In the opinion of the management, the most important areas which involve critical estimates and assumptions are as follows:
Expected credit loss on loans
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 regards to estimates of amounts and timing of future cash flows and collateral. 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 criteria 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 various 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, exposure and LGD (Loss Given Default)
- Choice of future-oriented macro-economic scenarios and weighting of probability,
Further information on the Group’s ECL model, loss calculations and associated sensitivities is presented in note 6.
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.