Note 1

1.1 Main policies

Møre Boligkreditt AS (the company) is part of the Sparebanken Møre Group. The company's Head Office is located at Keiser Wilhelmsgt. 29/33, P.O.Box 121 Sentrum, 6001 Ålesund, Norway.

The company`s financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), which have been issued by the International Accounting Standards Board, and approved by the EU as at 31 December 2016.

Changes in accounting policies and presentation

There were no changes to the accounting policies in 2016.

New or revised standards applicable for 2016

The mortgage company has not implemented any new or revised standards/interpretations in 2016.

Approved IFRSs and IFRICs with future effective dates

Standards and interpretations that are issued up to the date of issuance of the financial statements, but not yet effective are disclosed below. The company’s intention is to adopt the relevant new and amended standards and interpretations when they become effective, subject to EU approval before the financial statements are issued.

• IFRS 9 Financial Instruments:

IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. The Standard is endorsed by the EU and is effective for annual periods beginning on or after 1 January 2018.

The Sparebanken Møre group has set up an IFRS implementation project that will assess the effects and ensure implementation of the new standard throughout the group, including the subsidiary Møre Boligkreditt AS. The project is in the process of finishing the analysis and design phase and has assessed the corresponding disclosure requirements.

Classification and measurement

From a classification and measurement perspective, the new standard will require all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow characteristics. The IAS 39 measurement categories will be replaced by: fair Value through profit or loss (FVPL), fair value through other comprehensive income (FVOCI), and amortised cost.

The accounting for financial liabilities will largely be the same as the requirements of IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVPL. Such movements will be presented in OCI with no subsequent reclassification to the income statement, unless an accounting mismatch in profit or loss would arise.

Having completed its initial assessment, Møre Boligkreditt AS has concluded that the vast majority of financial instruments on the statement of financial position, will continue to be measured at amortised cost also under IFRS 9.

Hedge accounting

IFRS 9 allows for hedge accounting which is well adapted to the entitiy’s risk management objectives. Financial hedge relationships currently subject to hedge accounting under IAS 39 is expected to be maintained at large also under the new standard and with limited accounting impact apart from basisswap spreads inherent in some hedging instruments which are expected to be charged to OCI as cost of hedging under the new standard.

Impairment of financial assets

IFRS 9 will fundamentally change the loan loss impairment methodology. The standard will replace IAS 39’s incurred loss approach with a forward-looking expected credit loss (ECL) approach. Møre Boligkreditt AS will be required to record an allowance for expected losses for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default (PD) in the next twelve months (stage 1) unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the life of the asset.

In comparison to IAS 39, the impairment charge under IFRS 9 is expected to be more volatile than under IAS 39 and to result in an increase in the total level of current impairment allowances. For Møre Boligkreditt AS almost the entire portfolio of loans to customers is expected to be assigned to stage 1 in the expected credit loss model assessment as a consequence of low levels of PDs. Even though impairment charges will increase, the overall impairment figure is still expected to be at a low level due to well collateralised mortgages in the portfolio, resulting in a very low expected loss given default (LGD).

The following approved IFRSs with future effective dates are expected not to be relevant for the company, thus have no impact on the financial statements of the company:

• IFRS 15 Revenues from Contracts with Customers

• IFRS 16 Leases

1.2 Revenue recognition

Interest income is recognised as income using the effective interest rate method, including loan related fees and charges.

1.3 Currency

All amounts in the financial statements and notes are stated in NOK million, unless otherwise specified. The company's functional currency and presentation currency is Norwegian kroner (NOK). Cash items in foreign currencies are converted into NOK at the exchange rates at the reporting date. Changes in value for such items due to exchange rates differences between the transaction date and the reporting date are recognised in the income statement. Income statement items are converted using the exchange rate at the time of the transaction.

1.4 Recognition and derecognition of financial assets and liabilities

Financial assets and financial liabilities are recognized in the statement of financial position when the company becomes a party to the contractual provisions of the instruments. All financial instruments are measured initially at fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss. Fair value at initial recognition is normally equal to the transaction price.

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 substantially all of the potential for risk and rewards of ownership of the asset is transferred. A financial liability is derecognised when the financial liability is discharged, cancelled or expired.

1.5 Financial instruments

1.5.1 Classification

The company's financial instruments are classified at initial recognition based on type of instrument and their purpose. Møre Boligkreditt AS has the following categories of financial instruments:

• Financial assets held for trading. This category includes derivatives, including derivatives designated as hedging instruments.

• Financial assets designated as at fair value through profit or loss. This category includes the company’s holding of covered bonds.

• Loans and receivables (at amortised cost). The category includes loans and receivables from customers and receivables from the parent bank.

• Other financial liabilities. This category includes securities-related debt recorded in the statement of financial position at amortised cost.

1.5.2 Measurement

Measurement at amortised cost

Financial instruments at amortised cost include loans to and receivables from credit institutions, loans to and receivables from customers, loans from credit institutions and debt securities issued. These are recognised at fair value at initial recognition, with the addition of establishment fees and other commissions. Loans are subsequently measured at amortised cost by applying the effective interest rate method. The effective rate of interest is the rate which exactly discounts estimated, future cash flows over the loan’s expected life to the carrying amount of the financial instrument as shown in the statement of financial position. In this process all cash flows are estimated, and all contract-related terms and conditions relating to the loan are taken into consideration. Fees and commissions are amortised over the life of the loans as an integral part of the instruments effective interest rate.

Measurement at fair value

Møre Boligkreditt AS has covered bonds and financial derivatives (interest rate swaps and currency swaps) measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Furthermore, the fair value measurements are categorized into the following three levels based on the inputs used to measure fair value:

- Financial instruments traded in an active market

For financial instruments traded in an active market, quoted price obtained from either an exchange, a broker or a pricing agency is used to measure fair value. None of the financial instruments of the company are quoted in an active market

- Financial instruments not traded in an active market

For financial instruments that are not traded in active markets various valuation techniques are used to measure fair value. These measurements are divided into two types based on the inputs used in the measurement:

1) Measurement based on observable market data:

• Recently observed transactions in the same instrument between informed, willing and unrelated parties

• Instruments traded in an active market, which are substantially similar to the instruments that are valued

2) Measurement based on other than observable market data:

• Estimated cash flows

• Other valuation techniques where material parameters are not based on observable market data

Impairment

Møre Boligkreditt AS assesses whether there is objective evidence that the financial assets have been exposed to loss events that have negative effects on future cash flows. A financial asset or group of financial assets are impaired if there is objective evidence that one or more loss events have occurred after initial recognition of the asset or assets. See note 3 for further description. Impairment of loans is recognised in the income statement.

Individual assessment

An impairment loss is recognised for a loan on an individual basis if there is objective evidence that impairment exists when they are assessed individually. Examples of objective evidence of impairment that may be observed for assets on individual basis are:

a) Significant financial problems in the case of the borrower in question

b) Default of payment or other significant breaches of contract. A loan or other asset is considered to be in default if the borrower fails to pay when due, or overdrawn amounts are not repaid, within a maximum of 90 days past due limit

c) Amendments to terms or conditions as a result of the borrower’s financial difficulties, such as deferment of payment or new credit to make the borrower able to pay an instalment, or amendments to interest rate terms

d) It becomes probable that the debtor will enter into debt negotiations or other financial restructuring, or that the debtor’s assets are subject to bankruptcy proceedings

Collective assessment

Assets for which no objective evidence of impairment is observed on an individual instrument basis are grouped based on similar credit risk characteristics and assessed on a collective basis. Collective impairments are recognised for sub-groups of loans when there is observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of loans since the initial recognition, while the decrease cannot yet be identified with the individual financial assets in the group.

The collective assessment is based on risk classification and loss experience for the group in question.

Objective evidence of loss events for groups of loans include:

a) Negative changes in the payment status for the borrowers in the group

b) Negative changes in national or regional economic conditions that have occurred at the reporting date that have not been fully taken into account in the group's risk classification system

An impairment loss is reversed if the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised. If objective evidence of impairment is identified, impairment losses are calculated as the difference between the assets’ carrying amount and the present value of estimated future cash flows discounted using the effective interest rate. The effective interest rate used to calculate the impairment loss is the effective interest rate applicable to the loan before objective evidence of impairment was identified. The effective interest rate is accordingly not adjusted to reflect changes in the loan's credit risk or other amendments to terms. Impairment reduces the assets’ carrying amount and are recognised in the income statement as “Impairment on loans”. Interest income calculated using the effective interest method based on carrying amounts net of impairment loss, is included in “Net interest income”.

1.5.3 Hedge accounting

The company applies fair value hedge accounting and hedges interest rate risk and foreign exchange rate risk on debt securities issued with fixed interest rate or foreign currency denomination. Hedge accounting requires a clear, direct and proven correlation between changes in fair value or of the hedged item arising from the hedged risk and changes in fair value of the financial derivative (hedging instrument).

At the origination of the hedge, the relationship between the hedging instrument and the hedge item is documented. In addition the objectives and the strategy for the hedging transaction are documented. Changes in fair value related to the hedged risk of the hedged item and the hedging instrument are evaluated periodically to ensure sufficient hedge effectiveness. Hedging instruments are carried at fair value and are recorded under "Net change in value of debt securities and related derivatives".

For the hedged item, changes in fair value due to the hedged risk are recognised as an adjustment to the carrying value of the debt securities, and are recorded under "Net change in value of debt securities and related derivatives”.

1.6 Presentation in the statement of financial position and income statement

Lending

Lending is presented in the statement of financial position, depending on the counterparty, either as "Loans to and receivables from credit institutions" or "Loans to and receivables from customers". Interest income is recognised in the lines "Interest income from: Loans to and receivables from credit institutions and Loans to and receivables from customers" using the effective interest rate method. Impairments are recognised in "Impairment on loans".

Certificates and bonds

The holding of covered bonds measured at fair value is presented in the balance sheet as “Certificates and bonds”. The interest income is included in “Certificates, bonds and other interest bearing securities” and fair value changes in “Net change in value of securities and related derivatives”.

Liabilities to financial institutions

Liabilities to financial institutions are recognised in the statement of financial position as "Loans from credit institutions". Interest expenses on liabilities are included in "Interest expenses in respect of loans from credit institutions" based on the effective interest rate method.

Debt securities issued

Debt securities issued include issued bonds. Interest expenses on the financial instruments are included in "Interest expenses in respect of debt securities" based on the effective interest rate method.

1.7 Tax

Tax cost consists of payable tax for the income year, any tax payable for previous years, and any changes in deferred tax. Deferred tax is calculated on the temporary differences in accordance with IAS 12 Income Taxes. A temporary difference is the difference between the carrying amount of an asset or liability and the taxable value of that asset or liability. Tax increasing and tax reducing temporary differences that are reversed or could be reversed in the same period are offset and the net amount recognised. Deferred tax assets are recognised in the statement of financial position to the extent that it is likely they will be able to be utilised against future taxable income. Deferred tax (tax assets) is recognised at its nominal value and reported on a separate line on the statement of financial position.

1.8 Provisions, contingent assets and contingent liabilities

A provision is only recognised when an obligation exists (legal or constructive) as a result of a previous event, and it is likely that an outflow of resources embodying economic benefits will be required to fulfil the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are recognised at the amount that expresses the best estimate of the expenditure required to fulfil the existing obligation. If material the time value of money is taken into account when calculating the size of the provision. Contingent assets or contingent liabilities are not recognised.

1.9 Events occurring after the reporting period

New information about conditions that existed at the end of the reporting period is taken into account in the annual financial statements. Events after the reporting date that do not affect the mortgage company's position at that date, but will affect the mortgage company's financial position in the future, are disclosed if they are material.

1.10 Statement of cash flow

The cash flow analysis is prepared on the basis of the direct method with cash flows attributable to operating, investment and financing activities. Cash flows from operating activities are net receipts and payments from lending activities, and payments generated from costs associated with operational activities. Cash flows from investing activities are purchases or sales of bonds and other securities. Cash flows from other securities transactions, issuing and repaying securities issued, and equity are defined as financing activities.

1.11 Equity

The equity consists of paid-in share capital, share premium and retained earnings. Møre Boligkreditt AS recognises proposed dividends and group contributions as retained earnings until approved by the company's General Meeting. Transaction costs associated with an equity transaction are recognized directly against equity.

1.12 Use of estimates in the preparation of the annual financial statements

In the preparation of the financial statements, management makes estimates and assumptions that affect the financial statements and the reported amounts of assets and liabilities, income and costs. The assessments are based on historical experience and assumptions deemed to be reasonable and sensible by the management. There is a risk that the actual outcomes will deviate from the estimated outcomes.

The financial assets and liabilities of the company are allocated to different categories according to IAS 39 by the management. Normally this process requires limited judgment.

In the opinion of the management, the most important areas which involve critical estimates and assumptions are as follows:

Impairment on loans

The company examines the lending portfolio at least every quarter. Loans are reviewed individually and deemed to be impaired when there is objective evidence of impairment, at the latest when the commitment have been in default for more than 90 days. Similarly, groups of loans are assessed collectively for impairment on a quarterly basis. When examining the lending portfolio to assess whether loans or groups of loans are impaired, management relies on approximation and prior experience.

Fair value assessments

For financial instruments which are not traded in active markets, various methods are applied in order to ascertain fair value. Further information and a description of the techniques used, is stated above. Financial instruments not traded in an active market are measured based on in-house judgments and assumptions with regards to current market conditions, or valuations from other market participants.