NOTES CONCERNING THE PRESENTATION OF THE FINANCIAL STATEMENTS

A Accounting principles

A1 Basic information of the Group

The Group’s parent company is Finnvera plc (hereinafter Finnvera) and its subsidiaries are Finnish Export Credit Ltd, Veraventure Ltd and ERDF-Seed Fund Ltd. Finnvera provides financing for the business of small and medium-sized enterprises (SMEs), for exports and internationalisation, and helps implement the Government’s regional policy objectives. Finnish Export Credit Ltd focuses on the financing of export credits, whereas Veraventure Ltd and ERDF-Seed Fund Ltd engage in venture capital investment. The majority holding in Seed Fund Vera Ltd, a former subsidiary of the Group, was sold during 2016. As a result of this transaction, Seed Fund Vera Ltd is no longer included in the consolidated financial statements. During 2017, Seed Fund Vera Ltd merged with the Innovestor Kasvurahasto I Ky fund, where Finnvera has a 19.7 per cent holding.  Innovestor Kasvurahasto I Ky and ERDF-Seed Fund Ltd are classified as assignable assets available for sale and they are presented in more detail under “E23 Disposal groups classified as held for sale”. 

The Group’s parent company is a Finnish limited liability company established in accordance with Finnish law. Its business ID is 1484332-4 and it is domiciled in Kuopio. The parent company’s registered address is P.O. Box 1127, Kallanranta 11, FI-70111 Kuopio, Finland. Finnvera’s Board of Directors approved the financial statements on 19 February 2018.

Copies of the consolidated financial statements and the parent company’s financial statements are available on the Internet, at www.finnvera.fi, or at the Group’s head offices at Kallanranta 11, FI-70110 Kuopio, Finland and Porkkalankatu 1, FI-00180 Helsinki, Finland.

A2 Principles for drawing up the financial statements

The financial statements include both the consolidated and the parent company’s financial statements. The financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) complying with the IFRSs effective on 31 December 2017 that refer to the standards and their SIC and IFRIC interpretations adopted in accordance with the procedures laid down in IAS Regulation No 1606/2002 of the European Union. The notes to the financial statements also comply with the currently valid requirements of the Finnish Accounting and Limited Liability Companies Acts.

The financial statements have been prepared on the basis of historical costs, except for financial assets available for sale and financial assets and liabilities recognised at fair value through profit or loss. Drawing up financial statements in keeping with the IFRS standards requires the making of certain accounting estimates and judgment exercised by the management. In its judgments, the management uses estimates and assumptions that are based on earlier experience and the management’s best understanding or other knowledge. Use of the management’s judgment is described in more detail in section “A12 Accounting principles requiring the management’s judgment and the key sources of estimation uncertainty”.

The financial statements are presented in thousands of euros. The sums calculated from individual figures may therefore differ from the total sums presented on their own lines.

New and revised standards and interpretations applied

In 2017, Finnvera adopted the following new or revised IFRS standards or interpretations:

  • Amendments to IAS 7 Statement of Cash Flows – Changes in liabilities arising from financing activities (applied to financial periods starting on 1 January 2017 or thereafter), related to the Disclosure Initiative with a document issued in January 2016. The amendments concerning the statement of cash flow present information that enable users of financial statements to evaluate changes in liabilities that arise from financing activities, covering both liabilities that impact cash flows and liabilities that do not. In Finnvera’s consolidated financial statements, clarifying tables concerning changes in liabilities arising from financing activities have been added to the presentation of statements of cash flows.
  • Amendments to IAS 12 Income Taxes – Recognition of deferred tax assets for unrealised losses (applied to financial periods starting on 1 January 2017 or thereafter). The amendments clarify how deferred tax assets are recognised for debt instruments measured at fair value. In Finnvera’s consolidated financial statements, the amendments to IAS 12 do not affect the Group’s deferred taxes.
  • Amendments to IFRS 12 Disclosure of Interests in Other Entities (applied to financial periods starting on 1 January 2017 or thereafter), related to the document Annual Improvements to IFRS Standards 2014–2016 Cycle, issued in December 2016. When an entity’s interest in a subsidiary, a joint venture or an associated company is classified as an assignable asset available for sale in accordance with IFRS 5, the entity does not need to present in its financial statements a summary of the financial information concerning the subsidiary, joint venture or associated company in question. In Finnvera’s consolidated financial statements, the new requirements set by IFRS 12 are applied to subsidiaries that have been classified as assignable assets available for sale or as discontinued operations in accordance with IFRS 5. Consequently, financial information concerning ERDF-Seed Fund Ltd has been removed from Note 23 (Disposal groups classified as held for sale). 

New and revised standards and interpretations applied later

The IASB has issued the following new or revised standards and interpretations. The Group applies them as of the effective date of each standard and interpretation. If the effective date is not the first day of a financial period, they are applied as of the beginning of the next financial period following the effective date.

Adoption of IFRS 9

IFRS 9 Financial Instruments and its amendments (applied to financial periods starting on 1 January 2018 or thereafter): The new standard replaces the current IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 changes the classification and measurement of financial assets and includes a new calculation model, based on expected loss impairment, for assessing the impairment of financial assets.

Classification of financial assets

Finnvera’s management has classified the IFRS 9 financial assets on the basis of the business models:

The financial asset item on the balance sheet: Business model:
Loan receivables from clients The objective is to collect the contractual cash flows
Deposits Deposits The objective is to collect the contractual cash flows
Debt securities include certificates of deposit into public corporations, credit institutions and enterprises The objective is to collect the contractual cash flows
Investments in bonds The objective is to collect the contractual cash flows and to sell the assets

The business model with the objective of holding the financial assets to collect the contractual cash flows encompasses loan receivables from clients, debt securities and deposits. Financial assets may also be sold in situations resulting from sudden financing needs. According to Finnvera’s asset management policy, it has been decided that investments in bonds may be sold, if necessary, to maintain daily liquidity or a certain interest profile, among other things. In line with this business model, sales transactions recur more frequently and are larger.   

Classification of financial liabilities

The adoption of IFRS 9 will not bring about major changes with regard to financial liabilities. Hedge accounting for bonds issued will be discontinued at the beginning of 2018. This means that the cumulative change in credit risk fair value accrued by the time IFRS 9 is adopted is transferred from retained earnings to comprehensive income.  As of the beginning of 2018, the change in the credit risk is recognised in other components of comprehensive income and the reversing entry is presented in equity in the fair value reserve. The change in fair value that results from market interest rates is recognised through profit or loss.

Expected loss impairment

Finnvera is carrying out a system development and revision project owing to the changes required by the IFRS 9 standard. The project is related to export financing and SME and midcap financing.  Finnvera has estimated that the most significant changes in SME and midcap financing are related to expected loss impairment calculated on the basis of positive financing decisions (credit commitments). The project is still ongoing.

When calculating expected loss impairment, Finnvera adheres to the same general principles as the banking sector in general. In export financing, the impacts of IFRS 9 will be substantial when compared to the current provision calculation. The amount of expected loss impairment is substantially influenced by the following factors: how large a change in the probability of default indicates a significant increase in credit risk and what kinds of future scenarios are used in calculations. Undrawn guarantees are included in the calculation of expected loss impairment. A special characteristic of export financing is that the schedules for drawing credits covered by guarantees can extend for years ahead. As a result, undrawn guarantees are not fully taken into account in export financing when calculating expected loss impairment. The further in the future the drawing date of the loan covered by the guarantee is, the lower the multiplier used for the undrawn guarantee when taking it into account in expected loss impairment. According to the management’s current view, IFRS 9’s expected loss impairment calculation model will not take offer-stage guarantees (the so-called liability stemming from the offers given) into account in export financing as export financing offers are individually tailored, valid for a certain period of time and their continuation is decided case by case.         

In addition, Finnvera is currently carrying out a project to harmonise the risk classifications used within the company for SME and midcap financing clients and for export financing clients, which may still change transitions from one level to another and affect the expected loss impairment amounts in the future. The goal is to have uniform risk classification guidelines in place in 2018.

A significant increase in credit risk is indicated by a change in the risk score between the effective date and the reporting date. The level is also affected by the clients’ payment behaviour: for instance, a payment delay exceeding 30 or 90 days results in a lower level. Guarantee receivables on the balance sheet are handled on level 3. In SME and midcap financing, expected loss impairment is calculated for all offers given according to the level 1 because there is no significant credit risk increase to be expected in them as offers are valid for a maximum of six months.

In the calculation of expected loss impairment, the State’s credit loss compensation reduces Finnvera’s expected loss impairment. The State’s credit loss compensation applies to Finnvera’s SME and midcap financing loans and guarantees.

On 15 February 2018, the Government made a decision to change the commitment to compensate Finnvera plc partially for credit and guarantee losses. The changed commitment will enter into force on 1 March 2018, and it will be applied to all outstanding credits and guarantees of the company and to new credits and guarantees granted by the company as of 1 January 2018. The loss compensation level will be lowered and harmonised to 50 per cent in SME and midcap financing. Finnvera estimates that the financing for the company’s domestic operations will be annually self-sustainable also after the loss compensation level has been lowered.

Finnvera will not calculate expected loss impairment for credit loss receivables and interest subsidy receivables from the State as their impairment amounts are non-essential. If the situation changes in the future (e.g. if the State’s credit rating decreases), the need for recording expected loss impairment will be reviewed. 

For loans granted to the personnel, Finnvera will not calculate expected loss impairment according to IFRS 9 because personnel loans have been transferred to an external commercial bank as of the beginning of 2018.    

With regard to asset management, expected loss impairment is calculated for receivables from credit institutions and for certificates of deposit into public corporations, credit institutions and enterprises:

  • IFRS 16 Leases (applied to financial periods starting on 1 January 2019 or thereafter): Replaces the current standard IAS 17 on leases and the related interpretations. IFRS 16 includes major changes to the lessee’s accounting because a substantial percentage of leases is transferred to the lessee’s balance sheet as an item under fixed assets and as a lease liability. In addition, lessees will no longer classify leases as finance leases and operating leases. As a consequence, lessees will have only one accounting model for presenting leases. IFRS 16 will affect the accounting procedure for leases concerning Finnvera’s premises, as well as the accounting procedure for leasing cars and certain IT licence agreements. The impact of the changes is still being assessed.
  • IFRS 15 Revenue from Contracts with Customers (applied to financial periods starting on 1 January 2018 or thereafter): The new standard replaces the current IAS 18 and IAS 11 standards and the related interpretations. IFRS 15 includes a five-step model for recognising revenue: how and when is revenue recognised. The number of notes presented also increases. Finnvera recognises the revenue collected on loans and guarantees on the basis of time elapsed. According to Finnvera’s analysis, the adoption of IFRS 15 will not cause changes to the current calculation rules related to revenue recognitions. In export credit guarantees, notes concerning commitment fees paid by clients will be published in accordance with IFRS 15 starting from the half-year report and consolidated financial statements for 2018. 

A3 Consolidation principles for the financial statements

Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group, by being party to a corporation, is exposed to its variable income or is entitled to its variable income and can influence it by using its power over the corporation. The consolidated financial statements include the subsidiaries in which the parent company holds more than 50 per cent of the votes, or in which the company otherwise has control.

In the parent company’s financial statements, holdings in subsidiaries have been entered at acquisition cost. The value of the subsidiaries’ shares is tested when the books are closed and, whenever necessary, an impairment loss is recognised.

The consolidated financial statements include the financial statements of the parent company and its subsidiaries. Intra-group shareholding has been eliminated using the acquisition method. When subsidiaries are acquired, they are consolidated from the date of acquisition up to the date when the control ceases.

In accordance with the exemption granted under IFRS 1, the acquisition costs arising from business combinations prior to the IFRS transition date 1 January 2006 have been treated according to the Finnish accounting practice. The Group has not made company acquisitions after the date of transition.

Associates

Associated companies are entities in which the Group has significant influence but not control over the financial and operational policies of the entity.  Significant influence exists when the Group has 20 to 50 per cent of the voting shares of the entity. Associated companies are consolidated using the equity method of accounting. At the end of 2017, Finnvera had no associated companies consolidated using the equity method of accounting.

Equity investments made by Finnvera through its subsidiaries engaged in venture capital investment – Veraventure Ltd and ERDF-Seed Fund Ltd– are treated in the consolidated financial statements in the alternative manner allowed by IAS 28 Investments in Associates and Joint Ventures, as investments recognised at fair value through profit or loss. The consequent changes in fair value are recognised in the income statement of the consolidated financial statements, under the item Gains and losses from financial instruments carried at fair value.

Elimination of intra-group items in the consolidated financial statements

Intra-group transactions, internal receivables and liabilities, unrealised profits on internal transactions, and intra-group profit distributions are eliminated in the consolidation.

Non-controlling interest

Non-controlling interest in the equity and in the comprehensive income for the period is reported as a separate item in the comprehensive income statement and on the balance sheet as part of equity.

A4 Transactions denominated in foreign currencies

The consolidated financial statements are presented in euros, which is the currency that all Group companies use in their operations and presentations.

Transactions denominated in foreign currencies are recognised using the exchange rates prevailing at the dates of the transactions, and assets and liabilities denominated in foreign currencies are converted using the exchange rates on the balance sheet date.  Foreign exchange gains and losses arising from conversion are recognised under the comprehensive income statement item Gains and losses from financial instruments carried at fair value.

A5 Principles for recognising income and expenses

Net interest income

Interest income and interest expenses are recognised in the income statement over the maturity of the contract using the effective interest rate method. All fees received and paid, interest points that are an integral part of the effective interest rate of the contract, as well as transaction costs and any other premiums or discounts are taken into consideration in calculating the effective interest. Interest subsidies received from the State are recognised correspondingly over the maturity of the contract using the effective interest rate method.

The interest on interest rate swaps made for hedging receivables is treated as an adjustment item for interest income, while the interest on interest rate swaps made for hedging liabilities is treated as an adjustment item for interest expenses.

Net fee and commission income

Guarantee fees are recognised in the income statement over the maturity of the contract.

Commitment fees consist of fees collected from clients for undrawn credit. The commitment fee is collected for the undrawn credit amount in arrears on the basis of time elapsed and is recognised in the accounting on the same basis. 

Other fee and commission income and expenses are normally recognised when the service is rendered. These include, for instance, changes resulting from various debt restructuring arrangements, collection charges, invoicing expenses and legal procedures that are charged from clients after the change has been made.

Fee and commission expenses consist of service charges collected by banks, reinsurance fees related to export credit guarantees and expenses related to funding.

Gains and losses from financial instruments carried at fair value

Gains and losses (both realised and unrealised) from derivative contracts, liabilities and venture capital investments measured at fair value as well as exchange rate differences are presented under the comprehensive income statement item Gains and losses from financial instruments carried at fair value.

Net income from investments

Gains and losses from shares, participations and debt securities classified as available for sale, and impairments of these items, are presented under the item Net income from investments.

Dividends are recognised as income in the period in which the right to receive dividends is established.

Government grants

Finnvera receives interest subsidies and guarantee commission subsidies from the State as well as compensation for losses on credits and guarantees that Finnvera has granted on certain regional policy grounds agreed with the State. Credit and guarantee loss compensation is paid for credits and guarantees that have been granted without full security.

Interest and commission subsidies are recognised over the maturity of the contract using the effective interest rate method, and compensation received for credit losses is recognised when the contractual right to receive such compensation is established.

In previous years, Finnvera has received grants to be used as capital for Seed Fund Vera Ltd. More information on government grants is available in Note E12 to the balance sheet. 

A6 Intangible and tangible assets

Intangible assets

Intangible assets include licences and user rights for IT applications and software and their development costs, provided that their cost can be measured reliably and it is probable that the Group will gain economic benefit from the assets. Finnvera had two important IT projects in progress, one of which was completed in late 2017. In 2018, Finnvera continues the digitalisation project that aims to improve productivity and efficiency through possible digitalisation of business and support processes. Digitalisation will be developed in stages over several years.  The Salkku project replaced the old management system of SME and midcap financing customer accounts.  At the end of 2017, Finnvera adopted the Salkku system, and the related reporting feature came into use at the beginning of 2018.   

Intangible assets are recorded on the balance sheet at acquisition cost less amortisations and impairment losses accumulated after initial recognition. Intangible assets are amortised over their estimated economic life, which is five years.

Tangible assets

Property, plant and equipment comprise machinery and equipment in the company’s own use. Property, plant and equipment are carried at acquisition cost less accumulated depreciation and impairment losses. Property, plant and equipment are depreciated over their estimated economic lives, which is five years for machinery and equipment.

Impairment of intangible assets and property, plant and equipment

At every balance sheet date, the carrying amounts of intangible assets and property, plant and equipment are reviewed to determine whether there are indications of impairment. If such indications exist, the asset’s recoverable amount is estimated. An impairment loss is recognised through profit or loss when the carrying amount of an asset exceeds its recoverable amount.

A7 Costs of post-employment benefits

Group pension plans are classified as either defined benefit plans or defined contribution plans. Under a defined contribution plan, the Group pays fixed contributions to a pension insurance company and has no legal or constructive obligation to pay further contributions. Obligations resulting from a defined contribution plan are expensed in the period to which they relate. The cost of providing defined benefit plans is charged to the income statement over the working lives of the employees participating in the plan on the basis of actuarial calculations. The net liability of defined benefit pension plans is entered on the balance sheet.

Expenses based on work performed during the term and the net liability interest of defined benefit plans are recognised through profit or loss and presented under expenses incurred by employment benefits. Items resulting from revaluation of the net liability of defined benefit plans (e.g. actuarial gains and losses as well as earnings from plan assets) are recognised in other comprehensive income for the financial period during which they are incurred.

A8 Income taxes

Income taxes in the comprehensive income statement consist of income taxes and deferred taxes for the current and previous financial periods. Taxes are recognised in the income statement with the exception of any deferred tax for items charged or credited directly to equity. In that case, the tax is also charged or credited directly to equity.

Deferred taxes are calculated using the differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred taxes are calculated using a corporation tax rate of 20.0 per cent.

An amendment to the Income Tax Act passed by Parliament entered into force through a Government Decree issued on 20 December 2007. The amendment made Finnvera exempt from income taxation as from 1 January 2007. Finnvera’s subsidiaries have no corresponding exemption.

A9 Financial assets and liabilities

Classification

Financial assets are classified as financial assets at fair value through profit or loss, loans and other receivables, as well as financial assets available for sale. Financial liabilities are classified as financial liabilities at fair value through profit or loss and other financial liabilities.

Financial assets and liabilities recognised at fair value through profit or loss

Balance sheet items recognised at fair value through profit or loss comprise derivative contracts, financial liabilities designated at fair value through profit or loss and other items designated at fair value through profit or loss. Finnvera has no financial assets or liabilities held for trading.

Financial items recognised at fair value through profit or loss comprise derivative contracts and the liabilities for which the interest rate risk or the currency risk has been hedged using derivatives. Finnvera applies the fair value option in accordance with IAS 39 Financial Instruments: Recognition and Measurement to the above-mentioned items. Hedge accounting is applied to some of the bonds issued.

Venture capital investments made by the Group are classified as financial assets to be recognised at fair value through profit or loss upon initial recognition. Investments are recognised at fair value and the change in fair value is recognised in the income statement, under the item Gains/losses from items carried at fair value through profit or loss (for determination of the fair value of venture capital investments, see Note A12 concerning the presentation of the financial statements, called Accounting principles requiring the management’s judgment).

Fair value changes in assets and liabilities recognised at fair value through profit or loss are recognised in the income statement under the item Gains and losses from financial instruments carried at fair value.

Loans and other receivables

Contracts with fixed or determinable payments that are not quoted in an active market are classified as loans and other receivables. Upon initial recognition, loans and other receivables are measured at acquisition cost plus any costs directly attributable to the acquisition. Subsequently these items are measured at amortised cost using the effective interest rate method. Short-term investments, which include municipal notes, commercial papers, certificates of deposit and treasury bills, are measured at amortised cost. 

Available-for-sale financial assets

Non-derivative financial assets that are designated as available for sale or that do not belong to any other category of financial assets are classified as available-for-sale financial assets. In Finnvera, bond commitments as well as shares and participations other than those held for venture capital investments are classified as available-for-sale financial assets.

Unlisted shares and participations are measured at cost because their measurement at fair value is not possible. Upon initial recognition, bond commitments are measured at fair value plus any transaction costs directly attributable to the acquisition. Subsequently, available-for-sale financial assets are measured at fair value and the change in fair value is recognised in other components of comprehensive income and presented in equity in the fair value reserve.

If the value of an asset classified as a financial asset available for sale has declined markedly or for an extended period, the accumulated loss recognised in equity is entered in the income statement. The criteria for impairment loss are as follows: the company has been declared bankrupt or insolvent or has entered into a restructuring agreement, or has sought protection against its creditors, or extensive restructuring having an effect on the creditors is in progress.

Other financial liabilities

Other financial liabilities comprise liabilities to credit institutions, liabilities to subsidiaries, loans that are received from the State for refinancing export credits and that are not designated to be recognised at fair value through profit or loss, guarantee premiums paid in advance, and security received for derivatives.

State subsidies and grants received for the purpose of acquisition of subsidiaries are also classified as other financial liabilities because of the repayment obligation relating to these items in certain situations.

Other financial liabilities are recorded on the balance sheet at the amount of the consideration received, adjusted for any transaction costs incurred, and are measured at amortised cost using the effective interest rate method. 

Finnvera treats the zero-interest subordinated loans granted to the Group by the State as loans granted by the owner. They are recognised at nominal value due to their special nature and the related special clauses. Subordinated loans are presented in more detail in Note E16 to the balance sheet.

Determination of fair value

The fair value of financial instruments is determined on the basis of the following principles:

Level 1: The fair value of quoted shares, fund investments and other financial instruments is determined on the basis of published price quotations on an active market.

Level 2: If a published price quotation on an active market does not exist for a financial instrument in its entirety, but an active market exists for its components, fair value is determined on the basis of relevant market prices for the components using an applicable valuation technique. The valuation techniques used may vary by financial instrument.

Level 3: If the market is not active or the financial instrument is unlisted, the value is determined by using generally applied valuation techniques. If reliable determination of fair value is not possible, the financial instrument is measured at cost less any impairment losses.

The notes on Group financial assets and liabilities describe in greater detail the principles for determining fair value by financial instrument, the valuation techniques used in various situations, and the classification of the fair value of financial instruments according to whether they were obtained by public listing (Level 1), using valuation techniques that use verifiable data (Level 2), or using valuation techniques based on unverifiable data (Level 3).

Recognition and derecognition of financial assets and liabilities

Loans and other receivables are recognised on the balance sheet when a client takes out a loan; available-for-sale financial assets and derivative contracts are entered using trade date accounting, and financial liabilities recognised at fair value through profit or loss are entered when the consideration is received.

Financial assets are derecognised from the balance sheet when the contractual right to the asset expires or when a significant share of the risks and income are transferred to another party. Financial liabilities are derecognised when the related obligations are fulfilled.

Impairment losses on financial assets

An impairment loss is recorded on loans and other receivables when there is objective evidence of impairment as a result of one or more loss events and this has an impact on future cash flows to be received from the receivables.

Objective evidence of a client’s capability to fulfil obligations is based on the risk classification of clients, past experience and estimates made by the management about the effect of delayed payments on the accruing of receivables.

Impairment is assessed individually and collectively. Receivables where the client’s total risk exposure is significant are assessed individually. For the purposes of assessing receivables collectively, the receivables are divided into subgroups that are similar in terms of credit risk.

An impairment loss is recognised if the present value of the future cash flows discounted at the receivable’s original effective interest rate is lower than the carrying amount of the receivable. The amount recovered at the realisation of the collateral, as well as the credit loss compensation received from the State, are taken into account in the assessment.

An impairment loss is recognised as a realised loss when the debtor has been found insolvent in liquidation proceedings, has ceased operations, or the receivables have been written off in either a voluntary or statutory debt adjustment. In SME financing, as from the financial statements of 2015, Finnvera has applied the definition of doubtful receivables harmonised at the EU level.  The following are reported as doubtful receivables: receivables that are more than 90 days overdue; receivables subject to impairment losses, receivables from clients that have applied for restructuring or are in the process of restructuring, guarantee receivables and bankruptcy receivables. 

In the financial statements for 2017, Finnvera applies, in line with IAS 39, an individual and collective impairment assessment method in its SME and midcap financing, calculated on either a client-specific or risk category-specific basis. The Large Corporates unit makes individual and collective provisions for bank and enterprise commitments in export financing.

Hedge accounting

Finnvera adopted hedge accounting starting from 2016.  The purpose of hedge accounting is to hedge against the impact of fair value changes caused by changes in market interest rates.

When IFRS 9 enters into force, hedge accounting for bonds issued will be discontinued because, starting 1 January 2018, bonds will be measured at their fair value through profit or loss, in accordance with IFRS 9. In the financial statements for 2017, the bonds included in hedge accounting are measured at fair value with regard to changes in market interest rates.

Financial liabilities included in hedge accounting and their result are presented in Note E20. 

Impact of negative interest rates

As of the second quarter of 2016, the income received by the Group on some euro-denominated accounts and other investments has been negative. This has, for its part, reduced the Group’s interest income.

After the implementation of the Salkku application, Finnvera will compensate its clients for the negative reference rates in accordance with credit agreements during 2018. The compensation will be taken directly into account in clients’ future interest payments or paid in cash. In 2017, the impact of negative rates has been recorded as a provision in Finnvera’s accounting.

A10 Provisions

Provisions for export credit guarantee losses

A provision is recognised on outstanding export credit guarantees and special guarantees when there is objective evidence that the obligation to pay an indemnity is likely to arise and it is estimated that the present value of the cash flows arising from the indemnity and discounted at the effective interest rate exceeds the correspondingly discounted cash flow from the recovery receivables arisen on the basis of the indemnity paid.

Objective evidence of a client’s capability to fulfil obligations is based on the risk classification of clients, past experience and estimates made by management about the client’s ability to repay the credit covered by the guarantee.

The need for provisions is assessed individually and collectively. Individual assessment is applied to commitments where the amount of commitments is substantial, i.e. the total commitment as per the guarantee cover is at least EUR 500,000. For smaller commitments, the need for provisions is assessed collectively.

Provisions for domestic guarantee losses

Provisions for domestic guarantee losses are recognised according to the same principles as the impairment losses recognised on loans and other receivables individually or collectively.

Provisions

A provision is recognised on outstanding domestic guarantees and export credit guarantees in SME and midcap financing and export financing when there is objective evidence that the obligation to pay an indemnity is likely to arise and it is estimated that the value of the cash flows arising from the indemnity and discounted on the balance sheet date exceeds the correspondingly discounted cash flow from the recovery receivables arisen on the basis of the indemnity paid.

The principles for recognising provisions are described in more detail under section A10 of the accounting principles. The provisions have been made on the commitments presented in the note Contingent liabilities.

A11 Leases

Leases are classified as finance leases and operating leases. The classification is based on whether the substantial risks and rewards incidental to ownership are transferred to the lessee. At the end of 2017, Finnvera had no leases classified as finance leases.

Finnvera enters into operating leases both as a lessee and as a lessor. Lease payments payable and receivable under operating leases are recognised as income or expense through profit or loss on a straight-line basis over the lease term. Operating leases are mostly contracts relating to premises.

A12 Accounting principles requiring the management’s judgment and the key sources of estimation uncertainty

Financial statements drawn up according to the International Financial Reporting Standards (IFRS) require the management’s estimates and assumptions that affect the items reported in the consolidated financial statements and in the notes to the accounts. In addition, judgment is needed when the principles of drawing up financial statements are applied. The management’s estimates and assumptions are based on experience, historical data, and future forecasts. Changes in estimates and assumptions are entered into the accounts for the periods when the estimates or assumptions have undergone changes and for all subsequent periods. The final figures realised may differ from these estimates.

At Finnvera, the essential judgments concern the assessment of impairment losses on clients’ loans and other receivables, the provisions to be made for domestic guarantee and export credit guarantee commitments, recovery receivables related to export credit guarantees, and the determination of the fair value of financial instruments and venture capital investments made through Finnvera’s subsidiaries engaged in venture capital investment. At the end of 2017, only the subsidiary ERDF-Seed Fund Ltd had investments related to venture capital investment activities.

Impairment losses on receivables from clients

The impairment testing of receivables from credits, domestic guarantees and export guarantees included in SME and midcap financing is done individually for the largest sums and by risk category for other sums. The impairment testing is based on estimates of future cash flows to be received. The value of the receivables has impaired if the estimated value of the cash flow discounted on the balance sheet date, including collateral, is less than the carrying amount of the receivables. In export financing, the impairment testing of loans and recovery receivables is done separately for individual receivables.

The principles for recognising impairment losses are described in more detail under the section Impairment losses on financial assets. During the financial year, impairment losses were only recorded on the balance sheet item Loans and receivables from customers. Note E2 to the balance sheet shows the amount of impairment losses.

Determination of the fair value of venture capital investments

In accordance with the Government’s policy outlines, Finnvera gives up its venture capital investment activities. In 2016, Finnvera sold 78.9 per cent of its holding in Seed Fund Vera Ltd. In 2017, the remaining holding (19.7 per cent) transferred to Innovestor Kasvurahasto I Ky as Seed Fund Vera Ltd merged with Innovestor Kasvurahasto I Ky. Veraventure Ltd sold its remaining fund investments during 2017. In 2017, Finnvera bought the holdings of ERDF-Seed Fund Ltd’s minor shareholders (approximately 5 per cent), becoming the sole owner of the fund. The arrangement was made in preparation for Finnvera’s overall withdrawal from the fund. 

The fair value of venture capital investments of the subsidiary involved in venture capital investment, ERDF-Seed Fund Ltd, is determined using a valuation technique approved by the Board of Directors that complies with the International Private Equity and Venture Capital Valuation (IPEV) Guidelines and recommendations for early stage ventures. In this method, the determination of the investment’s fair value is based on the valuation and investments made by outside investors as well as on the portfolio company valuation approved by the fund’s Board of Directors. The starting point of the valuation is the value determined on the basis of the previous round of investments. If necessary, this value can be adjusted in accordance with change factors in the portfolio company, its performance and its operating environment. When the value of the holding is determined, the effect of any options and conversion options on the value of the ownership is also taken into consideration. Fund investments are also valued using the IPEV Valuation Guidelines.

Determination of the fair value of liabilities and derivative contracts

The fair value of derivative contracts and financial liabilities recognised at fair value through profit or loss is determined using a method based on the current value of cash flow, in which calculations are based on market interest rates and other accounting information on the end date of the financial period. The fair values of derivative contracts are equivalent to the average market price in situations where the Group would transfer or sell derivative contracts in normal business operations under market conditions on the end date of the financial period. The credit risk associated with derivative contracts is reduced by means of collateral arrangements.