Circular NBB_2020_04 on the recognition and valuation of assets and liabilities other than technical provisions

boulevard de Berlaimont 14 - BE.1000 Brussels tel. +322221 3612 company number: 0203. 201. 340 RPM Brussels www. bnb. be National Bank of Belgium BANQUE NATIONALE DE BELGIQUE Eurosystem Circular Brussels, 26 February 2020 Reference: your contact: Kajal Vandenput tel. +32 2 221 51 77 kajal. vandenput@nbb. be NBB 2020 04 Circular on the recognition and valuation of assets and liabilities other than technical provisions

Scope Belgian insurance or reinsurance undertakings. Insurance or reinsurance undertakings that are part of a Belgian group within the meaning of Article 339, 2° of the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings. Belgian entities that are part of a Belgian financial conglomerate within the meaning of Article 340, 1° of the aforementioned Law of 13 March 2016. Branches of third-country companies carrying on insurance [or reinsurance] activity in Belgium. This communication applies to mutual insurance companies defined in Article 15, 79° of the aforementioned Law of 13 March 2016. For these undertakings, "the Bank" should be replaced by "the Office for the Supervision of Mutualities and National Unions of Mutualities" as defined in Article 15, 84° of the same Law. This communication does not apply to insurance undertakings referred to in Articles 275, 276 or 294 of the aforementioned Law of 13 March 2016.

Summary/Objectives This circular cancels and replaces Circular 2016-28 of 17 May 2016 on the recognition and valuation of assets and liabilities other than technical provisions following the publication of Circular NBB-2020-03 of 26 February 2020 on the impact of deferred taxes in Solvency II. This circular aims to explain the Bank's orientations regarding the recognition and valuation of assets and liabilities other than technical provisions.

References The Law: the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings. Regulation 2015/35: Delegated Regulation (EU) 2015/35 of the Commission of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the access to and exercise of the activities of insurance and reinsurance (Solvency II). NBB_2020_04 - 26 February 2020 Circular - Page 1/7

Regulation 1606/2002: Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (OJ L 243, of 11/09/2002, p. 1).

Structure I. Objectives II. Definitions III. Additional Information IV. Entry into Force V. Orientations on the recognition and valuation of assets and liabilities other than technical provisions.

Dear Sir, Dear Madam,

I. Objectives This circular relates to Articles 123, 349 and 350 of the Law, as well as Articles 9, 10, 11 and 13 of Regulation 2015/35. The Law and Regulation 2015/35 generally provide that undertakings shall recognise and value assets and liabilities other than technical provisions in accordance with International Financial Reporting Standards (hereinafter, "IFRS") adopted by the European Commission under Regulation 1606/2002 of the European Parliament and of the Council, unless this is not in accordance with Article 123 of the Law. Regulation 2015/35 clearly defines the cases where valuation methods are not in line with the valuation approach provided for in Article 123 of the Law and where, consequently, other valuation principles or adjustments than IFRS should be applied. Article 9, paragraph 4, of Regulation 2015/35 sets out the criteria that must be met if an undertaking wishes to recognise and value an asset or a liability based on the valuation method it uses to prepare its annual or consolidated financial statements.

II. Definitions When the term "valuation" is used in the orientations, it is understood in the sense of Article 123 of the Law. In the absence of a definition in this circular, terms have the meaning defined in the legislative and regulatory acts referred to therein.

III. Additional Information This circular is part of the harmonised implementation of the principles of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the access to and exercise of the activities of insurance and reinsurance (Solvency II), as this implementation was determined by the guidelines of the European Insurance and Occupational Pensions Authority. Undertakings may, for information purposes, consult these guidelines at the following address: https://eiopa.europa.eu/publications/eiopa-guidelines.

IV. Entry into Force This circular enters into force on the day of its publication on the Bank's website.

V. Orientations on the recognition and valuation of assets and liabilities other than technical provisions.

Orientation 1 - Materiality When valuing assets and liabilities, undertakings should take into account the principle of materiality, as stated in recital 1 of Regulation 2015/35. In the context of the assessment of materiality, it should be accepted that quarterly measurements may be based on estimates and estimation methods to a greater extent than annual financial data measurements.

Orientation 2 - Consistent application of valuation methods Undertakings should apply valuation techniques consistently. They should also examine whether, following a change in circumstances, including those listed below, it is necessary to modify the valuation techniques or their application where such a modification would result in a more appropriate measurement under Article 123 of the Law. Changes may include, among others: a) a market evolution changing market conditions; b) the availability of new information; c) information previously used and no longer available; d) the improvement of valuation techniques.

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Orientation 3 - Investment properties and other properties: alternative valuation methods For the purposes of Article 10 of Regulation 2015/35, when valuing investment properties and other properties, undertakings should select the method that, in accordance with Article 10, paragraph 7, of that Regulation, provides the most representative estimate of the amount for which the assets could be exchanged in a transaction concluded under normal conditions of competition between informed and willing parties. In accordance with Article 10, paragraph 6, of that Regulation, these methods should be based on the following: a) current prices for active markets for properties of a different nature, condition or location or subject to different lease or other contractual terms, adjusted to reflect these differences; b) recent prices for similar properties on less active markets, adjusted to reflect the change in economic circumstances since the date of the transactions at those prices; c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease contract and other contracts and, where applicable, by external evidence, such as current market rents for similar properties in the same location and in the same condition and using discount rates that reflect current market assessments of the uncertainty of the amount and timing of cash flows. In some cases, the different data listed above may suggest different valuations for a property. The undertaking should examine the reasons for these differences, in order to determine the most representative valuation estimate within the range of estimates. When undertakings determine the valuation of the property, they should take into account the ability of a market participant to generate economic benefits by making optimal use of the asset or by selling it to another market participant who would make optimal use of it.

Orientation 4 - Investment properties and other properties: evidence supporting the valuation If the balance sheet valuation is based on a formal appraisal or other information prior to the balance sheet date, undertakings should be able to demonstrate to the Bank that all necessary adjustments have been made to reflect the change in value between the date of the formal appraisal or other information and the balance sheet date.

Orientation 5 - Financial liabilities and own credit quality When valuing financial liabilities, undertakings should use techniques to determine a value at which the liabilities could be transferred or settled in a transaction concluded under normal conditions of competition between informed and willing parties, except for any adjustment to reflect the change in the undertaking's own credit quality after initial recognition. These techniques may be based on: a) an upward approach; or b) a downward approach. In an upward approach, undertakings should determine their own credit quality at the time of initial recognition of the relevant financial liability. The portion of the discount curve spread relating to own credit quality should be kept constant after its initial recognition. In subsequent valuations, the value is calculated by determining the change in value resulting from the change in market conditions affecting the value of the financial liability, excluding the change in market conditions affecting own credit risk. When undertakings assess the change in market conditions giving rise to market risk, they should assess at least the changes in the relevant risk-free interest rate curve, the price of a commodity, an exchange rate or a price or rate index. In a downward approach, undertakings should determine the amount of the change in the valuation of a financial liability attributable to the change in the undertaking's own credit risk and exclude it from the valuation.

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Orientation 6 - Investments in related undertakings: IFRS equity method When undertakings value the assets and liabilities of a related undertaking using the IFRS equity method in accordance with Article 13, paragraph 5, of Regulation 2015/35, and if these related undertakings use an accounting framework other than IFRS, undertakings should make the necessary adjustments, where applicable, to recognise and value the assets and liabilities of this related undertaking in accordance with IFRS. When applying Article 13, paragraph 5, of Regulation 2015/35, an undertaking should be able to explain to the Bank the reason why it has not calculated the excess of assets over liabilities for related undertakings in accordance with Article 13, paragraph 4, of that Regulation.

Orientation 7 - Investments in related undertakings: alternative valuation methods When undertakings value investments in related undertakings using alternative valuation methods in accordance with Article 13, paragraph 1, point (e), of Regulation 2015/35, they should be able to explain to the Bank why it is not possible to revalue the assets and liabilities of the related undertaking using the default valuation method or the corrected equity method.

Orientation 8 - Contingent liabilities: contingent liabilities resulting from agreements concerning elements of ancillary own funds When concluding an agreement representing an element of ancillary own funds for consideration, undertakings should carefully assess whether it is appropriate to recognise the corresponding contingent liability as a liability in accordance with Article 11 of Regulation 2015/35. Undertakings should be able to justify their decision to the Bank in cases where they have not recognised a contingent liability when they concluded an agreement with another undertaking, including any other undertaking not part of the group, and that agreement was approved as an element of ancillary own funds.

Orientation 9 - Deferred taxes: recognition and valuation (for more details refer to Circular NBB_2020_03 of 26 February 2020 on the impact of deferred taxes in Solvency II). Discounting of deferred taxes Undertakings should not discount deferred tax assets and liabilities. Offsetting of deferred tax assets and liabilities in the Solvency II balance sheet An undertaking should only offset deferred tax assets and deferred tax liabilities if it has a legally enforceable right to offset current tax assets by current tax liabilities, and if the deferred tax assets and deferred tax liabilities relate to taxes levied by the same fiscal authority on the same taxable entity. Recognition and valuation of net deferred tax asset When there are not enough taxable temporary differences that are expected to reverse during the period in which the deductible temporary differences are expected to reverse, the undertaking should consider the possibility that taxable profits will arise during the same period in which the deductible temporary differences reverse or during previous or subsequent periods to which the tax loss resulting from the deferred tax asset can be carried back or forward. When making projections of taxable profits and assessing the possibility that sufficient taxable profits will arise in the future, an undertaking should: a) take into account the fact that even high past profits may not provide sufficient objective evidence of future profitability; b) take into account the fact that the degree of uncertainty relating to future taxable profits resulting from new expected activities increases as the projection period extends, and notably when it is expected that these projected profits will arise during periods exceeding the undertaking's ordinary planning cycle; c) take into account the fact that certain tax rules may delay or limit the recovery of unused tax losses and unused tax credits; d) avoid double counting: taxable profits resulting from reversing taxable temporary differences should be excluded from estimated future taxable profits when they have been used to support the recognition of deferred tax assets; e) ensure that, when making projections of taxable profits, these projections are reliable and largely consistent with the assumptions made for other expected cash flows. In particular, the assumptions underlying the projections should be consistent with those underlying the valuations of technical provisions and assets in the solvency balance sheet.

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Orientation 10 - Deferred taxes: documentation (on this point refer to Circular NBB_2020_03 of 26 February 2020 on the impact of deferred taxes in Solvency II.)

Orientation 11 - Treatment of deferred tax when undertakings are excluded from group supervision Undertakings should apply the following principles to recognise deferred taxes when related undertakings are excluded from the scope of group supervision under Articles 349 and 350 of the Law: a) when investments in related undertakings are excluded from the scope of group supervision under Article 349, first paragraph, first subparagraph, first indent of the Law, the deferred tax relating to this excluded undertaking should not be recognised at the level of the undertaking or at the group level; b) when investments in related undertakings are excluded from the scope of group supervision under Article 349, first paragraph, first subparagraph, second or third indents of the Law, the deferred tax relating to this related undertaking should not be recognised at the group level.

Orientation 12 - Application of valuation methods used in annual and consolidated financial statements in accordance with Article 9, paragraph 4, of Regulation 2015/35 Undertakings applying the derogation provided for in Article 9, paragraph 4, of Regulation 2015/35 must take into account Orientations 1, 2, 4, 5 and 8 to 11, as well as the comparison table in Technical Annex 1, when determining whether the valuations are in accordance with Article 123 of the Law. The technical annex forms an integral part of this orientation.

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Undertakings included in the consolidation scope of a group preparing consolidated financial statements in accordance with IFRS should not apply the derogation provided for in Article 9, paragraph 4, of Regulation 2015/35.

A copy of this circular is sent to the auditor(s), approved auditor(s) of your establishment.

We ask you to accept, Sir, Madam, the assurance of our very distinguished consideration.

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