The accounting for the HTC fixed income portfolio is done in accordance with IFRS 9, being measured at amortized cost.

With reference to sales, these are usually not compatible with a business model "held to collect" because it would put in doubt the actual intention of the entity to held the instruments to collect interests and principal cash flows. As a result, there is a presumption that debt instruments classified as HTC are held until maturity or repayment. However, the following kind of sales do not jeopardize the business model held to collect:

• sales that do not determine the accounting derecognition of the financial assets such as in repo contracts;

• sales that occur as a result of a deterioration in credit standing of the financial assets;

• sales that are not significant in value (regardless of the frequency);

• sales that are made close to the maturity of the respective T-Bill;

• sales that are infrequent.

b3.     Financial assets at fair value through comprehensive income

A financial asset is classified as at fair value through comprehensive income if: 

• its business model is held to collect and sell;

• its cash flows are solely the payment of principal and interest.

This category also includes equity instruments for which the Group applies the option granted by the standard of valuing the instruments at fair value through other comprehensive income.

On initial recognition, at settlement date, a financial asset is measured at fair value, which is usually equal to the amount paid, plus transaction costs and revenues directly attributable to the instrument.

After initial recognition, the interests accrued on interest-bearing instruments are recorded in the income statement at amortized cost using effective interest rate method.

The gains and losses arising from changes in fair value are recognized in the Statement of comprehensive income and shown under Revaluation reserves in shareholders' equity.

Impairment losses are recorded in the income statement with counterparty in the statement of comprehensive income and shown under Revaluation reserves in shareholders' equity.

In the event of disposal, the accumulated profits and losses are recorded in the income statement. 

With respect to equity instruments, earnings and losses arising from changes in fair value are recognized in the statement of comprehensive income and are presented in the revaluation reserves in equity. In the case of disposal, the accumulated profits and losses are recorded in other reserves in shareholders' equity.

In accordance with the provisions of IFRS9, no impairment losses on equity instruments are recognized in the income statement.

The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired.

The Group enters into transactions whereby it transfers assets recognised on its statement of financial position but retains either all risks or rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the balance sheet.

Asset transfers with the retention of all or most significant risks and benefits are, for example, securities lending or sale transactions with a redemption clause.

The Group entered into several transactions with UniCredit SpA and other entities within UniCredit Group SpA whereby:

• either UniCredit SpA directly financed some corporate customers, while the Group undertook the role of agent or security agent and payment agent; or

• the Group transferred to UniCredit SpA by means of novation agreements the outstanding amount of certain loans already granted to Romanian corporate customers and also undertook the role of security agent and payment agent.

For most contracts concluded with UniCredit SpA, there is a risk participation agreement by which the Group is obliged to indemnify UniCredit SpA against costs, loss or liability suffered by UniCredit SpA in connection with the relevant contracts to the extent of an agreed percentage of the relevant amounts and up to a limit agreed on a case by case basis.

Loans financed by UniCredit SpA are not recognized in the Group's financial statements (see Note 42 - "Commitments and contingencies") because the Group has transferred the right to receive cash from these loans, has not retained substantially all the risks and rewards of ownership, and has relinquished control of the asset.

The direct decrease of loans value (write-off) represents the operation of diminishing directly the gross loan value fully covered by impairment allowances and their transfer in the off-balance sheet accounts, where they are monitored until recovered. At the time of depletion, the legal actions for recovery of receivables, the off-balance sheet is removed.

4. Purchased or Originated Credit Impaired - POCI

The amortized cost and the interest income generated by these assets are calculated by considering, in the estimate of future cash flows, the expected credit losses over the entire residual duration of the asset.

This expected loss of credit is subject to a periodic review, resulting in recognition of impairment or write backs.

When on initial recognition an exposure, presented in "Financial assets at fair value through comprehensive income" or "Financial assets at amortized cost", is non-performing, it is qualified as "Purchased Originated Credit Impaired- POCI".

Purchased Originated Credit Impaired assets are conventionally classified on initial recognition in Stage 3.

If, as a result of an improvement in the creditworthiness of the counterparty, the assets become "performing" they are presented under Stage 2.

Besides impaired assets acquired, the Group identified as POCI those credit exposures that arise from restructuring impaired exposures that led to the provision of new funding as significant either in absolute terms or in relative terms compared to the original exposure.

For exposures in stage 1, impairment is equal to the expected loss calculated over a time horizon of up to one year. For exposures in stages 2 or 3, impairment is equal to the expected loss calculated over a time period corresponding to the entire duration of the exposure.

In order to meet the requirements of the standard, the Group has developed specific models to calculate expected loss based on PD, LGD and EAD parameters, used for regulatory purposes and adjusted in order to ensure consistency with the accounting regulations. In this context "forward looking" information was included through the elaboration of specific scenarios.

The Stage Allocation model is a key aspect of the accounting model required to calculate expected credit losses. The Stage Allocation model is based on a combination of relative and absolute elements. The main elements are:

• transfer logic quantitative internal model developed: Lifetime PD from the reporting date is being considered together with the lifetime PD as of the origination date valid for the rezidual maturity from the reporting date and related quantile level in order to assess if stage 2 is applicable; quantitative model is being aplied as developed on sub portfolios such as: Group wide models (multinationals, sovereign, banks, project finance) and Local Models: private indivisuals, corporate with turnover above 3 Mio EUR, retail micro and small corporate with tunover below 3 Mio EUR and corporate real estate.  In order to properly capture the risk underlying from revolving facilities, a behavioral maturity model has been developed for revolving facilities; 

• absolute elements such as the law requirements (e.g. 30 days past-due);

• additional internal evidence (e.g. Forborne classification, Watch List 2, Watch List 1 clients only in case of real estate with reimbursement directly linked with income from commercial spaces rental);

• additional criteria for stage 2 allocation such as: obligors with high PD such as 20%, threefold increase in lifetime PD (compared to origination, if PD reaches a level of more than 3 times);   

• a 3 months probation period  meaning the exposures can return to Stage 1 only after 3 months have passed from the moment when the conditions of Stage 2 allocation are not fulfilled anymore.

• all cases with PD at reporting date lower than 0.3% would be subject to LCRE (low credit risk exception) and kept under Stage 1 if no other qualitative triggers for stage 2 are active.

Regarding debt securities, the Group choose the application of the low credit risk exemption on investment grade securities. Therefore, on securities portfolio, considering the fact that the instruments are under investment grade, a classification under stage 1 is performed (from quantitative approach). Still, in case of presence of any qualitative criteria, the transactions must be allocated to stage 2.

Allowances for impairment of loans and receivables are based on the present value of expected cash flows of principal and interest. In determining the present value of future cash flows, the basic requirement is the identification of estimated collections, the timing of payments and the discount rate used.

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

g.     Identification and measurement of impairment (continued)

(i)    General topics (continued)

The amount of the loss on impaired exposures classified as non-performing loans and unlikely to pay, according to the categories specified below, is the difference between the carrying amount and the present value of estimated cash flows discounted at the original interest rate of the financial asset.

For all fixed rate positions, the interest rate thus determined is kept constant in subsequent financial years, while for floating rate positions the interest rate is updated according to contractual terms.

If the original interest rate cannot be found, or if finding it would be excessively burdensome, the rate that best approximates it is applied, also recurring to "practical expedients" that do not alter the substance and ensure consistency with the international accounting standards.

The time horizon for recovery is estimated based on business plans or forecasts based on historical recovery experience observed for similar classes of loans, considering the customer segment, the type of loan, the type of security and any other factors considered relevant.

Also, the impairment on impaired exposures was calculated as required by IFRS 9 to include (i) the adjustments necessary to arrive at the calculation of a point-in-time and forward-looking loss; and (ii) multiple scenarios applicable to this type of exposure.

2.   Parameters and risk definitions used for calculating value adjustments

As mentioned in the previous paragraph, the Group has developed specific models for calculating the expected loss; such models are based on the parameters of PD, LGD and EAD and on the effective interest rate. In particular:

• the PD (Probability of Default), represents the probability of occurrence of an event of default of the credit exposure, in a defined time lag (i.e. 1 year);

• the LGD (Loss Given Default), represents the percentage of the estimated loss, and thus the expected rate of recovery, at the date of occurrence of the default event of the credit exposure;

• the EAD (Exposure at Default), represents the measure of the exposure at the time of the event of default of the credit exposure;

• the Effective interest rate is the discount rate that expresses of the time value of money.

Such parameters are calculated based on the corresponding parameters used for regulatory purposes, with specific adjustments in order to ensure consistency between accounting and regulatory treatment despite different regulatory requirements. Main adjustments were in regard of:

• removing conservatism required for regulatory purposes;

• introducing "point-in-time" adjustments to replace "through-the-cycle" adjustments required for regulatory purposes;

• including "forward looking" information;

• expanding credit risk parameters to a multiannual perspective.

With reference to lifetime PD, through-the-cycle PD curves obtained by adjusting observed cumulated default rates were calibrated in order to reflect point-in-time and forward-looking forecasts on portfolio default rates.

The recovery rate incorporated in LGD over the cycle has been adjusted to eliminate conservatism and to reflect the current trend in recovery rates as well as expectations of future discounted rates at the effective interest rate or best approximation.

The lifetime EAD has been obtained by extending the 1 year regulatory or managerial model, removing margin of conservatism and including expectation about future drawing levels.

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

g.     Identification and measurement of impairment (continued)

(ii)  Parameters and risk definitions used for calculating value adjustments (continued)

 With reference to the qualitative component of the model for stage allocation, the Bank has adopted a statistical approach based on a quantiles regression whose objective is to define a threshold in terms of maximum variation acceptable between the PD at the time of origination and the PD assessed at the reporting date. The variable objective of the regressive model is thus the change between the PD at the reporting date compared to the one at the date of origination while the explicative variables are factors such as the age of the transaction, the PD at the date of origination, etc.

A key component of the model is the definition of the quantile that identifies the amount of Stage 2 expected on average in the long-run and that affects the determination of the threshold of change in PD after which the transaction is classified in Stage 2. The average quantile in the long run is determined based on the expected average of deterioration of the portfolio determined by the rate of defaults as in any other deterioration stage (i.e.: 30 days past due).

The amount of exposures classified in Stage 2 at each reporting date will be around the quantile identified for the long run based on the economic conditions at the time and on the future expectations about the evolution of the economic cycle.

With reference to stage 3, it should be noted that it includes impaired exposures corresponding to the aggregate Non-Performing Exposures as ITS EBA (EBA/ ITS/ 2013/ 03/ rev1 24/7/2014).

EBA has defined as "Non-Performing" exposures that meet one or both of the following criteria:

• material exposures more than 90 days past due;

• exposures for which the bank values that is unlikely that the debtor would pay in full his credit obligations without recurring to enforcement and realization of collaterals, regardless of past due exposures and the number of days the exposure is past due;

• unpaid amount/instalments;

Starting with 2021, the Bank implemented the new definition of default, in accordance with the requirements of EBA Guide GL / 2016/07 on the application of the definition of default and in conjunction with the requirements of the NBR Regulation no. 5/2013 on prudential requirements for credit institutions, with subsequent amendments and completions.

The significance threshold of the obligations from past due loans was aligned, at the level set up by Regulation no. 5/2018 amending and supplementing the Regulation of the National Bank of Romania no. 5/2013 regarding prudential requirements for credit institutions, as follows:

The materiality threshold for credit obligations past due, for retail exposures:

a) the level of the relative component of the materiality threshold is 1 %;

b) the level of the absolute component of the materiality threshold is 150 lei;

The materiality threshold for credit obligations past due, for exposures other than retail exposures:

a) the level of the relative component of the materiality threshold is 1 %;

b) the level of the absolute component of the materiality threshold is 1 000 lei;

During 2021, PD models on all segments were recalibrated with new DOD (using historical data restated with new default rules) and implemented within dedicated rating systems.

3. Prospective information for the calculation of value adjustments

The expected credit loss deriving from the parameters described in the previous paragraph considers macroeconomic forecasts through the application of multiple scenarios to the "forward looking" components in order to compensate the partial non-linearity naturally present in the correlation between macroeconomic changes and credit risk. Specifically, the non-linearity effect was incorporated through the estimation of an overlay factor directly applied to the portfolio Expected Credit Loss.

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

g.     Identification and measurement of impairment (continued)

(iii) Prospective information for the calculation of value adjustments (continued)

The process defined to include macroeconomic multiple scenarios is fully consistent with macroeconomic forecast processes used by the Group for additional risk management objectives (as for example processes adopted to calculate expected credit losses from macroeconomic forecasts based on EBA stress test and ICAAP Framework) and also took advantage of independent UniCredit Research function. The starting point was therefore fully aligned while the application is differentiated in order to comply with different requirements using internal scenarios only.

In particular, UniCredit Group has selected three macroeconomic scenarios to determine the forward looking component, a baseline scenario, a positive scenario and a negative scenario. The probabilities are set at 60% for the baseline scenario, 40% for the negative scenario and 0% for the positive scenario (31 December 2021: 55% for the baseline scenario, 40% for the negative (pandemic "mild") scenario and 5% for the positive scenario). 

The baseline scenario ("Baseline") is the main scenario and, indeed, is expected to be the one with the highest likelihood of occurrence and is coherent with the assumptions used in the planning processes. The positive and the negative scenario represent alternative occurrences, either better or worse when compared to the baseline scenario in terms of evolution of the economies of the countries where the Group operates.

The baseline scenario ("Mild Recession") (probabilities set at 60%) considering the followings:

Baseline scenario reflects the decline of Russian gas export, in line with recent recorded trends. It is assumed no material gas rationing in most of countries. Country's counter actions (high storage level and gas savings) in total are assumed to be able to compensate a very low (also a shutdown at a certain moment) gas supply from Russia.

The scenario is characterized by high energy prices, weak global trade and persistent supply shortage, impacting also on food and commodities prices.

A restrictive ECB policy is considered.

This scenario considers a deteriorating growth outlook with subdue global growth in 2022 and a still lower growth in 2023. The weakening reflects tighter financial conditions, surging energy bills in Europe and the spill over effect from reduced economic momentum across the US, Europe, and China. The manufacturing sector is under pressure, the boost to services from the reopening of the economy is declining, and consumer confidence is low. Supply constraints have eased but remain elevated compared to before the pandemic. High excess savings and the tight labour market should mean any recession is mild.

The table below summarizes the main macroeconomic indicators included in the baseline economic scenarios used at 31 December 2022: 

The table below summarizes the main macroeconomic indicators included in the baseline economic scenarios used at 31 December 2021: 

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

g.     Identification and measurement of impairment (continued)

(iii) Prospective information for the calculation of value adjustments (continued)

The Negative Scenario ("Severe Recession") has a probability set at 40% and considering the following:

• In the Recession scenario a complete stop of Russia gas supply is considered with lower substitutions with other sources, generating disruptions in the supply chain. The scenario severity is consistent with a further escalation of the Russia-Ukraine conflict.

• Higher energy prices vs. 'Baseline' (ca. 25%-30% higher oil price on avg. in '23-'25), food and other commodities price rise strongly, fuelling inflation. 

• High uncertainty, erosion of real incomes and further supply disruption on top of those related to COVID-19 push the European economy in a recession in 2023.

The forecasts in terms of changes in the "Default rate" and in the "Recovery Rate" provided by the Stress Test functions are included within the PD and LGD parameters during calibration. Credit parameters indeed, are normally calibrated over a horizon that considers the entire economic cycle ("Through-the-cycle - TTC"), it is thus necessary a "Point-in-time - PIT" calibration and a "Forward-looking - FL" one that allows to reflect in those credit parameters the current situation and the expectations about the future evolution of the economic cycle. 

In this regard, the PD parameter is calculated through a normal calibration procedure, such as logistic regression, using as anchorage point an arithmetic average among the latest default rates observed on the portfolio and the insolvency rates foreseen by the Stress Test function. The PD determined in such way will lose his through the cycle nature in favor of a Point in time and Forward looking philosophy.

The LGD parameter is made Point in time through a scalar factor that allows taking into account the ratio between average recoveries throughout the period and recoveries achieved in previous years. The inclusion of forecast within the LGD parameter is performed by adjusting the yearly "recovery rate" implicit in this parameter to take into account the expectations of variations of recovery rates provided by the Stress Test function.

Within 2021 Forward Looking information per each industry has been applied in order to properly capture the specific effect on each sector due to COVID19 context. Within 2022 no specific impact driven by Forward Looking Information on industries has been applied.

Geopolitical overlay resulting from Russia-Ukraine crisis 

During 2022, the uncertainties on the economic activities arising from Covid-19 pandemics progressively faded away as demonstrated by the lifting of the restrictive measures put in place by the governments to counteract the pandemic. As well, also the supply chain risk has started to decrease in relevance, given the evolving new geo-political context. Indeed, the start of the Russian-Ukraine conflict acted as a headwind to the economic growth. Indeed, the spill over effects of Russian and Ukraine crises continued leading to revise the outlook for the euro area economy, also pushing up inflationary pressures and interest rates.

In order to factor-in into the risks underlying the sharp rise in energy costs, inflation and interest rates for both corporate and private individuals, the geopolitical overlay was adopted during 2022.

In this regard, the adoption of this overlay is a complementary measure to the IFRS9 models that, by their structure, have been already properly and directly proving to recognize the effect of geo-political crises. In this context, while IFRS 9 models and in particular satellite models are able to capture the effect of macro-economic scenario at portfolio level, the geopolitical overlay act on specific sub-portfolios considered particularly vulnerable in case contingent situation may evolve to severe stressed conditions.

As of 31 December 2022 the geopolitical overlay amount to 149 million RON on standalone basis and 223 million RON on consolidated basis, additional impact in LLP, and is broken-down according to the following components: 

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

g.     Identification and measurement of impairment (continued)

(iii) Prospective information for the calculation of value adjustments (continued)

• Corporate energy-intensive industry sectors prone to be more affected by spill over effects linked to Russia - Ukraine crisis, specifically affecting the energy supply and related price soaring.

• Retail clients, for: (i) floating rate mortgages (not having overdue instalments), given the sensitiveness in this context of increasing interest rate / inflation, and (ii) at least 1 unpaid instalment on their exposures, considered a perimeter with already difficulties in payments and as such particularly vulnerable in this specific contingency.

With the aim of maintaining the Geo-political overlay for the months following its implementation, calculated as of November 2022, the following approach is being applied:

•     November 2022 Additional ECL is used as a starting point for the computation of the overlay to be applied in the subsequent months.

•     Each month the additional ECL corresponding to exposures shifted to default are identified and the corresponding additional ECL is deducted from the total additional ECL computed as of November 2022. An updated additional ECL value is then computed.

•     Based on the updated additional ECL value and on each month ECL (ECL value pre-application of the geo-political overlay) the overlay value should be recomputed.

As far as the calculation is concerned, credit exposures belonging to the above categories are identified according to their specific features. Starting from this, satellite models are run by applying - as macro-economic conditions - the Multi Year Plan recessive scenario to determine the adjustment to be applied to the default rate. Such adjusted default rate is then applied to the relevant categories to estimate the expected new inflows of defaulted exposure, whose LLPs are then calculated according to the average coverage rate applied to Unlikely to Pay.

Bullet and balloon methodology 

Bullet and balloon products are defined as the products for which the payment of principal (or a significant part of the initial principal granted) is performed at end of the maturity of the financial instrument, whereas the payment of interests (or payment of the interest and low level of principal) is performed during amortization schedule. 

In order to cope with the characteristics of the Bullet / Balloon products, a correction to the PD Lifetime is applied by keeping fixed the full maturity at inception (thus sterilizing the time effect assuming that the lifetime riskiness does not reduce as time passes, as per amortizing loan). In this way the PD Lifetime results higher thus recognizing:

• the significant loan payment close to maturity -> the adoption of higher PD Lifetime will be prone to make higher the allocation in Stage 2. Furthermore, the EAD fractioning has been removed since these products are characterized by a significant loan payment close to maturity.

• the potential re-financing risk -> by keeping fixed the PD Lifetime over the initial full maturity, that will be representative of the lifetime risk over the full maturity of the instrument, the risk of a re-financing at portfolio level will be inherently considered.

The impact of this change is only on Bank standalone side of about RON 35.9 million additional LLP as of December 2022, implemented via a dedicated overlay (with no stage reclassification).

The Group started to apply fair value hedge accounting starting with 2013. The Group designated interest rate swap contracts as hedging instruments and certain financial assets at fair value through other comprehensive income of the Group as hedged items.

Starting with June 2021, the Group/the Bank implemented Macro Fair Value Hedging in the context of replicating portfolio hedging of non-maturing deposits (the aim of a Macro hedge relationship is to offset changes in fair value of the hedged item included into a generic fixed rate portfolio of liabilities). The Group/the Bank applies requirements of IAS 39 Financial Instruments for Macro Fair Value Hedge transactions.

2. Other non-trading derivatives

When a derivative is not held for trading, and is not designated in a qualifying hedging relationship, all changes in its fair value are recognized immediately in profit or loss. 

3. Embedded derivatives

Derivatives may be embedded in another contractual arrangement (a "host contract"). The Group accounts for hybrid contracts that contain a host that is an asset by applying the classification and measurement requirements of IFRS 9 Financial instruments to the entire hybrid contract. If a hybrid contract contains a host that it is not an asset within the scope of IFRS 9 Financial instruments, The Group will separate the embedded derivative if and only if: 

1. the economic characteristics and risks of the embedded are not closely related to the economic characteristics and risks of the host;

2.  a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

3. the hybrid contract is not measured at fair value through profit or loss.

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

h.     Derivatives held for risk management purposes and hedge accounting (continued)

Separated embedded derivatives are accounted for depending on their classification (i.e. at fair value through profit or loss) and are presented in the statement of financial position under Derivatives assets at fair value through profit or loss and derivatives liabilities at fair value through profit or loss.

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in "Other comprehensive income". Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognized in "Other comprehensive income" from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in "Other comprehensive income" is reclassified immediately to profit or loss as a reclassification adjustment.

The Group designated certain interest rate swaps as hedging instruments and deposits from banks and from customers of the Bank as hedged items. For hedge accounting purposes, only instruments that involve an external party to the Group (or intra-group transactions directly replicated with third parties outside the Group) are designated as hedging instruments.

A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and:

• represents a separate major line of business or geographical area of operations;

• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

• is a subsidiary acquired exclusively with a view to resale.

The Group measures a non-current asset (or disposal group) classified as held for sale at the lower of it carrying amount and fair value less costs to sell. For the period the asset is classified as held for sale the depreciation ceases and is tested periodically for impairment. 

The non-current asset is reclassified out of non-current assets held for sale when it is sold or the conditions to be recognized as held for sale are no longer met.

The repossessed assets of UniCredit Leasing Corporation IFN ("UCLC") represent assets sold or available for sale in the current business activity, in accordance with IAS 2. As a result, they are presented in the category Inventories - Other non-financial assets and measured at lower of cost and net realizable value.

The Group provides banking services to retail and corporate customers, including account management, provision of overdraft facilities, foreign currency transactions, credit card and servicing fees. Fees for ongoing account management are charged to the customer's account on a monthly basis. Transaction-based fees for interchange, foreign currency transactions and overdrafts are charged to the customer's account when the transaction takes place. Servicing fees are charged on a monthly basis and are based on fixed rates reviewed annually by the Group.

Revenue from account service and servicing fees is recognised over time as the services are provided. Revenue related to transactions is recognised at the point in time when the transaction takes place.

The Group's investment banking segment provides various finance-related services, including loan administration and agency services, administration of a loan syndication, execution of client transactions with exchanges and securities underwriting. However, if a customer terminates the contract before December 31, then, upon termination, the fee for the services provided up to now is charged. Transaction-based fees for administration of a loan syndication, execution of transactions, and securities underwriting are charged during the tenor of the transaction, according to the terms of the facility agreement.

If the timing of cash-in is not aligned to the way the performance obligation is satisfied, the Group accounts for a contract asset or a contract liability for the portion of revenue accrued in the period or to be deferred in the following periods. 

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

k.     Fees and commissions (continued)

The amount of revenues linked to fees and commissions income and other operating income is measured based on contractual provisions.  If the amount contractually foreseen is subject, totally or partially, to variability, a revenue has to be booked based on the most probable amount that the Group expects to receive. Such amount is determined on the basis of all facts and circumstances considered relevant for the evaluation, that depend on the type of service provided and, in particular, on the presumption that it is not highly probable that the revenue recognised will be significantly reversed. Nevertheless, for the services provided by the Group such a variability is not usually foreseen. 

"Accrued income" includes the contract assets recognized in accordance with IFRS15. In this context accrued income represents the portion of the performance obligation already satisfied through the services provided by the Group and that will be settled in the future periods in accordance with contractual provisions. 

"Deferred income" includes the contract liabilities recognised in accordance with IFRS15. 

Deferred income represents the portion of performance obligations not yet satisfied through the services provided by the Group but already settled during the period or in previous periods.  The majority of this amount relates to performance obligations expected to be satisfied by the following year end reporting date.

The Group also provides finance lease services granted mainly to finance purchases of cars, trucks and trailers, equipment and real estate for which related income from fees and commissions are accounted for in the profit and loss account as the Group fulfils the performance obligation incorporated in the contract. Commissions earned if the performance obligation is satisfied at a specific moment ("point in time") are recognized in income statement when the service is provided; in this category are also included commissions from the intermediation of the insurance related to the leasing contracts. Commissions earned if the performance obligation is satisfied over-time are recognized in income statement as the services are provided or during the commitment period; in this category are included fees for the monthly administration of a financial lease or credit, other fees for services offered separately from the financing offered (GAP- guaranteed asset protection insurance service - by which it will compensate the good, in case of total damage in the first 3 years, at its purchase value, road assistance service). Transaction revenues (as in the case of early termination of leases/credit) are recognized at the time of the transaction. 

In this respect, the future leasing payments to be updated are determined on the basis of the net VAT provisions as a result of the obligation to pay the tax at the moment the invoice is issued by the lessor and not when the contract is entered into leasing.

In order to make this calculation, lease payments must be discounted using an implicit interest rate of the contract, or, if this is not available, at an incremental borrowing rate. The latter is established based on the cost of financing the liabilities of a similar duration and a guarantee similar to those implied in the lease.

In order to determine the lease term, it is necessary to consider the periods that cannot be cancelled in the contract, the period when the lessee has the right to use the asset support, also taking into account the renewal of the options if the tenant is reasonably entitled to renewal.

The re-measurement may occur as a result of either modification of the contract or by a change in the lease term not arising from a change in the lease contract. These latter changes shall be accounted for by re-measuring the lease liability by discounting the revised expected cash flows either at the original or at revised incremental borrowing rate depending on the reason for re-measurement.

Revaluations are made semi-annually, as per UniCredit SpA instructions. The fair value of land and buildings is usually determined from market-based evidence by appraisal undertaken by professionally qualified valuators.

If an asset's carrying amount is increased as a result of a revaluation, the increase is recognized in other comprehensive income and accumulated in equity under "Other reserves". However, the increase is recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. 

If an asset's carrying amount is decreased as a result of a revaluation, the decrease is recognized in profit or loss. However, the decrease is recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under "Other reserves".

For the other items of property, plant and equipment the cost model is used, in accordance with IAS 16 Property, plant and equipment. After initial recognition, computers and equipment, motor vehicles, furniture and other assets are carried at cost less any accumulated depreciation and any accumulated impairment losses. 

3. Subsequent costs

The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognized in the income statement as an expense as incurred.

3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

s.    Property and equipment Income tax (continued)

4. Depreciation

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. Leased assets are depreciated over the shorter of the lease term and their useful lives.

The estimated rates of depreciation are as follows:

Depreciation methods, useful lives and residual values are reassessed at the reporting date.

• Retail - the Bank provides individuals (except Private Banking customers) and small and medium-sized enterprises a large range of financial products and services, including loans (mortgages, personal loans, overdrafts, credit card facility and funds transfer), savings, payment services and transactions with securities. UCFIN is also included under "Retail" segment;

• Corporate Investment Banking("CIB") -   The Group provide services and products through the Global Banking Transactions Division (including payment services, trade finance, liquidity management), Finance Direction (develops and offers financing products - Factoring, Real Estate Investments, European Funds - is also actively involved in initiating, structuring and promotion of specialized financing transactions, syndications and other specialized investment banking transactions, overflow portfolio management and financial analysis for complex and high-risk transactions), Corporate Financial Consulting Corporation (management consulting for merger and acquisition companies, to finance capital markets or other financial advisory services) and the Treasury Department. The services are provided to corporate clients, medium-sized companies, large companies, international companies, real estate companies, public sector and financial institutions.

• Private Banking („PB") - It focuses on individual clients and families with significant investments and / or VIP (VIP). The segment offers personalized banking products and services, including Asset Management and Custody solutions;

• Leasing - The Group, through UCLC, provides financial leasing contracts mainly for financing purchases of cars, transport vehicles, equipments and real estate. Rental contracts are mainly concluded in EUR, USD and RON, and are granted for a period of between 1 and 15 years, the transfer of ownership of the leased assets being made at the end of the lease;

• Other - segment ("Other") comprises of all elements not assigned to above mentioned segments such as equity investments, taxes and Assets and Liabilities Management ("ALM") activities.

4.    RISK MANAGEMENT (continued)

c)     Credit risk (continued)

(iii)     Exposure to credit risk (continued)

• Loans and advances to customers, on and off balance - Asset Quality