Members Report and Financial Statements For year ended 31 December 2016
CONTENTS MEMBERS REPORT 2-3 Page STATEMENT OF MEMBERS RESPONSIBILITIES IN RESPECT OF THE MEMBERS REPORT AND FINANCIAL STATEMENTS 4 INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF DEPFA FUNDING IV LP 5-6 INCOME STATEMENT 7 STATEMENT OF COMPREHENSIVE INCOME 8 STATEMENT OF FINANCIAL POSITION 9 STATEMENT OF CHANGES IN MEMBERS EQUITY 10 CASH FLOW STATEMENT 11 NOTES TO THE MEMBERS REPORT AND FINANCIAL STATEMENTS 12-21 OTHER INFORMATION 22 1
Members Report Introduction DEPFA Funding IV LP ( the Partnership ) is a United Kingdom Limited Partnership established by a Limited Partnership Agreement dated 13 March 2007 ( the Partnership Agreement ). DEPFA BANK plc, a company registered in Ireland, is the General Partner. The purpose of the Partnership is to raise and provide finance and financial support to DEPFA BANK plc ( the Guarantor and General Partner ) and other subsidiaries of the DEPFA Group (together, the DEPFA Group ). The business of the partnership, as administered by, or on behalf of, the General Partner includes the following: Acquiring and holding the Partnership s assets; Monitoring the Partnership s assets and determining whether they continue to be suitable; and Functions necessary or incidental thereto. The Limited Partner as at 31 December 2016 is BT Globenet Nominees Limited. Ownership The Partnership is part of the DEPFA Group, which comprises the Guarantor and General Partner of the Partnership, DEPFA BANK plc and its subsidiaries. On 19 December 2014 the entire ordinary share capital of DEPFA BANK plc was acquired by FMS Wertmanagement AöR, a German State Agency established by the Federal Republic of Germany and to which the DEPFA Group transferred non strategic positions in 2010. Prior to this date and since 2 October 2007, the entire ordinary share capital of DEPFA BANK plc was held by Hypo Real Estate Holding AG ( HRE Holding ), the parent entity of the Hypo Real Estate Group ( HRE Group ). FMS Wertmanagement AöR is a German State Agency established in 2010 as the Federal Republic of Germany s winding up institution for the nationalised HRE Group. FMS Wertmanagement AöR is under the direct ownership of the German Financial Markets Stabilisation Fund/German Finanzmarktstabilisierungsfonds ( SoFFin ), which is managed by the Federal Agency for Financial Market Stabilisation ( FMSA ). There was no change in the ownership of the Partnership during 2016. Summary of the Partnership s activities The Partnership has issued 500,000,000 5.029% Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities ( Preferred Securities ). The Preferred Securities entitle holders to receive non-cumulative preferential cash distributions subject to certain conditions including the discretion of the Board of Directors of the Guarantor and General Partner, DEPFA BANK plc ( the Directors ). The proceeds of these securities have been lent to DEPFA Finance N.V., a DEPFA Group company. The Partnership has no contractual obligation to make interest payments under the Preferred Securities. Accordingly the carrying amount of the Preferred Securities is classified as equity. Dividends A dividend of 9,176,368 was paid to DEPFA BANK plc on 28 April 2016 (2015: 9,500,000). No further dividends have been proposed. Major events The following major event, which had no direct effect on the Partnership, had a significant impact on the financial statements of the Guarantor and General Partner. Asset / Liability management ( ALM ) transaction between the DEPFA Group and FMS Wertmanagement AöR In November 2016, the DEPFA Group executed an asset/liability management ( ALM ) transaction with FMS Wertmanagement AöR, which has had a significant impact on the income statement and statement of financial position of the DEPFA Group. On 4 November 2016, DEPFA Group entities DEPFA ACS BANK and DEPFA Pfandbrief Bank International S.A. acquired from FMS Wertmanagement AöR global notes and registered notes with a nominal amount of approximately 4.8 billion and a book value of 6.6 billion. These financial liability positions were derecognised from the statement of financial position of the DEPFA Group on the same date. On 4 November 2016, DEPFA Group entities DEPFA ACS BANK, DEPFA Pfandbrief Bank International S.A. and DEPFA BANK plc transferred financial assets with a nominal amount of approximately 5.3 billion and a book value of 5.9 billion to FMS Wertmanagement AöR. These positions were derecognised from the statement of financial position of the DEPFA Group on the same date. Also, on 4 November 2016, DEPFA ACS BANK, DEPFA Pfandbrief Bank International S.A. and DEPFA BANK plc entered into certain derivative transactions with FMS Wertmanagement AöR with the effect of closing the risk positions on derivatives in those entities which were previously used to hedge the liabilities purchased and assets transferred. All of the transactions referred to above on 4 November 2016 were transacted on an arm s length basis at fair value and resulted in a net cash settlement from the DEPFA Group to FMS Wertmanagement AöR of 554 million. 2
Members Report (continued) The effects of the above transactions resulted in a gain in the DEPFA Group consolidated income statement of 141 million and a further equity gain from a reversal of the related Available-for-sale reserve of 28 million. These transactions had no effect on the financial statements of the Partnership. Going concern Following the transfer of ownership of the DEPFA Group to FMS Wertmanagement AöR on 19 December 2014, the Directors continue to consider the appropriateness of the going concern assumption in the preparation of the financial statements of the Partnership. The Directors understand that the DEPFA Group including the Partnership was transferred to FMS Wertmanagement AöR as a going concern and will continue its principal activities, being the wind down of its portfolios in a manner designed to maintain value. The Directors consider that the liquidity position of the DEPFA Group including the Partnership is stable and that it continues to be in a position to meet its own funding requirements. The DEPFA Group is not currently dependent on additional funding from FMS Wertmanagement AöR and is expected to be able to meet its obligations as they fall due for a minimum period of one year from the date of this report. The Directors have also considered that the regulatory capital ratios of the DEPFA Group and its regulated entities are currently, and are expected to continue to be, significantly in excess of the required minimum ratios for a minimum period of one year from the date of this report. The Directors have therefore concluded that it is appropriate to prepare the financial statements on a going concern basis of accounting. Payments on Preferred Securities On 4 March 2016 the Guarantor and General Partner determined that the Partnership would not make payments on its 500,000,000 Preferred Securities (XS0291655727) on the next Distribution Payment Date scheduled for 21 March 2016. Principal risks and uncertainties The Partnership's principal asset is a loan to DEPFA Finance N.V., a DEPFA Group company. The principal risks and uncertainties facing the Partnership, which relate primarily to credit risk, therefore relate to the performance of this loan. Auditors The auditors, KPMG, Chartered Accountants, have indicated their willingness to continue in office. The Directors have taken all steps that they ought to have taken to make themselves aware of all audit information and to establish that auditors are aware of all such information and, so far as the Directors are aware, there is no relevant audit information of which the auditors are unaware. Signed on behalf of the Guarantor and General Partner, DEPFA BANK plc: Fiona Flannery Director Gearóid Shanley Director 26 April 2017 3
Statement of Members Responsibilities in respect of the Members Report and Financial Statements The members are responsible for preparing the Members' Report and the financial statements in accordance with applicable law and regulations. The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 require the members to prepare financial statements for each financial year. Under that law the members have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law. Under Regulation 8 of the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 the members must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Partnership and of the net income or loss of the Partnership for that period. In preparing these financial statements, the members are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU; in accordance with the Transparency Directive (Directive 2004/109/EC) ( the Transparency Regulations ), the members are required to include in their report a fair review of the business and a description of the principal risks and uncertainties facing the Partnership and a responsibility statement relating to these and other matters included below; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Partnership will continue in business. Under Regulation 6 of the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008, the members are responsible for keeping adequate accounting records that are sufficient to show and explain the Partnership's transactions and disclose with reasonable accuracy at any time the financial position of the Partnership and enable them to ensure that its financial statements comply with those regulations. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Partnership and to prevent and detect fraud and other irregularities. The members are responsible for the maintenance and integrity of the corporate and financial information included on the General Partner s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility Statement, in accordance with the Transparency Regulations Each of the Directors of the General Partner in office, whose names and functions are listed on page 22 confirm that to the best of each person's knowledge and belief: The Partnership s financial statements, prepared in accordance with IFRSs as adopted by the EU give a true and fair view of the assets, liabilities and financial position of the Partnership at 31 December 2016 and its net income for the year then ended; and The Members' Report includes a fair review of the development and performance of the business and the position of the Partnership, together with a description of the principal risks and uncertainties they face. Signed on behalf of the Guarantor and General Partner, DEPFA BANK plc: Fiona Flannery Director Gearóid Shanley Director 26 April 2017 4
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF DEPFA FUNDING IV LP We have audited the financial statements of DEPFA Funding IV LP ( the Partnership ) for the year ended 31 December 2016 which comprise the Income Statement, the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Members Equity, the Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is UK law and International Financial Reporting Standards ( IFRSs ) as adopted by the EU. Our audit was conducted in accordance with International Standards on Auditing ( ISAs ) (UK & Ireland). Opinion on financial statements In our opinion the financial statements: give a true and fair view, of the state of affairs of the Partnership as at 31 December 2016 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the EU, and have been prepared in accordance with the requirements of the Companies Act 2006 as applied to limited liability partnerships by the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 as applied to limited liability partnerships requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or we have not received all the information and explanations we require for our audit. ISAs (UK & Ireland) require that we report to you if, based on the knowledge we acquired during our audit, we have identified information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material of fact, or that is otherwise misleading. Basis of our report, responsibilities and restrictions on use As explained more fully in the Members Responsibilities Statement set out on page 4, the members are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK & Ireland). Those standards require us to comply with the Financial Reporting Council s Ethical Standards for Auditors. An audit undertaken in accordance with ISAs (UK & Ireland) involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Partnership s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the members; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the members report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Whilst an audit conducted in accordance with ISAs (UK & Ireland) is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather the auditor plans the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant audit work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the engagement partner responsible for the audit, to subjective areas of the accounting and reporting. 5
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF DEPFA FUNDING IV LP This report is made solely to the members of the Partnership, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006, as required by Regulation 39 of the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008. Our audit work has been undertaken so that we might state to the Partnership s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Partnership and the Partnership s members, as a body, for our audit work, for this report, or for the opinions we have formed. N. Marshall 26 April 2017 for and on behalf of KPMG, Statutory Auditor Chartered Accountants 1 Harbourmaster Place IFSC Dublin 1 Ireland 6
Income statement For the year ended 31 December 2016 Note Year ended 31 December 2016 2015 Interest income and similar income 5 25,198,833 25,103,152 Interest expense and similar charges 5 (17,823,745) (16,520,742) Net interest income 7,375,088 8,582,410 Net expense from hedging relationships 6 (155,546) (145,658) Net income 7,219,542 8,436,752 The notes on pages 12 to 21 are an integral part of these financial statements. Signed on behalf of the Guarantor and General Partner, DEPFA BANK plc: Fiona Flannery Director Gearóid Shanley Director 26 April 2017 7
Statement of comprehensive income 2016 2015 Before tax Tax After tax Before tax Tax After tax Net income 7,219,542-7,219,542 8,436,752-8,436,752 Total comprehensive income 7,219,542-7,219,542 8,436,752-8,436,752 Attributable to the General Partner 7,219,542-7,219,542 8,436,752-8,436,752 Disclosure of components of comprehensive income Net income 7,219,542 8,436,752 Total comprehensive income 7,219,542 8,436,752 The notes on pages 12 to 21 are an integral part of these financial statements. 8
Statement of financial position Note As at 31 December 2016 2015 ASSETS Loans and advances to customers 7 523,698,394 541,040,323 Loans and advances to banks 8 7,856,980 13,332,914 Other receivables 2 2 Total assets 531,555,376 554,373,239 LIABILITIES Derivative financial instruments 9 24,335,832 45,196,869 Preferred securities issued 10 1 1 Total liabilities 24,335,833 45,196,870 GENERAL MEMBERS EQUITY Capital contribution account 1 1 Preferred securities issued 500,000,000 500,000,000 Income account 7,219,542 9,176,368 Total members equity 11 507,219,543 509,176,369 Total liabilities and members equity 531,555,376 554,373,239 The notes on pages 12 to 21 are an integral part of these financial statements. Signed on behalf of the Guarantor and General Partner, DEPFA BANK plc: Fiona Flannery Director Gearóid Shanley Director 26 April 2017 9
Statement of changes in Members Equity For the year ended 31 December 2016 Capital Contribution Preferred securities issued Income Account Total Members Equity Balance at 1 January 2015 1 500,000,000 10,239,616 510,239,617 Net Income - - 8,436,752 8,436,752 Dividend paid in the year - - (9,500,000) (9,500,000) Balance at 31 December 2015 1 500,000,000 9,176,368 509,176,369 Net Income - - 7,219,542 7,219,542 Dividend paid in the year - - (9,176,368) (9,176,368) Balance at 31 December 2016 1 500,000,000 7,219,542 507,219,543 The notes on pages 12 to 21 are an integral part of these financial statements. 10
Cash Flow Statement For the year ended 31 December 2016 2016 2015 Cash flows from operating activities Net income on ordinary activities before taxation 7,219,542 8,436,752 Adjustments for non-cash movements: Net (increase)/decrease in accrued interest income (53,447) 54,989 Net increase/(decrease) in accrued interest expense 33,513 (35,944) Other non-cash items (3,498,788) (3,498,690) Decrease in loans and advances to banks 5,475,548 4,542,893 Tax paid - - Net cash from operating activities 9,176,368 9,500,000 Cash flows from financing activities Dividend paid (9,176,368) (9,500,000) Net cash from financing activities (9,176,368) (9,500,000) Cash and cash equivalents at the beginning of the year - - Cash and cash equivalents at the end of the year - - Included in the cash flows from operating activities for the year are the following amounts: Interest income received 25,145,000 25,157,774 Interest expense paid (21,444,180) (20,200,667) 2016 2015 The notes on pages 12 to 21 are an integral part of these financial statements. 11
Notes to the Members Report and Financial Statements 1. The Partnership (a) Establishment of the Partnership DEPFA Funding IV LP Limited Partnership ( the Partnership ) is a United Kingdom Limited Partnership, established by a Limited Partnership Agreement dated 13 March 2007 ( the Partnership Agreement ). The Preferred Securities Issued of the Partnership are listed on the Irish Stock Exchange. The General Partner, Manager and Guarantor of the Partnership is DEPFA BANK plc ( the Guarantor and General Partner ), which is responsible for the management, operation and administration of the affairs of the Partnership in accordance with the Partnership Agreement. The Limited Partner as at 31 December 2016 is BT Globenet Nominees Limited. (b) Business of the Partnership The business of the Partnership is as set out in the Members Report on page 2. (c) Duration of the Partnership The Partnership has no specific duration. The Partnership is part of the DEPFA Group which comprises the Guarantor and General Partner of the Partnership, DEPFA BANK plc and its subsidiaries ( the DEPFA Group ). On 19 December 2014 the entire ordinary share capital of DEPFA BANK plc was acquired by FMS Wertmanagement AöR, a German State Agency established by the Federal Republic of Germany and to which the DEPFA Group transferred non strategic positions in 2010. Prior to this date and since 2 October 2007, the entire ordinary share capital of DEPFA BANK plc was held by Hypo Real Estate Holding AG ( HRE Holding ), the parent entity of the Hypo Real Estate Group ( HRE Group ). FMS Wertmanagement AöR is a German State Agency established in 2010 as the Federal Republic of Germany s winding up institution for the nationalised HRE Group. FMS Wertmanagement AöR is under the direct ownership of the German Financial Markets Stabilisation Fund/German Finanzmarktstabilisierungsfonds ( SoFFin ) which is managed by the Federal Agency for Financial Market Stabilisation ( FMSA ). 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the EU using accounting policies in accordance with the Partnership Agreement and in accordance with the Transparency Directive (Directive 2004/109/EC). In accordance with the Partnership Agreement, the currency used for reporting purposes is Euro. The financial statements are prepared on a going concern basis. The Directors of the Guarantor and General Partner, DEPFA BANK plc ( the Directors ) understand that the DEPFA Group including the Partnership was transferred to FMS Wertmanagement AöR as a going concern and will continue its principal activities, being the wind down of its portfolios in a manner designed to maintain value. The Directors consider that the liquidity position of the DEPFA Group including the Partnership is stable and that it continues to be in a position to meet its own funding requirements. The DEPFA Group including the Partnership is not currently dependent on additional funding from FMS Wertmanagement AöR and is expected to be able to meet its obligations as they fall due for a minimum period of one year from the date of this report. The Directors have also considered that the regulatory capital ratios of the DEPFA Group and its regulated entities are currently, and are expected to continue to be, significantly in excess of the required minimum ratios for a minimum period of one year from the date of this report. The Directors have therefore concluded that it is appropriate to prepare the financial statements of the Partnership on a going concern basis of accounting. The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Partnership s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. The Partnership has prepared its financial statements for the period ended 31 December 2016 in line with EC ordinance No. 1606/2002 of the European Parliament and Council of 19 July 2002 in accordance with IFRSs. These financial statements are based on IFRSs, which have been adopted in European Law by the European commission as part of the endorsement process. With the exception of specific regulations relating to fair value hedge accounting for a portfolio hedge of interest risks in IAS 39 all mandatory IFRSs rules have been completely endorsed by the EU. The Partnership does not apply this type of hedge accounting. Therefore, the financial statements are accordingly consistent with the entire IFRSs and also with the IFRSs as applicable in the EU. 12
Notes to the Members Report and Financial Statements (continued) New standards, amendments and annual improvements The following are new standards, amendments to existing standards and interpretations that are EU endorsed and effective for the Partnership s financial year from 1 January 2016: - Amendments to IAS 16 and IAS 38: Clarification of acceptable methods of depreciation and amortisation - Amendments to IAS 27: Equity Method in Separate Financial Statements - Amendments to IAS 1: Disclosure Initiative - Annual improvements to IFRSs 2012 2014 Cycle - Amendments to IFRS 10, IFRS 12 and IAS 28: Investment entities exception to consolidation - Amendments to IFRS 11: Accounting for Acquisitions of Interest in Joint Operations - Amendments to IAS 16 and IAS 41: Bearer Plants - Amendments to IAS 19: Defined Benefit Plans: Employee Contributions - Annual Improvements to IFRSs 2010 2012 Cycle None of the above have any impact on the Partnership. Endorsed standards and amendments, which are not yet mandatorily applicable The following standards and amendments are EU endorsed, but are not mandatorily applicable in these financial statements and were not adopted early: - IFRS 15: Revenue from Contracts with Customers (effective for the Bank s 2018 financial statements) - IFRS 9: Financial Instruments (effective for the Bank s 2018 financial statements) New IFRSs and amendments not yet EU endorsed The following provides a brief outline of IFRSs which have not yet been EU endorsed: - IFRS 14: Regulatory Deferral Accounts (which is not expected to be endorses by the EU) - Amendments to IAS 7: Disclosure Initiative - Amendments to IAS 12: Recognition of deferred tax assets for unrealised losses - Amendments to IAS 40: Investment Property - Amendments to IFRS 2: Classification and measurement of share-based payment transactions - Amendments to IFRS 4: Insurance Contracts - IFRS 16: Leases - Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - IFRIC 22: Foreign Currency Translation and Advance Consideration - Annual Improvements to IFRSs 2014 2016 Cycle The above standards and amendments have not yet been EU endorsed. These standards and amendments will be applied for the purposes of the Partnership financial statements with effect from their respective effective dates. Other than IFRS 9, the Partnership has not fully assessed the effects of these new standards and changes on its financial statements but does not expect significant impacts on the Partnership. IFRS 9 Financial instruments IFRS 9, Financial instruments is the new accounting standard for financial instruments. It is effective from 1 January 2018 and replaces IAS 39 from that date. IFRS 9 introduces a number of very significant changes which will impact on the performance and financial position of the DEPFA Group. It will change the rules for classification and measurement, hedge accounting and impairment. Unless early adopted, the standard is effective for accounting periods beginning 1 January 2018. The implementation of IFRS 9 may have an impact on the level of impairment charges to be recorded by the Partnership on its loans. The extent of this impact is being assessed but cannot currently be reliably estimated. None of the other changes introduced by IFRS 9 are expected to have a material impact on the Partnership. Functional and presentation currency Items included in the financial statements of the Partnership are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The Partnership s financial statements are presented in Euro, which is the Partnership s functional currency and presentation currency. All of the Partnership s assets and liabilities are denominated in Euro. Interest income and expense Interest income and expense are recognised in the income statement for all interest bearing financial instruments using the effective interest method. 13
Notes to the Members Report and Financial Statements (continued) Financial assets The Partnership classifies its financial assets as loans and receivables, as determined by management in accordance with the rules set out in IFRSs. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets are initially recognised at fair value plus transaction costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the Partnership has transferred substantially all risks and rewards of ownership. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Interest income on financial assets is shown under the line item Interest income and similar income. Impairment of financial assets The Partnership assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Cash and cash equivalents For the purposes of the cash flow statement, Cash and cash equivalents comprise cash reserves with central banks. Issued debt and Preferred Securities The classification of instruments as a financial liability or an equity instrument is dependent upon the substance of the contractual arrangement. Instruments which carry a contractual obligation to deliver cash or another financial asset to another entity are classified as financial liabilities. The Preferred Securities issued by the Partnership entitle holders to receive non-cumulative preferential cash distributions subject to certain conditions including the discretion of the Board of Directors of the Guarantor and General Partner. The Partnership has no contractual obligation to make interest payments under the Preferred Securities. Accordingly the carrying amount of the Preferred Securities is classified as equity. Income tax Taxation has not been recorded in these financial statements as any tax liabilities that may arise, on income or capital, will be borne by the individual partners comprising the Partnership. Accordingly, no provision for taxation is made in the financial statements. Expenses Auditor s remuneration and all other administrative expenses of the Partnership are borne by the Partnership s General Partner, Manager and Guarantor, DEPFA BANK plc. Derivatives Derivatives consist of an interest rate swap which is documented as a fair value hedge of the interest rate risk of the Partnership s principal asset, a fixed rate loan to DEPFA Finance N.V. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Hedge accounting The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Partnership has designated its derivative as a hedge of the fair value of a fixed rate loan asset. 14
Notes to the Members Report and Financial Statements (continued) Hedge accounting is used for derivatives designated in this way provided certain criteria are met. The Partnership documents, at the inception of the transaction, the relationship between the hedging instrument and the hedged item, as well as its risk management objective and strategy for undertaking the hedge transaction. The Partnership also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivative that is used in the hedging transaction is highly effective in offsetting changes in fair value of the hedged item. For fair value hedges, changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The ineffective portion is included in the trading result with the remainder of the fair value movement on the underlying and the derivative being included in net interest income. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the period to the expected maturity. In 2016 and 2015 the Partnership s hedge relationship has continued to meet the criteria for hedge accounting. 3. Risk management (a) Strategy in using financial instruments The Partnership is party to various types of financial instruments in the normal course of business. The Partnership has issued perpetual preferred securities whereby the holders are entitled to receive non cumulative preferential cash distributions at a fixed rate of 5.029% per annum, subject to certain conditions including the discretion of the Board of Directors of the Guarantor and General Partner. To the extent that such cash distributions are made, these are offset by a fixed rate financial asset receivable from a DEPFA Group company. As the Partnership has no contractual obligation to make such cash distributions, the fair value interest rate risk of the fixed rate financial asset is hedged with an interest rate swap. Surplus liquidity held by the Partnership is placed on a short term basis with DEPFA BANK plc. (b) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts owed in full when due. Impairment provisions are provided for losses that have been incurred at the balance sheet date. The Partnership has credit exposures on a subordinated loan to DEPFA Finance N.V., a short term placement with DEPFA BANK plc and a swap with DEPFA BANK plc. Both DEPFA Finance N.V. and DEPFA BANK plc are DEPFA Group Companies. No impairment provisions are required at year end 31 December 2016 (2015: nil). The financial assets are neither past due nor impaired. The credit exposure of financial assets by country is analysed below: Netherlands 523,698,394 541,040,323 Ireland 7,856,980 13,332,914 Total assets 531,555,374 554,373,237 (c) Currency risk All the Partnership s assets and liabilities are denominated in Euro, therefore there is no foreign currency risk. (d) Fair value interest rate risk Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Partnership s interest earning assets are entered into at a fixed rate of interest. The Partnership hedges the fair value interest rate risk exposure of its loan to DEFPA Finance N.V. by using an interest rate swap. The Partnership s assets are primarily funded by the Preferred Securities which entitle holders to a fixed rate of interest subject to certain conditions including the discretion of the Board of Directors of the Guarantor. The residual interest rate risk of the Partnership is considered insignificant. 15
Notes to the Members Report and Financial Statements (continued) (e) Liquidity risk Liquidity risk is defined as the risk of not being able to meet future payment obligations in full or on time. The Partnership s assets comprise a loan funded by the Perpetual Preferred Securities and a short term liquidity placement. No additional assets are expected to require funding in the foreseeable future. The Partnership s financial liabilities comprise a derivative with DEPFA BANK plc. The Partnership expects to meet the payment obligations from the derivative from existing liquidity and cash flows from its fixed rate interest earning asset. The Partnership s liquidity risk is therefore considered insignificant. As described above the Partnership is required to make fixed rate payments at an annual rate of 5.029% on the Preferred Securities subject to certain conditions including the discretion of the Board of Directors of the Guarantor. The Preferred Securities are perpetual and therefore have no fixed maturity date. The following table provides a maturity analysis of the cash flows contractually due on the financial liabilities of the Partnership as at 31 December 2016 and 31 December 2015 and comprises the cash flows expected on the Partnership s derivative with DEPFA BANK plc. The analysis has been performed on the basis of gross cash flows due in the future. The effects of taking into account the time value of money by discounting these flows are not reflected. Expected net cash outflows/(inflows) As at 31 December 2016 Up to 3 months 3-12 Months 1-5 years Over 5 years Total Derivative financial instruments 24,330,000 - - - 24,330,000 Total liabilities 24,330,000 - - - 24,330,000 As at 31 December 2015 Up to 3 months 3-12 Months 1-5 years Over 5 years Total Derivative financial instruments 24,093,444 (3,013,059) 24,158,883-45,239,268 Total liabilities 24,093,444 (3,013,059) 24,158,883-45,239,268 (f) Gains and losses from fair value adjustments for recognised assets and liabilities The following table details the gains and losses relating to derivatives and from hedge accounting: Hedge Accounting 2016 Total fair value adjustments Hedge Accounting 2015 Total fair value adjustments Loans and advances to customers (17,395,763) (17,395,763) (14,540,419) (14,540,419) Total assets (17,395,763) (17,395,763) (14,540,419) (14,540,419) Hedging instruments 17,240,217 17,240,217 14,394,761 14,394,761 Net loss (155,546) (155,546) (145,658) (145,658) Capital risk management The Partnership is not subject to any externally imposed capital requirements. 16
Notes to the Members Report and Financial Statements (continued) 4. Critical accounting estimates The Partnership believes that of its significant accounting policies and estimates, the following may involve a higher degree of judgement and complexity. Impairment provisions Where there is a risk that the Partnership will not receive full repayment of the amount advanced, provisions are made in the financial statements to reduce the carrying value of loans and receivables to the amount expected to be recovered. The estimation of credit losses is inherently uncertain and depends on many factors such as general economic conditions, cash flows, structural changes and other external factors. Fair value of derivative instruments The fair value of derivatives is calculated using valuation models. The DEPFA Group, including DEPFA Funding IV LP, perform regular checks to assess whether the valuation models provide a comparable standard for current market prices. For practical considerations, the valuation models can only take account of quantifiable factors (e.g. cash flows and discount rates) that also require estimates. Changes in assumptions relating to these factors might have an impact on the fair values of the derivatives. 5. Net interest income Interest income and similar income Financial assets of the category loans and receivables 25,198,833 25,103,152 Total interest income 25,198,833 25,103,152 Interest expense and similar charges Net interest expense on hedging derivative (17,823,745) (16,520,742) Total interest expense (17,823,745) (16,520,742) Interest income on impaired loans amounted to nil (2015: nil). 6. Net expense from hedging relationships Result from fair value hedge accounting Result from hedged items (17,395,763) (14,540,419) Result from hedging instruments 17,240,217 14,394,761 (155,546) (145,658) 7. Loans and advances to customers Loans and advances to other group undertakings 500,000,000 500,000,000 Accrued interest receivable on loans and advances to other group undertakings 19,702,658 19,648,825 Fair value adjustment arising from hedge accounting 3,995,736 21,391,498 All of the above relates to amounts due from other DEPFA Group undertakings. The effective interest rate for the above transaction is 5.029% (2015: 5.029%). 523,698,394 541,040,323 Loans and advances to customers are broken down by maturity as follows: Within 1 year 19,702,658 19,648,825 Greater than 5 years 503,995,736 521,391,498 523,698,394 541,040,323 17
Notes to the Members Report and Financial Statements (continued) 8. Loans and advances to banks Loans and advances to other group undertakings 7,857,732 13,333,280 Accrued interest on loans and advances to other group undertakings (752) (366) 7,856,980 13,332,914 All of the above relates to amounts due from other DEPFA Group undertakings. The effective interest rate for the above transaction is -0.313% (2015: -0.09%). Loans and advances to banks are broken down by maturity as follows: Less than 3 months 7,856,980 13,332,914 7,856,980 13,332,914 9. Derivative financial instruments 31 December 2016 31 December 2015 Contract amount Fair Value Contract amount Fair Value Interest rate swap 500,000,000 (24,335,830) 500,000,000 (45,196,869) 500,000,000 (24,335,830) 500,000,000 (45,196,869) Amounts include: Due to other group undertakings 500,000,000 (24,335,830) 500,000,000 (45,196,869) 10. Preferred Securities Issued Limited partner contribution 1 1 1 1 Preferred securities issued are broken down by maturity as follows: No stated maturity 1 1 1 1 11. Members equity Capital contribution 1 1 Preferred securities 500,000,000 500,000,000 Retained income at start of the year 9,176,368 10,239,616 Income for the year 7,219,542 8,436,752 Dividend paid in the year (9,176,368) (9,500,000) 507,219,543 509,176,369 The Partnership has issued 500,000,000 5.029% Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities. The Preferred Securities will entitle holders to receive non-cumulative preferential cash distributions, subject to certain conditions including the discretion of the Board of Directors of the Guarantor and General Partner. The Partnership has no contractual obligation to make interest payments under the Preferred Securities. Accordingly the carrying amount of this instrument is classified as equity. 18
Notes to the Members Report and Financial Statements (continued) In 2016 the Guarantor and General Partner stated that it did not expect the Partnership to make any coupon payments in 2016. Accordingly, no coupon payment was made in 2016. 12. Fair values of financial assets and liabilities The following tables summarise the carrying amounts and fair values of financial assets and liabilities on the Partnership s statement of financial position. Bid prices are used to estimate fair values of assets, whereas offer prices are applied for liabilities. Asset and liability designations in the tables below are as follows: AC financial assets and liabilities carried at amortised cost FV financial assets and liabilities carried at fair value Fair value of financial assets and liabilities at 31 December 2016 Financial assets Carrying Value Fair Value Level 1 Level 2 Level 3 Loans and advances to banks (AC) 7,856,980 7,856,980 7,856,980 - - Loans and advances to customers (AC) 523,698,394 436,315,093 - - 436,315,093 Financial liabilities Derivative financial instruments (FV) 24,335,832 24,335,832-24,335,830 - Preferred securities issued (AC) 1 1 - - 1 Fair value of financial assets and liabilities at 31 December 2015 Carrying Value Fair Value Level 1 Level 2 Level 3 Financial assets Loans and advances to banks (AC) 13,332,914 13,332,914 13,332,914 - - Loans and advances to customers (AC) 541,040,323 455,330,731 - - 455,330,731 Financial liabilities Derivative financial instruments (FV) 45,196,869 45,196,869-45,196,869 - Preferred securities issued (AC) 1 1 - - 1 The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price). The fair values were determined as of the reporting date based on the market information available and on valuation methods described here. 19
Notes to the Members Report and Financial Statements (continued) DEPFA Funding IV LP measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. Level 1 inputs that are quoted market prices (unadjusted) in active markets for identical assets and liabilities that the entity can access at the measurement date. Level 2 inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. The tables below set out information about measurement methods and observable inputs in measuring financial instruments carried at their fair value and categorised as Level 2 in the fair value hierarchy. Measurement of Level 2 at 31.12.2016 Assets Fair Value Liabilities Measurement methods Observable parameters Financial assets/liabilities at fair value Fair value hedge derivatives - - 24,335,832 24,335,832 DCF Models Yield Curve Measurement of Level 2 at 31.12.2015 Assets Fair Value Liabilities Measurement methods Observable parameters Financial assets/liabilities at fair value - 45,196,869 Fair value hedge derivatives - 45,196,869 DCF Models Yield Curve The estimated fair value of nostros and short term placements at the reporting date is their carrying amount. The table below outlines the valuation methodology of amortised cost positions categorised as Level 2 or Level 3. Disclosure Requirements for Financial Instruments (FIs) measured at amortised cost Classes of Financial Instruments Valuation Methods for Fair Value Level 3 Observable Parameters Unobservable Parameters Asset Credit Spreads Loans and Receivables (LaR) Discounted Cash Flow Models Benchmark Interest Rates Adjustment to proxies Future Cash flow s 20
Notes to the Members Report and Financial Statements (continued) Assets and liabilities according to measurement categories: Loans and receivables at amortised cost 531,555,374 554,373,237 Total assets 531,555,374 554,373,237 Financial liabilities at amortised cost 1 1 Derivatives at fair value 24,335,832 45,196,869 Total liabilities 24,335,833 45,196,870 13. Related party transactions Balances due to and from related parties are disclosed in the notes to the statement of financial position. DEPFA BANK plc, the General Partner, Manager and Guarantor, is a related party of the Partnership. Key management is the Board of Directors of DEPFA BANK plc. The key management of the Partnership received no remuneration from the Partnership during the year. Transactions with related parties consist of: Interest income and similar income DEPFA Finance N.V. 25,198,832 25,091,168 Interest income and similar income DEPFA BANK plc - 11,984 Derivative (net interest expense) DEPFA BANK plc (17,823,744) (16,520,742) Dividend paid DEPFA BANK plc (9,176,368) (9,500,000) 14. Auditor s fee (excluding VAT) Auditor s fee (excluding VAT) 2015 2014 Audit of partnership financial statements 1,000 1,000 Total 1,000 1,000 The auditor s fee is borne by the General Partner, DEPFA BANK plc. 15. Ultimate controlling party DEPFA BANK plc, a company registered in Ireland, is the general partner of the Partnership. The largest group into which the results of the Partnership are consolidated is that headed by DEPFA BANK plc. The smallest group into which the results of the Partnership are consolidated is that headed by DEPFA BANK plc. DEPFA BANK plc is a wholly owned subsidiary of FMS Wertmanagement AöR, a German State Agency. Copies of the financial statements of DEPFA BANK plc can be obtained from The Secretary, DEPFA BANK plc, 1 Commons Street, Dublin 1, Ireland. 16. Events after 31 December 2015 Payments on Preferred Securities On 6 March 2017 the Guarantor and General Partner determined that the Partnership would not make payments on its 500,000,000 Preferred Securities (XS0291655727) on the next Distribution Payment Date scheduled for 21 March 2017. Apart from the above there have been no notable events after 31 December 2016. 17. Commitments The Partnership had no commitments as at 31 December 2016 (31 December 2015: nil). 18. Approval of financial statements The financial statements were approved by the General Partner on 26 April 2017. 21