NET INCOME FROM FINANCIAL INSTRUMENTS

ACCOUNTING POLICY

Table 3.1 specifies the income and expense elements, where the Total column shows the amount recognised in profit or loss for the respective income statement line item. The following accounting policies relate to the respective income and expense elements:

Interest income is recognised in profit or loss when the interest is earned. Interest expense is recognised in profit or loss as incurred.

Dividends are recognised as income for investments in Equities and units and Real estate when the dividends are formally approved by the shareholders’ meeting or comparable responsible party.

Net income/expense for Equities and units as well as Bonds constitutes net income from securities lending.

This income comprises securities lending fees, expenses related to cash collateral received, reinvestment income and the deduction of the security lending agent’s fees related to the handling of the transaction. Tax expenses are presented separately as net income/expense. Accounting policies for taxation are further detailed in Note 20.13 Tax expense.

Realised gain/loss represents amounts realised when assets or liabilities have been derecognised. Realised gains/losses include transaction costs, which are expensed as incurred. Transaction costs are defined as all costs directly attributable to the completed transaction. For investments in Equities and units and Bonds, these normally include commission fees and stamp duties.

Unrealised gain/loss represents changes in fair value for the period for the related balance sheet line item that are not attributable to the aforementioned categories.

For items measured at amortised cost, the effective interest is recognised in profit or loss. The effective inter-est rate is determined as the rate that discounts contractual cash flows within the agreed maturity to the rec-ognised amount. The cash flows include directly attributable transaction costs.

Table 3.1 Net income from financial instruments before foreign exchanges gains/losses

Amounts in NOK millions 2014 Interest

income/

expense Dividends

Net income/

expense

Realised gains/

losses

Un realised gains/

losses Total

Interest income from deposits and claims 7 - - - - 7

Interest income from lending to banks 80 - - - - 80

Interest income from lending associated with reverse repurchase

agreements 37 - - - - 37

Net income/expense and gains/losses from:

- Equities and units* - 3 045 54 3 761 11 861 18 721

- Bonds and other fixed income securities 5 090 - - -691 9 260 13 659

- Financial derivatives - - - 17 -13 4

Interest expense, borrowing associated with repurchase agreements -1 - - - - -1 Interest expense on banks' and Treasury deposits:

- Of which interest expense paid on sight deposits from banks -511 - - - - -511 - Of which interest expenses paid on F-deposits from banks -422 - - - - -422 - Of which interest expenses paid on depots operated by banks -16 - - - - -16 Net interest income, from claims on/liabilities to the IMF 11 - - - - 11

Tax expense - - -47 - - -47

Other financial income/expenses 46 - -42 - - 4

Net income from financial instruments before foreign exchanges

gains/losses 4 321 3 045 -35 3 087 21 108 31 526

Amounts in NOK millions 2013 Interest

income/

expense Dividends

Net income/

expense

Realised gains/

losses

Un realised gains/

losses Total

Interest income from deposits and claims 39 - - - - 39

Interest income from lending to banks 243 - - - - 243

Interest income from lending associated with reverse repurchase

agreements 26 - - - - 26

Net income/expense and gains/losses from:

- Equities* - 2 694 69 3 721 23 927 30 411

- Bonds and other fixed income securities 4 495 - - -138 -6 617 -2 260

- Financial derivatives -1 - - 36 -19 16

Interest expense, borrowing associated with repurchase agreements -22 - - - - -22 Interest expense on banks' and Treasury deposits:

- Of which interest expense paid on sight deposits from banks -498 - - - - -498

Interest terms for loans to banks

Fixed-rate loans (F-loans) are the instrument pri-marily used to supply liquidity to the banking system. They are issued at a fixed rate and speci-fied maturity against collateral in the form of secu-rities. The maturity on F-loans is determined by Norges Bank and varies depending on the projec-tion of structural liquidity. Average maturity on F-loans to banks was 0.2 month both in 2014 and 2013.

The interest rates on F-loans are normally determined by multi-price auctions. In a mul-ti-price auction banks submit bids for a desired amount and interest rate. Norges Bank decides the aggregate amount of the allotment. The banks’ interest rate bids are ranked in descending order. Banks that place bids within the aggregate amount will be awarded in the amount and at the interest rate submitted.

Interest terms for deposits from banks Sight deposits: Banks can deposit unlimited reserves in Norges Bank via the standing deposit facility. The interest rate on deposits less than or equal to a bank’s quota is equal to the key policy rate (sight deposit rate). Sight deposits in excess of this quota are remunerated at a lower rate, the reserve rate. In 2014 and 2013, the reserve rate was 100 basis points lower than the key policy rate.

Fixed-rate deposits: Norges Bank reduces the quantity of reserves in the banking system by

pro-viding banks with fixed-rate deposits (F-deposits).

As in the case of F-loans, the interest rate is nor-mally determined by multi-price auction. The maturity on F-deposits is determined by Norges Bank and varies depending on the projection of structural liquidity. Norges Bank can provide F-de-posits at a floating rate, i.e. the interest rate on the F-deposits depends on the benchmark rate in the money market. Average maturity for F-deposits from banks was 0.2 month in both 2014 and 2013.

Interest terms for deposits from the Treasury Interest terms for deposits from the government are set in a special agreement between Norges Bank and the Ministry of Finance. The deposit rate is calculated on the basis of money market rates weighted between Norwegian and foreign rates in proportion to investments in Norges Bank’s balance sheet (excluding Investments, GPFG and Deposits in krone account, GPFG).

Interest on Treasury deposits was paid at an annual rate of 0% during all of 2014 and 2013.

Tax expense

Tax expense comprises taxes in accordance with IAS 12 Income Taxes and comprises income tax that will not be refunded under local tax rules or tax treaties to Norges Bank. This pertains to with-holding tax on dividends, which gives rise to tax expenses related to the foreign exchange reserves (see specification in Table 3.2).

Table 3.2 Tax expense, Foreign Exchange reserves

Amounts in NOK millions Dividend equities - withholding tax

2014 2013

Gross income before taxes 3 027 2 669

Income taxes deducted -86 -57

Income taxes refunded 39 40

Tax expense -47 -17

Net income after taxes 2 980 2 652