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Auditor’s Report

To the Annual General Meeting of Finnvera Plc

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements of Finnvera Plc (business identity code 1484332-4) for the year ended 31 December, 2016. The financial statements comprise both the consolidated and the parent company´s balance sheet, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies.

In our opinion the financial statements give a true and fair view of the group’s and the parent company’s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and comply with statutory requirements.

Basis for Opinion

We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.

We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Materiality

The scope of our audit was influenced by our application of materiality. The materiality is determined based on our professional judgement and is used to determine the nature, timing and extent of our audit procedures and to evaluate the effect of identified misstatements on the financial statements as a whole. The level of materiality we set is based on our assessment of the magnitude of misstatements that, individually or in aggregate, could reasonably be expected to have influence on the economic decisions of the users of the financial statements. We have also taken into account misstatements that in our opinion are material for qualitative reasons for the users of the financial statements.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have also addressed the risk of management override of internal controls. This includes consideration of whether there was evidence of management bias that represented a risk of material misstatement due to fraud.

The key audit matter

How the matter was addressed in the audit

Fee and commission income from export credit guarantees and special guarantees and guarantee premiums paid in advance
(Accounting principles, note D2 to the income statement and note E15 to the balance sheet)

  • Guarantee fees are recognized over the maturity of the contract. These fees are charged using various methods and in different currencies based on the guarantee contracts.

  • Income from guarantee premiums charged in advance is recognized over the guarantee period based on the recognition criteria entered into the system.

  • Guarantee contracts entered into are client-specific and may be amended during the contract period.

  • Due to the significance of income from export credit and special guarantees (fee and commission income), reinsurance expenses (fee and commission expenses) and guarantee premiums paid in advance, as well as various bases on which they are determined, the related internal control and accounting are considered a key audit matter.
  • We assessed the adequacy and functionality of application controls in the IT system and other internal controls in respect of the accounting for guarantee premiums

  • We tested on a sample basis unrecognized guarantee-specific premiums paid in advance. Testing included guarantee premiums charged both in one installment and periodically.

  • We assessed and tested the control environment of the IT system, emphasizing change management.

Impairment losses on receivables and guarantees losses
(Accounting principles, note D10 to the income statement and notes E2 and E13 to the balance sheet)

  • Impairment losses on receivables from clients and loss provisions for guarantees, export credit guarantees and special guarantees granted are items that involve management judgments.

  • Impairment losses on receivables and provisions for guarantee losses are recognized on an individual or collective basis

  • In particular, the export credit guarantee portfolio includes significant individual guarantees which may bear risks and involve loss provisions that are material for the financial statements.

  • The risk rating of clients plays an essential role in the accounting for impairment losses and loss provisions.

  • The estimates involve the risk that the impairments and provisions recognized are not recorded at accurate amounts nor on a timely basis.

  • We assessed risk management, monitoring systems, accounting for impairment losses and provisions in respect of doubtful receivables and guarantees, and tested related internal controls.

  • We evaluated the Group’s approval processes in place for impairment losses and provisions.

  • Concerning significant individual loss provisions we assessed the appropriateness of the assumptions and methods used for accounting purposes, the financial status of the counterparty and coverage of the company’s reinsurance protection.

  • In respect of impairment losses and provisions recognized on a collective basis we assessed the appropriateness of the assumptions and data used and the accounting treatment applied, and tested the accuracy of these calculations.

  • Furthermore, we considered the appropriateness of the notes concerning impairment losses and provisions.

Debt securities, debt securities in issue and derivatives
(Accounting principles and notes E3, E10, E11 and E20 to the balance sheet)

  • At the financial year-end the Group had debt securities carried at fair value amounting to EUR 2.0 billion.

  • Debt securities in issue carried at fair value through profit or loss totaled EUR 4.9 billion in the balance sheet as at 31 December 2016. Bonds are measured at fair value when they are hedged with derivatives.

  • Derivatives are used to hedge the Group’s funding-related currency and interest rate risks and they are measured at fair value in preparing financial statements.

  • The company applies hedge accounting to fixed interest rate bonds issued after 31 December 2015 and to related interest rate and currency swap derivatives when the criteria for hedge accounting are fulfilled.

  • Due to the significance of debt securities, debt securities in issue and derivatives, the related internal control and accounting are considered a key audit matter.

  • We evaluated the company’s principles for treasury operations, monitoring systems for investments and derivatives, related internal controls, risk management and valuation principles applied to financial assets and liabilities.

  • In respect of the hedge accounting adopted by the company as from 1 January 2016, we evaluated the appropriateness of procedures and documentation by reference to the applicable international financial reporting standards.

  • Regarding the treasury IT system we assessed, among others, conversion reconciliations, user rights management and reconciliations to the accounting data.

Valuation of venture capital investments
(Accounting principles, notes D3 and D5 to the income statement and notes E3 and E23 to the balance sheet)

  • Finnvera is engaged in venture capital investment activities through early-stage investments and investments in regional limited-company type funds made by three subsidiaries.

  • Impairment testing for shares in subsidiaries in the parent company and valuation of investments carried at fair value in the consolidated financial statements requires management judgment.

  • Valuation methods involve a risk that the fair value determined may substantially differ from the final selling price.

  • Venture capital investment activities have showed losses during the past years. Part of subordinated loans received from the State of Finland have been cancelled due to the losses of Seed Fund Vera Ltd.

  • Finnvera will gradually give up its venture capital investments. During the financial year the venture capital investments funded by the European Regional Development Fund (ERDF) have been transferred to a separate company through a demerger and the majority of the shares in Seed Fund Vera Ltd has been sold to an external party in December 2016.
  • We assessed the investment monitoring systems used, internal controls, valuation methods and principles and management judgments applied.

  • In respect of investments carried at fair value, we tested reconciliations of data from the related monitoring systems to accounting and transactions included in the line item “Gains and losses from financial instruments carried at fair value” in the consolidated comprehensive income statement.

  • We assessed the bases on which the cancelled part of the subordinated loan was determined.

  • We observed management’s estimates and reasoning underlying the determination of the long-term assets held for sale presented in the balance sheet.

  • We considered the Group’s restructuring transactions related to venture capital investment activities carried out in the financial year and their accounting treatment.

Responsibilities of the Board of Directors and the Managing Director for the Financial Statements

The Board of Directors and the Managing Director are responsible for the preparation of the financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and comply with statutory requirements. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors and the Managing Director are responsible for assessing the parent company’s and the group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or cease operations, or there is no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the parent company’s or the group’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  • Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the parent company or the group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Other Reporting Requirements

Other Information

The Board of Directors and the Managing Director are responsible for the other information. The other information comprises information included in the report of the Board of Directors and in the Annual Report, but does not include the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other information.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations.

In our opinion, the information in the report of the Board of Directors is consistent with the information in the financial statements and the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations.

If, based on the work we have performed on the report of the Board of Directors and the Annual Report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Other Opinions

We support that the financial statements should be adopted. The proposal by the Board of Directors regarding the use of the profit for the financial year is in compliance with the Limited Liability Companies Act. We support that the members of the Supervisory Board and of the Board of Directors as well as the Managing Director of the parent company should be discharged from liability for the financial period audited by us.

Helsinki 28 February 2017

KPMG OY AB

Juha-Pekka Mylén

Authorised Public Accountant, KHT

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