A nnuAl

R epoRt
2017
Istituto per le Opere di Religione
Cortile Sisto V
00120 Vatican City State
Vatican City State

Registered under No 1 in the Register of Legal Persons

held at “Governatorato” of Vatican City State

Authorization n. 1 of 10/07/2015 issued by AIF,

to carrying out in professional way financial activities at Vatican City State

digital copy on site www.ior.va

Money must serve
not rule
His Holiness
Pope Francis,
Evangelii Gaudium, 2013
 AT THE SERVICE OF THE CATHOLIC
IOR

4| ANNUAL
REPORT 2017
CHURCH ALL OVER THE WORLD
SINGLE
LOCATION
Vatican City
State

102
employees

112
reached
countries

14,945
clients

m Eur
net profit
devolved
to the Holy
Father

5| ANNUAL
REPORT 2017
TABLE OF CONTENTS

President of the Commission of Cardinals’ message 9

Prelate’s message 10

Management Report 11
ChAPteR 1. StRAteGIC INFORMAtION 13
1. President of the Board of Superintendence’s message 13
2. Mission, Customers and Services 17
3. Corporate governance 18
4. IOR Organization chart 21
5. Control functions 21
6. Regulatory Framework and tax Requirements 21
7. Proposal of distribution of the net profit for the year 22
ChAPteR 2. OPeRAtIONAL INFORMAtION 23
1. 2017 Business Review 23
2. Prevalence of Catholic principles and values in the management of proprietary and
customers’ financial assets 28
3. Charitable and social activities 29
4. Forecast for 2018 30

Financial Statements 31
Balance Sheet 33
Income Statement 34
Statement of Comprehensive Income 35
Statement of Changes in equity 35
Cash Flow Statement 36
explanatory Notes 38
Part 1. Accounting policies 38
Part 2. Information on the Balance Sheet 55
Part 3. Information on the Income Statement 76
Part 4. Information on comprehensive income 86
Part 5. Information on risks and hedging policies 88
Part 6. Information concerning equity 111
Part 7. Related party transactions 115

Report of the Revisori 117

Report of the external Auditors 123

The present Annual Report has been translated from the original one which is prepared in Italian

7| ANNUAL
REPORT 2017
President of the Commission
of Cardinals’ message

the time has come for the Institute to present - for the sixth consecutive
year - the annual financial statements for the 2017 fiscal year, which closed
with a net profit of €31.9 million.
this is undoubtedly a remarkable result in light of both the strict ethical
parameters within which the IOR operates, in line with its Statutes, as well as
the complex geo-political and financial scenarios that characterized the global Cardinal Santos Abril y
economy in 2017. Castelló
Leaving the task of analysing the genesis of said profit and its consistency President of the Commission
of Cardinals
with the challenging global economic environment of 2017 to the Institute’s
“technical experts”, as President of the IOR’s Supervisory Commission of
Cardinals, I consider it, instead, a priority to emphasize the consistency of
this result with the Institute’s commitment to never subordinate the ethics of
its choices to profit, in compliance with the clear directives received from the
holy Father in this regard, even when this may lead to reduced profits.
Once again, in 2017, the Institute renewed its commitment to affirm the
importance of ethics over profit through key “ethical” decisions that have
affected, inter alia, sensitive areas of activity such as investments, tax
transparency and the legal strategy followed to protect its reputation.
In this regard, I wish to mention the Institute’s choice to continue to select
for itself and for its customers only investments in line with Catholic
principles and its decision to fully implement the tax agreements signed in
recent years with the United States of America and the Italian Republic in
order to make the accounts of the Institute and those of its customers fiscally
transparent, despite being aware of a possible reduction in the number of
customers as a result of such rigorous choices.
Likewise, I would like to remind you of the Institute’s choice to refer to the
decisions of the competent courts in ascertaining the responsibilities of
individuals who, in the past, while holding different positions (directors,
managers, investors and/or consultants of the time), betrayed its trust and
caused serious harm, in spite of the substantial settlement agreements
proposed by some of the parties involved to repair the damage caused to the
Institute by their conduct. Being aware of the importance of affirming, even
in this case, the centrality of ethics beyond the strictly financial dimension,
the Institute refused to negotiate with the people who had brought discredit
upon it, instead subordinating any compensation for reputational and
economic damages to the establishment of responsibilities by the competent
authorities and to their decisions.
Among the relevant facts of the year, the overall positive opinion
expressed in Moneyval’s December 2017 report on the appropriateness of the
legislative instruments and good practices already adopted by the IOR to
effectively combat money laundering and terrorism is worthy of mention.
Recognition by this prestigious european body of the progress the Institute
has made in such a sensitive sector has been a valuable incentive for the latter
to continue with renewed determination in the improvement of the existing
legislative instruments and practices that is already underway.
Lastly, the process of reform of the Statutes is reaching its conclusion and
it is to be expected that the reformed Statutes and the Institute’s new
regulation will be adopted in the near future, in compliance with the holy
Father’s request to provide the Institute with transparent, effective and
modern instruments of governance.

9| ANNUAL
REPORT 2017
 Prelate’s message

this year, as in the past, I would like to take advantage of the publication
of the Financial Statements to convey a few words, simply, without claiming
to have any technical competence, to all those who work conscientiously and
with professionalism, and have enabled the Institute for the Works of Religion
to continue along the road towards a change of mindset in working and
recovering a more precise understanding of the aims of the Institute.
Change of mindset: one should not work at the Institute and think it’s like
Msgr. Battista Mario Salvatore
Ricca working at any one place. In the past, this led us to take approaches that were
Prelate a bit too breezy and not always careful about ethics, in the absence of which,
an excessive independence had been reached, which threatened to make us
lose sight of the meaning of the real need of the Institute, and therefore its
usefulness for the holy See. the wise guidance of the President and the
Director and everyone’s willingness to question themselves has already
produced fruits that are there for all to see.
A more precise understanding of the goals: the results of the financial
statements show that the logic of making money for the sake of it has gone by,
and money is to be used to meet the needs for which the Institute was
founded, i.e. help the activities of the Catholic Church. It is often believed
that if one has so much, one can do a lot. It’s better to own little and do well,
do necessary things, and redesign priorities. the Scripture warns: “Better is a
little to the just, than the great riches of the wicked.” Psalm 36:16, and again:
“he who loves money will not be satisfied with money, nor he who loves
abundance with its income. this too is vanity.” ecclesiastes 5:9. In addition to
the Bible, even the way we all think makes us believe that if we had twice the
money and twice the possibilities, we would complain that they are not
enough, while reality shows us every day that with half of what we have, we
do the same things.
I am sure that we will continue along this pathway and wish everyone to
continue giving the best that everyone can give with enthusiasm.

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REPORT 2017
MAnAgeMent
RepoRt
ChAPteR 1
Strategic information

1. PRESIDENT OF THE BOARD OF SUPERINTENDENCE’S

MESSAGE
Since its appointment in July 2014, the Board of Superintendence has
worked on the necessary transformation of the IOR to serve with prudence
the holy Father in fulfilling his mission as Universal Pastor. the appointment
of three new Members in 2016, enriched the expertise, experience, and Jean-Baptiste Douville
diversity of the Board. de Franssu
In 2017, in a complex financial environment, much was accomplished and President of the Board of
Superintendence
the Board continued to dedicate itself to the nature and the quality of the
services offered to clients and to the Church. It has also furthered its efforts to
consolidate its governance, reinforce internal controls, and guarantee
unceasing respect for the laws and applicable regulations.

Overview
I believe there are four principal sectors that best evidence this progress:

First, controls were reinforced in the risk management and compliance

function, in the legal function and in the internal audit function and various
initiatives were taken on to improve procedures and surveillance. New
policies were adopted in accordance with AIF regulations relating to different
aspects of the everyday operations of the Institute. the hiring of new senior-
level executives represented an important step; they have greatly contributed
to making the IOR a stronger financial institution as illustrated in the recent
Moneyval Report. In addition, with the objective of consolidating all the
activities done in past years, at the initiative of the Audit and Risk Committee,
the AML (Anti-money laundering) and KYC (Know your customer)
procedures were reviewed by an external consultant to ensure that the IOR
meets the highest international standards. Likewise, a review of the treasury
operations was conducted to ensure that best practices are established and
adhered to in a critical area of the Institute. When it comes to past abuses that
affected IOR, a new momentum has been set with legal actions initiated in
Malta related to financial products in which IOR invested in between 2011-
2013, and in the Vatican, against some of former IOR managers and Board
members. these developments must not be underestimated: based on four
years of thorough investigative work, these are further examples of the
progress completed in the reform of the Institute.

Second, the Directorate has focused its efforts to improve the quality of
the products and services offered by IOR. this is the case for Asset
Management solutions, where a rationalization effort has taken place to focus
on major investment strategies to best serve IOR clients, improve efficiency
and reduce relevant operational risks. In addition, further developments were
made with regard to Catholic ethical investment principles. In 2018, the
Board approved a Faith Based approach to apply to all its financial
investment. Moreover, in 2018, one should start to see the fruits of the work
started by the Business transformation Strategy committee of the Board to
identify further structural steps that need to be taken as to generate further
growth in the Asset Management sector. In addition, the process for the

13 | ANNUAL
REPORT 2017
FINANCIALS 2017 Vatican City State and IOR to adhere to SePA has started: by joining SePA,
the IOR will have access to the european payment system. this will bring

5.3
more efficient and reliable procedures and be a source of savings for IOR
clients. It is also appropriate to mention all the efforts that took place on the
bn Eur
tax side over the last three years, which reached a point of final
Total client assets
implementation in 2017. this work comes as a result of the agreements
signed by the holy See with Italy and the United States of America. It
guarantees the level of transparency and stability required to build long term
relationships with IOR clients and its counterparts.

103,000
Payment transactions
Third, many aspects of the human Resources policies were reviewed and
adjusted where necessary. Among the objectives of such an exercise, one
could mention the need of IOR to attract external talent as well as to
contribute to the development of a new “culture” inside the Institute. this
latest aspect has also been supported by the initial efforts with regard to

659.1
Net equity
m Eur
training, very much encouraged by the hR and Remuneration committee of
the Board, with the purpose of offering more opportunities to IOR staff to
grow and gain further experience. Again, this is a very important step as the
wellbeing and motivation of the personnel are very significant aspects
considered and valued by the Board.

68.26%
Finally, 2017 has continued to benefit from a favorable interest rate
environment and this contributed to the delivery of a good set of results for
the Institute. It is also worth mentioning, the efforts undertaken to
successfully open relationships with new correspondent banks. As a
Core equity TIER 1
consequence notably of the impact of recent Sovereign tax agreements and
withdrawals to fulfil IOR’s customers’ charitable and missionary works,
clients’ assets have decreased. however, many of the previously described
initiatives that will enhance the quality and reliability of IOR services will
contribute to attracting new deposits.
the IOR and its personnel have made great strides over the last 12
months. however, in order that the Institute complete this ambitious task
with success, the management staff must continue to be reinforced and all the
efforts of the Director General of the last twelve months must be able to
continue.
In all these initiatives, the Board supports the Directorate of the Institute.
It will continue to provide its guidance and expertise when and where
required, especially thanks to a Corporate Governance that continues to
improve. Although such periods of change and transformation are never easy
and bring challenges, it is fair to say that resulting from the work completed
in previous years, important milestones were reached, as demonstrated
clearly by the Institute’s reputation significantly improving.

Approval of the 2017 accounts

After meeting with the Revisori and the independent audit firm, the
financial statements of the Institute and the management report were
approved. the proposed distribution of profits to be made to the holy See for
2017 were discussed and approved. As per the Statute, this information was
provided to the Commission of Cardinals to enable them to decide on the
allocation of profits. the financial statements, prepared in accordance with
IAS-IFRS, as adopted by the Circular issued by the AIF, were audited by
Deloitte & touche S.p.A.
the net result for 2017 is euro 31.9 million. this result reflects the
continuous downward trend of interest rates in europe and the conservative

14 | ANNUAL
REPORT 2017
approach that the Institute has adopted since 2014 in managing its assets
(mainly fixed income investments). As described in the Management Report,
Section 2, Part 1 - 2017 Business Review, this was achieved in a year of
complex financial and political developments. this net result is in line with
2016 result and above the 2017 budget. the cost control approach adopted by
the Institute had a positive contribution and IOR is now running on an
annual cost base of around euro 19 million versus euro 20 million in 2016
and euro 24 million in 2015 (note that 2015 operating expenses included
various one-off costs).

Corporate Governance
As per the Statutes, the Board, composed of seven Members since
December 2016, followed and supervised the work carried out by the
Directorate in the management of the Institute.
the Board met on four occasions and various informal meetings and
discussions took place. Resolutions were passed on various business matters,
for which its consent was mandatory, subject to reviews and consultations in
close coordination with the Directorate, as well as the Commission of
Cardinals, when necessary. Once approved, the Minutes of every Board
meeting were shared with the Revisori, the Directorate and the Prelate who
were always in attendance. the Commission of Cardinals always receive
copies of these acts.
the Commission of Cardinals was kept informed on every initiative and
consulted as necessary on issues relating to potential changes in governance,
in the IOR operating model or leadership. For example, the Board presented a
proposal to the Commission of Cardinals in order to adjust the IOR Statute
and to draft the first Internal Regulation.
Regular update meetings were held with the Prelate and the non-voting
secretary of the Board to guarantee, among other things, an adequate flow of
information.
Finally, in the first quarter of 2018, the Board asked for a review of IOR
corporate governance standard to be done in line with best international
practicises by a professional firm with a view to assess the Board functioning
and seek possible improvements.

Board Committees
In 2015, the Board created committees to strengthen and support the
governance of the Institute and the Board’s work, although such committees
are not provided for by the current Statute. First of all, there was the creation
of the Audit and Risk Committee and the human Resources and
Remuneration Committee. In 2016, the Board created a Past Abuses
Committee intended to help and support the Board in its work of
understanding legacy issues and allowing for the truth to come forth. the
Committee has completed its work at the end of January 2017. In 2017 a
Business transformation Strategy Committee was created to help lead the
necessary changes required in terms of products and services offered to IOR
clients (the composition of these committees is described below).
the meetings of the Board and the informal committees of the Board of
Superintendence were held in an environment of an open exchange of
information. these meetings benefitted from each member’s specific
expertise in various subject matters to find the appropriate resolutions to
meet the needs of this unique institution. Agenda items for the meetings and
materials on specific subjects important to members of the committees and
the Board were distributed in advance and minutes were drafted for each

15 | ANNUAL
REPORT 2017
 meeting. At each Board meeting, a specific report was presented by the
respective presidents of the committees and an annual report at year-end.

a) Members of the Human Resources and Remuneration Committee

Mary Ann Glendon – Chair (until February 2018)
Mauricio Larrain – Chair (from February 2018)
Jean-Baptiste Douville de Franssu (ex officio)
Scott C. Malpass (from April 2017)

b) Members of the Audit and Risk Committee

Sir Michael hintze – Chair
Jean-Baptiste Douville de Franssu (ex officio)
Georg Freiherr von Boeselager (from April 2017)
Javier Marin Romano (from April 2017)

c) Members of the Business Transformation Strategy Committee

Scott. C. Malpass – Chair
Jean-Baptiste Douville de Franssu (ex officio)
Javier Marin Romano
Mauricio Larrain

Gian Franco Mammì, IOR Director General is always invited to

participate at the committee meetings.

“Organismo di Vigilanza”
In order to comply with the provisions of Article 46 of Law VIII of the
Vatican City State which provides for the creation of an “Organismo di
Vigilanza”, the Board of Superintendence decided to set up such a body
having undertaken a thorough process to identify appropriate candidates
presented by the Director General. the Body, characterized by independent
decision making powers and control, has the task of supervising the
operation and guaranteeing compliance with the Institute’s organizational,
management and control models, ensuring that they are updated and/or
appropriately modified.

Acknowledgements
I would like to thank all the Board members for their support,
contribution and dedication. Many of them have devoted a considerable
amount of their time to help guide IOR through this transition. In early 2018,
Mary Ann Glendon resigned from her position and the Board thanked her
for her contribution.
In 2017, the Board has continued to work closely with the Commission of
Cardinals. I wish to extend my gratitude to its President and Cardinal
members for their availability and support.
I also wish to express my appreciation for the work of the Prelate, Msgr.
Battista Ricca, of the Director General, Gian Franco Mammì, and to all
employees of the IOR.
My gratitude, of course, also goes toward the work performed by the
Revisori and the independent audit firm that was important for the progress
achieved by IOR. Whilst the mandate of the members of the Revisori is
coming to an end, the Board wishes to express its particular thanks for their
support over the last three years.

16 | ANNUAL
REPORT 2017
2. MISSION, CUSTOMERS AND SERVICES
the Istituto per le Opere di Religione (the “Institute” or “IOR”) is an
institution of the holy See, founded on 27 June 1942 by Chirograph of his
holiness Pius XII. Its origins date back to the “Commissione ad Pias Causas”
established by Pope Leo XIII in 1887.

the Insistute is a public legal entity according to the Canon Law (Can. 114
and 116) and carries out financial activities.

the mission of the IOR, established by its Statute, with reference to the
Chirograph dated 1 March 1990 of his holiness John Paul II, is “to provide
for the custody and administration of goods transferred or entrusted to the
Institute by natural or legal persons, designated for religious works or charity.
the Institute can accept deposits of assets from entities or persons of the holy
See and of the Vatican City State”.

the IOR strives to serve the global mission of the Catholic Church
through the administration of the entrusted assets and providing payment
services to the holy See and related entities, religious orders, other Catholic
institutions, clergy, employees of the holy See and the accredited diplomatic
bodies.

the IOR is exclusively located on the sovereign territory of the Vatican

City State and subject to the regulations and legislation applicable therein.
the IOR is supervised and regulated by the “Autorità di Informazione
Finanziaria” (AIF).

Customers of the IOR

Customers served by the Institute include:
a) Institutional counterparties (Sovereign Institutions of the holy See and
Vatican City State and related entities, nunciatures and apostolic
delegations, embassies and diplomats accredited to the holy See);
b) Non-institutional counterparties (Institutes of Consecrated Life and
Societies of Apostolic Life, Dioceses and other Vatican legal canonical
or civil entities as legal persons; clerics and members of Institutes of
Consecrated Life and Societies of Apostolic Life, employees and retirees
of the Vatican as natural persons).

Most of the IOR’s clients are active in missions or perform charitable

works at institutions such as schools, hospitals or refugee camps.

the Catholic Church, through its institutions involved in missionary

activities and charitable works, is present throughout the world, even in
countries with very basic infrastructure and underdeveloped banking and
payment systems.

In such cases, the IOR’s services are particularly valuable. For customers
located in these areas, the IOR is a bedrock, affirming itself as a trusted
institution able to provide on-site services otherwise lacking or absent. this is
even more evident in those geographic areas with high political financial
instability.

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REPORT 2017
COMMISSION OF CARDINALS Nature of the Institute’s services
CURRENT MEMBERS ARE:
On behalf of its clients, the Institute carries out financial activities
authorized by the AIF, and offers the following services: acceptance of
deposits, asset management, certain custodial functions, international
payment transfers through correspondent banks, and holding salary and
pension accounts of employees of the holy See and the Vatican City State.

the Institute protects its clients’ assets by primarily investing in financial

instruments characterized as very low risk (e.g. government bonds, bonds
issued by institutions and international organizations, as well as deposits in
the interbank market).

Card. Santos Abril y Castelló Credit activity is residual and strictly subject to constraints of the internal
Archpriest emerito of the Papal policies as established by the Board of Superintendence.
Basilica of St. Mary Major,
President of the Commission of
Cardinals No funding activities are carried out on the interbank market and IOR
does not issue, underwrite or place debt securities.

Accounts opened at the IOR by authorized customers meet the

requirements of the legislation on preventing and combating money-
laundering and the financing of terrorism in force in the Vatican City State.

Customers are provided with services in IOR offices located in the Vatican
City State. the IOR has no other locations.

3. CORPORATE GOVERNANCE
Cardinal Josip Bozanic
Archbishop of Zagreb
the IOR’s governance structure is defined in its current Statutes. It
consists of five bodies: Commission of Cardinals, Prelate, Board of
Superintendence, Directorate and the Revisori.

the Commission of Cardinals oversees the Institute’s adherence to its

Statute. It appoints and removes members of the Board of Superintendence.
Furthermore:
– It deliberates, after considering the financial statements and taking into
account IOR’s own financing needs, the distribution of profits;
– It proposes to the high Authority changes to the Statutes;
– It deliberates the compensation due to members of the Board of
Cardinal Thomas Christopher Superintendence;
Collins – It approves the appointment and removal of the Director General and of
Archbishop of Toronto the Vice-Director made by the Board of Superintendence;
– Resolution of any issues concerning the members of the Board of
Superintendence and the Directorate.

Members of the Commission of Cardinals are appointed for a five year

term, and can be reappointed.
the current members are:
– Cardinal Santos Abril y Castelló, Archpriest emerito of the Papal Basilica
of St. Mary Major, President of the Commission of Cardinals
– Cardinal Josip Bozanic, Archbishop of Zagreb
– Cardinal thomas Christopher Collins, Archbishop of toronto
Cardinal Pietro Parolin
– Cardinal Pietro Parolin, Secretary of State
Secretary of State – Cardinal Christoph Schönborn, Archbishop of Wien

18 | ANNUAL
REPORT 2017
 – Cardinal Jean-Louis tauran, President of the Pontifical Council for
Interreligious Dialogue.

the Prelate is appointed by the Commission of Cardinals. the Prelate:

– Oversees the activities of the Institute and may have access to its acts
and documents;
– Participates, as Secretary, in meetings of the Commission of Cardinals,
drafting the minutes of the meeting;
– Attends the meetings of the Board of Superintendence;
– Submits his comments to the Commission of Cardinals, notifying the
Board of Superintendence. Cardinal Christoph Schönborn
Archbishop of Wien
Msgr. Battista Mario Salvatore Ricca was appointed as the Prelate of the
Institute in June 2013.

the Board of Superintendence is responsible for the administration and

management of the Institute, as well as the oversight and supervision of its
financial, economic and operational activities. In particular, the Board has the
task of:
– Formulating general policy guidelines and basic strategies for the
activities of the Institute in line with its mission;
– Defining the criteria for the implementation of annual programs and
objectives of the Directorate, and approving its proposals;
– Verifying the economic-financial activities of the Institute; Cardinal Jean-Louis Tauran
– Monitoring compliance with established programs and objectives, with President of the Pontifical
Council for Interreligious
regard to investments and other activities; Dialogue
– Defining the most appropriate financial structure for the Institute,
proposing the ways to improve it, and in general, the best means to
increase its assets and activities in the context of correct adherence to
economic-financial rules and in full compliance with the overall mission
of the Institute;
– Proposing to the Commission of Cardinals changes to the Statutes as
PRELATE
long as they are unanimously approved by the Board of
Superintendence;
– Arranging for the issuance of the Institute’s Regulations, which are
required to provide a detailed description of the powers and
competencies of the Board and of the Directorate;
– Delegating signing power in the name of the Institute to the Director
General and, at their request, the Vice-Director, Managers and Officers,
in the manner prescribed in the Regulations;
– Approving the Financial Statements prepared by the Directorate.

the members of the Board of Superintendence are nominated by the

Commission of Cardinals and serve for a five year term, and can be Msgr. Battista Mario Salvatore
reappointed. Ricca

In 2017 Board of Superintendence comprised:

– Jean-Baptiste Douville de Franssu, President
– Mary Ann Glendon (Until February 2018)
– Michael hintze
– Mauricio Larraín
– Scott C. Malpass
– Javier Marín Romano
– Georg Freiherr von Boeselager

19 | ANNUAL
REPORT 2017
IN 2017 BOARD OF Until February 2018, the Board was comprised also of Prof. Mary Ann
SUPERINTENDENCE COMPRISED:
Glendon, who resigned. the Board wishes to express its gratitude to Mary
Ann Glendon for all the help and counsel she provided to the IOR during her
tenure.

the Directorate is responsible for all operational activities of the Institute

and is accountable to the Board of Superintendence.

the Directorate is appointed by the Board of Superintendence and

approved by the Commission of Cardinals and in 2017 consisted of:
– Gian Franco Mammì, Director General
Jean-Baptiste Douville
– Giulio Mattietti “Aggiunto al Direttore” with delegated functions (Until
de Franssu, President November 2017)

the Revisori must:

– Verify at least quarterly, the administrative and accounting review of the
Institute’s books and records;
– May conduct internal audits or other inspections, if requested by the
Board of Superintendence;
– Review the financial statements including the report of the Directorate
and supporting documents, provide written comments to the Board of
Superintendence and present their observations to the attention of the
Mary Ann Glendon Directorate and the Prelate.
(Until February 2018)
the Revisori are three, appointed by the Board of Superintendence for a
maximum period of three years. they can be reappointed.

In 2017 members were:

– Mario M. Busso, President of the Revisori
– Giovanni Barbara (until March 2018)
– Luca Del Pico

Michael Hintze

Mauricio Larraín

Scott C. Malpass

20 | ANNUAL
REPORT 2017
4. IOR ORGANIZATION CHART

COMMISSIONE CARDINALIZIA

PRELATO

SEGRETERIA CONSIGLIO DI SOVRINTENDENZA

DI STAFF

RISK MANAGEMENT LEGALE,

ORGANIZZAZIONE INTERNAL AUDIT
E COMPLIANCE
E RISORSE UMANE

DIREZIONE
Javier Marín Romano

RISK MANAGEMENT SEGRETERIA

AMMINISTRATIVA

COMPLIANCE ED
ANTIRICICLAGGIO

DIPARTIMENTO DIPARTIMENTO DIPARTIMENTO DIPARTIMENTO DIPARTIMENTO DIPARTIMENTO

BILANCIO IT E SICUREZZA OPERATIONS FINANZA GESTIONI RAPPORTI CON
PATRIMONIALI LA CLIENTELA

DIPENDENZA FUNZIONALE DIPENDENZA GERARCHICA DIPENDENZA AMMINISTRATIVA

5. CONTROL FUNCTIONS
Georg Freiherr von Boeselager
Since 2015 a focus was made on the development of appropriate control
functions, reinforcing their independence and ensuring that activities and
controls were properly carried out. today, they are comprised of:
– Internal Audit
– Risk management and Compliance
In accordance with law no. XVIII/2013 (see art. 27 et seq.) and best
international practices, the Internal Audit function reports to the Board with
a dotted line to the Directorate.
In terms of second-level controls, Risk management and Compliance THE DIRECTORATE IN 2017
department is directly responsible, among other things, for the AML/CFt CONSISTED OF:
(Anti Money Laundering/Combating the Financing of terrorism) activities.

6. REGULATORY FRAMEWORK AND TAX REQUIREMENTS

Regulatory framework
the Institute is subject to the laws and regulations of the holy See and
Vatican City State.
the Vatican legal framework recognizes the Canon Law as the primary
source of legislation and the primary criterion for its interpretation.
Gian Franco Mammì
Furthermore, there are six organic laws and other ordinary laws specific to Director General
the Vatican City State. For matters not covered by Vatican laws, laws and
other regulations issued by the Italian Republic are observed as
supplementary, subject to prior approval by the competent Vatican authority.
they are adopted on the condition that they do not conflict with the doctrine
of divine law, the general principles of Canon Law or the provisions of the
Lateran Pact and subsequent Agreements, and provided that they are
applicable to the state of affairs existing in Vatican City State (See law No
LXXI on the source of law, promulgated by Pope Benedict XVI on 1 October
2008).
According to article 1.4 of Law no. LXXI on the sources of law, the legal
framework must also conform to the general norms of international law, and Giulio Mattietti
“Aggiunto al Direttore” with
to those arising from treaties and other agreements to which the holy See is delegated functions
part of. (Until November 2017)

21 | ANNUAL
REPORT 2017
 the Institute is subject to Law no. XVIII of 8 October 2013 that covers
norms of transparency, supervision, and financial intelligence and, as an
entity that carries out financial activities on a professional basis in Vatican
City State, it is also subject to Regulation No. 1 “Prudential Supervision of
entities carrying out financial activities on a professional basis” issued by AIF
and enacted on 13 January 2015.
the Regulation No. 1, establishing a clear system of authorization,
stipulates the criteria for the organization and management of entities and
mechanisms of internal control.
On 15 December 2016, the AIF promulgated the “Circular relating to the
preparation of the annual financial statements and the consolidated financial
statements of entities carrying out financial activities on a professional basis”.
these financial statements have been prepared in accordance with the
aforementioned Circular.

Tax requirements
On 15 October 2016 the “Agreement between the Government of the
Italian Republic and the holy See in tax matters” became effective. In force of
the Agreement, the clients resident in Italy for tax purposes fulfill their tax
debts, arising from the financial assets held with entities carrying out
financial activities on a professional basis in Vatican City State, through a
Fiscal Representative chosen by the Institute. the IOR provides the
calculations and withholds taxes to customers which are paid to the Italian
Government via an Italian tax Representative.
effective 2015, the IOR is subject also to the Foreign Account tax
Compliance Act (FAtCA), a United States federal law that requires U.S.
persons, including individuals who live outside the United States, to report
their financial accounts held outside of the United States to the U.S. Internal
Revenue Service (IRS).
FAtCA also requires foreign financial institutions to report to the IRS the
accounts of their U.S. clients. In this context, the holy See has reached an
Intergovernmental agreement (IGA) with the United States signed in June
2015. the IOR has been assigned an identification code (GIIN) by the IRS.
the IOR fully complies with the terms of the IGA.

7. PROPOSAL OF DISTRIBUTION OF THE NET PROFIT FOR THE

YEAR
For the net profit for the year ended 31 December 2017 amounting to
eUR 31.9m, the Board of Superintendence intends to propose to the
Commission of Cardinals, that the profits be distributed in full without
making any provision to the Reserves, also considering the adequacy of
capital (for further details see Part 6 - paragraph 6.2.2 “Capital adequacy”).

22 | ANNUAL
REPORT 2017
ChAPteR 2
Operational information

1. 2017 BUSINESS REVIEW

Macroeconomic environment
2017 was characterized by a synchronized recovery of all the major
economies. According to estimates by the International Monetary Fund, at
the end of 2017, global GDP will be around 3.6%. For the United States it was
the eighth consecutive year of expansion, supported by low interest rates, a Gian Franco Mammì
labor market that has almost reached full employment and a high degree of Director General
confidence of companies and households. the positive economic situation
took effect especially in the second half of 2017 and other positive results are
expected from investments in infrastructures and the tax reform requested by
President Donald trump. Growth in the eurozone also improved slightly,
progressively extending more evenly to peripheral areas. In this area too, in
support of this growth, other factors such as the upturn in international trade,
with the growth in consumption, have had a weight, in addition to low
interest rates, with the effect of favoring exports and consolidating the
investment cycle. Among the emerging countries, Russia and Brazil returned
to growth, India is recovering, and higher than expected results were
recorded in China.
this general path of development has not slowed down even with
potentially destabilizing political events such as tensions between the
international community and North Korea, the uncertain outcome of the
German parliamentary elections with the consequent difficult governability,
as well as the revived separatist tensions in Catalonia. the Asian political
situation was instead rather stable, thanks to the victory in Japan of Prime
Minister Abe in the October elections, with a consequent extension of the
government mandate until 2021 and in China, thanks to the re-confirmation
of Xi Jinping at the helm of the Communist Party and of the country’s
government for a further five years.
2017 marked the beginning of the trend reversal in monetary policy. the
set of extraordinary stimuli that allowed the main economies to come out of
the crisis after 2008, begins to be gradually reduced, always trying not to
compromise growth. the Federal Reserve (FeD) has started moderately the
path of rising interest rates with three increases during the year, the last in
December that brought rates to 1.5%. Starting in October, the FeD has also
started a program to reduce the reinvestment of maturing debt securities with
the aim of gradually reducing its balance sheet. 2017 was also the year of the
appointment of Jerome Powell, chosen by trump to take the helm of the
American Central Bank in place of Janet Yellen.
In europe, the eCB continued to maintain an expansionary monetary
policy during the year, given that inflation remained limited and far from the
medium-term targets, but nevertheless triggered the start of the program to
reduce purchases of securities that will continue gradually also in 2018, in
light of an improvement in the macroeconomic scenario. In the United
Kingdom, against an acceleration of inflation, the BOe also began a gradual
increase in rates. On the contrary, the Bank of Japan continued to pursue a
very accommodative economic policy due to inflation very close to zero.
In 2017, volatility was particularly low on the financial markets, which

23 | ANNUAL
REPORT 2017
FINANCIALS 2017 reacted to economic and political uncertainties in a lower tone than what
would have been expected by looking at the past experience.

51.3 m Eur
Intermediation margin
the asset class that performed best in 2017 is undoubtedly equities which
reached historical highs in many financial centers. the price lists continued
to mark records and the positive results of companies have boosted this trend.
In the United States, during 2017, the acceleration of share prices occurred
mainly in the second half of the year and was also supported by the approval
of the tax cuts plan by the trump administration with benefits mainly for

19.1
companies that, thanks to lower taxation, can benefit from positive effects on
their financial statements. the performance of the equity markets was also
generally positive in europe. the increase in prices was supported by good
m Eur
business fundamentals and a high rate of job creation.
Operating costs
however, much lower results are recorded for government bonds. In the
US, the rate of return on 10-year Government Bonds was characterized by an
initial phase of reduction due to disregarded expectations on tax reforms and

31.9
Profit for the year
m Eur
below-expected inflation data. In the second half of the year, with the
announcement from the FeD of a reduction in securities held in the balance
sheet as well as continued strong growth, yields rose again, closing the year at
2.42%. On the other hand, yields on the short-term bonds continued to
gradually rise, driven directly by monetary policy actions.
the market of european government bonds recorded returns that were
substantially stable or slightly up (both on the short and long part of the
curve). During the year, the yield on 10-year German Government Bonds
rose from 0.21% to 0.43%, and in the same period the yield of Italian
Government Bonds with the same maturity rose from 1.81% to 2.02%. the
year was nevertheless characterized by low volatility, mainly linked to the
monetary policy, with the announcement of the reduction in purchases of
securities that produced a strong upward trend in yields in the first part of
July, then partially subsided.
On the foreign exchange market, 2017 closed with the euro significantly
increasing in value against the US Dollar. the eUR-USD exchange rate rose
from 1.05 to 1.20. the euro also increased against the Yen, the Swiss Franc
and to a lesser extent the Pound. the emerging currencies ended the year
with a positive sign, thanks mainly to the weakness that characterized the US
Dollar and the improvement of the economic outlook.
2017 was a volatile year for the price of gold, which had to face events
such as the trump settlement, political tensions with North Korea, and the
gradual changes in central bank strategies. Coinciding with the recovery of
the Dollar in the second half of the year, we witnessed the weakening of gold
from the September highs over $ 1,350 to the lows around $ 1,240 at the end
of December.
Prospects have improved significantly for oil. the price trend seems to be
directed strongly to the upside. the global consumption of crude was solid
thanks to the contribution of China and the supply is still destined to contract
following the agreements reached by the producing countries. the
geopolitical tensions have not strongly influenced the trend.

Composition of the Client base

At the end of 2017, the IOR clients amounted to 14,945 (2016: 14,960)
and, measured by assets entrusted, comprised religious orders (52%), Roman
Curia departments, holy See Offices and nunciatures (11%), episcopal
conferences, dioceses and parishes (9%) entities of Canon Law (8%),
cardinals, bishops and clergy (8%), vatican employees and pensioners (8%),

24 | ANNUAL
REPORT 2017
others, included Canon Law foundations (4%).
the IOR’s customers have a common characteristic, which is that they are
part of and serve the Catholic Church (see client definition in Chapter 1).
to its clients IOR offers the services of acceptance of deposits, asset
management, securities custody.
As of 31 December 2017, the net value of assets held in managed
portfolios was eUR 3.0bn (2016: eUR 3.1bn), the net value of assets held in
non-managed portfolios was eUR 474.6m (2016: eUR 554.8m) and the value
of customer deposits was eUR 1.8bn (2016: eUR 2.0bn), resulting in eUR
5.3bn in total client assets (2016: eUR 5.7bn).

(in thousand Euro)

2017 2016
In Balance Off Balance In Balance Off Balance
Sheet Sheet Total Sheet Sheet Total
Customer deposits
(including Legates) 1,839,536 1,839,536 2,028,973 2,028,973
Assets under Custody 474,594 474,594 554,763 554,763
Assets under Management 332,696* 2,624,957 2,957,652 410,563 * 2,700,366 3,110,929
Total 2,172,232 3,099,550 5,271,782 2,439,536 3,255,129 5,694,665
*Deposits of Assets under Management are net of commissions collected in the first days of the subsequent year.

Assets under Custody mainly include client-owned securities held at the

IOR for custodial purposes, in accordance with the mission of the Institute.
For the purpose of the table above, securities, gold and precious metals under
custody are stated at market values.
Assets under Management consist mainly of client-owned securities held
at the IOR for management purposes, on the basis of portfolio management
mandates, compliant with the mission of the Institute. For the purpose of the
table above, securities under management are stated at market values.

Income Statement
In 2017, IOR’s Net profit was eUR 31.9m (2016: eUR 36.0 m). the
overview of the items that contributed to determine this result shows an
improvement of the ordinary activity result of the Institute.
In fact, 2017 accounts were characterized by an increase in trading
activities and a reduction in administrative expenses which are partially offset
by a reduction in interest income due to the low rates offered by the market.
the intermediation margin grew by 16.3% compared to 2016, reaching eUR
51.3m (2016: eUR 44.1m).
Furthermore, in 2017 there is not the extraordinary item that
characterized the 2016 financial statements, the release of 13 million of the
provision related to tax exposure towards other countries.
A brief overview of the main components of the Income Statement is
presented below.
the most significant source of revenues is the profit derived from
treasury activities on proprietary portfolios. the most important component
was derived from bond yeld which contributed for eUR 32.0m (interest of
eUR 30.5m and trading income eUR 1.5m).
Interest Margin amounting to eUR 29.0m decreased by 21% (2016: eUR

25 | ANNUAL
REPORT 2017
 36.7m). this was affected by the decline in the yield on investments in
securities and bank deposits, although the average amounts of capital
invested remained unchanged at eUR 2.9bn (2016: eUR 2.9bn). the average
rate on customer deposits remained unchanged at 0.14% (2016: 0.14%), while
the average yield on investments in securities and bank deposits declined to
1.09% (2016: 1.35%). Accordingly, the spread between the average rate
received on assets and the average rate paid on liabilities decreased from
1.22% to 0.95%. this was mainly due to the expiration of securities in 2017
purchased in previous years with a nominal interest rate higher than those
currently available on market.
Net Income for trading activities recognised a net gain of eUR 7.5m
(2016: eUR -9.0m affected by the decrease in UCI unit investment to eUR -
12.8m). In 2017 UCI unit investment lost eUR -700,000.
the improvement in the results was also due to the positive performance
of the equities held in the proprietary portfolio compared to 2016.
Stable was the contribution to the result from debt securities. they
recognised a positive total net profit, including gains and losses from trading
and gains and losses from valuation, amounting to eUR 1.5m in 2017 (2016:
eUR 1.6m). In the actual market scenario such stability was not assured and
it is a positive consequence of the positive reaction of proprietary portfolio to
market trends during the year.
Finally, Forex activity accounted for income of eUR 3.2m (2016: eUR
2.0m).
Dividends decreased by 47.6% to eUR 1.1m (2016: eUR 2.1m).
Net Fee and Commission income decreased 3.9% to eUR 12.3m in 2017
(2016: eUR 12.8m). Fee and Commission Income increased by 0.6%, to eUR
15.9m in 2017 from eUR 15.8m in 2016. In fact, the reason of the decrease in
the margin is the increase of Commission expense from eUR 3.0m in 2016 to
eUR 3.6m in 2017 (+20%).
the most important element of the Fee and Commission Income was
commissions from Asset Management services, which reached eUR 12.5m,
the same result as 2016. the slight growth in Commission Income is due to
commissions on trading in financial instruments, increased in 2017 to eUR
711,000 (2016: eUR 654,000) due to the increase in customer transactions.
the increase in Fee and Commission expense was mainly due to the fees
paid for bank deposits which increased to eUR 1.4m in 2017 (2016: eUR
571,000), recording +145% as increase.
Administrative Expenses were eUR 18.7m in 2017 (2016: eUR 19.1m).
this includes Staff expenses of eUR 11.4m in 2017, increased from the prior
year amount (2016: eUR 10.2m, or +11.8%).
Administrative expenses also include expenses for professional services,
which decreased in 2017 reaching eUR 2.7m (2016: eUR 4.0m). this was due
to lower extraordinary costs incurred during the year from the completion of
certain projects.
Other administrative expenses decreased by 6.1% to eUR 4.6m in 2017
(2016: eUR 4.9m) due to the review of outstanding contracts.
Other Operating Income (Expense) recognised income of eUR 164,000
(2016: income of eUR 7,000).

Balance Sheet
As of 31 December 2017, total assets on the IOR’s balance sheet were eUR
3.0bn (2016: eUR 3.3bn), with equity of eUR 659.1m (2016: eUR 672.6m).
On the Liabilities side, Due to customers is the most significant line item,

26 | ANNUAL
REPORT 2017
representing 71.1% of total liabilities. the balance decreased from the prior
year, amounting to eUR 2.1bn (-12.5%). Customer deposits decreased by
eUR 189.4m and asset management liquidity decreased by eUR 78.1m. this
was due to Forex effect on US Dollars deposits and to tax payments on
financial instruments made through the Institute.
As previously reported in Chapter 1, credit activity is residual and strictly
subject to constraints of the internal policies as established by the Board of
Superintendence.
the Asset side of the Balance Sheet mainly reflects bank deposits and
securities, and less than 3% of total assets is held in UCI units and equities.
Bank Deposits totaled eUR 473.4m at the end of 2017 (2016: eUR
643.2m). these mainly consisted of eUR 362.1m in deposits on demand
(2016: eUR 457.6m), and eUR 54.2m in term deposits in the interbank
lending market (2016: eUR 108.5m). the remaining part, eUR 57.1m (2016:
eUR 77.1), concerned term deposits with APSA.
the value of IOR Securities (debt securities, equity securities and
investment funds) was eUR 2.4bn in 2017 (2016: eUR 2.5bn).
Bonds, at eUR 2.3bn, were the most significant investments, representing
97.2% of the securities held as of 31 December 2017, while equities accounted
for 1.4%, and investment funds for 1.4%. As previously explained, the volume
of the securities in the portfolio slightly decreased compared to 2016, while
the portfolio composition remained unchanged. the decrease was mainly
recorded in the “financial assets held to maturity” portfolio due to the
expiration of some securities and in the absence of purchases made in 2017 in
the same portfolio.

Profitability ratios
the table below highlights the main economical, financial and
productivity ratios:

Profitability ratios (%) 2017 2016

ROE (Return on Equity) 5.1% 5.7%
ROA (Return on Assets) 1.1% 1.1%
Operating costs / Intermediation margin 37.3% 15.5%
Interest margin / Intermediation margin 56.4% 83.1%
Net fee and commission income / Intermediation margin 24.0% 29.0%
Interest margin / Total Assets 1.0% 1.1%
Intermediation margin / Total Assets 1.7% 1.3%
Core Equity TIER 1 68.3% 64.5%

While ROA was in line with the previous year, ROe recorded a slight
decrease compared with the previous year due to the decrease in Net profit.
the profitability, explained from the ratio “interest margin / total assets”,
amounted in 2017 to 1.0% against 1.1% recorded in 2016, due to the
reduction of interest margin; instead, the other profitability index, calculated
as the ratio between the intermediation margin and total assets, recorded a
relevant increase thanks to lower write-downs of UCI units in portfolio and
the higher contribution of the equity shares (1.7% in 2017 compared to 1.3%
in 2016).
these two ratios showed that the Institute ability to create income

27 | ANNUAL
REPORT 2017
 increased. the increase in the operating costs / intermediation margin ratio is
not a real increase because the index in 2016 was affected by the reestimation
of tax provision for exposure in foreing countries (eUR 13m).

Other aspects
the IOR does not issue securities or underwrite or place securities; it
protects its client assets by primarily investing in financial instruments
characterized as very low risk (e.g. government bonds, bonds issued by
institutions and international organizations, as well as deposits in the
interbank market).
the IOR has no branches and provides services only at the IOR office
located in the Vatican City State.
the Institute is the single shareholder of the real estate company Società
per Gestione di Immobili Roma (S.G.I.R. S.r.l.), which is governed by Italian
law and takes the legal form of a limited liability company, with its registered
office in Rome, which it was specifically set up to more easily and
transparently manage the owned real estate located in Italy.

2. PREVALENCE OF CATHOLIC PRINCIPLES AND VALUES

IN THE MANAGEMENT OF PROPRIETARY
AND CUSTOMERS’ FINANCIAL ASSETS
Undertaking the commitment to remain faithful and give concreteness to
the words pronounced by the holy Father Francis during his speech to the
members of the Board of Superintendence in November 2015: “the main
goal of the IOR cannot be to have the maximum possible gain, but should be
goals that are compatible with the norms of morality, consistent efficiency
and practices respecting the specificity of its nature and exemplarity in its
mode of operation”, in 2017, the IOR continued to responsibly manage its
financial resources, and those entrusted to it, in accordance with the Catholic
principles and values that inspire it.
Catholic principles and values are non-negotiable and cannot be based on
the logic of expected return.
therefore, also in 2017, while seeking to pursue a return on its
investments that is, to the extent possible, in line with that of the referenced
market, the Institute continued to favour the consistency of these investments
with the Catholic principles and values by which it is guided in its work.

Ethical investments
the glorification of human life, creation and human dignity are some of
the inalienable values that guided the Institute in the selection of the
investments made in 2017.
Indeed, the Institute expressed its commitment to contribute to the “care
of the common home”, invoked by Pope Francis in the encyclical Letter
Laudato si’, and selected its investments also on the basis of two fundamental
themes recalled by the holy Father:
a) corporate social responsibility; and
b) the role of companies in creating a sustainable future.

In 2017, the Institute continued to rule out investments in companies that

violate or do not fully respect the globally recognized principles of human
rights, labour standards, the fight against corruption and the fight against

28 | ANNUAL
REPORT 2017
environmental crime. the Institute also expressed its willingness to give up
investments already under way if compliance with these principles by the
selected companies ceased to exist due to force majeure, subsequently
occurred in the geo-political context of reference.
the Institute continued also to invest in projects to promoting the
development of poorer countries with choices consistent with the realization
of a sustainable future for future generations.

3. CHARITABLE AND SOCIAL ACTIVITIES

In addition to the transfer of the annual profit of the 2016 financial
statements, which has been placed in full availability of the holy Father, in
2017, the Institute for Works of Religion has contributed to the realization of
numerous charitable and social activities through:
a. donations intended to respond to requests for aid or contributions
received by the Institute. In the year under review, the most common
ones were the direct disbursement of contributions to student priests for
the completion of university studies, financial aid for destitute persons
or families (reported by Parishes or by individual priests), long-distance
adoptions, specific help for missionary and charity work, aid to families
that have lost everything as a result of natural disasters, etc., and
b. the granting of properties owned by the Institute - located within the
Italian territory - for rent with subsidized rent or on loan for free use to
support institutions with a social purpose.

the decisions concerning the recipients and the amount of donations

referred to in point a) above are always collegial and have been adopted by
the Charity Committee - chaired by the Prelate and composed of managers
and employees of the Institute - or directly by the Commission of Cardinals.
On the other hand, with regard to the granting of properties referred to in
point b), the Institute relies on S.G.I.R. S.r.l., a limited liability company under
Italian law, of which the Institute is sole shareholder, specifically established,
as already disclosed, to manage its own properties in a transparent and more
effective manner, which have been received in the course of its history in the
form of donations or legacies by institutions and individuals, located in the
Italian territory.
Alongside the typical activities of a real estate company, the forms of
management used by S.G.I.R. S.r.l. also include the granting of properties:
1. For rent with subsidized leases, to help associations or other Catholic
institutions that, due to their fragile budgets, could not afford to rent to
market;
2. On loan for free use, in favour of structures that offer hospitality and
support to people in conditions of particular fragility or risk, such as
young single mothers or victims of violence, refugees, the sick and the
needy.

29 | ANNUAL
REPORT 2017
 4. FORECAST FOR 2018
In the first months of 2018, the Institute’s activity was in line with the
Strategic Plan approved by the Board of Superintendence in January 2017.
the main objective is to improve the quality of services offered to clients and
the inflows of customer deposits. By the end of 2018, the results of this work
should be fully apparent.

the IOR will continue to operate in accordance with its Mission that is to
serve the holy Father with prudence, in his mission as the Universal Pastor,
through the provision of dedicated financial advisory, in complete
compliance with Vatican and international laws in force.

30 | ANNUAL
REPORT 2017
F inancial
S tatement
BALANCE SHEET

(in Euro)
ASSETS 2017 2016
10 Cash and cash equivalents 71,233,924 50,850,340
20 Financial assets held for trading 2,116,770,781 1,918,104,346
40 Financial assets available for sale 4,571,559 6,664,406
50 Financial assets held to maturity 246,167,943 558,955,610
60 Due from banks 473,386,281 643,229,012
70 Due from customers 25,422,935 29,152,785
100 Investment in subsidiaries 15,834,950 15,834,950
110 Tangible assets 3,246,863 3,095,565
120 Intangible assets 870,593 1,043,850
150 Other assets 41,502,287 41,958,806
Total Assets 2,999,008,116 3,268,889,670

(in Euro)
LIABILITIES AND EQUITY 2017 2016
10 Due to banks 4,096,356 -
20 Due to customers 2,131,421,457 2,398,924,457
100 Legates 47,035,020 47,074,644
110 Other liabilities 15,611,737 18,709,825
120 Staff severance fund 7,177,320 6,992,585
130 Provision for risks and charges 134,547,342 124,588,179
(a) Provisions for pensions and similar obligations 133,335,156 121,088,179
(b) Other provisions 1,212,186 3,500,000
140 Valuation reserves (54,948,816) (45,534,851)
160 Reserves 382,134,172 382,134,172
(a) Unavailable reserves 100,000,000 100,000,000
(b) Available reserves 282,134,172 282,134,172
170 Capital 300,000,000 300,000,000
180 Net profit for the year 31,933,528 36,000,659
Total Liabilities and Equity 2,999,008,116 3,268,889,670

33 | ANNUAL
REPORT 2017
INCOME STATEMENT

(in Euro)
INCOME STATEMENT 2017 2016
10 Interest and similar income 32,162,670 39,831,730
20 Interest and similar expense (3,200,984) (3,168,836)
30 Interest margin 28,961,686 36,662,894
40 Fee and commission income 15,927,102 15,836,850
50 Fee and commission expense (3,622,674) (3,029,222)
60 Net fee and commission income 12,304,428 12,807,628
70 Dividends and similar income 1,145,494 2,107,013
80 Net income for trading activities 7,526,946 (8,982,924)
100 Profit (loss) on disposal or repurchase of: 1,386,221 1,499,109
(b) Financial assets available for sale 1,386,221 1,499,109
120 Intermediation margin 51,324,775 44,093,720
130 Net losses/reversal on impairment: (392,122) (1,331,864)
(a) Receivables (392,122) (1,045,306)
(b) Financial assets available for sale (148,314)
(d) Other financial operations (138,244)
140 Net income from financial operations 50,932,653 42,761,856
150 Administrative expenses: (18,727,173) (19,085,562)
(a) Staff expenses (11,441,178) (10,244,959)
(b) Professional services expenses (2,655,023) (3,961,573)
(c) Other administrative expenses (4,630,972) (4,879,030)
160 Net provisions to risks and charges 13,000,000
170 Net value adjustments to/recoveries on tangible assets (68,818) (82,789)
180 Net value adjustments to/recoveries on intangible assets (488,981) (682,777)
190 Other operating income (expense) 163,724 7,287
200 Operating costs (19,121,248) (6,843,841)
220 Net result of fair value valuation of tangible and intangible assets 122,123 82,644
250 Profit (loss) from current operations before taxes 31,933,528 36,000,659
270 Profit (loss) from current operations after taxes 31,933,528 36,000,659
290 Profit (loss) for the year 31,933,528 36,000,659

34 | ANNUAL
REPORT 2017
STATEMENT OF COMPREHENSIVE INCOME

(in Euro)
2017 2016
10. Profit (loss) for the year 31,933,528 36,000,659
Items that will not be reclassified to Income Statement
40. Defined benefit plans (11,076,131) (13,275,014)
Items that are or may be reclassified to Income Statement
100. Financial assets available for sale 1,662,166 (4,278,583)
130. Total other income items (9,413,965) (17,553,597)
Comprehensive income (item 10 + item 130) 22,519,563 18,447,062

STATEMENT OF CHANGES IN EQUITY

(in Euro)
2017 Allocation of previous Changes during the year
year profit
Total net equity Changes Total net equity Reserves Dividends Changes in Extra Comprehensive Net Equity
at 31,12,2016 in opening at 01,01,2017 and other reserves dividend income at
balances allocations distribution 2017 31,12,2017
Capital 300,000,000 300,000,000 300,000,000
Reserves
(a) unavailable 100,000,000 100,000,000 100,000,000
(b) available 282,134,172 282,134,172 282,134,172
(c) other
Valuation
reserves (45,534,851) (45,534,851) (9,413,965) (54,948,816)
Net profit (loss)
for the year 36,000,659 36,000,659 (36,000,659) 31,933,528 31,933,528
Net Equity 672,599,980 672,599,980 (36,000,659) 22,519,563 659,118,884

2016 Allocation of previous Changes during the year

year profit
Total net equity Changes Total net equity Reserves Dividends Changes in Extra Comprehensive Net Equity
at 31,12,2015 in opening at 01,01,2016 and other reserves dividend income at
balances allocations distribution 2016 31,12,2016
Capital 300,000,000 300,000,000 300,000,000
Reserves
(a) unavailable 100,000,000 100,000,000 100,000,000
(b) available 282,134,172 282,134,172 282,134,172
(c) other
Valuation
reserves (27,981,254) (27,981,254) (17,553,597) (45,534,851)
Net profit (loss)
for the year 16,126,935 16,126,935 (16,126,935) 36,000,659 36,000,659
Net Equity 670,279,853 670,279,853 (16,126,935) 18,447,062 672,599,980

35 | ANNUAL
REPORT 2017
CASH FLOW STATEMENT

(in Euro)
DIRECT METHOD 2017 2016
A. Operating activities
1. Management 39,121,105 42,833,712
Interest income 38,153,573 48,639,880
Interest expense (3,153,835) (3,168,341)
Dividends and similar income 1,145,494 2,107,013
Net commissions 12,304,428 12,807,628
Realised profit (loss) from trading activities 7,879,311 2,024,715
Staff expenses (10,085,597) (10,566,173)
Other administrative expenses (7,285,995) (8,840,603)
Other income (expense) (163,726) (170,407)
2. Cash generated by/(used in) financial assets (21,108,946) (206,618,819)
Financial assets held for trading (199,939,285) (266,429,528)
Financial assets available for sale 5,141,233 5,575,219
Due from banks: on demand 95,500,207 (192,197,353)
Due from banks: other receivables 74,301,718 192,249,112
Due from customers 3,430,661 54,408,236
Other assets 456,519 (224,505)
3. Cash generated by/(used in) financial liabilities (268,879,319) 62,216,802
Due to banks: on demand 4,096,356 (10,591,428)
Due to banks: other payables
Due from customers (267,550,149) 75,515,176
Outstanding securities
Legates (39,624) (1,191,659)
Financial liabilities held for trading
Financial liabilities carried at fair value
Other liabilities (5,385,902) (1,515,287)
Cash generated by/(used in) operating activities (250,867,160) (101,568,305)
B. Investing activities
1. Cash generated by: 308,161,037 53,250,000
Disposals of investments in subsidiaries
Dividends received on investments in subsidiaries
Disposal/reimbursement of financial assets held to maturity 308,161,037 53,250,000
Disposals of tangible assets
Disposals of intangible assets
2. Cash used in: (413,717) (965,804)
Purchases of investments in subsidiaries
Purchases of financial assets held to maturity
Purchases of tangible assets (97,993) (113,986)
Purchases of intangible assets (315,724) (851,818)
Cash generated by/(used in) investing activities 307,747,320 52,284,196
C. Financing activities
Issues/purchases of capital instrument
Dividend distribution and other purposes (36,000,659) (16,126,935)
Cash generated by/(used in) financing activities (36,000,659) (16,126,935)
Cash generated/(used) during the year 20,879,501 (65,411,044)

36 | ANNUAL
REPORT 2017
Items 2017 2016
Cash and cash equivalents at beginning of the period 50,850,340 114,737,182
Cash generated/(used) during the year 20,879,501 (65,411,044)
Cash and cash equivalents: forex effect (495,916) 1,524,202
Cash and cash equivalents at end of the period 71,233,925 50,850,340

37 | ANNUAL
REPORT 2017
 financial statements, there were no material uncertainties
Explanatory Notes and therefore no significant doubt regarding the Institute’s
ability to continue as a going concern in the foreseeable
future.
The financial statements fairly present the financial posi-
PART 1. Accounting policies tion, financial performance and cash flows of the Institute.
The preparation of the financial statements requires the
Directorate to make certain estimates and assumptions
1.1 General information about the future where actual results may differ. Estimates
and assumptions affect the reported amounts of certain
1.1.1 Statement of compliance with accounting standards assets, liabilities, revenues and expenses in the financial
statements. In addition, changes in assumptions may have a
The 2017 financial statement have been prepared in significant impact on the financial statements in the year in
accordance with the Circular concerning the annual finan- which the assumptions change.
cial statements and the consolidated financial statements of The preparation of the financial statements also requires
entities carrying out financial activities on a professional the Directorate to exercise judgements in applying the IOR’s
basis, issued by Authority of Financial Information on 15 accounting policies to estimate the carrying value of assets
December 2016. and liabilities not readily obtainable from other sources.
As stated in the Circular, the financial statements must The Directorate believes that the underlying assump-
be prepared in accordance with the “International Account- tions are appropriate and that the IOR’s financial statements
ing Standards – IAS”, the “International Financial Reporting fairly present its financial positions and results. All estimates
Standards – IFRS” and related Interpretations (“Interpreta- are based on historical experience and/or expectations with
tions SIC / IFRIC”), as adopted by the Vatican in a special regard to future events that seem reasonable on the basis of
arrangement to the Monetary Convention between the information known at the time of the estimate. They are also
European Union and the State of the Vatican City on 17 reassessed on a regular basis and the effects of any variation
December 2009. are immediately reflected in the financial statements.
Those areas involving a higher degree of judgement or
1.1.2 Accounting policies complexity, or areas where assumptions and estimates are
significant to the financial statements, are disclosed in Sec-
The financial statements consist of the Balance Sheet, tion 1.1.4 “Critical accounting estimates and judgements”.
the Income Statement, the Statement of Comprehensive The financial statements do not reflect a provision for
Income, the Cash Flow Statement, the Statement of Changes taxes because there is no corporate income tax in the Vati-
in Equity and the Explanatory Notes. can City State.
Disclosures under IFRS 7 “Financial Instruments, dis- For the year ended 31 December 2017, the Institute,
closures” about the nature and extent of risks have been given the immaterial value of its subsidiary, did not prepare
included in Part V “Information on Risks and Hedging Poli- consolidated financial statements in accordance with the
cies”. provisions of the Conceptual Framework (QC6 – QC11) of
The accounting principles and valuation methods IAS/IFRS, since the additional information coming from the
applied in the preparation of these financial statements, consolidated financial statements would be of little rele-
detailed below, are consistent with those of the previous vance for the users of the financial statements.
financial year, except for new standards, new interpreta- The Institute provides the additional information
tions, or amendments of standards. required by IFRS 12 “Disclosure of interests in other enti-
The financial statements of the Institute are prepared in ties” in Part 5, Section 5.2.6 “Disclosure of unconsolidated
Euro, while the explanatory notes are expressed in thousand structured entities for accounting purposes”.
Euro. The financial statements of the Institute are prepared by
For the various items, the 2017 figures and correspon- the Directorate and approved by the Board of Superinten-
ding values for the previous year are provided. dence, which will be submitted to the Commission of Car-
Where necessary, the comparative figures have been dinals.
adjusted to conform to changes in presentations in the cur- The Commission of Cardinals acknowledges the finan-
rent year. cial statements and decides on the distribution of profits,
The financial statements are prepared in Italian. after taking into account the IOR’s own financing needs.
The financial statements of the IOR were prepared on a
going concern basis in accordance with IAS 1 “Presentation
of Financial Statements”. As of the date of the approval of the

38 | ANNUAL
REPORT 2017
1.1.3 Subsequent events so there are no significant information to be highlighted in
the financial statements.
According the provisions of IAS 10, all events that took This assessment is made on the basis of assumptions and
place subsequent to 31 December 2017 have been evaluated the process of estimation is characterized by elements of
in the preparation of the 2017 Financial Statements. uncertainty. By their nature, the estimates and assumptions
used may vary from one period to another and, therefore, it
1.1.4 Critical accounting estimates and judgements can not be excluded that in subsequent periods the amounts
of such liabilities may differ materially from those currently
Critical judgements in applying the Institute accounting estimated as a result of new information and charges in the
policies evaluations made.
In past years, the IOR has worked to review and confirm
In the process of applying the accounting policies its tax position and that of its clients in countries where
adopted by IOR, which are described in Section II, there investment relationships exist. This review has identified
may be circumstances that lead the Directorate to make probable contingencies related to prior years as a result of
judgements that have a significant impact on the amounts different interpretations regarding the legal nature of the
recognized in the financial statements. Institute and the related applicable tax treatments.
Such circumstances and related judgements may be part During 2017, the IOR has almost reached the final esti-
of the valuation process used for financial instruments. The mate of the outstanding liability and has made the expected
Directorate makes critical judgements when deciding the tax payments. Pending the formal and definitive conclusion
asset category for classification, determining whether a mar- of this issue, IOR has maintained on its books a residual
ket is active or not, whether the asset is liquid or illiquid, provision of EUR 1.2m, included in the Balance Sheet, item
market inputs and parameters to be used, when they must liability of 130 “Provision for risks and charges” line b
be reviewed, and assessing circumstances where internal “Other provisions”. As this represents an estimate based on
parameters are more reliable than market-based ones. critical assumptions, upon the conclusion of future events,
Retirement benefits and other post-employment liabili- actual results may differ from what is expected.
ties are estimated trough an actuarial valuation performed
by an independent expert. Such an evaluation is based on 1.1.5 Impact of New Accounting Pronouncements
critical judgements because estimates are made about the
likelihood of future events and the actual results could differ Accounting standards, amendments and interpretations
from those estimates. IFRS effective 1 January 2017

Estimates that contain elements of uncertainty The following accounting standards, amendments and
The process of applying the IOR’s accounting policies interpretations IFRS were adopted for the first time by the
may require the use of key assumptions affecting the future, IOR effective 1 January 2017:
and/or other sources of estimation uncertainty as of the bal- • Amendments to IAS 7 “Disclosure Initiative” (pub-
ance sheet date, with a significant risk of causing material lished on 29 January 2016). The document aims to pro-
adjustments to the carrying amount of assets and liabilities vide some clarification to improve disclosures about
in the next financial year. financial liabilities. In particular, the amendments
Key assumptions and judgments made in the 2017 required to provide disclosures that enable users of
Financial Statements relate to the assessment of illiquid debt financial statements to evaluate changes in liabilities
securities held for trading and external investment funds arising from financing activities. The adoption of the
included within the portfolio held for trading, as disclosed amendments had no impact on the disclosures or the
in the section 1.4 “Fair value information”. amounts recognized in the Institute’s financial state-
Illiquid securities are not quoted in active markets and ments.
their fair value is not readily available in the market. These • Amendments to IAS 12 “Recognition of Deferred
securities subject to estimation uncertainties (Level 3 of fair Tax Assets for Unrealised Losses” (published on 19
value hierarchy) amounted to EUR 22.3m as of 31 Decem- January 2016). The amendment aims to provide some
ber 2017 (2016: EUR 23.3m). These were exclusively com- clarifications on the recognition of deferred tax assets
prised of externally managed investment funds. on unrealized losses in the valuation of financial assets
With reference to the contingent liabilities related to of the “afs” category upon the occurrence of certain cir-
commitments linked to externally managed investment cumstances and on the estimate of taxable income for
funds, they are valued taking into account all available infor- future years. The adoption of the amendments had no
mation at the date of preparation of these financial state- impact on the disclosures or the amounts recognized
ments. The dispute in progress is currently at an early stage in the Institute’s financial statements.

39 | ANNUAL
REPORT 2017
Accounting standards, amendments and interpretations changes in the effectiveness test).
IFRS and IFRIC approved by the European Union, not The new standard is effective for financial state-
yet mandatorily applicable and not early adopted by the ments beginning on 1 January 2018 or later.
Institute at 31 December 2017 Below is a brief description of the main decisions,
choices and activities carried out by the Institute
• Standard IFRS 15 – Revenue from Contracts with regarding the provisions of the new standard. Regard-
Customers (published on 28 May 2014 and amended ing the business models identified by the Institute,
on 12th April 2016) will replace the following standards loans and securities Held to Maturity are classified in
and interpretations: IAS 18 – Revenue IAS 11 – Con- accordance with the Held To Collect business model,
struction Contracts, IFRIC 13 – Customer Loyalty Pro- while the other financial portfolios are classified in
grammes, IFRIC 15 – Agreements for the Construction accordance with the Held to Collect and Sell or Other
of Real Estate, IFRIC 18 – Transfers of Assets from Cus- (fair value through profit and loss) business models. On
tomersSIC 31 – Revenues-Barter Transactions Involving 1 January 2018, one of the securities held in the portfo-
Advertising Services. The standard establishes a new lio classified as Available for Sale was reclassified to the
revenue recognition model, which will apply to all con- portfolio Other (fair value through profit and loss).
tracts with customers except those that fall within the The main impacts expected from the adoption of
scope of other IAS / IFRS standards such as leasing, the the new standard are attributable to the application of
insurance contracts and financial instruments. This the new impairment model and, in particular, to the
core principle is delivered in a five-step model frame- estimate of the “lifetime” expected loss on the credit
work: exposures allocated in stage 2 as well as the collective
• Identify the contract(s) with a customer; recognition of impairment of loans to banks. Based on
• Identify the performance obligations in the contract; the analysis carried out and the implementations cur-
• Determine the transaction price; rently in progress, upon adoption, the effects on Com-
• Allocate the transaction price to the performance mon Equity are, under no circumstances, critical in
obligations in the contract; relation to the Institute’s solvency profile. Conversely,
• Recognize revenue when (or as) the entity satisfies a we note a slight positive impact on Tier 1 capital of
performance obligation. 0.1%.
The standard is effective for annual reporting peri-
ods beginning on or after 1 January 2018. Earlier appli- • Standard IFRS 16 – Leases (published on 13 January
cation is permitted.  However, the amendments to IFRS 2016), will replace the following standards and inter-
15, Clarifications to IFRS 15 - Revenue from Contracts pretations: IAS 17 – Leases, IFRIC 4 Determining
with Customers, published by the IASB on 12 April whether an Arrangement contains a Lease, SIC-15
2016, have not yet been endorsed by the European Operating Leases—Incentives, SIC-27 Evaluating the
Union. The adoption of the statement has no important Substance of Transactions Involving the Legal Form of a
impact on the disclosure or on the amounts recognized Lease.
in the Institute’s financial statements. The standard is effective for annual reporting peri-
ods beginning on or after 1 January 2019.
• Final version of IFRS 9 - Financial Instruments (pub- IFRS 16 establishes principles for the recognition,
lished on 24 July 2014). The document recognized the measurement, presentation and disclosure of leases,
results of the IASB project to replace IAS 39: with the objective of ensuring that lessees and lessors
• Introducing new criteria for the classification and provide relevant information that faithfully represents
measurement of financial assets and liabilities; those transactions. This new standard brings most
• With reference to the impairment model, the new leases on-balance sheet for lessees under a single
standard requires that the estimate of credit losses is model, eliminating the distinction between operating
carried out on the basis of the expected losses model and finance leases. Lessor accounting, however,
(and not on the incurred losses model used by IAS remains largely unchanged and the distinction between
39) using reasonable and supportable information operating and finance leases is retained. The Institute
about past events, current conditions and reasonable does not expect a significant impact in the financial
and supportable forecasts of future economic condi- statements from the application of this standard.
tions;
• Introducing a new hedge accounting model (types of • Document “Applying IFRS 9 Financial Instruments
transactions eligible for hedge accounting, changes in with IFRS 4 Insurance Contracts” (published on 12
the method of accounting for forward contracts and September 2016). For entities whose predominant
options when included in a hedge relationship, activity is issuing contracts within the scope of IFRS 4,

40 | ANNUAL
REPORT 2017
 the document is intended to clarify the concerns aris- cation of the PAA method do not apply to the assess-
ing from the application of the new IFRS 9, starting ment of liabilities for existing claims, which are meas-
from January 1 2018, to financial assets. No impact in ured with the General Model. However, it is not neces-
the financial statements from the application of this sary to discount those cash flows if it is expected that
document. the balance to be paid or collected will take place within
one year from the date on which the claim occurred.
Accounting standards, IFRS amendments and interpreta- The entity must apply the new standard to insur-
tions not yet endorsed by the European Union. ance contracts issued, including reinsurance contracts
issued, to reinsurance contracts held and also to invest-
At the date of these financial statements, the relevant ment contracts with a discretionary participation fea-
European Union bodies have not yet completed the ture (DPF). The standard is effective from 1 January
approval process necessary for the adoption of amendments 2021. Earlier adoption is permitted only for entities that
and the principles described below. apply IFRS 9 - Financial Instruments and IFRS 15 -
Revenue from Contracts with Customers. No impact in
• Standard IFRS 17 – Insurance Contracts (published the financial statements from the application of this
on 18 May 2017), will replace IFRS 4 - Insurance Con- document.
tracts. The aim of new standard is to ensure that an
entity provides relevant information that faithfully rep- • Amendments to IFRS 2 “Classification and measure-
resents the rights and obligations arising from the ment of share-based payment transactions” (pub-
insurance contracts issued. The IASB has developed lished on 20 June 2016). These amendments clarify the
the standard to eliminate inconsistencies and weak- recognition of the effects of vesting conditions in the
nesses in existing accounting policies by providing a presence of cash-settled share-based payments, the
single principle-based framework regarding all types of classification of share-based payments with net settle-
insurance contracts, including reinsurance contracts ment characteristics and the booking of changes to the
that an insurer holds. terms and conditions of a share-based payment that
The new standard also provides the disclosure require- modify the classification from cash-settled to equity-
ments to improve comparability between entities settled. The amendments are effective from 1 January
belonging to this sector. 2019, earlier adoption is permitted. No impact in the
The new standard measures an insurance contract financial statements from the application of this docu-
based on a General Model or a simplified version of ment.
this, called the Premium Allocation Approach (“PAA”).
The main features of the General Model are: • Amendments to IFRS 9 “Prepayment Features with
• the estimates and assumptions of future cash flows Negative Compensation” (published on 12 October
are always the current ones; 2017). These amendments specify that a debt instru-
• the measurement reflects the time value of money; ment with an early redemption option could comply
• estimates provide for an extensive use of information with the characteristics of the contractual cash flows
observable on the market; (“SPPI” test) and, consequently, could be measured
• there is a current and explicit measurement of the using the amortized cost method or the fair value
risk; through other comprehensive income even if the “rea-
• the expected profit is deferred and aggregated in sonable additional compensation” expected in case of
groups of insurance contracts at the time of initial early repayment is a “negative compensation” for the
recognition; and, lender. The amendments are effective from 1 January
• the expected profit is recorded in the contractual cov- 2019, however earlier adoption is permitted. The adop-
erage period taking into account the adjustments tion of the IFRS 9 could have an impact on the SPPI
deriving from changes in the assumptions related to Test on certain securities. No impact in the financial
the cash flows relating to each group of contracts. statements from the application of this document.

The PAA approach measures the liability for the • Document “Annual Improvements to IFRSs: 2014-
residual coverage of a group of insurance contracts pro- 2016 Cycle”, published on 8 December 2016, provides
vided that, upon initial recognition, the entity antici- partial integration on existing standards, that include:
pates that such liability is reasonably an approximation • IFRS 1 First-Time Adoption of International Financial
of the General Model. Contracts with a coverage period Reporting Standards - Deletion of short-term exem-
of one year or less are automatically eligible for the PAA ptions for first-time adopters;
approach. The simplifications deriving from the appli- • IAS 28 Investments in Associates and Joint Ventures –

41 | ANNUAL
REPORT 2017
 Measuring investees at fair value through profit or loss: more, the document does not contain any new disclo-
an investment-by-investment choice or a consistent sure obligation. The interpretation underlines that the
policy choice; entity will have to establish whether it will be necessary
• IFRS 12 Disclosure of Interests in Other Entities – Cla- to provide information on the comments made by
rification of the scope of the Standard. management related to the uncertainty of taxes
e adoption of the above improvement would not accounting, in accordance with IAS 1. The new inter-
affect significantly the Financial Statements. pretation is effective from 1 January 2019, but early
application is permitted. No impact in the financial
• Document “Annual Improvements to IFRSs: 2015- statements from the application of this interpretation.
2017 Cycle”, published on 12 December 2017, provides
partial integration on existing standards, that include: • Amendments to IAS 28 “Long-term Interests in Asso-
• IFRS 3 Business Combinations and IFRS 11 Joint ciates and Joint Ventures” (published on 12 October
Arrangements: the amendment clarifies that when an 2017). These amendments clarify the need to apply
entity obtains control of a business that represents a IFRS 9, including the requirements related to impair-
joint operation, it must remeasure the interest previ- ment, to other long-term interests in associates and
ously held in that business. However, this process is joint ventures for which the equity method is not
not envisaged if joint control is obtained, applied. The amendments are effective from January 1,
• IAS 12 Income taxes: the amendment clarifies that all 2019, but early application is permitted. No impact in
the fiscal effects related to dividends (including pay- the financial statements from the application of this
ments on financial instruments classified within document.
shareholders’ equity) should be accounted for in a
manner consistent with the transaction that gener- • Amendments to IAS 40 “Transfers of Investment
ated these profits (income statement, OCI or equity), Property” (published on 8 December 2016). These
• IAS 23 Borrowing costs: the amendment clarifies that amendments clarify the transfer of a property to, or
in the case of loans that remain in place even after the from, investment property. In particular, an entity shall
reference qualifying asset is ready for use or for sale, reclassify a property to, or from, investment property
these become part of the totality of the loans used to only when there is evidence that there has been a
calculate the financing costs. change in use of the property. Such a change must be
The amendments is effective from 1 January 2019, attributed to a specific event; a change of management’s
but early application is permitted. No impact in the intentions for the use of a property by itself does not
financial statements from the application of this docu- constitute evidence of a change in use. The amend-
ment. ments are effective from 1 January 2018. Earlier adop-
tion is permitted. The Institute considers that the appli-
• Interpretation IFRIC 22 “Foreign Currency Transac- cation of the above amendments would not affect sig-
tions and Advance Consideration” (published on 8 nificantly the Financial Statements.
December 2016). The interpretation clarifies the
accounting for transactions that include the receipt or • Amendments to IFRS 10 and IAS 28 “Sales or Contri-
payment of advance consideration in a foreign cur- bution of Assets between an Investor and its Associate
rency. This document provides guidance on how an or Joint Venture” (published on 11 September 2014).
entity should determine the date of a transaction, and The amendments address a conflict between the
consequently, the exchange rate to use in circum- requirements of IAS 28 ‘Investments in Associates and
stances in which consideration is received or paid in Joint Ventures’ and IFRS 10 ‘Consolidated Financial
advance of the recognition of the related asset, expense Statements’ and clarify that in a transaction involving
or income. IFRIC 22 is effective from 1 January 2018. an associate or joint venture the extent of gain or loss
Earlier adoption is permitted. No impact in the finan- recognition depends on whether the assets sold or con-
cial statements from the application of this interpreta- tributed constitute a business. At this stage, the IASB
tion. suspended the application of these amendments.

• Interpretation IFRIC 23 “Uncertainty over Income

Tax Treatments” (published on 7 June 2017). The
interpretation states that the financial statement has to
reflect the uncertainties in determining liabilities or
assets for taxes only when it is probable that the entity
will pay or recover the amount in question. Further-

42 | ANNUAL
REPORT 2017
1.2 Information on the main financial utable to the instrument.
statement items Financial assets available for sale are subsequently meas-
ured at fair value, and any changes in the fair value are rec-
1.2.1 Financial assets held for trading ognized in Other Comprehensive Income and therefore
directly in an equity reserve.
A financial asset is classified under this category if For the fair value measurement please refer to Section
acquired principally for the purpose of trading. 1.4 “Fair value information”.
Purchases of financial assets held for trading are recog- Disposals are recognized on the trade date which is the
nized at the transaction date, which is the date on which the date on which the Institute commits to dispose the assets.
IOR commits to purchasing the asset. At the time that the financial assets are derecognized or
On initial recognition, financial assets held for trading impaired, accumulated gain or loss from changes in the fair
are recognized at fair value, which generally corresponds to value of financial assets available for sale previously recog-
the initial cash consideration paid, excluding direct transac- nized in Other Comprehensive Income are reclassified and
tion costs or revenues directly attributable to the instru- recognized in the Income Statement.
ment, which are recognized in the Income Statement. When the financial assets available for sale are sold, any
Subsequent to initial recognition, the financial assets are unrealised gains or losses previously recognized in Other
measured at fair value, with any gains or losses arising from Comprehensive Income, are reclassified into the Income
the change in fair value recognized in the Income Statement. Statement, item 100 “Profit (loss) on disposal or repurchase”
For the fair value measurement please refer to Section line b “Financial assets available for sale”.
1.4, Fair value information. In case of impairment losses, gains or losses previously
Disposals are recognized on the trade date which is the recognized in Other Comprehensive Income are transferred
date on which the Institute commits to dispose the assets. to the Income Statement item 130 “Net losses/reversal on
Gains and losses arising from disposal or redemption impairment” line b “Financial assets available for sale”.
and unrealised gains and losses arising from changes in the At each balance sheet date, the IOR assesses whether
fair value are recognized in the Income Statement, item 80 there is objective evidence of impairment on financial asset
“Net trading result”. available for sale. A significant or prolonged decline in the
Interest income and expense arising from the financial fair value of the financial asset below its cost is considered as
assets held for trading are recognized in the Income State- objective evidence of a reduction in value. If there is such
ment on an accrual basis and recognized “pro rata” based on evidence, the cumulative loss, measured as the difference
the contractual interest rate. These are recognized in the between the acquisition cost and the current fair value, less
Income Statement, item 10 “Interest and similar income”. previously recognized impairment loss, is transferred from
Dividends on financial assets held for trading are recog- equity and recognized in the Income Statement in item 130
nized in the Income Statement, item 70 “Dividend income” “Net losses/reversal on impairment” line b. If, in a subse-
when the entity’s right to receive payment is established. quent period, the amount of the impairment loss decreases,
All financial assets held for trading are derecognized impairment losses recognized in the Income Statement on
when the rights to receive cash flows from the financial equity instruments are not reversed through the Income
assets have expired or when the IOR has substantially trans- Statement, but through the Fair Value Reserves, a compo-
ferred all risks and rewards of ownership. nent of equity. For debt instruments classified as available
for sale, if the fair value increases in a subsequent period and
1.2.2 Financial assets available for sale the increase can be objectively related to an event occurring
after the impairment loss was recognized in profit or loss,
Financial Assets classified as Available for sale are those the impairment loss is reversed through the Income State-
intended to be held for an indefinite period of time, and ment.
those that are subject to agreements that restrict the sale for The impairment policy adopted by IOR is that all equity
a specified period. securities classified as available for sale must be impaired
In addition, financial assets classified available for sale when their market prices are below their carrying prices and
include non-derivative financial assets that are not classified the price decline is more than 20%, or when the decline to
as held for trading or loans and receivables or held to matu- below the acquisition cost has persisted for more than 36
rity investments. months.
Financial assets available for sale are recognized on the Interest income and expense arising from the financial
trade date, which is the date on which the IOR commits to assets available for sale are recognized in the Income State-
purchasing the asset. ment on an accrual basis and recognized “pro rata” based on
Financial assets available for sale are initially recognized the effective interest rate method. These are recognized in
at fair value plus any direct transaction costs directly attrib- the Income Statement, item 10 “Interest and similar

43 | ANNUAL
REPORT 2017
income”. the Income Statement, item 10 “Interest and similar
Dividends on financial assets available for sale are recog- income”.
nized in the Income Statement, item 70 “Dividend income” The effective interest method is a method calculating
when the entity’s right to receive payment is established. amortized cost of an asset or a financial liability and of allo-
All financial assets available for sale are derecognized cating interest. The effective interest rate is the rate that
when the rights to receive cash flows from the financial makes the present value of expected cash flows until matu-
assets have expired or when the IOR has substantially trans- rity of the financial instrument (or, if more reliable for a
ferred all risks and rewards of ownership. shorter period) exactly equal to the current book value. The
calculation not only includes all fees and premiums or dis-
1.2.3 Financial assets held to maturity counts received or paid to the counterparty, which are an
integral part of the effective interest rate, but also the trans-
Financial assets held to maturity are quoted non-deriva- action costs and all other premiums or discounts.
tive financial assets with fixed or determinable payments All financial assets held to maturity are derecognised
and with fixed maturities which the IOR has the intention when the rights to receive cash flows from the financial
and ability to hold to maturity. If the IOR sells financial assets have expired or when the IOR has substantially trans-
assets held to maturity, the entire category must be reclassi- ferred all risks and rewards of ownership.
fied as available for sale and for two subsequent years, no
financial asset can be classified in this category. 1.2.4 Credits
Financial assets held to maturity are recognized at the
trade date, which is the date on which the IOR commits to This item includes loans to customers and banks, with
purchasing the asset, and are recognized at fair value plus fixed or determinable payments, provided directly, not
any direct transaction costs. quoted in an active market and not initially classified as
The financial assets held to maturity are subsequently financial assets held for trading, available for sale or at fair
measured at amortised cost using the effective interest rate value.
method, and adjusted to take into account the effects of any This item includes:
impairment losses, when applicable the circumstances 1. deposits on demand and time deposits with banks;
described below. 2. authorized financing agreements where the Institute
Gains and losses on financial assets held to maturity are provides money directly to the customers without the
recognized in the Income Statement through the financial intention of subsequent re-negotiation;
amortisation process (item 10 “Interest and similar 3. Loans and Receivables debt securities offered through
income”) or when the assets are derecognized (item 100 private placements, which the Institute does not desig-
“Profit (loss) on disposal or repurchase” line c “Financial nate as financial assets at fair value through profit or
assets held to maturity”) or when impairment losses are rec- loss or available for sale.
ognized in the Income Statement (item 130 “Net These financial assets are subject to the risk of deteriora-
losses/reversal on impairment” line c “Financial assets held tion of the creditworthiness of the counterparty.
to maturity”). Deposits with banks and financing agreements are rec-
As of each balance sheet date, the IOR assesses whether ognized when the amount is advanced to the borrower.
there is objective evidence of impairment on financial asset They are initially recognized at fair value, which is the value
held to maturity. A financial asset is impaired and impair- of the loan, plus any direct transaction costs. Financing
ment losses are recognized when one or more loss events agreements are subsequently measured at amortised cost
occurred after the initial recognition of the asset and that using the effective interest rate method.
loss event has an impact on the estimated future cash flows Securities are initially recognized on the trade date,
of the financial asset. The amount of the loss is measured as which is the date on which IOR commits to purchasing the
the difference between the asset’s carrying amount and the asset at fair value plus any direct transaction costs or
present value of estimated future cash flows discounted at income. Securities are subsequently measured at amortised
the financial asset’s original effective interest rate. The carry- cost using the effective interest rate method, and are subject
ing amount of the asset is directly reduced and the extent of to impaired test and impairment losses are recognized when
the loss is recognized in the Income Statement item 130 one or more loss events occurred after the initial recognition
“Net losses/reversal on impairment” line c “Financial assets of the asset and that loss event has an impact on the esti-
held to maturity”. mated future cash flows of the financial asset.
Interest income and expense arising from the financial The amortized cost method is not used for short-term
assets held to maturity are recognized in the Income State- loans for which the effect of the application of the discount-
ment on an accrual basis and recognized “pro rata” based on ing logic is negligible. A similar valuation criterion is
the effective interest rate method. These are recognized in adopted for loans without a defined or revocation term.

44 | ANNUAL
REPORT 2017
 Interest income and expense arising from loans and when the balance is deemed to be collectible in a mid/long
advances to customers are recognized in the Income State- term period, an impairment loss is recognized; when the
ment on an accrual basis and recognized “pro rata” using positions are past due and uncollectible, the department
the effective interest rate method. These are recognized in proposes a write-off the amount as a loss on loans to the
the Income Statement, item 10 “Interest and similar Directorate.
income”. It is to be mentioned that the Institute is not authorized
At each balance sheet date, the IOR assesses whether by the Autorità di Informazione Finanziaria to carry out the
there is objective evidence of impairment. A financial asset activity of “lending” (cfr. art. l (l) (b) of the Law n.XVIII and
is impaired and impairment losses are recognized when one art. 3 (24) (b) of the Regulation No. l), as credit activities on
or more loss events occurred after the initial recognition of its own. However, it is authorized to make “advances” that is
the asset and that loss event has an impact on the estimated to disburse funds to its clients and to a limited extent follow-
future cash flows of the financial asset. ing guarantee of future income (such as, for example, in the
The amount of the loss is measured as the difference case of the advance of salary or pension paid by the Holy See
between the asset’s carrying amount and the present value of or the Governatorato of Vatican City) or guaranteed by
estimated future cash flows discounted at the financial financial assets of the same amount deposited by the clients
asset’s original effective interest rate. The carrying amount at the Institute.
of the asset is reduced directly for securities or bank
deposits, while for financing agreements through the use of 1.2.5 Derivative financial instruments and hedge
a provision account. The extent of the loss is recognized in accounting
the Income Statement item 130 “Net losses/reversal on
impairment” line a “Receivables”. Derivatives are initially recognized at fair value on the
Loans which are not individually impaired are subject to date in which a derivative contract is entered into.
valuation on a portfolio basis based on historical data. The The initial fair value generally corresponds to the initial
loss is recognized in the Income Statement item 130 “Net cash consideration, and subsequently remeasured at fair
losses/reversal on impairment” line a “Receivables”. value with changes recognized through profit or loss.
If, in a subsequent period, the impairment loss decreases The fair value of derivatives quoted in active markets is
and the decrease can be objectively attributed to an event based on current bid prices. If the market for a financial
occurring after the impairment was recognized (such as an derivative is not active, the IOR obtains fair value from third
improvement in the debtor’s credit rating), the previously parties or establishes fair value by using valuation models
recognized impairment loss is reversed by adjusting the that are primarily based on objective financial inputs, as well
allowance account for the financing agreements or by as considering prices utilised in recent transactions and
adjusting the carrying amount of the asset for securities and prices of similar financial instruments. All derivatives are
bank deposits. The amount of the reversal is recognized in recognized as assets when the fair value is positive and as
the Income Statement, Statement item 130 “Net liabilities when fair value is negative.
losses/reversal on impairment” line a “Receivables”. In any Derivative financial instruments may include embedded
case, the reversal can not exceed the cost that the financial derivatives in a hybrid financial instrument.
instrument prior to the recognition of any impairment loss. IAS 39 requires that an embedded derivative be sepa-
Credits are derecognized when the rights to receive cash rated from its host contract and accounted for as a derivative
flows from the financial assets have expired or when the when:
IOR has substantially transferred all risks and rewards of 1. The economic risks and characteristics of the embed-
ownership. ded derivative are not closely related to those of the
When a loan becomes uncollectible, it is written off host contract;
against the related provision for loan impairment. Such 2. A separate instrument with the same terms as the
exposures are written off after all the necessary procedures embedded derivative would meet the definition of a
have been performed and the extent of the loss has been derivative;
determined. Subsequent recoveries of amounts previously 3. The hybrid (combined) instrument is not measured at
written off are recognized in the Income Statement item 130 fair value with changes in fair value recognized
“Net losses/reversal on impairment” line a “Receivables”. through Income Statement.
Regarding loans to customers, at the end of each month, The Institute does not enter into Fair value hedges, Cash
the Advances Department analyses all exposures and sub- flow hedges or Net investment hedges for foreign currency
mits to the Directorate a proposal on how to manage aged transactions/positions.
loans at risk for non-collection. Particularly, when the bal- As of 31 December 2017 and 2016, the Institute did not
ance is deemed to be collectible within a short period, an hold derivatives.
impairment loss is not realized, but the trend is monitored;

45 | ANNUAL
REPORT 2017
1.2.6 Investment in subsidiaries the asset’s carrying amount is greater than its estimated
recoverable amount. The recoverable amount is the higher
Investment in subsidiaries consists of the stake in the of the asset’s fair value less costs to sell and its value in use.
wholly-owned real estate company S.G.I.R. S.r.l., based in The result of the impairment test and the depreciations
Rome, Via della Conciliazione. The principal assets of this are recognized in the Income Statement item 170 “Net value
company are real estate properties. adjustments to/recoveries on tangible assets”.
Investment in subsidiaries is carried at cost, less impair- Gains and losses on disposals are determined as the dif-
ment. ference between the sale proceeds and the carrying amount
Real estate owned by the subsidiary is depreciated on a of the assets. They are recognized in the Income Statement,
straight-line basis over its estimated useful life which man- under item 190 “Other operating income (expense)”.
agement considers as between 30 and 50 years. Land is not
depreciated. 1.2.8 Intangible assets

1.2.7 Tangible assets Intangible assets correspond to computer software

licenses and to expenses related to their implementation.
1.2.7.1 Tangible assets for investment - Investment Acquired computer software licenses are recognized at
properties acquisition costs, including costs incurred to bring the spe-
cific software into use. These costs are amortised on a
Investment properties are properties directly owned by straight-line basis over their expected useful lives, usually
the IOR. These are buildings not owner-occupied. They measured in four years.
were inherited and held to generate rental income, capital These assets are reviewed for impairment whenever
appreciation or both. events or changes in circumstances indicate that the carry-
Investment properties are initially measured at cost ing amount may not be recoverable. An asset’s carrying
(which is zero in case of inheritances) and subsequently at amount is written down immediately to its recoverable
fair value with any change recognized in the Income State- amount if the asset’s carrying amount is greater than its esti-
ment, item 220 “Net result of fair value valuation of tangible mated recoverable amount. The recoverable amount is the
and intangible assets”. higher of the asset’s fair value less costs to sell it and its value
Improvements to buildings increase their carrying in use.
amounts. The results of the impairment test and depreciation are
recognized in the Income Statement item 180 “Net value
1.2.7.2 Tangible assets for business activities – adjustments to/recoveries on intangible assets”.
Equipment, furniture and vehicles Costs associated with maintenance of computer soft-
ware programmes are recognized as an expense in the
All equipment, furniture and vehicles are stated at his- Income Statement when they are incurred.
torical cost, minus accumulated depreciation. Historical
cost is generally based on the fair value of the sum paid in 1.2.9 Due to banks and to customers
exchange for assets and includes expenditure that is directly
attributable to the acquisition of the items. Due to banks comprises interim current accounts over-
Subsequent costs are included in the asset’s carrying drafts, as the Institute does not carry out funding activites
amount or are recognized as a separate asset, as appropriate, on the interbank market.
only when it is probable that the IOR will recognise future Due to customers are composed of financial instru-
economic benefits associated with the item. ments (different from trading liabilities) that assumed the
All repairs and maintenance costs are charged to the typical forms of funds, realised by IOR with customers.
Income Statement in the year they are incurred. The mentioned financial liabilities are recorded in the
Equipment, furniture and vehicles are amortised on a financial statements at the trade date, which is the date
straight-line basis over their expected useful lives, usually when IOR receives the amounts. They are initially recog-
measured in four years. nized at the current value, which normally corresponds to
The asset’s residual values and useful lives are reviewed, the amount collected. The initial recognition value includes
and adjusted if appropriate, on each balance sheet date. possible expenses and incomes from anticipated transac-
These assets are reviewed for impairment whenever events tion and directly attributable to each liability; not included
or changes in circumstances indicate that the carrying in the initial carrying amount are all charges which are paid
amount may not be recoverable. An asset’s carrying amount back by the credit counterparty or that are attributable to
is written down immediately to its recoverable amount if internal administrative expenses.

46 | ANNUAL
REPORT 2017
 After the initial recognition, due to banks and to cus- 1.2.11 Staff severance fund
tomers are measured at amortized cost using the effective
interest rate method. The short-term liabilities remain Staff severance fund is a post-employment benefit that
recorded at the amount received. corresponds to indemnities paid to personnel when they
Interest expense related to due to banks and to cus- leave the IOR. The amount due is based on years of service
tomers are recognized in the income statement, item 20 and salary paid in the last year of employment. These bene-
“Interest and similar expense”. fits are financed by contributions from employees and the
Due to banks and to customers are derecognized when IOR.
they expired or extinguished. The liability is measured with utilizing certain actuarial
assumptions, as the present value of the estimated future
1.2.10 Legates cash outflows according to the projected unit credit method
required by IAS 19. Remeasurements arising from the
According to the Canon Law (Can. 1303), the term defined benefit plan comprise actuarial gains and losses,
“Legati – non autonomous pious foundation” comprises: recognized in Other Comprehensive Income. All other
“temporal goods given in any way to a public juridical per- expenses related to the defined benefit plan in the Income
son and carrying with them a long-term obligation, such a Statement, item 150 “Administrative Expenses”, line a “Staff
period to be determined by particular law. The obligation is expenses”.
for the juridical person, from the annual income, to cele-
brate Masses, or to perform other determined ecclesiastical 1.2.12 Provisions for risks and charges – Pension fund
functions, or in some other way to fulfil the purposes men- and similar obligations
tioned in Can. 114, par. 2”.
Based on such definition, this is understood to be an For the pensions of its employees, the IOR operates a
arrangement whereby capital is donated or willed to the defined benefit plan, which is financed by contributions
IOR for religious or charitable purposes, based on the from employees and the IOR.
understanding that the transferred capital is invested on a The IOR’s net liabilities related to the defined benefit
long term basis and the annual income earned from the plan for pensions is calculated by estimating the amount of
investment is devoted to the fulfilment of the purpose pre- future benefit that employees will earn in return for their
scribed by the donor. Under these provisions, the IOR will service in the current and prior periods; that benefit is dis-
administer the capital in accordance with the purpose pre- counted to determine its present value.
scribed by the donor (e.g., for Holy Mass Intention or schol- The IOR determines the interest expense on the defined
arships). benefit liability for the year by applying the discount rate
Legates are recognised in the financial statement at the used to measure the same liability at the beginning of the
trade date. Legates are initially recognised at the current year.
value, which normally corresponds to the amount received. The discount rate is the yield on the reporting date from
The initial recognition value includes also expenses and high quality corporate bonds that have maturity dates
incomes for anticipated transaction and directly attributable approximating the terms of the IOR’s liabilities and that are
to each liability; not included in the initial carrying value denominated in the currency in which the benefits are
are all charges which are paid back by the credit counter- expected to be paid.
party or that are attributable to internal administrative The calculation is performed annually by a qualified
expenses. actuary, who assesses the fairness of the liability, using the
After the initial recognition, Legates are measured at projected unit credit method. Remeasurements arising
amortized cost using the effective interest rate method. from the defined benefit plan comprise actuarial gains and
The interest expense related to the Legates are recog- losses. The IOR recognizes them immediately in Other
nized in the income statement, item 20 “Interest and similar Comprehensive Income and all other expenses related to
expense”. the defined benefit plan in the Income Statement, item 150
Legates are derecognised when they expired or extin- “Administrative expenses”, line a “Staff expenses”.
guished. When the benefits of the plan are changed, the portion
of the changed benefit related to past service by employees
is recognized immediately in the Income Statement.
On 1 January 2005, all IOR personnel also joined the
general Vatican City State pension plan. This system is
financed by contributions made by the Institute and employ-
ees. Contributions to the Vatican plan made by the IOR are

47 | ANNUAL
REPORT 2017
recognized in the Income Statement, item 150 “Administra- • recognized in the Income Statement as part of the fair
tive expenses”, line a “Staff expenses” when they occur. value gain or loss if the non-monetary assets and liabil-
Consequently, the IOR’s defined benefit plan for pen- ities are carried at fair value through profit and loss;
sions covers the entire amount to be paid by the Institute to • included in the fair value reserves in the equity if the
employees for their service up to 31 December 2004. For non-monetary assets and liabilities are carried at fair
the employees’ services from 1 January 2005, the obligation value in the equity.
is limited to the part not covered by the Vatican City State
Pension Plan taking into account the difference in the 1.2.14 Offsetting financial instruments
retirement age of the two pension systems.
Financial assets and liabilities are offset and the net
1.2.13 Foreign Currency Transactions amount is reported on the Balance Sheet only when there is
a legally enforceable right to offset the recognized amounts
Functional and presentation currency and there is an intention to settle on a net basis. Otherwise,
The functional currency is the currency in which the the financial assets and liabilities are separately reported on
items included in the financial statements must be meas- the balance sheet.
ured. According to IAS 21 “The effects of changes in foreign
exchange rates” the functional currency is the currency of
the primary economic environment in which the entity 1.3 Transfers between Portfolios
operates. This is the currency that determines the pricing of
transactions, but it is not necessarily the currency in which The amendments to IAS 39 and to IFRS 7 allow for the
transactions are denominated. reclassification of certain financial assets after their initial
The reporting currency is the currency in which the recognition, out of the held for trading (HFT) and available
financial statements are prepared. IAS 21 allows an entity to for sale (AFS) portfolios.
prepare its financial statements in any currency. In particular, those HFT or AFS financial assets that
The IOR’s functional and presentational currency is the would have met the definition specified by international
Euro, which is the currency of the primary economic envi- accounting standards for the loan portfolio (if such assets
ronment in which the Institute operates. were not classified as HFT or AFS respectively on initial
recognition) may be reclassified if the entity intends, and is
Transactions and balances able, to hold them for the foreseeable future or until matu-
Foreign currency transactions, if they impact profit or rity.
loss accounts, are converted into the functional currency The Institute did not have any transfers between portfo-
using the exchange rates applicable at the date of the trans- lios in 2017 and in previous years.
action.
Monetary assets and liabilities denominated in foreign
currencies are converted into the functional currency using 1.4 Fair Value Information
the spot exchange rate at the reporting date (closing rate).
Non-monetary assets and liabilities denominated in for- Qualitative fair value information
eign currencies are translated using the rate at the date their For the measurement of fair value, the amendments to
amount (cost or fair value) was determined: non-monetary IFRS 7 and subsequent changes introduced by IFRS 13
items carried at cost are converted at the exchange rate at defines a fair value hierarchy based on level of observable
the date of initial recognition in the financial statements, inputs used for measurement. The financial assets are clas-
while non-monetary items carried at fair value are trans- sified according to the following hierarchy that consists of
lated using the rate at the date of the determination of their three levels.
fair value.
Foreign exchange gains and losses resulting from the Level 1
settlement of foreign currency transactions and from the In Level 1, the fair value is measured using the quoted
conversion at year-end exchange rates of monetary assets prices in active markets for the financial assets and liabilities
and liabilities denominated in foreign currencies are recog- to be evaluated.
nized in the Income Statement, item 80 “Net income for A financial instrument is considered quoted in an active
trading activities”. market when its price is:
Foreign exchange gains and losses resulting from the • readily and regularly available on stock exchanges,
conversion at year-end exchange rates of non-monetary from information providers or intermediaries;
assets and liabilities are: • significant, meaning that it represents effective market

48 | ANNUAL
REPORT 2017
 transactions regularly occurring in normal transac- on assumptions that market participants would use, based
tions. on observable inputs.
To be considered Level 1, the price should not be
adjusted through an adjustment factors (valuation adjust- IFRS 13 specifies a hierarchy of fair value measurements
ment). If it is adjusted, the measurement at fair value of based on whether the inputs are observable or unobserv-
financial instrument will be Level 2 or Level 3. able. Observable inputs reflect the assumptions that market
participants would use in pricing the asset or liability based
Level 2 on market data obtained from sources independent of the
A financial instrument is included in Level 2 when the reporting entity. The market price is the most observable
inputs utilised to measure fair value are directly or indi- and objective input (Level 1). Where no active markets
rectly observable in the market. exists or where quoted prices are not available, the entity
The parameters of Level 2 are as follows: determines the fair values by using valuation techniques.
• prices quoted on active markets for similar assets or Valuation techniques can utilise inputs observable on the
liabilities; market (Level 2) or non-observable inputs (Level 3).
• price quoted on non-active markets for similar or The above mentioned valuation approaches should be
identical assets and liabilities; applied in a hierarchical order.
• market observable inputs other than the quoted price When there is availability of quoted market prices in
for the asset or liability (interest rates, yield curve, active markets, an entity must measure fair value using
credit spreads, volatility); Level 1 inputs. Furthermore, the valuation techniques used
• parameters that derive mainly (or are corroborated by should prioritise the utilization of inputs observable on the
correlation or other techniques) from observable mar- market and should rely as little as possible on the reporting
ket data (market-corroborated inputs). entity’s own data, internal valuations or unobservable
inputs.

An input is observable when it reflects the assumptions Fair value Level 2 and 3: valuation techniques and input
that market participants would use in pricing an asset or lia- used
bility based on market data provided by sources independ- The criteria used by the IOR to determine the fair value
ent of the reporting entity. of financial instruments are as follows.
Valuation techniques used to determine fair value that The fair values of investments held by the IOR quoted in
should be used when the market price is not available or is active markets are usually based on current bid prices.
not significant, must meet three conditions. They must: A financial instrument is considered as quoted in active
1. be methodologically consolidated and widely markets if the prices are readily and regularly available in an
accepted; exchange or regulatory agency and those prices represent
2. utilise market inputs disclosed above; actual market transactions that occur regularly on an arm’s
3. be periodically reviewed. length basis.
In the absence of an active market, or in the event the
Valuation techniques used for fair value measurement market at the time of the valuation is not considered active,
should be periodically assessed using inputs observable in for example, in case of illiquid markets, the valuation tech-
the markets to ensure that outputs reflect actual data and niques adopted by IOR are based on the use of recent arm’s
comparative market prices and to identify any weaknesses. length transactions in the market, even on a non-active
If the fair value measurement utilise observable inputs market, relative to identical financial instrument or finan-
that require a significant adjustment based on unobservable cial instruments with similar characteristics. The valuation
inputs, the financial instrument should be considered in techniques include the discounted cash flow analysis and
Level 3. other valuation techniques commonly used by market par-
ticipants.
Level 3 If recent transactions of the same or similar instruments
Included in Level 3 are financial instruments valued are not available, the IOR uses valuation techniques based
using unobservable market data (unobservable inputs). To on market parameters or other parameters.
be included in Level 3, at least one of the inputs must be When using valuation techniques, the IOR tries to use
unobservable on the market. observable market data, reducing its reliance on internal
Level 3 financial instruments are valued using inputs data.
that are not derived from independent sources, rather they Valuation techniques are periodically reviewed for
are based on the reporting entity’s own assumptions based applicability, assessing the quantity and the quality of infor-

49 | ANNUAL
REPORT 2017
mation available as of the balance sheet date, in order to ing that fair value reflects the realised price of a market
correctly reflect any changes in the market. For the same transaction that is actually possible; and incorporating pos-
reason, adjustments to market inputs, utilised in a certain sible future costs.
model, can change from time to time. The Institute adjusts the value of financial instruments
Consequently IOR models ensure that outputs reflect measured at fair value on a recurring basis classified as
actual data and comparative market prices. Level 2 and Level 3 based on credit risk (Credit Valuation
In Level 1, the IOR has classified all financial instru- Adjustment), liquidity risk related to the disinvestment,
ments quoted in active markets. close-out costs and available informations about the out-
Under Level 2, the IOR has classified all illiquid finan- standing assets.
cial instruments, include those that are structured or With regard to the Credit Valuation Adjustment, the
unstructured, as well as listed external investment funds Institute considered the impact of fair value on credit risk of
that are not immediately payable and unlisted investment the counterparty and the country using the following
funds with investments in listed instruments. The basis for inputs:
the valuation of illiquid securities follow prices provided by • PD (Probability of Default) linked to the rating of
the securities issuer. These prices are internally verified and counterparty (if not available the PD corresponding to
tested utilising internal models and observable market an investment with an S&P rating of BBB was used);
parameters and, in case of discrepancies, adjusted consider- • LGD (Loss Given Default) based on the estimated level
ing the result of the above-mentioned analysis. They are of expected recovery in case of counterparty default
also adjusted on the basis of valuations from independent and defined through market benchmark and based on
sources. experience. The percentage used was 60%.
Under Level 3, the IOR has classified equity securities Regarding the close-out cost, an adjustment is applied
that are not quoted or other financial instruments for which on the NAV of external investment funds if close-out penal-
fair values are determined using a model based on internal ties are stipulated.
parameters.
To the extent that this is practical, the models use only Sensitivity Analysis
observable data. However, areas such as default rates, For fair value measurements where significant unob-
volatilities and correlations require the Directorate to make servable inputs are used (Level 3), a sensitivity analysis is
estimates. performed in order to obtain the range of reasonable alter-
In this category the Institute has also classified other native valuations. The Institute takes into account that the
assets: impact of unobservable inputs on the measurement of fair
• for which the IOR did not receive independent valua- value of Level 3 depends on the correlation between the dif-
tions; ferent inputs used in the valuation process.
• for which the IOR does not have access to financial A sensitivity analysis was performed using a stress test
information; on the PD and LGD by +/-5% and it did not have a signifi-
• for which, despite having financial information, the cant impact to the value of the investments classified as
Institute believes that the valuation of underlying Level 3.
assets, due to the nature of the investment, is based on
valuation parameters that are not immediately observ- Fair value hierarchy (transfers between portfolios)
able in the market; With reference to financial assets and liabilities meas-
• for which the IOR has received independent expert ured at fair value on a recurring basis, transfers between the
valuations (i.e. for investment properties). fair value hierarchy were based on the following guidelines.
For debt securities, transfers from Level 3 to Level 2
The NAV of investment funds, defined as the difference occur when the relevant parameters used as inputs to the
between the current value of the assets and liabilities of the valuation technique are observable on the market. Transfers
fund, a Fair Value Adjustment was calculated to include from Level 3 to Level 1 occur when the presence of an active
other risk factors. market has been verified, as defined by IFRS 13. Transfers
The Fair Value Adjustment (FVA) is defined as the from Level 2 to Level 3 occur when some of the relevant
amount to be added to the mid-price observed in markets, parameters for determination of fair value are no longer
rather than the price determined by the model, with the directly observable on the market.
aim of obtaining the fair value of the position. The FVA For equity instruments classified as available- for- sale,
includes the uncertainty inherent in the valuation of a transfers between the fair value hierarchy occur:
financial instrument with the goal of reducing the risk of • during the period, when market observable inputs
incorrect valuations in the financial statements and ensur- become available (e.g. prices are determined in com-

50 | ANNUAL
REPORT 2017
 parable transactions on the same instrument between Tangible assets for investment
independent and knowledgeable counterparties), the This item is comprised of properties directly owned by
Institute proceeds with the reclassification from Level the Institute.
3 to Level 2; The fair value of the properties is assessed by a qualified,
• when inputs that are directly or indirectly observable independent expert.
in the market used as the basis for the valuation no The appraisal is based on the real estate market data col-
longer exist, or no longer updated (e.g. No recent com- lected through surveys carried out by major industry play-
parable transactions or market multiples are no longer ers. The parameters used also reflect expert assumptions
applicable) and no other inputs are available, the Insti- based on available information. For these reasons, the
tute uses valuation techniques that use unobservable investment properties are classified as Level 3 on the fair
inputs, proceeding with the reclassification from Level value hierarchy.
2 to Level 3.
Assets not measured at fair value on a recurring basis
Information on assets measured at fair value on a For assets and liabilities not measured at fair value on a
recurring basis recurring basis, the following information is required by
We provide below the IFRS 13 disclosure requirements IFRS 13.
about assets measured at fair value on a recurring basis. By
definition, the carrying value of these items corresponds to Financial assets held to maturity
the fair value. The fair value of financial assets held to maturity corre-
Fair value is defined as the price that would be received sponds to the market value at the balance sheet date. The
in selling an asset or paid when transferring a liability in an securities are classified as Level 1 in the fair value hierarchy
ordinary transaction between market participants at the since they are regularly traded on active, liquid markets.
measurement date (i.e. an exit price).
Due from banks
Financial assets held for trading
This item is comprised of deposits on demand and time
These consist of:
deposits with banks in addition to financial “Loans and
• Debt securities: the Institute has investments in debt
Receivables” securities issued by banks.
securities valued at market price (mark-to-market)
Assuming that time deposits do not exceed ninety days,
and regularly traded in active, liquid markets. Conse-
the carrying value of bank deposits, at the balance sheet
quently, these instruments are classified as Level 1 in
date, approximates fair value and they are recorded in Level
the fair value hierarchy, except for some bonds whose
1 of the fair value hierarchy.
prices are determined internally on the basis of similar
For “Loans and Receivables” securities, the fair value
instruments quoted on active markets and are classi-
represents the market value at the closing date of the finan-
fied as Level 2; these amounted to EUR 26.9m.
cial statements.
• Equity securities: the Institute has investments in
By definition, “Loans and Receivables” securities are not
equity securities valued at market price (mark-to-
quoted in active, liquid markets, but the valuation is sent
market) and regularly traded in active, liquid markets.
weekly by the counterparty and is verified through an inter-
Consequently, these instruments classified as Level 1
nal model.
in the fair value hierarchy.
For these reasons, “Loans and Receivables” securities are
• Investments funds: the Institute has external invest-
classified in Level 2 of the fair value hierarchy.
ment funds amounting to EUR 32.6m. With the
exception of a fund of EUR 10.3m as Level 2 (liquid
Due from customers
with monthly NAV), investment funds are classified as
This item is comprised of receivables due from credits
Level 3. Consequently, at 31 December 2017, a total of
granted as advances to clients in addition to “Loans and
EUR 10.3m was classified as Level 2, while the remain-
receivables” securities issued from entities other than banks.
ing amount for EUR 22.3m was Level 3.
For Doubtful loans considered to be non-collectible, the
Institute proceeded in the calculation of a specific impair-
Financial assets available for sale
ment loss, and the carrying value represents fair value.
These are mainly classified as Level 1, comprise of
With regards to other receivables, the fair value was cal-
shares quoted in active, liquid markets, except for two
culated as follows:
unlisted equity securities, one classified as Level 2 and the
• Loans and credit lines: calculated by discounting
other classified as Level 3.
future cash flows using a discount rate representative

51 | ANNUAL
REPORT 2017
 rate for the Institute; The carrying value of this item approximates fair value,
• temporary Overdrafts: given their nature, the value of considering their short maturity.
overdrafts approximates fair value.
For “Loans and Receivables” securities the fair value Due to customers
represents the market value at the closing date of the finan- This item is comprised of client deposits on demand
cial statements. and time deposits, liquid accounts and term deposits related
By definition, “Loans and Receivables” securities are not to Asset Management positions. Their carrying value
quoted in active, liquid markets, but the valuation is sent approximates fair value, considering the short maturity or
weekly by the counterparty and is controlled through an indefinite maturity.
internal model. As the fair value calculation is based on parameters not
For these reasons, “Loans and Receivables” securities are observable on markets, not even indirectly, these are clas-
classified in Level 2 of the fair value hierarchy. sified as Level 3 in the fair value hierarchy.

Liabilities not measured at fair value on a recurring

basis

Due to banks

52 | ANNUAL
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1.4.2 Quantitative fair value information

1.4.2.1 Fair value hierarchy

(a) Assets and liabilities measured at fair value on a recurring basis: detail by fair value level

Assets and liabilities measured at fair value 2017 2016

L1 L2 L3 L1 L2 L3
1. Financial assets held for trading 2,057,336 37,181 22,254 1,802,904 91,923 23,277
2. Financial assets carried at fair value
3. Financial assets available for sale 3,879 684 8 6,157 499 8
4. Hedging derivatives
5. Tangible assets 3,102 2,980
6. Intangible assets
Total 2,061,215 37,864 25,364 1,809,061 92,422 26,265
1. Financial liabilities held for trading
2. Financial liabilities carried at fair value
3. Hedging derivatives
Total
Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

(b) Annual changes of assets measured at fair value on a recurring basis (Level 3)

The following table provides information about the assets measured at fair value on a recurring basis and categorized
as Level 3 in the fair value hierarchy at the beginning of the year, disposals and/or additions during the year, and their
final values at the balance sheet date.

Financial assets Financial assets Tangible

held for trading available for sale assets
1. Opening balance 23,277 8 2,980
2. Additions
2.1.Purchases
2.2.Profit recognized in:
2.2.1.Income Statement 392 136
- of which Gains 258 136
2.2.2 Net Equity
2.3.Transfers from other levels
2.4 Other variations in addition
3. Disposals
3.1 Sales
3.2 Reimbursement (400)
3.3 Losses recognized in:
3.3.1 Income Statement (1,015) (14)
- of which Losses (1,015) (14)
3.3.2 Net Equity
3.4. Transfers to other levels
3.5 Other variations in reduction
4. Closing balance 22,254 8 3,102

53 | ANNUAL
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((c) Annual changes of liabilities measured at fair value on a recurring basis (Level 3)
The Institute did not hold liabilities measured at fair value on a recurring basis.

d) Assets and liabilities not measured at fair value or measured at fair value on a non-recurring basis: detail by fair value
level

2017 2016
BV L1 L2 L3 BV L1 L2 L3
1. Financial assets held
to maturity 246,168 259,547 558,956 583,392
2. Due from banks 473,386 473,386 643,229 643,229
3. Due from customers 25,423 26,242 29,153 30,418
Total 744,977 732,933 26,242 1,231,338 1,226,621 30,418
1. Due to banks 4,096 4,096
2. Due to customers 2,131,421 2,131,421 2,398,924 2,398,924
Total 2,135,517 4,096 2,131,421 2,398,924 2,398,924
Key: BV = Book Value L1 = Level 1 L2 = Level 2 L3 = Level 3

1.5 Information on “day one profit/loss”

The Institute did not earn day one profit/loss from financial instruments pursuant to paragraph 28 of IFRS 7 and other
related IAS/IFRS.

54 | ANNUAL
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PART 2. informAtion on the BAlAnce sheet

ASSETS

item 10 - cAsh And cAsh equivAlents

Detail

2017 2016
(a) Cash 15,247 15,216
(b) Free deposits ex art. 9 (b) 55,987 35,634
(c) Free deposits ex art. 9 (c)
(d) Other free deposits
Total 71,234 50,850

The balance included in (b) represent free deposits with Public Authorities of the Holy See and Vatican City State with
the statutory purpose of administering the assets owned by the Holy See (at present APSA).

item 20 Assets - finAnciAl Assets held for trAding

2.1 Detail by asset type

2017 2016
L1 L2 L3 L1 L2 L3
A. Cash assets
1. Debt securities
1.1. Structured securities
1.2. Other debt securities 2,027,677 26,855 1,750,174 81,519
2. Equity securities 29,659 52,730
3. UCI units 10,326 22,254 10,404 23,277
4. Loans
4.1. Outstanding repos
4.2. Other
Total A 2,057,336 37,181 22,254 1,802,904 91,923 23,277
B. Derivatives
1. Financial derivatives
1.1. Held for trading
1.2. Related to the fair value option
1.3. Other
2. Credit derivatives
2.1. Held for trading
2.2. Related to the fair value option
2.3. Other
Total B
Total (A+B) 2,057,336 37,181 22,254 1,802,904 91,923 23,277

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 The table shows all financial assets, by type, allocated to the trading portfolio and classified in the fair value hierarchy
(L1, L2 or L3) according to their nature.
UCI units in the financial assets held for trading refers exclusively to investment funds managed by third parties com-
posed by equity securities. Regarding the composition of the funds, refer to the table included in section 5.2.6 “Information
on unconsolidated structured entities” of Part 5 “Information on risks and hedging policies”.
Financial assets held for trading is primarily comprised of debt securities classified as Level 1 in the fair value hierarchy;
the only financial assets classified as Level 3 are shares of UCI units.
As of 31 December 2017, similar to the prior year, the Institute did not have any derivative financial instruments in the
trading portfolio.

2.2 Detail by borrowers/issuers

2017 2016
A. Cash assets
1. Debt securities
(a) Public entities 1,198,653 912,466
(b) Financial companies 675,554 703,239
(c) Insurance companies 5,115 9,286
(d) Non financial companies 175,211 206,702
(e) Other subjects
2. Equity securities
(a) Banks
(b) Other issuers:
- insurance companies 4,125 2,759
- financial companies 10,748 36,529
- non financial companies 14,786 13,442
- other
3. UCI units 32,580 33,681
4. Loans
(a) Public entities
(b) Financial companies
(c) Insurance companies
(d) Non financial companies
(e) Other subjects
Total A 2,116,771 1,918,104
B. Derivatives
(a) Banks
(b) Customers
Total B
Total (A+B) 2,116,771 1,918,104

No borrowers/issuers are residents of the Vatican City State.

Line (a) “Public entities” of the item A.1 Debt securities is exclusively comprised of securities issued by Foreign Central
Public Administrations.
In the portfolio of financial assets held for trading, there are no equity securities classified as in default or at the risk of
default.

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item 40 Assets - finAnciAl Assets AvAilABle for sAle

4.1 Detail by asset type

2017 2016
L1 L2 L3 L1 L2 L3
1. Debt securities
1.1. Structured securities
1.2. Other debt securities
2. Equity securities
2.1. Carried at fair value 3,879 684 6,157 499
2.2. Carried at cost 8 8
3. UCI units
4. Loans
Total 3,879 684 8 6,157 499 8

4.2 Detail by borrowers/issuers

2017 2016
A. Cash assets
1. Debt securities
(a) Public entities
(b) Financial companies
(c) Insurance companies
(d) Non financial companies
(e) Other subjects
2. Equity securities
(a) Banks
(b) Other issuers:
- insurance companies 3,880 6,157
- financial companies 684 499
- non financial companies 8 8
- other
3. UCI units
4. Loans
(a) Public entities
(b) Financial companies
(c) Insurance companies
(d) Non financial companies
(e) Other subjects
Total A 4,572 6,664

No borrowers/issuers are resident in the Vatican City State.

In the portfolio of financial assets available for sale, there are no equity securities classified in default or at the risk of
default.

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4.3 Financial assets available for sale with specific hedges

The Institute did not hold financial assets available for sale with specific hedges.

item 50 Assets - finAnciAl Assets held to mAturity

5.1 Detail by asset type

2017 2016
FV FV
VB VB
L1 L2 L3 L1 L2 L3
1. Debt securities
- structured
- other 246,168 259,547 558,956 583,392
2. Loans
Total 246,168 259,547 558,956 583,392
Key: BV = book value, FV = fair value

Financial assets held to maturity is mainly comprised of government bonds issued by European countries and bonds
issued by international financial entities.
As of 31 December 2017, securities with maturity less than 1 year (31 December 2018) had a balance sheet value
amounting to EUR 94.7m.

5.2 Detail by borrowers/issuers

2017 2016
1. Debt securities
(a) Public entities 160,670 441,580
(b) Financial companies 67,338 88,033
(c) Insurance companies
(d) Non financial companies 18,160 29,343
(e) Other subjects
2. Loans
(a) Public entities
(b) Financial companies
(c) Insurance companies
(d) Non financial companies
(e) Other subjects
Total 246,168 558,956

No borrowers/issuers are residents of the Vatican City State.

Line (a) Public entities of the item A.1 Debt securities is exclusively comprised of securities issued by Foreign Central
Public Administrations.

5.3 Financial assets held to maturity with specific hedges

The Institute did not hold financial assets held to maturity with specific hedges.

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item 60 Assets – due from BAnks

6.1 Detail by type

2017 2016
FV FV
VB VB
L1 L2 L3 L1 L2 L3
A. Credits ex art. 14 (c)
1. Fixed-term deposits 57,058 57,058 77,104 77,104
2. Outstanding repos
3. Others
B. Credits ex art. 14 (d)
1. Fixed-term deposits
2. Outstanding repos
3. Others
C. Due from banks
1. Loans
1.1. Current accounts
and demand deposits 362,123 362,123 457,624 457,624
1.2. Outstanding repos 54,205 54,205 108,501 108,501
1.3. Other loans:
(a) Outstanding repos
(b) Finance lease
(c) Other
2. Debt securities
2.1. Structured securities
2.2 Other debt securities
Total 473,386 473,386 643,229 643,229
Key: BV = book value, FV = fair value

No asset impairment was recorded.

Line A. Credits ex art. 14 (c) is comprised of different deposits from free deposits held with the Public Authorities of the
Holy See and Vatican City State with the statutory purpose of administering the assets owned by the Holy See (at present,
APSA).

6.2 Credits with specific hedges

The Institute did not hold credits with specific hedges and it has no outstanding finance leases.

59 | ANNUAL
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item 70 Assets – due from customers

7.1 Detail by type

2017 2016
Book value Fair value Book value Fair value

Non Impaired Non Impaired

impaired Purch- Other L1 L2 L3 impaired Purch- Other L1 L2 L3
ased ased
A. Loans
1. Current accounts 11,253 11,253 8,424 27 8,451
2. Outstanding repos
3. Mortgages
4. Credit cards,
personal loans
and loans on salary
5. Finance leases
6. Factoring
7. Other loans 7,200 6,969 14,989 12,495 8,207 21,967
B. Debt securities
1. Structured
securities
2. Other debt
securities
Total 18,453 6,969 26,242 20,919 8,234 30,418

Additional supporting information is provided in Part 5 “Information on risks and related hedging policies” of this doc-
ument.
It is to be mentioned that the Institute is not authorized by the Autorità di Informazione Finanziaria to carry out the
activity of “lending” (cfr. art. l (l) (b) of the Law n.XVIII and art. 3 (24) (b) of the Regulation No. l), as credit activities on its
own. However, it is authorized to make “advances” that is to disburse funds to its clients and to a limited extent following
guarantee of future income (such as, for example, in the case of the advance of salary or pension paid by the Holy See or the
Governatorato of Vatican City) or guaranteed by financial assets of the same amount deposited by the clients at the Institute.

7.2 Detail by borrowers

2017 2016
Non Impaired Non Impaired
impaired Purchased Other Impaired Purchased Other
1. Debt securities
(a) Public Entities
(b) Financial companies
(c) Insurance companies
(d) Non financial companies
(e) Other subjects
2. Loans to:
(a) Public Entities 11,238 8,290
(b) Financial companies
(c) Insurance companies
(d) Non financial companies 2,908 3,315
(e) Other subjects 4,307 6,969 9,314 8,234
Total 18,453 6,969 20,919 8,234

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7.3 Credits with specific hedges

The Institute did not hold credits with specific hedges.

item 100 Assets – investment in suBsidiAries

10.1 Information on investment in subsidiaries

The Institute holds a financial investment in a real estate company, S.G.I.R. S.r.l., which is based in Italy and is 100%
owned by the IOR.

10.2 Material investments in subsidiaries: book value, fair value and dividends received

The value of the investment in the real estate company S.G.I.R. S.r.l. was EUR 15.8 m.
There was no change in the value of the investment during 2017 and no dividends were paid.
The equity of S.G.I.R. S.r.l. as of 31 December 2017 was EUR 23.2m (2016: EUR 22.6m), including EUR 12.4m (2016:
EUR 12.4m) for a Fiscal Revaluation Reserve.
As the investment is in an unlisted company, IOR has not carried out the measurement of the fair value.
In 2016, S.G.I.R. S.r.l. presented the “Social Report” to highlight the social benefits produced by the management of real
estate assets that are not exclusively focused on profit. In fact, S.G.I.R. S.r.l. grants some properties for rent with subsidized
rent or on loan for free use to support institutions with a social purpose, as notably discoled in the Chapter 2. Operational
Information in the Management Report.

10.3 Material investment in subsidiaries: financial information

Cash and Financial Non Financial Non Total Interest Value Profit Profit Profit Profit Other Compre-
cash assets financial liabilities financial income margin adjustments (loss) (loss) (loss) (loss) income hensive
equivalents assets liabilities and from from from groups for the year items income
write-backs current current of assets (1) after taxes (3) = (1) +
on operations operations being (2) (2)
tangible before after taxes disposed
and taxes after taxes
intangible
assets

A. Subsidiaries
entities
S.G.I.R. S.r.l. 179 690 25,802 3,428 46 1,843 -19 1,032 630 630 630
B. Entities
subject to
joint control
C. Entities
subject to
significant
influence

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item 110 Assets –tAngiBle Assets

11.1 Tangible assets in-use: detail of the assets measured at cost

2017 2016
1. Owned assets
(a) land
(b) buildings
(c) furniture 1 1
(d) electronic equipment 144 115
(e) other
2. Assets acquired under finance lease
(a) land
(b) buildings
(c) furniture
(d) electronic equipment
(e) other
Total 145 116

11.4 Tangible assets held for investment: detail of the assets measured at fair value

2017 2016
FV FV
VB VB
L1 L2 L3 L1 L2 L3
1. Owned assets
(a) land
(b) buildings 3,102 3,102 2,980 2,980
2. Assets acquired
under finance lease
(a) land
(b) buildings
Total 3,102 3,102 2,980 2,980
Key: BV = book value, FV = fair value

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11.5 Tangible assets in- use: annual changes

Land Buildings Furniture Electronic Other Total

equipment
A. Opening balance 2,629 4,448 32 7,109
A.1 Net total adjustments (2,628) (4,333) (32) (6,993)
A.2 Net opening balance 1 115 116
B. Increases:
B.1 Purchases 98 98
B.2 Capitalised improvement costs
B.3 Write-backs
B.4 Positive fair value differences recognized in
a) Net Equity
b) Income Statement
B.5 Positive foreign exchange differences
B.6 Transfer from investment property
B.7 Other changes
C. Decreases:
C.1 Sales
C.2 Depreciation (69) (69)
C.3 Impairment losses recognized in:
a) Net Equity
b) Income Statement
C.4 Negative fair value differences recognized in
a) Net Equity
b) Income Statement
C.5 Negative foreign exchange differences
C.6 Transfer to:
a) investment property
b) assets being disposed
C.7 Other changes
D. Net closing balance 2,629 4,546 32 7,207
D.1 Total net adjustments (2,628) (4,402) (32) (7,062)
D.2 Gross closing balance 1 144 145

All tangible assets in-use were measured at cost.

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11.6 Tangible assets held for investment: annual changes

Total
Land Buildings
A. Opening balance 2,980
B. Increases:
B.1 Purchases
B.2 Capitalised improvement costs
B.3 Positive fair value differences 136
B.4 Write-backs
B.5 Positive foreign exchange differences
B.6 Transfer from tangible assets for functional use
B.7 Other changes
C. Decreases
C.1 Sales
C.2 Depreciation
C.3 Negative fair value differences (14)
C.4 Impairment losses
C.5 Negative foreign exchange differences
C.6 Transfer to other assets
a) tangible assets for functional use
b) current assets being disposed
C.7 Other changes
D. Closing balance 3,102

All the tangible assets held for investment are measured at fair value.
The item includes 5 investment properties received in the past through donations, totaling EUR 3.1m. The item in-
creased from 31 December 2016 due to an increase in fair values.
The Institute has surveys performed by a qualified independent expert.
As of 31 December 2017, the properties did not generate any rental income, because the Institute signed a lease
agreement with its subsidiary S.G.I.R. S.r.l. for the use of properties for free. During 2017, S.G.I.R. S.r.l. earns EUR 57,000
as rental income on these properties.

item 120 Assets – intAngiBle Assets

12.1. Detail by asset

2017 2016
Definite life Indefinite life Definite life Indefinite life
A.1. Goodwill
A.2. Other intangible assets
A.2.1 Assets carried at cost:
(a) intangible assets generated internally
(b) other assets 871 1,044
A.2.2 Assets carried at fair value
(a) intangible assets generated internally
(b) other assets
Total 871 1,044

Intangible assets consist of software programs and costs incurred to implement them.

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12.2 Annual changes

Other intangible assets Other intangible assets:

generated internally other
Goodwill DEF INDEF DEF INDEF Total
A. Opening balance 7,081 7,081
A.1 Total net adjustments (6,037) (6,037)
A.2 Net opening balance 1,044 1,044
B. Increases
B.1 Purchases 316 316
B.2 Increases of intangible assets generated internally
B.3 Write-backs
B.4 Positive fair value differences recognized in
- Net Equity
- Income Statement
B.5 Positive foreign exchange differences
B.6 Other changes
C. Decreases
C.1 Sales
C.2 Impairment losses
- Depreciation (489) (489)
- Write downs recognized in
+ Net Equity
+ Income Statement
C.3 Negative fair value differences recognized in
- Net Equity
- Income Statement
C.4 Transfer to non-current assets being disposed
C.5 Negative foreign exchange differences
C.6 Other changes
D. Net closing balance 7,397 7,397
D.1 Total net adjustments (6,526) (6,526)
E. Gross closing balance 871 871

Intangible assets are carried at cost.

The IOR does not have internally generated intangible assets.

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item 150 Assets - other Assets

15. Other Assets

2017 2016
1.Gold 22,392 22,394
2. Medals and precious coins 10,536 10,490
3. Securities sold not settled 92
4. Commission from asset management services not yet received 6,225 6,463
5. Client Tax advances 610
6. Deposit for guarantees for credit cards transactions 702 799
7. Sundry debtors 451 833
8. Prepayments 494 980
Total 41,502 41,959

Gold is mainly deposited with the U.S. Federal Reserve, while medals and precious coins are kept in the IOR vaults.
Gold is carried at the lower of cost or net estimated recoverable amount.
Medals and precious coins are appraised on the basis of their weight and the quality of gold and silver they contain,
carried at the lower of cost or net estimated recoverable amount.
Gains and losses arising from disposal of gold, medals and precious coins are recognized in the Income Statement,
item 80 “Net trading result”. Losses arising from evaluation at the lower of cost or net estimated recoverable amount, as
well as reversals of the previously recognized loss are recognized in the Income Statement, item 190 “Other operating
income (expense)”.
Also included in Other Assets are commission from asset management services not yet received at the closing date
of the financial statements for EUR 6.2m. These commissions, pertaining to the second half of 2017, were collected at
the beginning of 2018.

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LIABILITIES

item 10 liABilities - due to BAnks

1.1 Detail by product

2017 2016
1. Due to Public Authorities
of which:
- Public Authorities ex art. 24 (c)
2. Due to foreign Public Authorities
of which:
- Public Authorities ex art. 24 (d)
3. Due to banks
3.1. Current accounts and demand deposits 4,096
3.2. Fixed-term deposits
3.3. Loans
3.3.1. Reverse repos
3.3.2. Other
3.4. Amounts due under repurchase agreements of own equity instruments
3.5. Other liabilities
Total 4,096
Fair value - level 1 4,096
Fair value - level 2
Fair value - level 3
Total fair value 4,096

Due to banks include amounts due to the Holy See and Vatican City State Public Authorities, the statutory purpose
of which is to administer the Holy See’s proprietary assets (at present APSA).
Amounts due as of 31 December 2017 was EUR 4.1m comprised payment orders to be paid in 2 days.

1.2 Subordinated liabilities

There are no subordinated liabilities recognized in this item.

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item 20 liABilities – due to customers

2.1 Detail by type

2017 2016
1. Current accounts and demand deposits 2,121,947 2,397,688
2. Fixed-term deposits 9,474 1,236
3. Loans
3.1. Reverse repos
3.2. Other
4. Amounts due under repurchase agreements of own equity instruments
5. Other payables
Total 2,131,421 2,398,924
Fair value - level 1
Fair value - level 2
Fair value - level 3 2,131,421 2,398,924
Total fair value 2,131,421 2,398,924

Due to customers had a decrease from 2016 due to the impact of Forex on US Dollars deposits as well as tax payments
on financial instruments made through the Institute.
The above amounts include liquidity and term deposits related to the Asset Management agreements, for which IOR is
the depository institution.
These are comprised of:

Deposits related to Asset management accounts 2017 2016

Deposits on demand 338,920 417,026
Time deposits
Total 338,920 417,026

The item Due to customers also includes a deposit at the disposal of the Commission of Cardinals to support works of
religion. As of the balance sheet date, this amounted to EUR 0.9m (2016: EUR 6.3m). The EUR 5.4m decrease was mainly
due to the distribution of funds for charitable activities.

2.2 Subordinated liabilities

There are no subordinated liabilities recognized in this item.

item 100 liABilities – legAtes

The item includes the deposits of the “Legates” amounting to EUR 47.0m (2016: 47.1m) as of 31 December 2017, com-
prised of 297 funds (2016: 293) donated to the Institute. The IOR has the burden, for a significant period of time, of fulfilling
specific ecclesiastical functions or otherwise achieving purposes related to works of piety, apostolate and charity works, on
the basis of its annual income.

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item 110 liABilities – other liABilities

Other liabilities 2017 2016

Inheritances to be settled 4,023 6,384
Invoices to be received 4,748 4,515
Outstanding checks 659 1,070
Remunerations to be paid 1,055 914
Other sundry creditors 75 908
Funds for charitable contributions 3,353 3,220
Liabilities for guarantees issued and commitments towards third parties 1,699 1,699
Securities purchased not settled
Total 15,612 18,710

The item “Inheritances to be settled” represents the property values of deceased donors pending resolution of inheritance
issues.
The amount of EUR 1.7m (2016: EUR 1.7m) reported under“ Liabilities for guarantees issued and commitments
towards third parties” is due to guarantees in addition to the commitments to third parties to disburse funds whose cash out
is uncertain (see paragraph 13.1 Guarantees and commitments).
Funds for charitable contributions are comprised of the Fund for Holy Masses and Fund for Missionary Activities.

Fund for Missionary Activities

The Fund for Missionary Activities is used to distribute contributions to congregations and institutions that operate mis-
sionary and charitable activities. The most common activities are the direct disbursement of contributions to student priests
for the completion of university studies, financial aid for destitute persons or families (reported by Parishes or by individual
priests), long-distance adoptions, specific help for missionary and charity work or aid to families that have lost everything as
a result of natural disasters. It is mainly funded by small donations with a commitment to execute Missionary activities.
Donations and distributions are recorded directly into the Fund’s account. Distributions to the beneficiaries are approved by
a Committee comprised of the Prelate, the Client Relationship Manager, and the Head of Operation, who took the place of
the “Aggiunto al Direttore” in January 2018.

Fund for Holy Masses

The Fund for Holy Masses is used to distribute contributions to priests for Holy Masses. It is financed through small
donations with a commitment to the Holy Masses. Donations and distributions are directly recorded into the Fund’s
account. Distributions to the priests are approved by a Committee comprised of the Prelate, the Client Relationship Man-
ager, and the Head of Operation, who took the place of the “Aggiunto al Direttore” in January 2018.

The detail of Funds for charitable contributions is as follows:

Funds for charitable 2017 2016

A. Fund for Missionary Activities 21 156
1. Balance at 1 January 156 239
2. Donations received 97 86
3. Distributions for Missionary Activities (232) (169)
B. Fund for Holy Masses 3,332 3,064
1. Balance at 1 January 3,064 3,064
2. Donations received 445 83
3, Distributions for Holy Masses (177) (83)
Total 3,353 3,220

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 Distributions to beneficiaries are subject to strict internal policies approved by the Board.
It should be noted that the charitable activities of the Commission of Cardinals are made through a deposit included
in item 20 of the liabilities.

item 120 liABilities – stAff severAnce fund

10.1 Annual changes

2017 2016
A. Opening balance 6,993 6,788
B. Increases
B.1 Allocation for the year 519 534
B.2 Other changes 34 518
C. Decreases
C.1 Benefits paid (247) (624)
C.2 Other changes (122) (223)
D. Closing balance 7,177 6,993

The Staff severance fund comprises indemnities paid to personnel when they leave the IOR.
The change in the fund balance is summarised as follows:

2017 2016
Balance at 1 January 6,993 6,788
Current costs 447 459
Contribution by individuals 72 75
Transfers to benefit plan for pensions - (223)
Advances (23) (80)
Advances restitution 34 148
Consideration paid during the year (224) (544)
Actuarial (gain) loss of the year (122) 370
Balance at 31 December 7,177 6,993

The actuarial assumptions used for the valuation of the Staff severance fund are the same as those used for the Benefit
Plan Liability for pensions, described in Item 130 (a) Liabilities.
As defined by IAS 19, a sensitivity analysis was performed on the variation of the main actuarial assumptions included
in the calculation model; these assumptions are:
• annual discount rate;
• annual rate of salary growth;
• annual mortality rate;
• probability of advances.

Annual Annual Annual Probability

discount rate rate of salary growth mortality rate of advances
Liabilities +0,50 p.p. -0,50 p.p. +0,50 p.p. -0,50 p.p. +0,50 p.p. -0,50 p.p. +0,025 p.p. -0,025 p.p.
7,063 7,299 7,290 7,070 7,176 7,178 7,185 7,194

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10.2 Other information

Please refer to the paragraphs regarding the accounting policies for more information on the calculation of employee
termination indemnities.
The portion of employee gross salaries retained by the Institute is 1.5%.
No payments were made to the Vatican Pension Plan.
Funds were managed by the IOR Treasury department.

item 130 liABilities – AllowAnces for risks And chArges

11.1 Detail by type

2017 2016
1. Post employment benefits for pensions 133,335 121,088
2. Other allowances for risks and charges
2.1 legal disputes
2.2 staff expenses
2.3 other 1,212 3,500
Total 134,547 124,588

11.2 Annual changes

Provision for pension and similar obligations Other provisions Total

A. Opening balance 121,088 3,500 124,588
B. Increases
B.1 Provision for the year 4,133 4,133
B.2 Time value changes
B.3 Changes due to discount rate variations 11,198 11,198
B.4 Other changes
C. Decreases
C.1 Utilization in the year (3,084) (2,288) (5,372)
C.2 Changes due to discount rate variations
C.3 Other changes
D. Closing balance 133,335 1,212 134,547

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11.3 Pension plan liabilities defined benefit obligations

The Provision for pension and similar obligations fund comprises the Pension plan of the IOR employees.
More in detail, the changes in the Plan concern the following items:

2017 2016
Opening balance 121,088 108,338
Current Service cost 703 607
Interest cost 1,685 2,031
New subscribers cost 1,649
Contribution by individuals 96 93
Transfer from staff severance fund 223
Pensions paid during the year (3,084) (3,109)
Transfer out
Actuarial (gain) loss of the year 11,198 12,905
Closing balance 133,335 121,088

The actuarial valuation of the defined benefit plan liability was performed using the following assumptions:

2017 2016
Annual inflation rate 2.00% 2.00%
Annual discount rate 1.19% 1.43%
Annual rate for revaluation of pension 2.00% 2.00%
Annual rate of real increase salary 2.01% 2.35%

The Current Service Cost is the actuarial present value of benefits due to employees for services rendered during the
period.
The Interest Cost is the increase in the present value of the obligation from the passage of time and it is proportional to
the discount rate used in the assessment of the previous year’s liabilities.
The Actuarial gain/loss is the change in the liability in the present year arising from:
• the effect of the differences between the previous actuarial assumptions and what has actually occurred;
• the effect of the changes in actuarial assumptions.
The results are recognized directly to Equity in a specific reserve named “Valuation reserves” “Post-employment benefit
actuarial gain (loss) reserves” and the actuarial gain or loss is recorded in Other Comprehensive Income.
For Staff severance fund and Provisions for pensions and similar obligations, in 2017, the Institute recognized an actuar-
ial loss of EUR 11.2m (2016: loss of EUR 13.3m) in Other Comprehensive Income. Consequently, change in the “Valuation
reserves” (item 140 Equity) was a loss of EUR 57.1m (2016: EUR -46m); the increased loss compared to the prior year is due
to the decrease in the discount rate to 1.19% in 2017 from 1.43% in 2016.
A total of 102 employees are active and contribute to the Pension plan (2016:102). A total of 74 former employees are in
retirement and benefit from the plan (2016: 74).
As defined by IAS 19, a sensitivity analysis was performed on the variation of the main actuarial assumptions included in
the calculation model; these assumptions are:
• annual discount rate;
• annual rate of salary growth;
• annual inflation rate;
• annual mortality rate.

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 Annual Annual Annual Mortality
discount rate rate of salary growth inflation rate rate
Liabilities +0,50 p.p. -0,50 p.p. +0,50 p.p. -0,50 p.p. +0,50 p.p. -0,50 p.p. +0,025 p.p. -0,025 p.p.
120,280 145,756 132,813 131,391 145,704 120,211 131,717 132,471

11.4 Other information

Please refer to the paragraphs regarding the accounting policies for more information on the calculation of the pension
fund.
The portion of employee gross salaries retained by the Institute is 6%.
No payments were made to the Vatican Pension Plan.
Funds were managed by the IOR Treasury department.

11.5 Other provisions

As of 31 December 2017 the Institute, based on the analysis carried out until now with the help of legal advisors, has
almost reached the final estimate of the outstanding liability for which it has already recorded the cash outflow. Pending the
formal and definitive conclusion of this issue, IOR has maintained on its books a residual provision of EUR 1.2m, included
in item 130 b “Provisions for risks and charges” on line b “Other Funds” of the Balance Sheet. As this represents an estimate
based on critical assumptions, upon the conclusion of future events, actual results may differ from what is expected.
The relative content of the item was explained in the paragraph 1.1.4 Other aspects - Critical accounting estimates and
judgements, Part 1 Accounting policies.

item 160 170 equity – reserves

12.1 Capital

Capital, as a separate component of Equity, represents a permanent endowment that cannot be reduced or distributed,
except in case of cessation or liquidation of the entity.
During 2017, no changes were recorded in Capital balance, amounting to EUR 300m.
Securities and liquid funds made up the Capital; in detail, deposits to APSA, other liquid assets, supranational bonds and
governative bonds with high quality credit rating.

12.2 Reserves

The equity balance is comprised of two different reserves, Available and Unavailable reserves.
Unavailable Reserves are earning reserves designed to further strengthen the Institute’s Equity and long-term stability.
Available Reserves are earning reserves representing earnings that could potentially fulfill a “stabilization” function, sub-
ject to a resolution of the Commission of Cardinals.
During 2017, no changes were recognized in Unavailable Reserves, amounting to EUR 100m, and Available Reserves,
amounting to EUR 282m.
Unavailable reserves are comprised of securities, properties and precious metals. In detail, these reserves are comprised
of gold bars, medals and coins, investment in subsidiary (S.G.I.R. S.r.l.), real estate properties and liquid financial instru-
ments traded on regulated markets.
The Available Reserve is comprised of securities, representing liquid financial instruments traded on regulated markets.

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13 Additional information

13.1 Guarantees and commitments

2017 2016
1) Financial guarantees given to
a) Banks
b) Customers 27 42
2) Commercial guarantees given to
a) Banks
b) Customers
3) Irrevocable commitments to disburse funds to
a) Banks
b) Customers
i) cash out certain
ii) cash out uncertain 4,000 4,000
4) Underlying commitments on credit derivatives: sales of protection
5) Assets pledged as collateral for third-party commitments
6) Other commitments
Total 4,027 4,042

At the balance sheet date, the Institute has a commitment of EUR 4m of uncertain use issued in favor of third par-
ties.
As at 31 December 2017, the IOR has one guarantee issued before the year 2000 and covered by assets held in cus-
tody.
No new guarantees were issued in 2017.
The guarantees were initially recognized at their nominal value, which is their fair value. In subsequent periods, the
guarantees are reported at the amount determined in accordance with IAS 37 “Provisions, Contingent Liabilities and
Contingent Assets”.

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13.4 Asset Management and Brokerage on behalf of third parties

2017 2016
1. Trading on behalf of customers
(a) purchases
(i) settled 122,935 129,087
(ii) to be settled
(b) sales
(i) settled 93,901 84,530
(ii) to be settled
2. Portfolio management (assets management)
(a) individual 2,957,652 3,110,929
(b) collective
3. Custody and administration of securities
(a) third party security held in deposit: related to depositary bank activities
(excluding portfolio management)
(i) security issued by the entity that prepare the financial statement
(ii) other securities
(b) third party securities held in deposit: other (excluding portfolio management)
(i) security issued by the entity that prepare the financial statement
(ii) other securities
(c) third party securities deposited with third parties 474,594 554,763
(d) proprietary portfolio securities deposited with third parties 2,380,889 2,508,160
4. Other operations

Assets under Management consist mainly of client-owned securities held at the IOR for management purposes. Invest-
ment decisions are made by the IOR on the basis of portfolio management mandates signed with its clients.
Assets under Management agreements are valued using the mark-to-market method. They include the total value of
portfolios as well as, liquid and term deposits. Accruals are also included, both on securities and on liquid and term deposits.
The IOR is the depository of liquid and term deposits, amounting to EUR 338.9m (2016: EUR 417.2m), as disclosed in item
20 Liabilities “Due to customers”.
Assets under Custody mainly include client-owned securities held at the IOR for custodial purposes. The clients make all
investment decisions and the IOR has no discretionary power to manage these assets, provided that such decisions are in
accordance with the role and mission of the Institute.
Assets under custody agreements are also valued based on current bid prices, using the mark-to-market method. They
also include accruals on interest to be received on debt securities.

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PART 3. informAtion on the income stAtement
item 10 income stAtement – interest And similAr income

1.1 Interest income and similar income: detail

Debt securities Loans Other transactions 2017 2016

1. Financial assets held for trading 19,944 19,944 22,574
2. Financial assets available for sale
3. Financial assets held to maturity 10,522 10,522 15,217
4. Due from banks - 1,393 1,393 1,615
5. Due from customers - 304 304 426
6. Financial assets carried at fair value
7. Hedging derivatives
8. Other assets
Total 30,466 1,697 32,163 39,832

In 2017 the Institute recorded a general decrease in all items related to interest margin, both income and expense, which
consequently led to a net reduction in the Interest Margin.
Interest and similar income accrued during the year in positions classified as impaired (other than those recorded in the
item 130 Income Statement “Net losses/reversal on impairment”) at the balance sheet date amounted to EUR 342,000. They
were directly deducted from line 5 in the table above.

item 20 income stAtement – interest And similAr expenses

1.4 Interest and similar expenses: detail

Payables Securities Other transactions 2017 2016

1. Due to Public Entities
(i) Public Authorities
(ii) Foreign Public Authorities
(iii) International and Regional Organizations
2. Due to banks (11) (11) (52)
3. Due to customers (3,190) (3,190) (3,117)
4. Outstanding securities
5. Financial liabilities held for trading
6. Financial liabilities designated at
fair value through profit and loss
7. Other liabilities and funds
8. Hedging derivatives
9. Due to other subjects
Total (3,201) (3,201) (3,169)

Interest income decreased due to the impact of lower interest rates determined by the European Central Bank in 2014,
2015 and 2016, and the expiration of many positions with higher interest rates.
Interest expense recorded the same amount of the previous year.

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item 40 income stAtement – fee And commission income

2.1 Fee and commission income: detail

2017 2016
a) Guarantees given/received 1 1
b) Credit derivatives
c) Administration, brokerage and consultancy services:
1. trading in financial instruments 711 654
2. trading in currencies
3. portfolio management
3.1 individual 12,540 12,483
3.2 collective
4. Custody and administration of securities 93 113
5. Custodian bank
6. Securities placement
7. Receipt and transmission of orders activity
8. Consulting
8.1 investments
8.2 financial structure
9. Distribution of third-party services
9.1 portfolio management
9.1.1 individual
9.1.2 collective
9.2 insurance products
9.3 other products
d) collection and payment services 2,226 2,196
e) servicing of securitization operations
f) factoring services
g) rate and tax collection office services
h) multilateral trading systems management
i) current account keeping and management 340 369
j) other services 16 21
Total 15,927 15,837

The Fee and Commission income recorded the same amount of the previous year.

2.2 Fee and commission income: distribution channels of products and services

All the IOR products and services are offered at IOR locations in Vatican City State.

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item 50 income stAtement – fee And commission expense

2.3 Fee and commission expense: detail

2017 2016
a) Guarantees given/received
b) Credit derivatives
c) Administration, brokerage and consultancy services:
1. trading in financial instruments (114) (83)
2. trading in currencies
3. portfolio management
3.1 own portfolio
3.2 third-party portfolio
4. Custody and administration of securities (1,434) (1,613)
5. Placement of financial instruments
6. Sales of financial instrument, products and services through other outlets
d) Collection and payment services (648) (761)
e) Administration and management of current accounts (1,427) (571)
f) Other services (1) (1)
Total (3,623) (3,029)

The increase in Fee and commission expense was mainly due to the fee and commissions charged by correspondent
banks on current accounts of the Institute as charges for the management of liquidity (+145%); while the custody and
administration fees for securities slightly decrease.

item 70 income stAtement – dividends And similAr income

3 Dividends and similar income: detail

2017 2016
Dividends Income Dividends Income
from UCI from UCI
A. Financial assets held for trading 508 400 860 812
B. Financial assets available for sale 237 435
C. Financial assets carried at fair value through profit and loss
D. Investment in subsidiaries
Total 745 400 1,295 812

Dividends received in 2017 for financial assets held for trading were EUR 0.9m (2016: EUR 1.7m), recording a strong
decrease, in line with the reduction of equites held in the category.
Of this, income from UCI units, which relates to dividends distributed by investment funds, decreased by 50%.
In 2017, the Institute received dividends of EUR 237,000 from investment securities recorded as financial assets available
for sale (2016: EUR 435,000).

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item 80 income stAtement – net income from trAding Activities

4. Net income from trading activities: detail

2017
Gains Profit from Losses Losses from Net
trading trading activities income
(A) activities (B) (C) (D) [(A+B) - (C+D)]
1. Financial assets held for trading
1.1 Debt securities 7,886 2,267 8,673 1,480
1.2 Equity securities 2,045 1,749 281 3,513
1.3 UCI units 258 134 1,092 (700)
1.4 Loans
1.5 Other 3 3
2. Financial liabilities held for trading
2.1 Debt securities
2.2 Payables
2.3 Other
3. Financial assets and liabilities: exchange differences 86 3,727 582 3,231
4. Derivatives
4.1 Financial derivatives
- On debt securities and interest rates
- On equity securities and stock indices
- On currencies and gold
- Other
4.2 Credit derivatives
Total 10,275 7,880 10,628 7,527

2016
Gains Profit from Losses Losses from Net
trading trading activities income
(A) activities (B) (C) (D) [(A+B) - (C+D)]
1. Financial assets held for trading
1.1 Debt securities 6,167 1,429 6,041 1,555
1.2 Equity securities 1,603 1,509 94
1.3 UCI units 1,693 14,445 (12,752)
1.4 Loans
1.5 Other 126 126
2. Financial liabilities held for trading
2.1 Debt securities
2.2 Payables
2.3 Other
3. Financial assets and liabilities: exchange differences 1,529 470 5 1,994
4. Derivatives
4.1 Financial derivatives
- On debt securities and interest rates
- On equity securities and stock indices
- On currencies and gold
- Other
4.2 Credit derivatives
Total 10,992 2,025 22,000 (8,983)

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 Below is a summary of the net trading results in 2017 compared to 2016.
In 2017, debt securities recognized a gain of EUR 1.5m compared to a gain of EUR 1.6m in 2016. Realized gain from
trading activity was EUR 2.3m compared to a gain of EUR 1.4m in 2016, and the unrealized loss was EUR 787,000 com-
pared to a gain of EUR 126,000 in 2016.
In 2017, equity securities recognized a gain of EUR 3.5m compared to a gain of EUR 94,000 in 2016. A realized profit of
1.7m was recognized compared to no realized profit (loss) in 2016, while unrealized gain was EUR 1.8m, compared to EUR
94,000 in 2016.
In 2017, UCI units recognized a loss of EUR 700,000 compared to a gain in 2016 of EUR 12.8m. A realized profit of
134,000 was recorded in 2017 compared to no realized gain in 2016, while unrealized loss was EUR 834,000 compared to an
unrealized gain of EUR 12.8m in 2016.
Line 1.5 “Financial assets held for trading: other” includes gains (losses) from currency trade, gold and other precious
metals, recognizing a gain of EUR 3,000 in 2017 compared to EUR 126,000 in 2016 (realized).
“Financial assets and liabilities: exchange differences” recognized a gain of EUR 3.2m compared to a profit of EUR 2m in
2016, comprised of EUR 3.7m realized profit in 2017 compared to EUR 470,000 in 2016 and unrealized loss of EUR 496,000
in 2017 compared to profit of EUR 1.5m in 2016.

item 100 income stAtement - profit (loss) on disposAl or repurchAse

6. Profit (loss) on disposal or repurchase: detail

2017 2016
Profit Losses Net income Profit Losses Net income
Financial assets
1. Due from banks
2. Due from customers
3. Financial assets available for sale
3.1 Debt securities
3.2 Equity securities 1,386 1,386 1,518 (19) 1,499
3.3 UCI units
3.4 Loans
4. Financial assets held to maturity
Total assets 1,386 1,386 1,518 (19) 1,499
Financial liabilities
1. Due to banks
2. Due to customers
3. Outstanding securities
Total liabilities

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item 130 income stAtement – net losses/reversAl on impAirment

8.1 Net impairment losses on loans: detail

Value adjustments (1) Write-backs (2)

Specific Specific Portfolio
Port-
folio 2017 2016
Derecognition Other A B A B (1)+(2) (1)+(2)
1. Due from banks
- Loans
- Debt securities
2. Due from customers
Purchased impaired loans
- Loans
- Debt securities
Other receivables
- Loans (45) (725) 259 119 (392) 353
- Debt securities
Total (45) (725) 259 119 (392) 353

8.2 Net impairment losses on financial assets available for sale: detail

Value adjustments (1) Write-backs (2)

Specific Specific
2017 2016
Derecognition Other A B (1)+(2) (1)+(2)
1. Debt securities
2. Equity securities (148)
3. UCI units
4. Loans to banks
5. Loans to customers
Total (148)

8.4 Net impairment losses on other financial assets: detail

Value adjustments (1) Write-backs (2)

Specific Specific Portfolio
Port-
folio 2017 2016
Derecognition Other A B A B (1)+(2) (1)+(2)
1. Guarantees given (138)
2. Credit derivatives
3. Commitments to lend funds
4. Other operations
Total (138)

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item 150 income stAtement – AdministrAtive expenses

9.1 Personnel expenses: detail

2017 2016
A. Staff
1. Wages and salaries (5,022) (5,078)
2. Social security charges
3. Termination indemnities
4. Supplementary benefits (630) (630)
5. Provisions for termination indemnities (447) (459)
6. Provisions for post employment benefits
(a) defined contribution plans
(b) defined benefit plans (4,037) (2,638)
7. Payments to external pension plans
(a) defined contribution plans
(b) defined benefit plans
8. Other benefits in favor of employees (241) (546)
B. Current Personnel with contracts pursuant to ex art. 10 (1)
1. letter (b)
2. letter (c)
3. letter (d)
C. Fees and charges for:
1. Board of Superintendence (668) (504)
2. Directorate (308) (299)
3. Revisori (88) (91)
D. Early retirement cost
E. Recovery of expenses for employees seconded to other entities
F. Reimbursement of expenses for employees of the institutions and organizations
of the Holy See and the Vatican City State placed at the Institute.
Total (11,441) (10,245)

9.2 Average number of employees by categories

Type Total Managers Officials Staff

Average number 102 4 5 93

Reimbursement of expenses for employees of the institutions and organizations of the Holy See and the Vatican City
State placed at the Institute.

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9.3 Post employment defined benefit plans: costs and revenues

Post employment defined benefit plans: costs 2017 2016

Current Service cost of internal Pension Plan (703) (607)
Interest cost of internal Pension Plan (1,685) (2,031)
New positions cost (1,649)
Post employment costs: contribution to Vatican Pension Plan (630) (630)
Total Costs (4,667) (3,268)
Post employment defined benefit plans: revenues
Total (4,667) (3,268)

9.5 Professional service expenses: detail

2017 2016
A. Professional services expenses
1. Legal services (1,940) (2,437)
2. Directional consultants (149) (718)
3. Technical consultants (200) (288)
4. Operational consultants (196) (342)
5. Translational services (49) (56)
B. Expenses related to works contract
1. ex art. 10 (1) (a)
2. ex art. 11 (1)
C. Expenses related to outsourcing contracts
D. Expenses related to independent auditors (121) (121)
Total (2,655) (3,962)

9.6 Other administrative expenses: detail

2017 2016
1. Software maintenances (1,688) (1,441)
2. Other maintenances (440) (800)
3. Information providers (376) (379)
4. AIF contribution (200) (346)
5. Other expenses (1,927) (1,913)
Total (4,631) (4,879)

item 160 income stAtement – net provision for risks And chArges

Detailed information is provided in Item 130 (b) Liabilities.

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item 170 income stAtement – net vAlue Adjustments to/recoveries on tAngiBle Assets
11. Net value adjustments to/recoveries on tangible assets: detail

2017 2016
Depre- Impairment Recoveries Net Depre- Impairment Recoveries Net
ciation losses income ciation losses income
(a) (b) (c) (a+b-c) (a) (b) (c) (a+b-c)
A. Tangible assets
A.1 Owned assets
- Functional use (69) (69) (83) (83)
- For investment
A.2 Acquired under
finance lease
- Functional use
- For investment
Total (69) (69) (83) (83)

item 180 income stAtement – net vAlue Adjustments to/recoveries on intAngiBle Assets

12. Net value adjustments to/recoveries on intangible assets: detail

2017 2016
Depre- Impairment Recoveries Net Depre- Impairment Recoveries Net
ciation losses income ciation losses income
(a) (b) (c) (a+b-c) (a) (b) (c) (a+b-c)
A. Intangible assets
A.1 Owned assets
- Generated internally
by the Institute
- Other (489) (489) (683) (683)
A.2 Acquired under
finance lease
Total (489) (489) (683) (683)

item 190 income stAtement – other operAting income (expense)

13.1 Other operating income (expense): detail

2017 2016
A. Income 459 736
Extraordinary income 459 558
Recovery of amounts for gold and precious metals 178
Closure of past years issue
B. Expenses (295) (729)
1. Operating losses (278) (715)
2. Extraordinary expenses (5) (14)
3. Impairment of amounts for gold and precious metals (12)
Total 164 7

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item 220 income stAtement – net result of fAir vAlue vAluAtion of tAngiBle And intAngiBle Assets

15. Net result of fair value valuation of tangible and intangible assets: detail

Exchange differences
2017 Revaluations Impairment Positive Negative Net
income
(a) (b) (c) (d) (a-b+c-d)
A. Tangible assets
A.1 Owned assets
- Functional use
- Held for investment 136 14 122
A.2 Acquired under finance lease
- Functional use
- Held for investment
B. Intangible assets
B.1 Owned assets
B.1.1 Generated internally by the Institute
B.1.2 Other
B.2 Acquired under finance lease
Total 136 14 122

Exchange differences
2016 Revaluations Impairment Positive Negative Net
income
(a) (b) (c) (d) (a-b+c-d)
A. Tangible assets
A.1 Owned assets
- Functional use
- Held for investment 136 53 83
A.2 Acquired under finance lease
- Functional use
- Held for investment
B. Intangible assets
B.1 Owned assets
B.1.1 Generated internally by the Institute
B.1.2 Other
B.2 Acquired under finance lease
Total 136 53 83

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PART 4. informAtion on comprehensive income

2017 2016
Gross Income Net Gross Income Net
amount tax amount amount tax amount

10. Profit (loss) for the year 31,934 31,934 36,001 36,001
Other comprehensive income that may not
be reclassified to the income statement
20. Tangible assets
30. Intangible assets
40. Defined benefit plans (11,076) (11,076) (13,275) (13,275)
50. Non current assets held for sale
60. Share of valuation reserves connected with
investments carried at equity
Other comprehensive income that may be
reclassified to the income statement
70. Hedges of foreign investment
(a) fair value changes
(b) reclassification to the income statement
(c) other changes
80. Foreign exchange differences
(a) fair value changes
(b) reclassification to the income statement
(c) other changes
90. Cash flow hedges
(a) fair value changes
(b) reclassification to the income statement
(c) other changes
100. Financial assets available for sale
(a) fair value changes 1,662 1,662 (1,838) (1,838)
(b) reclassification to the income statement
- impairment losses 148 148
- gains (losses) from disposals (2,589) (2,589)
(c) other changes
110. Non current assets held for sale
(a) fair value changes
(b) reclassification to the income statement
(c) other changes
120. Share of valuation reserves connected with
investments carried at equity:
(a) fair value changes
(b) reclassification to the income statement
- impairment losses
- gains (losses) from disposals
(c) other changes
130. Total other comprehensive income (9,414) (9,414) (17,554) (17,554)
Total Comprehensive Income (item 10 + item 130) 22,520 22,520 18,447 18,447

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AttAchments
A.1 Disclosure concerning the fees of the independent auditors and services other than auditing

During 2017, the IOR did not pay fees to the companies belonging to the network of the audit firm Deloitte & Touche
S.p.A. with the exception of those related to the audit of the annual accounts amounting to EUR 121,000.
The fees due are those contractually agreed, inclusive of any indexation and reimbursement of expenses calculated as a
forfeit. Fees do not include out-of-pocket expenses or taxes.

A.2 Exchange rates as of the balance sheet date

The balances at year-end, denominated in foreign currencies, are measured at the exchange rates observed by the Euro-
pean Central Bank on the last working day of the year (in 2017: 29 December).
For the other currencies, the rates used are those provided by infoproviders on the same date.
For the 2017 financial statements, the rates were determined as follows:

Currency 2017 2016

U.S. Dollars USD 1.1993 1.0926
Swiss Francs CHF 1.1702 1.0814
Canadian Dollars CAD 1.5039 1.5171
English Pounds GBP 0.8872 0.7380
Australian Dollars AUD 1.5346 1.4990
Japanese Yen JPY 135.01 131.66
Czech Crowns CZK 25.535 27.029
Danish Crowns DKK 7.4449 7.4625
Hungarian Forints HUF 310.33 313.15
Norwegian Crowns NOK 9.6723 9.6160
Polish Zloty PLZ 4.1770 4.2400
Swedish Crowns SEK 9.8438 9.1878
Brazilian Reais BRE 3.9729 4.2590
South African Rand ZAR 14.8054 16.8847
Hong Kong Dollars HKD 9.3720 8.4685
South Korean Won KRW 1.224.94 1.284.79
Singapore Dollars SGD 1.6024 1.5449
New Zealand Dollars NZD 1.6850 1.5959

A.3 Date of authorisation for issue

The financial statements were presented and authorised for issuance by the Directorate on 23 March 2018 and approved
by the Board of Superintendence on 24 April 2018.

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PART 5. informAtion on risks And hedging policies
5.1 Introduction

The Institute’s policies and procedures for the management and monitoring of risks arising from investments decisions,
are summarized in the following paragraphs, with a focus on the parties involved and their responsibilities. The Institute
considers it appropriate:
a) to assign risk measurement functions and risk integrated control to a specific department, headed by the Risk Man-
agement department;
b) to assign the functions dedicated to the definition of operating limits, the authorization of possible overruns or pay-
ment requests within assigned limits, to the appropriate Risk Committee.
Other bodies of the Institute are involved and assigned with different tasks in risk management and monitoring, such as
the Board of Superintendence, Directorate, Internal Audit department, Treasury department, Compliance.
This structure is based on the Vatican laws and rules and requirements provided by the Financial Information Authority
(AIF) for a compliant internal audit system, as defined by Regulation No.1/2015 on “Prudential Supervision of Entities Car-
rying out financial activities on a professional basis (“Regolamento n.1”), implementing Title III of the Law introducing
norms of “Transparency, Supervision and Financial Intelligence” no. XVIII issued on 8 October 2013 (“Law no. XVIII”).
The Risk Management function is an independent structure from the risk-taking functions, reporting directly to the
Directorate and with functional reporting also to the Board of Superintendence. The following paragraphs set out the rules
of the different organizational structures and the governing bodies involved in the monitoring and managingement of risks.

5.1.1 Duties and responsibilities of bodies involved

The Institute bodies involved in various capacities in the management and monitoring of risk relating to investment
decisions are the following:

• Board of Superintendence;
• Directorate;
• Risk Committee;
• Risk Management Department;
• Compliance Department;
• Internal Audit Department;
• Head of Treasury Department;

5.1.1.1 Board of Superintendence

The Board of Superintendence is responsible for defining the strategic guidelines, the Risk Appetite and general policies
for risk management. The Board of Superintendence can request the Directorate to update the guidelines for the measure-
ment and assessment of risks and periodically monitors the performance of risks and compliance with the limits established
on the basis of the information produced by the Risk Management function and the Risk Committee.

5.1.1.2 Directorate

The Directorate establishes the overall strategies, general policies and guidelines set forth by the Board of Superinten-
dence and any amendments thereto, the risk management and monitoring methodologies and their implementation and
integration proposed by the Risk Committee, and the general structure of market and credit operational limits (counterparty
risk and issuer risk), consistently with the overall Risk Appetite.
The Directorate also establishes periodically, based on the proposal of the Risk Committee, the limits granted to new
trading partners.
The Directorate monitors the risk exposure on a daily basis, through reports produced by the Risk Management depart-
ment, and is informed promptly by the department when operational limits have been exceeded and can request an emer-
gency meeting of the Risk Committee.
When operational limits are exceeded, based on a proposal from the Risk Committee, the Directorate determines the
way in which the overrun may be managed:

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 • the Directorate can authorize the overrun specifying the period for which the authorization is granted;
• the Directorate can ask the head of the operating area involved for a recovery plan to be established. The Directorate
then authorizes the plan, or can ask for recovery in different ways and/or in different periods than the recovery period
proposed.

5.1.1.3 Risk Committee

A Risk Committee has been established by the Directorate and chaired by Head of Risk Management department with
the aim:
• to propose a Risk Appetite Framework and management and control methodologies and all subsequent amendments
thereof, in compliance with the general limits set up by RAF;
• to propose to the Directorate the general structure of market and credit operational limits (counterparty risk and issuer
risk);
• to propose periodically to the Directorate credit limits granted to the new trading partners, in compliance with the gen-
eral limits defined in the RAF;
• to periodically review the Institute’s risk trend, with specific focus on the most relevant events or those with the greatest
impact;
• in case of an emergency meeting, where operational limits have been exceeded, to express an opinion to the Directorate
on the authorization for exceeding limits, or on the recovery plan arrangements.
The organizational aspects of the Risk Committee are disclosed in an appropriate regulation.

5.1.1.4 Risk Management Department

The Institute’s Risk Management department:

• presents to the Risk Committee issues related to the Institute’s exposure to market, credit, liquidity, operational and rep-
utational risks, proposing methodologies, instruments and processes for the management of those risks;
• is responsible for the implementation, validation and maintenance of an adequate risk exposure control system and its
performance;
• on a daily basis, observes the market, credit and liquidity risks and trading activity performance, preparing specific
reports for the Board, the Directorate and the head of Treasury Department;
• monitors the compliance with the risk indicators outlined in the Risk Appetite Framework (RAF) approved by the
Board of Superintendence, preparing specific reports;
• monitors the adherence to operational limits in the Institute’s trading activity, promptly informing the Directorate and
the head of Treasury Department of any overruns. When limits are exceeded, it can request an emergency meeting of
the Risk Committee;
• calculates capital requirements in compliance with legal requirements.

5.1.1.5 Compliance Department

The IOR Compliance Department, in accordance with AIF Regulation No. 1, oversees, using a risk-based approach,
management of the risk of non-compliance in corporate activity, ensuring that internal procedures are suitable to prevent
such risk.
In particular, it is responsible for managing the risk of non-compliance with the most important regulations, such as
those relating to financial activity and brokerage, anti-money laundering, and management of conflicts of interest, ensuring
that the internal procedures are suitable to mitigate these risks.
As regulated by Article 29 of Regulation No. 1, in order to achieve its mission, the Compliance Department:
• remains current on the rules applicable to the Institute and its activities and measures/assesses the impact of any
changes on existing processes and internal procedures;
• verifies compliance with external regulatory requirements and self-regulation;
• proposes organizational and procedural changes that ensure adequate supervision of the risk of non-compliance with
identified rules;
• monitors effectiveness of the suggested organizational changes for prevention of the risk of non-compliance;
• prepares direct information flows for the Institute’s governance bodies and for the other concerned functions/struc-
tures;

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 • provides advice and assistance to the Institute’s governance bodies for all matters in which the non-compliance risk is
relevant as well as collaboration in training personnel on the provisions applicable to their activities.

5.1.1.6 Internal Audit Department

The Institute’s Internal Audit department verifies through the audit plan:
• the adherence to risk management procedures as established by the Board of Superintendence and by the Directorate,
based on a proposal from the Risk Committee;
• the adequacy of the risk monitoring tools and procedures related to the Institute’s investment decisions.

5.1.1.7 Head of Treasury Department

• Defines the operating investment decisions to be made on financial markets, ensuring consistency with the strategic
goals and predetermined limits.
• Requests revisions to the assigned operational limits, or the authorization to engage with new counterparties, subject to
the review of the Risk Committee.
• Defines, within the limits of the authority granted, the necessary corrective actions to restore the defined risk/return
profile.

5.1.2 Risk culture and further developments

The Institute is involved in a complete overview of its current financial, credit, liquidity, reputational and operational
risks management programs. This involves the strengthening of the second level control functions (Risk Management and
Compliance), through the review of risk measurement and assessment systems and the adaptation to the most common
market practices, which includes preparation for the introduction of the new accounting standard IFRS9 for the classifica-
tion and measurement of financial instruments.
The approval of a Risk Appetite Framework integrated in the activities of daily risk management allows for the develop-
ment and dissemination of a risk culture, while the consolidation of the role of the Risk Committee has contributed to main-
taining a high level of attention from the management.
An ad-hoc e-learning platform for trainings was delivered by the Institute to capture the specificities of the Institute and
the current regulatory framework, in particular, in the anti-money laundering and combating the financing of terrorism.
External training activities are planned for specific areas, in particular, in the case of regulatory changes or in order to pro-
vide new skills.

5.2 Credit risk

Format and content of information on credit risk and related hedging policies

5.2.1 General aspects

Credit risk rises from the possibility that counterparties may not honour their commitments. Depending on the nature
of those commitments, the Institute’s credit risk may be divided in two categories:
a) credit risk arising from the Institute’s investment and trading activity for their own account and on behalf of its clients.
Credit risk represents the risk that a counterparty may not fulfill its contractual obligations related to a transaction
concerning financial instruments. This risk may be classified into three categories:
1) cash risk (e.g. deposits);
2) issuer risk (e.g. bond purchases);
3) counterparty risk, mainly generated by the operations in Delivery versus Payment (e.g. term operations, repos).
b) credit risk arising from loans to customers, classified in the financial statements as “Due from customers”; within this
risk category, the Institute considers it appropriate not to measure this risk because:
• the item is not material when compared to total assets;
• the exposure is limited to Catholic congregations and Vatican employees, both of which have low risk categories by
their nature;

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 • credits are usually accompanied by guarantees: securities, asset management or, for the Institute employees, post
employment benefits.
It is to be mentioned that the Institute is not authorized by the Autorità di Informazione Finanziaria to carry out the
activity of “lending” (cfr. art. l (l) (b) of the Law n. XVIII and art. 3 (24) (b) of the Regulation No. l), as credit activities on its
own. However, it is authorized to make “advances” that is to disburse funds to its clients and to a limited extent following
guarantee of future income (such as, for example, in the case of the advance of salary or pension paid by the Holy See or the
Governatorato of Vatican City) or guaranteed by financial assets of the same amount deposited by the clients at the Institute.
In general, the main sources of credit risk derive from the investment in bonds, mainly issued by government, financial
and corporate “Investment Grade” rating agencies and by deposits with banks. In consideration of the general level of inter-
est rates and yields offered, the strategy in 2017 was to focus more on issuers of good credit standing, favoring both issues
with medium-short maturity and variable-rate or inflation-linked securities.
At the end of 2017, the bond securities portfolio amounted to EUR 2.3bn with an average duration of 1.372 years and
high credit standing (99.6% investment grade). The portfolio is composed of governament bonds issued by major European
countries (core and peripheral), as well as financial and corporate bonds.
Additional details on the bond portfolio composition are provided in the next paragraphs.

5.2.2 Credit risk management policies

5.2.2.1 Organizational aspects

The Treasury Department is responsible for the management and monitoring of credit risks over trading activity and
collections of amounts due from clients. The Treasury Department is qualified to assume credit risk in compliance with
operational limits. Particularly, the process of risk assumption involves the following:
• the Director General delegates the assumption of credit risks to the Treasury Department, within a predetermined
amount, type and counterparty;
• the Treasury Department assumes credit risk in its operations in compliance with its defined limits. The assumption of
credit risk for amounts greater than the predetermined limit assigned to the department requires the authorisation of
the Director General;
• the Risk Committee supports the Director General in establishing a system of credit risk management and monitoring,
defining operational limits, analyzing any overruns and in evaluating authorisations of limits exceeded;
• the Risk Management Department, on a daily basis, monitors compliance with operational limits, promptly reporting
to the Directorate any unauthorized overruns.

5.2.2.2 Management, measurement and control systems

Credit risk monitoring activity is delegated to the Risk Management Department, applying the Institute’s specific-
methodology, validated by the Risk Committee and approved by the Director General.
This methodology provides, in particular, for the definition of:
• a set of determined counterparties with which the Treasury department is allowed to engage with. For each counter-
party, the type of risk that the Institute can assume and the maximum amount of exposure are defined;
• credit risk quantification criteria for each financial instrument, distinguishing between counterpart risk, issuer risk and
cash risk;
• add-on quantification criteria to be applied to all contracts with future settlement, diversified by maturity and margin-
ing practices.
Concerning the maximum amount of exposure to each counterparty, the methodology provides for the use of an inter-
nal rating, defined by the characteristics of the counterparty, the rating from International Rating Agencies (Moody’s, S&P,
Fitch) and credit spread level quoted in the market (spread on Credit Default Swaps). The use of the credit default swaps
spread enables prompt updating of the internal rating and their credit maximum exposure when the market shows signs of
difficulties with a determined issuer before these difficulties can lead to a change of the counterparty’s rating.
In addition to the limits defined above, the Board of Superintendence defined other limits at trading portfolio level based
on a sensitivity spread, distinguishing between government and corporate issuer. The impact of this stress test at the closing
date of this financial statements amount respectively to EUR 20.4m and EUR 16.1m.

5.2.2.3 Credit risk mitigation techniques

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 Currently, the Institute has no offsetting agreements in place with financial counterparties and does not operate in the
credit derivatives market.

5.2.2.4 Non-performing financial assets

For amounts due from clients, an internal monitoring system assists the Directorate in determining if there is objective
evidence of the impairment of loans, based on the following criteria established by the Institute:
• default in contractual payments of both capital and interest;
• delays in payments due to liquidity problems of customers;
• deterioration in the value of the guarantees provided.
The IOR has also issued guarantees requested by customers covered by assets held in custody, which are disclosed on
paragraph 13.1 Part 3.

5.2.3 Credit quality

As disclosed in AIF Circular, the use of the term “exposures” includes equity securities and UCI units while the use of the
term “credit exposures” excludes equity securities and UCI units.

1 Performing and non-performing credit exposures: amounts, adjustments, changes, economic and
geographical detail

1.1 Detail of credit exposures by portfolio classification and credit quality (book values)

Bad loans Unlikely Non performing Performing Other Total

to pay past due past due performing
exposures exposures exposures
1.Financial assets available for sale
2.Financial assets held to maturity 246,168 246,168
3.Due from banks 473,386 473,386
4.Due from customers 6,969 18,453 25,423
5.Financial assets carried at fair value
6.Financial assets being disposed
Total 2017 6,969 738,007 744,977
Total 2016 7,469 764 71 1,223,033 1,231,337
Note: There are no forborne exposures.

At the closing date of these financial statements there were not performing past due exposures. Based on the analysis of
debtors, there was no objective evidence of potential insolvency of the customer and no impairment loss was recognized.
Bad loans are totally impaired.

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1.2 Detail of credit exposures by portfolio classification and credit quality (gross and net values)

Non-performing assets Performing assets

Gross Individual Net Gross Collective Net Total
exposure adjustments exposure exposure adjustments exposure (net
exposure)
1. Financial assets available for sale
2. Financial assets held to maturity 246,168 246,168 246,168
3. Due from banks 473,386 473,386 473,386
4. Due from customers 24,386 (17,416) 6,969 18,956 (503) 18,453 25,423
5. Financial assets carried at fair value
6.Financial assets being disposed
Total 2017 24,386 (17,416) 6,969 738,510 (503) 738,007 744,977
Total 2016 24,842 (16,609) 8,233 1,223,726 (622) 1,223,104 1,231,337

Assets of evidently low credit Other assets

Cumulated capital losses Net exposure Net exposure
1. Financial assets held for trading 2,054,531
2. Hedging derivatives
Total 2017 2,054,531
Total 2016 1,831,693

1.3 On- and off-balance sheet credit exposures to banks: gross and net values and past due brackets

Type of exposure/value Gross exposure

Assets impaired
Up to 3 3-6 6-12 Over Performing Individual Collective Net
months months months 1 year assets adjustments adjustments exposure
A. On balance sheet exposures
a) Bad loans
- of which: forborne exposures
b) Unlikely to pay
- of which: forborne exposures
c) Non-performing past due exposures
- of which: forborne exposures
d) Performing past due exposures
- of which: forborne exposures
e) Other performing exposures 991,108 991,108
- of which: forborne exposures
Total A 991,108 991,108
B. Off-balance sheet exposure
a) Non performing
b) Performing
Total B
Total A + B 991,108 991,108

On-balance sheet exposures include all on-balance sheet financial assets claimed from banks, irrespective of their port-
folio of allocation.

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1.7 On- and off-balance sheet credit exposures to customers: gross and net values and aging

Type of exposure/value Gross exposure

Non-performing assets
Up to 3 3-6 6-12 Over Performing Individual Collective Net
months months months 1 year assets adjustments adjustments exposure
A. On balance sheet exposures
a) Bad loans 12,787 (12,787) -
- of which: forborne exposures
b) Unlikely to pay 11,599 - (4,629) 6,969
- of which: forborne exposures
c) Non-performing past due exposures
- of which: forborne exposures
d) Performing past due exposures
- of which: forborne exposures
e) Other performing exposures 1,801,932 (503) 1,801,430
- of which: forborne exposures
Total A 24,386 1,801,932 (17,416) (503) 1,808,399
B. Off balance sheet exposure
a) Non performing
b) Other 27 27
Total B 27 27
Total A + B 24,386 1,801,959 (17,416) (503) 1,808,426

On-balance sheet exposures include all on-balance sheet financial assets claimed from customers, irrespective of their
portfolio of allocation.

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1.8 On-balance sheet credit exposures to customers: changes in gross non-performing exposures

Bad loans Unlikely Non-performing

to pay past due
exposures
A. Initial gross exposures 9,876 12,098 2,868
- of which: exposures sold not derecognised
B. Increases
B.1 inflows from performing exposures 62
B.2 transfers from other non-performing exposure categories 2,688
B.3 other increases 342
C. Decreases
C.1 outflows toward performing exposures
C.2 write-offs
C.3 repayments (181) (499) (180)
C.4 credit disposals
C.5 losses from disposals
C.6 transfers to other non-performing exposure categories (2,688)
C.7 other decreases
D. Final gross exposures 12,787 11,599 –
- of which: exposures sold not derecognised

1.10 On-balance sheet non-performing credit exposures to customers: changes in total adjustments

Reason / Categories Bad loans Unlikely to pay Non-performing

past due exposures
Total of which: Total of which: Total of which:
forborne forborne forborne
exposures exposures exposures
A. Initial total adjustments 9,876 4,629 2,104
- of which: exposures sold
not derecognised
B. Increases
B.1 impairment losses 725
B.2 losses on disposal
B.3 transfers from other non
performing exposure categories 2,016
B.4 other increases 342
C. Decreases
C.1 recoveries on impairment losses
C.2 recoveries on repayments (172) (88)
C.3 profits on disposal
C.4 write-offs
C.5 transfers to other non-performing
exposure categories (2,016)
C.6 other decreases
D. Final total adjustments 12,787 4,629 –
- of which: exposures sold not derecognised

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2 Classification of exposures based on external and internal ratings

2.1 Detail off and on-balance sheet credit exposures by external rating class

Exposures External rating classes

Class 1 Class 2 Class 3 Class 4 Class 5 Class 6 Unrated Total
A. On balance sheet exposures 694,255 587,064 1,408,133 10,159 735 73,739 2,774,085
B. Derivatives
B.1 Financial derivatives
B.2 Credit derivatives
C. Guarantees given 27 27
D. Commitments to lend funds
E. Other
Total 694,255 587,064 1,408,133 10,159 735 73,766 2,774,112

For the analysis of the credit risk of the borrowers / guarantors, the Institute uses S&P ratings; when S&P ratings are not
available, the Institute utilizes the equivalent value from the Moody’s rating agency.
In the preparation of the above table, S&P ratings have been used.
Below is a reconciliation between risk classes and the S&P ratings:
Class 1 – from AAA to AA-
Class 2 – from A+ to A-
Class 3 – from BBB+ to BBB-
Class 4 – from BB+ to BB-
Class 5 – from B+ to B-
Class 6 – Others

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3 Detail of guaranteed credit exposures by type of guarantee

3.2 Guaranteed credit exposures to customers

Real collateral (1) Guarantees (2)

Credit derivatives
Credit commitments

Real estate assets – financial lease

Other derivatives

Real estate assets - mortgages

Other real guarantees

Other Public Entities

Other Public Entities

Credit Linked Notes

Governments and

Governments and
Central Banks

Central Banks
Other entities

Other entities
Net exposure

Total (1)+(2)
Securities

Banks

Banks
1. Guaranteed on balance
sheet credit exposures
1.1 totally guaranteed 435 435 435
- of which non performing
1.2 Partly guaranteed
- of which non performing
2. Guaranteed off-balance
sheet credit exposures
2.1 Totally guaranteed
- of which non performing
2.2 Partly guaranteed
- of which non performing

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 5.2.4 Distribution and concentration of credit exposures

1. Detail by sector of on-balance and off-balance sheet credit exposures to customers (book
value)

Domestic Foreign Public Sector Foreign Private Sector

Public Foreign Public Regional – Local International Other Public Financial Insurance Non-financial Other companies
Authorities Authorities Public Authorities Public Authorities Entities companies companies companies
Individual adjustments

Individual adjustments

Individual adjustments

Individual adjustments

Individual adjustments

Individual adjustments

Individual adjustments

Individual adjustments

Individual adjustments
Portfolio adjustments

Portfolio adjustments

Portfolio adjustments

Portfolio adjustments

Portfolio adjustments

Portfolio adjustments

Portfolio adjustments

Portfolio adjustments

Portfolio adjustments
Net exposure

Net exposure

Net exposure

Net exposure

Net exposure

Net exposure

Net exposure

Net exposure

Net exposure
A. On-balance sheet exposures

A.1 Bad loans 12,787

- of which forborne
exposures

A.2 Unlikely to pay 6,969 4,629

- of which forborne
exposures

A.3 Non-performing past

due exposures

- of which forborne
exposures

A.4 Performing exposures 11,238 1,359,322 225,168 5,115 196,279 4,310 502

- of which forborne
exposures

TOTAL A 11,238 1,359,322 225,168 5,115 196,279 11,279 17,416 502

B. Off-balance sheet exposures

B.1 Bad loans

B.2 Unlikely to pay

B.3 Other non-performing

assets

B.4 Other exposures 27

TOTAL B 27

TOTAL (A+B) 2017 11,238 1,359,322 225,168 5,115 196,279 11,306 17,416 502

TOTAL (A+B) 2016 8,290 1,354,046 237,021 9,286 239,360 17,590 16,609 622

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2. Detail by geographical area of on- and off-balance sheet credit exposures to customers (book
value)

Exposures / Geographical areas Domestic European Countries America Asia Rest of the world
Net Total Net Total Net Total Net Total Net Total
exposure adjust- exposure adjust- exposure adjust- exposure adjust- exposure adjust-
ments ments ments ments ments
A. On-balance sheet exposures
A.1 Bad loans (12,787)
A.2 Unlikely to pay 6,969 (4,629)
A.3 Non-performing past
due exposures
A.4 Performing exposures 11,261 (3) 1,481,647 (485) 250,423 49,046 (13) 9,053 (1)
Total A 11,261 (3) 1,488,616 (17,901) 250,423 49,046 (13) 9,053 (1)
B. Off balance sheet exposures
B.1 Bad loans
B.2 Unlikely to pay
B.3 Other non-performing assets
A.4 Performing exposures 27
Total B 27
Total A+B 2017 11,261 (3) 1,488,643 (17,901) 250,423 49,046 (13) 9,053 (1)
Total A+B 2016 8,326 (2) 1,601,032 (17,224) 217,127 50,415 5,923 (2)

3. Detail by geographical area of on- and off-balance sheet credit exposures to banks (book
value)

Exposures / Geographical areas Domestic European Countries America Asia Rest of the world
Net Total Net Total Net Total Net Total Net Total
exposure adjust- exposure adjust- exposure adjust- exposure adjust- exposure adjust-
ments ments ments ments ments
A. On-balance sheet exposures
A.1 Bad loans
A.2 Unlikely to pay
A.3 Non-performing past
due exposures
A.4 Performing exposures 57,058 682,621 182,485 1,623 67,321
Total A 57,058 682,621 182,485 1,623 67,321
B. Off-balance sheet exposures
B.1 Bad loans
B.2 Unlikely to pay
B.3 Other non-performing assets
A.4 Performing exposures
Total B
Total A+B 2017 57,058 682,621 182,485 1,623 67,321
Total A+B 2016 976,812 148,537 1,396 70,736

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4. Large exposures

IOR has no large exposures as defined by art. 46 of AIF Regulation No. 1.

5.2.5 Securitisation

No securitisation transactions were made by the IOR.

5.2.6 Information on unconsolidated structured entities

For unconsolidated structured entities, the Institute considers the shares held in externally managed investment funds.
For some external funds, the Institute is the owner of a significant number of shares, however, it does not control these
funds because, it does not participate in investment decisions, either directly or indirectly, and it does not hold the ability to
affect the returns of the above-mentioned funds.
The information required by IFRS 12 on the unconsolidated structured entities is below.
As of the balance sheet date, the Institute holds external funds in its trading portfolio for EUR 32.6m. Dividends col-
lected in 2017 on such funds amount to EUR 400,000 (EUR 812,000 in 2016).
68% of the funds in the portfolio are closed-ended funds, and can be subscribed to only at given times by specific parties,
who, as mentioned, have no control, and the remaining 32% of funds are related to funds that can be subscribed to by differ-
ent entities at any time and for any amount (open-ended funds).
Conversely, with regard to their asset classes, funds held by the Institute invest in equity securities (27%), debt securities
(32%) and the real estate market (41%). Regarding geographical distribution, the criteria used in the above mentioned table
was used to separate funds based on their legally registered domicile.
According to those criterion, all of the funds are located within the European Union.

Investment Fund type 2017 2016

Balance sheet exposure Balance sheet exposure
Nominal Value Carrying Nominal Value Carrying
(quantity) amount (quantity) amount
Open-end fund 75,160 10,326 75,160 10,404
Closed-end fund 19,770,677 13,322 20,170,677 13,333
Hedge fund
Exchange traded fund
Unit Investment Trust
Fund of fund 2,300 8,932 2,300 9,944
Seed Fund
Total 19,848,137 32,580 20,248,137 33,681
Underlying asset class focus
Equity 2,300 8,932 2,300 9,944
Debt 75,160 10,326 75,160 10,404
Asset Allocation
Money Market
Real Estate 19,770,000 13,302 20,170,000 13,311
Commodity
Alternative Investments 677 20 677 22
Total 19,848,137 32,580 20,248,137 33,681
Geographical Area
UE 19,848,137 32,580 20,248,137 33,681
USA
Total 19,848,137 32,580 20,248,137 33,681

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 At the balance sheet date, the IOR did not provide any guidance to unconsolidated structured entities on their invest-
ment policies. The Institute has not sponsored any unconsolidated structured entities.
At the balance sheet date, the Institute had a standing commitment to one of these funds to third parties of EUR 4m.
S.G.I.R. S.r.l. is 100% owned by IOR. The Institute does not prepare consolidated financial statements because the result-
ing information would not be relevant to the readers of the financial statements. The total balance sheet assets of the sub-
sidiary are insignificant when compared with those of the Institute and, accordingly, the consolidated financial statements
would not differ significantly from these financial statements.

5.2.7 Models for the measurement of credit risk

For the credit risk measurement, the Institute adopted the standard methodology defined by AIF Regulation No. 1, arti-
cles 63-89. No individual and portfolio internal models are used.

5.3 Market risks

Format and content of information on market risk and relative hedging policies

5.3.1 Interest rate risk and trading portfolio price risk

5.3.1.1 General aspects

Interest rate risk related to the trading portfolio is derived from the Institute’s trading activity in financial instruments,
both simple and complex, exchanged on organized markets and over-the-counter markets, put in place by the Treasury
department. This risk pertains to positions in bonds, particularly those based on a fixed rate, the value of which is closely
linked to the trend in interest rates. In line with the objectives of the Treasury Department in liquidity management and cap-
ital, and in line with the Institute’s threshold for risk, the level of risk in the trading portfolio is rather low, as indicated by the
short holding period (1.31 years). In anticipation of an increase in interest rates, the Institute has further reduced the overall
holding period in order to mitigate any negative impact on the value of the portfolio.
Price risk comes from the exposure on equity securities, ETF and funds. The Institute reduced the threshold for such risk
and exposures come mainly from the need to obtain a diversified return on own equity, in a period characterized by low
interest rates.

5.3.1.2 Operating procedures and methods for measuring interest rate risk and price risk

Interest rate risk and price risk are measured and managed as part of the overall management and monitoring of risk.
Market risk is the risk of change in portfolio value from adverse fluctuations in market parameters, such as interest or
currency rates, equity prices or prices of commodities underlying derivative contracts.
The Institute’s trading portfolio is comprised mainly of bond securities, and the main associated risks are interest rate and
LIBOR spread variation risk, as further described in the next paragraphs.
The power to assume market risk lies with the Directorate, which plays an active role in risk management and monitor-
ing, according to the guidelines issued by the Board of Superintendence. Specifically, the Director General delegates the
assumption of market risk and management to the Treasury department that operates autonomously in accordance with the
limits assigned to the department.
Market risk assumption and management is separate from the confirmation, settlement, matching and execution (Back
Office) and of the Risk Management department.
At 31 December 2017, the Institute did not hold quoted derivatives. A project analysing future interest rates is being per-
formed, with the goal of providing an instrument for hedging the interest rate risk of the bond portfolio.
The system of measurement of financial risks and the establishment of operational limits of the Institute are based on the
use of statistic calculation tools. Specifically, the three measures of potential loss are: Value at Risk, Expected Shortfall and
Stress Test. These measures are defined as follows:
Value at Risk (VaR) is defined as the maximum loss that the Institute could withstand, with probability equal to predeter-
mined confidence levels, in the case of adverse market trends to the position taken;
Expected Shortfall is defined as the average loss that the Institute could withstand in case of a VaR overrun;

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 Stress Test is defined as the loss that the Institute could withstand in case of negative events impacting main risk indica-
tors (equity prices and indexes, interest rates, currency rates, credit spread) analyzed independently and as established by the
RAF.

In addition to the aforementioned measures, the Institute utilises an indicator of realized losses on a 10-day time horizon,
defined as the sum of the negative results realized on closed positions and unrealized losses on open positions, valued at
market prices.
The VaR and the Expected Shortfall are calculated using the historic method (at least one year of data and quarterly
update of the scenarios), with a daily timeline and confidence level at 99%.
The Stress Tests are calculated by simulating extreme scenarios of the main risk factors, starting from the worst move-
ments recorded in the history of the world’s financial markets, as further described in the following paragraphs. In particu-
lar:
• for interest rate risk, the variations in interest rates that make up the market curve, the rate volatility risk and correlation
risk. On a daily basis, stress test analyses are conducted on the rates curve, assuming substantial shifts of the curve (-
40% / +50% with a floor equal to 50 basis points);
• for LIBOR spread variation risk, the stress scenarios consider increases depending on the absolute spread level: more
precisely, these are set equal to -20/+40 bps for securities with a spread lower than Libor, -40/+80 bps for securities with
a spread between 0 and 100 bps and -40%/+80% of the spread for securities with a spread above 100 bps;
• for price risk, different categories of instruments are adequately presented: equities securities, equities indexes, funds
and ETF. A stress test analysis is then conducted, applying the defined scenarios to spot prices (from -30% to +30%).

Monitoring compliance with limits on a daily basis is performed by the Risk Management department, which provides
daily updates to the Directorate on the level of risk assumed and compliance with operational limits.
When operational limits have been exceeded, the Risk Management department promptly informs the Directorate of the
overrun and the Director General decides on the appropriate action.
In establishing a system of market risk measurement, definition of operational limits, and the monitoring of compliance
with the limits, the Director General is supported by the Risk Committee, who serves as an advisor on the following matters:
• assignment and review limits for of VaR, Expected Shortfall, Stress Test and WCL to the Treasury department;
• assignment of additional limits, determined based on nominal sensitivity factor (portfolio sensitivity to the single risk
factors), etc;
• periodical trend analysis of the Institute’s risk position and identification of the root causes of the unusual trends;
• monitoring risks assumed and compliance with the pre-established limits;
• total or partial disruption of the activities in certain sensitive financial instruments to risk factors;
• analysis of the ordinary and extraordinary events, following particular market turbulences and macroeconomic scenar-
ios.

During 2017, the Institute maintained a prudential approach in the management of financial risks. Specifically, during
the year, the held for trading portfolio had a daily average VaR of EUR 3.18m, a daily maximum VaR of EUR 3.55m and a
daily minimum VaR of EUR 2.51m; the operational limits calculated on 10 working days, determined as EUR 25m under
RAF, was never exceeded. At the end of 2017, the VaR amounted to EUR 7.5m. The portfolio only contained highly liquid
products.
The Risk Management department, to verify the adequacy of the VaR calculation, periodically conducts retrospective
reviews, comparing the actual trading results achieved, with the VaR measures previously calculated. During 2017, the Insti-
tute did not identify events where actual daily losses exceeded the risk measures expressed in terms of VaR on a daily basis.
The potential impact of a shock of +/- 100 basis point on the portfolio held for trading could have an impact of EUR
26.9m, representing 52.4%, 84.2% and 0.9% of interest margin, profit for the year and equity, respectively.
Stress test data at the end of 2017 shows, for interest rate risk, an exposure equal to EUR 14.0m for a variation of +50% of
interest rates, with a minimum variation of 50 basis points; the exposure is focused on the EUR rate risk for 76% and on
USD rate risk for the 23%.

The management and monitoring of risk is continuously improving. At the beginning of 2017, the implementation of the
new system for the Treasury department has been completed; the system allows:
• monitoring of positions, profits and risks real time (automatic feed of main risk parameters and continuous revaluation
of the position, calculation of the VaR position at any time of the day);

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 • possibility of monitoring P&L trend and risks in different aggregation levels, from the single instrument, to the entire
position of the Treasury department.

2.1 Trading portfolio: detail by maturity date (re-pricing date) of financial assets and liabilities on balance sheet and
financial derivatives

Type / Expiration date On demand Up to 3 3-6 6-12 1-5 5-10 Over 10 Undefined
months moths months years years years
A. Cash assets
1.1 Debt securities
- with early redemption
option 121,138 15
- other 735,738 285,538 29,173 833,879 43,199 448
1.2 Other assets
2. Cash liabilities
2.1 Repurchase agreements
2.2 Other liabilities
3. Financial derivatives
3.1 With underlying security
- Options
+ Long positions
+ Short positions
- Other derivatives
+ Long positions
+ Short positions
3.2 Without underlying security
- Options
+ Long positions
+ Short positions
- Other derivatives
+ Long positions
+ Short positions

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2.2 Trading portfolio: detail of equity securities and index exposures for the main countries quoted markets

Type / Quotation index Quoted

Italian Other Not
Stock Exchange NYSE Arca Xetra New York NASDAQ GS quoted
A. Equity securities
- long positions 5,065 4,969 4,732 3,741 3,398 7,754
- short positions
B. Transactions not yet settled
on equity securities
- long positions
- short positions
C. Other derivatives on equity
securities
- long positions
- short positions
D. Derivatives on equity index
- long positions
- short positions

The application of a 30% shock on the value of equity securities would have an impact of EUR 8.90 million, correspon-
ding respectively to 17.3%, 27.9% and 0.3% of the intermediation margin, operating result and equity.
With reference to price risk of other financial instruments classified as held for trading, at the end of 2017, the Institute’s
portfolio had the following exposure:
• Closed-end funds EUR 22.3m;
• Open-end funds EUR 10.3m.

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5.3.2 Interest rate risk and price risk of other financial instruments in portfolio

2.1 Other financial instruments in portfolio: detail by expiration date (re-pricing date) of financial assets and liabilities

Type / Expiration date On demand Up to 3 3-6 6 - 12 1-5 5 - 10 Over Unde-

months months months years years 10 years fined
1. Cash assets
1.1 Debt securities
- with early redemption option 10,018
- other 31,387 20,029 44,967 90,895 48,872
1.2 Loans to banks 362,123 54,205 25,052 32,007
1.3 Loans to customers
- current accounts 11,254
- other loans
- with early redemption option 7,969
- other 6,200
2. Cash liabilities
2.1 Due to customers
- current accounts 2,121,948
- other liabilities
- with early redemption option
- other 2,339 4,752 2,383
2.2 Due to banks
- current accounts 4,096
- other liabilities
2.3 Debt securities
- with early redemption option
- other
2.4 Other liabilities
- with early redemption option
- other
3. Financial derivatives
3.1 With underlying security
- Options
+ Long positions
+ Short positions
- Other derivatives
+ Long positions
+ Short positions
3.2 Without underlying security
- Options
+ Long positions
+ Short positions
- Other derivatives
+ Long positions
+ Short positions
4. Other off balance sheet transactions
+ Long positions
+ Short positions

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 Regarding interest rate risk for financial instruments other than those classified as trading, the Institute’s exposure refers
mainly to the assets classified as held to maturity and to interbank deposits, already listed in the paragraph related to credit
risk.
The application of a variation of interest rates of +/- 100 basis points to the portfolio, including other financial instru-
ments (EUR 246.17m) shows a potential impact of EUR 0.79m, in terms of variation of the coupon flow representing 2.7%,
2.5% and 0.03% of interest margin, profit for the year and equity, respectively.
The application of a variation of interest rates of +/- 100 basis points to the portfolio, including other financial instru-
ments (EUR 246.17m) shows a potential impact of EUR 4.94m, in terms of changes in economic value representing 9.6%,
15.5% and 0.2% of interest margin, profit for the year and equity, respectively.
With reference to price risk of financial instruments not classified as trading, at the end of 2017, the Institute’s portfolio
had the following exposure:
• Financial assets available for sale EUR 4.6m;
• Investment in subsidiaries S.G.I.R. S.r.l. EUR 15.8m.

Regarding the limits, the Board of Superintendence established limits for the investment in financial assets held to matu-
rity in relation to equity. For this portfolio, a measure of VaR is also calculated (respectively EUR 0.37m, 0.53m and 0.75m of
minimum, medium and maximum daily value), but not associated with limits.
At the end of the year, the 10-day VaR was equal to EUR 1.22m.

5.3.3 Currency risk

General aspects, operating procedures and methods for measuring currency risk

Currency risk is the risk that the Institute can incur losses due to the adverse variation of currency rates. As mentioned
above, the management of currency risk is based on the system in place for the management of financial risks.
For the currency rate, as it was for interest rates, the following pre-defined Stress Test scenarios were used for each cur-
rency providing shock higher for minor currencies and for those not related to Euro. The potential impact of these shocks
could result in a loss of approximately EUR 1m.

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2.1 Detail by currency of financial assets, liabilities and derivatives

Items Currencies
USD GBP CAD AUD CHF Other
currencies
A. Financial assets
A.1 Debt securities 475,658 5,000 192 2,418 3,427 173
A.2 Equity securities 9,949 1,220 6
A.3 Loans to banks 94,513 6,049 5,821 4,661 4,168 6,536
A.4 Loans to customers 107 - 23 -
A.5 Other financial assets 7,461 136 1,105 439 1,211 1,318
B. Other assets
C. Financial liabilities
C.1 Due to banks 304
C.2 Due to customers 560,908 9,733 7,735 5,036 9,131 2,359
C.3 Debt securities
C.4 Other financial liabilities 21,965 40 458 1,136 4
D. Other liabilities
E. Financial derivatives
- Options
+ Long positions
+ Short positions
- Other derivatives
+ Long positions
+ Short positions
Total Assets 587,688 12,405 7,118 7,518 8,829 8,033
Total Liabilities 583,177 9,773 8,193 6,172 9,135 2,359
Difference (+/-) 4,511 2,632 (1,075) 1,346 (306) 5,674

The exchange rate risk exposure resulting from the application of the abovementioned stress tests of 100 basis points at
31 December 2017 resulted in an amount equal to EUR 0.07m, representing 0.1%, 0.2% and 0% of interest margin, profit for
the year and equity, respectively.

2.2 Internal models and other methods for sensitivity analysis

For the capital requirement calculation related to currency risk, the IOR adopted the standard methodology provided by
AIF Regulation No. 1.

5.3.4 Derivative instruments

In 2017 IOR did not hold derivative financial instruments.

5.4 Liquidity risk

Format and content of information on liquidity risk and relative hedging policies

5.4.1 General aspects, operating procedures and methods for measuring liquidity risk

Liquidity risk is the risk that the Institute will encounter difficulties in meeting payment obligations by cash or by
expected or unexpected delivery, compromising the daily operations or the financial situation.
Regarding liquidity risk, during 2017, the IOR did not encounter any notable problems; at year-end 2017, the liquidity

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risk indicator (LCR), calculated over a period of 30 days, resulted in a value equal to 642%, well above the regulatory limit of
200% established by RAF. It is important to note that Institute liabilities are represented, other than equity, by deposits from
customers, mainly on demand. Moreover, the Institute does not carry out funding transactions on the interbank market or
on the capital market.
From an organizational standpoint, the Institute’s liquidity risk is managed by the Treasury Department, which monitors
the expected and realized flows in currencies and maintains an adequate portfolio of liquid assets to meet any unexpected
payments.
Monitoring of liquidity and adherence to liquidity operating limits are performed daily by the Risk Management Depart-
ment.
The following tables show the Institute’s assets and liabilities with current values, divided by contractual maturities of the
financial liabilities and the expected maturities of the financial assets. The first table includes only financial assets and liabil-
ities in Euro, while the second table comprises only financial assets and liabilities in other currency than Euro.

1.1 Detail by contractual residual maturity of financial assets and liabilities in Euro

Type / Residual maturity On demand 1-7 7 - 15 15 - 30 1-3 3-6 6 -12 1-5 Over 5 Unde-
days days days months months months years years fined
Cash assets
B.1 Government bonds 675 5,313 52,850 14,203 153,691 954,500 160,098
B.2 Other debt securities 7 6 38,974 11,398 28,383 19,991 27,013 292,772 53,094
B.3 UCI units 32,580
B.4 Loans
- Banks 294,581 25,052 32,007
- Customers 11,229 89 1 6 159 3,277 10,546
Cash liabilities
B.5 Deposits and current accounts
- Banks 3,792
- Customers 1,557,879
B.6 Debt securities
B.7 Other liabilities
Off balance sheet transactions
B.8 Financial derivatives with exchange of capital
- long positions
- short positions
B.9 Financial derivatives without
exchange of capital
- long positions
- short positions
B.10 Deposits and loans to be settled
- long positions
- short positions
B.11 Irrevocable commitments to
lend funds
- long positions
- short positions
B.12 Financial guarantees given
B.13 Financial guarantees received
B.14 Credit derivatives with exchange of capital
- long positions
- short positions
B.15 Credit derivatives without exchange of capital
- long positions
- short positions

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1.2 Detail by contractual residual maturity of financial assets and liabilities in other currency than Euro

Type / Residual maturity On demand 1-7 7 - 15 15 - 30 1-3 3-6 6 -12 1-5 Over 5 Unde-
days days days months months months years years fined
Cash assets
B.1 Government bonds 2,804 26 5 16,137 2,279 5,238 82,343 468
B.2 Other debt securities 96 6,674 342 15,808 16,127 20,599 312,624 6,162
B.3 UCI units
B.4 Loans
- Banks 67,542 54,205
- Customers 25 91
Cash liabilities
B.5 Deposits and current accounts
- Banks 304
- Customers 564,068 167 2,172 4,752 2,383
B.6 Debt securities
B.7 Other liabilities
Off balance sheet transactions
B.8 Financial derivatives with exchange of capital
- long positions
- short positions
B.9 Financial derivatives without exchange of capital
- long positions
- short positions
B.10 Deposits and loans to be settled
- long positions
- short positions
B.11 Irrevocable commitments to
lend funds
- long positions
- short positions
B.12 Financial guarantees given
B.13 Financial guarantees received
B.14 Credit derivatives with exchange of capital
- long positions
- short positions
B.15 Credit derivatives without exchange of capital
- long positions
- short positions

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5.5 Operational risk

Format and content of information on operational risk and relative hedging policies

5.5.1 General aspects, operating procedures and methods for measuring operational risk

Operational risks represent the risk of loss caused by inadequate and failure of processes, human resources and internal
system, or caused by external events.
Operational risk does not include strategic and reputational risks, but includes legal risk, which is the risk of loss from
violations of laws and regulations, contractual or non-contractual liability, or other disputes.
Operational risks include, among other things, administrative risk (for example, absence or inadequacy of line controls),
human resources risk (for example, a lack of professional training for staff), and IT risk (for example, inadequacy of the
computer system that could cause loss of data or interruption of operations).
The Institute is defining a framework for operational risk management, establishing the organizational processes for
measurement, management and control of that risk. More specifically, the risk assessment framework for the Institute’s activ-
ities provides an assessment of the operational risk of each process (unmitigated risk), a verification of the tools for monitor-
ing and mitigation of this risk and an assessment of the residual risks (mitigated risk).
Extraordinary losses and operating losses have been recorded during 2017 for a total amount of EUR 222,500 in consid-
eration of the lower recovery compared to the returns expected by customers following unauthorized external transactions
in 2016 related to external transactions not authorized (credit cards and payment services). However, it should be noted that
the provision for allowances for risk and charges, allocated for EUR 3.5m as at 31 December 2016, was used for payment of
previous tax issued with other countries for EUR 2.3m. The remainder, equal to EUR 1.2m, has been kept pending the for-
mal conclusion on this issue.
For more information on contingent liabilities related to an investment fund held in a proprietary portfolio, refer to para-
graph “Estimates that contain elements of uncertainty” in part 1.

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PART 6. informAtion concerning equity
6.1 Shareholders’ Equity

6.1.1 Qualitative information

The Institute’s equity represents capital funding provided by the owner or generated by the business to create value.
In managing capital (a broader concept than “equity” presented in the balance sheet and consistent with regulatory cap-
ital, which is not comprised solely of equity in the strict sense), the Institute’s objectives are:
• to safeguard the Institute’s ability to continue as a going concern, so that it can continue to provide benefits for all stake-
holders;
• to maintain a strong capital base to support business growth.
The Institute pursues its objectives of capital management during the planning processes, through the analysis of risks
associated with planned activities, and during the monitoring processes through the analysis and monitoring compliance
with limits.
In managing capital, the Institute observes regulatory capital requirements established by the regulatory framework
related to prudential supervision.

6.1.2 Quantitative information

1 Detail

2017 2016
1.Capital 300,000 300,000
2.Reserves
a) Earning reserves
(i) Unavailable 100,000 100,000
(ii) Available 282,134 282,134
(iii) Other
b) Other
3.Equity instruments
4.Valuation reserves
a) Available for sale assets 2,161 499
b) Tangible assets
c) Intangible assets
d) Hedging of foreign investments
e) Cash flows hedging
f) Exchange differences
g) Non current assets held for sale
h) Actuarial gains (losses) on defined benefit plans (57,110) (46,034)
i) Share of valuation reserves connected with investments carried at equity
5.Profit (loss) for the year 31,934 36,001
Total 659,119 672,600

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 Capital, clearly identified as a component of Equity, represents a permanent endowment that cannot be reduced or dis-
tributed, except in case of cessation or liquidation of the entity.
Unavailable Reserves are profit reserves designed to further strengthen the Institute’s Equity and long-term stability.
Available or “distributable” Reserves are earnings available for distribution, subject to a resolution of the Commission of
Cardinals.
Fair Value Reserves for available for sale securities represent the net fair value gain/loss recognized on investment securi-
ties classified as available for sale.
Post-employment benefit actuarial gain (loss) Reserves represent the actuarial unrealised gain or loss related to the post-
employment benefit plans.

2 Fair value reserve of financial assets available for sale: detail

2017 2016
Positive Negative Positive Negative
Reserve Reserve Reserve Reserve
1.Debt securities
2.Equity securities 2,161 499
3.UCI units
4.Loans
Total 2,161 499

3 Fair value reserve of financial assets available for sale: annual changes

Debt Equity UCI

securities securities units Loans
1.Opening balance 499
2.Positive changes
2.1 Fair value increases 1,662
2.2 Reclassification from negative reserves to the Income statement:
From Impairment
From disposal
2.3 Other changes
3.Negative changes
3.1 Fair value decreases
3.2 Impairment
3.3 Reclassification from positive reserves to the Income statement:
From disposal
3.4 Other changes
4.Closing balance 2,161

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4 Valuation reserves related to defined benefit plans: annual changes

Defined Pension Staff severance

benefit plan plan liabilities fund
1.Opening balance (46,034) (44,292) (1,742)
2.Positive changes
2.1 Post-employment benefit actuarial gain of the year 122 122
3.Negative changes
3.1 Post-employment benefit actuarial loss of the year (11,198) (11,198)
4.Closing balance (57,110) (55,490) (1,620)

6.2 Own equity and prudential supervision ratios

1 Own equity

2017 2016
A.Positive components
1. Capital 300,000 300,000
2. Supplemental Capital
a) Retained earnings
(i) Unavailable 100,000 100,000
(ii) Available 282,134 282,134
(iii) Others
b) Provisions
c) Reserves (54,948) (45,535)
3. Positive prudential filter IAS/IFRS
B.Negative components
1. Goodwill
2. Intangible assets (871) (1,044)
3. Impairments on loans
4. Losses recognized in previous years and in current year
5. Regulatory downs of assets carried at fair value
6.Negative prudential filter IAS/IFRS (1,081) (250)
Common Equity 625,234 635,305

Capital is defined by AIF Regulation No.1 art. 3 (8) as the initial funding or subsequent integration of capital by the Holy
See or the Vatican City State.
a) it is paid pursuant to the legislation of the Holy See and the Vatican City State;
b) it is clearly and distinctly identified in the financial statements;
c) it cannot be reduced or distributed, except in the case of cessation or liquidation of the entity, ensuring that it is distrib-
uted proportionality to legitimate creditors, according to the legislation of the Holy See and the Vatican City State and
acquired by the Apostolic See.
For regulatory purposes, the term “Capital” shall be considered as equivalent to “core capital”.
The Supplemental Capital is defined under AIF Regulation No. 1 art. 3 (68) as the sum of retained earnings, accumulated
as other comprehensive income and other reserves.
The Common Equity is defined under Regulation No. 1, art. 3 (12) as:
• the sum of the following positive components:
a. the Capital;
b. the supplemental capital;

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 • deducting the following components (if negative):
a. goodwill;
b. intangible assets;
c. adjustments to the value of receivables;
d. losses recognized in previous financial periods and in the current period;
e. adjustments to the regulatory value of assets valued at their “fair value”.
For regulatory purposes, “common equity” shall be considered as equivalent to “common equity tier 1”.
Regulatory capital consists of common equity and is calculated by the Institute on a monthly basis, although only
required to be calculated by the Supervisory Authority quarterly.
As required, the amount of annual and half-yearly earnings, excluding the amounts that can potentially be allocated to
dividends, contributes to the calculation of regulatory capital for the months of December and June.
The Common Equity at the end of 2017 amounted to EUR 625.2m (2016: EUR 635.3m).
Considering the items comprising the Institute’s equity, the sole prudential filter in common equity at 31 December 2017
is associated with the positive fair value reserve relating to the investment securities held in the Available for Sale portfolio.
This reserve is computed using a negative prudential filter, for an amount equal to 50%.
In the calculation of the Regulatory Capital 2017, the Net profit for the year not included, as it is considered fully distrib-
uted.

6.2.2 Capital adequacy

The monitoring of key ratios is performed daily by the Risk Management Department, in order to continuously monitor
compliance with regulatory requirements. The table below shows the data relating to capital requirements at the end of 2017
and at the end of 2016 for comparison.

Unweighted amounts Weighted amounts/

Capital requirements
2017 2016 2017 2016
A. Risk asset
A.1 Credit and counterparty risk
1. Standardised approach 861,541 1.333,514 306,678 360,173
2. Approach based on internal ratings
2.1 Based
2.2 Advanced
3. Securitizations
B. Capital requirements
B.1 Credit and counterparty risk 24,534 28,814
B.2 Credit valuation adjustment risk
B.3 Settlement risk
B.4 Market risk
1. Standardised approach 41,700 40,245
2. Internal model
3. Concentration risk
B.5 Operational risk
1. Basic indicator approach 7,043 9,699
2. Standardised approach
3. Advanced approach
B.6 Other calculation elements
B.7 Total capital requirements 73,278 78,758
C. Risk weighted assets and capital ratios
C.1 Risk-weighted assets 915,971 984,472
C.2 Capital/ Risk-weighted assets 32.75% 30.47%
C.3 Common equity/Risk-weighted assets 68.26% 64.53%

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PART 7. relAted pArty trAnsActions
Related parties of the Institute include key management personnel (Directorate and Board of Superintendence), the
Commission of Cardinals and the Revisori.
Transactions with these related parties relate to salaries and remuneration

Details of key management compensation

Compensation due to related parties was EUR 731,200 in 2017, of which EUR 323,200 was not yet paid as of 31 Decem-
ber 2017. Specifically, these expenses relate to:
• EUR 340,000 for the Board of Superintendence of which EUR 240,000 has not yet been paid;
• EUR 308,000 for the Directorate;
• EUR 83,200 for the Revisori, completely to be paid.
These amounts are recognized in the Income Statement as Operating Expenses.

Related-party transactions

During 2017, no transactions with key management were entered into, except for the management of the deposit
accounts opened with the Institute and salaries and remuneration discussed above.
As of the balance sheet date, the balance of deposits by the members of the Commission of Cardinals was EUR 3.02m.
Key management personnel and Revisori had deposits totaling EUR 33,000.
The Institute has a long-term zero-interest loan to its subsidiary S.G.I.R. S.r.l., amounting to EUR 2.8m. Furthermore the
Institute signed the loan for the use of 5 real estate properties at no cost with its subsidiary, S.G.I.R. S.r.l. During 2017,
S.G.I.R. S.r.l. earned rental income for EUR 57,000 on these properties.

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RepoRt
oF the
ReviSoRi
 To the Board of Superintendence of the Istitute

In this report, drawn up in accordance with Article 28 of the Statute, the Board of Auditors of the Institute

(the “Institute” or the “IOR”) remarks on the annual financial statements, the report and the supporting

documents, as prepared by the Directorate for the financial year 2017.

As in previous years, once again in the course of this year in performing its tasks the Board of Auditors has

been constantly focused on proving its full loyalty and compliance with the Will of the Holy Father, who

demands respect for the Statutory provisions and impartiality and independence in our role.

During the financial year, the Board of Statutory Auditors convened periodically to perform its duties and

attended, upon invitation, all the meetings of the Board of Superintendence.

The meetings of the Board of Auditors were characterized by intense work sessions and benefited from the

members’ diverse skills as well as the solid support of the President, the Directorate and, where necessary,

the Institute’s Administration and Control Functions.

The Board also noted that in 2017, through the provision of dedicated services, the Institute confirmed its

commitment to serving the Holy Father in the fulfilment of his mission as universal pastor.

Activities carried out in compliance with the Statute’s provisions

The Board reports that, in accordance with Article 27 of the Statute, during 2017 it carried out the audits of

treasury assets falling within its jurisdiction, as well as the administrative and accounting review of the

books and accounts, also by obtaining information from the heads of the internal control functions, and has

no remarks to make in this respect.

119 | ANNUAL
REPORT 2017
 2017 financial statements

Pursuant to Article 28 of the current Statute, the Board of Auditors of the Institute examined the 2017
financial statements (“Financial Statements”) and the Management Report.
The Financial Statements were drawn up in accordance with the Circular on the Preparation of the Annual
Financial Statements and Consolidated Financial Statements of Entities carrying out Financial Activities
on a Professional Basis, issued by the Financial Information Authority on 15 December 2016; the compar-
ison with the previous year’s data is consistent given that the financial statements at 31.12.2016 had
already been drawn up in accordance with the provisions laid down in the previously mentioned Circular
Letter
The Financial Statements are made up of the following:
• Balance Sheet
• Profit and Loss Statement
• Comprehensive Profit and Loss Statement
• Statement of Changes in Equity
• Statement of Cash Flows

The Annual Report includes the above documents as well as a description of the Institute’s activities, a
summary of the accounting policies as well as the risks and uncertainties linked to the use of estimates, the
explanatory notes to the Financial Statements, and financial risk information prepared in accordance with
the Vatican rules on prudential supervision.
The Financial Statements may be summarised as follows:
EUR000
BALANCE SHEET
Total assets 2,999,008
Total liabilities 2,339,889
Net assets 659,119

PROFIT AND LOSS ACCOUNT

Net result from financial activities 50,933
Net operating profit 31,934

120 | ANNUAL
REPORT 2017
The Financial Statements have been audited by Deloitte & Touche S.p.A., which expressed a clean and
unqualified opinion on 20 April 2018.
Based on the audits that have been performed, and taking into account the conclusions drawn by the inter-
nal control functions and the audit firm’s unqualified opinion, this Board of Auditors:
– is in favour of the approval of the 2017 financial statements (Financial Statements) included in the
Annual Report, as prepared by the Directorate;
– agrees with the proposed allocation of the net operating profit.

The approval of the 2017 Annual Balance Sheet (Financial Statements) has also coincided with the end of
the current Board of Auditors’ mandate. We wish to thank the Commission of Cardinals and the Board of
Superintendence for the confidence they have placed in us and also the Institute’s governing bodies for
their constant and effective cooperation that has enabled us to provide our professional assistance, serving
the Holy Church and the Holy Father.

Vatican City State, 20 April 2018

President of the Board of Statutory Auditors

This report has been translated into the English language solely for convenience of international readers.

121 | ANNUAL
REPORT 2017
RepoRt
oF the
exteRnal
auditoRS
125 | ANNUAL
REPORT 2017
126 | ANNUAL
REPORT 2017
127 | ANNUAL
REPORT 2017
 Press
Iger & Partners S.r.l.
Rome - Italy

Rome, 22 May 2018