AS LATVIJAS PASTA BANKA. Financial statements of the Bank for the year ended 31 December 2011

Transcription

1 for the year ended 31 December 2011

2 CONTENTS Page Management Report 3-4 The Council and the Board 5 Statement of Management s Responsibility 6 Auditors Report 7-8 Bank s Financial Statements: Statement of Comprehensive Income 9 Statement of Financial Position 10 Statement of Changes in Equity 11 Statement of Cash Flows 12 Notes to the Financial Statements

3 MANAGEMENT REPORT Dear customers, cooperation partners and shareholders, On behalf of the management of AS Latvijas pasta banka allow us to present for your consideration the annual report of AS Latvijas pasta banka (hereinafter also the Bank) showing the Bank s financial performance for the year ended 31 December In spite of unexpected shocks that occurred at the end of the year, the year 2011 was marked by the rather positive mood in the economy and financial sector of Latvia, which is demonstrated by GDP growth, reduction in unemployment, and gradual but steady recovery of the lending market. According to the current forecasts, no material growth is expected in the European Union and the eurozone at the beginning of It is forecasted that European financial markets will gradually pass the crisis situation by the end of 2012, at which time business and consumer confidence will be restored and economic recovery will be back on track, although relatively weak at the very beginning. The European Central Bank increased the interest rate for main refinancing operations twice in April and July 2011 by 50 basis points, up to 1.5%. However, no further increases are planned for the next two years. Meanwhile, the US Federal Reserve committed to keeping the interest rates at present level until at least late Given the economic situation and future forecasts, the Bank s basic values remained almost the same, with only one value security added. Namely, those are integrity (fair and just treatment of all the customers), professionalism (professional team), responsibility (high level of responsibility for the decisions made), loyalty (equal treatment of all the customers and colleagues), quality (supply of convenient, high-quality and competitive services), flexibility (ability to adapt to the customer needs), and security (safety of deposits made by customers and information provided to the Bank during their cooperation). To guarantee security, in 2011 the Bank s shareholders increased the Bank s share capital by LVL 1,2 million and obtained a subordinated loan of LVL 1,054 million. The Bank is constantly working to expand the range of the services it provides, meanwhile maintaining the high quality level, which is confirmed by the ever-growing customer base. During the year, notwithstanding the complicated economic situation, the Bank s assets have almost doubled and reached LVL 45 million. The performance of the Bank as a relatively new market player can undoubtedly be assessed as positive, reflecting the Bank s ability to successfully solve all problems and operate in all situations. Regardless of the fact that, in the line with the economic recovery, the demand for new loans was growing gradually and the competition became tougher, in 2011 the Bank was specifically focusing on the increase of its loan portfolio. The Bank s targeted efforts included supplementing the range of its products and analysis of new lending opportunities, including successful development of cooperation and support of local residents in acquiring the EU financing. 3

4 The Bank has complied with all the statutory requirements. The Bank s capital adequacy ratio is 23.32%, which is above the minimal threshold set by the Financial and Capital Market Commission. The liquidity ratio is %, which also exceeds the statutory threshold of 30% substantially. The above shows that the Bank is well equipped to successfully continue implementing its operating strategy. The Bank s strategy will keep a major focus on management of assets of affluent customers and customised products also in the future. Another future strategic priority of the Bank is issue and acceptance of payment cards via POS terminals and the Internet, in cooperation with renowned organisations, such as MasterCard, Visa, Tieto, First Data, Global Payment. The Bank s management keeps pace with the highly volatile situation on the financial market, being well aware of its responsibility towards the customers and potential risks that are carefully assessed and managed following the prudence principle, keeping the overall risk exposure moderate. The Bank is able to be a reliable partner in the business and private matters of its customers, keeping to the steady and professional approach to achieve further growth through joint efforts. In view of the regional and national economic forecasts, we are still highly optimistic about the Bank s prospects for the year 2012 and beyond and we are sure that the Bank will have then an even steadier position in the Latvian banking sector. We would like to express our deep gratitude to the customers of AS Latvijas pasta banka for their confidence and hope to continue our mutually beneficial cooperation also in the future! Best regards, Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 27 March

5 THE COUNCIL AND THE BOARD The Council The Council of the Bank as at 31 December 2011 Name Position Date of appointment Biomins Kajems Chairman of the Council 13/10/2008 Jūlija Kozlova Council Member 13/10/2008 Guntars Grīnvalds Council Member 13/10/2008 The Board The Board of the Bank as at 31 December 2011 Name Position Date of appointment Date of resignation Boriss Ulmans Chairman of the Board 05/09/2008 Arnis Kalveršs Board Member 05/09/2008 Einārs Vaivods Board Member 05/09/ /12/2011 For the Bank s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 27 March

6 STATEMENT OF MANAGEMENT S RESPONSIBILITY The management of AS LATVIJAS PASTA BANKA (hereinafter the Bank) is responsible for the preparation of the Bank s financial statements for each financial year. In preparing the financial statements set out on pages 9 to 66 for the year ended 31 December 2011, the management has applied appropriate accounting principles that are based on prudent and reasonable judgments and estimates. In our opinion, all appropriate accounting principles have been consistently applied, including International Financial Reporting Standards as adopted by the European Union and the regulations of the Financial and Capital Market Commission. The Bank s management is responsible for maintaining proper accounting records and ensuring compliance of these financial statements with the Regulations of the Financial and Capital Market Commission on annual reports of credit institutions. Management is also responsible for taking all reasonable efforts to safeguard the Bank s assets and the prevention and detection of fraud and other irregularities in the Bank. Management s decisions and judgments used in the preparation of these financial statements were prudent and reasonable. For the Bank s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 27 March

7 AUDITORS REPORT 7

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9 STATEMENT OF COMPREHENSIVE INCOME Notes Interest income Interest expense 4 (535) (562) Net interest income Commission and fee income Commission and fee expense 5 (792) (140) Net commission and fee income Net trading income Operating income Administrative expense 8 (855) (616) Depreciation/ amortisation 15 (87) (73) Other income Other expense 6 (306) (174) Total operating expense (1 151) (863) Change in allowances 9 (2 161) - (Loss)/profit before tax (1 142) 95 Corporate income tax (14) Net (loss)/ profit for the year (974) 81 (Loss)/profit attributable to equity holders of the Bank (974) 81 Change in revaluation reserve, net 14 (40) (23) Total comprehensive income/(expense) (1 014) 58 Total comprehensive income/(expense) attributable to equity holders of the Bank (1 014) 58 (Loss)/ earnings per share (LVL) 25 (0.157) The accompanying notes on pages 13 to 66 form an integral part of these financial statements. The Bank s financial statements set out on pages 9 to 66 were approved by the Board and by the Council on 27 March Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 27 March

10 STATEMENT OF FINANCIAL POSITION Notes 31/12/ /12/2010 ASSETS Cash and balances with the Bank of Latvia Due from credit institutions Available-for-sale financial assets Derivative financial instruments Loans and receivables Held-to-maturity financial investments Current tax assets 1 1 Deferred tax assets Property, plant and equipment Intangible assets Other assets Prepaid expense and accrued income Total assets LIABILITIES Due to credit institutions Liabilities at amortised cost Deposits from customers Subordinated debt Derivative financial instruments Deferred tax liabilities Other liabilities Deferred income and accrued expense Total liabilities EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK Paid-in share capital Asset revaluation reserve (63) (23) (Accumulated deficit)/ retained earnings (974) 179 Total equity attributable to equity holders of the Bank Total equity Total liabilities and equity The accompanying notes on pages 13 to 66 form an integral part of these financial statements. The Bank s financial statements set out on pages 9 to 66 were approved by the Board on and by the Council on 27 March Biomins Kajems Chairman of the Council Riga, 27 March 2012 Boriss Ulmans Chairman of the Board 10

11 STATEMENT OF CHANGES IN EQUITY Paid-in share capital Fair value revaluation reserve of available-forsale financial assets Retained earnings Total Balance as at 31 December Profit/ (loss) for the reporting year Comprehensive income/ (expense) - (23) - (23) Total comprehensive income - (23) Balance as at 31 December (23) Profit/ (loss) for the reporting year - - (974) (974) Comprehensive income/ (expense) - (40) - (40) Total comprehensive income - (40) (974) (1 014) Dividends paid - - (179) (179) Issue of shares Balance as at 31 December (63) (974) (5 163) The accompanying notes on pages 13 to 66 form an integral part of these financial statements. The Bank s financial statements set out on pages 9 to 66 were approved by the Board on and by the Council on 27 March Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 27 March

12 STATEMENT OF CASH FLOWS CASH FLOWS TO/ FROM OPERATING ACTIVITIES (Loss) / profit before tax (1 142) 95 Amortisation/ depreciation Increase in impairment allowance for financial assets Unrealised foreign exchange (gain)/ loss 127 (94) Increase in cash and cash equivalents from operating activities before changes in assets and liabilities (Increase)/ decrease in balances due from credit institutions (1 322) (Increase)/ decrease in loans and receivables (1 334) (4 540) Decrease/ (increase) in other assets (241) (132) Increase/ (decrease) in balances due to credit institutions Increase/ (decrease) in deposits from customers Increase/ (decrease) in other liabilities Change in cash and cash equivalents from operating activities CASH FLOWS TO/ FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (28) (194) Acquisition of held-to-maturity financial investments (5 287) (8 406) Redemption of held-to-maturity financial investments Acquisition of available-for-sale financial assets (13 481) (3 869) Sale/ redemption of available-for-sale financial assets Increase in cash and cash equivalents from investing activities (10 687) (5 793) CASH FLOWS TO/ FROM FINANCING ACTIVITIES Issue of shares Dividends paid (179) - Increase of subordinated loan Increase in cash and cash equivalents from financing activities Net cash flows for the year (1 558) Cash and cash equivalents at the beginning of the year Foreign exchange gain/(loss) (127) 56 Cash and cash equivalents at the end of the year Cash and cash equivalents are disclosed in note 26. Operational cash flows from interest Interest paid Interest received

13 NOTE 1 GENERAL INFORMATION AS Latvijas pasta banka (hereinafter the Bank) is a joint stock company registered in the Republic of Latvia and operating according to the laws of the Republic of Latvia and the licence issued by the Financial and Capital Market Commission on 12 September The registered office of AS Latvijas pasta banka is at Katlakalna iela 1, Riga, LV-1073, Latvia. The Bank has the head office and two customer service centres. The core business activity of the Bank comprises local and international payments, attraction of deposits, issue and servicing of payment cards, issue of loans, securities and foreign exchange transactions. According to the Commercial Law of the Republic of Latvia, the general shareholders meeting has a right and duty to decide on the approval of the annual report. NOTE 2 BASIS OF PREPARATION (a) Statement of compliance The Bank s financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union ( EU ). (b) Going concern The financial statements are prepared on the going concern basis. The Bank s management has analysed the Bank s financial position, availability of financial resources as well as the impact of the financial crisis on the future operations of the Bank. The Bank is operating pursuant to a development strategy that is based on an assumption that the initial Pasta Banka project is not supported and the initial development strategy cannot be implemented. This strategy will be pursued until it is confirmed legally that the initial strategy is or is not feasible. The Bank s operating strategy is aimed at further creating a bank servicing certain customers and developing customised products and service technologies. The Bank s capital adequacy is monitored by the following: - Analysing the report prepared in accordance with the Bank s Procedure for Calculating the Minimum Capital Requirements at least on a monthly basis; - Assessing the capital required to cover all significant risks the Bank is exposed to and the extent of the available capital for a three-year planning period at least once every year and by benchmarking the actual financial performance of the Bank against the target indicators on a monthly basis; - Analysing the asset quality and estimating the required allowances at least on a quarterly basis. Pursuant to the Bank s Crisis Management Plan, in the event of a prolonged crisis of capital the Bank will use its capital buffer, attract subordinated deposits, or seek a shareholders decision to increase the Bank s capital. Considering the persisting uncertainty on financial markets that leads to an elevated risk of impairment of government bonds and the potential necessity of additional capital injections, on 23 March 2012 the Bank s shareholders and related parties provided letters of support, committing to supplying an additional capital whenever it may be necessary. 13

14 Overall, the performance for the year 2011 does not affect the focus areas of the Bank s development strategy. Having analysed the key risks related to the present and potential economic situation, the development of the banking industry as well as the Bank s existing and potential human and financial resources, the Bank has selected to pursue the following strategy: - As a priority, to offer its services to legal entities, forming the customer portfolio based on customised services; - Along with legal entities, to offer equal customised services also to high-income and ultrahigh income private individuals; - To be present in Latvia, Russia, and Ukraine; - To define as the priority business activity the following: issue and acceptance of payment cards via POS terminals and the Internet, in cooperation with renowned organisations, such as MasterCard, Visa, Tieto, First Data, Global Payment, investment of attracted funds in financial instruments, issue of credit lines linked to payment cards to private individuals, issue of loans to legal entities based on the moderately conservative risk approach, especially financing of current assets and transportation flows; - To set the target capital adequacy ratio of at least 20 per cent. The Bank takes into account that this target ratio has been set in a resolution adopted by the Council of the Financial and Capital Market Commission on 12 July 2010, based on the information presented in the Bank s strategy for the years (c) Functional and presentation currency These financial statements are reported in thousands of lats (LVL 000), unless otherwise stated. The functional currency of the Bank is the Latvian lat (LVL). (d) Basis of presentation These financial statements are prepared on a historical cost basis, except for assets and liabilities which are reported at fair value: - derivative financial instruments; - available-for-sale financial assets. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense are not offset in the financial statements unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Bank. 14

15 NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Adoption of new and/or changed IAS, IFRS and IFRIC interpretations The accounting policies adopted are consistent with those used in the previous financial year except as follows: Starting from 1 January 2011, the Bank has adopted the following new and amended IFRS and IFRIC interpretations: IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment) The amendment removes an unintended consequence when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as a pension asset. This amendment does not affect these financial statements because the Bank does not have defined benefit assets. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in profit or loss. This interpretation does not affect these financial statements because the Bank does not have such transactions. IAS 24 Related Party Transactions (Amendment) The IASB issued an amendment to IAS 24 that clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships and clarify the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The amendment is applied retrospectively. The adoption of this amendment affects neither the Bank s financial position or performance nor the related party disclosures in these financial statements. IAS 32 Financial Instruments: Presentation (Amendment) The IASB issued an amendment that alters the definition of a financial liability in IAS 32 to enable entities to classify rights issues and certain options or warrants as equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity s non-derivative equity instruments, to acquire a fixed number of the entity s own equity instruments for a fixed amount in any currency. The amendment is applied retrospectively. The adoption of this amendment does not affect the Bank s financial position or performance because the Bank does not have such instruments. 15

16 Improvements to IFRSs In May 2010, the IASB issued its omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments may result in changes to accounting policies but does not have any impact on the financial position or performance of the Bank: - IFRS 7 Financial Instruments - Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context. The Bank reflects the revised disclosure requirements in Note 29. Other amendments resulting from Improvements to IFRSs to the following standards and interpretations did not have any impact on the accounting policies, financial position or performance of the Bank: - IFRS 3 Business Combinations; - IAS 1 Presentation of Financial Statements; - IAS 27 Consolidated and Separate Financial Statements; - IAS 34 Interim Financial Reporting; - IFRIC 13 Customer Loyalty Programmes. (b) Standards issued but not yet effective and not early adopted IAS 1 Financial Statement Presentation (Amended) Presentation of Items of Other Comprehensive Income The amendment is effective for annual periods beginning on or after 1 July The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Bank s financial position or performance. This amendment has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of this amendment on the financial position or performance of the Bank. IAS 12 Income Taxes (Amended) Recovery of Underlying Assets The amendment is effective for annual periods beginning on or after 1 January The amendment clarified the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. Furthermore, it introduces the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16 always be measured on a sale basis of the asset. This amendment has not yet been endorsed by the EU. The adoption of this amendment does not affect the Bank s financial position or performance because the Bank does not have investment properties. 16

17 IAS 19 Employee Benefits (Amended) The amendment is effective for annual periods beginning on or after 1 January The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. Early application is permitted. This amendment has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of this amendment on the financial position or performance of the Bank. IAS 27 Separate Financial Statements (Revised) The Standard is effective for annual periods beginning on or after 1 January As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. Earlier application is permitted. This amendment has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of this amendment on the financial position or performance of the Bank. IAS 28 Investments in Associates and Joint Ventures (Revised) The Standard is effective for annual periods beginning on or after 1 January As a consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. Earlier application is permitted. This amendment has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of this amendment on the financial position or performance of the Bank. IAS 32 Financial Instruments: Presentation (Amended) - Offsetting Financial Assets and Financial Liabilities The amendment is effective for annual periods beginning on or after 1 January This amendment clarifies the meaning of currently has a legally enforceable right to set-off and also clarifies the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments to IAS 32 are to be retrospectively applied. Earlier application is permitted. However, if an entity chooses to early adopt, it must disclose that fact and also make the disclosures required by the IFRS 7 Offsetting Financial Assets and Financial Liabilities amendments. This amendment has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the amendment on the financial position or performance of the Bank. IFRS 7 Financial Instruments: Disclosures (Amended) - Enhanced Derecognition Disclosure Requirements The amendment is effective for annual periods beginning on or after 1 July The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, 17

18 the entity s continuing involvement in those derecognised assets. The amendment has only disclosure effects. The adoption of this amendment does not affect the Bank s financial position or performance. IFRS 7 Financial Instruments: Disclosures (Amended) - Offsetting Financial Assets and Financial Liabilities The amendment is effective for annual periods beginning on or after 1 January The amendment introduces common disclosure requirements. These disclosures would provide users with information that is useful in evaluating the effect or potential effect of netting arrangements on an entity s financial position. The amendments to IFRS 7 are to be retrospectively applied. This amendment has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the amendment on the financial position or performance of the Bank. IFRS 9 Financial Instruments - Classification and Measurement The new standard is effective for annual periods beginning on or after 1 January IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. Phase 1 of IFRS 9 will have a significant impact on (i) the classification and measurement of financial assets and (ii) a change in reporting for those entities that have designated financial liabilities using the FVO. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The completion of this project is expected over the first half of Early application is permitted. This standard has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the new standard on the financial position or performance of the Bank. IFRS 10 Consolidated Financial Statements The new standard is effective for annual periods beginning on or after 1 January IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the new standard on the financial position or performance of the Bank. IFRS 11 Joint Arrangements The new standard is effective for annual periods beginning on or after 1 January IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. This standard has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the new standard on the financial position or performance of the Bank. 18

19 IFRS 12 Disclosures of Involvement with Other Entities The new standard is effective for annual periods beginning on or after 1 January IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. This standard has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the new standard on the financial position or performance of the Bank. IFRS 13 Fair Value Measurement The new standard is effective for annual periods beginning on or after 1 January IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard should be applied prospectively and early adoption is permitted. This standard has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the new standard on the financial position or performance of the Bank. IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine The interpretation is effective for annual periods beginning on or after 1 January This interpretation only applies to stripping costs incurred in surface mining activity during the production phase of the mine ('production stripping costs'). Costs incurred in undertaking stripping activities are considered to create two possible benefits a) the production of inventory in the current period and/or b) improved access to ore to be mined in a future period (striping activity asset). Where cost cannot be specifically allocated between the inventory produced during the period and the stripping activity asset, IFRIC 20 requires an entity to use an allocation basis that is based on a relevant production measure. Early application is permitted. IFRIC 20 has not yet been endorsed by the EU. The Bank is in the process of assessing the impact of the new interpretation on the financial position or performance of the Bank. (c) Significant accounting judgments and estimates In the process of applying the Bank's accounting policies, management has exercised judgment and estimates in determining the amounts recognised in the financial statements. The most significant uses of judgment and estimates are as follows: Going concern The Bank s management has made an assessment of the Bank s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any uncertainties that may cast doubt upon the Bank s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. 19

20 Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs. Impairment losses The individual impairment allowance is made for credits based on the borrower s financial position, value of collateral, and fulfilment of the loan agreement. The level of the allowance is based on the present value of expected future cash flows considering relevant factors that may affect the borrowers ability to repay, collateral value, and current economic conditions. Ultimate losses may vary from the current estimates. The value of the collateral held in connection with loans and advances is based on the estimated fast realisable value of the asset and is taken into account when determining expected cash flows and accordingly the allowance. Available-for-sale financial assets are assessed individually for impairment whenever there is any indication of potential impairment. If there is objective evidence that available-for-sale financial assets are impaired irreversibly, the related impairment loss is removed from equity and recognised in the statement of comprehensive income. An objective evidence would also include a significant or prolonged decline in the fair value of the investment below its cost. The bank treats significant generally as 20% and prolonged generally as greater than six months. (d) Foreign currency translation Transactions and balances Transactions in foreign currencies are recorded in lats at the functional currency rate of exchange ruling at the date of the transaction set by the Bank of Latvia. Monetary assets and liabilities denominated in foreign currencies are translated into lats at the official rate set by the Bank of Latvia of exchange prevailing at the end of the year. All realised gains and losses are taken to the statement of comprehensive income in the period when incurred. Unrealised gains and losses resulting from the revaluation of assets and liabilities are included in the statement of comprehensive income applying the exchange rates prevailing at the reporting date. The principal year-end rates of exchange (LVL to one foreign currency unit) used in the preparation of these financial statements are as follows: Official exchange rate 31 December December 2010 EUR USD

21 (e) Financial assets and liabilities Recognition and derecognition of financial assets Financial assets are recognised in the statement of financial position when, and only when, the Bank becomes a party to the contractual provisions of the instrument. A financial asset is derecognised only when the contractual rights to receive cash flows from the asset have expired, or the Bank has transferred the financial asset and substantially all the risks and rewards of the asset to the counterparty. All purchases and sales of financial assets, except for loans issued to non-bank customers, are recognised and derecognised on the settlement date. Loans to non-bank customers are recognised in the statement of financial position when cash is transferred to the customer s current account. Derivatives recorded at fair value through profit or loss The Bank uses derivatives such as forward foreign exchange contracts and currency swaps. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The fair value of derivatives is disclosed in the statement of financial position as derivative financial instruments. Daily changes in the fair value of derivatives are included in the statement of comprehensive income in net trading income. Available-for-sale financial assets The Bank acquires available-for-sale securities to hold them for an undefined period and generate interest income and/or profit from the increase in prices of securities. The available-forsale portfolio includes fixed income securities. After initial recognition at fair value, including direct transaction costs, available-for-sale securities are measured at fair value. The revaluation result is charged through the statement of comprehensive income to the shareholders equity as the fair value revaluation reserve of available-for-sale financial assets. For available-for-sale securities acquired at a discount (premium), the respective discount (premium) amount is amortised on a systematic basis, using the effective interest method. Amortised amounts are charged to the statement of comprehensive income as interest income from debt securities. Any gain or loss resulting from disposal of available-for-sale securities and the fair value revaluation reserve accrued until such disposal are included in the statement of comprehensive income as net realised trading gain/ (loss). Held-to-maturity financial investments Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and ability to hold to maturity and which do not meet the criteria of loans and receivables. Held-to-maturity financial investments comprise debt securities. Held-to-maturity financial investments are carried at amortised cost using the effective interest rate method, less any allowance for impairment. 21

22 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans are carried at amortised cost using the effective interest method. The amortised cost of a loan is the amount at the issue of the loan minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method of any difference between the initial amount and the maturity amount, and minus any reduction for impairment or uncollectability. Finance leases (Bank as a lessor) For reporting purposes, finance lease receivables are carried as loans and receivables. Finance lease receivables are recognised as assets at the commencement of the lease term at an amount equal at the inception of the lease to the net investment in the lease. Finance income is recognised over the lease term to produce a constant periodic return on the net investments outstanding in respect of finance leases. Financial liabilities Financial instruments carried as deposits from customers and subordinated debt are classified as financial liabilities at amortised cost. After initial measurement, financial liabilities are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount on issue and fees that are an integral part of the effective interest rate. The amortisation is included in interest expense in the statement of comprehensive income. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognised in profit or loss. Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. The Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant and collectively for all past due loans regardless of their net carrying amount. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of 22

23 estimated future cash flows discounted at the financial asset s original effective interest rate. For the purpose of a collective evaluation of impairment, the Bank assumes that contractual cash will be recovered and the impairment loss is evaluated on the basis of historical loss experience adjusted for current observable data. The carrying amount of the asset is reduced through the use of an allowance account, and the decrease or increase of allowances is taken to the statement of comprehensive income for the reporting year. Loss together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write off is later recovered, the recovery is credited to the Credit loss expense. Fair value of financial assets and liabilities Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. To determine the fair value of financial assets and liabilities, the Bank uses quoted market prices, ratings assigned by independent rating agencies, or relevant valuation techniques. Where quoted prices are not readily available, fair values are determined by using alternative pricing models considering that fair value is not the amount that the Bank would receive or pay in a forced transaction, involuntary liquidation or distress sale. These models are based on the discounted cash flow analysis where relevant cash flows from the respective financial assets are measured and discounted at an interest rate based on discount rates applicable to a certain category of assets. (f) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method applying the following rates: Property, plant and equipment: Computers and equipment 33 % Other property, plant and equipment % An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset is calculated as the difference between the net disposal proceeds and the carrying amount of the item at the disposal date and is included in the statement of comprehensive income. Useful lives and residual values are reviewed annually. 23

24 (g) Intangible assets Intangible assets are identifiable non-monetary assets without physical substance (licences, software that is not an integral part of the related hardware, etc.) held for supply of services or otherwise and are recognised as such when it is probable that the expected economic benefits that are attributable to the asset will flow to the Bank. Intangible assets are stated at cost less accumulated amortisation and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation is included in the statement of comprehensive income on a straight-line basis over the useful life of the asset. The useful life of each asset is estimated on an individual basis, considering the contractual provisions and/or the period in which the asset s future economic benefits are expected to be consumed by the Bank. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation rates by categories of assets are as follows: Intangible assets: Licences 10 % Software 10 % (h) Impairment of non-financial assets The Bank assesses at each reporting date whether there is an indication that non-financial assets (except for the deferred tax asset) may be impaired. If any such indication exists, the Bank makes an estimate of the asset s recoverable amount. An impairment loss is recognised when the carrying amount of an asset exceeds its recoverable amount. Impairment losses are taken to the statement of comprehensive income. (i) Recognition of income and expense For all financial instruments measured at amortised cost, interest bearing financial assets classified as available-for-sale and financial instruments designated at fair value through profit or loss, interest income or expense is recorded in the statement of comprehensive income by using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. The calculation takes into account all contractual terms of the financial instrument (for example, prepayments, maturity and other options), but not future credit losses. 24

25 Interest income and expense include the amortisation of any difference between the cost of interest-bearing financial assets or liabilities and their maturity amount calculated applying the effective interest rate method (discount, premium, etc.). Interest income comprises coupons earned from debt securities of the Bank s portfolio. Accumulated interest income and income from impaired financial assets are included in the statement of comprehensive income unless the Bank has objective evidence that payments will not be received in the due term. Once the recorded value of a financial asset has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Commission and fee income from customers is usually recognised on an accrual basis as the service is supplied based on each particular situation, or on a certain performance. Fees earned for the provision of services over a period of time are accrued over that period and taken to income. These fees include account servicing, asset management, commission from payment card transactions, etc. Loan related fees are taken to income on a systematic basis over the period of the loan. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis. Fees that are due for the provision of certain services are taken to income on completion of the respective service. Income and expense attributable to the reporting period are taken to the statement of comprehensive income regardless of the receipt or payment date. (j) Cash and cash equivalents According to IAS 7 Cash flow statements, cash and cash equivalents comprise cash and amounts due from central banks and other credit institutions on demand with an original maturity of three months or less. The statement of cash flows reports cash flows during the period classified by operating, investing and financing activities. Cash flows from operating activities are reported using the indirect method. Cash flows from investing and financing activities are presented on the basis of comprehensive income and cash payments for the year. (k) Taxation Corporate income tax is calculated according to the requirements of Latvian tax laws. The income tax rate applied in 2010 and 2011 is 15%. Deferred corporate income tax arising from temporary differences in the timing of the 25