KOMERCIJALNA BANKA AD SKOPJE. Financial Statements prepared in accordance with International Financial Reporting Standards

Transcription

1 KOMERCIJALNA BANKA AD SKOPJE Financial Statements prepared in accordance with International Financial Reporting Standards For the year ended 31 December 2010

2 Financial statements for the year ended 31 December 2010 Content Page Independent auditor s report Statement of comprehensive income 3 Statement of financial position 4 Statement of changes in equity 5 Cash flow statement 6-7 Notes to the financial statements 8-67

3 Independent auditor s report To the Shareholders of Komercijalna Banka AD - Skopje We have audited the accompanying financial statements of Komercijalna Banka AD - Skopje, which comprise the statement of financial position as of 31 December 2010 and the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers Revizija doo, Oktomvriska Revolucija Blvd. bb. Hyperium Business Center, 2 nd floor, 1000 Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

4 Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of Komercijalna Banka AD Skopje as of 31 December 2010, and of its financial performance and its cash flows for the year than ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers REVIZIJA DOO Skopje, 25 February 2011 PricewaterhouseCoopers Revizija doo, Oktomvriska Revolucija Blvd. bb. Hyperium Business Center, 2 nd floor, 1000 Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

5 Financial statements for the year ended 31 December 2010 Statement of comprehensive income Notes Year ended 31 December Interest and similar income 5 4,198,514 4,004,517 Interest expense and similar charges 5 (1,711,950) (1,612,743) Net interest income 2,486,564 2,391,774 Fee and commission income 6 933, ,834 Fee and commission expense 6 (158,962) (145,201) Net fee and commission income 774, ,633 Dividend income 7 4,132 12,903 Foreign exchange gains (net) 145,296 90,447 Net (losses)/gains on financial instruments classified as held for trading (5,834) 2,881 Other operating income 8 130, ,689 Personnel expenses 9 (812,071) (853,564) Other operating expenses 10 (1,057,934) (941,832) Impairment charge for credit losses 11 (251,499) (514,926) Operating profit 1,413,583 1,058,005 Share of profit of associates accounted for using the equity method 18,802 17,250 Profit before income tax 1,432,385 1,075,255 Income tax expense 12 (313) (125) Profit for the year 1,432,072 1,075,130 Other comprehensive income for the year - - Total comprehensive income for the year 1,432,072 1,075,130 Basic earnings per share Diluted earnings per share The notes on pages 8 to 67 are an integral part of these financial statements. 3

6 Financial statements for the year ended 31 December 2010 Statement of financial position Notes At 31 December ASSETS Cash and balances with the National Bank of Republic of Macedonia 14 10,599,914 8,112,561 Treasury and other eligible bills 15 1,098, ,573 Financial assets at fair value through profit or loss ,201 30,592 Loans and advances to banks 17 12,912,488 9,116,491 Loans and advances to customers 18 40,832,418 38,851,929 Investment securities , ,875 Investments in associates ,601 88,799 Property and equipment 21 1,655,857 1,637,121 Investment properties 22 39,936 41,037 Intangible assets 23 69,489 56,864 Other financial assets , ,340 Other assets 25 81, ,282 Deferred income tax assets Non-current assets held for sale 26 2,385,455 1,139,601 Total assets 70,830,806 60,709,378 LIABILITIES Deposits from banks 27 1,737,849 1,829,129 Other deposits 28 58,036,780 49,768,300 Borrowings 29 2,389,906 1,587,235 Current income tax liabilities - 5,303 Other taxes liabilities 11,027 - Provisions , ,469 Other liabilities , ,690 Total liabilities 62,824,926 53,756,126 SHAREHOLDERS EQUITY Share capital 35 2,014,067 2,014,067 Share premium 109, ,026 Retained earnings 1,428,950 1,070,886 Statutory reserves 36 4,344,120 3,649,556 Other reserves , ,717 Total shareholders equity 8,005,880 6,953,252 Total equity and liabilities 70,830,806 60,709,378 The notes on pages 8 to 67 are an integral part of these financial statements. 4

7 Financial statements for the year ended 31 December 2010 Statement of changes in equity Share capital Share premium Statutory Reserves Other reserves Retained Earnings Total equity Balance at 1 January ,014, ,026 2,653, ,717 1,373,346 6,259,292 Total comprehensive income for ,075,130 1,075,130 Dividends relating to (381,170) (381,170) Transfer to statutory reserve ,420 - (996,420) - Balance at 31 December ,014, ,026 3,649, ,717 1,070,886 6,953,252 Balance at 1 January ,014, ,026 3,649, ,717 1,070,886 6,953,252 Total comprehensive income for ,432,072 1,432,072 Dividends relating to (341,503) (341,503) Transfer to statutory reserve ,564 - (694,564) - Tax on dividends paid (37,941) (37,941) Balance at 31 December ,014, ,026 4,344, ,717 1,428,950 8,005,880 Detailed information is provided in Notes 35 and 36. The notes on pages 8 to 67 are an integral part of these financial statements. 5

8 Financial statements for the year ended 31 December 2010 Cash flow statement Year ended Notes 31 December Cash flows from operating activities Profit before tax 1,432,072 1,075,255 Adjustments for: Depreciation of property and equipment and amortization of intangible assets , ,618 Gain on sale of property and equipment 8 (1,775) (6,095) Loss on sale of collected collateral 10 6,072 8,864 Decrease in value of assets acquired through foreclosure procedure 10 14,417 - Depreciation of investment property 10 1, Impairment losses , ,926 Dividend income 7 (4,132) (12,903) Interest income 5 (4,198,514) (4,004,517) Interest expense 5 1,711,950 1,612,743 Net trading income 5,834 (2,881) Share of profit from associates accounted for using the equity method (18,802) (17,250) Interest and commission receipts 4,061,064 3,914,566 Interest paid (1,674,357) (1,506,431) Income tax paid (7,690) (89,319) 1,775,659 1,681,537 Restricted accounts (3,781) (92,932) Current accounts with foreign banks - 10 Balances with NBRM (1,794,338) (1,370,415) Financial assets at fair value through profit or loss (187,609) 192,189 Loans and advances to banks 185,030 43,057 Loans and advances to customers (2,119,386) (4,331,005) Other financial assets (29,037) (221,954) Collected collateral (1,227,135) (372,400) Other assets 19,677 (3,815) Deposits from banks and other financial institutions (91,280) 256,668 Amounts owed to other depositors 8,268,480 3,998,430 Other liabilities 139, ,682 Net cash from/(used in) operating activities 4,935,996 (92,948) Cash flow from investing activities Acquisition of property and equipment, and intangible assets (249,263) (315,165) Proceeds from the sale of property and equipment 2,045 10,903 Proceeds from sale of investments 35, ,219 Purchase of investments - (48,872) Dividends received 3,294 12,903 Net cash used in investing activities (208,176) (237,012) The notes on pages 8 to 67 are an integral part of these financial statements. 6

9 Financial statements for the year ended 31 December 2010 Cash flow statement (continued) Year ended Notes 31 December Cash flows from financing activities Proceeds from borrowed funds 6,842,858 12,668,904 Repayments of borrowed funds (6,041,163) (12,065,946) Dividends paid (362,288) (381,819) Net cash from financing activities 439, ,139 Cash and cash equivalents at beginning of year 10,486,811 10,595,632 Net cash provided by/(used in) operating activities 4,935,996 (92,948) Net cash used in investing activities (208,176) (237,012) Net cash provided by financing activities 439, ,139 Cash and cash equivalents at end of year 37 15,654,038 10,486,811 The notes on pages 8 to 67 are an integral part of these financial statements. 7

10 1 General Information A Introduction Komercijalna Banka AD Skopje (further the Bank ) is a joint stock company incorporated and domiciled in the Republic of Macedonia. The Bank is listed on the Macedonian Stock Exchange under the ID code KMB. The Bank is licensed to perform all banking activities and the main activities include commercial lending, receiving of deposits, foreign exchange deals, and payment operation services in the country and abroad and retail banking services. In addition, it provides trade finance facilities to companies for export and import purposes. The address of its registered office is as follows: Kej Dimitar Vlahov 4, 1000 Skopje Republic of Macedonia These financial statements have been approved for issue by the Supervisory Board on 24 February Directors The names of the Directors of the Bank serving during the financial year and to the date of this report are as follows: Chief Executive Officer Chief Operative Officer Chief Financial Officer Liquidity and Financial Market Division Manager Corporate Lending Division Manager International Division Manager Retail Banking Division Manager Risk management and Planning Division Manager Human resources and General Affairs Division Manager Legal Affairs, Problem Loans Workout and Management Division Manager Information Technology Division Manager Finance Department Manager Domestic Payment Operations Department Manager Vault Operation Department Manager Marketing Department Manager Branch Managing Department Compliance and Anti Money Laundering Department Manager Head of Internal Audit Department Hari Kostov Ilija Iloski Maja Stevkova Sterieva Suzana Moskovska Biljana Maksimovska Popovik Vesela Curilova Gabriela Stojanovska Maja Stevkova Sterieva Slavko Razmilik Teodora Guskova Prodanova Zorica Cerepnalkoska Violeta Markovska Valjak Biljana Mitevska Aneta Velevska Jasmina Bucevska Margarita Ognenovska Milica Georgieva Vesna Maslinko 8

11 1 General information B Operating Environment of the Bank Recent volatility in global and Macedonian financial markets. The global liquidity crisis which started in spring 2008, continued in 2009 and has an influence to a certain level in 2010 has mostly resulted in a lower level of capital market funding while liquidity levels across the banking sector remained high. It is expected that there will be no liquidity shocks in domestic banking in To preserve structural liquidity in 2009 NBRM has imposed minimum 100% fulfilment of obligatory one and six month liquidity limits. These requirements remain in 2010 and are expected to remain in In January 2009 NBRM started and continued in 2010 with organizing foreign currency deposits auctions with interest rates equal to those of Central Banks in the euro zone, international financial institutions and yields of government bills of countries in euro zone. In May 2009, NBRM has increased the rates of mandatory reserve for the obligations in foreign currency and domestic currency indexed to foreign exchange currency and in 2010 these rates remain unchanged. Impact on liquidity: The funding base of the Bank is mostly dependant on its stable deposit base, which may to be under pressure of increasing interest rates offered by the Banks' that are changing financing strategies. This may influence the cost of funding, but it is not expected to have a significant influence on the deposit base. Impact on customers/borrowers: The Bank s clients, both the borrowers and depositors, may be affected by weak domestic demand which could in turn impact their liquidity and their ability to repay the amounts owed or to seek to withdraw deposits placed with the Bank. Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. Management has properly reflected revised estimates of expected future cash flows in its impairment assessments. Impact on collateral (especially real estate): The amount of provision for impaired loans and the carrying amount of foreclosed collateral is based on management's appraisals of these assets at the statement of financial position date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in the Republic of Macedonia for many types of collateral, especially real estate, has not been severely affected by the recent volatility in global financial markets since the supply of real estates, especially residential, is still lower than demand. Expected lower incomes of households and possible lower liquidity of companies in 2011 may decrease liquidity for certain types of assets. As a result, the actual realizable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. Fair value of financial assets and liabilities: The fair values of quoted investments in active markets are based on current bid prices (financial assets) or offer prices (financial liabilities). If there is no active market for a financial instrument, the Bank establishes fair value using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the statement of financial position date management has reviewed its models to ensure they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads. 9

12 2 Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below: A Basis of presentation The financial statements of Komercijalna Banka AD - Skopje have been prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in Macedonian Denars (MKD). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets held at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Those areas where assumption and estimates are significant to the financial statement are disclosed in Note 4. a) Adoption of New or Revised Standards and Interpretations Certain new standards and interpretations became effective for the Bank from 1 January 2010: IFRIC 17, Distributions of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets should be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 did not have an impact on these financial statements. IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 did not have a significant impact on these financial statements. Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). 10

13 2 Accounting policies A Basis of preparation a) Adoption of New or Revised Standards and Interpretations (Continued) The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity s own equity instruments as noncurrent; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss for the year and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. In addition, the amendments clarifying classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary published as part of the Annual Improvements to International Financial Reporting Standards, which were issued in May 2008, are effective for annual periods beginning on or after 1 July The amendments did not have a material impact on these financial statements. Unless otherwise stated above, the amendments and interpretations did not have any significant effect on the Bank financial statements. b) New Accounting Pronouncements Certain new standards and interpretations have been published that are mandatory for the Bank s accounting periods beginning on or after 1 January 2011 or later periods and which the Bank has not early adopted: Classification of Rights Issues - Amendment to IAS 32 (issued on 8 October 2009; effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. The Bank does not expect the amendments to have any material effect on its financial statements. 11

14 2 Accounting policies A Basis of preparation b) New Accounting Pronouncements (Continued) Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. The Bank does not expect the amendments to have any material effect on its financial statements. IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). This IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognised in profit or loss based on the fair value of the equity instruments compared to the carrying amount of the debt. The Bank does not expect IFRIC 19 to have any material effect on its financial statements. Prepayments of a Minimum Funding Requirement Amendment to IFRIC 14 (effective for annual periods beginning on or after 1 January 2011). This amendment will have a limited impact as it applies only to companies that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14 related to voluntary pension prepayments when there is a minimum funding requirement. The Bank does not expect the amendments to have any material effect on its financial statements. Limited exemption from comparative IFRS 7 disclosures for first-time adopters - Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2010). Existing IFRS preparers were granted relief from presenting comparative information for the new disclosures required by the March 2009 amendments to IFRS 7, Financial Instruments: Disclosures. This amendment to IFRS 1 provides first-time adopters with the same transition provisions as included in the amendment to IFRS 7. The Bank does not expect the amendments to have any effect on its financial statements. IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9 issued in November 2009 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities. Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. 12

15 2 Accounting policies A Basis of preparation b) New Accounting Pronouncements (Continued) An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent only payments of principal and interest (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated as at fair value through profit or loss in other comprehensive income. While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. The Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption. Disclosures Transfers of Financial Assets Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011.). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure are required to enable the effects of those risks to be understood. The amendment is not expected to have any impact on the Bank's financial statements. Improvements to International Financial Reporting Standards (issued in May 2010 and effective from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and 13

16 2 Accounting policies A Basis of preparation b) New Accounting Pronouncements (Continued) (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on acquirer s share-based payment arrangements that were not replaced or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The Bank does not expect the amendments to have any material effect on its financial statements. The Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption by the Bank. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Bank s financial statements. 14

17 2 Accounting policies B Segment reporting Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM) and for which discrete financial information is available. The CODM is the person or group of persons who allocates resources and assesses the performance for the entity. The functions of CODM are performed by Supervisory Board of the Bank. The internal reporting within the Bank presented to the CODM is on a Bank level and as one operating segment. The decisions brought by the CODM are based on received reports presented as one operating segment. C Foreign currencies Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). The financial statements are presented in MKD thousands, which is the Bank s functional and presentation currency. Transactions and balances Assets and liabilities denominated in foreign currency are translated into MKD at exchange rates ruling at the statement of financial position date. Transactions denominated in foreign currency are translated into MKD at the exchange rates valid at the date of the transactions. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the profit or loss. Exchange rate: 31 December December 2009 MKD MKD USD 46, EUR 61, D Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and when there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 15

18 2 Accounting policies E Interest income and expense Interest income and expenses for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within interest income and interest expense in the the profit or loss using the effective interest method. Interest income and expense are recognized in the the profit or loss for all interest bearing instruments on an accrual basis using the effective interest method. When loans become doubtful of collection, they are written down to their recoverable amounts and interest income is thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. F Fee and commission income Fees and commissions consist mainly of fees received from enterprises arising from guarantees and letter of credits and fees arising from domestic and foreign payment traffic and other banking activities. Fees and commissions are generally recognized on an accrual basis when the service has been provided. G Rental income Rental income from investment property is recognized in the profit or loss on a straight line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income. H Financial assets The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. There are no financial assets at fair value through profit and loss that are not held for trading. 16

19 2 Accounting policies H Financial assets (Continued) A financial asset is classified as held for trading if it is acquired principally for the purpose of selling or repurchasing it in the near term and for which there is evidence of a recent actual pattern of short-term profit-taking. The only trading assets held by the Bank are Treasury bills and government treasury bills. Income from debt and other fixed-income instruments is recognised in interest income. Income from equity investments and other non-fixed income instruments is recognised in dividend income. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money to a debtor with no intention of trading the receivable. Loans are recognized when cash is advanced to the borrowers and are carried at amortised cost using the effective interest method. Loans and advances to banks, loans and advances to customers and cash and balances to NBRM are classified as loans and receivables. Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Were the Bank to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale. Available-for-sale Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity. Available-for-sale financial assets are subsequently carried at fair value. The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the Bank establishes fair value using valuation techniques. Unrealized gains and losses arising from changes in the fair value of securities classified as available-for sale are recognized in other comprehensive income. All regular way purchases of available-for-sale investments are recognized at trade date, which is the date that the Bank commits to purchase the asset. I Impairment of financial assets Assets carried at amortised cost The Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and 17

20 2 Accounting policies I Impairment of financial assets (Continued) that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; and Deterioration in the value of collateral; The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the profit or loss. Once a financial assets or a group of financial assets has been written down as a result of the impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Assets classified as available for sale The Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available for - sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is 18

21 2 Accounting policies I Impairment of financial assets (Continued) removed from other comprehensive income and recognised in the profit or loss. Impairment losses recognised in the profit or loss on equity instruments are not reversed through the profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the profit or loss. J Property and equipment All property and equipment is stated at cost or valuation less accumulated depreciation. Assets in course of construction are reported at their cost of construction including costs charged by third parties. No depreciation is charged on assets during construction. Upon completion, all accumulated costs of the asset are transferred to the relevant tangible property and equipment category and subsequently subject to the applicable depreciation rates. Gains and losses on disposal of property and equipment are recognized in the profit or loss. Depreciation on all assets except assets in the course of construction is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 40 years Furniture and equipment 4-10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. K Intangible assets Intangible assets consist of computer software and licences. The initial cost of acquiring the intangible asset is recognised as an asset and amortised on a straightline basis over the estimated useful life, not exceeding a period of 5 years. L Investment property Investment property is defined as property held by the owner to earn rental income. Investment property is stated at cost less accumulated depreciation. The depreciation rate based on the estimated useful life is 40 years. M N Assets held for sale Collected collateral is classified as assets held for sale. Collected collateral include apartments, equipment and business premises which are not used by the Bank for its core operations. These assets are stated at the lower of carrying amount and fair value less costs to sell. The Bank plans to dispose the collected collateral within one year of forced acquisition. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with NBRM, loans and advances to banks and treasury bills. 19

22 2 Accounting policies O Provisions Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. P Employee benefits The Bank, in the normal course of business, makes payments on behalf of its employees for pensions, health care, employment and personnel tax that are calculated on the basis of gross salaries and wages, food allowances and travel expenses according to the legislation. The Bank makes these contributions to the Government s health and retirement funds, at the statutory rates in force during the year, based on gross salary payments. The Bank pays contributions to public pension insurance fund on a mandatory basis. Once the contributions have been paid, the Bank has no further payment obligations. The regular contributions constitute costs for the year in which they are due and as such are included in staff costs. The cost of these payments is charged to the profit or loss in the same period as the related salary cost. The Bank does not operate any other pension scheme or post retirement benefits plan and consequently, has no obligation in respect of pensions. In addition, the Bank is not obliged to provide further benefits to current and former employees. The Bank recognizes liability and expense for share in profit and payments for bonuses to employees, members of the managing board and management. Q Taxation Income tax Companies do not have to pay income tax on their profit before tax (earned since 1 January 2009) until that profit is distributed in a form of dividend or other forms of profit distributions. If dividends are paid, 10% income tax was payable at the moment of the dividend payment, regardless of whether in monetary or non-monetary form. As of 7 July 2010 dividends distributed by Companies to resident legal entities are exempt from corporate income tax at the level of the distributing entity. Dividends distributed to individuals and foreign legal entities are not exempt from corporate income tax and are subject to 10% at the level of the distributing entity and the corporate income tax liability arises at the time of the dividend payment. Provided the tax arises from retained earnings, such tax is recorded in equity. Apart from distribution of dividends, the tax is still payable on the non-deductable expenses incurred in that fiscal year, decreased by the amount of tax credits and other tax relief s (see the following paragraph). Tax on non-deductible expenses Due to the changes in the Macedonian tax legislation effective from 1 January 2009, and additional changes during 2010 at the end of fiscal year the Companies are liable to pay tax on non deductible expenses, regardless of their financial results. The basis is expenses which are not within the scope of the company business i.e. non deductible expenses (representation expenses, provisions, gifts etc) less tax credits and other tax reliefs. 20

23 2 Accounting policies Q Taxation (Continued) Tax on non-deductible expenses (Continued) The tax on non-deductible expenses is recognized in the profit or loss for the year in Other operating expenses (see Note 10) and against Other tax liabilities in the statement of financial position. Deferred income tax Due to the changes in the Macedonian tax legislation effective from 1 January 2009, and additional changes during 2010 the tax rate for undistributed profits was effectively reduced to zero, as tax is only payable when profits are distributed. According IAS 12.52A, deferred tax assets and liabilities should be measured using the undistributed rate. Deferred tax assets as at 31 December 2009 were recognized to the extent that, and only to the extent that, it was probable that the temporary difference will reverse in the future and items will be available against which the temporary difference can be utilized. The additional changes in Macedonian tax legislation during 2010 resulted in a reversal of all deferred tax assets as of 31 December In line with the requirements of SIC 25, the Bank accounted the impact of this change in the profit or loss in 2010 (see Note 12 and Note 32). R Borrowings Borrowings are recognized initially at fair value net of transaction costs incurred. Subsequent to the initial recognition, interest-bearing borrowings are stated at amortised cost. If debt is settled before maturity, any difference between the amount repaid and the carrying amount is recognized in the profit or loss for the period. S Share capital Share capital comprises ordinary and preference shares. Share issue costs Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends on ordinary shares are recognized as a liability in the period in which they are declared. 21

24 2 Accounting policies T Investment in associates An associate is an entity over which the Bank has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost. U Financial guarantees contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due. Such financial guarantees are given to Banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Bank s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated to recognize in the profit or loss the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the statement of financial position date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to the profit or loss under other operating expenses. 22