BASISBANK Joint Stock Company. 1, Ke. Tsamebuli Avenue Tbilisi, Georgia

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1 BASISBANK Joint Stock Company 1, Ke. Tsamebuli Avenue Tbilisi, Georgia Auditors' Report and Financial Statements Prepared under International Accounting Standards for the year ended 31 December 2002

2 BASISBANK Annual report for the year ended 31 December 2002 Page Independent auditors'report Income statement Balance sheet Statement of changes in shareholders'equity Cash flow statement Notes to the financial statements

3 INDEPENDENT AUDITORS'REPORT TO THE SHAREHOLDERS OF BASIS BANK We have audited the accompanying balance sheet of BasisBank as of 31 December 2002 and the related statements of income and cash flows for the year then ended. These financial statements set out on pages 4 to 29 are the responsibility of the Bank's management. 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 plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of 31 December 2002 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Pricewaterhouse Coopers Rainer Stawinoga Partner th Paris, the 19 of March, 2003

4 Income statement ,1827 0,1467 The following notes are an integral part of these financial statements and should be read in conjunction therewith. 3

5 The following notes are an integral part of these financial statements and should be read in conjunction therewith. 4

6 earnings The following notes are an integral part of these financial statements and should be read in conjunction therewith. 5

7 1. Cash Flow from Operating Activities Interest paid Fees and commission received Fees and commission paid Foreign exchange income/loss, net Other net operating income / (expenses) Salaries expenses Repayment of loans previously written off Income tax paid Change in operating Assets (Increase) / Decrease in trading securities (Increase) / Decrease in loans to customers (Increase) / Decrease in other assets Net cash flow from operating assets 3. Change in operating liabilities (Decrease) / Increase in deposits from banks (Decrease) / Increase in amounts owed to other depositors (Decrease) / Increase in other liabilities Net cash flow from operating liabilities Net cash flow from operating activities II 4. Change in investing activities (Purchase) sale of fixed asset (Purchase) sale of equity investments Net cash flow from investing activities III 5. Change in financing activities Increase in share capital Increase in share premium Dividends paid Net cash flow from financing activities IV Net increase / (decrease) in cash and cash equivalents I+II+III+IV The following notes are an integral part of these financial statements and should be read in conjunction therewith. 6

8 st Cash as at 1 January 2002 Net cash inflow (outflow) st The following notes are an integral part of these financial statements and should be read in conjunction therewith. 7

9 1 Accounting policies and basis of presentation The principal accounting policies adopted in the preparation of these financial statements are set out below: (1) Basis of presentation The financial statements have been prepared in accordance with and comply with International Accounting Standards (IAS) and are presented in thousands of Georgian Lari (GEL). The bank maintains its books and prepares its financial statements in accordance with the Georgian accounting and banking rules and regulations (GAR). The accompanying statements are based on the banks records, appropriately adjusted and reclassified for fair presentation in accordance with IAS. (2) Foreign currencies Assets and liabilities in foreign currencies are expressed in Georgian Lari at official NBG exchange rate prevailing at the balance sheet date. Majority of those items are denominated in freely convertible currencies (USD and EUR). The exchange rate of Georgian Lari to US Dollar during the year 2002 has declined by 1,5% from 2.06 to 2.09, the range of currency fluctuation has been between 2.06 and However at the balance sheet date exchange rate of Lari raised to 2.09, at February 25, 2003 official NBG rate quoted to Transactions denominated in foreign currencies are reported at NBG official rate at the date of exchange. Any difference between official rate and the contractual rate of transactions are recognized as foreign exchange gain or loss at the day of transaction. Gains and losses on assets and liabilities denominated in foreign currencies arising from changes in the official rates are recognized as translation gain or loss and are included in profit and loss account. The fluctuation of currency exchange rates mentioned above had its effect on reported profit and loss of assets and liabilities translation. In 2002 exchange rates of freely convertible currencies (USD and EUR) in which bank maintains its balances in foreign currencies evolved as follows: GEL/USD GEL/EUR At 1 January 2002 Highest (at 18 April 2002) Lowest (at 1 January December February At 1 January 2002 Highest (at 22 July 2002) Lowest (at 1 January 2002) 31 December February The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith

10 (3) Interest income and expense Interest income and expenses are recognized on an accruals basis. The recognition of interest income ceases when the payment of interest or principal is in doubt or if principal and interest accrued thereon is 30 days in arrears. Any interest previously accrued but not received on a loan subsequently placed on non-accrual basis is reversed. Interest is included in income thereafter only when it is received. Loans are returned to the accruals basis only when doubt about collectability is removed and when the outstanding arrears of interest are paid. (4) Fees and commissions income Fees and commissions income mainly consist of fees received from cash operations, foreign currency transaction, and other banking operations including fees and commissions on bank guarantees and letters of credit. Fees and commissions are recognized and included in income upon receipt when related transactions are completed. Non-interest expenses are recognized as soon as such expenses occur. (5) (5.1) Securities Available for sale investment securities Investment securities include investments in Georgian and foreign companies and are held for yield purposes. Investment securities in Georgian Companies were acquired on zero auctions and are available for sale. Any related realized and unrealized gains and losses are included in dealing profit and loss account. Securities of foreign companies were purchased through DATEK Financial Services, USA for generating a profit from fluctuations in prices. (5.2) Trading securities Trading securities consist of short-term treasury bills issued by Ministry of Finance of Georgia. They are stated at market value based on the quoted market prices at the date of purchasing. Treasury bills are recorded into balance sheet position on settlement date and are held to maturity. Carrying amounts in the balance sheet are calculated as nominal value less amortized cost of discount based on original rate of interest. 9

11 (6) Loans and the provisions for bad and doubtful debts Loans are recognized when cash is delivered to borrowers. They are stated at principal amounts outstanding net of provisions for losses on loans. Provisions for loan loss are based on the evaluation by the management of the collectability of Loans and advances. Specific provisions are raised against debts whose recovery has been identified as doubtful. Recoveries of amounts previously written off are treated as income by reducing the provision for losses on loans for the year. The net aggregate provisions raise during the year are recognized in the income statement. Estimates of losses require the exercise of judgment and the use of assumptions. The principal factors considered in determining the loan loss provision are the growth, composition and quality of the loan portfolio, the ability of individual borrowers to repay the loans, the past performance history of the individual loans the level of past due loans, current economic conditions and the value adequacy of collateral. When loans and advances are deemed to be uncollectable they are written off and charged to against the balance sheet provision for losses on loans. The provision for loans are calculated at the following basis: General provision for credit portfolio Watched credits Non-standard Doubtful credits High risk credits 2% 10% 30% 50% 100% Maturity of loans is shown in Note 27. (7) Property, plant and equipment All property, plant and equipment are stated at historical cost less depreciation and correspondingly restated as explained below. Depreciation is calculated on the straight line method to write off the cost of each asset to their residual values over their estimated useful life as follows: Building 50 years - Office equipment 12 years 12 years Computers, Furniture, Vehicles 5 years 5 years Other tangible assets 10 years 10 years Repairs and maintenance costs are charged to profit and loss account when such cost incur. Small value items under GEL 500 are charged to profit and loss account 10

12 (8) Cash and cash equivalents Cash and cash equivalent comprise balances in cash, accounts with the NBG and due from credit institutions with maturity of three months or less. Amounts with credit institutions are mainly due from Western Banks. No provision is provided for amounts due from banks of CIS countries and Georgia, composing 4% of total placements with the banks. See note 28. (9) Taxation The taxation charge is calculated according with the tax regulations of Georgia and based on the results reported in the profit and loss account prepared under Georgian Accounting Legislation.Current tax rate in Georgia is 20% of income, but profits gained from the Treasury Bonds issued by Georgian Government are imposed to 10% tax rate. Banks are also imposed to various operating taxes, which are included in the income statement as noninterest expenses. Deferred income tax is provided on temporary difference between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. 11

13 12

14 The banks are required to pay contributions to the State Pension Fund of Georgia. The contribution is calculated as a percentage of current gross salary payments and are charged to the profit and loss account in the period. 13

15 9 Bad and doubtful debts expenses Loans and advances to customers (Notes 15) Deferred tax (Notes 21) The amount of current income tax represents the charge for tax, which is determined on the basis of statutory profits calculated in accordance with Georgian tax Legislation and statutory accounting regulations of the National Bank of Georgia. The current applicable rate is 20%, but 10% tax rate is applied to the profits gained from the Treasury Bonds issued by Georgian Government. The effect on Income tax is shown below: Tax effect of incomes with a tax rate 10%

16 Mandatory reserve with the central bank represent regulatory reserve deposits of 14% on attracted deposits. These funds are not available to finance the Bank's day-to-day operations. As of February 2002, the mandatory reserve with the National Bank of Georgia bears a 4.5% interest. Placements with other banks represent nostro accounts with foreign and local correspondents. These foreign correspondents include Deutsche Bank AG Frankfurt, Deutsche Bank Trust Co. Americas, ABN-Amro Bank, Anelik Bank Moscow. Trading securities consist of Georgian Government bills. In 2002, investments of the bank in Government securities have increased to a considerable amount. This year was characterised by comparatively higher interest rates on the T-Bills primary market. Interest income from trading securities amounted to GEL 360. At balance sheet date, two items of T-bills were uncovered - GEL 1000 maturing on 15 January 2003, GEL 75 maturing on 12 March 2003, with average interest rate of 15%. 15

17 Other 16

18 Gross value of property and equipment 17

19 Depreciation of property and equipment 18

20 19

21 Credit related commitments. At as 31 December, 2001 Provisions charged / (recovered) Written off At 31 December,

22 The following notes expose the Bank's risk management policy in relation to those risks. 25 Retirement obligations 21

23 22

24 Interest sensitivity of assets and liabilities

25 24

26 The Bank's activities exposure in CIS (Community of Independent States) and non-cis countries is composed as follows: 25

27 Associated companies belong to individuals who directly or indirectly own voting power of the bank and have the significant influence over the bank. 26

28 Uncertainty about the future evolution of foreign currencies exchange rates st Operating environment and business risks 27

29 Uncertainty in the country 28

Bank of Georgia Group Consolidated Financial Statements. Years ended December 31, 2004 and 2003 Together with Report of Independent Auditors

Bank of Georgia Group Consolidated Financial Statements. Years ended December 31, 2004 and 2003 Together with Report of Independent Auditors Consolidated Financial Statements Years ended December 31, 2004 and 2003 Together with Report of Independent Auditors Bank of Georgia 2004 Consolidated Financial Statements CONTENTS REPORT OF INDEPENDENT