Звіт про фінансовий стан (Баланс)

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2 2015 Financial Statements CONTENTS INDEPENDENT AUDITOR S REPORT Statement of Financial Position... 1 Statement of Comprehensive Income... 2 Statement of Changes in Equity... 3 Statement of Cash Flows Introduction Bank s operating environment Basis for preparation Accounting policy Adoption of new and revised standards and interpretation Cash Securities measured at fair value through profit or loss Due from other banks Loans and advances to customers Investment securities available for sale Investment property Property, equipment and intangible assets Other assets Due to banks Customer accounts Debt securities in issue Other borrowed funds Other liabilities Subordinated debt Share capital, share premium and additional paid-in capital Revaluation reserve (component of other comprehensive income) Maturity analysis of assets and liabilities Interest income and expense Fee and commission income and expense Other operating income Administrative and other operating expenses Income tax Earnings per share Segment analysis Financial Risk Management Management of capital Contingencies and commitments Derivatives Fair value Presentation of financial instruments by measurement category Related party transactions Subsequent events after the balance sheet date... 50

3 2015 Financial Statements

4 2015 Financial Statements

5 2015 Financial Statements Statement of Financial Position as at 31 December 2015 Notes Translation from Ukrainian original ASSETS Cash 6 5,840,041 4,056,596 Mandatory reserves with the National Bank of Ukraine 582, ,926 Securities at fair value through profit or loss 7 23,072 2,770,711 Due from other banks 8 1,909, ,671 Loans and advances to customers 9 27,462,754 24,486,891 Investment securities available for sale 10 3,842, ,270 Investment property , ,752 Deferred income tax assets , ,451 Property, equipment and intangible assets , ,798 Other assets , ,312 TOTAL ASSETS 42,363,131 35,244,378 LIABILITIES Due to banks 14 3,010,965 5,121,681 Customer accounts 15 25,244,246 18,060,830 Debt securities in issue 16 2,261,961 48,605 Other borrowed funds 17 7,598,698 6,772,668 Other liabilities , ,577 Subordinated debt 19 1,200,030 2,878,258 TOTAL LIABILITIES 39,739,428 33,181,619 EQUITY Share capital 20 4,639,121 4,639,121 Share premium and additional paid-in capital , ,604 Unregistered paid-in capital 20 3,135,237 - Accumulated deficit, i.e. (5,836,235) (3,178,544) reserve capital 294, ,047 retained earnings (6,130,282) (3,472,591) Revaluation reserve , ,578 TOTAL EQUITY 2,623,703 2,062,759 TOTAL EQUITY AND LIABILITIES 42,363,131 35,244,378, Approved for issue and signed 21 April 2016 V. Mikhalyo A. Kukharchuk Chairman of the Management Board Chief Accountant Notes on pages 5-50 are integral part of these financial statements 1

6 2015 Financial Statements Statement of Comprehensive Income for the year ended 31 December 2015 Notes Translation from Ukrainian original Interest income 23 5,421,333 4,657,360 Interest expense 23 (4,218,285) (3,013,322) Net interest income 1,203,048 1,644,038 Net provision for impairment of loans and advances to 8,9 (3,183,727) (4,452,392) customers, and due from other banks Net interest income less provision for impairment of interest (1,980,679) (2,808,354) assets Fee and commission income , ,284 Fee and commission expense 24 (112,121) (74,212) Gains less losses from securities measured at fair value through 318, ,168 profit or loss (Losses less gains)/ gains less losses from derivative (406,262) 1,352,833 Gains less losses/ (losses less gains) from trading in foreign 55,784 (81,059) currencies Foreign exchange translation (losses less gains) (998,509) (1,496,807) Gains less losses on revaluation of investment property 11 97,715 4,155 Losses from initial recognition of financial assets at rates below (6,110) (2,983) market Provision for possible loss of own fixed assets and investment 18 (9,602) (2,166) property Provision for impairment of other assets 13 (5,573) (3,455) Other operating income , ,074 Administrative and other operating expenses 26 (1,886,240) (1,672,838) Loss before tax (3,169,506) (2,633,360) Changes in income tax , ,987 Loss for the year (2,657,691) (2,193,373) OTHER COMPREHENSIVE INCOME: Revaluation of securities available for sale 21 (531) 12,062 Revaluation of fixed assets ,353 68,062 Income tax related to other comprehensive income 21 (18,424) (14,461) including:, OTHER COMPREHENSIVE INCOME TO BE RECLASSIFIED THROUGH PROFIT/LOSS Revaluation of securities available for sale 21 (531) 12,062 Income tax related to other comprehensive income 21 - (1,321) other comprehensive income after tax for the year 21 83,398 65,663 comprehensive income for the year (2,574,293) (2,127,710) Loss per share (hryvnias) 28 (2,427.12) (2,003.08) Approved for issue and signed 21 April 2016 V. Mikhalyo A. Kukharchuk Chairman of the Management Board Chief Accountant Notes on pages 5-50 are integral part of these financial statements 2

7 2015 Financial Statements Statement of Changes in Equity for the year ended 31 December 2015 In thousands of hryvnias Translation from Ukrainian original Balance at 31 December 2013 comprehensive income Distribution of profit for previous years Balance at 31 December 2014 comprehensive income Unregistered paid-in capital Balance at 31 December 2015 Share capital Unregistered paidin capital (note 20) Share premium and additional paid-in capital (note 20) Reserves, other funds and revaluation reserve Retained earnings Equity 4,639, , ,849 (1,266,105) 4,190, ,663 (2,193,373) (2,127,710) ,113 (13,113) - 4,639, , ,625 (3,472,591) 2,062, ,398 (2,657,691) (2,574,293) - 3,135, ,135,237 4,639,121 3,135, , ,023 (6,130,282) 2,623,703 Approved for issue and signed 21 April 2016 V. Mikhalyo A. Kukharchuk Chairman of the Management Board Chief Accountant Notes on pages 5-50 are integral part of these financial statements 3

8 2015 Financial Statements Statement of Cash Flows for the year ended 31 December 2015 Translation from Ukrainian original CASH FLOWS FROM OPERATING ACTIVITIES Interest received Interest paid Fees and commissions received Fees and commissions paid Income received from securities measured at fair value through profit or loss Income received from derivatives Income received from trading in foreign currencies Other operating income received Staff cost paid Administrative and other operating expenses paid Income tax paid Cash flows from operating activities before changes in operating assets and liabilities CHANGES IN OPERATING ASSETS AND LIABILITIES Mandatory reserves with the National Bank of Ukraine Securities measured at fair value through profit or loss Due from other banks Loans and advances to customers Other assets Cash received from the National Bank of Ukraine Due to banks Due to customers Debt securities in issue Other liabilities Net cash flows from/(used in) operating activities CASH FLOWS FROM INVESTMENT ACTIVITIES Net flow of securities available for sale Acquisition of investment property Net changes in fixed and intangible assets Net cash flows used in investment activities CASH FLOWS FROM FINANCIAL ACTIVITIES Proceeds from securities in issue Repayment/deduction of subordinated debt Net changes in other borrowed funds Net cash flows (used in)/from financial activities Effect of the National Bank of Ukraine official exchange rate change on cash Net increase/(decrease) in cash Cash at the beginning of the period Cash at the end of the period Notes ,045,367 (4,279,723) 991,875 (112,088) 1,030,569 (276,634) 55, ,109 (787,052) (947,724) (352) 521,131 4,401,881 (3,075,480) 828,550 (74,069) 812 1,171,482 (81,059) 601,835 (758,903) (793,417) (184) 2,221,448 (28,465) 2,746,124 (474,893) 2,186,009 (229,926) (1,364,856) (2,195,974) 2,713,083 1,977,756 71,145 5,921,134 (146,089) (56,719) (565,038) (315,402) (156,129) 1,343,400 (3,872,759) (3,812,158) (214,991) (41,048) (5,615,485) (3,525,427), (268,466) (111,133) (3,905,026) 113,959 (4,200) (173,505) (63,746) 3,135,237 (3,149,245) (2,363,405) (2,377,413) 2,144,796 1,783,491 4,056,307 5,839, , ,935 1,320,045 2,750,231 (1,608,955) 5,665,262 4,056,307 Approved for issue and signed 21 April 2016 V. Mikhalyo Chairman of the Management Board A. Kukharchuk Chief Accountant Notes on pages 5-50 are integral part of these financial statements 4

9 1. Introduction Public Joint-Stock Company ALFA-BANK (hereinafter the Bank) was registered with the National Bank of Ukraine on 24 March 1993, 158. The Bank is the resident of Ukraine with registered address located at: 4/6 Desiatynna St., Kyiv, 01001, Ukraine. The Bank s legal form is public joint-stock company and its shareholders liability is limited by shares they possess. At the end of the reporting period the significant part of the Bank belongs to ABH Ukraine Limited (Temistokleks Dervi 5, Elenion Building, 2 nd floor, P.C. 1066, Nicosia, Cyprus), which is a direct owner of 100% of the Bank s share capital and is the only owner and a parent company of the Bank. The indirect holder of the Bank (via ABH Ukraine Limited) is ABH Holdings S.A. (Luxemburg) that owns 100 % of the Bank s share capital. The Bank s management does not own the Bank s shares. Ultimate owners of the Bank are six private individuals, Mr. Mikhail Fridman, Mr. German Khan and Mr. Alexey Kuzmichov, Mr. Peter Aven, Mr. Andriy Kosogov and non-profit organisation, (which owns the part of shares that belonged to Mr. Alex Knaster before 2015). None of these individuals has separate controlling vote in the Bank and/or owns 50% and more shares of ABH Holdings S.A. The Bank s strategy goal is to develop a big universal bank that operates in all segments. The Bank s core business is focused on providing banking services to legal enmities and private individuals all over Ukraine. These services include, but not limited to raising funds, deposits, granting loans, advances, investing in securities, cash transfers in Ukraine and abroad, and forex operations. The Bank operates on the basis of Bank License to provide banking services 61 of 05 October 2011 and General License 61 of 05 October 2011 authorising transactions in foreign currency. The Bank has been a permanent member of Individuals Deposit Guarantee Fund since 02 September As at the end of the reporting year 2015 the Bank has the Head office and 97 outlets that operate and provide services in various regions of Ukraine (in the Head office and 126 outlets respectively). As at 31 December 2015 total number of the Bank s staff was 4,352 people, as at 31 December ,359 people respectively. In Aprilі 2015 the Bank s shareholder ABH Ukraine Limited gained control of PJSC NEOS BANK. As a result PJSC ALFA-BANK and PJSC NEOS BANK became banks under common control, which under the laws of Ukraine is a hallmark of the banking group. The Bank sent relevant notifications regarding creating banking group to the National Bank of Ukraine and accordingly, financial statements of the banking group is prepared to meet the requirements of the Regulation on procedure for banking group regulation approved by the Resolution of the Board on the National Bank of Ukraine #254 of June 20, Bank s operating environment Drastic deterioration of economic situation in 2015 was a result of unfavourable combination of external and internal factors, which were amplified by macroeconomic imbalances accumulated in the previous years. Negative factors that have determined economic trends in 2015 included rupture of interregional relations due to hostilities in eastern Ukraine and annexation of Crimea; low external demand and level of financial resources involvement in the international market; complicated trade relations with Russian Federation; decline in the population s purchasing power due to reduction in real income; deteriorating financial performance of enterprises; narrowing lending activity, reduced public funding and high level of uncertainty. The decline in GDP in 2015 was about 10.5%, consumer inflation in 2015 raised to 44.0%, decline in industry was 13.5%, devaluation of hryvnia for the year was 97.0%, decline in imports and exports were 30.4% and 28.2% respectively. In the bank was forced to stop its business in temporary occupied territories of Donetsk and Lugansk regions and in Crimea. The carrying value of assets located in these areas is specified in the respective accompanying notes. 5

10 3. Basis for preparation These financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB), and interpretations released by the International Financial Reporting Interpretations Committee (IFRIC). The Bank carries out its accounting in accordance with IFRS. These financial statements have been prepared based on bookkeeping entries without transformation postings. These financial statements are presented in thousands of hryvnias ("UAH thousands") unless otherwise stated. 4. Accounting policy 4.1 Key measurements for preparation of financial statements These financial statements are prepared based on different value measurements of various basis and combination, including: - Fair value is the amount for which an asset was sold, or a liability settled in an arm s length transaction at the main (or the most favorable) market at the measurement date under current market conditions (i.e. starting price); regardless of whether this price is directly observable or is measured by other evaluation methods. In the absence of quotations on the main market as at the reporting date, to determine the fair value the Bank used available quotations as at the date nearest to the balance sheet date. The fair value of the asset or liability is measured using the assumptions that would be used by market participants to estimate the price of asset or liability while acting in their best interests. The fair value of non-financial asset or liability account for market participant ability to generate economic benefits from using an asset in the best and most efficient way, or from selling it to another market participant that will use it in the best and most efficient way. The Bank uses valuation techniques that are most appropriate in the circumstances and for which sufficient data for fair value measurement is available, while at the maximum using relevant observable output data with minimal use of unobservable output data; Historical cost is the amount at which assets are recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amount of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business; Present value where assets are recorded at present value of discounted future net cash inflows, which, as expected, shall be generated by an item during the normal course of business. Liabilities are recorded at present value of discounted future net cash outflow expected to be required to satisfy the liability in the normal course of business; Realisable value (redemption) is the amount at which assets are recorded at the amount of cash or cash equivalents that could have been currently obtained by selling asset in the normal course of realisation. Liabilities are recorded at cost of their realisation, i.e. at the undiscounted amount of cash and cash equivalents expected to be paid to satisfy the liability in the normal course of business; Current cost is the amount at which assets are recorded at the amount of cash or cash equivalents that would have been paid to acquire the same or an equivalent asset at the current moment. Liabilities are recorded at the undiscounted amount of cash and cash equivalents that would have been required to satisfy the liability at the current moment; Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately, and are included in the carrying values of related items in the statement of financial position. The Bank s accounting policy on recognition and measurements of assets and liabilities, income and expenses is disclosed in the related notes to these financial statements below. 6

11 4.2 Initial recognition of financial statements Derivatives and other financial instruments at fair value through profit or loss are initially recognized at fair value. All other financial instruments are initially recognized at fair value plus transaction cost. Gains or loss at initial recognition is recognized only in case there is difference between fair value and contractual price. All other purchases and sales of financial asset or liability provided for the period under the law or according to the market practice (arm s length transaction) are recognized at settlement date, i.e. the date the Bank provides financial asset. All other purchases and sales of financial asset or liability are recognized when the Bank becomes a party to the contractual purchase of the financial instrument. 4.3 Impairment of financial assets Impairment losses are recognized in profit or loss when incurred when there is an objective evidence that as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset, there was an adverse impact on the estimated future cash flows related to the financial asset or the group of financial assets if this loss can be reliably measured. If the Bank determines that no objective evidence exists that impairment was incurred 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. The main factors the Bank considers to determine impairment of financial asset are the past due status and possibility to realize collateral, if any. To collectively asses for impairment the financial assets are grouped on the basis of similar credit risk characteristics. These characteristics are considered to determine future cash flows for these groups of assets and indicate the ability of the borrower to pay its debts according to the contractual terms. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the management experience regarding the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. Impairment losses are recognised through a provision necessary to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 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, the previously recognised impairment loss is reversed by adjusting the provision account through profit or loss. The amount of decrease is recognised through profit/loss for a year. Uncollectible assets are written off against the related impairment loss provision based on resolutions of the Bank s Management Board. and analysis of the proportion of loans written off under the regulatory requirements of the National Bank of Ukraine to respective gains received thereof after write off. Repayment of previously written off amounts is credited to related impairment loss provision account in profit/loss for a year. 4.4 Derecognition of financial assets Financial assets. The Bank derecognizes financial assets (or a part of financial asset or a part of the group of similar financial assets) when: - the assets are redeemed or the rights to cash flows from the assets otherwise expired; or - the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying passthrough arrangement while also transferring substantially all the risks and rewards of ownership of the assets; or neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. 7

12 Financial liabilities. Financial liability is derecognized when it is settled, annulled, or expired. In the case a financial liability is changed for another from the same creditor on significantly other terms, or the existing liability sustains significant alterations, then the existing original liability shall be derecognized and the new liability shall come into force and the difference of the relevant balance-sheet value is recognized in the Statement of Comprehensive Income. 4.5 Cash Cash and cash equivalents are assets that can be converted in cash at first request and inherent of little risk of value fluctuation. Cash and cash equivalents include cash on hand, unrestricted balances on correspondent accounts with the National Bank of Ukraine, balances on correspondent accounts with other banks. According to the accounting policy accounted for credit risk, loans and deposits overnight due from other banks, including guarantee deposits are recorded in Due from other banks. Cash balances of mandatory reserve, which the Bank maintains under the requirements of the National Bank of Ukraine is not recorded in cash equivalents due to restrictions in use. 4.6 Securities measured at fair value through profit or loss Portfolio of securities measured at fair value through profit or loss include the following securities: Debt securities, shares and other equity securities used by the Bank for generating profit from short-term fluctuations in price to sell them within a short period after purchase; Any other securities defined by the Bank at initial recognition as such, for which the Bank has an intention and ability to recognize at fair value through profit/loss (except for securities that do not have quoted price on the active market and which fair value cannot be reliably determined). These securities include those, not used by the Bank for generating profit from short-term fluctuations in price and government bonds with indexed value, which comprise an integral derivative. According to paragraph 12 of ISA 39, such securities are carried at fair value through profit or loss. 4.7 Loans and advances to customers After the loans are initially recognized they are carried at amortized cost applying the effective interest rate less impairment loan loss provision. Credit related commitments. The Bank enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and are initially recognized at their fair value, which is normally evidenced by the amount of fees received. This amount is amortized on a straight-line basis over the life of the commitment and measured at the higher of: - the remaining unamortized balance of the amount at initial recognition; and - the best estimate of expenditure required to settle the commitment at the end of each reporting period. Loans acquired with discount are initially recognised at fair value based on cash flow management models. When the acquired loans are repaid the amount of received consideration that exceeds carrying value is recognised by the Bank in other operating income in the Statement of comprehensive income (note 25). 4.8 Investment securities available for sale The Bank includes in investment securities available for sale portfolio debt securities, shares and other equity securities, which are intended for sale and which are not classified as securities measured at fair value through profit or loss or securities held to maturity. The Bank initially recognizes securities available for sale at fair value except for shares and other equity securities, which fair value is not reliably determinable and which are carried at historical cost less impairment loss. All investment securities available for sale are revaluated for impairment. Impairment loss is recognised at each balance sheet date if there is objective evidence of one or several events (note 4.3), which have effect on expected future cash flows for securities. 4.9 Repurchase and reverse repurchase agreements Repurchase (hereinafter - "Repo") and reverse repurchase (hereinafter - the "reverse repo") agreements are securities sold under the reverse repo agreements are carried as collateralized finance transactions, while securities sold under 8

13 repo agreements are still recognised in the Statement of Financial position. The client s liability is included to amounts of payments under repo transactions within deposits and due from other banks, or customer deposits and accounts, depending on the situation. The difference between the sale price and reverse repurchase price is interest expense and recognised in profit or loss during the term of "reverse repo" agreement by effective interest rate method. Securities acquired under the "reverse repo" agreements are carried as the amounts due under reverse repo transactions within due from banks or loans to customers, depending on the situation. The difference between the acquisition cost and the sale price is interest income and recognised in profit or loss during the term of "reverse repo" agreement by effective interest rate method. If assets acquired under the reverse repo sale agreements are sold to third parties, the liability to return securities is carried as liability measured at fair value Investment property Under the Bank s defines investment property by meeting the following criteria: Land held for gains from capital appreciation in the long-term perspective, but not for disposal in the short term in the course of operations; Land held for a currently undetermined use; Buildings in lease (or intended for lease) of at least 95 percent of their total floor area. At initial recognition the Bank s investment property is measured and carried at current cost. After initial recognition investment property is further measured at fair value through profit or loss for the year. Amortization and impairment are not recognised Property, Equipment and intangible assets Fixed assets include tangible assets the Bank holds to use in its operation; estimated useful life of which is over one year and which value per unit or set is over UAH 6,000. Noncurrent fixed assets of initial cost under UAH 6,000 and useful life of over a year are low-value noncurrent fixed assets. Purchased fixed assets are assessed at initial cost. The carrying value of purchased assets consists of acquisition cost, state duty, customs duty, costs of delivery and installment and other costs directly attributable to the acquisition. Administrative and other expenses that are not directly associated with the acquisition cost or putting it in operation are not included in the initial cost of fixed asset. After initial recognition of fixed asset it is carried at historical cost less accumulated depreciation and accumulated impairment loss of all groups of assets except for groups Buildings, constructions and transmitting devices and Land, which are carried at revaluated cost (fair value) less accumulated depreciation and accumulated impairment loss. Expenses for asset s repair and maintenance are recognised at expenses when occurred and do not change the carrying value of noncurrent fixed assets. Intangible assets include non-monetary assets, which do not have material form and can be identified. Intangible assets include acquired licenses and computer software and carried at initial cost, which comprise actual acquisition cost (production) and costs to put them in operation for intended purpose. Every intangible asset has definite useful life determined by the Bank based on the following criteria: the Bank s experience with similar assets, modern trends in software development and their technical characteristics. Royalty. The Bank policy is to recognise expenses incurred for intangible asset on straight-line basis during the term of validity of agreement that entitles the Bank to use intangible asset. Depreciation. Useful life of fixed assets and intangible assets is established by the Bank depending on their expected time of operation. Useful lives the Bank applies to the following groups of assets are given below: Buildings, construction and transmitting devices - 7 to 50 years with depreciation rate from 2.0 % to 15 %; Machinery and equipment - 2 to 10 years with depreciation rate from 10% to 50 %; Tools, appliances, inventory (furniture) 2 to 10 years with depreciation rate from 10% to 50%; Other fixed assets 2 to 10 years with depreciation rate from 10% to 50 %; Renovation of leased premises during the lease term; Title for goods and services brand - 2 to 10 years with depreciation rate from 10 % to 50 %; software 0.5 to 15 years with depreciation rate from 7 % to 100 %; other intangible assets - 3 to 10 years with depreciation rate from 10 % to 34%; depreciation of low-value noncurrent fixed assets is recognised in the first month of asset use in 100 percent of its value. 9

14 Fixed and intangible assets are depreciated on straight-line bases. Depreciation is accrued from the first day of the month following the month of their put in operation until the first day of the month following its write off. Depreciation rates are calculated based on the expected useful life of assets and are revised every year end. Impairment loss of noncurrent assets is recognised at each balance sheet date if there is evidence of possible loss of economic benefit according to IAS 36 Impairment of assets Operating and finance lease where the Bank acts as a Lessor or a Lessee Finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset, while the title may be transferred to the lessee or may remain with the lessor, depending on the operation according to the IAS 17 Lease. In 2015 the Bank did not put its fixed assets in finance lease; however, the Bank continued to act as a lessee having transport vehicles in the finance lease. These transport vehicles received in finance lease are carried by the Bank at their current value of total amount of minimum rent payments. Operating lease is a Bank s economic transaction whereby the lessor transfers to the lessee a fixed asset on terms other than those of finance lease. In the event the Bank acts as Lessor, the operating lease income is defined under the straight-line method within the term of the relevant lease contract. In the event the Bank acts as Lessee, the lease payments are under the operating lease contract are carried under the straight-line method within the term of the relevant lease. Bank s expenses as the Lessor towards the improvement of an asset in operating lease are carried in the accounting as capital investments in other noncurrent assets. Bank s expenses as the Lessee towards the maintenance of an asset hired in operating lease are recognised in Administrative and Other Operating Expenses in the Statement of Comprehensive Income. As a Lessor, the Bank continues to recognise assets put in operating lease in its Statement of Financial Position. During the year the Bank put premises, deposit boxes and safes in operating lease Derivatives Derivative is the financial instrument or other contract that possess the following characteristics: - its value changes in relation to the change of established interest rate, cost of financial instrument, sale price, currency exchange rate, price indices or rates, etc., on the condition that in case of non-financial variable amount, this variable amount is not determined for the party of the base contract; - it does not require initial net investments, smaller than those, which would be required for other contract types, that as expected, similarly respond to changes of market factors; - is a forward contract. Derivative is recognized as financial asset or financial liability as at the date the liability arise to purchase or sell the subject of the contract. Derivative include currency swaps, forward transactions, swap currency exchange transactions and their combinations. During 2015 the Bank did not have hedging transactions. During the year the Bank carried out Depo Swap transactions: credits (deposits) were granted and received in the interbank market with the same counterparty, in different currencies and the same maturity. These transactions were carried in conformity with IFRS requirements for derivative. Derivatives are recognized at their fair value as at the date of the contract and revaluated at fair value through profit/loss. Derivatives are recognized as assets if their fair value is positive; or as a liability, if their fair value is negative. Fair value of derivative not available for purchase or sale on the active market is determined by estimation methods Borrowings Due to other banks and customer accounts are recorded when money or other assets are advanced to the Bank. This non-derivative financial liability is carried at amortised cost. Debt securities comprise bonds issued by the Bank and saving (deposit) certificates. Bonds and deposit certificates are carried at amortised cost. In case the Bank signed an agreement on redemption of previously sold bonds, the difference between the liability carrying value and the amount paid is recognized in the Statement of Comprehensive Income. As required by the resolution of the Board of the National Bank of Ukraine of December 4, On regulating the situation on the money lending and foreign exchange markets of Ukraine registered saving (deposit) certificates with circulation term of at least than six month are repaid without limitation only after their specified date of maturity. 10

15 4.15 Provisions for liabilities Provisions for liabilities are recognized when the Bank has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions for contingent liabilities are assessed in compliance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which stipulates measurement and professional judgment application. Contingent liabilities are not recognized in the Statement of Financial Position, but disclosed in the notes to the financial statements, except for the events when the use of the resources in settlement of the liability is negligible. Contingent asset is not recognized in the Statement of Financial Position, but disclosed in the notes to financial statements in the event there is probability of economic benefits Subordinated debt Subordinated debt is regular, unsecured debt equity instruments, which pursuant to the Contract cannot be settled earlier than five years; and in the event of Bank s bankruptcy or liquidation will be repaid to the investor after meeting claims of all other creditors. The amount of subordinated debt, included into the regulatory capital, shall be reduced by 20% of its initial size annually, in the course of the five successive years after the contract. Subordinated debt may be included into the regulatory capital upon receiving a permission of the National Bank of Ukraine. Subordinated debt is carried at amortised cost Income tax Current income tax is the amount, which, as expected, is due to or from tax authorities based on taxable profit/ loss for the current or previous periods. Taxable profit or loss is based on the estimates if the financial statements are approved before appropriate tax returns are submitted. Other taxes, apart from income tax, are recorded in administrative and other operating expenses. Deferred tax is calculated at balance sheet liability method regarding tax losses carried forward and temporary differences between the tax base of assets and liabilities and their carrying value for the purpose of these financial statements. Deferred tax assets and liabilities are determined using tax rates that are enacted at the end of the reporting period and which are expected to apply to the period when the temporary difference will reverse or the tax loss carry forwards will be utilised. Deferred tax assets for temporary differences that decrease tax base and carried forward tax losses are recognized to the extent that it is probable that future taxable profit will be available against which the deductible taxable differences can be utilised. Income tax expenses include current income tax and deferred tax and recognised in profit/loss for the year, unless they should be presented in other comprehensive income Share capital and share premium Share capital is the shareholders paid commitments in subscription to the shares which were duly registered in full compliance with Ukrainian legislation. Increase (decrease) in the Bank s share capital is in strict conformity to the procedure established by the National Securities and Stock Market Commission. Under the Laws of Ukraine On Banks and Banking and On Joint Stock Companies, as well as the Bank s Articles of Association a decision to issue shares is taken by the General Meeting of Shareholders. As at 31 December 2015 the Bank did not either issue preferred shares or paid dividends. Share premium and additional paid-in capital. Share premium represents the excess of contributions over the nominal value of shares issued and their placement cost and includes the following: - share premium according to the law of Ukraine in the amount of UAH 6 thousand (note 20); - other income additional paid-in capital (share premium paid) was recognised in equity at the first implementation of IFRS, which resulted from the change in hryvnia US dollar exchange rate (transfers to share capital were made in USD), from the date of the decision on raising share capital until the date of share issue official register in the amount of UAH 366,598 thousand (note 20). Ukraine was considered hyperinflation economy during the period ended 31 December In prior years the Bank applied IAS 29 Financial reporting in hyperinflationary economies. The effect of IAS 29 is that non-monetary items were restated in measurement units valid as at 31 December 2000 using consumer price index, and the resulted values were used as a basis for accounting in the subsequent periods. The nominal amount of share capital was adjusted to account for the effect of hyperinflation on capital contributions made before 1 January The appropriate amount of 11

16 UAH 14,085 thousand was reclassified from retained earnings in equity. This year it was decided to derecognize the effect of IAS 29 Financial reporting in hyperinflationary economies on share capital as immaterial Income and expense recognition Interest income and expense for all debt instruments are recognised on an accrual basis using the effective interest method. When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter carried based on the effective interest rate that was used to measure impairment loss. If the loans are recovered the received interest is recognised in interest income. According to the Bank s management judgment, effective interest rate was not calculated for on demand or short-term financial instruments, for which it is almost impossible to assess future cash flows and the effect of effective interest rate application is insignificant; and for instruments that can be attributed to the above categories based on their economic features and term of validity, such as: - financial instruments for current and correspondent accounts; - cash on demand for payment cards transactions; - overdraft credits for current and card accounts, corresponded accounts, including unauthorized; - deposits on demand for current and card accounts, corresponded accounts; - loans and overnight deposits; - loans used payment cards for some products, in case unscheduled funds provision and repayment, etc. All other payments, commissions and other income and expenses are generally carried on accrual basis depending on stage of the operation completion, which is determined as part of actually provided service to its total scope. For the purpose of income and expenses recognition in the financial statements the Bank classifies income and expenses from operation, investment and financial activity. Income/expense is accrued and recognised in the financial statements if meet the following conditions with regard to: - assets and liabilities the real debt; - provided (received) services financial result can be objectively measure and there is an agreement on providing (receiving) services and/or there are documents to confirm their full (partial) delivery. If the above conditions are not met the Bank recognises income / expenses at the time income received/ expenses incurred Foreign currency translation Monetary assets and liabilities in the foreign currency are translated into the functional currency of the Bank at the official exchange rate of NBU on the respective balance sheet date. Transactions with foreign currency are carried at the official exchange rate at the date of the transaction. Gains and losses on exchange differences arising from the translation of foreign currency are recognised in foreign currency translation item of the Statement of Comprehensive income. Income and expense carried forward raised in foreign currency on non-monetary items are non-monetary and carried at the official exchange rate at the transaction date, i.e. date of their actual income received/expense incurred; and were not revaluated at every change in the official exchange rate until were finally recognised in respective income/expense account. Income and expense carried forward raised in foreign currency on monetary items are monetary and carried at the balance sheet date; and were revaluated at every change in the official exchange rate. The Bank applied the following exchange rates for preparation of these financial statements. 31 December December 2014 UAH / 1 US Dollar UAH / 1 EUR Offsetting assets and liabilities Assets and 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 either settle on a net basis, or to realise the asset and settle the liability simultaneously. 12

17 4.22 Operating segments Operating segments are components of the Bank engaged in its business activities (earn revenues/incur expanses), which operating results are reviewed regularly by its chief operating decision maker and for which discrete financial information is available. Chief operating decision maker is a person or a group of people that allocate the Bank s resources and assess its operating results. The Board of the Bank acts as a chief operating decision maker that analysis segment reports to assess operating results and allocate the Bank s resources. Information about operating segments is presented in the form of internal reporting and submitted to the chief operating decision maker of the Bank. Reportable segments criteria. Reportable segment is a separate component engaged in providing a separate product or service (or the group of related products or services), faces risks and earns revenues separately from other segments. Segment s assets are 10% or more of the Bank s combined assets. External revenue from all reportable segments constitutes at least 75% of the Bank s total revenue. According to the above the Bank has the following operating segments: Retail banking that represents private banking services, private customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages; Corporate banking that represents direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products, asset management of repossessed collaterals, etc.; Centralized treasury banking is a business segment that arranges financing and risk management of the Bank by raising funds in the financial markets of securities, investing in liquid assets. Transactions between segments are carried out on general market conditions. Resources are reallocated between segments, which causes segment s transfer expenses or income (recognised in operating result). There are no other significant reallocations between segments. Segment s assets and liabilities constitute the biggest part of the total equity and do not exclude the possibility of tax consequences. Capital is not assigned to segments except for the segment results of the current year and other comprehensive income Critical accounting estimates, judgments in applying accounting policies In the course of preparation of IFRS financial statements the Bank makes estimates and assumptions that affect the amounts recognized in the financial statements. The Management makes estimates and professional judgments on a regular basis. Estimates and judgments are based on information, available for Bank s management as of the reporting date. Consequently, actual results may differ from such estimates and judgments. Apart from judgments that envisage accounting estimates, Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Going concern. These financial statements were prepared based on assumption that the Bank is able to continue as going concern in the nearest future. Impairment losses on loans. Estimation of allowance for loan impairment requires a significant amount of professional judgment. The Bank regularly reviews its loan portfolios to assess their impairment. The Bank estimates allowances for impairment losses to maintain the allowances at the level, which management believes to be sufficient to cover losses incurred with respect to the Bank s loan portfolio. Allowance for loan impairment is calculated based on the estimates made using statistical techniques based on historical experience. The results are adjusted based on management's judgment. The Bank expects that the accounting estimate related to determination of allowance for loan impairment is a major source of estimation uncertainty because of the fact that: (i) they are particularly sensitive to change from period to period, as assumptions about future default rates and valuation of potential losses relating to impaired loans and given funds is based on recent performance experience, and ( ii ) any significant difference between the expected losses of the Bank (recognized in reserves) and actual losses would require the Bank provisioning, which, in case of significant differences could significantly affect its Statement of Comprehensive Income and Statement of Financial Position in the future periods. The allowances for impairment of financial assets in the financial statements have been determined on the basis of existing economic and political conditions. The Bank is not able to predict what changes in conditions will take place in Ukraine and what effect such changes might have on the adequacy of allowance for impairment of financial assets in future periods. 13

18 Tax legislation and deferred tax recognition. Ukrainian tax, currency and customs legislation cause different interpretations, which results in existence of significant differences in assessing taxes due and other payments to the budget. Deferred tax assets are recognised by the Bank only to extent that it is probable to get taxable profit in future periods, which are assessed based on the calculations of this profit until As at 31 December 2015 the Bank has no legal or other disputes that entail risks of potential tax liabilities. Provisions for financial guarantees and other contingent liabilities are measured in accordance with IAS 37 "Provisions, Contingent Liabilities and Contingent Assets", which requires the use of management estimates and assumptions. Fair value of investment property. Owner-occupied property and investment property is subject to regular revaluation. This revaluation is based on evaluation results carried out by an independent appraiser, who applies professional judgment and assessment to assess similar buildings, useful life of assets and income capitalization norms. Fair value of the collateral. To calculate loan loss provisions collateral was measured at fair value based on reports prepared by independent appraisers and appraisal companies and the Bank s employees - certified appraisers, which are not the Bank s related persons. The collateral value was measured on the basis of assessed value, which was based on the professional opinion of appraisers. Fair value of collateral requires the use of judgments and assumptions about the property comparability and other factors. Based on the above, the provision for loan impairment may be affected by use of the collateral assessed value. Accounting estimates related to valuation of property is a key source of the assessment uncertainty, because recognition of changes in estimates can potentially have a significant impact. Assets in the temporarily occupied territories. The main assets of the Bank that are located in Crimea and in the temporary occupied territories in Donetsk and Lugansk regions are as follows (information is disclosed in the accompanying notes to this financial statements): - loans to customers - legal entities and individuals; - investment property; - property, plant and equipment; - other assets. In 2015 the value of other nonfinancial assets provided to customers in the temporary occupied territories in Donetsk and Lugansk regions in the amount of UAH 86 thousand was written off against provisions (note 13). The Bank made allowance for possible loss of noncurrent assets in the temporary occupied territories (note 18). In assessing the fair value of these assets and/or their impairment the Bank used all information available at the balance sheet date taking into account considerable uncertainty that exists in economic and political environment of Ukraine. In some cases the Bank applied a more conservative judgment than that applied to similar assets located outside Crimea or temporary occupied territories in Donetsk and Lugansk regions. The Bank did everything possible to make the most reasonable judgments as at the balance sheet date, but it is not able to predict possible future changes in economic and political situation in Ukraine, which may have effect on the value of these assets. Initial recognition of related party transactions. In normal course of business the Bank enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgment is applied to determine if transactions are priced at market or non-market interest rates where there is no active market for such transactions. The basis for judgment is pricing for similar types of transactions with unrelated parties and analyzing effective interest rate and characteristics of signed agreements. 5. Adoption of new and revised standards and interpretation IFRS 9 Financial instruments: classification and measurement, effective for annual periods on or after 1 January It is not expected to have effect on classification and measurement of the Bank s financial assets and liabilities. IFRS 15 Revenue from contracts with customers, issued on 28 May 2014 and effective for annual reporting periods beginning on and after 1 January This standard will not have effect on the Bank s financial statements. IFRS 16 Leases, issued in January 2016 and effective for annual reporting periods beginning on and after 1 January It is expected to have insignificant effect on the Bank s financial statements. Amendments to IFRS 11 Accounting for acquisitions of interests in joint operations, issued on 6 May 2014 and effective for annual reporting periods beginning on and after 1 January These amendments will not have effect on the Bank s financial statements. 14