B.C. PROCREDIT BANK S.A. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013

Transcription

1 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (free translation)

2 FINANCIAL STATEMENTS 31 DECEMBER 2013 CONTENTS PAGE Independent auditor s report STATEMENT OF COMPREHENSIVE INCOME 1 BALANCE SHEET 2 STATEMENT OF CHANGES IN EQUITY 3 CASH FLOW STATEMENT 4-5 GENERAL INFORMATION BASIS OF PREPARATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NET INTEREST INCOME ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND ADVANCES NET FEE AND COMMISSION INCOME TRADING RESULT PERSONNEL EXPENSES ADMINISTRATIVE EXPENSES OTHER OPERATING INCOME/ (EXPENSE), NET INCOME TAX (EXPENSES)/CREDIT CASH AND BALANCES WITH NATIONAL BANK OF MOLDOVA AVAILABLE-FOR-SALE DEBT INSTRUMENTS LOANS AND ADVANCES TO BANKS AVAILABLE-FOR-SALE EQUITY INSTRUMENTS LOANS AND ADVANCES TO CUSTOMERS ALLOWANCES FOR LOSSES ON LOANS AND ADVANCES INTANGIBLE ASSETS PROPERTY AND EQUIPMENT DEFERRED TAXES OTHER ASSETS LIABILITIES TO BANKS BORROWED FUNDS LIABILITIES TO CUSTOMERS LIABILITIES TO INTERNATIONAL FINANCING INSTITUTIONS OTHER LIABILITIES PROVISIONS SUBORDINATED DEBTS SHARE CAPITAL RISK MANAGEMENT FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINGENT LIABILITIES AND COMMITMENTS RELATED PARTY TRANSACTIONS MANAGEMENT COMPENSATION SUBSEQUENT EVENTS

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5 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Note Interest and similar income 3 340,511, ,394,959 Interest and similar expenses 3 (156,957,141) (135,987,061) Net interest income 183,554, ,407,898 Allowance for impairment losses on loans and advances 4 (41,152,884) (26,439,358) Net interest income after allowances 142,401, ,968,540 Fee and commission income 5 32,748,422 23,056,710 Fee and commission expenses 5 (5,591,028) (4,618,869) Net fee and commission income 27,157,394 18,437,842 Net trading result 6 17,451,537 13,338,583 Net other operating income/(expense) 9 (1,367,010) (1,867,554) Operating income 185,643, ,877,411 Personnel expenses 7 67,982,683 64,206,434 Administrative expenses 8 (93,413,437) (81,408,026) Operating expenses 161,396, ,614,460 Profit before tax 24,247,677 9,262,951 Income tax (expenses) /credit 10 (3,201,147) (6,015,033) Profit for the year 21,046,530 3,247,917 Other elecments of total comprehensive income, net of taxes - - Total comprehensive income for the year 21,046,530 3,247,917 These financial statements were approved for issue on 17 April 2014 and signed by: Vladislav Garbu Chairman of the Management Board Elena Gornet Chief Accountant The notes on pages 6 to 102 are an integral part of these financial statements. 1 of 102

6 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 Assets Note Cash and balances with National Bank of Moldova ,755, ,938,671 Available for sale debt instruments ,761, ,359,414 Loans and advances to banks ,392, ,940,604 Available for sale equity investments 14 1,200,000 1,200,000 Loans and advances to customers, gross 15 2,216,440,445 1,884,797,499 Allowance for losses on loans and advances 16 (74,024,750) (45,575,330) Loans and advances to customers, net 2,142,415,696 1,839,222,168 Intangible assets 17 10,519,128 12,180,490 Property and equipment 18 25,625,187 28,210,839 Current income tax receivables 400, ,000 Other assets 20 12,806,949 6,900,710 Total assets 2,943,876,291 2,618,352,897 Liabilities Liabilities to banks 21-62,188,474 Other Borrowings ,160, ,754,000 Liabilities to customers 23 1,608,586,794 1,101,913,408 Liabilities to International Financing Institutions ,583, ,568,371 Other liabilities 25 14,704,704 2,974,433 Provisions 26 4,034,958 2,876,571 Deferred tax liabilities 19 5,113,915 1,912,768 Subordinated debt ,737, ,756,485 Total liabilities 2,594,921,375 2,313,944,511 Shareholders equity Share capital ,850, ,350,000 Accumulated loss (39,895,084) (60,941,614) Total shareholders equity 348,954, ,408,386 Total capital - 348,954, ,408,386 Total shareholders equity and liabilities 2,943,876,291 2,618,352,897 These financial statements were approved for issue on 17 April 2014 and signed by: Vladislav Garbu Chairman of the Management Board Elena Gornet Chief Accountant The notes on pages 6 to 102 are an integral part of these financial statements. 2 of 102

7 STATEMENT OF CHANGES IN EQUITY Sharecapital Acumulated loss Total Balance as at 1 January ,233,000 (64,189,531) 258,043,469 Profit of the year ,247,917 3,247,917 Total comprehensive income for the year ,233,000 (60,941,614) 261,291,386 Share issue 43,117,000-43,117,000 Balance as at 31 December ,350,000 (60,941,614) 304,408,386 and 1 January 2013 Profit of the year ,046,530 21,046,530 Total comprehensive income for the year ,350,000 (39,895,084) 325,454,916 Transactions with owner of the Bank Proceeds from shares issued 23,500,000-23,500,000 Balance at 31 December ,850,000 (39,895,084) 348,954,916 The notes on pages 6 to 102 are an integral part of these financial statements. 3 of 102

8 STATEMENT OF CASH FLOW Cash flows from operating activities Interest and commissions receipts 325,482, ,957,456 Interest and commission payments (162,205,085) (134,730,262) Other income received 48,235,669 37,447,689 Payments to employees (67,095,169) (63,607,510) Payments to suppliers (87,263,614) (76,186,494) Cash flows from operating activities before working capital changes 57,154,063 42,880,879 (Increase) / decrease in operating assets (Increase) / decrease of due from banks (62,525,877) (66,016,817) Increase of loans and advances to customers (329,072,784) (509,263,265) Increase in other assets (5,912,404) (508,509) Decrease / (increase) in available for sale investments - 6,646,448 Increase/ (decrease) in operating liabilities Increase in liabilities to customers 506,332, ,900,323 Increase/(decrease) in liabilities to banks and borrowings from banks (61,933,000) 61,933,000 Increase in other liabilities 11,332, ,005 Net cash used in operating activities before taxes 115,375, ,675,063 Income taxes paid - (400,000) Net cash from/ (used in) operating activities 115,375, ,275,063 Cash flow used in investing activities Purchase of property and equipment (7,715,449) (11,955,703) Purchase of intangible assets (1,915,048) (4,060,762) Net cash flows used in investing activities (9,630,497) (16,016,466) The notes on pages 6 to 102 are an integral part of these financial statements. 4 of 102

9 STATEMENT OF CASH FLOW Cash flow from financing activities Issues of shares and other securities 23,500,000 43,117,000 Increase of long-term borrowings (194,871,177) 91,774,596 Increase of subordinated debts 21,005,800 49,645,600 Net cash flows from financing activities (150,365,377) 184,537,196 Net cash flow before extraordinary items (44,620,408) 289,795,793 Effect of exchange rate differences on cash and cash equivalents 3,009, ,523 Net increase in cash and cash equivalents (41,611,245) 290,768,315 Cash and cash equivalents at the beginning of the year 579,385, ,617,116 Cash and cash equivalents at the end of the year 537,774, ,385,431 The notes on pages 6 to 102 are an integral part of these financial statements. 5 of 102

10 GENERAL INFORMATION GENERAL INFORMATION B.C. ProCredit Bank S.A. (thereafter the Bank ) was established in the Republic of Moldova in On 17 December 2007 the Bank received a licence of type B from the National Bank of Moldova. Currently the Bank has a licence that allows it to engage in all banking activities. The Bank s registered office is located at the following address: 65, Stefan cel Mare si Sfant Street MD , Chisinau Republic of Moldova The Bank provides retail and commercial banking services in Moldovan Lei ( MDL ) and foreign currency for individuals and legal entities. These include: accounts opening, domestic and international payments, foreign exchange transactions, working capital finance, medium and long term facilities, retail loans, bank guarantees, letter of credits and documentary collections, etc. As at 31 December 2013 and 31 December 2012 the Bank had 14 branches and 7 agencies in Chisinau, Balti, Drochia, Soroca, Comrat, Straseni, Orhei, Floresti, Edinet, and Ocnita, which offer the full range of banking services and operations. As at 31 December 2013 the Board of Directors of the Bank comprised the following members: 1. Mr. Stephan Boven, ProCredit Holding AG & Co. KGaA., Chairman of the Supervisory Board; 2. Mr. Vitalis Ritter, KfW Bankengruppe, member of the Supervisory Board; 3. Dr. Joachim Glaser, SHR Heidelberg University, member of the Supervisory Board; 4. Dr. llinca Rosetti, General Manager of the ProCredit Bank S.A., Romania, member of the Supervisory Board; 5. Mr. Daan Lameris, Program manager and Investment manager, DOEN Foundation, member of the Supervisory Board. The Bank s had 531 employees as at 31 December 2013 (31 December 2012: 563). 6 of 102

11 1 BASIS OF PREPARATION Statement of Compliance These financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS). 1.1 Basis of measurement The financial statements have been prepared under the historical cost basis or amortised cost basis, except for available-for-sale financial assets which are carried at fair value. Non-current assets held for sale are stated at lower of carrying amount and fair value less cost to sell. The best evidence of fair value are quoted prices in an active market. If the market for a financial instrument is not active, the Bank establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm s length exchange determined by normal business considerations. Valuation techniques include using recent arm s length market transactions between knowledgeable, willing parties (if available), reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Bank uses that technique. The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Financial instruments measured at fair value for accounting purposes on an ongoing basis include all instruments at fair value through profit or loss and financial instruments classified as available forsale. Details on the applied measurement techniques for the Statement of financial position positions are part of the accounting policies listed below. These financial statements have been prepared based on the going concern principle, which assumes that the Bank will continue its operations for the foreseeable future. In order to assess the reasonability of this assumption, the management reviews forecasts of the future cash inflows. Based on these reviews and on the ongoing support of the ProCredit group, the management believes that the Bank will be able to continue to operate as a going concern for the foreseeable future and, therefore, this principle was applied in the preparation of these financial statements. The financial year begins on 1 January and ends on 31 December and includes all operations performed by the Bank. 7 of 102

12 1 BASIS OF PREPARAION (CONTINUED) 1.2 Functional and presentation currency Items included in the Banks financial statements are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). The Banks financial statements are presented in Moldovan Leu (MDL), which is the Bank s functional and presentation currency. 1.3 Use of assumptions and estimates The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank s accounting policies, as well as the reported value of assets, liabilities, income and expenses. Such estimates and judgments are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the result of which form the basis of judgments used in assessing the carrying value of assets and liabilities for which no other evaluation sources are available. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. 8 of 102

13 1 BASIS OF PREPARAION (CONTINUED) 1.3 Use of assumptions and estimates (continued) Accounting policies and management s judgements and estimates for certain items are especially critical for the Bank s results and financial situation due to their materiality in amount. This applies to the following positions: Impairment of loans ProCredit Bank uses rates for portfolio - based loan loss provisions which are in line with the ProCredit Group (group of ProCredit banks) rates. To determine the group-wide rates to be applied for portfoliobased loan loss provisioning, the group performed an evaluation of the quality of the loan portfolio, taking into account historical loss experiences of the majority of the institutions. This migration analysis is based on statistical data from and therefore it reflects not only average losses during a period of constant growth and favourable economic environments but also average losses during a period of global recession in nearly all of the ProCredit group s countries of operation. The Bank in its turn performs verification of the compatibility of rates for provisions at Group level with quality of loan portfolio in order to ensure their consistency. Further information on the Bank s accounting policy on loan loss provisioning can be found in the respective notes. Were the net present value of estimated cash flows differs by +1% the impairment loss on collectively assesed loans is to be estimated MDL 410,664 lower, if by -1%, the impairment loss on collectively assesed loans is to be estimated MDL 410,664 higher (2012: +1% MDL 317,183 lower and if -1% MDL şi 317,183 higher). 9 of 102

14 1 BASIS OF PRESENTATION (CONTINUED) Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2014 or later and which the Bank has not early adopted 1.4 Accounting developments The following new Standards and Interpretations are not yet effective for the annual period ended 31 December 2013 and have not been applied in preparing these financial statements: IFRS 9 Financial Instruments adoption date not yet decided. This Standard replaces the guidance in IAS 39, Financial Instruments: Recognition and Measurement, about classification and measurement of financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivable. Financial assets will be classified into one of two categories on initial recognition: financial assets measured at amortized cost or financial assets measured at fair value. A financial asset is measured at amortized cost if the following two conditions are met: the assets is held within a business model whose objective is to hold assets in order to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. Gains and losses on re-measurement of financial assets measured at fair value are recognized in the statement of profit or loss and other comprehensive income, except that for an investment in an equity instrument which is not held for trading, IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in other comprehensive income (OCI). The election is available on an individual share-by-share basis. No amount recognized in OCI is ever reclassified to profit or loss at a later date. It is expected that the new Standard, when initially applied, will have a significant impact on the financial statements, since the classification and the measurement of the Bank s financial assets are expected to change. 10 of 102

15 1 BASIS OF PRESENTATION (CONTINUED) 1.4 Accounting developments (continued) Amendments to IFRS 10 - Consolidated Financial Statements, IFRS 12 - Disclosure of Interests in Other Entities and IAS 27 (2011) Separate Financial Statements Investment Entities (effective for annual periods beginning on or after 1 January 2014). According to these amendments, an entity does not have to prepare consolidated financial statements and has the obligation to assess all its subsidiaries at fair value through profit or loss. An entity qualifies as an investment entity if it meets all of the essential elements of the definition of an investment entity. According to these essential elements an investment entity obtains funds from investors to provide those investors with investment management services: - commits to its investors that its business purpose is to invest for returns solely from appreciation and/or investment income; and - measures and evaluates the performance of substantially all of its investments on a fair value basis. The amendments also set out disclosure requirements for investment entities. It is expected that these amendments would not have a significant impact since the Bank does not have subsidiaries. IFRS 11 Joint Arrangements (Effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively subject to transitional provisions. Earlier application is permitted if IFRS 10, IFRS 12, IAS 27 (2011) and IAS 28 (2011) are also applied early.) IFRS 11 Joint Arrangements eliminates and replaces IAS 31 Interests in Joint Ventures. IFRS 11 does not introduce substantive changes to the overall definition of an arrangement subject to joint control, although the definition of control, and therefore indirectly of joint control, has changed due to IFRS 10. Under the new Standard, joint arrangements are divided into two types, each having its own accounting model defined as follows: a joint operation is one whereby the jointly controlling parties, known as the joint operators, have rights to the assets, and obligations for the liabilities, relating to the arrangement an a joint venture is one whereby the jointly controlling parties, known as joint ventures, have rights to the net assets of the arrangement. IFRS 11 effectively carves out from IAS 31 jointly controlled entities those cases in which, although there is a separate vehicle for the joint arrangement, separation is ineffective in certain ways. These arrangements are treated similarly to jointly controlled assets/operations under IAS 31, and are now called joint operations. The remainder of IAS 31 jointly controlled entities, now called joint ventures, are stripped of the free choice of equity accounting or proportionate consolidation; they must now always use the equity method in its consolidated financial statements. The Bank does not expect IFRS 11 to have material impact on the financial statements since it is not a party to any joint arrangements. 11 of 102

16 1 BASIS OF PRESENTATION (CONTINUED) 1.4 Accounting developments (continued) IFRS 12, Disclosure of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively; earlier application is permitted). IFRS 12 requires additional disclosures relating to significant judgments and assumptions made in determining the nature of interests in an entity or arrangement, interests in subsidiaries, joint arrangements and associates and unconsolidated structured entities. The Bank does not expect the new standard will have a material impact on the financial statements. IAS 27 (2011) Separate Financial Statements (effective for annual periods beginning on or after 1 January Earlier application is permitted if IFRS 10, IFRS 11, IFRS 12 and IAS 28 (2011) are also applied early). IAS 27 (2011) carries forward the existing accounting and disclosure requirements of IAS 27 (2008) for separate financial statements, with some minor clarifications. As well, the existing requirements of IAS 28 (2008) and IAS 31 for separate financial statements have been incorporated into IAS 27 (2011). The Standard no longer addresses the principle of control and requirements relating to the preparation of consolidated financial statements, which have been incorporated into IFRS 10, Consolidated Financial Statements. The Bank does not expect IAS 27 (2011) to have material impact on the financial statements, since it does not results in a change in the entity s accounting policy. IAS 28, Investments in Associates and Joint Ventures (amendments effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively; earlier application is permitted if IFRS 10, IFRS 11, IFRS 12 and IAS 27 are also applied early.) There are limited amendments made to IAS 28: a) associates and joint ventures held for sale. IFRS 5, Non-current Assets Held for Sale and Discontinued Operations applies to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale. For any retained portion of the investment that has not been classified as held for sale, the equity method is applied until disposal of the portion held for sale. After disposal, any retained interest is accounted for using the equity method if the retained interest continues to be an associate or a joint venture; b) changes in interests held in associates and joint ventures. Previously, IAS 28 and IAS 31 specified that the cessation of significant influence or joint control triggered re-measurement of any retained stake in all cases, even if significant influence was succeeded by joint control. IAS 28 now requires that in such scenarios the retained interest in the investment is not re-measured. The Bank does not expect the amendments to standard to have material impact on the financial statements since it does not have any investments in associates or joint ventures that will be impacted by the amendments. 12 of 102

17 1 BASIS OF PRESENTATION (CONTINUED) 1.4 Accounting developments (continued) Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively; earlier application is permitted, however the additional disclosures required by amendments to IFRS 7, Disclosures - Offsetting Financial Assets and Financial Liabilities must also be made). The amendments do not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The amendments clarify that an entity currently has a legally enforceable right to set-off if that right is: not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The Bank does not expect the amendments to have any impact on the financial statements since it has not entered into master netting arrangements. Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets (effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively. Earlier application is permitted, however an entity shall not apply the amendments in periods (including comparative periods) in which it does not also apply IFRS 13). The Amendments clarify that recoverable amount should be disclosed only for individual assets (including goodwill) or cashgenerated units for which an impairment loss was recognized or reversed during the period. The Amendments also require the following additional disclosures when an impairment for individual assets (including goodwill) or cash-generated units has been recognized or reversed in the period and recoverable amount is based on fair value less costs to disposal: the level of IFRS 13 Fair value hierarchy within which the fair value measurement of the asset or cash-generating unit is categorized; for fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation techniques used and any changes in that valuation technique together with the reason for making it; for fair value measurements categorized within Level 2 and Level 3, each key assumption (i.e. assumptions to which recoverable amount is most sensitive) used in determining fair value less costs of disposal. If fair value less costs of disposal is measured using a present value technique, discount rate(s) used both in current and previous measurement should be disclosed. The Bank does not expect the new standard will have a material impact on the financial statements. 13 of 102

18 1 BASIS OF PRESENTATION (CONTINUED) 1.4 Accounting developments (continued) Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively. Earlier application is permitted, however an entity shall not apply the amendments in periods (including comparative periods) in which it does not also apply IFRS 13). The Amendments allows hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws and regulations, when the following criteria are met: the novation is made as a consequence of laws or regulations; a clearing counterparty becomes a new counterparty to each of the original counterparties of the derivative instrument; changes to the terms of the derivative are limited to those necessary to replace. The Bank does not expect the new standard to have any impact on the financial statements, since the entity does not apply hedge accounting. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank s financial statements. 14 of 102

19 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Change in accounting policy The accounting policies set out below have been applied consistently to all periods presented in these financial statements, and have been applied consistently by the Bank. 2.2 Financial assets and liabilities 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. As of 31 December 2013 and 2012 there were no financial assets classified as at fair value through profit or loss or held to maturity. Management determines the classification of financial assets at initial recognition. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading ( trading assets ), including the derivatives held, and financial assets designated at fair value through profit or loss at inception. The Bank does not apply hedge accounting. 15 of 102

20 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Financial assets and liabilities (continued) Financial assets are designated at fair value through profit or loss when they are part of a separate portfolio that is managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy. Financial assets at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in profit and loss. Subsequently, they are carried at fair value. Gains and losses arising from changes in their fair value are immediately recognised in profit and loss of the period. Together with interest earned on financial instruments designated as at fair value through profit or loss they are shown as net result from financial assets at fair value through profit or loss. Purchases and sales of financial assets at fair value through profit or loss are recognised on the tradedate the date on which the Bank commits to purchase or sell the asset. Financial assets at fair value through profit or loss are derecognised when the rights to receive cash flows from the financial assets have expired or when the Bank has transferred substantially all risks and rewards of ownership. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the entity intends to sell immediately or in the short term, which are classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (b) those that the entity upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. Loans and receivables are initially recognised at fair value plus transactions costs; subsequently they are measured at amortised cost using the effective interest method. At each Statement of financial position date and whenever there is evidence of potential impairment, the Bank assesses the value of its loans and receivables. Their carrying amount may be reduced as a consequence through the use of an allowance account (see note 2.7 for the accounting policy for impairment of loans). If the amount of the impairment loss decreases, the impairment allowance is reduced accordingly, and the amount of the reduction is recognised in profit and loss. The upper limit on the release of the impairment is equal to the amortised cost which would have been incurred as of the valuation date if there had not been any impairment. Loans are recognised when the principal is advanced to the borrowers. Loans and receivables are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. 16 of 102

21 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.3 Financial assets and liabilities (continued) (c) Held to-maturity investments 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. If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale. At initial recognition, held-tomaturity investments are recorded at fair value plus transaction costs. Subsequently they are carried at amortised cost. (d) Available for-sale financial assets Available-for-sale assets are those intended to be held for an indefinite amount of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. At initial recognition, available for-sale financial assets are recorded at fair value plus transaction costs. Subsequently they are carried at fair value. The fair values reported are either observable market prices or values calculated with a valuation technique based on current observable market. For very short-term financial assets it is assumed that the fair value is best reflected by the transaction price itself. Gains and losses arising from changes in fair value of available-for-sale financial assets are recognised directly in other comprehensive income (OCI) in the position revaluation reserve from available-forsale financial instruments, until the financial asset is derecognised or impaired. At this time, the cumulative gain or loss previously recognised in OCI is recognised in income statementas gains and losses from available-for-sale financial assets. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available for-sale are recognised in income statement under interest and similar income. Dividends on available for-sale equity instruments are recognised in income statement when the entity s right to receive the payment is established. Purchases and sales of available-for-sale financial assets are recorded on the trade date. The available-for-sale financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. 17 of 102

22 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which it operates, i.e. the functional currency: the Moldovan leu. Normally, it is the currency of the environment in which an entity primarily generates and expends cash. The financial statements of the Bank are presented in Moldovan leu, which is ProCredit Bank s presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in income statement within trading result. Monetary items denominated in foreign currency are translated with the closing rate as of the reporting date. In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available for sale, a distinction is made between translation differences resulting from changes in the amortised cost of securities and other changes in the carrying amount of the available-for-sale assets. Translation differences related to changes in the amortised cost are recognised in income statement, while other changes in the carrying amount are recognised in OCI. Non - monetary items measured at historical cost denominated in foreign currency are translated with the exchange rate as of the date of initial recognition. The exchange rates for the year 2013 and 2012 are presented below: USD EUR USD EUR Closing rate Average rate of 102

23 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.5 Cash and balances with National Bank of Moldova For the purposes of the Statement of financial position, cash and balances with the National Bank of Moldova comprise cash in hand and balances with less than three months maturity at the National Bank of Moldova. For the purposes of the Statement of cash flow, cash and balances with National Bank of Moldova comprise balances with less than three months maturity from the date of acquisition, including: cash and non-restricted balances with the National Bank of Moldova, non-pledged securities and other securities eligible for refinancing with the National Bank of Moldova, and loans and advances to banks and amounts due from other Banks with original maturity less than 3 months. 2.6 Loans and receivables The amounts reported under loans and advances to customers consist mainly of loans and advances granted. In addition to overnight and term deposits, the amounts reported under loans and advances to banks include current account balances. All loans and advances to banks as well as loans and advances to customers fall under the category loans and receivables and are carried at amortised cost, using the effective interest method. Amortised premiums and discounts are accounted for over the respective terms in income statement under net interest income. Impairment of loans is recognised on separate allowance accounts (Note 16). For the purposes of the Statement of cash flow, loans to Banks with a remaining maturity of less than three months from the reporting date are treated as cash equivalents (Note 11). 19 of 102

24 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Allowance for losses on loans and advances (a) Assets carried at amortised cost loans and advances Impairment of loans and advances 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. If there is objective evidence that impairment of a loan or a portfolio of loans has occurred which influences the future cash flow of the financial asset(s), the respective losses are immediately recognised. Depending on the size of the loan, such losses are either calculated on an individual loan basis or are collectively assessed for a portfolio of loans. The carrying amount of the loan is reduced through the use of an allowance account and the amount of the loss is recognised in income statement. The Bank does not recognise losses from expected future events that have not occurred at the Statement of financial position date. Individually assessed loans and advances Loans are considered individually significant if they have a certain size. The Bank considers that all loans over USD 30,000 should be individually assessed for impairment. For such loans, it is assessed whether objective evidence of impairment exists, i.e. any factors which might influence the customer s ability to fulfil his contractual payment obligations towards the Bank: delinquencies in contractual payments of interest or principal; breach of covenants or conditions; initiation of bankruptcy proceedings; any specific information on the customer s business (e.g. reflected by cash flow difficulties experienced by the client); changes in the customer s market environment; the general economic situation. Additionally, the aggregate exposure to the client and the realisable value of collateral held are taken into account when deciding on the allowance for impairment. 20 of 102

25 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Allowance for losses on loans and advances (continued) (a) Assets carried at amortised cost loans and advances (continued) Individually assessed loans and advances (continued) If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of its estimated future cash flows discounted at the financial asset s original effective interest rate (specific impairment). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether individually significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment (impairment for collectively assessed loans). The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. Collectively assessed loans and advances There are two cases in which loans are collectively assessed for impairment: individually insignificant loans that show objective evidence of impairment; the group of loans which do not show signs of impairment, in order to cover all losses which have already been incurred but not identified on an individual loan basis. For the purposes of the evaluation of impairment of individually insignificant loans, the loans are grouped on the basis of similar credit risk characteristics, i.e. according to the number of days they are in arrears. Arrears of 30 or more days are considered to be an indicator of impairment. This characteristic is relevant for the estimation of future cash flows for the thus defined groups of such assets, based on historical loss experiences with loans that showed similar characteristics. 21 of 102

26 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Allowance for losses on loans and advances (continued) (a) Assets carried at amortised cost loans and advances (continued) Collectively assessed loans and advances (continued) The collective assessment of impairment for individually insignificant loans (lump-sum impairment) and for unimpaired loans (portfolio-based impairment) belonging to a group of financial assets is based on a quantitative analysis of historical default rates for loan portfolios with similar risk characteristics in the individual ProCredit group subsidiaries (migration analysis), grouped into geographical segments with a comparable risk profile. After a qualitative analysis of this statistical data, the holding company s management prescribed appropriate rates to the banks of the ProCredit group as the basis for their portfolio-based impairment allowances. Deviations from this guideline were allowed, if necessitated by the specific situation of a ProCredit group institution. 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 in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. Reversal of impairment 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 allowance account. The amount of the reversal is recognised in income statement. 22 of 102

27 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Allowance for losses on loans and advances (continued) (a) Assets carried at amortised cost loans and advances (continued) Writing off loans and advances When a loan is uncollectible, it is written off against the related allowance 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 allowance for loan impairment in income statement. Restructured loans Restructured loans which are considered to be individually significant are assessed for impairment on an individual basis. The amount of the loss is measured as the difference between the restructured loan s carrying amount and the present value of its estimated future cash flows discounted at the loan s original effective interest rate (specific impairment). Restructured loans which are individually insignificant are collectively assessed for impairment. All loans exceeding USD 30,000 that have been restructured shall be individually assessed to determine the level of impairment. All loans that have been restructured more than once shall be individually assessed, regardless of their amount. Once a restructured loan has been performing (defined as having no payment obligation towards the Bank in arrears by more than 30 days) for at least six consecutive instalments after the restructuring, the Bank may treat the loan as unimpaired. If other loans to the client are outstanding, in addition to the restructured loan, the contamination principle shall apply, i.e. the other loans to the client and any related parties must also be assessed for impairment. 23 of 102

28 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Allowance for losses on loans and advances (continued) (b) 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 group of financial assets is impaired. In determining whether an available-for-sale financial asset is impaired the following criteria are considered: Deterioration of the ability or willingness of the debtor to service the obligation; A political situation which may significantly impact the debtor s ability for debt repayment; Additional events that make it unlikely that the carrying amount may be recovered. In the case of equity investments, a significant or prolonged decline in the fair value of the investments below its cost is considered as indicator in determining whether the assets are impaired. If any such evidence exists, the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortisation for debt securities) and the current fair value, less any impairment loss on that financial asset previously recognised in Income statement is removed from OCI and recognised in income statement. Impairment losses recognised in income statement on equity instruments are not reversed through income statement at any point thereafter. 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 income statement, the impairment loss is reversed through income statement. The Bank primarily invests in government securities with fixed or variable interest rates. Impairments on these investments are recognised when objective evidence exists that the government is unable or unwilling to service these obligations. 24 of 102

29 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8 Intangible assets (a) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives. Software has a maximum expected useful life of five years. The assets are amortised using the straight-line method over their useful lives. (b) Other intangible assets The items reported under Other intangible assets are software in progress. The intangible assets in progress are not amortised. 25 of 102

30 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.9 Property and equipment Land and buildings comprise mainly branches and offices. All property and equipment are stated at historical cost less scheduled depreciation and impairment losses. Historical cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit and loss during the financial period in which they are incurred. Depreciation on assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: - Leasehold improvements shorter of rental contract life or useful life - Computers 3 years - Furniture 5 years - Motor vehicles 5 years - Other fixed assets 2-5 years The assets residual carrying values and useful lives are reviewed, and adjusted if appropriate, at each Statement of financial position date. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit and loss. The Bank does not hold investment property. 26 of 102

31 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.10 Impairment of non-financial assets Assets that have an indefinite useful life are not depreciated on a scheduled basis but are tested annually for impairment. Assets that are subject to depreciation/amortisation are reviewed for indications of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying value exceeds its recoverable amount. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount exceeds its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest level, for which there are separately identifiable cash flows (cash-generating units) Leases Leases are accounted for in accordance with IAS 17 and IFRIC 4. (a) ProCredit Bank as the lessee Finance lease The Bank did not entered in any finance lease transactions under the reported period as a lessee. Operating lease Operating leases are all lease agreements which do not qualify as finance leases. Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. The total payments made under operating leases are charged to income statement under administrative expenses on a straight-line basis over the period of the lease. 27 of 102