Public Joint-Stock Company Joint-Stock Commercial Bank Industrialbank Financial Statements

Transcription

1 Public Joint-Stock Company Joint-Stock Commercial Bank Industrialbank Financial Statements For the year ended 31 December 2016 Together with Independent Auditors Report

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4 2016 Financial statements CONTENTS INDEPENDENT AUDITORS REPORT Statement of financial position... 1 Income statement... 2 Statement of comprehensive income... 3 Statement of changes in equity... 4 Statement of cash flows... 5 NOTES TO THE FINANCIAL STATEMENTS 1. Principal activities Operating environment, risks and economic conditions Basis for preparation Summary of accounting policies Significant judgements and accounting estimates Segment information Cash and cash equivalents Amounts due from credit institutions Derivative financial instruments Loans to customers Assets held for sale Available-for-sale securities Investment property Property and equipment Intangible assets Taxation Other impairment and provisions Other assets and liabilities Amounts due to credit institutions Amounts due to customers Other borrowings Equity Commitments and contingencies Net fee and commission income Other income Personnel and other administrative and operating expenses Earnings per share Financial risk management Fair value of financial instruments Maturity analysis of assets and liabilities Related party transactions Capital adequacy Subsequent events... 46

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10 1. Principal activities (the Bank ) was established as a Joint Stock Bank through the reorganisation of Commercial Bank Spivdruzhnist which had been registered by the State Bank of the USSR under #744 on 6 November 1990 and is its legal successor and registered by the National Bank of Ukraine under #36 on 16 October The Bank operates under the general banking licence #126 issued by the National Bank of Ukraine (the NBU ) on 12 October The Bank also possesses the licenses to perform professional activities at the stock market securities trading activity, issued by the State Commission for Securities and Stock Market of Ukraine: series АЕ # dated 17 October 2012 (brokerage), series AЕ # dated 17 October 2012 (dealing). The Bank accepts deposits from the public and extends credits, transfers payments in Ukraine and abroad, trades with securities, issues debit and credit cards, exchanges currencies and provides banking services to its commercial and retail customers. The Bank s Head Office is located in Zaporizhya. As at the end of the reporting period, the Bank had 34 outlets (2015: 36 outlets) throughout Ukraine covering districts and major industrial centres in various regions of Ukraine and the representative office in Kyiv. The Bank s registered address is 39-d, Nezalezhnoyi Ukrainy St., Zaporizhya, Ukraine. The Bank is a member of the Individuals Deposits Guarantee Fund. The Fund is state owned and operates under the Ukrainian laws and regulations. The individuals deposit insurance payment amounts to UAH 200 thousand (2015: UAH 200 thousand) for each individual in case of the Bank s bankruptcy and revocation of the Bank s banking license. In 2017 the Bank will continue to develop in the following areas: - focus on maintaining customer and resource base of the Bank; - improving the quality of customer service; - bad debts management; - developing of card business; - improving internal processes, including automatization;. development of crediting and servicing for small and middle-scale businesses; - development of remote servicing systems. As at 31 December 2016, the following shareholders owned more than 5% of the Bank s share capital (direct ownership): Shareholders 31 December December 2015 DVORETSKYY ROZA (Dvoretska Roza) 48.3 Insurance company with additional responsibility Zakhid-Rezerv Public joint stock company Ukrtransnafta Pol Invest Group LLC 9.6 Sauslenk-Zaporizhzhya LLC 9.3 FINVAL Group LLC CUVCIF Ukrainski portfelni investitsii PJSC 9.0 NOLVA LLC 7.7 Other Total As at 31 December 2016, the members of the Bank s Supervisory Board and Management Board controlled % (2015: 13.99%) of the Bank s share capital (including that a member of the Supervisory Board Nemyrovskiy R. is the representative of the Bank s shareholder Dvoretska G.M who directly owns % of the Bank s share capital. As at 31 December 2016 the group of associated individuals consisting of Dvoretska Roza, Dvoretskyy Ihor Volodymyrovych and Dvoretska Ganna Mykolayivna control the Bank. According to the Committee on oversight and regulation of banks, supervision of payment systems of the National Bank of Ukraine Decision on approval of the acquisition of significant ownership in the Bank dated 16 February 2016 #62 joint direct and indirect ultimate control of the Bank belongs to a group of associated individuals (close family members): As at 31 December 2016 DVORETSKYY ROZA (Dvoretska Roza) owns % of the Bank s share capital ( % - directly and %- indirectly); As at 31 December 2016 Dvoretskyy Ihor Volodymyrovych directly owns % of the Bank s share capital; As at 31 December 2016 Dvoretska Ganna Mykolayivna directly owns % of the Bank s share capital. 6

11 As at 31 December 2016 total ownership of the associated group amounts to % of the Bank s share capital (2015: %). 2. Operating environment, risks and economic conditions Ukraine s political and economic situation has deteriorated significantly since Following political and social unrest, which started in November 2013, in March 2014 various events in Crimea led to the accession of the Republic of Crimea to the Russian Federation, which was not recognised by Ukraine and many other countries. This event resulted in a significant deterioration of the relationship between Ukraine and the Russian Federation. Following the instability in Crimea, regional tensions have spread to the Eastern regions of Ukraine, primarily Donetsk and Lugansk regions. In May 2014, protests in those regions escalated into military clashes and armed conflict between supporters of the self-declared republics of the Donetsk and Lugansk regions and the Ukrainian forces, which continued throughout the date of these financial statements. As a result of this conflict, part of the Donetsk and Lugansk regions remains under control of the self-proclaimed republics, and Ukrainian authorities are not currently able to fully enforce Ukrainian laws on this territory. Political and social unrest combined with the military conflict in the Donetsk and Lugansk regions has deepened the ongoing economic crisis, caused a fall in the country s gross domestic product and foreign trade, deterioration in state finances, depletion of the National Bank of Ukraine s foreign currency reserves, significant devaluation of the national currency and a further downgrading of the Ukrainian sovereign debt credit ratings. Following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions, which among others included restrictions on purchases of foreign currency by individuals and companies, a ban on payment of dividends abroad, a ban on early repayment of foreign loans and restrictions on cash withdrawals from banks. These events had a negative effect on Ukrainian companies and banks, significantly limiting their ability to obtain financing on domestic and international markets. The final resolution and the effects of the political and economic crisis are difficult to predict but may have further severe effects on the Ukrainian economy. Whilst management believes it is taking appropriate measures to support the sustainability of the Bank s business in the current circumstances, a continuation of the current unstable business environment could negatively affect the Bank s results and financial position in a manner not currently determinable. These financial statements reflect management s current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 3. Basis for preparation General information These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The financial statements have been prepared under the historical cost basis, except that derivative financial instruments and securities available-for-sale are measured at fair value, as mentioned below in summary of accounting policies. These financial statements are presented in thousands of Ukrainian hryvnia ( UAH thousand ), unless otherwise indicated. 4. Summary of accounting policies Changes in accounting policies Amendments to IFRS that became effective for the reporting periods starting from 1 January 2016 had no significant impact on the financial statements of the Bank. During the year ended 31 December 2016, management of the Bank has made several changes in the presentation of information in the following disclosures: Segment information During 2016 the Bank changed its approach to the presentation of allowance for impairment for loans and advances, cash and cash equivalent, amounts due from credit institutions and available-for-sale securities in reporting of information about segment assets. In 2015 information in relation to allowance for impairment for these financial assets was reported as part of Other/ Unallocated segment caption, whereas starting from 2016 all allowance for impairment for respective financial assets were allocated to respective segments assets. Comparative figures were represented accordingly. Loans to customers Disclosure of the Gross amount of loans individually determined to be impaired, before deducting the individually assessed impairment allowance during the year ended 31 December 2015, was prepared by presenting all loans which were assessed for impairment on individual basis. Starting from 2016, the Bank changed its approach to the preparation of this disclosure and disclosed in this category only loans which were individually determined to be impaired. Comparative figures were represented accordingly. Additionally, management has updated its approach to the presentation of financial effect of collateral. In 2015 respective disclosure was based on the presentation of total amount of fair value of all collateral items pledged for all loans, including 7

12 all types of collateral. Starting from 2016 approach for the disclosure of fair value of collateral has been changed, the Bank started to present fair value of collateral determined in accordance with Bank s policies and procedures which impact the provision calculation. This amount includes possible costs of debt recovery through the foreclosure such as court expenses, disposal costs and other costs related to debt recovery through the foreclosure. Comparative figures were represented accordingly. Financial risk management disclosures Due to the change in presentation of Gross amount of loans individually determined to be impaired, the Bank has respectively disclosed the amount of Past due but not impaired, and individually impaired loans in the disclosure of credit quality of financial assets based on internal credit ratings of borrowers. Comparative figures were represented accordingly. Disclosure of financial assets and liabilities by levels of fair value hierarchy During the year ended 31 December 2016, the Bank has corrected the presentation of carrying value of assets and liabilities by levels of fair value hierarchy for The following captions were presented as level 2: deposit certificates issued by National bank of Ukraine, cash and cash equivalents, loans to customers, amounts due to customers, derivative financial liabilities, whereas as at 31 December 2015 these captions were disclosed as level 1 by levels of fair value hierarchy. Fair value measurement principles The Bank measures such financial instruments as securities available-for-sale and derivative financial instruments at fair value at each reporting date. Information on fair value of financial instruments, measured at amortized cost, is disclosed in Note 29. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. Fair value measurement assumes that transaction on selling an asset or transferring a liability takes place on: the principle market for this asset or liability; or, in the absence of a principle, the most advantageous market for this asset or liability. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. All the assets and liabilities for which fair value is determined or disclosed in the financial statements, are classified under following fair value hierarchy based on the input data (of the lowest hierarchy level), which is significant for fair value measurement in its entirety: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - valuation techniques which use input data, significant for fair value measurement, which is observable in the market, either directly or indirectly. Level 3 - valuation techniques which use input data, which is significant for fair value measurement, which is unobservable in the market. 8

13 Financial assets Initial recognition Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, investments held-to-maturity, or available-for-sale financial assets, as appropriate. When financial assets are initially recognised, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Bank determines the classification of its financial assets upon initial recognition, and can subsequently reclassify financial assets in certain cases as described below. Date of recognition All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are the purchases or sales of financial assets that require the delivery of assets within the period generally established by the regulation or convention in the marketplace. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into agreements with the intention of immediate or short-term resale and are not classified as financial assets at fair value through profit or loss or as financial assets, available-for-sale. Loans issued by the Bank are initially recognised at fair value inclusive of the relevant transaction costs. Then such loans are carried at amortised cost using the effective interest method. After impairment recognition interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring of impairment loss. Gains and losses are recognised in the income statement when the loans are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or those that are not classified to any of the above categories of financial assets. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognised in other comprehensive income until the investment is derecognised, or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the income statement. However, the interest calculated using the effective interest method is recognised in the income statement. Reclassification of financial assets Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the fair value through profit or loss or available-forsale category if the Bank has an intention and ability to hold them for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Financial assets are reclassified at fair value as at the date of reclassification. Fair value of a financial asset as at the date of reclassification becomes its amortized cost. For financial assets reclassified out of available-for-sale financial assets, any gain or loss previously recognized in equity is amortized in profit or loss over the term of the financial asset using the effective interest method. If the financial asset is impaired, the amount previously recognized in equity is reclassified in profit or loss. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balance on the account within the NBU and amounts due from credit institutions with maturity of three months or less. Precious metals Gold and other precious metals are recorded at the NBU exchange rates set on the reporting date. Changes in the NBU exchange rates are recorded in the income statement as exchange differences from precious metals in foreign exchange gains less losses. Repurchase and reverse repurchase agreements Securities sold under sale and repurchase (repo) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions within deposits and balances from banks or current accounts and deposits from customers, as appropriate. The difference between the sale and repurchase prices represents interest expense and is recognised in profit or loss over the term of the repo agreement using the effective interest method. 9

14 Securities purchased under agreements to resell (reverse repo) are recorded as amounts receivable under reverse repo transactions within loans to banks or loans to customers, as appropriate. The difference between the purchase and resale prices represents interest income and is recognised in profit or loss over the term of the repo agreement using the effective interest method. If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. Derivative financial instruments Derivative financial instruments include swaps, forwards, futures, spot transactions and options in interest rates, foreign exchanges, precious metals and stock markets, and any combinations of these instruments. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the income statement as net gains/(losses) from derivative financial instruments, depending on the nature of the instrument. Promissory notes Promissory notes purchased are included in available-for-sale securities, or in amounts due from credit institutions or in loans to customers, depending on their substance, and are accounted for in accordance with the accounting policies for these categories of assets. Borrowings Borrowings are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to the National Bank of Ukraine, amounts due to credit institutions, amounts due to customers and other borrowings. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the borrowings are derecognised as well as through the amortisation process. Leases Operating Bank as a lessee Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under the operating lease are recognised as expenses on a straight-line basis over the lease term and included into other operating expenses. Operating Bank as a lessor The Bank presents assets subject to operating leases in the statement of financial position according to the nature of the asset. Lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term as other income. Expenses related to the leased property are recognised as a part of this property cost and are recorded in the income statement on a straight-line basis as income from operating lease over the lease term. Initial measurement of financial instruments Initially, financial assets and liabilities are measured at fair value, including transaction costs, for assets and liabilities not measured at fair value through profit or loss. The best evidence of fair value of financial instrument upon initial recognition is usually transaction price. If fair value on initial recognition differs from transaction price: - if fair value is evidenced by active market quotations for identical asset or liability (input data of Level 1) or determined based on the valuation technique, which uses solely observable market data, the Bank recognized the difference between fair value on initial recognition and transaction price in profit or loss; - In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the income statement when the inputs become observable, or when the instrument is derecognised. Offsetting Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are recorded gross in the statement of financial position. 10

15 Impairment of financial assets At each reporting date the Bank assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may include the indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that it will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Amounts due from credit institutions and loans to customers For amounts due from credit institutions and loans to customers carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. 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. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized, are not included in a collective assessment of impairment. 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 estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. Amounts due from credit institutions and loans to customers together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the income statement. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. 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, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank s internal credit grading system that considers credit risk characteristics such as the type of an asset, industry, geography, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of 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 years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable market data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Available-for-sale financial assets For available-for-sale financial assets, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement is reclassified from other comprehensive income to the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair values after impairment are recognised in other comprehensive income. In the case of debt instruments are classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. The interest income is recorded in the income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed in the income statement. 11

16 Renegotiated loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and negotiating new loan conditions. The accounting treatment of such restructuring is as follows: If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised; If the loan restructuring is not caused by the financial difficulties of the borrower in this case the loan is not recognised as impaired. Such loan is not derecognised, future cash flows remaining until the loan repayment are discounted at the original effective interest rate; If the loan is impaired after restructuring, the Bank uses the original effective interest rate in respect of new cash flows to estimate the recoverable amount of the loan. The difference between the recalculated present value of the new cash flows taking into account collateral and the carrying amount before restructuring is included in the provision charges for the period. Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: the rights to receive the cash flows from the asset have expired; the Bank has transferred its rights to receive the cash flows from the asset, or retained the right to receive the cash flows from the asset, but has assumed an obligation to pay them in full without a material delay to a third party under a pass-through arrangement; and the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Bank has transferred its rights to receive the cash flows from the asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Financial guarantees Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised, less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Any increase in the liability relating to financial guarantees is taken to the income statement. The premium received is recognised in the income statement on a straight-line basis over the life of the guarantee. Taxation The current income tax expense is calculated in accordance with Ukrainian taxation regulations. Deferred tax assets and liabilities are calculated in respect of temporary differences using the balance sheet liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected 12

17 to apply to the period when the asset is realised or the liability is settled, based on the legislation/tax rates that have been enacted or substantively enacted at the reporting date. Moreover, Ukraine also has various operating taxes that are imposed on the Bank s activities. These taxes are included in other administrative and operating expenses in the income statement. Property and equipment Property and equipment are carried at cost, less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing a part of equipment when that cost is incurred if the recognition criteria are met. The carrying amounts of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Depreciation of an asset commences when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives: Years Buildings 50 Furniture and fixtures 2-20 Computers and office equipment 5-11 Motor vehicle 8-10 The asset s residual values, useful lives and depreciation methods are reviewed, and adjusted as appropriate, at each financial year-end. Costs related to repairs and renewals are charged when incurred and included in other administrative and operating expenses, unless they qualify for capitalization. Intangible assets Intangible assets include computer software and licenses. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic lives of one to twenty years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with indefinite useful lives are reviewed at least at each financial year-end. Investment property Investment property is the property held to earn rental income or for capital appreciation rather than for use in the operating activities or for administrative purposes and which is not occupied by the Bank. Property that is being constructed or developed or redeveloped for future use as investment property is also classified as investment property. Investment property is initially recognised at cost, including the acquisition costs, and carried at cost less accumulated depreciation and any accumulated impairment. Depreciation is calculated on a straight-line basis over the estimated useful lives of 50 years for buildings. The assets residual values, useful lives and method are reviewed and adjusted at each reporting date. Gains or losses on disposal of investment property are calculated as proceeds less residual value. Subsequent expenditure is capitalised to the asset s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Bank and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. Assets classified as held for sale The Bank classifies a non-current asset as held for sale if its carrying amount is recovered principally through a sale transaction rather than through continuing use. For this to be the case, the non-current asset should be available for immediate sale in its present condition subject only to the terms that are usual and customary for sales of such assets and its likelihood should be rather high. The sale qualifies as highly probable if the Bank s management is committed to a plan to sell the non-current asset and an active program to locate a buyer and complete the plan should have been initiated. Further, the non-current asset should be actively marketed for a sale at a price that is reasonable in relation to its current fair value and in addition the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification of the non-current asset as held for sale. The Bank measures an asset classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The Bank recognises an impairment loss for any initial or subsequent write-down of the asset to its fair value less costs to sell if any events or changes in the circumstances indicate that its carrying amount may be impaired. 13

18 Provisions Provisions are recognised 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 of the amount of obligation can be made. Retirement and other employee benefit obligations The Bank does not have any pension arrangements separate from the state pension system, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the income statement in the period, in which the related salaries are earned. The Bank has no significant post-retirement benefits. Share capital Share capital Ordinary shares that cannot be retired with discretionary dividends are both classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of the consideration received over the par value of shares issued is recognised as additional paid-in capital. Dividends Dividends are recognized as a liability and deducted from equity at the reporting date, if they are declared before or on the reporting date. Dividends are recommended or declared before or after the balance sheet date and before the date of signing the financial statements are disclosed in the financial statements. Fiduciary assets Assets recorded on fiduciary accounts, which are operated by the Bank on the basis of power of attorney, are not recognized in the financial statements since they are not assets of the Bank. Segment reporting The Bank s segment reporting is based on the following operating segments: retail banking, corporate banking, investment and banking activities and other transactions. An operating segment is a component of the Bank that is engaged in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same group); which operating results are regularly reviewed by the Management Board to make decisions about the resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Contingencies Contingent liabilities are not recognised in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the statement of financial position but disclosed when an inflow of economic benefits is probable. Recognition of income and expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria will be also met before revenue is recognised: Interest and similar income and expense For all financial instruments measured at amortised cost and interest bearing securities classified at fair value through profit or loss or as available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate and taking into account the impairment. For impaired financial assets, interest income is accrued on carrying value of the asset after impairment (allowance). 14

19 Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: - Fee income earned from the services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management consideration, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan. - Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses are recognised on completion of the underlying transaction. Fees or components of fees related to a certain performance are recognised after meeting the corresponding criteria. Foreign currency transactions The financial statements are presented in Ukrainian hryvnia, which is the Bank s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into functional currency at the exchange rate as at the reporting date. Gains and losses from currency translation are recognised in the income statement on a net basis as foreign exchange differences. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rates as at the dates of initial transactions. Non-monetary items measured at fair value in a foreign currency are translated at the exchange rates as at the date when the fair value was determined. Differences between the contractual exchange rate for a transaction in a foreign currency and the NBU exchange rate on the date of the transaction are included in gains less losses from foreign currencies: translation differences. As at 31 December 2016, the exchange rate of Ukrainian hryvnia as established by the NBU was UAH for USD 1 (2015: UAH ) and UAH for EUR 1 (2015: UAH ). The average exchange rate of Ukrainian hryvnia for 2016 was UAH for USD 1 (2015: UAH ) and UAH for EUR 1 (2015: UAH ). Going concern As at 31 December 2016, the Bank does not comply with the ratio of maximum credit risk exposure per single counterparty (R7 ratio) and ratio of maximum credit exposure to related parties (R9 ratio). Based on the above facts, the Bank has prepared the Restructuring Plan aimed at fulfilment of the National Bank of Ukraine requirements on additional capitalisation based on the results of the Bank s diagnostic study performed according to the requirements of the NBU Resolution On Diagnostic Study of Banks No.59 dated 4 February 2016 and the Action Plan to bring Bank s operations in conformity with requirements of the legislation and regulations of the National Bank of Ukraine in respect of transactions with related parties. Both Plans have been developed by the Bank for the period until 1 January 2019 and until 1 January 2020, respectively. As at the date of issue of these financial statements, the relevant documents were approved by the NBU (Note 33). The relevant plans stipulate the list of measures, subject to implementation of which, the Bank will fulfil the regulatory requirements of the National Bank of Ukraine. As at the date of issue of these financial statements, the Bank has executed all actions to be taken till 1 April Apart from that, the Bank plans to increase its lending volumes and to optimise current expenses which will allow to increase its operating profitability. The Bank s management plans to implement these and other measures planned during Based on the agreed terms the Bank s shareholders, DVORETSKYY ROZA (Dvoretska Roza), Dvoretskyy Ihor Volodymyrovych and Dvoretska Ganna Mykolaivna provided their personal guarantee about enforcement of fulfilment of the actions that are set by the Restructuring Plan and the Action Plan to bring Bank s operations in conformity with requirements of the legislation and regulations of the National Bank of Ukraine in respect of transactions with related parties. Taking into consideration the above measures, management of the Bank believes that the Bank has the resources to continue its operations in the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank s ability to continue as a going concern in the foreseeable future. 15

20 Future changes in accounting policies Standards and interpretations issued but not yet effective New standards, amendments, and interpretations that are issued but not yet effective as at 31 December 2016 and are not used in preparing theses financial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement, and includes requirements for classification and measurement of financial instruments, impairment of financial assets, and hedge accounting. Classification and measurement IFRS 9 contains three principal classification categories for financial assets: financial assets measured at amortised cost, at fair value through other comprehensive income (FVOCI), and at fair value through profit or loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables, and available-for-sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated. Instead, the whole hybrid instrument is assessed for classification. Equity investments are measured at fair value. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, though IAS 39 required that all changes in financial liabilities measured at fair value through profit or loss were recognized in profit or loss, IFRS 9 requires that changes in fair value are recorded as follows: the amount of change in fair value of a financial liability that is attributable to changes in credit risk of the financial liability is recognized in other comprehensive income; the remaining amount of change in fair value of a financial liability is recognized in profit or loss. Impairment IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss model. The new impairment model applies to financial assets measured at amortised cost and FVOCI, lease receivables, certain loan commitments and financial guarantee contracts. The new impairment model generally requires to recognize expected credit losses in profit or loss for all financial assets, even those that are newly originated or acquired. Under IFRS 9, impairment is measured as either expected credit losses resulting from default events on the financial instrument that are possible within the next 12 months ( 12- month ECL ) or expected credit losses resulting from all possible default events over the expected life of the financial instrument ( lifetime ECL ). Initial amount of expected credit losses recognized for a financial asset is equal to 12-month ECL (except for certain trade payables and lease receivables, and contract assets, or purchased or originated credit-impaired financial assets). If the credit risk on the financial instrument has increased significantly since initial recognition, the loss allowance is measured at an amount equal to lifetime ECL. Financial assets for which 12-month ECL is recognized are considered to be in Stage 1 for impairment; financial assets that have experienced a significant increase in credit risk since initial recognition are considered to be in Stage 2; and financial assets that are in default or otherwise credit-impaired are considered to be in Stage 3. Measurement of expected credit losses is required to be unbiased and probability-weighted, to reflect the time value of money, and incorporate reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions. Under IFRS 9, credit losses are recognised earlier than under IAS 39, resulting in increased volatility in profit or loss. It will also tend to result in an increased impairment allowance, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population of financial assets with objective evidence of impairment identified under IAS 39. Calculation of expected credit losses is likely to be based on the PDxLGDxEAD approach (at least for some portfolios), (where, PD- possibility of default, LGD- loss value in case of default, EAD amount of loan, regarding which it is exposure of default, depending on the type of the exposure, impairment stage at which the exposure is classified under IFRS 9, collective or individual assessment, etc. Hedge accounting General hedge accounting requirements aim to simplify hedge accounting aligning the hedge accounting more closely with risk management strategies. The standard does not explicitly address macro hedge accounting, which is considered a separate project. IFRS 9 includes an accounting policy choice to continue to apply the hedge accounting requirements of IAS