ARARATBANK cjsc Financial statements for the year ended 31 December 2006

Transcription

1 Financial statements for the year ended 31 December 2006

2 Contents Independent Auditors Report 3 Income Statement 4 Balance Sheet 5 Statement of Cash Flows 6 Statement of Changes in Shareholders Equity 7 Notes to the Financial Statements 8 ARARATBANK cjsc 19 Pushkin Street, Yerevan Republic of Armenia

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8 1 Background (a) Principal activities ARARATBANK cjsc (the Bank ) was established in the Republic of Armenia as a closed joint stock company in The Bank is the legal successor of Haykap Bank, the latter being established in The Bank mainly provides lending, customer accounts and deposits maintenance, operations with securities, gold bullions, cash and foreign exchange operations services. The Bank conducts business throughout the Republic of Armenia from its head office and four branches. The registered address of the Bank s head office is 19 Pushkin Street, Yerevan, Armenia. The majority of the Bank s assets and liabilities are located in the Republic of Armenia. The average number of persons employed by the Bank during the year was 69 (2005: 45). Shareholders The Bank s only shareholder is Flash Ltd. The major shareholder of the latter Mr. Barsegh Beglaryan is also the Chairman of the Board of Directors. Related party transactions are detailed in note 43. (b) Armenian business environment The Republic of Armenia has been experiencing political and economic change which has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in the Republic of Armenia involve risks, which do not typically exist in other markets. The accompanying financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 2 Basis of preparation and significant accounting policies (a) Statement of compliance These financial statements have been prepared in accordance with Accounting Regulations of the Republic of Armenia. (b) Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale assets are stated at fair value, and land and buildings are revalued periodically. (c) Measurement and presentation currency The national currency of Armenia is the Armenian Dram ( AMD ). Management has determined the Bank s measurement currency to be the AMD as it reflects the economic substance of the underlying events and circumstances of the Bank. The AMD is also the Bank s presentation currency for the purpose of these financial statements. Financial information is presented in AMD rounded to the nearest thousand. The AMD is not a convertible currency outside the Republic of Armenia. 8

9 (d) Going concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realisation of assets and the satisfaction of liabilities in the normal course of business. The recoverability of the Bank s assets, as well as the future operation of the Bank, may be significantly affected by the current and future economic environment (refer note 1 (c)). The accompanying financial statements do not include any adjustments should the Bank be unable to continue as a going concern. 2.1 Significant accounting policies The following significant accounting policies have been applied in the preparation of the financial statements. These accounting policies have been consistently applied. (a) Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate of the Central Bank of Armenia (CBA) ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate ruling at the date of the transaction. The official rate of exchange prevailing at the year-end was AMD = USD 1; AMD = EUR 1 (31 December 2005: AMD = USD 1; AMD = EUR 1). (b) Financial instruments (i) Classification Trading instruments are those that the Bank principally holds for the purpose of short-term profit taking. Originated loans and receivables are loans and receivables created by the Bank providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables comprise loans and advances to banks and customers other than purchased loans. Held-to-maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Bank has the intent and ability to hold to maturity. Available-for-sale assets are financial assets that are not held for trading purposes, originated by the Bank, or held to maturity. (ii) Recognition The Bank recognises financial assets held for trading and available-for-sale assets on the date the assets are delivered to the Bank. Held-to-maturity assets and originated loans and receivables are recognised on the day they are transferred to the Bank. 9

10 (iii) Measurement Financial instruments are measured initially at cost, including transaction costs. Subsequent to initial recognition all trading instruments and all available-for-sale assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses. All non-trading financial liabilities, originated loans and receivables and held to maturity assets are measured at amortised cost less impairment losses. Amortised cost is calculated on the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. (iv) Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. (v) Gains and losses on subsequent measurement Gains and losses arising from a change in the fair value of trading and available-for-sale instruments are recognised in the income statement. (vi) Derecognition A financial asset is derecognised when the Bank loses control over the contractual rights that comprise that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Assets held for trading and available for sale assets that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Bank delivers the assets. Held-to-maturity instruments and originated loans and receivables are derecognised on the day they are transferred by the Bank. (c) Cash and cash equivalents Cash and cash equivalents comprise cash, balances with the CBA and Nostro accounts. (d) Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase substantially identical instruments at a certain date in the future at a fixed price are transferred from the corresponding securities portfolio to other assets. Liability accounts are used to record the obligation to repurchase the securities. The difference between the sale and repurchase price represents interest expense and is recognised in the income statement over the term of the repurchase agreement. 10

11 Securities held under reverse repurchase agreements are recognised in the balance sheet as an asset. The amounts paid under these agreements are recognised as receivables. The obligation to return the collateral is recognised as a liability. The difference between the purchase and sale price represents interest income and is recognised in the income statement over the term of the reverse repurchase agreement. (e) Impairment The carrying amounts of the Bank s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amounts are estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses are recognised in the income statement. (i) Calculation of recoverable amount The recoverable amount of the Bank s investments in held-to-maturity securities and receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. The recoverable amount of the Bank s trading investments and available-forsale investments is their fair value. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. (ii) Reversals of impairment An impairment loss in respect of a held-to-maturity security or receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (f) Interest bearing borrowings Interest-bearing borrowings are recognised initially at cost, net of any transaction costs incurred. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings. When borrowings are repurchased or settled before maturity, any difference between the amount repaid and the carrying amount is recognised immediately in the income statement. 11

12 (g) Provisions A provision is recognised in the balance sheet when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (h) (i) Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. (ii) Leased assets Operating leases, under the terms of which the Bank does not assume substantially all the risks and rewards of ownership are expensed. (iii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets. The estimated useful lives are as follows: Buildings Equipment Fixture and fittings Vehicles 30 years 1-3 years 5 years 5 years (i) (i) Other intangible assets Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. (ii) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows: Computer software Up to 10 years (j) Interest income and expense Interest income and expense is recognised in the income statement as it accrues, taking into account the effective yield of the asset or liability or an applicable floating rate. Interest income and expense includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis. 12

13 (k) Fee and commission income Fee and commission income arises on financial services provided by the Bank including cash management services, remittance services, credit card services and trade finance services. Fee and commission income is recognised when the corresponding service is provided. (l) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease payments made. (m) Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (n) Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet 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 realize the asset and settle the liability simultaneously. (o) Pensions Pensions are provided by the State through mandatory contributions by companies and employees. The Bank s cost for these contributions is disclosed in a note 10. The Bank does not have a pension scheme for its employees. 13

14 3 Interest income Unaudited Interest income on correspondent account with the CBA Interest income on other placements with the CBA 174 1,758 Interest income on correspondent accounts with resident banks 24 - Interest income on placements with resident banks and other financial institutions 12, Interest income on correspondent accounts with non-resident banks Interest income on placements with non-resident banks and other financial institutions 9,064 - Interest income on loans and borrowings provided to resident legal entities and institutions 289,242 32,757 Interest income on loans and borrowings provided to non-resident legal entities and institutions - - Interest income on loans and borrowings provided to resident individuals 48,512 2,679 Interest income on loans and borrowings provided to non - resident individuals - - Interest income on loans and borrowings provided to the employees of the Bank Interest income on loans and borrowings provided to the related parties 7,949 46,285 Interest income on investments in treasury bills 347 1,230 Interest income on investments in other securities 10,723 - Other interest income ,175 85,382 14

15 4 Interest expense Unaudited Interest expense on resources attracted from the CBA by repurchase agreements - - Interest expense on other resources attracted from the CBA - - Interest expense on correspondent accounts of resident banks - - Interest expense on other resources attracted from resident banks and other financial organisations Interest expense on correspondent accounts of non-resident banks - - Interest expense on other resources attracted from non-resident banks and other financial institutions - - Interest expense on bank accounts and demand deposits from resident legal entities and institutions 28 - Interest expense on bank accounts and demand deposits from resident individuals 1,134 - Interest expense on bank accounts and demand deposits from non-resident legal entities and institutions - - Interest expense on bank accounts and demand deposits from non-resident individuals - - Interest expense on demand deposits of other non-resident - - Interest expense on term deposits of resident legal entities and institutions 28,902 - Interest expense on term deposits of resident individuals 2,558 - Interest expense on term deposits of non-resident legal entities and institutions - - Interest expense on term deposits of non-resident individuals - - Interest expense on term deposits of other non-residents - - Interest expense on repurchase agreements and currency swaps with resident legal entities and institutions 39 - Interest expense on repurchase agreements and currency swaps with resident individuals - - Interest expense on repurchase agreements and currency swaps with non-resident legal entities and institutions - - Interest expense on repurchase agreements and currency swaps with non-resident individuals - - Interest expense on due/payables to the RA Government - - Interest expense accrued but not collected on assets not in use - - Other interest expenses 1,000 1,128 34,205 1,128 15

16 5 Net income/(loss) from investments held for trading Unaudited Net profit/(loss) from sale of investments held for trading - - Net profit/(loss) from revaluation of investments held for trading Net income/(loss) from investments available for sale Unaudited Net profit/(loss) from sale of investments available for sale 875,491 - Net profit/(loss) from revaluation of investments available for sale 2, ,151-7 Net foreign exchange gain/(loss) Unaudited Net profit/(loss) from foreign currency sale 34,373 65,051 Net profit/(loss) from foreign currency revaluation 4, ,623 39, ,674 8 Other operating income Unaudited Income from operations with guarantees, letters of acceptance, letters of credits and trustee management 1,004 5,207 Net income from derivatives - - Net income from disposals of property, plant and equipment (3,891) (4,958) Net income from revaluation of property, plant and equipment and intangible assets - (26,973) Income from fines and penalties Income from factoring - - Net income from operations with precious metals bullions and commemorative coins 11,459 - Extraordinary income - 2,271,868 Other income 2, ,960 2,246,063 16

17 9 Impairment losses AMD 000 AMD 000 Unaudited Provision on placements with other banks Balance at the beginning of the year - 11,026 Net recovery for the year (86) (7,415) Net recovery of write-offs/(write-off) 86 (3,611) Balance at the end of the year - - AMD 000 AMD 000 Unaudited Provision on loans and advances to customers Balance at the beginning of the year 5,187 - Net charge/(recovery) for the year 13,252 (118,587) Net recovery of write-offs 6, ,774 Balance at the end of the year 25,128 5,187 AMD 000 AMD 000 Unaudited Provision on investments available-for-sale Balance at the beginning of the year 4,891,291 - Net charge/(recovery) for the year - 4,891,291 Net recovery of write-offs (4,891,291) - Balance at the end of the year - 4,891,291 AMD 000 AMD 000 Unaudited Provision on trade receivables and other assets Balance at the beginning of the year 54 2 Net recovery for the year (1,652) (13,287) Net recovery of write-offs 1,856 13,339 Balance at the end of the year AMD 000 AMD 000 Unaudited Total provision on assets Balance at the beginning of the year 4,896,532 11,029 Net charge for the year 11,514 4,752,002 Net recovery of write-offs (4,882,660) 133,502 Balance at the end of the year 25,386 4,896,533 17

18 AMD 000 AMD 000 Unaudited Provision on off-balance sheet contingent liabilities Balance at the beginning of the year - - Net charge for the year Balance at the end of the year AMD 000 AMD 000 Unaudited Provision on assets and off-balance sheet contingencies Balance at the beginning of the year 4,896,532 11,029 Net charge for the year 11,929 4,752,002 (Write off)/recovery fro the year (4,882,660) 133,502 Balance at the end of the year 25,801 4,896, General administrative expenses Unaudited Salaries and related expenses 136,928 84,760 Contributions to the state pension fund 16,241 9,622 Training expenses Business trip expenses Rentals of buildings and other property, plant and equipment of the Bank 1, Insurance expenses - - Service and maintenance of the equipment of the Bank 5,761 1,120 Security expenses 13,497 7,473 Audit and consulting services 6,000 5,846 Communication and information services 27,027 14,606 Transportation expenses 4,142 2,582 Expenses on taxes, duties and other mandatory payments 17,089 8,628 Office supplies and organisational expenses 10,140 5,367 Expenses on issue and recovery of loans , ,260 18

19 11 Other operating expenses Unaudited Fines and penalties (received)/paid (7,848) 7,894 Advertising and representation expenses 14, Expenses on factoring - - Amortisation charge of property, plant and equipment and intangible assets 41,695 34,496 Expenses from operations with guarantees, letters of acceptances and letters of credits and trustee management - - Extraordinary expense - - Other expenses 19,867 5,504 68,487 48, Income tax AMD 000 AMD 000 Unaudited Current tax expense Current year Deferred tax benefit Origination and reversal of temporary differences 207,342 (237,037) Change in unrecognized deferred tax assets (237,037) 237,037 (29,695) - Total income tax benefit in the income statement (29,695) - The Bank s applicable tax rate for current and deferred tax is 20% (2005: 20%). Reconciliation of effective tax rate: 2006 AMD 000 % 2005 AMD 000 % Unaudited Income/(loss) before tax 981,793 (2,405,565) Income tax at the applicable tax rate 196,359 20% (481,113) 20% Non-deductible costs/(non-taxable income) 10, % 244,076 (10.1%) Change in unrecognized deferred tax assets (237,037) (24.1%) 237,037 (9.9%) (29,695) (3%) - 0% 19

20 13 Cash and balances with the Central Bank of Armenia Cash and cash equivalent payment documents 258, ,984 Correspondent accounts with the CBA 906, ,353 Deposits with the CBA 400, ,000 1,565,079 1,459, Other balances with the Central Bank of Armenia Repurchase and swap agreements with the CBA - - Due from the CBA 35,138-35, Financial investment held for trading Government securities of the Republic of Armenia 1,402,651 - Government securities of other countries - - Non-government securities of the Republic of Armenia - - Non-government securities of other countries - - Receivables on factoring - - Derivatives - - 1,402,651-20

21 16 Placements with other banks Correspondent accounts and demand deposits with resident banks 29,433 27,125 Correspondent accounts and demand deposits with non-resident banks 323, ,986 Frozen accounts in non resident banks - Term deposits with resident banks - - Term deposits with non-resident banks - - Loans to resident banks - - Loans to non-resident banks - - Repurchase agreements and currency swaps with resident banks 410,652 - Repurchase agreements and currency swaps with non-resident banks - Due from resident banks - - Due from non-resident banks - - Provision for deposits, correspondent accounts and loans , , Other placements Demand deposits with other non-resident financial organisations - - Term deposits with other non-resident financial organisations - - Loans to other resident financial organisations - - Loans to other non-resident financial organisations - - Repurchase agreements and currency swaps with other resident financial organisations 909,828 - Repurchase agreements and currency swaps with other non-resident financial organisations - - Provision for deposits and loans ,828-21

22 18 Loans to customers Loans to resident legal entities and institutions 1,928,960 1,456,705 Loans to non-resident legal entities and institutions - - Loans to resident individuals 558,871 22,254 Loans to non-resident individuals - - Loans to the employees of the Bank 5,258 - Loans to related parties of the Bank 19,682 2,221 Repurchase agreements and currency swaps with resident legal entities and institutions - - Repurchase agreements and currency swaps with non-resident legal entities and institutions - - Repurchase agreements with resident individuals 82,171 - Repurchase agreements with non-resident individuals - - 2,594,942 1,481,180 Provision for loans to customers (25,128) (5,187) 2,569,814 1,475,993 Contractually overdue loans The Bank had no loans with contractually overdue principal or interest as at 31 December 2006 and Analysis of movements in the provision for impairment AMD 000 AMD 000 Balance at the beginning of the year 5,187 - Net charge/(recovery) for the year 13,252 (118,587) Write-offs 6, ,774 Balance at the end of the year 25,128 5,187 The Bank has reviewed its current commercial and retail loan portfolio and has not identified any loans which display indicators of impairment. The Bank estimates loan impairment based on the industry experience for similar loans and management estimates. Based on these factors the Bank has created 1% (2005: 0.3%) provision for collective impairment on its loan portfolio. Changes in these estimates would effect the loan impairment provision. For example, if the provision for collectively assessed assets differed by plus one percent, the total loan impairment on loans to customers as of 31 December 2006 would be AMD 50,255 thousand. Loan maturities The maturity of the Bank s loan portfolio is presented in note 37, which shows the remaining period from the reporting date to the contractual maturity of the loans comprising the loan portfolio. Due to the short-term nature of the credits issued by the Bank, it is likely that many of the Bank s loans to customers will be prolonged on maturity. Accordingly, the effective maturity of the loan portfolio may be significantly longer than the classification indicated based on contractual terms. 22

23 19 Financial investments available for sale Government securities of the Republic of Armenia 531,103 - Government securities of other countries - - Non-government securities of the Republic of Armenia 12, Non-government securities of other countries 1, Receivables on factoring operations - - Loss from adjustment of market price of securities - - Securities investment loss provision ,860 1,069 Non-government securities at AMD 12,415 thousand represent unquoted equity instruments classified as available-for-sale. There is no market for this investment and there have not been any recent transactions that provide evidence of the current fair value. In addition, discounted cash flow techniques yield a wide range of fair values due to the uncertainty regarding future cash flows in this industry. However, investments with a carrying amount of AMD 12,144 thousand were acquired during the current year and management believes it unlikely that the fair value at the year end would differ significantly from that carrying amount. 20 Amounts receivables from banking operations Dividends to be received - - Receivables for trustee management operations - - Letters of credit and bank guarantees - - Hedging derivatives - - Other receivables - - Provision for trade receivables and other assets Lease receivables Lease receivables - - Financial income not received - - Provision on trade receivables and other assets

24 22 Investments held to maturity Government securities of the Republic of Armenia - 49,358 Government securities of other countries - - Non-government securities of the Republic of Armenia - - Non-government securities of other countries - - Receivables on factoring operations - - Provision on impairment of investments held to maturity - - Loss on trade receivables and other assets ,358 22/1 Investments in the share capital of other entities Investments in share capital of other entities accounted for by the equity method - - Investments in share capital of other entities accounted for by the cost method 40 - Impairment provision of investments in the share capital of other entities Capital investments in property, plant and equipment and intangible assets of the Bank Capital investments in property, plant and equipment - - Capital investments in intangible assets - - Capital investments in leased property, plant and equipment 4,456-4,456-24

25 24 Property, plant and equipment and intangible assets 01/01/06-31/12/06 AMD 000 Land, buildings, fixtures and fittings Computer equipment Motor vehicles Other property, plant and equipment and intangible assets Total Assets in use Carrying value At the end of the prior year 592,819 48,804 7,142 28, ,314 Additions - 66,656 20,210 45, ,328 Disposals - (371) (5,021) (53) (5,445) Revaluation At the end of the current year 592, ,089 22,331 73, ,197 Depreciation Opening balance 78,298 38,119 6,992 5, ,667 Depreciation charge 20,625 10,649 1,374 8,873 41,521 Disposals - (593) (4,879) (53) (5,525) Revaluation Closing balance 98,923 48,175 3,487 14, ,663 Net carrying value At the end of the prior year 514,521 10, , ,647 At the end of the current year 493,896 66,914 18,844 59, ,534 Assets not in use Carrying value At the end of the prior year 34, ,987 Additions - 13,941-3,765 17,706 Disposals - (222) - - (222) At the end of the current year 34,816 13,890-3,765 52,471 Depreciation Opening balance Accumulated amortisation Disposals Closing balance Net carrying value At the end of the prior year 34, ,987 At the end of the current year 34,816 13,890-3,765 52,471 Revaluated assets On 19 May 2005 buildings were revalued by the Management based on the results of independent appraisals performed by independent valuers Fobics and M&M. The Management assessed that no significant changes occurred in the market value of the buildings from the revaluation date up to the year-end of The basis used for the appraisals was the market approach. The market approach was based upon an analysis of the results of comparable sales of similar buildings. The carrying value of buildings, if the buildings would not have been revalued, would be AMD 316,420 thousand (2005: AMD 341,979 thousand). 25

26 24/1 Deferred tax asset and liability Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax liabilities as of 31 December 2006 and These deferred tax liabilities have been recognised in these financial statements. These deductible temporary differences, which have no expiry dates, are listed below at their tax effected accumulated values: AMD 000 Assets Liabilities Net Placements with banks and other financial institutions Financial instruments at fair value through profit or loss - (46) (46) Property and equipment ,455 43,222 41,455 43,222 Other liabilities (2,656) (6,369) - - (2,656) (6,369) Tax loss carry-forwards (25,977) (230,622) - - (25,977) (230,622) Total deferred tax assets/(liabilities) (28,633) (237,037) 42,160 43,222 13,527 (193,815) Unrecognized deferred tax assets/(liabilities) - 237, ,037 Recognized net deferred tax (assets)/liabilities (28,633) - 42,160 43,222 13,527 43,222 The rate of tax applicable for deferred taxes was 20% (2005: 20%). The above deductible temporary differences do not expire under current tax legislation. The tax loss carry-forwards expire on 1 January Movement in temporary differences during the year AMD 000 Balance 1 January 2006 Recognised in income Balance 31 December 2006 Placements with banks and other financial institutions Financial instruments at fair value through profit or loss (46) 46 - Property and equipment 43,222 (1,767) 41,455 Other liabilities (6,369) 3,713 (2,656) Tax loss carry-forwards (230,622) 204,645 (25,977) Unrecognized deferred tax assets/(liabilities) 237,037 (237,037) - 43,222 (29,695) 13,527 26

27 25 Interest receivable Accrued interest 14,479 5,159 Interest income not recognised - (51) 14,479 5, Other assets Trade receivables 10, Advances to employees and suppliers 7, Advances to the budget and to state pension fund 241 2,823 Provision on trade receivables and other assets (258) (54) Expenses of future periods 7, Small value items 6,827 3,238 Securities sold under repurchase agreements - - Securities sold under currency swap agreements - - Other assets 11,572 37,525 44,121 43, Due to the Central Bank of Armenia Loans received from the CBA - - Repurchase and swap agreements with the CBA

28 28 Due to other banks Correspondent accounts and demand deposits from resident banks Correspondent accounts and demand deposits from non-resident banks - - Term deposits from resident banks - - Term deposits from non-resident banks - - Loans from resident banks - - Loans from non-resident banks - - Repurchase agreements and currency swaps with resident banks - - Repurchase agreements and currency swaps with non-resident banks - - Other amounts due to resident banks - - Other amounts due to non-resident banks Other borrowings Correspondent accounts and demand deposits from other resident financial organisations 81,200 - Correspondent accounts and demand deposits from other non-resident financial organisations - - Term deposits from other resident financial organisations 28,000 - Term deposits from other non-resident financial organisations - - Loans from other resident financial organisations - - Loans from other non-resident financial organisations - - Repurchase agreements and currency swaps with other resident financial organisations - - Repurchase agreements and currency swaps with other non-resident financial organisations ,200-28

29 30 Current accounts and deposits from customers Bank accounts and demand deposits from resident legal entities and institutions 1,966,524 1,324,649 Bank accounts and demand deposits from non-resident legal entities and institutions 5,554 6,879 Bank accounts and demand deposits from resident individuals 83,215 2,635 Bank accounts of resident sole proprietors 1,926 8,707 Bank accounts of non-resident individuals - - Demand deposits from other non-resident individuals - - Term deposits from resident legal entities and institutions 719,775 - Term deposits from non-resident legal entities and institutions - - Term deposits from resident individuals 188,376 - Term deposits from non-resident individuals - - Term deposits from other non-resident individuals - - Repurchase agreements and currency swaps with resident legal entities and institutions - - Repurchase agreements and currency swaps with non-resident legal entities and institutions - - Repurchase agreements and currency swaps with resident individuals - - Repurchase agreements and currency swaps with non-residents individuals - - 2,965,370 1,342,870 As at 31 December 2006 and 2005, current accounts and deposits from customers, which individually exceeded 10% of total current accounts and deposits from customers, were as follows: AMD 000 AMD 000 Flash Ltd 1,647, ,807 Defence Ministry of Republic of Armenia 381,026-2,028, , Lease payables Lease payables - - Financial expenses not incurred

30 32 Other securities issued by the Bank Interest bearing securities - - Non-interest bearing securities - - Other securities issued Amounts payable Dividends to be paid - - Payables on trustee management agreements - - Liabilities on deposits insurance Other payables 1,402,651-1,403, Other liabilities Settlement liabilities with payment documents - - Trade payables and transit accounts 99,024 93,709 Future period income 1, Other liabilities 50,433 65, , ,824 30

31 35 Share capital The decision on payment of annual dividends and approval of their amount is made only at the annual meeting of the shareholders. The shareholders make the decision regarding the payment of dividends at the suggestion of the Board of Directors of the Bank. Number of shares authorised by the Bank 6,480 5,580 Nominal value of the shares authorised by the Bank AMD 500,000 AMD 500,000 Number of shares issued and fully paid 6,480 5,580 Nominal value of shares issue and fully paid AMD 500,000 AMD 500,000 Number of shares issued but not allocated - - Nominal value of the shares issued but not allocated - - Number of shares allocated but not paid - - Nominal value of shares allocated but not paid - - Number of shares repurchased by the Bank - - Nominal value of shares repurchased by the Bank - - Number of shares outstanding at the beginning and end of the year - - Issued capital The authorised, issued and outstanding share capital comprises of 6,480 ordinary shares (2005: 5,580). All shares have a par value of AMD 500, ordinary shares were issued at their par value during 2006 (2005: 3,800). The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank. 36 Revaluation reserve Not realised profit/loss from investments available for sale - - Revaluation reserve of property, plant and equipment 172, ,890 Other reserves , ,890 36/1 Accumulated profit Unaudited Profit/loss of the current period 1,011,488 (2,405,565) Dividends - - Retained earnings/loss of the previous period (664,058) 1,741, ,430 (664,058) 31

32 37 Maturity analysis of assets and liabilities per balance sheet captions 31 December 2006 AMD 000 Overdue Demand Up to From 31 to From 91 days From 1 to More than No Total 30 days 90 days to 1 year 5 years 5 years maturity Assets Cash and balances with the CBA - 1,165, , ,565,079 Other balances with the CBA - 35, ,138 Precious metals bullions Accounts and deposits in precious metals Financial investments held for trading - - 1,402, ,402,651 Placements with other banks - 352, , ,123 Other placements , ,828 Loans to customers , , ,862 1,169, ,375-2,569,814 Financial investments available for sale , ,450 97,243 32,849-13, ,860 Amounts receivables from banking operations Lease receivables Investments held to maturity Investments in the share capital of other entities Capital investments in property, plant and equipment and intangible assets of the Bank ,456 4,456 Property, plant and equipment and intangible assets , ,005 Deferred tax asset Interest receivable , ,479 Other assets - - 1,871 6,325 3,597 3,525-28,803 44,121 Total - 1,552,688 3,361, ,363 1,015,702 1,205, , ,100 8,545,594 32

33 31 December 2006 AMD 000 Demand Up to 30 From 31 to From 91 days From 1 to More than No maturity Total days 90 days to 1 year 5 years 5 years Liabilities Due to the CBA Due to other banks Other borrowings 81,200 28, ,200 Current accounts and deposits from customers 2,057,220 68, , , ,965,370 Due to the Government of the Republic of Armenia Lease payables Deposit certificates issued by the Bank Other securities issued by the Bank Impairment losses Amounts payables 1,402, ,403,547 Deferred tax liability ,527 13,527 Interest payable 14 6,835 1, ,080 Other liabilities 77,109 60,410 1,896 4, , ,486 Total 3,618, , , , ,683 4,651,774 33

34 38 Currency analysis 31 December 2006 AMD 000 AMD Freely convertible currency Non-freely convertible currency Total Assets 7,571, ,262 15,734 8,545,594 Total liabilities 3,670, , ,651,774 Net foreign currency position 3,901,063 (22,974) 15,731 3,893, Interest rate risk AMD 000 Prior year Demand Current year Up to 1 month Prior Current year year 1 month to 3 months 3 months 1 year More than 1 year Prior Current Prior Current Prior Current year year year year year year Resources attracted In AMD In foreign currency Resources allocated In AMD In foreign currency

35 39/1 Credit risk AMD 000 Standard Controlled Nonstandard Doubtful Total Loans including: Loans to non-residents Loans to residents, including: Industry Agriculture Construction Transport and communication Trade Public food and other areas of service Financial sector, including: Resident banks Consumer loans including: Secured by real estate Secured by cars Other sectors of economy Trade receivables Investments The above table is not completed since the Bank has made assessment and provisioning against assets according to ASRA

36 40 Contingencies and commitments (i) Legal As of the reporting date Bank management is unaware of any actual, pending or threatened claims which would have a material impact on the Bank. (ii) Credit related commitments At any time the Bank has outstanding commitments to extend credit. These commitments take the form of approved loans and overdraft facilities. Outstanding loan commitments have a commitment period that does not extend to beyond the normal underwriting and settlement period of two years. The Bank provides financial guarantees to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year. The total outstanding contractual amounts of loan commitments and guarantees does not necessarily represent future cash requirements, as many of these commitments may expire or terminate without being funded. Breakdown of credit related commitments is provided below: Loan and credit line commitments 8,158 - Credit card commitments 14,141 - Guarantees and letters of credit 19,250-41,549 - (iii) Tax contingencies The taxation system in the Republic of Armenia is relatively new and is characterised by frequently changing legislation, which is often unclear, contradictory, and subject to interpretations. Taxes are subject to review and investigation by a number of authorities, who are enabled by law to impose severe fines, penalties and interest charges. These facts may create tax risk in Armenia substantially more significant than in other countries. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation. However, the relevant authorities may have differing interpretations and the effects could be significant. 36

37 41 Concentration of assets, liabilities and off-balance sheet items AMD 000 Residents Non-residents Total Assets Cash and balances with the CBA 1,565,079-1,565,079 Other balances with the CBA 35,138-35,138 Precious metals bullions Accounts and deposits in precious metals Financial instruments held for trading 1,402,651-1,402,651 Placements with other banks 440, , ,123 Other placements 909, ,828 Loans and other advances to customers 2,569,814-2,569,814 Investments available-for-sale 544, ,860 Amounts receivable from banking operations Lease receivables Investments held-to-maturity Investments in share capital of other entities Capital investments in property, plant and equipment - and intangible assets of the Bank 4,456 4,456 Property, plant and equipment and intangible assets 692, ,005 Deferred tax asset Interest receivable 14,479-14,479 Other assets 37,392 6,729 44,121 Total assets 8,215, ,767 8,545,594 Liabilities Due to the CBA Due to other banks Other borrowings 109, ,200 Current accounts and deposits from customers 2,957,890 7,480 2,965,370 Due to the Government of the Republic of Armenia Lease payables Deposit certificates issued by the Bank - Other securities issued by the Bank Provisions Amounts payable 1,403,547-1,403,547 Deferred tax liability 13,527-13,527 Interest payable 9,080-9,080 Other liabilities 111,736 38, ,486 Total liabilities 4,605,544 46,230 4,651,774 Off-balance sheet items Loan guarantees Other guarantees 19,250-19,250 Unused part of credit lines 8,158-8,158 Unused part of credit cards 14,141-14,141 Unused part of overdrafts Letters of credit Total off-balance sheet items 41,549-41,549 37

38 42 Assets pledged Collateral received State securities - - Other securities - - Precious metals bullions - - Jewellery, scrap-gold, precious gems 86,805 - Real estate and other property, plant and equipment 4,851, ,539 Finished production and goods 361,151 1,785,354 Cash 300,250 - Other collateral 25,300 - Collateral provided State securities (book values), which by par value amount to Related parties Control relationships The Bank s Parent is Flash Ltd. The party with ultimate control over the Bank is Mr. Barsegh Beglaryan, owner of Flash Ltd, which owns 100% of shares of the Bank. No publicly available financial statements are produced by the Bank s Parent, ultimate controlling party or any other intermediate controlling party. Transactions with members of the Board of Directors and the Management Board Members of the Board of Directors and the Management Board of the Bank and their immediate relatives control 100% (2005: 100%) of the voting shares of the Bank. Total remuneration included in employee compensation (refer note 10): AMD 000 AMD 000 Unaudited Members of the Board of Directors 2,464 1,230 Members of the Management Board 7,718 4,440 10,182 5,670 The above amounts include all benefits in respect of members of the Board of Directors and the Management Board. The outstanding balances and average interest rates as of 31 December 2006 with members of the Board of Directors and the Management Board are as follows: 38

39 2006 AMD 000 Average Interest Rate 2005 AMD 000 Average Interest Rate Balance sheet Assets Loans to customers 2,352 12% - - Amounts included in the income statement in relation to transactions with members of the Board of Directors and the Management Board are as follows: AMD 000 AMD 000 Unaudited Income statement Interest income 19 - Transactions with the entities under common control of the Bank s ultimate controlling party The outstanding balances and the related average interest rates as of 31 December 2006 and related income statement amounts of transactions for the year ended 31 December 2006 with entities under common control are as follows: Balance sheet Assets Loans to customers - Principal balance - Provision for impairment Parent company Other Total AMD 000 Average Interest Rate AMD 000 Average Interest Rate AMD ,064 (191) 14% - 19,064 (191) Liabilities Current accounts and deposits from customers 1,647, % 4, % 1,652,240 Income statement Interest income - - 1,129-1,129 Interest expense Fee and commission income 21, ,634 General and administrative expenses ,558-46,558 39

40 The outstanding balances and the related average interest rates as of 31 December 2005 and related income statement amounts of transactions for the year ended 31 December 2005 with entities under common control are as follows: Parent company Other Total AMD 000 Average Interest Rate AMD 000 Average Interest Rate AMD 000 Balance sheet Liabilities Current accounts and deposits from customers 940, % ,807 Off balance sheet items Guarantees 29, ,200 Income statement Fee and commission income (unaudited) 9, ,115 General and administrative expenses (unaudited) ,579-31, Cash and cash equivalents Cash and cash equivalents at the end of the financial year as shown in the statement of cash flow is composed of the following items: AMD 000 AMD 000 Cash 258, ,984 Due from Central Bank 1,341,546 1,192,366 Frozen amount (35,138) - Placements with banks and other financial institutions (see note 16) 352, ,111 1,917,570 1,820,461 40

41 45 Fair value of financial instruments The Bank has performed an assessment of its financial instruments, as required by ASRA 32 Financial Instruments: Disclosure and Presentation, are as follows: Fair value Carrying value Fair value Carrying value Assets Cash and balances with the Central Bank of Armenia 1,565,079 1,565,079 1,459,337 1,459,337 Other balances with the Central Bank of Armenia 35,138 35,138 Financial investments held for trading 1,402,651 1,402, Placements with other banks 763, , , ,111 Other placements 908, , Loans to customers 2,569,814 2,569,814 1,475,993 1,475,993 Financial investments available for sale 544, ,860 1,069 1,069 Investments held to maturity ,358 49,358 Investments in the share capital of other entities Capital investments in property, plant and equipment and intangible assets of the Bank 4,456 4, Property, plant and equipment and intangible assets 692, , , ,634 Interest receivable 14,479 14,479 5,108 5,108 Other assets 44,121 44,121 43,795 43,795 Liabilities Due to other banks Other borrowings 109, , Current accounts and deposits from customers 2,965,370 2,965,370 1,342,870 1,342,870 Due to the Government of the Republic of Armenia (RA) Impairment losses Amounts payable 1,403,547 1,403, Deferred tax liability 13,527 13,527 43,222 43,222 Interest payable 9,080 9, Other liabilities 150, , , ,824 41

42 46 Risk management (i) Management of risk is fundamental to the business of banking and is an essential element of the Bank s operations. The major risks faced by the Bank are those related to credit exposures, liquidity and movements in interest rates and foreign exchange rates. These risks are managed in the following manner: Credit risk Credit risk is the risk of financial loss occurring as a result of default by a borrower or counterparty on their obligation to the Bank. The Bank has developed policies and procedures for the management of credit exposures, including guidelines to limit portfolio concentration and the establishment of a Credit Committee which actively monitors the Bank s credit risk. The Bank s credit policy is reviewed and approved by the Board of Directors. (ii) Interest rate risk Interest rate risk is measured by the extent to which changes in market interest rates impact on margins and net interest income. To the extent the term structure of interest bearing assets differs from that of liabilities, net interest income will increase or decrease as a result of movements in interest rates. The Bank s interest rate policy is reviewed and approved by the Board of Directors. See note 39 Interest rate risk. (iii) Liquidity risk The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honour all cash flow obligations as they become due. The Bank s liquidity policy is reviewed and approved by the Board of Directors. See note 37 Maturity analysis. (iv) Foreign exchange rate risk The Bank has assets and liabilities denominated in several foreign currencies. Foreign currencies risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank s foreign currency policy is reviewed and approved by the Board of Directors. 42