We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Transcription

1 INDEPENDENT AUDITORS REPORT To the Management of Bank Melli Iran Baku branch: Report on Financial Statements We have audited the accompanying financial statements of Bank Melli Iran Baku branch (the Bank ), which comprise the statement of financial position as at 31 December 2015, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing ( ISA ). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

2 Basis for Qualified Opinion Bank s provision for impairment losses against the correspondent accounts and short-term deposits placed with the resident banks was not sufficient in accordance with IFRS. Should the Bank be able to provide calculation of impairment losses in accordance with IFRS, it would record additional impairment loss provision in the amount of AZN 12,598,174. Qualified Opinion In our opinion, except for the potential impact of the aforementioned qualification, the financial statements present fairly, in all material respects the financial position of the Bank as at 31 December 2015, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without further qualifying our opinion, we draw attention to Note 11 to the accompanying financial statements. The Bank s building in the net book value of AZN 9,295,964 was dismantled based on decree of the Major of Baku. The Bank and the State Authorities have not yet negotiated on the price of compensation though more than one year have passed. The Bank s Management believes that their claim for damage will be fulfilled at the court. Our opinion is not qualified in respect of this matter. Baku, the Republic of Azerbaijan 31 March, 2016

3 Statement of Financial Position Note 31 December December 2014 ASSETS Cash and current placements with other banks 7 25,721,933 20,636,475 Due from banks and other financial institutions 8 45,939,941 25,055,261 Loans to customers 9 10,235,220 5,689,869 Financial assets held for trading 10 5,419,218 8,995,116 Investment securities held to maturity 10-2,504,676 Premises and equipment 11 3,795,027 13,214,877 Intangible assets 11 33,493 21,425 Other assets 12 9,720, ,141 TOTAL ASSETS 100,865,429 76,584,840 LIABILITIES Due to banks and other financial institutions 13 46,917,755 24,595,798 Customer accounts 14 2,708,850 1,293,936 Deferred tax liabilities 21 33,034 42,157 Other liabilities 15 30,046 28,643 TOTAL LIABILITIES 49,689,685 25,960,534 EQUITY Share capital 16 51,433,671 51,433,671 Revaluation surpluss 22,770 30,477 Accumulated deficit (280,697) (839,842) TOTAL EQUITY 51,175,744 50,624,306 TOTAL EQUITY AND LIABILITIES 100,865,429 76,584,840 On behalf of the Management Board: Najafimarganmaskan Asghar Khalil Deputy Branch Manager Elkhan Rahimli Chief Accountant 31 March March 2016 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan 3 The notes on pages 7-49 form an integral part of these financial statements.

4 Statement of Comprehensive Income Note Year ended 31 December 2015 Year ended 31 December 2014 Interest income 17 3,053,755 2,004,549 Interest expense 17 (25,462) (8,153) Net interest income 3,028,293 1,996,396 (Provision for impairment)/reversal of provision, net (4,778,421) (350,204) Net interest income after provision for loan impairment (1,750,128) 1,646,192 Gain from operations in foreign currencies - less losses 18 3,736,227 (24,195) Fee and commission income , ,321 Fee and commission expense 19 (14,251) (37,353) Realized loss on trade securities designated at fair value through profit or loss (16,587) (3,547) Loss on disposal of property, plant and equipment 687 (300) Other income Operating income 2,066,813 1,740,211 Operating expenses 20 (1,526,123) (1,638,243) Profit before income tax 540, ,968 Income tax benefit/(expense) 21 7,715 (41,412) NET PROFIT FOR THE YEAR 548,405 60,556 Gains on property revaluation 1,625 36,492 Income tax benefit/(expense) relating to components of other comprehensive income 1,408 (7,298) Other comprehensive income for the year 3,033 29,194 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 551,438 89,750 On behalf of the Management Board: Najafimarganmaskan Asghar Khalil Deputy Branch Manager Elkhan Rahimli Chief Accountant 31 March March 2016 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan 4 The notes on pages 7-49 form an integral part of these financial statements.

5 Statement of Changes in Equity Share Capital Accumulated deficit Other Reserves Total Equity Balance at 01 January ,408,701 (902,598) 3,483 21,509,586 Net profit for the year - 60,556-60,556 Gain on property revaluation, net of taxation ,194 29,194 Total comprehensive income for the year - 60,556 29,194 89,750 Increase of share capital 29,024, ,024,970 Transfer of revaluation surpluss - 2,200 (2,200) - Balance at 31 December ,433,671 (839,842) 30,477 50,624,306 Net profit for the year - 548, ,405 Other comprehensive income - (198) 3,231 3,033 Total comprehensive income for the year - 548,207 3, ,438 Transfer of revaluation surpluss - 10,938 (10,938) - Balance at 31 December ,433,671 (280,697) 22,770 51,175,744 On behalf of the Management Board: Najafimarganmaskan Asghar Khalil Deputy Branch Manager Elkhan Rahimli Chief Accountant 31 March March 2016 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan 5 The notes on pages 7-49 form an integral part of these financial statements.

6 Statement of Cash Flows CASH FLOW FROM OPERATING ACTIVITIES Note Year ended 31 Year ended 31 December December Profit/(loss) before income tax 540, ,968 Adjustments for: Provision expense 4,512, ,429 Amortisation and depreciation expense 177, ,097 Loss on disposal of property, plant and equipment (687) 300 Translation gain on foreign exchange operations (3,727,590) (15,139) Cash flow from operating activities before changes in operating assets and liabilities 1,501, ,655 (Increase)/decrease in operating assets: Due from banks and other financial institutions (8,861,897) (220,433) Loans to customers (4,875,621) (969,184) Financial assets held for trading 3,575,899 (8,995,116) Investment securities 2,504,676 (2,504,676) Other assets (203,507) 112,399 Increase/(decrease) in operating liabilities: Due to banks and other financial institutions 79,151 (21,643,818) Customer Accounts 191,791 (1,492,610) Other liabilities (2,116) (17,614) Cash inflow from operating activities before taxation: (6,089,631) (35,116,397) Income tax paid - (10,645) Net cash from operating activities (6,089,631) (35,127,042) CASH FLOW FROM INVESTING ACTIVITIES Purchase of premises and equipment (39,602) (3,522) Purchase of intangible assets (28,000) (1,711) Proceeds from sale of property, plant and equipment 4,671 - Net cash used in investing activities (62,931) (5,233) CASH FLOW FROM FINANCING ACTIVITIES Increase of share capital - 29,024,970 Net cash used in financing activites - 29,024,970 Effect of changes in foreign exchange rates on cash and cash equivalents NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 11,238,020 (960,806) 5,085,458 (7,068,111) CASH AND CASH EQUIVALENTS, beginning of the year 7 20,636,475 27,704,586 CASH AND CASH EQUIVALENTS, end of the year 7 25,721,933 20,636,475 On behalf of the Management Board: Najafimarganmaskan Asghar Khalil Deputy Branch Manager Elkhan Rahimli Chief Accountant 31 March March 2016 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan 6 The notes on pages 7-49 form an integral part of these financial statements.

7 1 Introduction These financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2015 for Bank Melli Iran Baku Branch (the Bank ), which was incorporated in Azerbaijan in 1993.The Bank s principal business activity is commercial and retail banking operations. Basic activities.the Bank s primary business consists of bank services for legal and individual persons. The Bank is regulated by the Central Bank of the Republic of Azerbaijan (the CBAR ) and conducts its business under general license number 124. As at 31 December 2015, the following shareholders owned the issued shares of the Bank: 31 December December 2014 Shareholders Country % % Bank Melli Iran Iran Islamic Republic Registered address and place of business. The Bank s registered address is: Nobel ave. 23, AZ 1025 Baku, the Republic of Azerbaijan Presentation currency. These financial statements are presented in Azerbaijani Manats ( AZN ). The Azerbaijani Manat ( AZN ) is the official currency of Republic of Azerbaijan. 2 Operating Environment of the Bank Azerbaijan displays certain characteristics of an emerging market. Tax, currency and customs legislation is subject to varying interpretations and contributes to the challenges faced by companies operating in the country. The ongoing uncertainty and volatility of the financial markets, but also in the context of the developments in Eastern Ukraine and the Middle East, the devaluation of a number of currencies in the region and other risks, such as recent decrease in global oil prices, could have significant negative effects on the country s financial and corporate sectors. Management is unable to predict all developments which could have an impact on the country s economy and consequently what effect, if any, they could have on the future financial position of the Bank. Management believes it is taking all the necessary measures to support the sustainability and development of the Bank s business. 3 Summary of Significant Accounting Policies Basis of Preparation. These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the historical cost convention. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value, or amortized cost as described below. 7

8 3 Summary of Significant Accounting Policies (Continued) Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Bank may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm s length basis. Valuation techniques such as discounted cash flows models or models based on recent arms length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortized cost is the amount at which the financial instrument was recognized at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortization of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortized discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related balance sheet items. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest reprising date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortized over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate (refer to income and expense recognition policy). 8

9 3 Summary of Significant Accounting Policies (Continued) Initial recognition of financial instruments. Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date that the Bank commits to deliver a financial asset. All other purchases are recognized when the entity becomes a party to the contractual provisions of the instrument. Following their initial recognition, the financial assets and financial liabilities are subsequently measured at amortized cost using the effective interest rate method. Derecognition of financial assets. The Bank derecognizes financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortized cost. Mandatory cash balances with the CBAR. Mandatory cash balances in AZN and foreign currency held with the CBAR are carried at amortized cost and represent non-interest bearing mandatory reserve deposits, which are not available to finance the Bank s day-to-day operations. Due from other banks. Amounts due from other banks are recorded when the Bank advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates and the Bank has no intention of trading unquoted non-derivative receivables. Amounts due from other banks are carried at amortized cost. Loans and advances to customers. Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances to customers are carried at amortized cost. Impairment of financial assets carried at amortized cost. Impairment losses are recognized in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. 9

10 3 Summary of Significant Accounting Policies (Continued) If the Bank determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Bank considers whether a financial asset is impaired is its overdue status and reliability of related collateral, if any. The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred: - Any installment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - The borrower experiences a significant financial difficulty as evidenced by the borrower s financial information that the Bank obtains; - The borrower considers bankruptcy or a financial reorganization; - There is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or - The value of collateral significantly decreases as a result of deteriorating market conditions. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortized cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognized through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 10

11 3 Summary of Significant Accounting Policies (Continued) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account through profit or loss. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Credit related commitments. The Bank enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognized at their fair value, which is normally evidenced by the amount of fees received. This amount is amortized on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At each balance sheet date, the commitments are measured at the higher of (i) the remaining unamortized balance of the amount at initial recognition and (ii) the best estimate of expenditure required settling the commitment at the balance sheet date. Premises and equipment. Premises are stated at revalued amounts, as described below, less accumulated depreciation and provision for impairment, where required. All other items of premises and equipment are stated at cost less accumulated depreciation and impairment losses, if any. The costs of minor repairs and maintenance are expensed when incurred. The cost of replacing major parts or components of premises and equipment items are capitalized and the replaced part is retired. If impaired, premises and equipment are written down to the higher of their value in use and fair value less costs to sell. The decrease in carrying amount is charged to profit or loss to the extent it exceeds the previous revaluation surplus in equity. An impairment loss recognized for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognized as profit or loss from disposal of fixed assets. Depreciation. Depreciation on other items of premises and equipment is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives as follows: Premises 2 %; Computers and communication equipment 20%; Furniture, fixtures and other 20%; Vehicles 15%; Other fixed assets 20%. 11

12 3 Summary of Significant Accounting Policies (Continued) The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Bank expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Intangible assets. All of the Bank s intangible assets have definite useful life and primarily include capitalized computer software. Acquired computer software licenses are capitalized based on the costs incurred to acquire and bring to use the specific software. Development costs that are directly associated with identifiable and unique software controlled by the Bank are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is probable. Capitalized costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalized computer software is amortized on a straight line basis over expected useful lives of 10 years. Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced to the Bank by counterparty banks. The non-derivative liability is carried at amortized cost. If the Bank purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from retirement of debt. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortized cost. Other borrowed funds. Other borrowed funds include loans from resident and non-resident financial institutions with fixed maturities and fixed or floating interest rates. Term borrowings are carried at amortised cost. Income taxes. Income taxes have been provided for in the financial statements in accordance with Azerbaijani legislation enacted or substantively enacted by the end of the reporting period. The income tax charge comprises current tax and deferred tax and is recognized in the statement of comprehensive income except if it is recognized directly in the statement of other comprehensive income because it relates to transactions that are also recognized, in the same or a different period, directly in the statement of other comprehensive income. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits for the current and prior periods. Taxable profits are based on estimates if financial statements are authorized prior to filing relevant tax returns. Taxes, other than on income, are recorded within administrative and operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. 12

13 3 Summary of Significant Accounting Policies (Continued) In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilized. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available, against which the deductions can be utilized. Income and expense recognition. Interest income and expense are recorded in the statement of comprehensive income for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Bank to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Bank does not designate loan commitments as financial liabilities at fair value through profit or loss. When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Foreign currency translation. Institutions of the Bank's functional currency of the primary economic environment in which the entity is the currency. The Bank s functional and presentation currency is the national currency of the Republic of Azerbaijan, Azerbaijani Manats ( AZN ). Monetary assets and liabilities are translated into entity s functional currency at the official exchange rate of the CBAR at the respective balance sheet dates. Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities into Bank s functional currency at year-end official exchange rates of the CBAR are recognized in profit or loss. Translation at year-end rates does not apply to non-monetary items, including equity investments. Effects of exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or loss. Rate of exchange as at 31 December 2015: 1 USD = AZN (31 December 2014: 1 USD = AZN) 1 EUR = AZN (31 December 2014: 1 EUR = AZN) 13

14 3 Summary of Significant Accounting Policies (Continued) Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously. Earnings per share. Preference shares are not redeemable and are considered to be participating shares. Earnings per share is determined by dividing the profit or loss attributable to owners of the Bank by the weighted average number of participating shares outstanding during the reporting year. Staff costs and related contributions. Wages, salaries, contributions to the Azerbaijan Republic state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Bank. 4 Critical Accounting Estimates and Judgments In Applying Accounting Policies The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Bank regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in the statement of comprehensive income the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Initial recognition of related party transactions. In the normal course of business the Bank enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 27. Tax legislation. Azerbaijani tax, currency and customs legislation is subject to varying interpretations. 14

15 5 Adoption of New or Revised Standards and Interpretations The following new standards and interpretations became effective for the Bank from 1 January 2015: Amendments to IAS 19, Defined Benefit Plans: Employee Contributions. IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after 1 January 2015, however, earlier application is permitted (1 July 2014). This amendment is not relevant to the Bank, since none of the entities within the Bank has defined benefit plans with contributions from employees or third parties. Annual Improvements Cycle The following amendments are effective for annual periods beginning on or after 1 February 2015, however, earlier application is permitted (1 July 2014): IFRS 2, Share-based Payment. This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions. The clarifications are consistent with how the Bank has identified any performance and service conditions which are vesting conditions in previous periods. In addition, the Bank had not granted any awards during the second half of 2014 and Thus, these amendments did not impact the Bank s financial statements or accounting policies. IFRS 3, Business Combinations. This amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IAS 39. This amendment did not impact the Bank s accounting policy. IFRS 8, Operating Segments. These amendments are applied retrospectively and clarify that: - An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are similar. - The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities. This amendment did not impact the Bank s accounting policy. IAS 16, Property, Plant and Equipment and IAS 38 Intangible Assets. The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. 15

16 5 Adoption of New or Revised Standards and Interpretations (Continued) In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset. This amendment did not have any impact to the revaluation adjustments recorded by the Bank during the current period. IAS 24, Related Party Disclosures. The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Bank as it does not receive any management services from other entities. Annual Improvements Cycle The following amendments are effective for annual periods beginning on or after 1 January 2015, however, earlier application is permitted (1 July 2014): IFRS 3, Business Combinations. The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that: - Joint arrangements, not just joint ventures, are outside the scope of IFRS 3. - This scope exception applies only to the accounting in the financial statements of the joint arrangement itself. The Bank is not a joint arrangement, and thus this amendment is not relevant for the Bank. IFRS 13, Fair Value Measurement. The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IAS 39. The Bank does not apply the portfolio exception in IFRS 13. IAS 40, Investment Property. The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. This amendment did not impact the accounting policy of the Bank. 6 New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2015 or later and which the Bank has not early adopted. IFRS 9, Financial Instruments (2014). The finalized version of IFRS 9 was issued on 19 November 2003 and supersedes IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013) and depending on the chosen approach to applying, the transition can involve one or more than one date of initial application for different requirements. Normally it becomes effective for annual periods beginning on or after 1 January

17 6 New Accounting Pronouncements (Continued) The standard contains requirements in the following areas: - Classification and measurement. Financial assets are classified by reference to the business model within which they are held and their contractual cash flow characteristics. It introduces a fair value through other comprehensive income category for certain debt instruments. Financial liabilities are classified in a similar manner to under IAS 39, however, there are differences in the requirements applying to the measurement of an entity s own credit risk. - Impairment. It introduces an expected credit loss model for the measurement of the impairment of financial assets, so it is no longer necessary for a credit event to have occurred before a credit loss is recognized. - Hedge accounting. Introduce a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and nonfinancial risk exposures. - Derecognition. The requirements for the derecognition of financial assets and liabilities are carried forward from IAS 39. IFRS 14, Regulatory Deferral Accounts. IFRS 14 was issued on 30 January 2014 and will be applicable for annual periods beginning on and after 1 January It permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for regulatory deferral account balances in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. IFRS 14 cannot be applied by entities that have already adopted IFRS. IFRS 15, Revenue from Contracts with Customers. IFRS 15 was issued on 28 may 2014 and will be applicable for annual periods beginning on and after 1 January It provides a single, principle based five-step model to be applied to all contracts with customers. The five steps in the model are as follows: - Identify the contract with the customer; - Identify the performance obligation in the contract; - Determine the transaction price; - Allocate the transaction price to the performance obligations in the contracts; - Recognize the revenue when (or as) the entity satisfies a performance obligation. IFRS 16, Leases. IFRS 16 was issued in January 2016 and specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard will be applicable for annual periods beginning on and after 1 January Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Bank s financial statements. 17

18 7 Cash and Current Placements with Other Banks 31 December December 2014 Cash on hand 1,055, ,582 Cash balances with the CBAR 11,070,658 12,500,168 Correspondent accounts and overnight placements with other banks: - The Republic of Azerbaijan 4,217,627 1,885,541 - Other countries 9,973,802 5,725,505 Less: provision for imapirment (595,223) (329,321) Total cash and current placements with other banks 25,721,933 20,636,475 The balances with the Central Bank of the Azerbaijan Republic as at 31 December 2015 and 31 December 2014 include AZN 14,028 and AZN 36,565 respectively, which represent the mandatory minimum reserve deposits with the CBAR. Included in correspondent accounts with other banks AZN 457,889 represents correspondet accounts placed with Debutbank OJSC for which the Bank recorded 100% impairment provision. Moreover correspondent accounts with other banks include amounts of AZN 9,692 placed in Texnikabank OJSC and AZN 1,843,907 placed in Atrabank OJSC. As disclosed in Note 28, Events After the Reporting Period, the licenses of Texnikabank OJSC and Atrabank OJSC were cancelled by the CBAR in Impairment loss provision against the correspondent accounts placed with these banks amounts to AZN 18,536 which comprises only 1 percent of gross amounts receivable. The analysis by credit quality of cash and current placements with other banks at 31 December 2015 is as follows: Correspondent Cash on hand with other banks Cash balances accounts and with the CBAR overnight placements Total Current and not impaired - Cash on hand 1,055, ,055,069 - The Republic of Azerbaijan - 11,070,658 3,722,142 14,792,800 - Other countries - - 9,874,064 9,874,064 Total current and not impaired 1,055,069 11,070,658 13,596,206 25,721,933 Total cash and current placements with other banks 1,055,069 11,070,658 13,596,206 25,721,933 The analysis by credit quality of cash and current placements with other banks at 31 December 2014 is as follows: 18

19 7 Cash and Current Placements with Other Banks (Continued) Cash on hand Cash balances with the CBAR Correspondent accounts and overnight placements with other banks Total Current and not impaired - Cash on hand 854, ,582 - The Republic of Azerbaijan - 12,500,168 1,556,220 14,056,388 - Other countries - - 5,725,505 5,725,505 Total current and not impaired 854,582 12,500,168 7,281,725 20,636,475 Total cash and current placements with other banks 854,582 12,500,168 7,281,725 20,636,475 8 Due from Banks and Other Financial Institutions 31 December December 2014 Short-term deposits in Resident banks 47,394,050 26,404,931 Less: provision for imapirment (1,454,109) (1,349,670) Total due from banks and other financial institutions 45,939,941 25,055,261 The balance values of the amounts due from banks as of 31 December 2015 and 31 December 2014 approximate their fair values. The approximate fair value of the amounts due from banks as of 31 December 2015 is AZN 45,939,941 (2014: AZN 25,055,261). In 2015, the Bank placed two deposits in the total amount of AZN 5,000,000 in Texnikabank OJSC at an annual interest rate of 7.0 % for a period of 6 months. Later these deposits were prolonged to another sixmonth period. In 2015, the Bank placed a deposit in the amount of AZN 1,000,000 in Texnikabank OJSC at an annual interest rate of 5.0 % for a period of 6 months. In 2015, the Bank placed two deposits in the total amount of AZN 5,000,000 in Texnikabank OJSC at an annual interest rate of 5.5 % for a period of 1 month. The deposits have no outstanding amount as at 31 December In 2015, the Bank placed two deposits in the total amount of AZN 2,000,000 in Atrabank OJSC at an annual interest rate of 6.0 % for a period of 6 months. Later these deposits were prolonged to another sixmonth period. In 2014, the Bank placed two deposits in the total amount of AZN 5,000,000 in Texnikabank OJSC at an interest rate of 5.5 % for a period of 6 months. Later, in 2015, these deposits were prolonged to another six-month period and have no outstanding amount as at 31 December

20 8 Due from Banks and Other Financial Institutions (Continued) In 2014, the Bank placed a deposit in the amount of AZN 1,000,000 in Atrabank OJSC at an interest rate of 6 % for a period of 6 months. Later, in 2015, this deposit was prolonged to another six-month period and has no outstanding amount as at 31 December As disclosed in Note 28, Events After the Reporting Period, the licenses of Texnikabank OJSC and Atrabank OJSC were cancelled by the CBAR in Impairment loss provision against the deposits placed with these banks amounts to AZN 80,333 which comprises only 1 percent of gross amounts receivable. Should the abovementioned banks be not able to repay the deposits, the Bank would incur significant impairment losses. Other deposits placed in 2015: The Bank placed a deposit in the amount of AZN 300,000 in Nikoil Bank OJSC at an annual interest rate of 7.0 % for a period of 6 months. The Bank placed two deposits in the total amount of EUR 2,000,000 in Zaminbank OJSC at an annual interest rate of 5.0 % for a period of 6 months. The Bank placed a deposit in the amount of AED 7,346,000 in Bank Melli Iran Dubai Branch at an annual interest rate of 0.65 % for a period of 6 months. The Bank placed nine deposits in the total amount of AZN 9,000,000 in Mughanbank OJSC at an annual interest rate of 5.0 % for a period of 6 months. Later these deposits were prolonged to another six-month period. Other deposits placed in the previous years: The Bank placed a deposit in the amount of AZN 4,000,000 in Zaminbank OJSC at an interest rate of 5.5 % for a period of 6 months. Later this deposit was prolonged to another six-month period. The Bank placed deposits in the total amount of USD 12,500,000 in Birlikbank OJSC whose license cancelled by the Central Bank of Azerbaijan. Due to the fact that this amount is reimbursed by the deposits from the Head Office of Bank Melli Iran, as at 31 December 2015 the Bank did not make any provision for impairment against these deposits. Information on the deposits in the same amount placed by the Head Office of Bank Melli Iran is disclosed in Note 13. Should Birlikbank OJSC be not able to repay the mentioned deposits, the Bank would incur significant impairment losses. The Bank had placed the total amounts of AZN 40,000 in Debutbank OJSC. As at 31 December 2015, the Bank s provision for impairment against these deposits amounts to 100%. As at 31 December 2015, the Bank s term deposits with Royal Bank amount to AZN 4,000,000. Royal Bank provided collateral against these deposits which was valued at a market value of AZN 4,300,000 by an appraiser firm in June, At 31 December 2015, the Bank made provision for impairment against these deposits about 30% (31 December 2014: 30%). Taking into account that Royal Bank s license has been cancelled and it ceased its operations, as well as there are inherent risks in determination of market value of the collateral, the collateral agreement has been cancelled by the court, the Bank may incur impairment losses in the future. 20