Tirana Bank sh.a. Financial Statements as of and for the year ended 31 December 2016

Transcription

1 Financial Statements as of and for the year ended 31 December 2016

2 TABLE OF CONTENT AUDITOR S REPORT STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 8 STATEMENT OF FINANCIAL POSITION 9 STATEMENT OF CHANGES IN EQUITY 10 STATEMENT OF CASH FLOWS 11 1 CORPORATE INFORMATION 12 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance Basis of preparation 12 a) Position of the Group SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of preparation (continued) 13 a) Position of the Group (continued) 13 b) Position of the Bank SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign currency translation 14 Transactions and balances Financial instruments initial recognition and subsequent measurement SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments initial recognition and subsequent measurement (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments initial recognition and subsequent measurement (continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments initial recognition and subsequent measurement (continued) Repurchase and reverse repurchase agreements Determination of fair value 17 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Determination of fair value (continued) Impairment of financial assets 18 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of financial assets (continued) 19 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of financial assets (continued) Leasing Revenue recognition 20 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue recognition (continued) 21 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and cash equivalents Property and equipment Intangible assets Intangible assets (continued) Investment properties 23 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of non-financial assets 24

3 2.15 Financial guarantee contracts Pensions and other post-employment benefits Provisions 24 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Provisions (continued) Income tax Income tax (continued) 26 3 FINANCIAL RISK MANAGEMENT Credit risk FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit risk measurement FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit risk measurement (continued) Risk limit control and mitigation policies Risk limit control and mitigation policies (continued) Impairment and provisioning policies Maximum exposure to credit risk before collateral held or other credit enhancements FINANCIAL RISK MANAGEMENT (CONTINUED) Credit Risk (continued) Loans and advances FINANCIAL RISK MANAGEMENT (CONTINUED) Credit Risk (continued) Loans and advances (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Credit Risk (continued) Loans and advances (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Credit Risk (continued) Loans and advances (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Credit Risk (continued) Cash and balances with Central Bank Debt securities, treasury bills and other eligible bills Concentration of risks of financial assets with credit risk exposure Market risk Foreign exchange risk FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (continued) Foreign exchange risk FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (continued) Foreign exchange risk (continued) 39 3

4 3.2.2 Interest rate risk FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (continued) Interest rate risk (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (continued) Interest rate risk (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (continued) Interest rate risk (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity risk management process FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity risk management process (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity risk management process (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity risk management process (continued) Fair value of financial assets and liabilities FINANCIAL RISK MANAGEMENT (CONTINUED) Fair value of financial assets and liabilities (continued) FINANCIAL RISK MANAGEMENT (CONTINUED) Fair value of financial assets and liabilities (continued) Capital management FINANCIAL RISK MANAGEMENT (CONTINUED) Capital management (continued) 50 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED) 51 5 ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS 51 5 ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (CONTINUED) 52 5 ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (CONTINUED) ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (CONTINUED) 54 6 INTEREST INCOME 55 7 INTEREST EXPENSE 55 8 NET FEES AND COMMISSION INCOME 55 9 PERSONNEL EXPENSES OTHER OPERATING EXPENSES INCOME TAX EXPENSE 56 4

5 11. INCOME TAX EXPENSE (CONTINUED) INCOME TAX EXPENSE (CONTINUED) CASH AND BALANCES WITH THE BANK CASH AND BALANCES WITH THE BANK (CONTINUED) LOANS AND ADVANCES TO CUSTOMERS LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) FINANCIAL ASSETS AVAILABLE FOR SALE FINANCIAL ASSETS HELD TO MATURITY INVESTMENT PROPERTIES Fair value measurement of the Bank's investment properties INTANGIBLE ASSETS PROPERTY AND EQUIPMENT OTHER ASSETS DUE TO BANKS DUE TO CUSTOMERS OTHER LIABILITIES PROVISIONS PAID-IN CAPITAL AND SHARE PREMIUM OTHER RESERVES DIVIDEND PER SHARE CASH AND CASH EQUIVALENTS RELATED PARTIES RELATED PARTIES (CONTINUED) PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY (CONTINUED) COMMITMENTS AND CONTINGENCIES COMMITMENTS AND CONTINGENCIES (CONTINUED) EVENTS AFTER THE REPORTING DATE 75 5

6 6

7 7

8 8

9 9

10 10

11 11

12 1 Corporate information Tirana Bank sh.a. is a banking institution operating in accordance with the provisions of Law 9901, dated 14 April 2008 On Entrepreneurs and Commercial Companies, and Law 9662, dated 18 December 2006 On Banks in the Republic of Albania as amended, Law dated 17 November 2011, as well as other relevant laws. According to article 4 of its Statute, the scope of work of the Bank is to execute, on its behalf or on behalf of third parties, any and every operation acknowledged or delegated by law to banks. Tirana Bank sh.a. is incorporated and domiciled in Albania and operates in Albania. Tirana Bank sh.a. is owned by Piraeus Bank S.A which owns % of shares. The Bank has 39 branches (2015: 39) within the Republic of Albania and has no overseas operations. The total number of the Bank s employees is 432 (2015: 422) The financial statements for the year ended 31 December 2016 were authorized for issue by the Board of Directors on 12 May Approval of the financial statements by the Shareholders will take place in the Annual General Meeting of the Shareholders. Principal activity The Bank s principal business activity is commercial and retail banking operations within the Republic of Albania. The Bank has been operating under a full banking licence issued by the Central Bank of the Republic of Albania ( Bank of Albania or BoA ) since Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. 2.1 Statement of compliance The financial statements of Tirana Bank Sh.A. have been prepared in accordance with International Financial Reporting Standards (IFRSs) and IFRIC interpretations. The accounting policies adopted are consistent with those of the previous financial year. 2.2 Basis of preparation The financial statements have been prepared on a historical cost basis, except for availablefor-sale financial investments that have been measured at fair value. The financial statements are presented in Albanian Lek and all values are rounded to the nearest thousand (LEK 000) except when otherwise indicated. a) Position of the Group Piraeus Group branch network at the end of December 2016, totalled 921 units, of which 660 operated in Greece and 261 in 7 other countries. The branch network in Greece was reduced by 49 units and abroad by 19 units during 2016 as a result of the rationalization plan. At the same time, the Group s headcount totalled 18,075 employees in the continuing operations, of which 14,492 were employed in Greece (2015: 19,279 and 15,559 respectively).. 12

13 2. Summary of significant accounting policies (continued) 2.2 Basis of preparation (continued) a) Position of the Group (continued) On 8 July 2016, Piraeus Bank announced that it has entered into an agreement with Holding M. Sehnaoui SAL ("HMS"), for the sale of shares in its subsidiary in Cyprus, Piraeus Bank Cyprus Ltd ("PBC") for a consideration of 3.2 million. This, in combination with a concurrent share capital increase by PBC of 40 million which was fully-subscribed by HMS and a group of investors procured by HMS, resulted in the reduction of Piraeus Banks participation in PBC s share capital to 17.7%. Following the necessary approvals secured by the competent authorities in the European Commission, Cyprus and Greece, including the Hellenic Financial Stability Fund, the transaction was concluded on December 29, On 1 August 2016, Piraeus Bank announced that the conclusion of the agreement for the sale of 100% of the share capital of ATE Insurance to Ergo International AG - a subsidiary of Munich Re - was completed, following the fulfilment of all the conditions under the relevant agreement, as well as the receipt of all necessary approvals from the competent bodies, including the Hellenic Financial Stability Fund. ERGO International AG paid a consideration of 90.1 million in cash for the total stake of Piraeus Bank in ATE Insurance s share capital. On 2 August 2016, S&P Global Ratings upgraded the credit rating of Piraeus Bank to CCC+ with Stable outlook from SD before. b) Position of the Bank In the current environment the focus of the Bank has been on liquidity and capital adequacy. As disclosed in Notes 20 and 21, the Bank s main source of funding is locally collected deposits from corporate and retail customers. The Bank s capital adequacy ratio (as prescribed by BoA) as at 31 December 2016 amounts to 17.89% (2015: 20.07%) and is higher than the specifically-set regulatory minimum of 15%. Additionally, the Bank s liquidity ratio as of 31 December 2016 was 46,7% (2015: 47,6%), which is in compliance with the article 71 of the Bank of Albania regulation on liquidity, dated 14 October Bank is in compliance with the regulatory requirements and did not exceed the amount prescribed by the Law. Consequently, the going concern assumption has been applied in the preparation of the financial statements. Management prepared these financial statements on a going concern basis, which assumes that the Bank will continue to operate in the foreseeable future. In order to assess the reasonability of this assumption, management reviews the forecasts of the future cash inflows and the support provided by shareholders. Based on the current financial plans, the actual situation of the Bank, management is satisfied that the Bank will be able to continue to operate as a going concern in the foreseeable future and, therefore, this principle is applied in the preparation of these financial statements. The main accounting policies used in the preparation of these financial statements are set out below. 13

14 2. Summary of significant accounting policies (continued) 2.3 Foreign currency translation The financial statements are presented in Albanian Lek, which is the Bank s functional and presentation currency. Transactions and balances Transactions in foreign currencies are translated into the respective functional currency of the operation at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the spot exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historic cost, are translated at the prevailing foreign exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are generally recognised in profit or loss, except for foreign currency differences arising from the translation of available-for-sale equity instruments, which are recognised in OCI. The applicable rates of exchange (Lek to foreign currency unit) for the principal currencies as at 31 December 2016 and 2015 were as follows: USD EUR Financial instruments initial recognition and subsequent measurement a) Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Bank commits to purchase or sell the asset. 14

15 2. Summary of significant accounting policies (continued) 2.4 Financial instruments initial recognition and subsequent measurement (continued) b) Initial recognition of financial instruments The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus, in case of financial assets and liabilities not at fair value through profit and loss, 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. c) Financial assets held to maturity Financial assets held to maturity are those investments which carry fixed or determinable payments and have fixed maturities and which the Bank has the intention and ability to hold to maturity and which do not meet definition of loans and receivables. If the Bank were to sell other than an insignificant amount of held to maturity investments, the entire category would be reclassified to available for sale. Financial assets held to maturity are subsequently measured at amortised cost using the effective interest rate method, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortisation is included in Interest and similar income in profit or loss. The losses arising from impairment of such investments are recognised in profit or loss as Impairment losses on financial investments, if any. d) Loans and receivables Loans and receivables include Due from banks and Loans and advances to customers, which are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as Financial assets held for trading, designated as Financial investment available-for-sale or Financial assets designated at fair value through profit or loss. After initial measurement, amounts due from banks and loans and advances to customers are subsequently measured at amortised cost using the effective interest rate method, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortisation is included in Interest and similar income in profit or loss. The losses arising from impairment are recognised in profit or loss in Impairment losses on loans and advances. 15

16 2. Summary of significant accounting policies (continued) 2.4 Financial instruments initial recognition and subsequent measurement (continued) e) Financial assets at fair value through profit or loss This category includes treasury bills issued by the Albanian Government. Financial assets at fair value through profit or loss include financial assets which are managed and their performance is evaluated on a fair value basis, in accordance with the Bank s risk management strategy. Financial assets at fair value through profit or loss are carried at fair value. All changes in the fair value and gains or losses on derecognising are recorded in profit or loss as other gains the period in which they arise. f) Available for sale financial assets This classification includes investment securities which the Bank intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Investment securities available for sale are carried at fair value. Interest income on availablefor-sale debt securities is calculated using the effective interest method and recognised in profit or loss for the year. Dividends on available-for-sale equity instruments are recognised in profit or loss for the year when the Bank s right to receive payment is established and it is probable that the dividends will be collected. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate prevailing at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income. As at December 31, 2016 and 2015 the Bank classified its financial assets as held-to-maturity and available-for-sale financial investments, loans and receivables. The Bank did not classify any financial assets designated at fair value through profit or loss during reporting period. 16

17 2. Summary of significant accounting policies (continued) 2.4 Financial instruments initial recognition and subsequent measurement (continued) g) Financial liabilities After initial measurement, debt issued and other borrowings are subsequently measured at amortized cost using the effective interest rate method. There is no financial liability measured at fair value through profit and loss. Any differences between proceeds net of transactions costs and the redemption value is recognised in Interest and similar expenses in profit or loss. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate. h) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. i) Derecognition Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognising). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. 2.5 Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date ( repos ) are not derecognised from the balance sheet. The corresponding cash received, including accrued interest, is recognised in the statement of financial position as a Due to Banks, reflecting its economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method. Conversely, securities purchased under agreements to resell at a specified future date ( reverse repos ) are recorded as due from other banks or loans and advances to customers, as appropriate. The corresponding cash paid, including accrued interest, is recognised in the statement of financial position as Due from Banks. The difference between the purchase and resale prices is treated as interest income and is accrued over the life of the agreement using the effective interest rate method. 2.6 Determination of fair value For financial instruments that are traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. If the above criteria are not met, the market is regarded as being inactive. Indicators that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions, a significant decrease in the average daily trading volume of all the shares under consideration in country 2 over the last 5 years, etc.. 17

18 2 Summary of significant accounting policies (continued) 2.6 Determination of fair value (continued) For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models. Valuation techniques such as discounted cash flow models or models based on recent arm s length transactions or consideration of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). 2.7 Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an (negative) impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the high probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. a) Due from banks and loans and advances to customers For amounts due from banks and loans and advances to customers carried at amortised cost, the Bank first assesses whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. 18

19 2 Summary of significant accounting policies (continued) 2.7 Impairment of financial assets (continued) If a future write-off is later recovered, the recovery is credited to the Provisions for impairment of loans and advances. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank s internal credit grading system that considers credit risk characteristics such as asset type, industry, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. b) Financial assets held to maturity For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are credited to the Impairment losses on financial investments. c) Assets classified as available for sale The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of debt investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of investment securities available for sale. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss for the year. 19

20 2 Summary of significant accounting policies (continued) 2.7 Impairment of financial assets (continued) d) Renegotiated loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. 2.8 Leasing The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. i. Bank as a Lessee Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at commencement of the lease term at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in Property and equipment with the corresponding liability to the lessor included in Other liabilities. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income in Interest and similar expense. The Bank did not have significant financial lease agreements during the reporting period. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Any operating lease rentals payable are accounted for on a straight-line basis over the lease term and included in Other operating expenses. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place. ii. Bank as a Lessor Where the Bank is a lessor in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the Bank to the leasee, the total lease payments are recognised in profit or loss for the year (rental income note 2.8, c) on a straight-line basis over the period of the lease. 2.9 Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. 20

21 2 Summary of significant accounting policies (continued) 2.9 Revenue recognition (continued) a) Interest and similar income and expense Interest and similar income includes coupons earned on fixed income investments, any discount and premium on zero coupon treasury bills recognised using in profit or loss the effective interest rate method and interest income on loans and advances. For all financial instruments measured at amortised cost and interest bearing financial instruments classified as available-for-sale financial investments, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: i. Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan. ii. Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. b) Rental income Rental income is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in profit or loss in Other operating income. The Bank did not have significant investment property as at year end and during the reporting period. 21

22 2 Summary of significant accounting policies (continued) 2.10 Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. For the purpose of the Cash Flow Statement, cash and cash equivalents consist of cash on hand, current accounts with Central Bank and amounts due from other banks on demand and with an original maturity of three months or less. The statutory reserve with the Central Bank is not available for the Bank s day-to-day operations and is not included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Cash and cash equivalents are carried at amortised cost. Further details of what cash and cash equivalents comprises can be found in note Property and equipment Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: Own Buildings: up to 20 years Furniture and other equipment: 5 years Vehicles: 5 years Computer hardware: 4 years Leasehold improvements: the shorter of useful life and lease term The assets residual value and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in Other operating income or Other operating expenses in profit or loss in the year the asset is derecognised Intangible assets Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. 22

23 2.12 Intangible assets (continued) Internally-generated intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated: the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and the ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Intangible assets include the Bank s software with an estimated useful life of five years Investment properties Investment properties are properties held to earn rentals and/or for capital appreciation (including property under construction for such purposes). Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are measured at fair value. All of the Bank s property interests held under operating leases to earn rentals or for capital appreciation purposes are accounted for as investment properties and are measured using the fair value model. Gains and losses arising from changes in the fair value of investment properties are included in profit or loss in the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised. Investment properties includes collateral obtained due to legal process include land, building and business premises which are not used by the Bank for its core operations. 23

24 2 Summary of significant accounting policies (continued) 2.14 Impairment of non-financial assets The Bank assesses at each reporting date or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, whether there is an indication that a non-financial asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the asset s recoverable amount. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount to the extent that the increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated to recognize in profit or loss the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the reporting date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to profit or loss under other operating expenses. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment Pensions and other post-employment benefits The Bank contributes to its employees post retirement plans as prescribed by the domestic social security legislation. Bank s pension obligations, relate only to defined contribution plans. Defined contribution plans, based on salaries, are made to the state administered institution (i.e. Social Security Institute) responsible for the payment of pensions. Once the contributions have been paid, the Bank has no further payment obligations. The contributions constitute net periodic costs for the year in which they are due and as such they are included in Personnel expenses in the statement of comprehensive income Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. 24

25 2 Summary of significant accounting policies (continued) 2.17 Provisions (continued) Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense Income tax Income taxes have been provided for in the financial statements in accordance with Albanian legislation enacted or substantively enacted by the reporting date. The income tax charge comprises current tax and deferred tax and is recognised in the statement of comprehensive income except if it is recognised in other comprehensive income because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income. Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.(2016:15%, 2015: 15%). Deferred tax Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. 25