NLB Tutunska Banka AD Skopje. Financial statements prepared in accordance. with International Financial Reporting Standards

Transcription

1 NLB Tutunska Banka AD Skopje Financial statements prepared in accordance with International Financial Reporting Standards For the year ended 31 December 2011

2 Financial statements for the year ended 31 December 2011 Content Independent auditor s report Pages Income statement 1 Statement of comprehensive income 2 Statement of financial position (balance sheet) 3 Statement of changes in equity 4 Cash flow statement 5-6 Notes to the financial statements 7-81

3 Independent auditor s report To the Shareholders and Supervisory Board of NLB Tutunska Banka AD Skopje We have audited the accompanying financial statements of NLB Tutunska Banka AD Skopje, which comprise the statement of financial position as of 31 December 2011 and the income statement and the statement of comprehensive income, statement of changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the 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. 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion. PricewaterhouseCoopers Revizija doo, Oktomvriska Revolucija Blvd. bb. Hyperium Business Center, 2 nd floor, 1000 Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

4 Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of NLB Tutunska Banka AD Skopje as of 31 December 2011 and of its financial performance and its cash flows for the year than ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Skopje, REVIZIJA doo 8 March 2012 PricewaterhouseCoopers Revizija doo, Oktomvriska Revolucija Blvd. bb. Hyperium Business Center, 2 nd floor, 1000 Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

5 Financial statements for the year ended 31 December 2011 Income statement Notes Year ended 31 December Interest and similar income 5 3,811,261 3,852,505 Dividend income 6 2,497 2,648 Interest and similar expenses 5 (2,008,338) (2,019,188) Net interest income 1,805,420 1,835,965 Loan impairment charges 7 (569,735) (757,475) Net interest income after loan impairment charges 1,235,685 1,078,490 Fee and commission income 8 1,040, ,382 Fee and commission expense 8 (223,156) (194,406) Net fee and commission income 817, ,976 Net gains/(losses) on financial instruments classified as held for trading 9 23,835 76,521 Net gains/(losses) on investment securities 11 37,456 4,877 Net foreign exchange gain 132, ,578 Personnel expenses 12 (627,373) (607,689) General and administrative expenses 13 (270,379) (268,351) Depreciation and amortisation expense 14 (205,857) (198,849) Gains less losses on revaluation of investment property 16 (5,849) - Other operating expenses 15 (726,289) (594,128) Other operating income , ,466 Other tax expense 17 (1,414) (2,056) Operating profit 644, ,835 Share of profit of associates and joint ventures accounted for using the equity method 24 14,336 13,931 Profit for the year 658, ,766 The notes on pages 7 to 81 are an integral part of these financial statements 1

6 Financial statements for the year ended 31 December 2011 Statement of comprehensive income Notes Year ended 31 December Profit for the year 658, ,766 Net gains on available-for-sale financial assets - Unrealised net losses arising during the period, before tax (6,837) (3,263) - Net reclassification adjustments for realised net losses, before tax (37,456) (4,877) Income tax relating to components of other comprehensive income - 3,132 Other comprehensive income for the year, net of tax 18 (44,293) (5,008) Total comprehensive income for the year 614, ,758 The notes on pages 7 to 81 are an integral part of these financial statements 2

7 Financial statements for the year ended 31 December 2011 Statement of financial position (balance sheet) Notes As at 31 December Assets Cash and balances with central banks 19 7,805,877 8,909,474 Loans and advances to banks 20 4,777,819 5,011,584 Loans and advances to customers 22 35,358,547 32,930,213 Financial assets held for trading 21-10,117 Investment securities: Available for sale 23 11,655,577 13,656,363 Held to maturity , ,937 Investments in associates for using the equity method 24 96,854 79,739 Investment properties ,978 70,471 Property, plant and equipment , ,543 Intangible assets , ,288 Foreclosed collateral , ,005 Other assets , ,621 Assets classified as held for sale 31-30,864 Total assets 61,667,463 62,705,219 Liabilities Deposits from banks 32 3,616,150 3,867,711 Deposits from customers 33 44,158,251 45,754,892 Other borrowed funds 34 6,321,396 5,633,172 Debt securities in issue ,928 Provisions , ,906 Subordinated debt 37 1,828,480 1,800,162 Other liabilities , ,166 Total liabilities 56,659,875 58,310,937 Equity Capital and reserves attributable to equity of parent entity Share capital , ,061 Share premium 42 2,203,056 2,203,056 Revaluation reserve 42 (3,267) 41,026 Retained earnings 888, ,110 Other reserves 1,065, ,029 Total equity 5,007,588 4,394,282 Total equity and liabilities 61,667,463 62,705,219 The notes on pages 7 to 81 are an integral part of these financial statements 3

8 Financial statements for the year ended 31 December 2011 Statement of changes in equity Share capital Attributable to owners of the parent entity Share premium Revaluation reserve Retained earning Other reserves Total equity Balance at 1 January ,061 2,203,056 28, , ,888 4,504,722 Profit , ,766 Fair value gains on available for sale financial assets, net of tax - - (5,008) - - (5,008) Total comprehensive income - - (5,008) 470, ,758 Dividends income to (367,246) - (367,246) Тax paid on dividends distribution (40,805) - (40,805) Transfer to statutory reserve (35,203) 35,203 - Loss of control of the investment in subsidiary ,850 (128,935) (57,062) (168,147) Balance at 31 December ,061 2,203,056 41, , ,029 4,394,282 Balance at 1 January ,061 2,203,056 41, , ,029 4,394,282 Profit , ,440 Fair value gains on available for sale financial assets, net of tax - - (44,293) - - (44,293) Total comprehensive income - - (44,293) 658, ,147 Dividends income to Тax paid on dividends distribution Transfer to statutory reserve (454,512) 454,512 - Other transfer to retained earning (841) (841) Balance at 31 December ,061 2,203,056 (3,267) 888,197 1,065,541 5,007,588 Detailed information is provided in Note 42. The notes on pages 7 to 81 are an integral part of these financial statements 4

9 Financial statements for the year ended 31 December 2011 Statement of cash flow Note Year ended 31 December Cash flows from operating activities Profit before tax 658, ,766 Adjustments for non cash items: Depreciation of property and equipment , ,472 Amortization of intangible assets 27 46,820 35,377 Losses on revaluation of investment property 16 5,849 - Capital loss/(gain) of intangible assets, property, plant 11,043 (643) and equipment and assets acquired through foreclosure procedure Impairment loss 656, ,977 Decrease in value of assets acquired through 23,161 19,172 foreclosure procedure Dividends income 6 (2,497) (2,648) Interest income 5 (3,811,261) (3,852,505) Interest expense 5 2,008,338 2,019,188 Interest received 3,808,467 3,851,440 Interest paid (1,956,626) (1,984,276) Share of net profits from equity method investments (14,336) (13,931) Other non-cash items 32, ,820 Operating profit before changes in operating assets 1,624,982 1,588,209 (Increase)/decrease in operating assets: Balances with NBRM 39,883 (389,372) Loans and advances to banks 662,956 1,028,055 Loans and advances to customers (2,991,023) (3,835,669) Foreclosed collateral 103,057 (427,781) Other assets (194,198) (15,411) Assets classified as held for sale 30,864 (30,864) Increase/(decrease) in operating liabilities: Deposits from banks and other financial institutions (268,697) 708,654 Deposits from customers (1,632,615) 5,320,413 Other liabilities 26,157 51,636 Net cash (used in)/ from operating activities before income tax (2,598,634) 3,997,870 Taxation paid Income tax paid Net cash (used in)/ from operating activities (2,598,634) 3,998,442 Cash flows from investing activities Purchase of property and equipment 26 (120,903) (123,540) Purchase of intangible assets 27 (43,494) (57,298) Purchase of investments (1,707,435) (15,371,120) Payments to acquire associate (3,619) - Loss of control of the investment in subsidiary - (27,391) Proceeds from sale of securities held for trading 10, ,208 Disposal of investments 10,225,060 10,532,071 Proceeds from sale of property and equipment 1, Proceeds from sale of intangible assets 1,254 - Dividends received 6 2,497 2,648 Net cash (used in)/ investing activities 8,365,123 (4,683,720) The notes on pages 7 to 81 are an integral part of these financial statements 5

10 Financial statements for the year ended 31 December 2011 Statement of cash flow (continued) Note Year ended 31 December Cash flows from financing activities Proceeds from borrowed funds and debt securities 23,329,658 25,444,622 Repayment of borrowings funds and debt securities (23,256,139) (23,958,238) Dividends paid - (408,051) Net cash (used in)/ from financing activities 73,519 1,078,333 Net (decrease)/increase in cash and cash equivalents 5,840, ,055 Cash and cash equivalents at 1 January 14,470,270 14,077,215 Cash and cash equivalents at 31 December 43 20,310,278 14,470,270 The notes on pages 7 to 81 are an integral part of these financial statements 6

11 1. General information 1.1 Intoduction NLB Tutunska Banka AD Skopje ( the Bank ) is a joint stock company incorporated and domiciled in the Republic of Macedonia. The Bank is a subsidiary of NLB Group, which controls 86.97% (2010: 86.97%) of the voting shares of the Bank. The address of its registered office is as follows: St. Vodjanska 1, p.fax. 702, Skopje, principal Centar 1000 Skopje, Republic of Macedonia The Bank is licensed to perform all banking activities in accordance with the law. The main activities include commercial lending, receiving of deposits, foreign exchange deals, and payment operation services in the country and abroad and retail banking services. In addition, it provides trade finance facilities to companies for export and import purposes. These financial statements have been approved for issue by the Supervisory Board on 24 February

12 Directors The names of the Members of the Management Board of the Bank serving during the financial year and to the date of this report are as follows: President of Management Board Member of Management Board Member of Management Board Manager of Financial Market and Treasury Division Manager of Logistic Division Manager of Cash Services and Depot Division Manager of Internal Audit Division Manager of Sales Logistics Division Manager of Branch Network Division Manager of Corporate Banking Division Manager of Center for coordination and cooperation between NLB Group members and their clients Manager of Risk Management Division Manager of Legal, Compliance and Menagment of problematic loans division Payment System Division Information Technology Division Gjorgji Jancevski Ljube Rajevski Damir Kuder Stojna Stojkoska Jordanka Grujoska Dragan Panovski Ljiljana Nastoska Slagjana Beleva Antonio Argir Straso Pupulkovski Goran Kreacic Bogoja Kitancev Nadica Ceneva Igor Davchevski Aleksandar Misovski 8

13 1.2 Operating Environment of the Company Recent volatility in global and Macedonian financial markets The ongoing global financial and economic crisis has prolonged effects in 2011 resulting in a lower level of capital market funding, higher lending rates and high volatility in stock and currency markets. While liquidity levels of real sector in Republic of Macedonia decreased on lower levels, the liquidity across the banking sector remained high four years in row. It is expected that there will be no liquidity shocks in domestic banking in The full extent of the impact of the ongoing global financial and economic crisis is providing to be difficult to anticipate or completely guard against. Impact on liquidity The funding of the Bank is mostly dependant on stable deposit base. The Bank does not expect any significant negative influence on stability of deposit base and thus on liquidity. However the overall market pressure towards decreasing interests on loans may influence on possible alternative ways of funding. Impact on customers/borrowers The bank s clients, both the borrowers and depositors, may be adversely affected by the financial and economic environment which could in turn impact their liquidity and their ability to repay the amounts owed. Additionally, significant amount of loans pleaced with FX clause impose direct foreign currency risk and indirect credit risk for customers, although the official middle exchange rate of Denar calculated by the means of quotations made by banks - market makers in Macedonia is considered to represent the real price of the domestic currency. Possible deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments. Impact on collateral (especially real estate) The amount of provision for impaired loans is based on management's appraisals of these assets at the balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in Macedonia for many types of collateral, especially real estate, has not been severely affected by the recent volatility in global financial markets since the supply of real estate especially residential is still lower than demand. Never the less, prolonged lower liquidity of companies in 2012 may decrease liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. 9

14 Fair value of financial assets and liabilities (excluding financial assets and liabilities directly affected by the credit crunch (e.g. mortgage backed securities) for which specific disclosures would be required) The fair values of quoted investments in active markets are based on current bid prices (financial assets) or ask prices (financial liabilities). If there is no active market for a financial instrument, the Bank establishes fair value using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the balance sheet date management has reviewed its models to ensure they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads. 10

15 2 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 the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and are stated in Macedonian Denars (MKD). The Bank owns 49% of Nov Penziski Fond AD Skopje, which is incorporated and domiciled in the Republic of Macedonia and represents an investment in an associate. Accounting treatment and presentation of an investment in associate is by equity method. The Bank was 100% owner of the capital of NLB Tutunska Broker AD Skopje, i.e participated with 100% in total number of shares with voting rights. Supervisory Board of the Bank on 28 January 2010 approved contractual liquidation of NLB Tutunska Broker AD - Skopje (NLB Tutunska Broker), as its sole founder and the only shareholder. Based on the Securities Law and Company Trade Law, during the liquidation procedures, an external liquidator was appointed. After the appointment of external liquidator, the Bank has neither control nor significant influence over NLB Tutunska broker. The investment in NLB Tutunska broker was presented as non-current assets held for sale (see Note 31). According to Court decision On 10 November 2011, liquidation procedure was closed, and the assets were transferred to NLB Tutunska Banka AD Skopje. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. 11

16 (a) Adoption of New or Revised Standards and Interpretations The following new standards and interpretations became effective for the Bank from 1 January 2011: Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. As a result of the revised standard, the Bank now also discloses contractual commitments to purchase and sell goods or services to its related parties. Improvements to International Financial Reporting Standards (issued in May 2010 and effective from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on the acquiree s share-based payment arrangements that were not replaced, or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date, and not the amount obtained during the reporting period; IAS 1 was amended to clarify the requirements for the presentation and content of the statement of changes in equity; IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The above amendments resulted in additional or revised disclosures, but had no material impact on measurement or recognition of transactions and balances reported in these financial statements. The financial effect of collateral required to be disclosed by the amendments to IFRS 7 is presented in these financial statements by disclosing 12

17 collateral values separately for (i) those financial assets where collateral and other credit enhancements are equal to, or exceed, carrying value of the asset ( overcollateralised assets ) and (ii) those financial assets where collateral and other credit enhancements are less than the carrying value of the asset ( under-collateralised assets ). Other revised standards and interpretations effective for the current period. IFRIC 19 Extinguishing financial liabilities with equity instruments, amendments to IAS 32 on classification of rights issues, clarifications in IFRIC 14 IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction relating to prepayments of minimum funding requirements and amendments to IFRS 1 First-time adoption of IFRS, did not have any impact on these financial statements. Unless otherwise stated above, the amendments and interpretations did not have any significant effect on the Bank s financial statements. b) New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2012 or later, and which the Bank has not early adopted. IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities, and in December 2011 the adoption of the standard was postponed by 1 January Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent payments of principal and interest only (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. 13

18 Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements currently found in IAS 28 Investments in associates. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgements and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. IFRS 13, Fair value measurement, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. IAS 27, Separate Financial Statements, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013), was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10, Consolidated Financial Statements. IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. Disclosures Transfers of Financial Assets Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011.). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between 14

19 the financial assets and associated liabilities. Where financial assets have been derecognized, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to statement of profit or loss and other comprehensive income. Amended IAS 19, Employee Benefits (issued in June 2011, effective for periods beginning on or after 1 January 2013), makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. Other revised standards and interpretations: The amendments to IFRS 1 Firsttime adoption of IFRS, relating to severe hyperinflation and eliminating references to fixed dates for certain exceptions and exemptions, will not have any impact on these financial statements. The amendment to IAS 12 Income taxes, which introduces a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale, will not have any impact on these financial statements. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank s financial statements. 15

20 2.2 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). The financial statements are presented in MKD thousands, which is the Bank s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount are recognised in equity. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity. The foreign currencies the Bank deals with, are predominantly Euro (EUR) and United States Dollars (USD) based. The exchange rates used for translation at 31 December 2011 and 2010 were as follows: MKD MKD 1 EUR USD

21 2.3 Financial assets The Bank classifies its financial assets in the following categories: loans and receivables, financial assets held for trading, available-for-sale financial assets and held to maturity investments. Management determines the classification of its investments at initial recognition. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money to a debtor with no intention of trading the receivable. Loans and receivables are initially recognized when cash is advanced to the borrowers and subsequently are carried at amortized cost using the effective interest method. (b) Held for trading A financial asset is classified as held for trading if it is acquired principally for the purpose of selling or repurchasing it in the near term and for which there is evidence of a recent actual pattern of short-term profit-taking. Trading assets held by the Bank are government bonds. Held for trading assets are initially recognised at fair value and transaction costs are expensed in the income statement. Fair value of a financial assets held for trading is a bid price for assets and an ask price for liabilities. Subsequent measurement does not include transaction costs. Gains and losses arising from changes in the fair value are included in the income statement in the period in which they arise. Interest income and expense and dividend income and expense, are included together with gains and losses arising from changes in the fair value. (c) Available-for-sale financial assets Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity. Available-for-sale financial assets are initial recognised at fair value, which is the cash consideration including any transaction costs and measured subsequently at fair value. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired. At this time, the cumulative gain or loss previously recognised in equity is recognised in profit or loss. However, interest calculated using the interest method and foreign currency gains and losses on monetary assets classified as available for sale are recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the entity s right to receive payment is established. The fair values of quoted investments in active markets are based on current bid prices, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, less impairment losses. 17

22 (d) Held - to - maturity financial assets Held - to - maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available for sale. These are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method. (e) Recognition Regular-way purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognised on trade - date - the date on which the Bank commits to purchase or sell the asset. (f) Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when they are extinguished that is, when the obligation is discharged, cancelled or expires. 18

23 2.4 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.5 Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within interest income and interest expense in the income statement using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. 2.6 Fee and commission income Fees and commissions consist mainly of fees received from enterprises arising from guarantees and letter of credits and fees arising from domestic and foreign payment traffic. Fees and commissions are generally recognised on an accrual basis when the service has been provided. Fees and commissions from guarantees and letter of credit and credit cards are recognised rateably over the period in which the service is provided. 2.7 Dividend income Dividends are recognised in the income statement when the entity s right to receive payment is established and inflow of economic benefits is probable. 19

24 2.8 Impairment of financial assets (a) Assets carried at amortised cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (for example: equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; Deterioration in the value of collateral and Legal and other difficulties in enforcing the bank s rights to repossess collateral. The estimated period between a losses occurring and its identification is determined by local management for each identified portfolio. In general, the period used is one month. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually 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. 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 (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. 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 20

25 less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Bank s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). 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 in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement in impairment charge for credit losses. (b) Assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity 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. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. 21

26 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 the income statement. (c) Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated. 2.9 Investment property Investment property is property held either to earn rental income or for capital appreciation or both. The Bank holds investment property that has been acquired through the enforcement of security over loans and advances and property acquired from transfer of property to investment. Rental income from investment property is recognized in the income statement on a straight - line basis over the term of the lease. Investment property is measured at fair value, which reflects market conditions at the date of the statement of financial position. Gains or losses arising from changes in the fair value of investment properties are included in the income statement in the year in which they arise. When the Bank makes a decision to use the assets for its own purposes, they are reclassified to property and equipment Intangible assets Intangible assets that are acquired by the Bank are stated at cost less accumulated amortisation and impairment losses. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific assets to which it relates. All other expenditure is expensed as incurred. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortised from the date they are available for use. At least annually or whenever there is evidence that the intangible asset may be impaired Bank performs impairment testing. Software 5 years 5 years Patents and licenses 5 years 5 years Other 5 years 5 years 22

27 2.11 Property and equipment Property and buildings comprise mainly branches and offices. All property and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred. Land is not depreciated. Depreciation of other assets is calculated using the straightline method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 40 years 40 years Furniture and equipment 4-10 years 4-10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in other operating expenses in the income statement Leases (a) Bank is the lessee The leases entered into by the Bank are primarily operating leases. The total payments made under operating leases are charged to other operating expenses in the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including 23