Report of Independent Auditor To the Shareholders of LH Financial Group Public Company Limited

Transcription

1 LH Financial Group Public Company Limited and its subsidiary Report and financial statements 31 December 2009

2 Report of Independent Auditor To the Shareholders of LH Financial Group Public Company Limited I have audited the accompanying consolidated balance sheet of LH Financial Group Public Company Limited and its subsidiary as at 31 December 2009, the related consolidated statements of income, changes in shareholders equity, and cash flows for the year then ended, and the separate financial statements of LH Financial Group Public Company Limited as at 31 December 2009, and for the period as from 22 April 2009 (the Company s incorporation date) to 31 December These financial statements are the responsibility of the Company s management as to their correctness and the completeness of the presentation. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LH Financial Group Public Company Limited and its subsidiary as at 31 December 2009 and the results of their operations and cash flows for the year then ended, and the financial position of LH Financial Group Public Company Limited as at 31 December 2009 and the results of its operations and cash flows for the period as from 22 April 2009 (the Company s incorporation date) to 31 December 2009 in accordance with generally accepted accounting principles.

3 Without qualifying my opinion on the above-mentioned financial statements, I draw attention to the following matters: (a) As described in Note 2 and Note 3.2 to the financial statements, the Company was established in accordance with a shareholding restructure plan of Land and Houses Retail Bank Public Company Limited whereby on 1 December 2009 the Company issued and offered additional ordinary shares of the Company to shareholders of Land and Houses Retail Bank Public Company Limited at that time at an offer price of Baht 10 per share in exchange for ordinary shares of Land and Houses Retail Bank Public Company Limited, in a ratio of 1:1. On 9 December 2009, the Company already arranged to have its ordinary shares, issued in exchange for ordinary shares of Land and Houses Retail Bank Public Company Limited and deemly paid-up, registered with the Ministry of Commerce and therefore such shareholding restructure is completed in accordance with the requirements as approved by the Bank of Thailand. The Company recorded investments in securities of Land and Houses Retail Bank Public Company Limited at Baht 2,654.5 million in the Company s separate financial statements and prepared the consolidated financial statements to include the financial statements of Land and Houses Retail Bank Public Company Limited since beginning of the year 2009 since such exchange of securities is under the shareholding restructure plan as required and approved by the Bank of Thailand and considered a business combination under common control whereby the Company is considered as if it had been the parent company of Land and Houses Retail Bank Public Company Limited since the beginning of the year

4 (b) As described in Note 3.2 to the financial statements, the Company presented the financial statements of Land and Houses Retail Bank Public Company Limited for the year 2008 (before the shareholding to facilitate comparison by the financial statement users since this business combination is in accordance with the under common control shareholding restructure plan and in accordance with the requirement as approved by the Bank of Thailand, as already described in Note 2 to the financial statements. The balance sheet as at 31 December 2008, and statements of income, changes in shareholders equity and cash flows, together with notes to financial statements, as presented herein for comparative purposes, formed a part of the financial statements of Land and Houses Retail Bank Public Company Limited (before the shareholding which I previously audited and on which I expressed an unqualified opinion under my report dated 20 February Rungnapa Lertsuwankul Certified Public Accountant (Thailand) No Ernst & Young Office Limited Bangkok: 24 February

5 LH Financial Group Public Company Limited and its subsidiary Balance sheets As at 31 December 2009 and 2008 After shareholding restructure Before shareholding restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. Note Assets Cash 324,164, ,457, ,307 Interbank and money market items 7, 32.2 Domestic items Interest bearing 2,698,759,925 3,430,652,103 75,709,535 Non-interest bearing 581,379, ,252,166 24,221,504 Interbank and money market items - net 3,280,139,550 3,728,904,269 99,931,039 Investments 8 Short-term investments - net ,223,184 2,042,064,749 - Long-term investments - net 8.1 9,901,086,332 5,910,789,989 - Investment in a subsidiary 8.1, ,654,499,000 Investments - net 10,313,309,516 7,952,854,738 2,654,499,000 Loans and accrued interest receivables 10 Loans 10.1, ,604,203,996 32,013,715,612 - Accrued interest receivables 10.1, ,391,878 69,461,920 - Total loans and accrued interest receivables 35,662,595,874 32,083,177,532 - Less : Allowance for doubtful debts 11 (262,733,695) (403,439,974) - Revaluation allowance for debt restructuring 12 (46,305,655) (1,414,340) - Loans and accrued interest receivables - net 35,353,556,524 31,678,323,218 - Leasehold improvements and equipment - net ,058, ,924,550 - Intangible assets - net 14 77,140,194 93,024,590 - Notes receivable - net 15 38,614, ,621,150 - Other assets - net 17, ,140, ,676, Total assets 49,660,123,108 44,215,786,714 2,754,532,505 The accompanying notes are an integral part of the financial statements.

6 LH Financial Group Public Company Limited and its subsidiary Balance sheets (continued) As at 31 December 2009 and 2008 After shareholding restructure Before shareholding restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. Note Liabilities and shareholders' equity Deposits 19 Deposits in Baht 32.2, ,721,735,993 31,955,117,571 - Deposits in foreign currencies Deposits 31,721,735,993 31,955,117,571 - Interbank and money market items 20 Domestic items Interest bearing 4,251,173,848 5,431,457,323 - Non-interest bearing 10,766,700 12,800,300 - Interbank and money market items 4,261,940,548 5,444,257,623 - Liabilities payable on demand ,879,825 52,277,869 - Borrowings 21, 32.2, 32.3 Short-term borrowings 10,205,418,003 3,717,863,344 - Long-term borrowings 11,000, Borrowings 10,216,418,003 3,717,863,344 - Interest payables ,417, ,877,874 - Accrued expenses ,968,386 23,020, ,668 Other liabilities 22 91,943, ,612,900 1,780 Total liabilities 46,592,304,073 41,466,028, ,448 The accompanying notes are an integral part of the financial statements.

7 LH Financial Group Public Company Limited and its subsidiary Balance sheets (continued) As at 31 December 2009 and 2008 After shareholding restructure Before shareholding restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. Note Liabilities and shareholders' equity (continued) Shareholders' equity Share capital Registered share capital ,000,000 ordinary shares of Baht 10 each 7,500,000,000 7,500,000, ,000,000 ordinary shares of Baht 10 each 3,400,000,000 Issued and paid-up share capital 275,778,487 ordinary shares of Baht 10 each 2,757,784,870-2,757,784,870 (2008: 265,450,000 ordinary shares of Baht 10 each) - 2,654,500,000 - Revaluation surplus on investments ,687, ,113,701 - Retained earnings Appropriated - statutory reserve 79,635, Unappropriated (deficit) 210,710,227 (44,855,143) (3,544,813) Equity attributable to the Company's shareholders 3,067,817,897 2,749,758,558 2,754,240,057 Minority interests - equity attributable to minority shareholders of a subsidiary 1, Total shareholders' equity 3,067,819,035 2,749,758,558 2,754,240,057 Total liabilities and shareholders' equity 49,660,123,108 44,215,786,714 2,754,532, Off-balance sheet items - commitments 30.1 Aval to bills 3,020,000 1,761,750 - Other commitments 1,465,956, ,869,739 - The accompanying notes are an integral part of the financial statements. Directors

8 LH Financial Group Public Company Limited and its subsidiary Statements of income After shareholding restructure Before shareholding restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. For the period as from Note For the year ended For the year ended 22 April 2009 to 31 December December December 2009 Interest and dividend income Loans ,608,668,708 1,692,092,262 - Interbank and money market items 16,654,717 19,713,089 15,874 Investments ,215, ,257,287 - Total interest and dividend income 1,963,539,210 2,060,062,638 15,874 Interest expenses 32.1 Deposits 552,700, ,473,011 - Interbank and money market items 84,454, ,409,433 - Short-term borrowings 67,504, ,281,077 86,689 Long-term borrowings 195, Total interest expenses 704,855,012 1,108,163,521 86,689 Net interest and dividend income 1,258,684, ,899,117 (70,815) Bad debt and doubtful accounts (259,500,000) (96,600,000) - Net interest and dividend income after bad debt and doubtful accounts 999,184, ,299,117 (70,815) Non-interest income Gains (losses) on investments ,357,731 (6,236,865) - Fees and service income - others ,797,760 76,321,080 - Gain on disposals of properties foreclosed 57,791 2,728 - Other income 4,979,661 7,926,491 - Total non-interest income 165,192,943 78,013,434 - The accompanying notes are an integral part of the financial statements.

9 LH Financial Group Public Company Limited and its subsidiary Statements of income (continued) After shareholding restructure Before shareholding restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. For the period as from Note For the year ended For the year ended 22 April 2009 to 31 December December December 2009 Non-interest expenses Personnel expenses 308,789, ,420,119 - Premises and equipment expenses ,231, ,740,656 - Taxes and duties 54,985,321 55,079,188 - Fees and charges ,988,682 38,499,000 3,176,794 Directors' remuneration 27 4,230,000 3,217,500 - Contributions to the financial institution development fund/ Deposit Protection Fund 109,828,526 82,668,059 - Other expenses 43,850,248 49,495, ,204 Total non-interest expenses 773,903, ,120,275 3,473,998 Earnings (losses) before income tax 390,473, ,192,276 (3,544,813) Income tax 28 28,727, Net income 361,745, ,192,276 (3,544,813) Net income attributable to: Equity holders of the Company 361,745, ,192,276 (3,544,813) Minority shareholders of the subsidiary ,745, ,192,276 Earnings per share 29 Basic earnings (losses) per share Net income (losses) attributable to equity holders of the Company (Baht per share) (0.15) Weighted average number of ordinary shares (shares) 265,665, ,299,644 24,341,996 Diluted earnings (losses) per share Net income (losses) attributable to equity holders of the Company (Baht per share) (0.15) Weighted average number of ordinary shares (shares) 265,665, ,299,644 24,341,996 The accompanying notes are an integral part of the financial statements. Directors

10 LH Financial Group Public Company Limited and its subsidiary Statements of changes in shareholders' equity For the year ended 31 December 2009 After shareholding restructure - Consolidated financial statements of LH Financial Group Plc. and its subsidiary Equity attributable to the Company's shareholders Minority interest - equity Issued and Revaluation Retained earnings (deficit) Total equity attributable to minority paid-up share surplus (deficit) Appropriated - Unappropriated attributable to the shareholders Note capital on investments statutory reserve (deficit) Company's shareholders of a subsidiary Total Balance as at 31 December ,654,500, ,113,701 - (44,855,143) 2,749,758,558-2,749,758,558 Changes in value of investments during the year 8.3 (120,425,901) - - (120,425,901) - (120,425,901) Income recognised directly in equity - (120,425,901) - - 2,629,332,657-2,629,332,657 Net income ,745, ,745, ,745,508 Total revenue for the year - (120,425,901) - 361,745,370 2,991,078, ,991,078,165 Increase in share capital 103,284, ,284, ,284,870 Appropriated to statutory reserve 25 79,635,000 (79,635,000) Dividend paid (26,545,000) (26,545,000) - (26,545,000) Increase in minority interest of subsidiaries ,000 1,000 Balance as at 31 December ,757,784,870 19,687,800 79,635, ,710,227 3,067,817,897 1,138 3,067,819,035 The accompanying notes are an integral part of the financial statements.

11 LH Financial Group Public Company Limited and its subsidiary Statements of changes in shareholders' equity (continued) For the year ended 31 December 2008 Before shareholding restructure - Financial statements of Land and Houses Retail Bank Plc. Issued and Revaluation Retained earnings (deficit) paid-up share surplus (deficit) Appropriated - Unappropriated Note capital on investments statutory reserve (deficit) Total Balance as at 31 December ,600,000,000 25,990,387 - (285,047,419) 2,340,942,968 Changes in value of investments during the year ,123, ,123,314 Revenue recognised directly in equity - 114,123, ,123,314 Net income ,192, ,192,276 Total revenue for the year - 114,123, ,192, ,315,590 Increase in share capital 54,500, ,500,000 Balance as at 31 December ,654,500, ,113,701 - (44,855,143) 2,749,758,558 The accompanying notes are an integral part of the financial statements.

12 LH Financial Group Public Company Limited and its subsidiary Statements of changes in shareholders' equity (continued) For the period as from 22 April 2009 to 31 December 2009 Separate financial statements - LH Financial Group Plc. Issued and paid-up Note share capital Deficit Total Balance as at 22 April Issuance of ordinary shares 23 2,757,784,870-2,757,784,870 Net loss - (3,544,813) (3,544,813) Balance as at 31 December ,757,784,870 (3,544,813) 2,754,240,057 The accompanying notes are an integral part of the financial statements.

13 LH Financial Group Public Company Limited and its subsidiary Statements of cash flows After shareholding Before shareholding restructure restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. For the period as from For the year ended For the year ended 22 April 2009 to 31 December December December 2009 Cash flows from operating activities Earnings (losses) before income tax 390,473, ,192,276 (3,544,813) Adjustments to reconcile earnings (losses) before income tax to net cash provided by (paid from) operating activities: Depreciation and amortisation 87,751,207 77,423,256 - Bad debt and doubtful accounts 259,500,000 96,600,000 - Gains on sales of investments (90,359,011) (1,072,623) - Losses on impairment of investments 1,280 7,309,488 - Gain on disposals of properties foreclosed (57,791) (2,728) - (Gains) losses on disposal/write off of equipment (7,015) 67,996 - Losses on write off of other assets - 513,660 - Amortisation of deferred income/expenses 508,512 (3,789,282) - Amortisation of allowance for present value loss on notes receivable to be interest income (2,507,620) (7,083,100) - Increase in accrued expenses 17,947,411 12,357, ,668 Income (loss) from operations before changes in operating assets and liabilities 663,250, ,516,225 (3,254,145) (Increase) decrease in operating assets Interbank and money market items 446,873,046 (2,549,427,170) (99,931,039) Loans (3,948,212,815) (6,413,689,769) - Notes receivable 134,514,440 Other assets (1,405,640) (18,780,067) (159) Increase (decrease) in operating liabilities Deposits (233,381,578) 14,799,609,243 - Interbank and money market items (1,182,317,075) (1,284,720,117) - Securities sold under repurchase agreements - (1,310,000,000) - Liability payable on demand 112,601,956 (93,204,182) - Borrowings 6,498,554,659 (1,293,751,925) - Other liabilities (23,590,589) 52,853,914 1,780 Cash provided by (used in) operating activities 2,466,886,774 2,311,406,152 (103,183,563) Interest and dividend income (1,963,539,210) (2,060,062,638) - Cash received on interest income 1,630,608,197 1,698,312,370 - Interest expense 704,855,012 1,108,163,521 - Cash paid on interest expense (775,331,200) (1,041,265,595) - Cash paid on income tax by means of being withheld (4,590,613) (3,275,962) - Net cash provided by (used in) operating activities 2,058,888,960 2,013,277,848 (103,183,563) The accompanying notes are an integral part of the financial statements.

14 LH Financial Group Public Company Limited and its subsidiary Statements of cash flows (continued) After shareholding Before shareholding restructure restructure Consolidated financial statements Financial statements Separate of LH Financial Group Plc. of Land and Houses financial statements of and its subsidiary Retail Bank Plc. LH Financial Group Plc. For the period as from For the year ended For the year ended 22 April 2009 to 31 December December December 2009 Cash flows from investing activities Proceeds from sales of available-for-sale securities 1,753,952,839 1,339,072,623 - Proceeds from matured debt securities 211,500,000 50,000,000 - Proceeds from sales of general investments 413, Cash received on interest income on investments 346,052, ,054,804 - Cash received on dividend income 842,300 1,486,600 - Investments in available-for-sale securities (303,444,548) (693,405,353) - Investments in held-to-maturity debt securities (4,060,461,307) (2,885,541,798) - Cash paid for purchases of equipment (33,171,321) (60,638,742) - Proceeds on disposals of equipment 77,886 19,075 - Cash paid for acquisitions of intangible assets (16,684,649) (42,201,415) - Net cash used in investing activities (2,100,922,788) (1,963,154,206) - Cash flows from financing activities Dividend paid (26,545,000) - - Proceeds from increases in ordinary share capital 103,285,870 54,500, ,285,870 Net cash provided by financing activities 76,740,870 54,500, ,285,870 Net increase in cash and cash equivalents 34,707, ,623, ,307 Cash and cash equivalents at beginning of the periods 289,457, ,834,005 - Cash and cash equivalents at the end of the periods 324,164, ,457, , Supplemental cash flows information Purchases of fixed assets on credit 9,590,049 11,432,056 - Issuance securities for swap ordinary shares under holding restructuring under common control - - 2,654,499,000 The accompanying notes are an integral part of the financial statements.

15 LH Financial Group Public Company Limited and its subsidiary Notes to financial statements For the years ended 31 December 2009 (the consolidated financial statements) and for the period as from 22 April 2009 to 31 December 2009 (the separate financial statements) 1. The Company s information On 22 April 2009, LH Financial Group Public Company Limited ( the Company ) was incorporated as a public limited company under Thai laws to engage in investment holding business whereby it is established to invest in Land and Houses Retail Bank Public Company Limited ( LH Bank ) under the shareholding restructure plan of LH Bank. As at 31 December 2009, the Company had investments in ordinary shares of Land and Houses Retail Bank Public Company Limited at the rate of 99.99% of the paid-up capital of such bank and the Company has 3 major shareholders, which are Land and Houses Plc., Quality Houses Plc. and Ms. Piengjai Harnpanich and their shareholding percentages in the Company are 40.95%, 25.71%, and 19.04%, respectively. The Company s registered office is located at No. 1, on the 5th Floor of Q-House Lumpini Building, South Sathorn Road, Thungmahamek Sub-district, Sathorn District, Bangkok. 2. Shareholding restructure of Land and Houses Retail Bank Public Company Limited In compliance with the Act on Undertaking of Banking Business B.E and the related Notification of the Bank of Thailand No.66/2551, dated 3 August 2008, regarding The criteria regulating consolidated supervision, LH Financial Group Public Company Limited was incorporated on 22 April 2009 with an initial registered capital of Baht 100,000, to be the parent company of the financial business group and of Land and Houses Retail Bank Public Company Limited. On 28 October 2009, the Bank of Thailand issued a letter granting the Company and Land and Houses Retail Bank Public Company Limited permission to establish the financial business group whereby the Company is to be the parent company of the financial business group. On 27 November 2009, the Office of the Securities and Exchange Commission ( SEC ) issued a letter granting the Company permission to offer new securities and warrants. 1

16 On 1 December 2009, the Company issued and offered additional ordinary shares of the Company, the first series of the Company s warrants (W1) and the second series of the Company s warrants (W2), as follows: (a) (b) (c) Issued and offered additional 265,450,000 ordinary shares with a par value of Baht 10 each at an offer price of Baht 10 each to existing shareholders of LH Bank at that time in a ratio of 1:1. Issued and offered 69,750,000 units of the first series of warrants at a price of Baht 0 per unit to holders of Warrant#1 and Warrant#2 of LH Bank in exchange for units of Warrant#1 and Warrant#2 of LH Bank held by them, in a ratio of 1:1; and to additional 5 persons and 2 directors of the Company. Issued and offered 23,256,000 units of the second series of warrants at a price of Baht 0 per unit to holders of Warrant#3 of LH Bank, in exchange for Warrant#3 of LH Bank held by them, in a ratio of 1:1. On 9 December 2009, the Company registered with the Ministry of Commerce the additional paid-up capital of Baht 2,654,499,000, comprising 265,449,900 shares with a par value of Baht 10 each, issued and offered as mentioned in (a) above. As a result, the shareholding restructure is considered to be completed on that date. 3. Basis of preparation of the financial statements 3.1 The financial statements have been prepared in accordance with accounting standards enunciated under the Accounting Profession Act B.E. 2547, with reference to the principles stipulated by the Bank of Thailand and the presentation of the financial statements has been made in compliance with the Notification of the Bank of Thailand relating to the preparation and publication of the financial statements of commercial banks and holding parent company of financial business group dated 3 August The financial statements in Thai language are the official statutory financial statements of the Company. The financial statements in English language have been translated from the Thai language financial statements. The financial statements have been prepared on a historical cost basis except where otherwise disclosed under Note 5 to the financial statements regarding significant accounting policies. 2

17 3.2 Basis of consolidation (a) (b) As mentioned in Note 2 to the financial statements, the Company and Land and Houses Retail Bank Public Company Limited have implemented the shareholding restructure plan of Land and Houses Retail Bank Public Company Limited ( LH Bank ) whereby the Company offered to sell its securities (ordinary shares and warrants to purchase ordinary shares) at a price of Baht 10 per share for the ordinary shares and Baht 0.00 per unit for warrants in exchange for ordinary shares and warrants of LH Bank, in a ratio of 1:1 for securities of the same type. On 9 December 2009, the Company received 265,449,900 ordinary shares of LH Bank, amounting to Baht 2,654,499,000, and 73,206,000 warrants, and the Company already registered the increase in its share capital issued to exchange for ordinary shares of LH Bank as described above. As a result, the Company held 99.99% of the paid-up capital of LH Bank and the shareholding restructure is considered to be completed in compliance with the requirements as approved by the Bank of Thailand. The Company has therefore recognised investments in securities of LH Bank at Baht 2,654.5 million in the separate financial statements and prepared consolidated financial statements to have included the financial statements and operating results of LH Bank and presented shareholders equity as if a business combination had taken place at the beginning of the year 2009 since such shareholding restructure is considered to be a business combination under common control and the Company is treated as if it had been the parent company of LH Bank since the beginning of the year The consolidated financial statements include the financial statements of the LH Financial Group Public Company Limited (herein after referred to as the Company ) and Land and House Retail Bank Public Company Limited (herein after referred to as the subsidiary ) whereby the information of the subsidiary is as follows: Revenues as a Assets as a percentage percentage to the consolidated Percentage of to the consolidated total revenues Nature of Country of Shareholding as of total assets as at for the year ended Company s name business incorporation 31 December December December 2009 Percent Percent Percent Land and Houses Retail Bank Plc. Banking business Thailand

18 (c) (d) Subsidiary is fully consolidated as from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiary are prepared for the same reporting period as the parent company, using consistent significant accounting policies. (e) Material balances and transactions between the Company and its subsidiary have been eliminated from the consolidated financial statements. (f) (g) Minority interests represent the portion of net income or loss and net assets of the subsidiary that are not held by the Company and are presented separately in the consolidated income statement and within equity in the consolidated balance sheet. For comparative purposes and to facilitate comparison by the financial statement users, the Company presented financial statements of Land and Houses Retail Bank Public Company Limited (before shareholding, consisting of balance sheet as at 31 December 2008, and the related consolidated statements of income, changes in shareholders equity, and cash flows for the year ended 31 December 2008, together with notes to the financial statements. 3.3 The separate financial statements, which present investment in subsidiary presented under the cost method, have been prepared solely for the benefit of the public. 4. Adoption of new account standards In June 2009, the Federation of Accounting Professions has issued Notification No. 12/2552, assigning new number of Thai Accounting Standards that match the corresponding International Accounting Standards. The numbers of Thai Accounting Standards as referred to these financial statements reflect such change. The Federation of Accounting Professions has issued Notification No. 86/2551 and 16/2552, mandating the use of new accounting standards, financial reporting standard and accounting treatment guidance as follows. 4

19 4.1 Accounting standards, financial reporting standard and accounting treatment guidance which are effective for the current year Framework for Preparation and Presentation of Financial Statements (revised 2007) TAS 36 (revised 2007) Impairment of Assets TFRS 5 (revised 2007) Non-current Assets Held for Sale and Discontinued Operations Accounting Treatment Guidance for Leasehold Right Accounting Treatment Guidance for Business Combination under Common Control These accounting standards, financial reporting standard and accounting treatment guidance became effective for the financial statements for fiscal years beginning on or after 1 January The management of the Company and its subsidiary has assessed the effect of these standards and guidances and believes that the afore-mentioned accounting standards, financial reporting standards and accounting treatment guidances do not have any significant impact on the financial statements for the current period. 4.2 Accounting standards which are not effective for the current year Effective date TAS 20 Accounting for Government Grants 1 January 2012 and Disclosure of Government Assistance TAS 24 (revised 2007) Related Party Disclosures 1 January 2011 TAS 40 Investment Property 1 January 2011 However, TAS 24 (revised 2007) and TAS 40 allow early adoption by the entity before the effective date. The management of the Company and its subsidiary has assessed the effect of these standards and believes that TAS 20 is not relevant to the business of the Company and its subsidiary while TAS 24 (revised 2007) and TAS 40 will not have any significant impact on the financial statements for the year in which they are initially applied. 5

20 5. Significant accounting policies 5.1 Revenue recognition (a) Interest and discount on loans The subsidiary recognises interest and discounts on loans as revenue on an accrual basis, based on the amount of principal outstanding. For (a) loans on which principal or interest payments have been defaulted for more than three months from the due date; (b) loans on which principal or interest payments have been defaulted for not more than three months but are classified as sub-standard, doubtful or doubtful of loss; and (c) factoring loans, which have been defaulted from the due dates, the subsidiary ceases accrual of interest income and instead recognises interest income on a cash basis and reverses any interest previously accrued as revenue, in accordance with the Notification of the Bank of Thailand. However, the subsidiary does not reverse the interest income recorded prior to the issuance of the Notification of the Bank of Thailand dated 31 March Interest income on restructured loans is recognised on the same accrual basis as applied for loans discussed above, with the exception of loans that are subject to monitoring for compliance with restructuring conditions. On those loans, the subsidairy recognises interest income on a cash basis until the borrower has been able to comply with the restructuring conditions for a period of not less than three consecutive months or three consecutive installments, whichever is longer. Interest or discounts which are already included in the face value of notes receivable or loans are recorded as deferred interest and taken up as income evenly throughout the term of the notes or loans. (b) Interest and dividends on investments Interest on investments is recognised as revenue on an accrual basis. Dividends from securities are recognised as revenue when the right to receive such dividends is established. (c) Gains (losses) on sales of investments Gains (losses) on sales of investments are recognised as revenue/expenses on the transaction dates. (d) Fees and service income Fees income is recognised as revenue on an accrual basis. Service income is recognised as revenue when services have been rendered taking into account the stage of completion. 6

21 5.2 Expense recognition (a) Interest expenses Interest expenses are charged to statements of income on an accrual basis. Interest on notes payable included in the face value is recorded as deferred interest expense, which will be amortised to expenses evenly throughout the term of the notes. (b) Other expense The Company and its subsidiary adopt an accrual basis on expense recognition. 5.3 Cash and cash equivalents Cash and cash equivalents are the amounts included in the balance sheets under the caption of Cash, which consists of cash on hand and cheques in transit. 5.4 Securities purchased under resale agreements/securities sold under repurchase agreements The subsidiary enters in to agreements to purchase securities under conditions to resell or to sell securities under conditions to repurchase at certain dates in the future at fixed prices. Amounts paid for securities purchased subject to a resale commitment are presented as assets under the caption of Interbank and money market items - assets in the balance sheets and the underlying securities are treated as collateral to such receivables while securities sold subject to repurchase commitment are presented as liabilities under the caption of Interbank and money market items - liabilities in the balance sheets at the amounts received from the sale of those securities. The difference between the sale and purchase considerations is recognised as interest income or expense on an accrual basis over the transaction periods. 5.5 Investments Short-term investments are investments that are intended to be held for not more than one year. Short-term investments include available-for-sale securities and held-tomaturity debt securities due within one year counting from the balance sheet dates. Long-term investments are investments that are intended to be held for longer than one year. Long-term investments include held-to-maturity debt securities due longer than one year counting from the balance sheet dates and general investments. Investments in available-for-sales securities, both held for short-term and long-term investments, are presented at fair value. Changes in the value of such securities are shown as a separate item in shareholders equity until the securities are sold, when the changes are then included in statements of income. 7

22 Investments in debt securities expected to be held to maturity are presented at amortised costs. Premiums/discounts on debt securities are amortised by the effective rate method with the amortised amount presented as an adjustment to interest income. Investments in non-marketable equity securities which are classified as general investments are valued at cost less allowance for impairment (if any). Investments in a subsidiary is accounted for, using the cost method, in the separate financial statements. In cases where there is reclassification of investment type, the investments are presented at their fair value prevailing on the reclassification dates. Differences between the carrying amount of the investments and their respective fair value on those dates are charged against statements of income or recorded as revaluation surplus or deficit on investments, which is presented as a separate item in shareholders equity to be amortised over the remaining periods to maturity of the debt securities, according to the type of the reclassified investment and/or the type to which it is reclassified. The fair value of marketable securities is based on the latest bid price of the last working day of the year as quoted on the Stock Exchange of Thailand. The fair value of debt securities is based on the yield rates quoted by the Thai Bond Market Association. The fair value of investment units is determined based on their net asset value as of the balance sheet date. Losses on impairment (if any) of investments are included in statements of income. The weighted average method is used for computation of the cost of investments when sold. 5.6 Loans The subsidiary presents loans at the principal balances excluding accrued interest receivables, with the exception of bank overdrafts, which are presented at the principal balances including interest. Unrealised deferred income and discounts on loans are deducted from the loan balances. 8

23 5.7 Allowance for doubtful debts The subsidiary provides allowance for doubtful debts for loans in accordance with the Notifications of the Bank of Thailand ( BoT ) and makes additional adjustment based on an evaluation of the current status of the debtors, taking into accounts the subsidiary s experience in consideration of the credit risk and the value of collateral. For loans classified as Pass, including restructured loans, and Special mention, the subsidiary sets provision at the rates of 1% and 2%, respectively, of the loan balances (excluding accrued interest receivables) after deducting collateral value in accordance with criteria stipulated by the BoT. For non-performing loans, which are loans classified as Sub-standard, Doubtful and Doubtful of loss, the subsidiary sets provision at a rate of 100% of the excess of the loan balance over the present value of expected future cash flows from debt collection or from collateral disposal for loans, in accordance with criteria stipulated by the BoT. The discount rate and expected time required to dispose collateral used in determining the present value is in accordance with criteria stipulated by the BoT. Allowance for doubtful debts additionally set up during the years is recognised as expenses for the years. Amounts written off as bad debts are deducted from the allowance for doubtful debts and in case of recovery being made from bad debtors, the recovered amount is recognised as revenue in statements of income in the years it is recovered. 5.8 Troubled debt restructuring and losses from troubled debt restructuring The subsidiary records troubled debt restructuring transactions and relevant losses with reference to criteria stipulated by the Bank of Thailand. In cases where the troubled debt restructuring involves modification of the repayment conditions, the subsidiary will determine the present value of expected future cash flows to be received in accordance with the new restructuring agreements, discounted by the loan s original interest rates. The excess of the recorded outstanding loans and receivables due from a debtor over the then-determined present value of future cashflows is accounted for as revaluation allowance for debt restructuring. If the thendetermined revaluation allowance for debt restructuring exceeds the allowance for doubtful debts already provided for such loans and receivables, the subsidiary will recognise such excess as loss from troubled debt restructuring in the statements of income on the debt restructuring dates. 9

24 In cases where the debt restructuring has been processed through the courts, the subsidiary will calculate discounted cash flows from the disposal of collateral using the original contract rate. Any excess of the book value of receivables over the present value of expected future cash flows from disposal of collateral is recorded as revaluation allowance for debt restructuring and expensed in the statements of income as at the restructuring date to the extent that it exceeds the existing allowance for doubtful debts. In cases where the troubled debt restructuring involves debts/assets swap and/or debts/equity swap, the subsidiary recognises a loss from troubled debt restructuring in the statements of income equal to the excess of the recorded outstanding loan and receivable balances due from a debtor over the fair value of assets and/or equity received in settlement of debts (after deducting the estimated selling expense). However, the value of assets being transferred to the subsidiary will be recorded at the amount not exceeding the sum of the book value of loans and receivables and nonaccrued interest income to which the subsidiary is entitled legally. In cases where the troubled debt restructuring involves reduction of principal and/or interest previously accrued as revenue, the subsidiary recognises it as expenses in the statements of income. 5.9 Leasehold improvements and equipment/depreciation Leasehold improvements and equipment are stated at cost less accumulated depreciation and allowance for impairment (if any). Depreciation of leasehold improvements and equipment is calculated by reference to their costs on the straightline basis over the following estimated useful lives. Leasehold improvements - 5 years Furniture and fixtures - 5 years Office equipment - 5 years Vehicles - 5 years Depreciation of leasehold improvements and equipment is included in statements of income. No depreciation is provided on leasehold improvements under construction. 10

25 5.10 Intangible assets/amortisation Intangible assets are measured at cost upon initial recognition and subsequently measured at cost less any accumulated amortisation and allowance for impairment losses (if any). Intangible assets with finite lives are amortised on a systematic basis over their economic useful lives and tested for impairment whenever there is an indication that the intangible assets may be impaired. The amortisation period and method for such intangible assets are reviewed at least at each fiscal year-end. The amortisation expenses are recognised as expenses in the statements of income. Intangible assets with finite useful lives of the Company and its subsidiary are computer softwares, which have an estimated useful life of 5 years and no amortisation is provided on intangible assets under development Impairment of assets At each balance sheet date, the Company and its subsidiary perform impairment reviews in respect of their leasehold improvements, equipment and intangible assets whenever events or changes in circumstances indicate that such assets may be impaired. The Company and its subsidiary recognise loss on impairment in statements of income when the recoverable amount of asset is less than the carrying amount. An asset s recoverable amount is the higher of its asset s fair value less costs to sell and its value in use. In determining fair value less costs to sell, the Company and its subsidiary assess value that reflects the amount that the Company and its subsidiary could obtain from the disposal of the asset in an arm s length transaction between knowledgeable and willing parties, after deducting the costs of disposal. In determining value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset Employee benefits Salary, wages, bonuses and contributions to the social security fund and provident fund are recognised as expenses on an accrual basis Income tax Income tax is provided in the accounts based on the taxable profits determined in accordance with tax legislation. 11

26 5.14 Related party transactions Related parties comprise enterprises and individuals that control, or are controlled by the Company and its subsidiary, whether directly or indirectly, or which are under common control with the Company and its subsidiary. In addition, related parties include associated companies and individuals which directly or indirectly own a voting interest in the Company and its subsidiary that gives them significant influence over the Company and its subsidiary, directors or key management personnel with authority in the planning and direction of the Company s and its subsidiary s operations, together with close family members of such persons and companies which are controlled and influenced by them, whether directly or indirectly. 6. Significant accounting judgments and estimates The preparation of financial statements in conformity with generally accepted accounting principles at times requires management to make subjective judgments and estimates regarding matters that are inherently uncertain. These judgments and estimates affect reported amounts and disclosures and actual results could differ. The significant accounting judgments and estimates are as follows: 6.1 Fair value of financial instruments In determining the fair value of financial instruments that are not actively traded and for which quoted market prices are not readily available, the management exercises judgment in estimating the fair value of such financial instruments using the generally accepted valuation method. The variables used are comparable to those from the observable markets, taking into consideration of liquidity and correlation and longerterm volatility of financial instruments. 6.2 Allowance for doubtful debts on loans and accrued interest receivables Allowances for doubtful debts on loans and accrued interest receivables are intended to adjust the value of loans and receivables for probable credit losses. The management uses judgment to losses expected to be incurred on loans and accrued interest receivables when a debtor defaults repayments on principal and/or payments of interest, taking into consideration an analysis of each debtor s status, payment history, collection history experience from the debtor, the value of collateral and current surrounding economic conditions. However, the use of different estimates and assumptions could affect the amounts of allowances for doubtful debts and adjustments to the allowances may therefore be required in the future. 12

27 6.3 Allowance for impairment on investments in securities The Company and its subsidiary consider available-for-sale equity investments as impaired when there has been a significant and prolonged decline in the fair value below its cost. The determination of what is significant or prolonged is subject to the management s judgment. 6.4 Intangible assets The initial recognition and measurement of intangible assets and subsequent impairment testing require management to make estimates of cash flow to be generated by the assets or the cash generating units and to choose a suitable discount rate in order to calculate the present value of those cash flows. 6.5 Assessment of risk and rewards When considering the recognition or derecognition of assets and liabilities, the management use judgment in considering and assessing risk and rewards. Although management uses their best judgement and knowledge of current events in making assessments of risk and rewards, actual risks and rewards may ultimately differ. 7. Interbank and money market items (assets) Consolidated financial statements LH Bank s financial statements 31 December December 2008 (After shareholding (Before shareholding At call Term Total At call Term Total Domestic Bank of Thailand 472,877,194 2,540,000,000 3,012,877, ,928,147 2,700,000,000 2,912,928,147 Commercial banks 108,502, ,502,431 85,324, ,000, ,324,019 Other financial Institutions ,000, ,000, ,000, ,000,846 Total domestic 581,379,966 2,700,000,000 3,281,379, ,253,012 3,300,000,000 3,728,253,012 Add: Accrued interest receivables - 359, ,584 33,219 1,418,038 1,451,257 Less: Allowance for doubtful debts - (1,600,000) (1,600,000) (800,000) - (800,000) Interbank and money market items - net 581,379,966 2,698,759,584 3,280,139, ,486,231 3,301,418,038 3,728,904,269 Separate financial statements 31 December 2009 At call Term Total Domestic Commercial banks 99,931,039-99,931,039 99,931,039-99,931,039 13

28 8. Investments 8.1 Classified by types of investment Consolidated financial statements LH Bank s financial statements 31 December December 2008 (After shareholding Cost/ (Before shareholding Cost/ Carrying value Fair value Carrying value Fair value Short-term investments Available-for-sale securities Government and state enterprise securities 196,322, ,208,064 1,708,978,386 1,841,899,505 Private sector debt securities 140,188, ,607, Domestic marketable equity securities - - 3,073,680 1,580,842 Total 336,510, ,815,403 1,712,052,066 1,843,480,347 Add: Allowance for revaluation 12,304, ,479,225 - Less: Allowance for impairment - - (50,944) - Available-for-sale securities - net 348,815, ,815,403 1,843,480,347 1,843,480,347 Held-to-maturity debt securities - due within 1 year Government and state enterprise securities 63,407,781 64,948, ,605, ,632,931 Private sector debt securities ,978,819 50,521,521 Held-to-maturity debt securities - due within 1 year 63,407,781 64,948, ,584, ,154,452 Short-term investments - net 412,223, ,763,890 2,042,064,749 2,046,634,799 Long-term investments Held-to-maturity debt securities Government and state enterprise securities 9,856,286,332 9,876,126,076 5,905,989,989 6,545,802,585 Private sector debt securities 40,000,000 38,431, Held-to-maturity debt securities 9,896,286,332 9,914,557,264 5,905,989,989 6,545,802,585 General investments Domestic non-marketable equity securities 5,365,310 12,198,035 Less: Allowance for impairment (565,310) (7,398,035) General investments - net 4,800,000 4,800,000 Long-term investments - net 9,901,086,332 5,910,789,989 Separate financial statements 31 December 2009 Cost/ Carrying value Fair value Investment in subsidiary Investment in subsidiary (cost method) 2,654,499,000 Investment in subsidiary - net 2,654,499,000 Net investments 2,654,499,000 14