AnnualReport & FinancialStatements

Transcription

1 AnnualReport & FinancialStatements 31 December IBB Annual Report & Financial Statements Islamic Bank of Britain PLC Registered number

2 Financial & Operational Highlights 6% No. of Customers (To 50,000) 18% Customer Deposits (Liabilities at 186.6m) 97% Customer Financing (Assets at 46.2m) 2

3 Contents Chairman s statement...pg 4 Report of the Sharia Supervisory Committee...pg 6 Directors report...pg 7 Statement of directors responsibilities in respect of the Annual Report and the Financial Statements...pg 10 Independent auditors report to the Members of Islamic Bank of Britain PLC...pg 11 Statement of comprehensive income...pg 12 Statement of financial position...pg 13 Statement of changes in equity...pg 14 Statement of cash flows...pg 15 Notes to the financial statements...pg 16 Islamic Bank of Britain PLC Annual Report & Financial Statements

4 Chairman s statement The Bank s fi nancial performance for the year ended 31 December 2009 has continued to be impacted by the challenging economic environment. The UK was in recession for the majority of 2009, negatively impacting the housing market, unemployment, disposable incomes and market yields. In addition, there has been increased regulatory focus on minimum liquidity and capital adequacy requirements. Despite the diffi cult conditions, the past twelve months have seen strong growth in both customer fi nance assets and customer deposits. Highlights Customer fi nancing increased by 97% to 46.2m Deposits increased by 18% to 186.6m Customer numbers increased by 6% to just under 50,000 Launch of 12, 18 and 24 month term deposits Enhancements to the Home Purchase Plan product range Winner of Global Finance Best UK Islamic Financial Institution 2009 award Current environment and trading performance The major impact of the ongoing market conditions has been to reduce the Bank s revenues throughout the year. A signifi cant source of revenue for the Bank is the return earned from investing customer deposits on the Islamic interbank market. Yields in the interbank markets declined during the fi rst half of 2009 and have since remained at historic low levels, resulting in a reduction in operating income to 1.6m (2008: 4.9m) and a loss for the year of 9.5m (2008: 5.9m). The directors implemented specifi c actions during the year to mitigate the decline in revenues. These included growth in higher yielding customer fi nance assets and achieving cost reductions through operational effi ciencies that regrettably involved a number of redundancies at the Bank s head offi ce at the end of These actions have continued in Products The Home Purchase Plan ( HPP ) product achieved strong growth, resulting in a near 100% increase in the Bank s customer fi nance assets. The HPP range was expanded during the year with a fi xed rental product and a product adapted for the Scottish market. It is also pleasing to note that this new business was achieved in accordance with prudent credit policies, with currently no arrears within the HPP and commercial property fi nance portfolios. The Bank continues to use retail deposits to fund all customer fi nance assets and has no reliance on wholesale funding. Growth in longerterm savings products was achieved during the year with the launch of a wider range of term deposits in July 2009 and continued growth in the Notice Savings account launched in the prior year. Capital As noted in the Interim Report, the Bank raised new capital of 7.5m via a placing of new shares in January While the Bank continues to have suffi cient capital for its current requirements, the Board is in ongoing discussions with its advisors and interested parties regarding the raising of additional capital to support planned future growth. If additional capital is not raised, the Bank will need to scale back its growth plans and operations during 2010 in order to ensure that regulatory capital requirements continue to be achieved. 4 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

5 Outlook The challenging market conditions look set to persist into 2010 and the directors and management will continue to identify opportunities to mitigate the adverse effects. We will maintain tight cost control and focus on growth in low risk secured customer fi nance assets funded by longer-term savings deposits. Chairman s statement Finally, I would like to extend my thanks and gratitude to Islamic Bank of Britain s customers, employees, Sharia Supervisory Committee scholars and shareholders for their continued support and commitment to the Bank. Mohsen Moustafa Chairman 24 March 2010 Islamic Bank of Britain PLC Annual Report & Financial Statements

6 Report of the Sharia Supervisory Committee In the name of Allah, the Most Gracious, the Most Merciful To the Members of the Islamic Bank of Britain PLC For the period from 1 January 2009 to 31 December 2009 In compliance with the Terms of Reference of the Bank s Sharia Supervisory Committee, we submit the following report: We have reviewed the documentation relating to the products and transactions entered into by the Islamic Bank of Britain PLC for the period from 1 January 2009 to 31 December According to Management, the Sharia Compliance Offi cer of the Bank and documents evidencing the facts, the Bank s funds were raised and invested during this period on the basis of agreements approved by us. Therefore, based on the report of our representative and representations received from Management, in our opinion, the transactions and the products entered into by the Bank during the period from 1 January 2009 to 31 December 2009 are in compliance with the Islamic Sharia rules and principles and fulfi l the specifi c directives, rulings and guidelines issued by us. We beg Allah the Almighty to grant us all the success and straightforwardness. Dr Abdul Sattar Abu Ghuddah Chairman of the Sharia Supervisory Committee 24 March Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

7 Directors report The directors present their report and fi nancial statements for the year ended 31 December Principal activities Islamic Bank of Britain PLC (the Company or the Bank ) is the only independent Islamic retail bank in the United Kingdom established and managed on a wholly Sharia compliant basis. The Bank offers a range of Sharia compliant banking solutions for both individual and business customers including current accounts, savings accounts, and consumer and business fi nancing. These are delivered through the Bank s branch network, which is complemented by internet, telephone and postal banking channels. Financial Results These fi nancial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU. The fi nancial statements for the year ended 31 December 2009 are shown on pages 12 to 41. The loss for the year amounts to 9,492,744 (2008: 5,910,700). Details of the Company s performance and prospects are given within the Chairman s statement on pages 4 and 5. The directors do not recommend the payment of a dividend (2008: nil). Risks The Bank has exposure to the following risks arising from its use of fi nancial instruments: Credit risk: Credit risk is the risk arising from the failure of a customer or counterparty to meet their contractual obligations. The risk arises from the Bank s secured and unsecured fi nance provided to customers and the investment of surplus funds in Sharia compliant wholesale deposits with bank counterparties; Liquidity risk: Liquidity risk is the risk that the Bank does not have suffi cient resources to meet its commitments when they fall due, or can secure them only at excessive cost. The risk arises from the mismatch of the Bank s fi nancial assets and fi nancial liabilities; Market risk: Market risk is the risk of loss of income arising from unfavourable market movements, including foreign exchange rates and profi t rates. The Bank does not operate a trading book and therefore market risk arises only within the banking book; Operational risk: Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. It includes risks arising from product and service failures, legal and regulatory risks, poor customer treatment, theft and fraud, the impact of change, the use of third party suppliers and information technology failure; Concentration risk: Concentration risk is the risk of loss arising from inadequate diversifi cation of credit risk across sectors. The risk arises due to exposure to particular geographic locations, industry sectors or particular customers or institutions; and Sharia compliance risk: Sharia compliance risk is the risk of loss arising from products or services not complying with Sharia requirements or in accordance with Islamic principles. A detailed explanation of the Bank s approach to fi nancial and operational risk management is set out in note 4 to the fi nancial statements. Creditor payment policy The Company seeks to settle trade invoices in line with their payment terms. The amount due to the Company s trade creditors as at 31 December 2009 represented 30 days (2008: 40 days) average daily purchases of goods and services calculated in accordance with the Companies Act Capital On 19 December 2008, an ordinary resolution was passed at an extraordinary general meeting increasing the authorised share capital of the Company from 5,000,000 to 7,250,000 by the creation of an additional 225,000,000 new Ordinary Shares. On 23 January 2009, an additional 127,470,000 shares were allotted for consideration of 7,488,863 before expenses. Islamic Bank of Britain PLC Annual Report & Financial Statements

8 Directors report (continued) Directors and directors interests The directors who held offi ce during the year were as follows: Mr. Mohsen Moustafa (Chairman) (c) Mr. Abdulaziz Al-Khulaifi Resigned 19 January 2009 Mr. Robert Owen (a) (b) (c) Mr. Abdul Hakim Al-Adhamy (a) (b) Mr. Gerry Deegan (c) Mr. Sultan Choudhury (a) (b) (c) Denotes member of Audit Committee Denotes member of Remuneration Committee Denotes member of Nomination Committee The directors who held offi ce at the end of the fi nancial year had the following interests in the ordinary shares of the Company according to the register of directors interests: Class of share Interest at start and end of year Mr. Mohsen Moustafa Ordinary 100,000 Mr. Gerry Deegan Ordinary 20,000 Mr. Sultan Choudhury Ordinary 34,000 Details of the Executive Director s options to subscribe for ordinary shares are given below. Further information on the share options is provided in note 22. Interest at start of year Interest at end of year Earliest exercise date Latest exercise date Exercise price Mr. Gerry Deegan 157, ,894 5 Nov Nov p Mr. Sultan Choudhury 157, ,894 5 Nov Nov p No options were granted or exercised during the year by the directors. None of the other directors who held offi ce at the end of the fi nancial year had any disclosable interest in the shares of the Company. 8 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

9 Directors report Signifi cant Shareholders The following shareholders had interests in the ordinary shares of the Company in excess of 3% as at 31 December 2009 (comparatives only shown if holding as at 31 December 2008 was greater than 3%): 2009 (%) 2008 (%) HE Sheikh Thani Bin Abdulla Bin Thani Jasim Al Thani HRH Sheikh Hamad Bin Khalifa Bin Hamad Al Thani Qatar International Islamic Bank Vidacos Nominees Limited DCD London & Mutual PLC Lynchwood Nominees Limited Qatar Islamic Insurance Company UBS Private Banking Nominees Limited Sharia Supervisory Committee members The Sharia Supervisory Committee members during the year were as follows: Dr. Abdul Sattar Abu Ghuddah (Chairman) Sheikh Nizam Yaqoobi Mufti Abdul Kadir Barkatullah The report of the Sharia Supervisory Committee is set out on page 6. Political and charitable contributions The Company made no political contributions during the year (2008: nil). Donations to UK charities amounted to 1,200 (2008: 2,023) and consisted of late payment fees received on personal fi nance accounts that were paid to charity in accordance with product terms as agreed with the Sharia Supervisory Committee. Disclosure of information to auditors The directors who held offi ce at the date of approval of this directors report confi rm that, so far as they are each aware, there is no relevant audit information of which the Company s auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company s auditors are aware of that information. Islamic Bank of Britain PLC Annual Report & Financial Statements

10 Directors report (continued) Auditors In acco rdance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the board Gerry Deegan Managing Director Islamic Bank of Britain PLC Edgbaston House 3 Duchess Place Birmingham B16 8NH 24 March 2010 Statement of directors responsibilities in respect of the Annual Report and the Financial Statements The directors are responsible for preparing the Annual Report and the fi nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare fi nancial statements for each fi nancial year. Under that law they have elected to prepare the fi nancial statements in accordance with IFRSs as adopted by the EU and applicable law. Under company law the directors must not approve the fi nancial statements unless they are satisfi ed that they give a true and fair view of the state of affairs of the Company and of the profi t or loss of the Company for that period. In preparing these fi nancial statements the directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU; and prepare the fi nancial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are suffi cient to show and explain the Company s transactions and disclo se with reasonable accuracy at any time the fi nancial position of the Company and enable them to ensure that its fi nancial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and fi nancial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of fi nancial statements may differ from legislation in other jurisdictions. 10 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

11 I ndepen dent auditors report to the Members of Islamic Bank of Britain PLC We have audited the fi nancial statements of Islamic Bank of Britain PLC for the year ended 31 December 2009 set out on pages 12 to 41. The fi nancial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. This report is made solely to the Company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Director s Responsibilities Statement set out on page 10, the directors are responsible for the preparation of the fi nancial statements and for being satisfi ed that they give a true and fair view. Our responsibility is to audit the fi nancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s (APB s) Ethical Standards for Auditors. Scope of the audit of the fi nancial statements A description of the scope of an audit of fi nancial statements is provided on the APB s web-site at Opinion on fi nancial statements In our opinion the fi nancial statements: give a true and fair view of the state of the Company s affairs as at 31 December 2009 and of its loss for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the EU; and have been prepared in accordance with the requirements of the Companies Act Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors Report for the fi nancial year for which the fi nancial statements are prepared is consistent with the fi nancial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the fi nancial statements are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration required by law are not made; or we have not received all the information and explanations we require for our audit. Ian A Dewar (Senior Statutory Auditor) 24 March 2010 for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants One Canada Square London E14 5AG Islamic Bank of Britain PLC Annual Report & Financial Statements

12 Statement of comprehensive income For the year ended 31 December 2009 Note Income receivable from Islamic fi nancing transactions 6 3,017,012 8,307,297 Returns payable to customers and banks 6 (1,807,271) (3,811,516) Net income from Islamic financing transactions 1,209,741 4,495,781 Fee and commission income 7 480, ,212 Fee and commission expense 7 (86,939) (94,783) Net fee and commission income 393, ,429 Operating income 1,603,393 4,928,210 Net impairment loss on fi nancial assets 14 (408,939) (325,971) Personnel expenses 9 (5,241,104) (4,831,978) General and administrative expenses (4,314,807) (4,017,168) Depreciation 15 (724,477) (775,007) Amortisation 16 (406,810) (888,786) Total operating expenses (11,096,137) (10,838,910) Loss before income tax (9,492,744) (5,910,700) Income tax expense Loss for the year (9,492,744) (5,910,700) Total comprehensive income for the year (9,492,744) (5,910,700) Loss attributable to owners of the Company (9,492,744) (5,910,700) Total comprehensive income attributable to owners of the Company (9,492,744) (5,910,700) Loss per ordinary share Basic and diluted (pence) 24 (1.8) (1.4) The notes on pages 16 to 41 are an integral part of these fi nancial statements. 12 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

13 Statement of financial position As at 31 December 2009 Note Assets Cash 577, ,953 Commodity Murabaha and Wakala receivables and other advances to banks ,951, ,687,736 Consumer fi nance accounts and other advances to customers 14 4,488,744 7,878,292 Net investment in home purchase plans 14 33,077,501 6,980,840 Net investment in commercial property fi nance 14 8,611,393 8,597,893 Property and equipment 15 2,660,754 3,265,745 Intangible assets , ,713 Other assets 17 1,340,277 1,263,128 Total assets 207,022, ,799,300 Liabilities and equity Liabilities Deposits from banks ,292 5,094,119 Deposits from customers ,975, ,280,754 Other liabilities 20 3,623,541 3,480,891 Total liabilities 190,208, ,855,764 Equity Called up share capital 22 5,464,700 4,190,000 Share premium 54,806,652 48,747,255 Retained defi cit (43,502,640) (34,046,165) Profi t stabilisation reserve 45,321 52,446 Total equity 16,814,033 18,943,536 Total equity and liabilities 207,022, ,799,300 The notes on pages 16 to 41 are an integral part of these fi nancial statements. These fi nancial statements were approved by the Board of Directors on 24 March 2010 and were signed on its behalf by: Gerry Deegan Managing Director Islamic Bank of Britain PLC Registration number: IBB Annual Report & Financial Statements

14 Statement of changes in equity For the year ended 31 December 2009 Share capital Share premium account Profit and loss account Profit stabilisation reserve Total Balance at 1 January ,190,000 48,747,255 (28,137,072) 25,126 24,825,309 Total comprehensive income for the year - - (5,910,700) - (5,910,700) Credit in respect of share based payments charge ,927-28,927 Transfer to profi t stabilisation reserve - - (27,320) 27,320 - Balance at 31 December ,190,000 48,747,255 (34,046,165) 52,446 18,943,536 Balance at 1 January ,190,000 48,747,255 (34,046,165) 52,446 18,943,536 Total comprehensive income for the year - - (9,492,744) - (9,492,744) Credit in respect of share based payments charge ,144-29,144 Transfer from profi t stabilisation reserve - - 7,125 (7,125) - Issue of ordinary share capital 1,274,700 6,059, ,334,097 Balance at 31 December ,464,700 54,806,652 (43,502,640) 45,321 16,814,033 The notes on pages 16 to 41 are an integral part of these fi nancial statements. 14 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

15 Statement of cash flows For the year ended 31 December 2009 Note Cash fl ows from operating activities Loss for the year (9,492,744) (5,910,700) Adjustments for: Depreciation , ,007 Amortisation , ,786 Impairment on fi nancial assets , ,971 Share based payments charge 22 29,144 28,927 Change in Commodity Murabaha and Wakala receivables (3,151,765) (12,784,885) Change in consumer fi nance accounts and other advances to customers 2,980,609 1,459,032 Change in net investment in commercial property fi nance (13,500) (2,506,011) Change in net investment in home purchase plans (26,096,661) (6,980,840) Change in other assets (77,149) 934,696 Change in deposits from banks (4,484,827) 2,601,729 Change in deposits from customers 32,695,238 18,634,228 Change in other liabilities 142, ,289 Net cash used in operating activities (5,928,779) (2,025,771) Cash fl ows from investing activities Purchase of property and equipment 15 (119,486) (597,397) Purchase of intangible assets 16 (143,638) (205,268) Net cash used in investing activities (263,124) (802,665) Cash fl ows from financing activities Issue of ordinary share capital 7,334,097 - Net cash generated from financing activities 7,334,097 - Net change in cash and cash equivalents 1,142,194 (2,828,436) Foreign exchange gains (4,716) (221,586) Cash and cash equivalents at 1 January 2,614,484 5,664,506 Cash and cash equivalents at 31 December 12 3,751,962 2,614,484 The notes on pages 16 to 41 are an integral part of these fi nancial statements. Islamic Bank of Britain PLC Annual Report & Financial Statements

16 Notes to the financial statements 1 Reporting entity Islamic Bank of Britain PLC (the Company or the Bank ) is a company domiciled in the UK. The address of the Company s registered offi ce is Edgbaston House, 3 Duchess Place, Hagley Road, Birmingham B16 8NH. The fi nancial statements of the Company are presented as at and for the year ended 31 December The Company is a retail bank offering Sharia compliant banking products and services. 2 Basis of preparation (a) Statement of compliance These fi nancial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and approved by the directors. These fi nancial statements were approved by the Board of Directors on 24 March The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these fi nancial statements. (b) Basis of measurement The fi nancial statements of the Company have been prepared on the going concern basis. In making the going concern assessment, the directors have prepared detailed fi nancial forecasts for the Company, including its funding and capital position, for the twelve months from the date of approval of these fi nancial statements. As noted in the Chairman s statement, the Board is in ongoing discussions with its advisors and interested parties regarding the raising of additional capital to support planned future growth. The directors have considered the effect upon the Company of more pessimistic scenarios on its business, in particular the worsening of the economic environment and if new capital is not raised as planned. The scenarios show that if new capital is not raised, the directors will need to scale back the Bank s growth plans and operations during 2010 in order to ensure that regulatory requirements continue to be achieved. The directors are prepared to implement as appropriate management actions to address any potential regulatory capital defi cit as required, including a cost reduction exercise. Based on the forecasts, the directors are confi dent that the Company has adequate resources to continue in operational existence and will continue to comply with all relevant regulatory requirements for a period of at least the next 12 months. Accordingly, they continue to adopt the going concern basis in preparing the fi nancial statements. The fi nancial statements have been prepared on the historical cost basis. (c) Functional and presentation currency The fi nancial statements are presented in Sterling, which is the Company s functional currency. (d) Use of estimates and judgements The preparation of fi nancial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about signifi cant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most signifi cant effect on the amount recognised in the fi nancial statements are described in note 5. 3 Signifi cant accounting policies (a) (i) Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. 16 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

17 3 Signifi cant accounting policies (continued) Notes to the financial statements (ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefi ts embodied within the part will fl ow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in the income statement as incurred. (iii) Depreciation Depreciation is recognised in the income statement on a straight line basis over the estimated useful lives of each part of an item of property and equipment as follows: Computer equipment 3 Years Fixtures, fi ttings and offi ce equipment 5 Years Leasehold improvements 10 Years or over the life of the lease whichever is shorter Depreciation methods, useful lives and residual values are reassessed at each reporting date. (b) Intangible assets Software and computer licences acquired by the Company are stated at cost less accumulated amortisation and accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Company is able to complete the development and use the software in a manner that will generate future economic benefi ts, and can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software, and are amortised over its estimated useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and impairment. Subsequent expenditure on software assets and computer licences is capitalised only when it increases the future economic benefi ts embodied in the specifi c asset to which it relates. All other expenditure on software or computer licenses is expensed as incurred. Amortisation is recognised in the income statement on a straight line basis over the estimated useful life of the software or the licence term, from the date that it becomes available for use. The estimated useful life of software is three years. (c) Commodity Murabaha and Wakala receivables and other advances to banks Commodity Murabaha is an Islamic fi nancing transaction, which represents an agreement whereby the Company buys a commodity and sells it to a counterparty based on a promise received from that counterparty to buy the commodity according to specifi c terms and conditions. The selling price comprises of the cost of the commodity and a pre-agreed profi t margin. Wakala is an Islamic fi nancing transaction, which represents an agreement whereby the Company provides a certain sum of money to an agent, who invests it according to specifi c conditions in order to achieve a certain specifi ed return. The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. Commodity Murabaha receivables are recognised upon the sale of the commodity to the counterparty. Wakala receivables are recognised upon placement of funds with other institutions. Income on both Commodity Murabaha and Wakala receivables is recognised on an effective yield basis. The effective yield rate is the rate that exactly discounts the estimated future cash payments and receipts through the agreed payment term of the contract to the carrying amount of the receivable. The effective yield is established on initial recognition of the asset and is not revised subsequently. The calculation of the effective yield rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective yield rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a fi nancial asset or liability. Islamic Bank of Britain PLC Annual Report & Financial Statements

18 Notes to the financial statements 3 Signifi cant accounting policies (continued) Commodity Murabaha and Wakala receivables are initially recorded at fair value and are subsequently measured at amortised cost using the effective yield method, less impairment losses. The accrued income receivable is classifi ed under other assets. Other advances to banks are stated at cost and are non-return bearing. (d) Consumer finance accounts Islamic consumer fi nancing transactions represent an agreement whereby the Company buys a commodity or goods and then sells it to the customer with an agreed profi t mark-up with settlement of the sale price being deferred for an agreed period. The customer may subsequently sell the commodity purchased to generate cash. Consumer fi nance assets will be recognised on the date that the commodity or good is sold by the Company. Consumer fi nance account balances are initially recorded at fair value and are subsequently measured at amortised cost. The amortised cost is the amount at which the asset is measured at initial recognition, minus repayments received relating to the initial recognised amount, plus the cumulative amortisation using an effective yield method of any difference between the initial amount recognised and the agreed sales price to the customer, minus any reduction for impairment. Income is recognised on an effective yield basis over the period of the contract. The effective yield rate is the rate that exactly discounts the estimated future cash payments and receipts through the agreed payment term of the contract to the carrying amount of the receivable. The effective yield is established on initial recognition of the asset and is not revised subsequently. The calculation of the effective yield rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective yield rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a fi nancial asset or liability. The accrued income receivable from the customer is classifi ed under other assets. (e) Commercial property finance and home purchase plans Commercial property fi nance and home purchase plans are provided using the Diminishing Musharaka (reducing partnership) principle of Islamic fi nancing. The Company will enter into an agreement to jointly purchase a property and rental income will be received by the Company relating to that proportion of the property owned by the Company at any point in time. The other party to the agreement will make separate payments to purchase additional proportions of the property from the Company, thereby reducing the Company s effective share. The transaction is recognised as a fi nancial asset upon legal completion of the property purchase and the amount receivable is recognised at an amount equal to the net investment in the transaction. Where initial direct costs are incurred by the Company such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging the transaction, these costs are included in the initial measurement of the receivable and the amount of income over the term will be reduced. Rental income is recognised to provide a constant periodic rate of return on the Company s net investment. (f) Deposits from customers Profi t sharing accounts are based on the principle of Mudaraba whereby the Company and the customer share an agreed percentage of any profi t earned on the customer s deposit. The customer s share of profi t is paid in accordance with the terms and conditions of the account. The profi t calculation is undertaken at the end of each calendar month. Customer Murabaha deposits consist of an Islamic fi nancing transaction involving the Company arranging the purchase of an asset on behalf of the customer and the purchase thereof from the same customer by the Company at cost plus an agreed profi t mark-up with settlement on a deferred payment basis. Customer Murabaha deposit balances are included in the balance sheet under deposits from customers and the accrued returns payable to the customer are classifi ed under other liabilities. Returns payable on customer Murabaha deposits are recognised on an effective yield basis over the period of the contract. Customer Wakala deposits consist of an Islamic fi nancing transaction, which represents an agreement whereby the customer appoints the Company as agent to invest a certain sum of money, according to specifi c conditions in order to achieve a certain specifi ed return. The Company, as agent, is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. 18 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

19 3 Signifi cant accounting policies (continued) Notes to the financial statements (g) Profit stabilisation reserve The profi t stabilisation reserve is used to maintain returns payable to customers on Mudaraba based savings accounts. Returns payable on these profi t sharing accounts are credited to customers in accordance with the terms and conditions of the account. Any surplus returns arising from the investment of funds are then credited to this reserve. In the case of inadequate returns generated by these funds, the Company will maintain the return to depositors by utilising this reserve. (h) Derecognition of financial assets and liabilities The Company derecognises a fi nancial asset when the contractual rights to the cash fl ows from the asset expire, or it transfers the rights to receive the contractual cash fl ows on the fi nancial asset in a transaction in which substantially all the risks and rewards or ownership of the fi nancial asset are transferred. Any remaining nterest in transferred fi nancial assets that is created or retained by the Company is recognised as a separate asset or liability. The Company derecognises a fi nancial liability when its contractual obligations are discharged or cancelled or have expired. (i) Impairment of financial assets At each balance sheet date the Company assesses whether there is objective evidence that fi nancial assets are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash fl ows of the asset that can be estimated reliably. The Company considers evidence of impairment at both a specifi c asset and collective level. All individually signifi cant fi nancial assets are assessed for specifi c impairment. All signifi cant assets found not to be specifi cally impaired are then collectively assessed for any impairment that has been incurred but not yet identifi ed. Assets that are not individually signifi cant are then collectively assessed for impairment by grouping together fi nancial assets (carried at amortised cost) with similar risk characteristics. Objective evidence that fi nancial assets are impaired include default or delinquency by the counterparty, extending or changing repayment terms, indications that a counterparty may go into bankruptcy, or other observable data relating to the group of assets such as adverse changes in the payment status of counterparties, or economic conditions that correlate with defaults in the group. In assessing collective impairment the Company uses analysis of historical trends to identify the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic conditions are such that actual losses are likely to be greater or less than suggested by historical analysis. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the fi nancial asset and the present value of the estimated cash fl ows discounted at the assets original effective yield rate. Losses are recognised in the income statement and refl ected against the assets carrying value. When a subsequent event causes the amount of expected impairment losses to decrease, the impairment loss is reversed through the income statement. (j) Impairment of non-financial assets The carrying amounts of the Company s non-fi nancial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cashgenerating unit is the smallest identifi able asset group that generates cash fl ows that largely are independent from other assets and groups. Impairment losses are recognised in the income statement. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to resell. In assessing value in use, the estimated future cash fl ows are discounted to their present value. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Islamic Bank of Britain PLC Annual Report & Financial Statements

20 Notes to the financial statements 3 Signifi cant accounting policies (continued) (k) Provisions A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outfl ow of economic benefi ts will be required to settle the obligation. Provisions are determined by discounting the expected future cash fl ows at a pre-tax rate that refl ects current market assessments of cost of funds and, where appropriate, the risks specifi c to the liability. (l) Fees and commissions Fee and commission income that relates mainly to transaction and service fees are recognised as the related services are performed. Fees and commission expenses that relate mainly to transaction and service fees are expensed as incurred. Arrangement fees for commercial property fi nance deals and home purchase plans are amortised over the expected life of the transaction. (m) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profi ts will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefi t will be realised. (n) Lease payments made Payments made under operating leases are recognised in the income statement on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease. (o) Employee benefits Obligations for contributions to defi ned contribution pension plans are recognised as an expense in the income statement when they are due. Short-term employee benefi ts, such as salaries, paid absences, and other benefi ts, are accounted for on an accruals basis over the period for which employees have provided services. Bonuses are recognised to the extent that the Company has a present obligation to its employees that can be measured reliably. (p) Cash and cash equivalents Cash and cash equivalents include notes and coins in hand, unrestricted balances held with central banks and highly liquid fi nancial assets with original maturities of less than three months, which are subject to insignifi cant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments. Commodity Murabaha and Wakala transactions, used by the Company for investment purposes, are not included within cash and cash equivalents. Cash and cash equivalents are carried at amortised cost in the balance sheet. 20 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009

21 3 Signifi cant accounting policies (continued) Notes to the financial statements (q) Other receivables Trade and other receivables are stated at their nominal amount (discounted if material) less impairment losses. (r) Earnings per share The Company presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profi t or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profi t or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. (s) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency at exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate ruling at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period and the amortised cost in foreign currency translated at the exchange rate ruling at the end of the period. Foreign currency differences arising on retranslation are recognised in the income statement. (t) Share based payments The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined by an external valuer using an option pricing model, taking into account the terms and conditions upon which the options were granted. The cost of equity-settled transactions is expensed on a straight-line basis, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfi lled, ending on the date on which the relevant employees become fully entitled to the award ( the vesting date ). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date refl ects the extent to which the vesting period has expired and the Company s best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. Any dilutive effect of outstanding options is refl ected as additional share dilution in the computation of earnings per share. (u) New standards and interpretations effective in 2009 IAS 1 (Revised), Presentation of Financial Statements. This standard revises the overall requirements for the presentation of fi nancial statements and provides guidance for their structure and minimum content requirement. The revised standard requires the presentation of all non-owner changes in equity within a statement of comprehensive income. IFRS 2 (Amendment), Share Based Payment. This amendment restricts the defi nition of vesting conditions to include only service conditions and performance conditions and deals with the accounting consequences of a failure to meet a condition other than a vesting condition including how to deal with cancellations by the counterparty and the circumstances where neither the entity nor the counterparty is in a position to choose whether or not to meet a vesting condition. IAS 32 (Amendment), Financial Instruments: Presentation, and IAS 1 (Amendment), Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation. The amended standards require entities to classify puttable fi nancial instruments and instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation as equity, provided the fi nancial instruments have particular features and meet specifi c conditions. IFRS 7 (Amendment), Financial Instruments: Disclosure. This amendment requires enhanced disclosures about the fair value measurements and liquidity risks in respect of fi nancial instruments. The main change relates to fair value measurements which should now be disclosed in a three level hierarchy that refl ects the signifi cance of model inputs. Specifi c disclosures are required for Level 3 (signifi cant unobservable inputs), movements between level 1 and 2, and around changes in valuation techniques Islamic Bank of Britain PLC Annual Report & Financial Statements

22 Notes to the financial statements 3 Signifi cant accounting policies (continued) between different periods. As all of the Company s fi nancial assets are carried at amortised cost the requirement to provide hierarchy disclosures has no impact on these fi nancial statements. IFRS 8, Operating Segments. IFRS 8 replaces IAS 14 Segment Reporting and requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. Improvements to IFRSs. This sets out minor amendments to IFRS standards as part of an annual improvements process. (v) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations relevant to the Company have been issued, but are not yet effective within the EU and have not been applied in preparing these fi nancial statements. IAS 24 (Revised), Related Party Disclosures (effective from 1 January 2011). This revised standard includes an exemption from the disclosure requirements for related transactions between state-controlled entities and includes a revised defi nition for related parties. The revised standard will not have a material impact on the Company s fi nancial results. (*) IFRS 9, Financial Instruments (effective from 1 January 2013). This standard deals with the classifi cation and measurement of fi nancial assets and will replace IAS 39. The requirements of this standard represent a signifi cant change from the existing requirements in IAS 39. The standard contains two primary measurement categories for fi nancial assets: amortised cost and fair value. The standard eliminates the existing IAS 39 categories of held to maturity and loans and receivables. The potential effect of this standard is currently being evaluated. (*) * The revised IAS 24 and IFRS 9 have not yet been endorsed by the EU. 4 Financial risk management The Company has exposure to the following risks arising from its use of fi nancial instruments: Credit risk Liquidity risk Market risk Operational risk Sharia compliance risk Concentration risk This note presents information about the Company s exposure to each of the above risks, its objectives, policies and processes for measuring and managing these risks, and its management of capital. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework. The Company has established the Asset & Liability (ALCO), Credit and Risk Committees, which are responsible for developing and monitoring risk management policies in their specifi c areas. The Company s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to refl ect changes in market conditions, products and services offered. The Company, through its training and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. Risk management controls and procedures are reviewed by Internal Audit, both as part of the regular audit review programme and through ad-hoc reviews. The results of these reviews are reported to the Audit Committee. 22 Islamic Bank of Britain PLC Annual Report & Financial Statements 2009