ANNUAL CONSOLIDATED FINANCIAL STATEMENTS OF THE CAPITAL GROUP OF BANK OCHRONY ŚRODOWISKA S.A. FOR THE YEAR ENDED 31 DECEMBER 2016 WITH THE

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1 ANNUAL CONSOLIDATED FINANCIAL STATEMENTS OF THE CAPITAL GROUP OF BANK OCHRONY ŚRODOWISKA S.A. FOR THE YEAR ENDED 31 DECEMBER 2016 WITH THE INDEPENDENT AUDITORS` REPORT Warsaw, March 2017

2 Contents of the annual consolidated financial statements in accordance with IFRS as endorsed by the EU Page Annual consolidated income statement... 3 Annual consolidated statement of comprehensive income... 4 Annual consolidated statement of financial position... 5 Annual consolidated statement of changes in equity... 6 Annual consolidated statement of cash flow Basic information about Bank Ochrony Środowiska S.A. and the Bank Ochrony Środowiska S.A. Capital Group Information on the accounting policies adopted in the preparation of the annual consolidated financial statements Adjustments of prior period errors Significant accounting estimates and judgements Risk management Net interest income Net fee and commission income Net trading income Result on investment securities Result on hedge accounting transactions Foreign exchange result Other operating income Other operating expenses Net impairment result General administrative expenses Employee benefits Income tax charges Earnings per share Cash and balances with the Central Bank Receivables from other banks Securities held for trading Loans and advances to customers Investment securities Financial assets by maturity dates Intangible assets Property, plant and equipment Other assets Amounts due to the Central Bank and other banks Amounts due to customers Debt securities issued

3 31. Subordinated debts Provisions Deferred income tax Other liabilities Contingent assets and liabilities Operating lease Brokerage activities Share capital Revaluation reserve Retained earnings Share-based payment Additional information to the statement of cash flow Description of derivative financial instruments and foreign exchange transactions Fair value of the financial assets and liabilities Breakdown of financial instruments measured at fair value by the valuation model Segment reporting Related party transactions Business disposal, liquidation and business combinations Dividends paid and declared Events after the reporting date Remuneration of the entity authorized to audit financial statements

4 Annual consolidated income statement For the year ended Continued operations comparative Note data Interest income and similar income Interest expense and similar charges Net interest income Fee and commission income Fee and commission expense Net fee and commission income Dividend income Net trading income Result on investing securities Result on hedge accounting Foreign exchange result Other operating income Other operating expense Net impairment gains/losses wind farm loans Administrative expenses 15, Operating profit Profit/loss before tax Income tax expense current tax deferred tax Net profit/loss Attributable to: - equity holders of the parent Earnings per share attributable to equity holder of the parent during the period (in PLN) basic diluted There were no discontinued operations in 2016 and Notes on the pages 9 to 155 are an integral part of these consolidated financial statements. 3

5 Annual consolidated statement of comprehensive income Item Note For the year ended comparative data Net profit/loss Items that may be subsequently reclassified to profit or loss Loss/gain on valuation of available for sale financial assets Valuation of cash flow hedges Deferred tax Items that will not be reclassified subsequently to profit or loss Revaluation of provisions for employee benefits Deferred tax Total comprehensive income Attributable to: - equity holders of the parent Notes on the pages 9 to 155 are an integral part of these consolidated financial statements. 4

6 Annual consolidated statement of financial position Item Note comparative data ASSETS Cash and balances with the Central Bank Receivables from other banks Securities held for trading Derivative financial instruments Hedging derivatives Loans and advances to customers Investment securities: available for sale held to maturity Intangible assets Property, plant and equipment Income tax assets current deferred Other assets Total assets LIABILITIES Amounts due to the Central Bank and other banks Derivative financial instruments Hedging derivatives Amounts due to customers Debt securities issued Subordinated debt Provisions Income tax liabilities current deferred Other liabilities Total liabilities EQUITY Attributable to equity holders of the parent: Core capital Share capital Own shares Share premium Revaluation reserve Retained earnings Total equity Total equity and liabilities Notes on the pages 9 to 155 are an integral part of these consolidated financial statements. 5

7 Annual consolidated statement of changes in equity Item Share capital Core capital (note 38) Own shares Attributable to shareholders of the Bank Share premium Revaluation reserve (note 39) Retained earnings (note 40) Other supplementary capital Other reserve capital General risk fund Retained earnings TOTAL equity As at Net result Other comprehensive income Total comprehensive income Transfer to retained earnings Issue of own shares Share issue costs Sale of a subsidiary Profit distribution including: Transfer of net profit to other capital Coverage of losses from previous periods As at As at Net result Other comprehensive income Total comprehensive income Purchase of own shares Management options Profit distribution including: Transfer of net profit to other capital Coverage of losses from previous periods As at There were no non-controlling interests in 2016 and Notes on the pages 9 to 155 are an integral part of these consolidated financial statements. Annual consolidated statement of cash flows 6

8 Annual consolidated statement of cash flow Indirect method CASH FLOWS FROM OPERATING ACTIVITIES Note For the year ended comparative data Profit/loss before tax Total adjustments: Amortization and depreciation Interest on investing activities Profit/loss from investing activities Interest on financing activities Realized and unrealized exchange rate differences on financing activities Dividends received Dividends received from financial instruments held for trading Dividends received on securities available for sale Change in securities held-for-trading Change in assets and liabilities due to valuation of derivative financial instruments and derivative hedging instruments Change in receivables from other banks Change in loans and advances to customers Change in investment securities Change in investments in a subsidiary Change in other assets and income tax Change in amounts due to other banks and the Central Bank Change in amounts due to customers Change in provisions Change in other liabilities and income tax Income tax paid Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Inflows Sale of shares in a subsidiary Disposal of tangible fixed assets Redemption of securities held to maturity Interests received from securities held to maturity Outflows Purchase of securities held to maturity Purchase of intangible assets Purchases of property, plant and equipment Net cash flows from investing activities

9 For the year ended Indirect method Note comparative data CASH FLOWS FROM FINANCING ACTIVITIES Inflows Inflow from issue of bonds by the Group including subordinated bonds Inflow from the issue of shares and additional capital contribution Outflows Purchase of own shares Redemption of bonds issued by the Group Interest paid on bonds issued by the Group including subordinated bonds Other outflows Net cash flows from financing activities TOTAL NET CASH FLOWS BALANCE SHEET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD, including: Cash and cash equivalents with limited availability for use Notes on the pages 9 to 155 are an integral part of these consolidated financial statements. 8

10 Additional notes to the annual consolidated financial statements 1. Basic information about Bank Ochrony Środowiska S.A. and the Bank Ochrony Środowiska S.A. Capital Group 1.1. Bank Ochrony Środowiska S.A. The parent company of the is Bank Ochrony Środowiska S.A. (hereinafter the Bank, BOŚ S.A. or the parent company ) Bank Ochrony Środowiska S.A. with its registered office in Warsaw, Żelazna 32 street, was incorporated based on the decision No. 42 of the President of the National Bank of Poland ( NBP ) dated 15 September 1990 and the Notarial Deed of 28 September 1990 on the establishment of the Bank. The Bank is entered into the National Court Register of the District Court in Warsaw, 12th Commercial Department, with the reference number KRS and the statistical number REGON According to the Polish Classification of Activities (PKD), the Bank s activities fall within the category PKD 6419Z. The Bank was incorporated for an indefinite term. The primary objective of the Bank is to effectively manage shareholders capital and the funds deposited by customers to ensure profitability of its operations and safety of customers funds. According to BOŚ S.A. Statute, the Bank s operations are focused on accumulating cash funds, lending, clearing, providing other banking services as well as financial advisory and consulting services. According to BOŚ S.A. Statute, the key mission of the Bank is to support activities relating to the development of industry and services for the environmental protection, to develop the market for products and services related to environmental protection and promotion and setting up environmental attitudes and initiatives to protect environment. The Bank fulfills its mission mainly by: providing specialized bank services, which suport activities related to enviromental protection and water management, providing universal banking services for individuals, small and medium-sized enterprises as well as for units of local self-government. The main scope of the Bank s operations includes: - accepting deposits payable on demand or on maturity and maintaining bank accounts for these deposits; - maintaining other bank accounts; - granting loans; - issuing and confirming bank guarantees and opening and approving letters of credit; - issuing bank securities; - clearing cash transactions; - issuing e-money instruments; - granting cash loans; - processing checks and bills of exchange; - issuing payment cards and conducting transactions with the use of those cards; - purchasing and selling cash receivables; - custody services in respect of goods and securities and providing safe deposit facilities; - buying and selling monetary instruments; - issuing and confirming warranties; - performing commissioned tasks related to issuing securities; - intermediation in transferring cash and making international settlements; - depositary bank services. 9

11 The scope of the Bank s operations also includes: - acquiring shares, rights vested in those shares or equity interests in legal entities and participation units in investment funds; - incurring liabilities related to the issue of securities; - trading in securities; - performance of forward financial transactions; - exchange of amounts due from debtors for their assets, on terms and conditions agreed with the debtors; - purchasing and selling real estate; - financial advisory services, especially with respect to the environmental protection; - factoring services; - reception and transmission of orders to buy or sell financial instruments with the proviso that a transaction may only be securities issued by the Treasury, or the Polish National Bank, or other admitted to organized trading financial instruments and bonds referred to in Art. 39p 1 of the Act of 27 October 1994 on Toll Motorways and the National Road Fund Act, as well as the execution of such orders on behalf of the principal; - investments intermediation services; - insurance intermediation services ; - receivables collection services on commission of banks and entities with which the Bank concluded joint financing agreements or agreements for action under operation programs. The Bank is obligated to maintain payment liquidity, tailored to the size and type of business so as to ensure that all Bank s payables are settled on time. The Bank is obligated to comply with exposure concentration limits. The Bank, the Bank s employees and other people who perform banking activities on behalf of Bank are obligated to keep bank secrecy. Starting from 24 January 1997, in accordance with the decision of the Management Board of the Warsaw Stock Exchange (WSE), the Bank s shares were admitted to trading on the Warsaw Stock Exchange and classified as belonging to the finances - banking sector category. The annual consolidated financial statements of Bank Ochrony Środowiska S.A. Capital Group were approved on the 28 March 2017 by the Management Board of the parent company for publication on Warsaw Stock Exchange on 31 March List of consolidated entities. The Capital Group of BOŚ S.A. as at 31 December 2016 includes Bank Ochrony Środowiska S.A., which plays a dominant role over its subsidiary Dom Maklerski BOŚ S.A., BOŚ Eko Profit S.A., BOŚ Invest Management Sp. z o.o., BOŚ Nieruchomości Sp. z.o.o. w likwidacji, BOŚ Capital Sp. z o.o. (previously: BOŚ Nieruchomości Sp. z o.o. Spółka Komandytowo Akcyjna), BOŚ Ekosystem Sp. z o.o. and indirectly owned subsidiary (a subsidiary of BOŚ Eko Profit S.A.) MS Wind Sp. z o. o. Dom Maklerski BOŚ S.A. operates on the capital market and in particular offers brokerage services. BOŚ Eko Profit S.A. - capital investments in pro-ecological projects and financial and advisory services supplementary to the Bank s offer. BOŚ Invest Management sp. z o.o. runs a financial business including financing of the entities of Capital Group of BOŚ, providing a support in the area of office and service space lease as well as providing leasing services for units of local self-government. BOŚ Ekosystem sp. z o.o. provides leasing for corporate clients, comprehensive solutions for households in the field of renewable energy sources and carries out financial intermediary services in the field of financing environmental projects. 10

12 BOŚ Nieruchomości Sp. z o.o. w likwidacji does not offer any services. BOŚ Capital Sp. z o.o. (previously: BOŚ Nieruchomości Sp. z o.o. Spółka Komandytowo Akcyjna) provides operations regarding lease and management of own and leased real estate. MS Wind sp. z o.o. manages wind farm. The list of entities belonging to the Capital Group BOŚ S.A. subject to consolidation as at 31 December 2016: No. Subordinated entities Registered office Type of activity % Share in capital of the Company as at % Share in the voting rights as at Consolidation method Direct subsidiaries 1. Dom Maklerski BOŚ S.A. 2. BOŚ Eko Profit S.A. Warsaw BOŚ Invest Management Sp. z o. o. BOŚ Nieruchomości Sp. z o.o. w likwidacji BOŚ Capital sp. z o.o. (previously: BOŚ Nieruchomości Sp. z o.o. S.K.A.) BOŚ Ekosystem Sp. z o.o. Warsaw Brokerage services 100% 100% Financial brokerage, advisory services 100% 100% Warsaw Financial services 100% 100% Warsaw Warsaw Does not offer any services Operations regarding lease and management of own and leased real estate 100% 100% 100% 100% Warsaw Financial services 100% 100% Subsidiary dependent in an indirect way (subsidiary of BOŚ Eko Profit S.A.) MS Wind sp. z o. o. Warszawa Manages wind farm 100% 100% Full consolidation method Full consolidation method Full consolidation method Full consolidation method Full consolidation method Full consolidation method Full consolidation method As at 31 December 2015, the Bank s interest in the share capital and in the voting rights equaled to: in Domu Maklerskim BOŚ S.A. 100%, in BOŚ Eko Profit S.A. 100%, in BOS Finance AB 100% (subsequently Srodowisko Finance AB) 100% - sale of the company in the year 2016 (note 48), in BOŚ Invest Management Sp. z o.o. 100%, in BOŚ Nieruchomości Sp. z o.o. 100%, in BOŚ Capital Sp. z o.o. (previously: BOŚ Nieruchomości Sp. z o.o. S.K.A.) 100%, in Ekosystem Sp. z o.o. 100%, in MS Wind Sp. z o.o. 100%. Additional information concerning Companies as at 31 December 2016: 11

13 No. Subordinated entities Revenue* \ Number of employees etaty osoby Profit or loss before taxation (in PLN thousand) Income tax (in PLN thousand) Received financial support **\ Direct subsidiaries 1. Dom Maklerski Banku Ochrony Środowiska S.A , BOŚ Eko Profit S.A , BOŚ Invest Management Sp. z o. o , BOŚ Nieruchomości Sp. z o.o. w likwidacji BOŚ Capital Sp. z o.o. (former: BOŚ Nieruchomości Sp. z o.o. S.K.A.) , BOŚ Ekosystem Sp. z o.o , Subsidiary dependent in an indirect way (subsidiary of BOŚ Eko Profit S.A.) MS Wind sp. z o. o *\ Income understood as net interest income + net commission income + net result on financial instruments + other operating income in thousands PLN. **\ Financial support from public funds, in particular on the basis of the act from 12 February on the State Treasury support to financial institutions (Journal of Laws 2016 item 1436). 12

14 1.3. (a) Composition of the Management Board and the Supervisory Board of BOŚ S.A. Composition of the Bank s Management Board The composition of the Management Board of the Bank as at 31 December 2016 was as follows: Stanisław Kluza President of the Board, Stanisław Kolasiński Vice-President, the first Deputy of the President of the Management Board, Anna Milewska Vice-President of the Board, Paweł Pitera Vice-President of the Board. On 7 January 2016 the Supervisory Board supplemented the composition of the Management Board with two members: - Mr. Paweł Pitera as Vice-President of the Board, - Mr. Sławomir Zawadzki as Vice-President of the Board, The newly appointed Board members took office on 11 January As a result of the above the composition of the Management Board of the Bank was as follows: Dariusz Daniluk - President of the Board, Stanisław Kolasiński Vice-President, the first Deputy of the President of the Management Board, Piotr Lisiecki Vice-President of the Board, Paweł Pitera Vice-President of the Board, Sławomir Zawadzki Vice-President of the Board. On 15 February 2016 the Supervisory Board of BOŚ S.A. dismissed Mr. Dariusz Daniluk from the position of President of the Board and Mr. Piotr Bolesław Lisiecki from the position of Vice-President of the Board and at the same time entrusted duties of the President of the Management Board to Mr. Sławomir Zawadzki, Vice-President of the Management Board of BOŚ S.A. and delegated member of the Supervisory Board of BOŚ S.A., Mr. Oskar Kowalewski to temporarily perform the duties of Vice- President of the Management Board for a period of three months. As a result of the above the composition of the Management Board of the Bank was as follows: Sławomir Zawadzki Vice-President acting as President of the Board, Stanisław Kolasiński Vice-President, the first Deputy of the President of the Management Board, Paweł Pitera Vice-President of the Board, Oskar Kowalewski Member of the Supervisory Board delegated to temporarily perform the duties of Vice-President. On 17 March 2016 the Supervisory Board: appointed Mr. Stanisław Kluza as Vice President of the Bank s Management Board, board adopted a resolution which reversed, with effect as of 23 March 2016, the Supervisory Board s Resolution from 15 February 2016 appointing Mr. Sławomir Zawadzki to act as President of the Management Board of BOŚ S.A., appointed Mr. Stanisław Kluza, Vice President of the Management Board of BOŚ S.A., to act as President of the Management Board of BOŚ S.A., requested the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego - KNF) to give its consent for appointing Mr. Stanisław Kluza as President of the Management Board of Bank Ochrony Środowiska S.A. Simultaneously, due to Ms. Anna Milewska s resignation from being a member of the Supervisory Board of BOŚ S.A., submitted on 17 March 2016, the Supervisory Board of BOŚ S.A. adopted a resolution amending the period of secondment of Mr. Oskar Kowalewski, Member of the Supervisory Board of BOŚ S.A., to temporarily act as Vice President of the Bank s Management Board, by deciding that this period would end on 23 March 2016, and appointed Ms. Anna Milewska as Vice President of the Bank s Management Board as of 23 March On 23 March 2016 the Supervisory Board dismissed Mr. Sławomir Zawadzki from the position of Vice President of the Bank s Management Board. As a result, the composition of the Bank's Management Board as of 23 March 2016 was as follows: 13

15 Stanisław Kluza Vice President of the Management Board, the incumbent President of the Management Board, Stanisław Kolasiński Vice President the first Deputy of President of the Management Board, Anna Milewska Vice-President of the Management Board, Paweł Pitera Vice-President of the Management Board. On 6 December 2016 the Polish Financial Supervision Authority gave its consent for appointing Mr. Stanisław Kluza as President of the Management Board of Bank Ochrony Środowiska S.A. On 7 December 2016 the Supervisory Board appointed Mr. Stanisław Kluza as President of the Bank s Management Board (the Resolution became effective on 8 December 2016 i.e. the date when Polish Financial Supervision Authority s decision giving consent for appointing Mr. S. Kluza as President of the Management Board of BOŚ S.A. was delivered to the Bank). The management Board of the Bank as at 31 March 2015 was as follows: Dariusz Daniluk - President of the Board, Stanisław Kolasiński - Vice-President, the first Deputy of the President of the Management Board, Piotr Lisiecki - Vice-President of the Board. 14

16 (b) Composition of the Bank s Supervisory Board The composition of the Supervisory Board of the Bank as at 31 December 2016 was as follows: - Wojciech Wardacki - President of the Board, - Andrzej Matysiak - Vice-President of the Board, - Emil Ślązak Secretary of the Board, Członkowie: Members of the Board: - Janina Goss, - Oskar Kowalewski, - Paweł Mzyk, - Piotr Sadownik, - Marian Szołucha. On 15 February 2016, during the Extraordinary General Shareholders Meeting of BOŚ S.A. Mr. Jacek Ciepluch, President of the Supervisory Board, resigned from the Supervisory Board of BOŚ S.A. On 15 February 2016 the Extraordinary General Meeting of BOŚ S.A. adopted the following resolutions on: dismissal from the Supervisory Board: Mr. Bartosz Zbigniew Januszewski, Mr. Piotr Bogdan Kaczyński, Mr. Józef Kozioł, Mr. Marek Ignacy Mielczarek, Mr. Ryszard Ochwat, Mr. Adam Grzegorz Wasiak and Mr. Adam Aleksander Wojtaś, appointment to the Supervisory Board: Mr. Oskar Marek Kowalewski, Mr. Andrzej Kurnicki, Mr. Andrzej Grzegorz Matysiak, Ms. Anna Stanisława Milewska, Mr. Paweł Wojciech Mzyk, Mr. Piotr Sadownik, Mr. Marian Szołucha, Mr. Emil Stanislaw Ślązak, Mr. Wojciech Piotr Wardacki. On 15 February 2016 the Supervisory Board appointed Mr. Wojciech Piotr Wardacki as the President of the Board, Mr. Andrzej Grzegorz Matysiak as Vice-President of the Board and Mr. Andrzej Kurnicki as Secretary of the Board. Simultaneously, the Supervisory Board of BOŚ S.A. delegated Mr. O. Kowalewski, acting as a Member of the Supervisory Board to temporarily perform the duties of Vice-President of the Management Board for a period of three months. On 17 March 2016: the Supervisory Board adopted a resolution amending the period of secondment of Mr. O. Kowalewski, Member of the Supervisory Board of BOŚ S.A., to temporarily act as the Bank s Vice President, by shortening that period to 23 March 2016, on that date Ms. Anna Milewska resigned from being a member of the Bank s Supervisory Board. As a result of the above the composition of the Supervisory Board of the Bank was as follows: - Wojciech Wardacki President of the Board, - Andrzej Matysiak President of the Board, - Andrzej Kurnicki Secretary of the Board, - Oskar Kowalewski (from 15 February to 23 March delegated to temporary duties as Vice- President of the Board), - Anna Milewska (until 17 March 2016), - Paweł Mzyk, - Piotr Sadownik, - Marian Szołucha, - Emil Ślązak. 15

17 On 23 June 2016 the Ordinary General Shareholders Meeting of BOŚ S.A. appointed the new (X) term Supervisory Board with the following composition: - Janina Goss, - Oskar Kowalewski, - Andrzej Matysiak, - Paweł Mzyk, - Piotr Sadownik, - Marian Szołucha, - Emil Ślązak, - Wojciech Wardacki. At the meeting held on 23 June 2016 the composition of the Supervisory Board was as follows: - Mr. Wojciech Wardacki was elected as President of the Supervisory Board, - Mr. Andrzej Matysiak was elected as Vice-President of the Supervisory Board, - Mr. Emil Ślązak was elected as Secretary of the Supervisory Board. The composition of the Supervisory Board of the Bank as at 31 December 2015 was as follows: - Jacek Ciepluch President, - Piotr Kaczyński Vise-President, - Adam Wasiak Secretary. Members: - Bartosz Januszewski, - Józef Kozioł, - Marek Mielczarek, - Ryszard Ochwat, - Adam Wojtaś. 16

18 2. Information on the accounting policies adopted in the preparation of the annual consolidated financial statements 2.1. Basis for the preparation of financial statements The annual consolidated financial statements of the Bank Ochrony Środowiska S.A. Capital Group (the, the Group, the Capital Group ) include:: consolidated statement of profit or loss for the period of 12 months ended 31 December 2016 and comparative data for the period of the 12 months ended 31 December 2015, consolidated statement of comprehensive income for the period of 12 months ended 31 December 2016 and comparative data for the period of 12 month ended 31 December 2015, consolidated statement of the financial position as at 31 December 2016 and comparative data as at 31 December 2015, consolidated statement of changes in equity for the period of 12 months ended 31 December 2016 and comparative data for the period of 12 months ended 31 December 2015, consolidated statement of cash flows for the period of 12 months ended 31 December 2016 and comparative data for the period of 12 months ended 31 December 2015, additional explanatory notes. These annual consolidated financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) as endorsed by the European Union ( EU ) in force as at 31 December 2016 and have been prepared under the same accounting policies for each period. IFRSs comprise standards and interpretations accepted by the International Accounting Standards Board ( IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ). Dom Maklerski BOŚ S.A., BOŚ Eko Profit S.A., BOŚ Invest Management s. z o.o. BOŚ Nieruchomości Sp. z o. o., BOŚ Capital Sp. z o.o. (formerly: BOŚ Nieruchomości Sp. z o. o. S.K.A.), BOŚ Ekosystem Sp. z o.o. and MS Wind Sp. z o.o. prepare financial statements in accordance with International Financial Reporting Standards ( IFRS ) as endorsed by the European Union ( EU ). The annual consolidated financial statements of the Capital Group were prepared under the historical cost convention, except for the valuation of the available for sale financial assets and trading securities, and all the derivative contracts measured at the fair value. The accounting policies applied by the Group are described in detail in the Note of these financial statements. The annual consolidated financial statements have been prepared in Polish zloty (PLN) and all the values are presented, unless stated otherwise. The annual consolidated financial statements have been prepared based on the assumption that the Bank and the companies of the Group will continue as going concern in the foreseeable future, at least 12 months from the balance sheet date except BOŚ Nieruchomości sp. z o.o. w likwidacji. Due to incurring a net loss in 2015 and the requirements determined in Article 142 of the Banking Law, the Bank prepared a Recovery Program. The Polish Financial Supervision Authority accepted the aforementioned Program taking into account the Authority s comments and information presented in the letter sent to the Bank on 14 December In addition, the Bank developed a Framework Strategy of BOŚ s operations for , consistent with the aforementioned Program in terms of assumptions, directions and objectives. The main assumptions of the Strategy were communicated to the public in the current report published on 20 April The assumptions contained in the Strategy include the achievement of the following business goals by 2020: - return on assets (ROA) of approx. 0.7%, - return on equity (ROE) above 7%, - cost of income (C/I) of approx. 51%, where the amounts of the ratios do not include banking tax. 17

19 Major strategic goals will be achieved as a result of the realization of the assumed strategic directions based on the existing and developed competitive advantages of the Bank. The implemented Strategy is based on 4 basic directions: - development of effective and modern retail banking, - increase in corporate banking profitability and effectiveness, - proactive, effective support of external and internal customers in line with their needs, - development of a high performance and high quality culture, based on the Bank s value. As part of the implementation of the new Strategy, in the 1st half of 2016 BOŚ S.A. increased its share capital by way of a private subscription. The value of the share issuance was PLN 400 million. The share capital increase was registered by the court on 12 July As a result the Group will achieve the required levels of capital adequacy ratios in accordance with the recommendations of the Polish Financial Supervision Authority dated 22 October 2015 and 29 December As at 31 December 2016, the Group met the required capital adequacy ratios recommended by the Polish Financial Supervision Authority as presented in section of Declaration of compliance with capital adequacy requirements. In the period from 1 January 2016 to 22 December 2016 the Group met the minimum capital requirements in the field of own funds referred to in Art. 92 CRR Regulation and the Group did not meet the capital requirements in accordance with the recommendations of the Financial Supervision Authority. As of 15 July 2016 amendments were made to the Tax Code in order to reflect the provisions of the General Anti-Avoidance Rule (GAAR). The GAAR is meant to prevent the creation and use of artificial legal structures designed to avoid payment of taxes in Poland. The GAAR defines tax avoidance as an activity performed primarily to obtain a tax benefit which is, in the given circumstances, contrary to the subject matter and purpose of the tax law. In accordance with the GAAR, such an activity does not result in obtaining a tax benefit if the mode of operation was artificial. The occurrence of any (i) unjustified split of the transaction, (ii) engagement of intermediary entities despite the lack of economic or commercial justification, (iii) items which cancel each other out or offset each other and (iv) other activities with a similar mode of operation as those mentioned above, may be treated as an indication of the existence of artificial activities which are subject to the GAAR. The new regulations will require a considerably increased judgement when assessing the tax effects of specific transactions. The GAAR should be applied to transactions made after its effective date and those for which, although they had been made prior to the GAAR s effective date, tax benefits were or continue to be obtained after its effective date. The implementation of these regulations will enable Polish tax inspection authorities to challenge the legal arrangements and agreements implemented by the tax payers. BOŚ S.A. is subject to a recovery program, it is, therefore, exempt from the obligation to pay the tax on certain financial institutions under Article 11 Clause 2 Item 1 of the Act on the Tax on Certain Financial Institutions. As of 9 October 2016, Article 381a of the Act on the Bank Guarantee Fund, a system of guaranteeing deposits and compulsory restructuring, based on which the Bank continues to be exempt from certain financial institutions under Article 11 Clause 2 Item 1 of the Act on the Tax on Certain Financial Institutions in its wording until 9 October 2016 came into force. Taking into account the above factors, as at the date of the authorization of this consolidated annual financial statement, the Management Board is not aware of any facts or circumstances that would indicate a threat to the continued activity of the Group* within a least 12 months from the balance sheet date due to an intended or compulsory abandonment or limitation of the current activity. *\ except BOŚ Nieruchomości sp. z o.o. w likwidacji In annual consolidated financial statements, the same accounting policies have been adopted as in the annual financial statements for the year 2015, with the exception of the adoption of the new or amended standards or interpretations obligatory for the annual periods beginning on or after 1 January 2016: 18

20 1) Amendments arising from Annual Improvements to IFRSs Cycle, including:. Amendments to IFRS 2 Share-based Payment. The amendment clarifies the definition of the vesting condition and separately defines the performance condition and service condition. Amendments to IFRS 3 Business Combinations. This Standard was amended in order to clarify that the obligation to pay a contingent consideration which meets the definition of a financial instrument shall be classified as either a financial liability or an equity instrument based on the definitions included in IAS 32 Financial Instruments: Presentation. Another amendment to this Standard clarifies that each contingent consideration that has not been classified as equity, either financial or non-financial, shall be measured at fair value at each reporting date, with changes in fair value being recognized in profit or loss. Due to this amendment, amendments were also made to IFRS 9, IAS 37 and IAS 39. Amendments to IFRS 8 Operating Segments. This Standard was amended by including a requirement to disclose the judgment made by management while aggregating operating segments. Such a disclosure must include the description of the aggregated segments as well as the economic ratios that have been used to determine that the aggregated segments have similar economic characteristics. This amendment is designed to address the issue of incorrect aggregation of segments by the preparers of financial statements. Another amendment to this Standard requires that, in the event of reporting segment assets, reconciliation of the total of the reportable segments assets to the entity s assets should be included. Amendments to IFRS 13 Fair Value Measurement. When issuing IFRS 13 paragraph B of IFRS 9 and paragraph AG79 of IAS 39 were deleted (these amendments resulted from the issuing of IFRS 13). This gave rise to concerns that enterprises would be no longer allowed to measure short-term receivables and payables at invoice amounts in those cases where the effect of the lack of a discount is insignificant. The IASB amended the Basis for Conclusions of IFRS 13 to clarify that it did not intend to make it impossible to measure short-term receivables and payables at invoice amounts in such cases. Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. Both of these Standards were amended in order to clarify the method of recognizing the gross carrying amount and accumulated depreciation/amortization when the enterprise makes use of the revalued amount model. In the event of revaluation, the division between the gross carrying amount and accumulated depreciation/ amortization is recognized using one of the following methods: 1. gross carrying amount is revalued consistently with the revaluation of the carrying amount and the accumulated depreciation/ amortization is adjusted so as to make it equal to the difference between the gross carrying amount and the carrying amount net of accumulated depreciation/ amortization and impairment losses, or 2. accumulated depreciation/ amortization is eliminated in correspondence with the asset s gross carrying amount. Amendments to IAS 24 Related Party Disclosures. This Standard was amended by including a requirement to disclose information about an entity providing KMP services to the reporting entity or its parent ( management entity ). The reporting entity is not required to disclose the compensation paid by the management entity to its employees or directors, but it is required to disclose the amounts paid by the reporting entity to the management entity for the services rendered by that entity. 2) Amendments arising from Annual Improvements to IFRSs Cycle, including: 19

21 Amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Methods of disposal The amendment clarifies that when an asset (or a disposal group) is reclassified from assets held for sale to held for distribution or vice versa this does not mean a change of a sale or distribution plan and does not have to be disclosed as such. This means that an asset (or a disposal group) does not have to be reinstated in the financial statements as if it has never been classified as held for sale or held for distribution only due to the change of the disposal method. The amendment also clarifies that the guidance regarding changes in the sale plan shall be applied to an asset (or a disposal group) that ceases to be classified as held for distribution but has not been classified as held for sale. Amendments to IFRS 7 Financial Instruments: Disclosures - Servicing Contracts and Interim Financial Statements. Two amendments have been introduced: 1) Servicing Contracts: In the event where an enterprise transfers a financial asset to a third party on such terms which enable the transferor to derecognize the asset, IFRS 7 requires disclosure of any type of continuing involvement that the enterprise may still have in the assets transferred. IFRS 7 provides guidance on how to understand continuing involvement in this context. The amendment adds specific guidance to help the enterprise s management to determine whether the terms of the contract for servicing the financial asset transferred constitute continuing involvement. The amendment shall be applied prospectively but can also be applied retrospectively. A related amendment has been made accordingly to IFRS 1 to provide the same relief to IFRS first-time adopters. 2) Interim Financial Statements The amendment clarifies that additional disclosures required under the amendment to IFRS 7 regarding the method of disclosure of the offsetting of financial assets and financial liabilities are not required for all interim periods unless this is required by the requirements of IAS 34. The amendment shall be applied retrospectively. Amendments to IFRS 11 Joint Arrangements with regard to accounting for acquisition of an interest in a joint operation. These amendments provide specific guidance for accounting for acquisition of an interest in a joint operation that constitutes a business. The amendments are intended to resolve the problem of different accounting treatments used for such transactions in practice. Amendments to IAS 1 Presentation of Financial Statements Disclosure Initiative (issued on 18 December 2014) applicable to annual periods beginning on or after 1 January These amendments clarify that further disaggregation of specific line items in the financial statements specified in IAS 1.54 (statement of financial position) and IAS 1.82 (profit or loss) may be needed. Disaggregation of balances is required when it is material for understanding the financial position or results of the enterprise. The Standard states which additional subtotals are allowable and how they should be presented in the statement of financial position or statement of profit or loss and OCI. The guidance includes commonly used subtotals which are not specifically required by IFRS such as operating profit/loss or EBIT. Amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture Agriculture: Bearer Plants (issued on 30 June 2014) applicable to annual periods beginning on or after 1 January The amendment introduces a distinction between bearer plants and other biological assets. Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets with regard to clarification of acceptable methods of depreciation/ amortization. The amendment to IAS 38 introduces a rebuttable assumption that amortization of an intangible asset based on the revenue earned using that asset is incorrect. This assumption can only be rebutted in certain limited circumstances: 20

22 1) when an intangible asset is expressed as a measure of revenues; 2) when it can be proved that revenues and consumption of economic benefits from an intangible asset are closely linked. With regard to amortization of intangible assets the Standard introduces a need to consider what is the key factor limiting the benefits obtained from an asset and provides examples from which it arises that revenue or volume can be such factors only in certain limited circumstances. Amendments to IAS 19 Employee Benefits determining discount rates for post-employment benefit obligations. The amendment clarifies that in determining the discount rate applied to post-employment benefit liabilities the currency of the liability is important rather than the currency of the country in which the liability arose. The assessment of whether there is a deep market in high quality corporate bonds is based on corporate bonds in a given currency rather than on corporate bonds in the given country. Similarly, if there is no deep market in high quality corporate bonds in a given currency, Treasury bonds in the given currency should be considered. The amendment should be applied retrospectively but is limited to the beginning of the earliest period presented. Amendments to IAS 27 Separate Financial Statements with regard to the application of the equity method in separate financial statements. The amendment concerns recognition of investments in subsidiaries, joint ventures and associates in separate financial statements at cost, or in accordance with IFRS 9/ IAS 39 or using the equity method in line with the guidance included in IAS 28. The definition of separate financial statements has also been clarified to mean financial statements which are prepared in addition to consolidated financial statements by an entity which has subsidiaries or financial statements prepared by an entity which has no subsidiaries but holds investments in associates or joint ventures, which must be measured using the equity method under IAS 28. Amendments to IAS 34 Interim Financial Reporting disclosure of information elsewhere in the interim financial report. The amendment clarifies the reference made in the Standard to the disclosure of information elsewhere in the interim financial report. An additional amendment to IAS 34 is also made which requires the inclusion of a cross-reference from the interim financial statements to the location of this information. The amendment shall be applied retrospectively. Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates Investment Entities: Applying the Consolidation Exception. These amendments clarify that the exemption from preparing consolidated financial statements applies to an intermediate parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. The intermediate parent must also satisfy the remaining exemption criteria listed in IFRS 10. With regard to an investment entity, consolidation should include subsidiaries that are not investment entities themselves and whose main objective and area of operations is providing services to support the investment entity s investment activities. The amendments confirm that when a subsidiary is itself an investment entity, the parent investment entity should measure its investment in such a subsidiary at fair value through profit and loss. Such an approach is required regardless of whether the subsidiary provides services in relation to the parent s investment activities or to third parties. The amendments to IAS 28 allow an entity that is not itself an investment entity, and that has an interest in an investment entity associate or joint venture, to choose the accounting policy when applying the equity method. The entity may either decide to retain the fair value measurement applied by the investment entity associate or joint venture, or to resign from such measurement and instead consolidate the investment entity associate or joint venture. 21

23 Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates with regard to sale or contribution of assets between the investor and its associates or joint ventures. These amendments shall only apply for a sale or contribution of assets by an investor to its subsidiary or joint venture. They shall not apply to the accounting treatment of a sale or contribution of an investor s assets in joint operations. The adoption of these amendments did not have any effect on the financial position or performance of the Group or data presented in these Group s consolidated financial statements New standards and interpretations have been issued but have not come into force The following standards and interpretations have been issued by the International Accounting Standards Board or International Financial Reporting Interpretations Committee, but did not come into force IFRS 9 "Financial Instruments" (published on 24 July, 2014) - applicable to annual periods beginning on or after 1 January The implementation, as of 1 January 2018, of International Financial Reporting Standard 9 (IFRS 9) will result in amendments to at least three areas (1) the model of impairment measurement / impairment methodology, (2) the model of classification and measurement of financial instruments and (3) hedge accounting. With regard to impairment measurement, a model based on expected credit losses will be implemented. The new model will apply to debt instruments measured at amortized cost, where expected credit losses are recognized as an allowance at an amount equal to: - total 12-month expected credit losses (loses which may arise due to debtors default on financial instruments within the period of 12 months after the reporting date) or - total lifetime expected credit losses (i.e. forecast credit losses that result from all possible default events that may arise over the life of a financial instrument). A novelty in IFRS 9 is the introduction of the concept of a significant increase in credit risk, after the occurrence of which expected credit losses will be determined within the horizon of lifetime of the exposure, causing an increase in the amount of the allowance recognized. An additional amendment is the requirement to use forecasts of future macroeconomic conditions in the calculation of expected loss. With regard to the model of classification and measurement of financial assets: The implementation of IFRS 9 will result in a new approach to the classification and measurement of financial assets, i.e. two main classification and measurement criteria will be introduced: 1) The criterion of the entity s business model for managing the financial assets, 2) The criterion of the contractual cash flow characteristics of the financial asset. Ad. 1. In its operations, the Bank will classify its assets into 3 types of business models: - Held to collect, comprising assets which are intended to be held to acquire contractual cash flows, - Held to collect and sell, comprising assets which are intended to be held both to collect contractual cash flows and to sell financial assets, - Other, comprising all other operations that do not meet the criteria of the two foregoing models. Ad. 2. The Bank s financial assets classified under the first two business models will undergo a cash flow test to verify whether the contractual cash flows are solely payment of principal and interest (the SPPI test). This test is designed to check whether the assets can be measured at: 22