5 Independent auditors report

Transcription

1 10 FINANCIAL REPORT

2 Financial statements 4 Responsibility for the financial statements 5 Independent auditors report 6 Financial statements 7 Income statement for the period from 1 January to Statement of comprehensive income 9 Statement of financial position as at Statement of changes in equity 11 Cash flow statement 12 Notes to the financial statements 3

3 Responsibility for the financial statements Pursuant to the Croatian Accounting Law (Official Gazette 109/07), the Board is responsible for ensuring that financial statements are prepared for each financial year in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB) and statutory accounting regulations applicable to banks in Croatia, which give a true and fair view of the financial position and results of the Bank for that period. The Management Board has a reasonable expectation that the Bank has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Management Board continues to adopt the going concern basis in preparing the financial statements. In preparing those financial statements, the responsibilities of the Board include ensuring that: appropriate accounting policies are selected and then applied consistently; judgments and estimates are reasonable and prudent; applicable accounting standards are followed, subject to any material departures disclosed and explained in the financial statements; and financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business. The Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Bank and must also ensure that the financial statements comply with the Croatian Accounting Law (Official Gazette 109/07). The Board is also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Fran Renko President of the Management Board Gordana Aman i Member of the Management Board Centar banka d.d. Amruševa 6, Zagreb Zagreb, 28 April

4 Independent auditors report To the Management Board and Shareholders of Centar banka d.d. We have audited the accompanying financial statements of Centar banka d.d. (herein below the Bank), which comprise of the statement of financial position as at 2010, the income statement, the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes as presented on pages 4 to 55. Management s Responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting regulations applicable to banks in Croatia. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Bank s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for qualified opinion Investment in subsidiary The Bank has an investment in subsidiary CEBA Invest d.o.o. in the amount of 5 million HRK. Since the subsidiary CEBA Invest d.o.o. has continuously been making losses, we could not confirm recoverability of the investment amount. 5

5 Qualified opinion In our opinion, except for the effects on the financial statements described in preceding paragraph, the financial statements presented on pages 4 to 55 give a true and fair view of the Bank financial position as at 2010 and the results of its operations, changes in equity and cash flows for the year then ended in accordance with statutory accounting regulations applicable to banks in Croatia. Grant Thornton revizija d.o.o. Koranska 16, Zagreb Zagreb, 28 April 2011 Siniša Duši Certified auditor 6

6 Income statement (u 000 HRK) Note Interest income 4 115, ,247 Interest expense 5 (58,401) (56,144) Net interest income 56,684 54,103 Fee and commission income 6 15,347 20,245 Fee and commission expense 7 (4,614) (5,257) Net fee and commission income 10,733 14,988 Net foreign exchange gains 68 (157) Net income / (loss) from financial activities 8 4,815 5,318 Other income 3,266 1,297 Total other income 8,149 6,458 Other operating expenses 9 (59,216) (54,482) Impairment charge 10 (15,456) (9,679) Total other expenses (74,672) (64,161) Income before tax ,389 Income tax 11 (269) (2,375) Profit for the year 625 9,014 Earnings per share These financial statements were approved and signed by the Management Board on 28 April Fran Renko Gordana Aman i President of the Management Board Member of the Management Board The notes to the financial statements are an integral part of the Income statement 7

7 Statement of comprehensive income Note Profit for the year 625 9,014 Unrealised gain / (loss) from the financial assets available for sale (604) (565) Other comprehensive income (604) (565) Total comprehensive income 21 8,449 These financial statements were approved and signed by the Management Board on 28 April Fran Renko Gordana Aman i President of the Management Board Member of the Management Board The notes to the financial statements are an integral part of the Income statement 8

8 Statement of financial position as at 2010 These financial statements were approved and signed by the Management Board on 28 April Fran Renko Gordana Aman i President of the Management Board Member of the Management Board (in 000 HKR) Note ASSETS Cash 12 97,541 84,773 Obligatory reserve with the Croatian National Bank 13 81,114 76,850 Placements with banks 14 52,355 35,725 Financial assets at fair value through profit and loss 15 20,183 2,389 Financial assets available for sale 16 11,674 10,697 Financial assets held to maturity , ,343 Loans and advances to customers 18 1,144,602 1,031,019 Investment in subsidiaries 19 5,000 5,000 Property, plant and equipment 20 9,736 9,127 Intangible assets 20 3,659 2,908 Other assets 21 64,511 38,036 Total assets 1,602,644 1,408,867 LIABILITIES AND SHAREHOLDER S EQUITY LIABILITIES Due to banks , ,792 Due to customers demand deposits , ,839 Due to customers term deposits , ,338 Other liabilities 25 19,769 17,291 Hybrid instruments 26 24,398 - Total liabilities 1,408,516 1,213,260 SHAREHOLDER S EQUITY Share capital , ,700 Treasury shares (1,097) (1,097) Share premium 3,216 3,216 Reserves 12,044 12,044 Other reserves 18,970 18,969 Unrealised gain/(loss) from the financial assets available for sale (3,974) (3,371) Retained earnings 25,644 18,132 Current year profit 625 9,014 Total shareholder s equity 194, ,607 Total liabilities and shareholder s equity 1,602,644 1,408,867 The notes to the financial statements are an integral part of the Statement of financial position 9

9 Statement of changes in equity Share capital Treasury shares Share premium Reserves Other reserves Unrealised loss from the financial assets available for sale Retained earnings Current year profit Total Balance as at 1 January ,700 (1,097) 3,216 12,044 18,969 (2,805) 13,286 13, ,415 Unrealised loss from the financial assets available for sale (565) - - (565) Current year profit ,014 9,014 Other comprehensive income (565) - 9,014 8,449 Dividend payment (8,257) (8,257) Transfer to reserves ,845 (4,845) - Transfer to retained earnings (565) - - (565) Balance as at 31 December ,700 (1,097) 3,216 12,044 18,969 (3,371) 18,132 9, ,607 Unrealised gain/(loss) from the financial assets available for sale (604) - - (603) Current year profit Other comprehensive income - - (604) Dividend payment (1,501) (1,501) Transfer to retained earnings (604) 7,513 (7,513) (604) Balance as at 31 December ,700 (1,097) 3,216 12,044 18,969 (3,974) 25, ,128 The notes to the financial statements are an integral part of the Statement of changes in equity 10

10 Cash flow statement NET CASH FLOW FROM OPERATING ACTIVITIES Note Net profit 625 9,014 Adjustments for: Depreciation and amortisation 4,714 4,373 Increase in impairment charge for credit losses 4,668 3,399 Impairment of financial assets held to maturity 6,706 1,215 Impairment of other assets 4,572 4,962 Provision for potential liabilities (332) (160) Changes in operating assets and liabilities Increase / (Decrease) in receivables from Central National Bank (4,264) (9,185) Increase in loans and advances to customers (124,454) (153,097) Increase in other assets (31,047) (13,388) Increase in due to banks (28,153) 27,769 Decrease in due to customers demand deposits (16,334) (39,478) Increase in due to customers term deposits 135,852 59,754 Increase in loan liabilities 77,015 48,014 Decrease in other liabilities 2,810 (155) Increase in hybrid instruments 24,398 - Net cash flow from operating activities 56,776 (56,963) NET CASH FLOW FROM INVESTING ACTIVITIES Proceeds from / (purchase of) financial assets at fair value (17,794) 9,677 Purchase of financial assets available for sale (977) (891) Proceeds from / (purchase of) financial assets held to maturity 12,582 45,560 Investment in subsidiaries - (1,000) (Increase) in property, plant, equipment and intangible assets (6,074) (2,442) Net cash flow from investing activities (12,263) 50,904 NET CASH FLOW FROM FINANCIAL ACTIVITIES Dividends paid (1,501) (8,257) Net cash flow from financial activities (1,501) (8,257) Net change of cash and cash equivalents 43,012 (14,316) Cash and cash equivalents at the beginning of the year , ,970 Cash and cash equivalents at the end of the year , ,654 The notes to the financial statements are an integral part of the Cash Flow Statement 11

11 Notes to the financial statements 1. General information CENTAR BANKA d.d. ZAGREB is registered with the Commercial Court in Zagreb as a joint stock company on 2 October Bank s headquarter is in Zagreb, Amruševa 6. Principal activities of the Bank are: accepting and placing of cash deposits, accepting demand and term deposits, granting short term and long term loans and issuing of short-term and long-term guarantees to companies and individuals, foreign exchange operations, inter-bank market activities, investment banking services, domestic and foreign payment operations, providing bank services through the network of branches in Croatia. Management board members are: Fran Renko, President Gordana Amančić, Member Supervisory board members are: Dragutin Biondić, President Igor Knežević, Vice president Zlatko Mateša, Member Dragutin Kalogjera, Member Milenko Umičević, Member Audit committee members are: Dragutin Biondić, Member Zlatko Mateša, Member 12

12 2. Basis of preparation of the financial statements The principal accounting policies applied in preparation of these financial statements are summarized below. Where specific accounting policies are aligned with accounting principles set out in International Financial Reporting Standards ( IFRS ), reference may be made to certain Standards in describing the accounting policies of the Bank. Unless otherwise stated, these references are to Standards applicable in the Republic of Croatia as at Compliance of statutory requirements for accounting of banks in Croatia and IFRS The financial statements have been prepared in accordance with statutory accounting requirements for banks in Croatia. The Banks operations in Croatia are subjected to the Law for credit institutions, in accordance with which the Bank s financial reporting is regulated by the Croatian National Bank ( CNB ) which is the central monitoring institution of the banking system in Croatia. These financial statements have been prepared in accordance with these banking regulations. The main difference between the requirements of the International Financial Reporting Standards ( IFRS ) and the accounting regulations of the CNB relates to the recognition of the impairment losses of financial assets calculated on the portfolio basis. In accordance with the regulations of the CNB, banks with headquarters in Croatia should recognize impairment on the portfolio basis by the prescribed rates from 0.85% to 1.20% on the balance sheet and off-balance sheet exposure to credit risk of counterparties for which impairment on individual basis is not determined, while IFRS requires that the impairment provision on portfolio basis should be determined for existing, but unidentified losses on the basis of valuation models taking into account individual characteristics of the Bank and debtor in the portfolio (i.e. collaterals, type and rating of a debtor and similar). Additionally, the CNB prescribes minimal levels of impairment losses against certain specifically identified impaired exposures, which may be different from the impairment loss required to be recognized in accordance with IFRS Basis of preparation The financial statements have been prepared on the accrual basis (effects of transactions and other events are recognized when incurred and included in financial statements for the period to which they relate to), as well as under going concern assumption. The financial statements are presented in the official currency of the Republic of Croatia, in Croatian Kuna (HRK), rounded to the nearest thousand. The Bank owns 100% share in CEBA Invest d.o.o. that controls C-Premium and C-Zenit funds, but does not prepare consolidated financial statements because of the immaterial effect of CEBA Invest d.o.o. on the Bank s financial statements. 13

13 3. Summary of significant accounting policies 3.1. Basis of preparation Standards, Interpretations and amendments issued by IASB, adopted by the Croatian Board and effective At the date of approval of financial statements in Republic of Croatia, the following standards and interpretations were in issue and effective for the year ended at In 2010 the Bank has adopted this revised standards and interpretations, and presented comparative information as was required. Adoption of revised Standards had no effect on the equity as at 1 January IFRS 1 First-time Adoption of IFRS, cost of an investment at first application - revised (effective for annual periods beginning on or after 1 January 2010), IFRS 2 Share based payment revised (effective for annual periods beginning on or after 1 January 2010), IFRS 7 Financial Instruments: Disclosures (effective for annual periods beginning on or after 1 January 2010), IAS 1 Presentation of Financial Statements revised (effective for annual periods beginning on or after 1 January 2010), IAS 16 Property, Plant and Equipment revised ( effective for annual periods beginning on or after 1 January 2010), IAS 18 Revenue (effective for annual periods beginning on or after 1 January 2010), IAS 19 Employee Benefits revised (effective for annual periods beginning on or after 1 January 2010), IAS 20 Accounting for Government Grants and Disclosure of Government Assistance revised (effective for annual periods beginning on or after 1 January 2010), IAS 23 Borrowing costs revised (effective for annual periods beginning on or after 1 January 2010), IAS 27 Consolidated and Separate Financial Statements Cost of an investment at first application (effective for annual periods beginning on or after 1 January 2010), IAS 28 Investments in Associates revised (effective for annual periods beginning on or after 1 January 2010), IAS 29 Financial Reporting in Hyperinflationary Economies revised (effective for annual periods beginning on or after 1 January 2010), IAS 31 Interests in Joint Ventures revised (effective for annual periods beginning on or after 1 January 2010), IAS 32 Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation revised (effective for annual periods beginning on or after 1 January 2010), IAS 36 Impairment of Assets revised (effective for annual periods beginning on or after 1 January 2010), IAS 38 Intangible Assets revised (effective for annual periods beginning on or after 1 January 2010), IAS 39 Financial Instruments: Recognition and Measurements revised (effective for annual periods beginning on or after 1 January 2010), 14

14 3. Summary of significant accounting policies (continued) 3.1. Basis of preparation (continued) IAS 40 Investment Property revised (effective for annual periods beginning on or after 1 January 2010), IAS 41 Agriculture revised (effective for annual periods beginning on or after 1 January 2010), IFRIC 15 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2010), IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 January 2010), IFRIC 17 Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1 January 2010), IFRIC 18 Transfers of Assets from Customers (effective for annual periods beginning on or after 1 January 2010), IFRS 3 Business Combinations revised (effective for annual periods beginning on or after 1 January 2010), IFRS 5 Non-current Assets Held for Sale and Discontinued Operations revised (effective for annual periods beginning on or after 1 January 2010), IAS 27 Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 January 2010), IAS 28 Investments in Associates - revised based on IFRS improvements (effective for annual periods beginning on or after 1 January 2010), IAS 31 Interests in Joint Ventures - revised based on IFRS 3 amendment (effective for annual periods beginning on or after 1 January 2010), IAS 39 Financial Instruments: Recognition and Measurement: Eligible Hedge items (effective for annual periods beginning on or after 1 January 2010). Standards, Interpretations and amendments to existing standards that are not yet effective At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective for the year ended 2010: 2010 IFRS Improvements (most of those improvements are effective for annual periods beginning on or after 1 July 2010 or 1 January 2011), IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010), IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013), Amendments to IAS 24 Related party Disclosures (as revised in 2009) (effective for annual periods beginning on or after 1 January 2011). Management anticipates that all of the relevant interpretations and standards will be adopted in the financial statements of the Company for the first period beginning after their effective date and that their adoption should not have a material impact on the Company s financial statements in the first year of application. 15

15 3. Summary of significant accounting policies (continued) 3.2. Interest income and expense Interest income is recognized on accrual basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount. Interest income includes coupons earned on fixed income investments and securities and accrued discount and premium on treasury bills and other discounted instruments. When loans become impaired, they are written down to their recoverable amounts and interest income thereafter is recognized based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount Fee and commission income and expense Fees and commissions consist mainly of fees on domestic and foreign payments, fees for issuing guarantees and letters of credit, fees and commissions on card operations and other credit instruments issued by the Bank. Fees and commissions are generally recognized as income when service is provided. Fees for loans that are probable of being drawn are deferred, together with the related direct issue costs, and recognized as an adjustment to the effective yield of the loan and thus adjust the interest income Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax expense is based on taxable income for the year. Taxable income differs from net income as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable based on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, calculated using the liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available on the possible use of deductible temporary differences. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is not likely to be available a sufficient amount of taxable income for the refund of all or part of the asset. Deferred tax is calculated at the tax rates that are expected to be applicable in the period in which the liability will be settled or the asset realized. Deferred tax is charged or credited to the income statement, except when it relates to items recorded directly in equity, when the deferred tax is also dealt with in equity. 16

16 3. Summary of significant accounting policies (continued) 3.4. Taxation (continued) Deferred tax assets and liabilities are offset when they relate to income taxes charged by the same taxation authority and the Bank intends to settle its current tax assets and liabilities on a net basis. The Bank is subject to various indirect taxes which are included in administrative expenses. The Bank is liable to pay various indirect taxes which have been presented under administrative expenses Cash and cash equivalents For the purposes of reporting cash flows, cash and cash equivalents include cash, balances with the CNB, balances per gyro accounts and term deposits with banks with maturity of less than 3 months. Cash and cash equivalents excludes the statutory reserves with the CNB, as the reserve funds are not available to the Bank s day to day operations. Obligatory reserves with the CNB is the amount required by all commercial banks licensed to operate in the Republic of Croatia Financial assets Financial assets held by the Bank are categorized into portfolios in accordance with the Bank s intent on the acquisition and pursuant to the Bank s investment strategy. Financial assets and liabilities are classified as At fair value through profit or loss, Held to maturity, Assets available for sale or as Loans and receivables. The principal difference among the portfolios relates to the measurement of financial assets and the recognition of their fair values in the financial statements. All financial assets and financial liabilities are recognized and derecognized on a settlement date basis where the purchase or sale of financial asset or liability is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned. When a financial asset or financial liability is recognized initially, the Bank measures it at its cost increased for transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. (a) Assets at fair value through profit and loss Financial assets are classified at fair value through profit or loss where the financial assets are held for trading. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling in the near future; or it is a part of an identified portfolio of financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. At the balance sheet date, there are no financial assets at fair value through profit or loss which are designated into this category. 17

17 3. Summary of significant accounting policies (continued) 3.6. Financial assets (continued) (a) Assets at fair value through profit and loss (continued) Measurement: Financial assets at fair value through profit or loss are initially accounted at fair value and related transaction costs are recorded as an expense. Subsequent to the initial recognition financial assets at fair value through profit or loss are accounted for and stated at fair value which approximates the price quoted on recognized stock exchanges or acceptable valuation models. The Bank includes unrealized gains and losses in Net gain from financial operations. Interest earned on assets at fair value through profit or loss representing coupons on debt securities is accrued on a daily basis and reported as Interest income in the income statement. Dividends on trading securities are recorded when declared and included as a receivable in the balance sheet line Other assets and in Other operating income in the profit and loss account. All purchases and sales of securities held for trading that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recognized as spot transactions. Transactions that do not meet the regular way settlement criterion are treated as financial derivatives. (b) Assets available for sale Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. This portfolio comprises equity and debt securities. Subsequent to initial recognition, available-for-sale financial assets are re-measured at fair value based on quoted prices or amounts derived from cash flow models. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of future cash flows and the fair value of unquoted equity instruments is estimated using applicable price/earnings or price/cash flow ratios refined to reflect specific circumstances of the issuer. For available-for-sale assets, gains and losses arising from changes in fair value are recognised directly in equity under the caption Other reserves, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the income statement for the period. The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement is removed from equity and recognised in the income statement. 18

18 3. Summary of significant accounting policies (continued) 3.6. Financial assets (continued) Impairment losses recognized in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through the income statement. Impairment losses recognized in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. Interest earned whilst holding available-for-sale securities is accrued on a daily basis using the effective interest rate method and reported as Interest income in the income statement. Financial assets (continued) Foreign exchange differences related to available-for-sale equity instruments held in foreign currency are reported together with fair value gains and losses in equity until the financial asset is sold. Foreign exchange differences related to available-for-sale debt instruments held in foreign currency are reported in the income statement. Dividends on securities available for sale are recorded as declared and included as a receivable in the balance sheet line Other assets and in Net trading valuation gains on financial instruments in the profit and loss account. Upon payment of the dividend, the receivable is offset against the collected cash. (c) Held to maturity investments Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, except: (a) those which the Bank, after the initial recognition, designates as at fair value through profit and loss; (b) those which the Bank designates as available for sale; and (c) those which can be defined as loans and receivables. They are initially recognized at fair value including all direct and indirect transaction costs and are subsequently measured at the amortised cost using the effective interest method. Interests on held to maturity investments are recognised in the income statement under Interest and similar income. In the case of impairment, impairment losses are recognised as decreases to the carrying amounts of the investments in the income statement under Net gains / (losses) from investment securities. Held to maturity investments are government bonds and bills of exchange. (d) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than (a) those that the Banks intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; 19

19 3. Summary of significant accounting policies (continued) 3.6. Financial assets (continued) (d) Loans and receivables (continued) (b) those that the Bank upon initial recognition designates as available for sale; or (c) those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available for sale. This portfolio comprises loans given to customers Loans and receivables are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest method, less any allowance for impairment. Third party expenses, such as legal fees, incurred in securing a loan are treated as part of the cost of the transaction as well as fees received from customers. Loan origination fees for loans which are probable of being drawn down, are deferred (together with related direct costs) and recognized as an adjustment to the effective yield of the loan and as such adjust the interest income. The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; Deterioration in the value of collateral; and Downgrading below investment grade level. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets individually assessed for impairment and for which impairment loss is recognized are not included in the assessment for impairment on collective basis. 20

20 3. Summary of significant accounting policies (continued) 3.6. Financial assets (continued) (d) Loans and receivables (continued) The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement in impairment charge for credit losses. Impairment loss on loans is recognized if there is objective evidence that the Bank will not be able to collect whole amount of receivable at maturity date. (e) Financial liabilities Financial liabilities of the Bank like Other borrowed funds, Amounts due to customers, are recognised initially at fair value net of transaction cost incurred. Financial liabilities are subsequently stated at amortized costs using the effective interest rate method. Interest expense arising on the issue of certificated debts is included in the income statement line Interest expense. (f) Sale and repurchase agreements If a financial asset is sold under an agreement to repurchase it at a fixed price or at the sale price plus a lender s return or if it is loaned under an agreement to return it to the transferor, it is not derecognized as the Bank retains substantially all the risks and rewards of ownership. Securities sold under sale and repurchase agreements ( repos ) are recorded as assets in the balance sheet lines of assets in original classification or the Bank reclassifies the asset on its balance sheet, as a Repurchase receivable if the transferee obtains the right to sell or pledge the asset. The corresponding liability towards the counterparty is included in Amounts due to banks or Amounts due to customers as appropriate. Securities purchased under agreements to purchase and resell ( reverse repos ) are recorded as assets in the balance sheet line Due from banks or Loans and receivables as appropriate, with the corresponding decrease in cash being included in Cash and balances with the Croatian National Bank. The difference between the sale and repurchase price is treated as interest and accrued evenly over the life of the repo agreement using the effective interest rate. 21

21 3. Summary of significant accounting policies (continued) 3.7. Tangible and intangible assets Tangible and intangible fixed assets are started at cost less accumulated depreciation/amortization. Depreciation is calculated on a straight-line basis to write down the cost of such assets to their residual values over their estimated useful lives. Assets in the course of construction are not depreciated. In 2010 the Bank applied new depreciation rates as stated in the table below: Buildings 20 years 20 years Motor vehicles 5 years 5 years Equipment and furniture 4 years 4 years IT equipment 2 years 2 years Software 4 years 4 years Leasehold improvements 4 years 4 years Other equipment 4 years 4 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. In addition, the carrying amounts of fixed and intangible assets are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts, and where carrying values exceed this estimated recoverable amount, assets are written down to their recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. Impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for fixed assets is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life Non-current assets held for sale Non-current assets are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is recovered principally through a sale transaction rather than through continuing use Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). The financial statements are presented in Croatian Kuna s (HRK), which is the Bank s functional and presentation currency. 22

22 3. Summary of significant accounting policies (continued) 3.9. Foreign currency translation (continued) b) Transactions and balances in foreign currency Transactions denominated in foreign currencies are translated into HRK at the prevailing exchange rates on the date of the transaction. Monetary items denominated in foreign currencies are retranslated into HRK at the appropriate spot rates of exchange prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in Net profit/loss on financial operations for the period. Exchange differences arising on the retranslation of non-monetary assets carried at fair value are included in profit or loss for the period except for exchange differences arising on the retranslation of non-monetary assets available-for-sale in respect of which gains and losses are recognized directly in equity. For such nonmonetary items, any exchange component of that gain or loss is also recognized directly in equity. The Bank has assets and liabilities originated in HRK, which are linked to foreign currency with oneway currency clause. Due to this clause the Bank has to revalue both the asset and related liability by higher of: foreign exchange rate valid as of the date of maturity, or foreign exchange rate valid as of the date of origination of the financial instrument. In case of liability linked to this clause the counterparty has this option. As such the Bank values its assets and liabilities related to this clause by middle rate of CNB valid at the date of balance sheet or foreign exchange rate agreed by the option (rate valid at origination), whichever is higher. The principal rates of exchange set forth by the CNB and used in the preparation of the Bank s balance sheet at the reporting dates were as follows: 31. December EUR 7, HRK 7, HRK 1 USD 5, HRK 5, HRK Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. 23

23 3. Summary of significant accounting policies (continued) Financial guarantee contracts (continued) Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank s liabilities under such guarantees are measured at the higher of the initial measurement, less amortisation calculated to recognise in the income statement the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to the income statement under other operating expenses Provisions Provisions are recognized when the Bank has a present obligation as a result of a past event, and it is probable that the Bank will be required to settle that obligation. Management Board determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors at the balance sheet date. Provisions are discounted to present value where the effect is material Retirement benefit costs The Bank has no post-retirement benefit plans for its employees or management. The Bank makes contributions on behalf of its employees to mandatory state pension plans, which are charged as expense in the period to which they relate. Any future payments to employees are the responsibility of the Republic of Croatia Fiduciary activities Assets and income arising thereon together with related undertakings to return such assets to customers are excluded from these financial statements when the Bank acts in a fiduciary capacity such as nominee, trustee or agent Critical accounting judgements and key sources of estimation uncertainty In the application of the Bank s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. 24

24 3. Summary of significant accounting policies (continued) Critical accounting judgements and key sources of estimation uncertainty (continued) The 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 if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The 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 if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. While it is possible that in particular periods the Bank may sustain losses, which are substantially relative to the allowance for impairment losses, it is the judgment of management that the allowance for impairment losses is adequate to absorb losses incurred on the risk assets. There are several legal actions against the Bank, which have arisen from the regular course of its operations. The management estimates that the probable outcome will have no significant negative effects on the Banks financial position or its results Regulatory requirements The Bank is subject to the regulatory requirements of the CNB. These regulations include limits and other restrictions pertaining to minimum capital adequacy requirements, classification of loans and off balance sheet commitments and forming allowances to cover credit risk, liquidity, interest rate and foreign currency position. At year end the Bank was in compliance with all regulatory requirements Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously Leases The leases entered into by the Bank are operating leases. The total payments made under operating leases are charged to other operating expenses in the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. 25

25 4. Interest income Legal entities 87,340 80,302 Individuals 22,207 23,701 Public sector 4,545 5,366 Banks Other Total interest income 115, , Interest expense Fee and commission income Financial institutions 32,118 32,755 Individuals 15,644 12,642 Legal entities 7,613 7,479 Non-profit organizations 2,393 2,316 Non-residents Total interest expense 58,401 56, Legal entities 12,583 15,594 Individuals 2,642 4,540 Other Total fee and commission income 15,347 20, Fee and commission expense FINA services 1,852 2,039 Domestic clients 2,043 2,703 Foreign banks Total fee and commission expense 4,614 5,257 26

26 8. Net foreign exchange gains Income from foreign exchange transactions 3,540 4,766 Net income/(loss) from foreign exchange trading 1, Net profit/(loss) from sales of financial assets available for sale Dividend income Total net foreign exchange gains 4,815 5, Other operating expenses Personnel expenses (note 9.1) 28,605 26,812 Depreciation and amortisation (note 20) 4,714 4,373 Other operating expenses (note 9.2) 25,897 23,297 Total other operating expenses 59,216 54, Personnel expenses Salaries 14,455 13,477 Contributions, taxes and surtaxes 13,533 12,732 Other personnel expenses Total personnel expenses 28,605 26,812 As at 2010 the Bank had 124 employees ( 2009: 118 employees). 9.2 Other expenses Materials and services 18,207 16,639 Entertainment, marketing and other administrative expenses 5,411 5,214 Saving deposits insurance premiums Other expenses 1, Total other expenses 25,897 23,297 27