Financial Statements prepared in accordance with International Financial Reporting Standards

Transcription

1 Financial Statements prepared in accordance with International Financial Reporting Standards For the year ended 31 December 2012

2 Financial statements for the year ended 31 December 2012 Contents Independent Auditors' report Financial Statements Statement of comprehensive income 1 Statement of financial position 2 Statement of changes in equity 3 Statement of cash flows 4 Notes to the financial statements 5-58

3 Independent auditor s report To the Shareholders and Supervisory Board of We have audited the accompanying financial statements of, which comprise the statement of financial position as at 31 December 2012 and the statement of comprehensive income, statement of changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion. PricewaterhouseCoopers Revizija doo, 8 September Blvd 16 Hyperium Business Center, 2 nd floor, 1000 Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

4 Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of as of 31 December 2012 and of its financial performance and its cash flows for the year than ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Revizija doo Skopje 29 March 2013

5 Financial statements for the year ended 31 December 2012 Statement of comprehensive income For the year ended 31 December Note Interest income 7 372, ,304 Interest expense 7 (197,183) (192,780) Net interest income 175, ,524 Fee and commission income 8 67,857 67,496 Fee and commission expense 8 (22,810) (19,526) Net fee and commission income 45,047 47,970 Net foreign exchange gain 18,082 32,549 Other operating income 9 32,385 27,361 50,467 59,910 Operating income 270, ,404 Net impairment losses to cover credit risk 16 (31,073) (80,168) Personnel expenses 10 (199,344) (217,515) Operating lease expenses 11 (36,215) (44,892) Depreciation and amortization 19,20 (54,587) (69,145) Other expenses 12 (268,436) (167,760) Loss before income taxes (319,007) (219,076) Income tax income / (expense) - - Loss for the period (319,007) (219,076) Other comprehensive loss for the period, net of income tax - - Total comprehensive loss for the period (319,007) (219,076) Basic and diluted loss per share (MKD) 13 (40,940) (28,293) The notes on pages 5-58 are an integral part of these financial statements 1

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7 Financial statements for the year ended 31 December 2012 Statement of changes in equity For the year ended 31 December Share capital Share premium Other reserves Accumulated loss Total Balance at 1 January , , ,746 (219,806) 1,501,269 Loss for the period (219,076) (219,076) Other comprehensive income, net of income tax Total comprehensive income/(loss) for the period (219,076) (219,076) Balance at 31 December , , ,746 (438,882) 1,282,193 Balance at 1 January , , ,746 (438,882) 1,282,193 Loss for the period (319,007) (319,007) Other comprehensive income, net of income tax Total comprehensive income/(loss) for the period (319,007) (319,007) Share Capital Increase 307, ,440 Balance at 31 December ,236, , ,746 (757,889) 1,270,626 The notes on pages 5-58 are an integral part of these financial statements 3

8 Financial statements for the year ended 31 December 2012 Statement of cash flows For the year ended 31 December Note Cash flows from operating activities Loss for the period (319,007) (219,076) Adjustments for: Depreciation and amortization 19, 20 54,587 69,145 Written off property and equipment 12 20, Impairment loss on assets held for sale 12 2,832 1,050 Net impairment losses on financial assets 16 31,073 80,168 Net capital gain on sold assets held for sale (12) (207) Interest income 7 (372,317) (445,304) Interest expense 7 197, ,780 Dividend income 9 (651) (600) (385,624) (321,970) Change in loans and advances to customers 102, ,876 Change in other financial assets (894) 23,948 Change in other non-financial assets (395) 24,958 Change in obligatory reserve in foreign currency 55,377 68,517 Change in available for sale assets (18,197) (1,239) Change in deposits from banks (466,377) (1,059,377) Change in deposits from customers 384,675 (137,357) Change in other liabilities 75,332 (6,551) (253,198) (510,195) Interest received 366, ,174 Interest paid (173,858) (198,389) Net cash (used in) / from operating activities (60,463) (274,410) Cash flows from investing activities Purchase of property and equipment 19 (4,288) (5,802) Purchase of intangible assets 20 (727) (2,165) Proceeds from investment securities 345,585 - Purchase of investments (770,051) - Net cash from investing activities (429,481) (7,967) Net cash inflow before financing (489,944) (282,377) Cash flows from financing activities Proceeds from issued share capital 307,440 - Proceeds from subordinated liabilities - - Net cash from financing activities 307,440 - Net (decrease) in cash and balances with Central Bank (182,504) (282,377) Cash and Cash equivalents at 1 January 2,130,243 2,412,620 Cash and Cash equivalents at 31 December 30 1,947,739 2,130,243 The notes on pages 5-58 are an integral part of these financial statements 4

9 1. Reporting entity ( the Bank ) is a joint stock company incorporated and domiciled in the Republic of Macedonia. The Bank is fully owned by Alpha Bank A.E. Athens which is the ultimate parent company of the Alpha Group. The address of the Bank s registered office is as follows: St. Dimitrie Chupovski br Skopje Republic of Macedonia The Bank is licensed to perform all banking activities in accordance with the law. The main activities include commercial lending, receiving of deposits, foreign exchange deals, and payment operation services in the country and abroad and retail banking services. Operating environment of the Bank Recent volatility in global and Macedonian financial markets. The global liquidity crisis which started in spring 2008 continued in 2011 and has a certain influence in The European debt crisis during 2012 has slowed the export demand and consequently decreased the overall growth rate of the domestic economy by the end of the year. This has mostly resulted in a lower level of capital market funding while liquidity levels across the banking sector remained strong. It is expected that there will be no liquidity shocks in domestic banking in To preserve structural liquidity the Central Bank has imposed obligatory one and six month liquidity limits. These requirements remain in 2012 and are expected to remain in The Bank is wholly owned by Alpha Bank A.E Athens. The wave of worsening of the sovereign debt of Greece has intensified the worries for the losses in the banking sector and resulted with deterioration of the banks rating with significant exposure toward troubled countries. However, the following facts will lead to the normalization of the liquidity conditions: Continuing financial support of Greece by the European Commission, the European Central Bank and the International Monetary Fund, which included the financing of the exchange bond program (PSI) and the recapitalization of the Greek banks; Approval from the Euro group of 13 December 2012 of the disbursement of the second instalment of the second adjustment program of the Greek economy, which includes the amount of 23.2 billion for the recapitalization and the resolution of the Greek banks, bringing the total amount available for this purpose to 50 billion approximately. In March 2012, Alpha Bank participated in the attempt to ensure the long-term sustainability of Greek Government debt through the Greek Bond exchange program (PSI+). With the completion of the PSI+ and its final accounting impact, the Bank of Greece (BoG) assessed Greek banks capital needs, commensurate with PSI losses and taking into account the results of the BlackRock diagnostic exercise. In particular, Alpha Bank s, total recapitalization needs were determined by the Bank of Greece at Euro 4.6 billion of which Euro 2.9 have already been disbursed by the Hellenic Financial Stability Fund (HFSF) as bridge capital in view of its participation in the capital raising across the sector. 5

10 Operating environment of the Bank (continued) On November 12, 2012, the Ministry of Finance released through a cabinet act the legal framework for the Greek banks recapitalization process. According to those terms, Greek Banks should maintain an EBA Core Tier I of 9%, of which 6% should be in the form of common shares, while the remaining 3% could be covered by existing preference shares placed with the Government and potentially by contingent convertible instruments (CoCos), fully subscribed by the HFSF. The designed recapitalisation framework aims at private sector participation by providing incentives such as warrants and full voting rights given private investors commit to at least 10% of the equity raising. In addition, on February 1, 2013 Alpha Bank completed the acquisition of Emporiki Bank S.A. from Credit Agricole S.A., creating the largest private bank in Greece. With the acquisition of Emporiki Bank, Alpha Bank strengthens its capital base, placing it in a leading position ahead of the recapitalization of the Greek financial sector. Following a Euro 2.9 billion capital increase by Credit Agricole pre closing of the transaction, the acquisition of Emporiki s shares contributes to Alpha Bank a Net Asset Value of Euro 2.3 billion as of January 31, 2013 before synergies and other potential financial effects such as portfolio workout. It should also be noted that according to the transaction agreement Crédit Agricole S.A. subscribed also into a Euro 150 million convertible bond issued by Alpha Bank, which, at the discretion of Crédit Agricole S.A., will convert into Alpha Bank common shares, subject to certain terms and conditions. Impact on liquidity: The funding base of the Bank is mostly dependant on its stable deposit base, which may to be under pressure of increasing interest rates offered by the Banks' that are changing financing strategies. This may influence the cost of funding, but it is not expected to have a significant influence on the deposit base. Impact on customers/borrowers: The Bank s clients, both the borrowers and depositors, may be affected by weak domestic demand which could in turn impact their liquidity and their ability to repay the amounts owed or to seek to withdraw deposits placed with the Bank. Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. Management has properly reflected revised estimates of expected future cash flows in its impairment assessments. Impact on collateral (especially real estate): The amount of provision for impaired loans and the carrying amount of foreclosed collateral is based on management's appraisals of these assets at the statement of financial position date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in the Republic of Macedonia for many types of collateral, especially real estate, has not been severely affected by the recent volatility in global financial markets since the supply of real estates, especially residential, is still lower than demand. Expected lower incomes of households and possible lower liquidity of companies in 2013 may decrease liquidity for certain types of assets. As a result, the actual realizable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. 6

11 2. Basis of preparation (a) (b) (c) (d) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Basis of measurement The financial statements have been prepared on the historical cost basis except for the following: available-for-sale financial assets are measured at fair value. Functional and presentation currency These financial statements are presented in Macedonian denar ( MKD ), which is the Bank s functional and presentation currency. Except as indicated, financial information, presented in MKD has been rounded to the nearest thousand. Use of estimates and judgments The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in note 5. 7

12 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Foreign currency transactions Transactions in foreign currencies are translated into Macedonian denars at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into Macedonian denars at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in Macedonian denars at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the spot exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into Macedonian denars at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for the differences arising on the retranslation of available-for-sale equity instruments, which are recognised directly in other comprehensive income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The foreign currencies the Bank deals with are predominantly Euro (EUR) and United States Dollars (USD). The exchange rates used for translation at 31 December 2012 and 2011 were as follows: MKD MKD 1 EUR USD

13 3. Significant accounting policies (continued) (b) Interest income and expense Interest income and expenses for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within interest income and interest expense in the profit or loss on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. (c) (d) Fees and commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including financial services provided by the Bank in respect of foreign currency settlements, guarantees, letters of credit, domestic and foreign payment operations and other services, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. Dividends Dividend income is recognized when the right to receive payment is established. 9

14 3. Significant accounting policies (continued) (e) (f) Lease payments made Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Income tax expense According the tax regime effective in the Republic of Macedonia the base for income tax computation is the income distribution concept. Distributions are split into two components: Tax on any dividend distribution i.e. the tax base is the dividend paid; Tax on non deductable items i.e. the tax base is the non deductable items specified in the tax rulebook less any allowable tax credits. The tax on non deductable items is paid each month in monthly advance installments based on the previous fiscal year computation of such non deductable differences. At year end a final tax computation is prepared with a final tax settlement (see note 23). (i) Tax on dividend distribution: Tax on dividend distribution is considered to be income tax within scope of International Accounting Standards - Tax on Income ( IAS 12 ). The timing of recognition of this type of income tax is to be consistent with the underlining dividend liability recognition (i.e., recognized when the dividend is paid and/or declared). As such no provisions are required for income tax arising from dividend distribution until the dividend is declared and/or paid. (ii) Tax on non deductable items: Tax on non deductable items is not income tax and is out of scope of IAS 12. Accordingly, such tax expense is presented within the operating results see note 12, and related tax payable/receivable is presented within the other assets/other liabilities in the statement of financial position. 10

15 3. Significant accounting policies (continued) (f) (g) (i) (ii) (iii) Income tax expense (continued) Recognition of tax provisions: Taking into account that tax on non deductable items is not income tax and is out of scope of IAS 12, in case of tax contingencies, provisions are made in line with International Accounting Standards Provisions, Contingent Liabilities and Contingent Assets adopted in the Republic of Macedonia ( IAS 37 ). Such provisions are not presented as deferred tax assets or deferred tax liabilities, but as other assets or other liabilities. Recognition/reversal of such tax provisions (that is not income taxes) is presented within the other expenses/other income. Financial assets and liabilities Recognition The Bank initially recognizes loans and advances, deposits and borrowed funds on the date at which they are originated. Regular way purchases and sales of financial assets are recognized on the trade date at which the Bank commits to purchase or sell the asset. All other financial assets and liabilities are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at fair valu e plus, for an item not subsequently measured at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. Classification See accounting policies 3(h), (j) and (k). Derecognition The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability in the statement of financial position. 11

16 3. Significant accounting policies (continued) (g) (iii) (iv) (v) (vi) Financial assets and liabilities (continued) Derecognition (continued) On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss. In transactions in which the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions such as in the Bank s trading activity. Amortized cost measurement The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, less any reduction for impairment. Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. 12

17 3. Significant accounting policies (continued) (g) (vi) (vii) Financial assets and liabilities (continued) Fair value measurement (continued) If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. Assets are measured at a bid price; liabilities are measured at an asking price. Identification and measurement of impairment At each reporting date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is (are) impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows on the asset(s) that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include: delinquency in contractual payments of principal or interest, cash flow difficulties experienced by the borrower, breach of loan covenants or conditions, initiation of bankruptcy proceedings, deterioration of the borrower s competitive position; and deterioration in the value of collateral. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. 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. All individually significant financial assets (loans and advances and investment securities) are assessed for specific impairment. 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. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics. 13

18 3. Significant accounting policies (continued) (g) (vii) (h) (i) Financial assets and liabilities (continued) Identification and measurement of impairment (continued) Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset s original effective interest rate. Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognized by transferring the cumulative loss that has been recognized in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. The Bank writes off certain loans and advances and investment securities when they are determined to be uncollectible (see note 4). Cash and cash equivalents Cash and cash equivalents include cash balance on hand, demand deposits with banks, cash deposited with the National Bank of the Republic of Macedonia ( NBRM ) and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position. Assets classified as held for sale Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. Immediately before classification as held for sale, the assets are re-measured in accordance with the Bank s accounting policies. 14

19 3. Significant accounting policies (continued) (g) (i) (j) (k) (i) Financial assets and liabilities (continued) Assets classified as held for sale (continued) Thereafter generally the assets are measured at the lower of their carrying amount and fair value less cost to sell. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss. Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortized cost using the effective interest method. Investment securities Held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which are not designated as at fair value through profit or loss or as available for sale. Held-to-maturity investments are carried at amortized cost using the effective interest method. A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments as available for sale, and would prevent the Bank from classifying investment securities as held to maturity for the current and the following two financial years. However, sales and reclassifications in any of the following circumstances would not trigger a reclassification: sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset s fair value; sales or reclassifications after the Bank has collected substantially all of the asset s original principal; sales or reclassifications attributable to non-recurring isolated events beyond the Bank s control that could not have been reasonably anticipated. 15

20 3. Significant accounting policies (continued) (k) (ii) (l) (i) Investment securities (continued) Available-for-sale Available-for-sale investments are non-derivative investments that are designated as available for sale or are not classified as another category of financial assets. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. All other available-for-sale investments are carried at fair value. Interest income is recognized in profit or loss using the effective interest method. Dividend income is recognized in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognized in profit or loss. Other fair value changes are recognized in other comprehensive income until the investment is sold or impaired, where upon the cumulative gains and losses previously recognized in other comprehensive income are reclassified to profit or loss as a reclassification adjustment. Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognized within other income or other expenses in profit or loss. 16

21 3. Significant accounting policies (continued) (l) (ii) (iii) Property and equipment (continued) Subsequent costs The cost of replacing part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. Depreciation Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Depreciation rates, based on the estimated useful lives for the current and comparative periods are as follows: Buildings 40 years 40 years Leasehold improvement 10 years 10 years Furniture and equipment 4 to 10 years 4 to 10 years Depreciation methods, useful lives and residual value are reviewed at each financial year-end and adjusted if appropriate. (m) (i) (ii) Intangible assets Recognition and measurement Intangible assets acquired by the Bank are stated at cost less accumulated amortization and accumulated impairment losses. Subsequent expenditure Subsequent expenditure on intangible assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. 17

22 3. Significant accounting policies (continued) (m) (iii) Intangible assets (continued) Amortization Amortization is recognized in profit or loss on a straight-line basis over the estimated useful life of the intangible assets, from the date that it is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The amortization rates based on the estimated useful lives for the current and comparative periods are as follows: Software 5 to 14 years 5 to 14 years Licenses 5 years 5 years (n) (o) Amortization methods, estimated useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. Leased assets lessee Leases in terms of which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognized on the Bank s statement of financial position. Impairment of non-financial assets The carrying amounts of the Bank s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognized in profit or loss. Impairment losses in respect of cashgenerating units are allocated to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 18

23 3. Significant accounting policies (continued) (o) (p) (q) Impairment of non-financial assets (continued) Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Deposits, borrowed funds, debt securities issued and subordinated liabilities Deposits, borrowed funds, debt securities issued and subordinated liabilities are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortized cost using the effective interest method, except where the Bank chooses to carry the liabilities at fair value through profit or loss. Provisions A provision is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognized when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognizes any impairment loss on the assets associated with that contract. 19

24 3. Significant accounting policies (continued) (r) (i) (ii) (iii) (s) (i) (ii) (iii) Employee benefits Defined contribution plans The Bank contributes to its employees' post retirement plans as prescribed by the national legislation and will have no legal or constructive obligation to pay further amounts. Contributions, based on salaries, are made to the national organisations responsible for the payment of pensions. There is no additional liability in respect of these plans. Obligations for contributions to defined contribution pension plans are recognized as an expense in profit or loss when they are due. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Other long-term employee benefits In accordance with local regulations the Bank pays two average salaries to its employees at the moment of retirement. The employee benefits are discounted to determine their present value. There is no additional liability in respect of post retirement. Share capital and reserves Ordinary shares Share capital comprises ordinary shares. Incremental costs Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognized as a liability in the period in which they are declared. (t) Earnings per share The Bank presents basic and diluted earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees. 20

25 3. Significant accounting policies (continued) (u) (v) Adoption of New or Revised Standards and Interpretations The following new Standards and Interpretations became effective for the Bank from 1 January 2012: Disclosures Transfers of Financial Assets Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. The standard requires these new disclosures to be presented in a separate note. Other revised standards and interpretations: The amendments to IFRS 1 First-time adoption of IFRS, relating to severe hyperinflation and eliminating references to fixed dates for certain exceptions and exemptions, did not have any impact on these financial statements. The amendment to IAS 12 Income taxes, which introduced a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale, did not have a material impact on these financial statements. New accounting pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2013 or later, and which the Bank has not early adopted. IFRS 9 Financial Instruments Part 1: Classification and Measurement. IFRS 9, issued in November 2010, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent payments of principal and interest only (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. 21

26 3. Significant accounting policies (continued) (v) New accounting pronouncements (continued) (All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-byinstrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. The Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption by the Bank. The following other new pronouncements are not expected to have any material impact on the Bank when adopted: IFRS 10 Consolidated Financial Statements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) which replaces all of the guidance on control and consolidation in IAS 27 Consolidated and separate financial statements and SIC-12 Consolidation - special purpose entities. IFRS 11 Joint Arrangements, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), which replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities Non-Monetary Contributions by Venturers. IFRS 12 Disclosure of Interests in Other Entities, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) which requires new disclosures by entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 13 Fair Value Measurement, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), which aims to improve disclosures and achieve consistency by providing a revised definition of fair value. IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures,, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013), which were changed by IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements Amendments to IAS 1 Presentation of Financial Statements (issued in June 2011, effective for annual periods beginning on or after 1 July 2012), which aim to improve the disclosure of items presented in other comprehensive income. 22