HSBC Middle East Securities LLC Financial statements for the year ended 31 December 2011

Transcription

1 Financial statements for the year ended 31 December 2011

2 Financial statements for the year ended 31 December 2011 Contents Page Directors' report Independent auditors' report Statement of income Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Notes to the financial statements 8-19

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5 Statement of income for the year ended 31 December 2011 Note AED '000 AED '000 Commission income 1,648 2,509 Interest income on term deposits Gross income 1,884 3,179 Commission expense (285) (588) Net operating income 1,599 2,591 Administrative expenses 3 (11,867) (16,031) Loss for the year (10,268) (13,440) ====== ====== The notes on pages 8 to 19 form an integral part of these financial statements. The independent auditor's report is set out on page 2. 3

6 Statement of comprehensive income for the year ended 31 December AED '000 AED '000 Net loss for the year (10,268) (13,440) Other comprehensive income Total comprehensive loss for the year (10,268) (13,440) ===== ===== The notes on pages 8 to 19 form an integral part of these financial statements. The independent auditor's report is set out on page 2. 4

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8 Statement of cash flows for the year ended 31 December 2011 Cash flows from operating activities AED '000 AED '000 Loss for the year (10,268) (13,440) Change in prepayments and others Change in accrued income Change in payables and accrued expenses (638) (67) Net cash used in operating activities (10,686) (13,197) Cash flows from investing activities Movement in term deposits with bank maturing after 3 months (7,000) 28, Net cash (used in)/from investing activities (7,000) 28, Net (decrease)/increase in cash and cash equivalents (17,686) 14,827 Cash and cash equivalents at the beginning of the year 27,631 12, Cash and cash equivalents at 31 December 9,945 27,631 ===== ===== The cash and cash equivalents at 31 December consist of the following: Term deposits with bank maturing within 3 months 8,801 24,598 Balance in current accounts 1,144 3, ,945 27,631 ===== ===== The notes on pages 8 to 19 form an integral part of these financial statements. The independent auditor's report is set out on page 2. 6

9 Statement of changes in equity for the year ended 31 December 2011 Statutory Accumulated Share capital reserve losses Total AED '000 AED '000 AED '000 AED '000 Balance at 1 January , (15,430) 39,595 Total comprehensive loss for the year - - (13,440) (13,440) Balance at 31 December , (28,870) 26,155 ===== === ===== ===== Balance at 1 January , (28,870) 26,155 Total comprehensive loss for the year - - (10,268) (10,268) Balance at 31 December , (39,138) 15,887 ===== === ===== ===== The notes on pages 8 to 19 form an integral part of these financial statements. The independent auditor's report is set out on page 2. 7

10 Notes to the financial statements for the year ended 31 December Legal status and activities ( the Company ) is registered in the Emirate of Dubai as a limited liability company under United Arab Emirates ( UAE ) Federal Law No.8 of 1984 as applicable to commercial companies. The Company was established on 09 October The Company started operations from 16 March 2008 after obtaining license from Emirates Securities and Commodities Authority ( ESCA ) on 3 March 2008, Dubai Financial Market ( DFM ) on 9 March 2008 and Abu Dhabi Securities Exchange ( ADX ) on 16 March The principal activity of the Company is to deal on behalf of customers as brokers in local shares and bonds. The principal office of the Company is located at HSBC Bank Middle East Limited Building, Level 5, Building 5, Emaar Square, P.O.Box , Dubai, United Arab Emirates. The shareholding pattern of the Company is as follows: HSBC Bank Middle East Limited ( HBME ) a related party 49% Abdul Wahid Al Ulama 51% % ==== 2. Significant accounting policies a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board (IASB). b) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations that are issued but not effective for accounting period starting 1 January 2011, and have not been early adopted in preparing these financial statements: Amendments to IAS 12 - Deferred Tax: Recovery of Underlying Assets (effective 1 Jan 2012) Amendment to IAS 1 - Presentation of Items of Other Comprehensive Income (effective 1 July 2012) IFRS 9 Financial Instruments (effective 1 January 2013) IFRS 10 Consolidated Financial Statements (effective 1 January 2013) IFRS 11 Joint Arrangements (effective 1 January 2013) IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013) IFRS 13 Fair Value Measurement (effective 1 January 2013) IAS 19 Employee Benefits (amended 2011) (effective 1 January 2013) IAS 27 Separate Financial Statements (2011) (effective 1 January 2013) IAS 28 Investments in Associates & Joint Ventures (2011) (effective 1 January 2013) 8

11 2. Significant accounting policies (continued) b) New standards and interpretations not yet adopted (continued) Management has assessed the impact of the new standards, amendments to standards and interpretations and amendments to published standards, and concluded that they are either not relevant to the Company or their impact is not material or is limited to the disclosures and presentation requirement in the financial statements. c) Basis of preparation These financial statements are prepared under the historical cost convention. d) Functional and presentation currency These financial statements are presented in United Arab Emirates 'Dirhams' ("AED") which is the Company's functional currency. All financial information presented in AED has been rounded to the nearest thousand. e) Key accounting estimates and judgements The preparation of these financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. 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. As at 31 December 2011, there are no significant areas where considerable management s judgment is required. f) Revenue recognition Fee, commission and interest income are recognised on an accrual basis. g) Financial instruments Classification A financial instrument is any contract that gives rise to both a financial asset for the Company and a financial liability or equity instrument of another party. 9

12 2. Significant accounting policies (continued) g) Financial instruments (continued) Initial recognition Purchases and sales of investment securities are recognised on trade-date which is the date on which the Company commits to purchase or sell the securities. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. De-recognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Company has substantially transferred all the risks and rewards of ownership. A financial liability is derecognised when it is extinguished. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. Subsequent measurement Financial assets are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale investments are recognised directly in equity, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in the statement of income. h) Property and equipment Property and equipment is stated at cost less accumulated depreciation and impairment losses. Depreciation is charged to the statement of income on a straight line basis over the estimated useful lives of property and equipment. Where the carrying value of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal are taken to income. The estimated useful lives for motor vehicles, furniture and fixtures and equipment ranges between 3 5 years. Useful lives are re-assessed at each reporting date. i) Receivables Receivables are stated at cost less impairment losses, if any. 10

13 2. Significant accounting policies (continued) j) Impairment Financial assets are reviewed at each reporting date to determine whether there is objective evidence of impairment. If any such indication exists, the asset s recoverable amount is estimated. Impairment loss is the difference between the net carrying value of an asset and its recoverable amount. Any such impairment loss is recognised in the statement of comprehensive income. k) Payables Payables are stated at cost. l) Employee terminal benefits Provision is made for amounts payable under the UAE Labour law applicable to non UAE nationals accumulated periods of service at the reporting date. The Company pays its contributions in respect of the UAE Nationals under the UAE Pension and Social Security Law. m) Foreign currencies g y g g Monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are Monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to AED at the foreign exchange rates ruling at the dates that the fair values were determined. Foreign exchange differences arising on translation are recognised in the statement of income. n) Provisions A provision is recognised in the statement of financial position when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. o) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand and at bank maturing within three months of their original placement date. 11

14 2. Significant accounting policies (continued) p) Offsetting Financial assets and liabilities are offset and the net amount is reported on the balance sheet only when the Company has a legally enforceable right to set off the recognised 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 IFRS or IAS or if gains or losses are arising from a group of similar transactions. 3. Administrative expenses 31 December 2011 AED December 2010 AED 000 Salaries, allowances and other benefits 4,191 6,481 Property lease Cost recharge by HSBC Bank Middle East Limited Cost recharge by Head Office (Jersey) IT costs 5,613 6,446 Charge for inaccurate trades Contract services License fees General and other expenses Total 11,867 16,031 ===== ===== 4. Balances with banks AED '000 AED '000 Current accounts 1,144 3,033 Term deposits - Maturing within three months 8,801 24,598 - Maturing after three months 7, ,945 27,631 ====== ====== 12

15 5. Prepayments and others 31 December 31 December AED '000 AED '000 Prepaid license fee for ADX and DFM Prepaid commission on guarantees Others ====== ====== 6. Share capital 31 December December 2010 AED '000 AED '000 Authorised: 55,000 (2010: 55,000) ordinary shares of AED 1,000 each 55,000 55,000 ===== ===== Issued and fully paid: 55,000 (2010: 55,000) ordinary shares of AED 1,000 each 55,000 55,000 ===== ===== Statutory reserve In accordance with UAE Federal law No 8 of 1984 (as amended), a minimum of 10% of the profit for the period is to be transferred to a non-distributable statutory reserve. Such transfers may cease when the statutory reserve becomes equal to half of the paid up share capital. In view of the loss for the year, no amount has been transferred to statutory reserve. 7. Bank overdraft facility The Company has arranged an overdraft facility from HSBC Bank Middle East Limited-UAE, a related party, for an amount of USD 75,000,000 (2010: USD 75,000,000). The facility carries an interest rate of LIBOR/EIBOR plus 0.75% per annum. The purpose of the facility is to utilise funds in case of short term mismatches in receipt of funds from customers and onward payments to the stock exchanges. Accordingly, the interest amount on this facility is recharged to the respective customers. The overdraft balance as at 31 December 2011 was Nil (2010: Nil). 13

16 8. Contingent liabilities and commitments Contingencies HSBC Bank Middle East Limited UAE operations, a related party, issued bank guarantees amounting to AED 15 million (2010: AED 15 million) and AED 40 million (2010: AED 60 million) in favour of Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) respectively, for the Company s fulfillment of obligations under the contract / agreement with DFM and ADX. Commitments The Company had no significant capital commitments as at 31 December 2011 (2010: Nil). 9. The management of risk Risk management framework All the Company s activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. The Company is primarily exposed to credit risk, interest rate risk, currency risk and operational risk. The risk management framework is established by the shareholder HBME ( the Group ), which sets out the well established risk governance and ownership structure to ensure oversight of accountability for, and effective management of risk at regional, customer group and operating entity levels. However, the primary responsibility for managing risk rests with the Board of Directors of the Company. The Board of Directors has the responsibility to cascade the Group s risk management policies which are designed to support the formulation of risk appetite, guide employees and establish procedures for monitoring and controlling risk with timely and reliable reporting to the Board. The Group regularly reviews and updates its risk management policies and systems to reflect changes in markets, products and emerging best practice which are then cascaded to the Company. a) Credit risk management Credit risk is the risk of financial loss if a customer or counterparty of the Company fails to meet an obligation under a contract. The Company has in place group standards; regulations of ESCA, ADX and the DFM; and policies & procedures dedicated to monitor and manage risk from such activities. The Company s financial assets which are potentially subject to concentration of credit risk consist of balances with bank. Credit risk is managed by placing funds with banks and institutions within the HSBC Group of entities. 14

17 9. The management of risk (continued) a) Credit risk management (continued) Periodic risk based audits are undertaken by Group Internal Audit and the internal compliance to check that the local regulatory and the Group standards and policies are adhered to in the approval and management of receivable balances. b) Market risk management Market risk is the risk that movements in market risk factors, including foreign exchange rates, interest rates and equity prices; will reduce the Company s income or the value of its investments. Market risk arises principally from mismatches between the future yield on assets and their funding cost as a result of interest rate changes. Interest rate risk Sensitivity to interest rates arises from mismatches in the period to re-pricing of assets and that of the corresponding liability funding. Significant changes in gap positions can be made to adjust the profile as market outlooks change. Additionally, whilst mismatches exist, liabilities maturing are to a great extent historically rolled over rather than withdrawn. The following table represents the Company s interest rate sensitivity for its assets, liabilities and off-balance sheet instruments based on the maturity dates in the periods shown: 31 December 2011 Financial assets Balances with banks Term deposits with bank Accrued income Effective Up to 3 3 to 12 Over 1 to 5 Non interest Total average months months years bearing interest rate AED 000 AED 000 AED 000 AED 000 AED ,144 1, % 8,801 7, , Total financial assets 8,801 7,000-1,153 16,954 Financial liabilities ,151 1,151 Total financial liabilities ,151 1,151 15

18 9. The management of risk (continued) b) Market risk management (continued) 31 December 2010 Effective Up to 3 3 to 12 Over 1 to 5 Non interest Total average months months years bearing interest rate AED 000 AED 000 AED 000 AED 000 AED 000 Financial assets Balances with banks ,033 3,033 Term deposits with bank 0.7% 24, ,598 Accrued income Total financial assets 24, ,052 27,650 Financial liabilities ,789 1,789 Total financial liabilities ,789 1,789 Foreign currency risk The Company is not currently exposed to any significant foreign currency risk as all its assets and liabilities are in AED. c) Liquidity and funding management Liquidity risk is the risk that the Company does not have sufficient financial resources to meet its obligations as they fall due or will have to do so at an extensive cost. The risk arises from mismatches in the timing of the cash flows. Funding risk arises when the necessary liquidity to fund illiquid asset positions cannot be obtained at the expected terms and when required. The management of liquidity and funding is carried out by the Company in accordance with the internal practices and limits as approved by the Board of directors. The Company is not significantly exposed to liquidity risks as its primary source of funding is through approved financing arrangements with HSBC entities and capital infusion by shareholders. d) Operational risk management Operational risk is the risk of loss arising from fraud, unauthorized activities, error, omission, inefficiency, systems failure or external events. It is inherent to every business organization and covers a wide spectrum of issues. 16

19 9. The management of risk (continued) d) Operational risk management (continued) The Company is governed by the regulations of ESCA, ADX and DFM which are monitored by the Compliance and audit department. Additionally the board of directors of the Company has codified its operational risk management process by issuing a high level standard and detailed guidance. This explains how the Company manages operational risk by identifying, assessing, monitoring, controlling and mitigating the risk, rectifying operational risk events, and implementing any additional procedures required for compliance with local regulatory requirements. The Company is responsible for managing this risk through a controls-based environment in which processes are documented, authorization is independent and transactions are reconciled and monitored. This is supported by an independent programme of periodic reviews undertaken by the Internal Compliance and Audit department and Group Internal Audit, and by monitoring external operational risk events, which ensure that the Company stays in line with best practice and takes account of lessons learned from publicised operational failures within the industry. Assigning responsibility for the operational risk at the Company; Use of information systems to record the identification and assessment of operational risks and to generate appropriate, regular operational risk reporting; Assessment of risks inherent in the processes, activities and products; Reporting of the operational risk loss data to the management and HBME if it exceeds the materiality thresholds set by the board of directors; and Consideration of risk mitigation, including insurance, where it is cost-effective. 10. Capital management The Company s capital management approach is driven by its strategy and organisational requirements, taking into account the commercial environment in which it operates. The Company s capital management takes into account assets growth and the optimal amount and mix of capital required to support planned business growth. Regulatory capital The Company s lead regulator, Emirates Securities and Commodities Authority (ESCA), sets and monitors the regulatory capital requirements of the Company. The Company s regulatory capital set by ESCA is AED 55,000,000. The Company has complied with all externally imposed capital requirements throughout the year. 17

20 11. Fair values of financial instruments The Company s management believes that the carrying value of all its financial instruments approximates their fair value. 12. Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In the case of the Company, related parties, as defined in the International Accounting Standard No. 24, include major shareholders of the Company, directors and officers of the Company and companies of whom they are principal owners and key management personnel. Transactions are entered into with related parties on agreed terms and conditions approved by the Management. Transactions and balances with related parties are as follows: Transactions with related parties 31 December 31 December AED '000 AED '000 HSBC Holding Plc, UK Commission income 729 1,726 HSBC Bank Middle East Limited - UAE Interest earned Intercompany charges: - Commission expense Administrative expenses 6,571 8,168 HSBC Bank Middle East Limited - Jersey Administrative expenses ====== ====== 18

21 12. Related party transactions (continued) Balances with related parties 31 December December 2010 AED '000 AED '000 HSBC Bank Middle East Limited - UAE Current accounts 1,144 3,009 Term deposits - Maturing within three months 15,801 24,598 - Maturing after three months - - Payables and accrued expenses (188) (188) Remuneration to key management personnel Salaries and benefits paid to and post employment benefit charge for key management personnel during the year ended 31 December 2011 amounted to AED 1.22 million (31 December 2010: 1.90 million). 13. Comparative figures Certain comparative figures have been re-classified where necessary to conform to the current period's presentation. 19