BURGAN BANK GROUP CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2009

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2009

2 Consolidated Statement of Financial Position Notes (Restated) ASSETS Cash and cash equivalents 3 602, ,955 Treasury bills and bonds with CBK and others 417, ,378 Due from banks and other financial institutions 4 407, ,412 Loans and advances to customers 5 2,246,949 2,132,990 Investment securities 6 140, ,404 Investment in an associate 7 15,434 - Other assets 8 79,523 75,945 Property and equipment 9 36,664 30,607 Intangible assets 9&10 147, ,308 TOTAL ASSETS 4,093,984 3,942,999 LIABILITIES AND SHAREHOLDERS EQUITY LIABILITIES Due to banks 276, ,262 Due to other financial institutions 701, ,224 Deposits from customers 2,424,981 2,416,101 Other borrowed funds , ,943 Other liabilities , ,668 TOTAL LIABILITIES 3,665,710 3,557,198 SHAREHOLDERS EQUITY Share capital ,133 94,666 Share premium 13 64,759 64,759 Treasury shares 13 (18,290) (16,589) Statutory reserve 13 39,872 39,216 Voluntary reserve 13 40,250 39,594 Treasury shares reserve 13 37,296 37,286 Investment revaluation reserve 12,447 7,481 Share based compensation reserve Foreign currency translation reserve 10,675 5,026 Retained earnings 33,795 38,363 Equity attributable to the equity holders of the Bank 325, ,286 Non controlling interests 102,799 75,515 TOTAL SHAREHOLDERS EQUITY 428, ,801 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 4,093,984 3,942,999 Tariq Mohammed Abdul Salam Chairman The attached notes 1 to 25 form an integral part of these consolidated financial statements. 3

3 Consolidated Income Statement For the year ended 31 December Notes (Restated) Interest income 201, ,744 Interest expense (100,167) (140,727) Net interest income 101,829 68,017 Fee and commission income 14 31,844 24,600 Fee and commission expense (1,878) (2,184) Net fee and comission income 29,966 22,416 Net gain (loss) from foreign currencies 4,499 (237) Net (loss) gain from financial assets at fair value through profit or loss 6 (438) 3,150 Net gains from financial assets available for sale 4,431 21,028 Share of result from an associate Dividend income 1,084 2,257 Other income 10 12,552 4,474 Operating income 154, ,105 Staff expenses (20,994) (17,985) Other expenses (22,542) (15,501) Operating profit before provision 111,173 87,619 Provision for impairment of loans and advances 5 (79,389) (36,396) Impairment of investment securities (3,448) (10,158) Profit before taxation and board of directors' renumeration 28,336 41,065 Taxation 15 (7,662) (5,261) Board of directors' remuneration (70) (70) Profit for the year 20,604 35,734 Attributable to: Equity holders of the Bank 6,211 37,065 Non controlling interests 14,393 (1,331) 20,604 35,734 Fils Fils Basic and diluted earnings per share -attributable to the equity holders of the Bank The attached notes 1 to 25 form an integral part of these consolidated financial statements. 4

4 Consolidated Statement of Comprehensive Income For the year ended 31 December (Restated) Profit for the year 20,604 35,734 Other comprehensive income Financial assets available for sale: Net fair value gain (loss) 5,688 (6,851) Net transfer to income statement 350 (7,694) Foreign currency translation adjustment 9,192 7,675 Other comprehensive income (expense) for the year 15,230 (6,870) Total comprehensive income for the year 35,834 28,864 Attributable to: Equity holders of the Bank 16,826 27,916 Non controlling interests 19, ,834 28,864 The attached notes 1 to 25 form an integral part of these consolidated financial statements. 5

5 Consolidated Statement of Changes in Shareholders Equity For the year ended 31 December 2009 Share capital Share premium Treasury shares Attributable to equity holders of the Bank Statutory reserve Voluntary reserve Treasury shares reserve Investment revaluation reserve Share based compensation reserve Foreign currency translation reserve Retained earnings Total Non controlling interests Total equity Balance at 1 January 2009 (Restated) 94,666 64,759 (16,589) 39,216 39,594 37,286 7, ,026 38, ,286 75, ,801 Profit for the year ,211 6,211 14,393 20,604 Other comprehensive income ,966-5,649-10,615 4,615 15,230 Total comprehensive income ,966-5,649 6,211 16,826 19,008 35,834 Transfer to reserves (1,312) Bonus shares issued (note 13) 9, (9,467) Cash dividend paid to non controlling interests (3,333) (3,333) Purchase of treasury shares - - (1,758) (1,758) - (1,758) Sale of treasury shares Share based compensation expense (note 19) Acquisition of a subsidiary (note 10) ,449 6,449 Net movement in non controlling interests (note 10) ,160 5,160 Balance as at 31 December ,133 64,759 (18,290) 39,872 40,250 37,296 12, ,675 33, , , ,274 The attached notes 1 to 25 form an integral part of these consolidated financial statements. 6

6 Consolidated Statement of Changes in Shareholders Equity (Continued) For the year ended 31 December 2009 Share capital Share premium Treasury shares Attributable to equity holders of the Bank Statutory reserve Voluntary reserve Treasury shares reserve Investment revaluation reserve Share based compensation reserve Foreign currency translation reserve Retained earnings Total Non controlling interests Total equity (Restated) Balance at 1 January ,060 64,759 (297) 35,257 35,635 38,489 21, , , ,140 Profit for the year (Restated) ,065 37,065 (1,331) 35,734 Other comprehensive (expense) income (14,175) - 5,026 - (9,149) 2,279 (6,870) Total comprehensive (expense) income (14,175) - 5,026 37,065 27, ,864 Transfer to reserves ,959 3, (7,918) Cash dividend paid (51,583) (51,583) - (51,583) Bonus shares issued 8, (8,606) Purchase of treasury shares - - (18,819) (18,819) - (18,819) Sale of treasury shares - - 2, (1,203) ,324-1,324 Share based compensation expense (note 19) Acquisition of a subsidiary (Restated) ,602 74,602 Net movement in non controlling interests (35) (35) Balance as at 31 December ,666 64,759 (16,589) 39,216 39,594 37,286 7, ,026 38, ,286 75, ,801 The attached notes 1 to 25 form an integral part of these consolidated financial statements. 7

7 Consolidated Statement of Cash Flows Year ended 31 December Notes (Restated) Operating activities Profit before taxation and board of directors' remuneration 28,336 41,065 Adjustments: Net loss (gain) from financial assets at fair value through profit or loss 438 (3,150) Net gain on sale of financial assets available for sale (4,431) (21,028) Share of result from an associate (786) - Provision for impairment of loans and advances 79,389 36,396 Impairment of investment securities 3,448 10,158 Dividend income (1,084) (2,257) Depreciation and amortisation 5,966 3,857 Provision for share based compensation Operating profit before changes in operating assets and liabilities 111,330 65,349 Changes in operating assets and liabilities: Treasury bills and bonds with CBK and others (29,671) 86,148 Due from banks and other financial institutions 102,520 (104,876) Loans and advances to customers (79,456) (279,679) Other assets 11,678 (2,768) Due to banks 69,257 (277,356) Due to other financial institutions 97, ,626 Deposits from customers (65,609) 246,989 Other liabilities Taxation paid (56,053) (23,148) (1,704) (2,655) Net cash from (used in) operating activities 159,308 (47,370) Investing activities Purchase of investment securities (240,880) (654,661) Proceeds from sale of investment securities 211, ,004 Investment in an associate 7 (14,648) - Purchase of property and equipment (net of disposals) (5,156) (5,220) Dividends received 1,084 2,257 Acquisition of a subsidiary, net of cash acquired 10 11,128 36,374 Net cash (used in) from investing activities (36,989) 83,754 Financing activities Other borrowed funds (74,921) 149,282 Purchase of treasury shares (1,758) (18,819) Sale of treasury shares 67 1,324 Cash dividend paid - (51,583) Cash dividend paid to non controlling interests (3,333) - Net cash (used in) from financing activities (79,945) 80,204 Effect of foreign currency translation 3,599 3,212 Net movement in non controlling interests 5,160 (35) Net increase in cash and cash equivalents 51, ,765 Cash and cash equivalents at 1 January 550, ,190 Cash and cash equivalents at 31 December 3 602, ,955 The attached notes 1 to 25 form an integral part of these consolidated financial statements. 8

8 1. INCORPORATION AND PRINCIPAL ACTIVITIES Burgan Bank S.A.K. ("the Bank ) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a Bank with the Central Bank of Kuwait. The Bank s registered address is P.O. Box 5389, Safat 12170, State of Kuwait. The consolidated financial statements of the Bank and its subsidiaries (collectively the Group ) for the year ended 31 December 2009 were authorised for issue in accordance with a resolution of the Board of Directors on 21 January, 2010 and are issued subject to the approval of the Ordinary General Assembly of the shareholders of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance. The principal activities of the Group are explained in note 17. The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company ). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements are prepared under the historical cost basis, except for the financial assets at fair value through profit or loss, financial assets available for sale and derivative financial instruments that are measured at fair value. The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency rounded to the nearest thousand except when otherwise stated. The comparative information on consolidated statement of financial position as at 31 December 2008, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders equity and consolidated statement of cash flows for the year then ended have been restated in accordance with IFRS 3: Business Combination Revised due to the completion of the purchase price allocation of JKB, which requires retrospective adjustment of provisional amounts recognised at the acquisition date (note 9). Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait ( CBK ). These regulations require adoption of all International Financial Reporting Standards ( IFRS ) as issued by International Accounting Standard Board ( IASB ) except for International Accounting Standards ( IAS ) 39: Financial instruments: recognition and measurement requirement for collective provision, which has been replaced by the CBK s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets and note 5. Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in previous year, except for the adoption of new accounting policies on Intangible assets and Investment in an associate and the following issued, revised and amended IASB Standards during the year: IAS 1: Presentation of Financial Statements (Revised) IFRS 2: Share-based Payment: Vesting conditions and cancellation IFRS 7: Financial Instruments: Disclosures (Amended) IFRS 8: Operating Segments (new) IAS 16: Property, plant and equipment (Amended) IAS 19: Employee benefits (Amended) IAS 28: Investment in associates (Amended) IAS 32: Financial instruments: Presentation (Amended) IAS 36: Impairment of assets (Amended) IAS 38: Intangible assets (Amended) IAS 39: Financial instruments: recognition and measurement (Amended) 9

9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) The major changes in the new and amended Standards are as follows: IAS 1: Presentation of Financial Statements (Revised) The revised Standard separates owner and non-owner changes in shareholders equity. The statement of changes in shareholders equity includes only details of transactions with owners, with non-owner changes in shareholders equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements. IFRS 7: Financial Instruments: Disclosure (amended) The amended Standard requires additional disclosures about fair value measurement and liquidity risk. Measurements related to items at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments. The amended Standard also requires disclosing a reconciliation between the beginning and ending balance for level 3 fair value measurements, as well as significant transfers between levels in the fair value hierarchy. IFRS 8: Operating segments The new Standard requires disclosure of information about the Group s operating segments and replaces the requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. Adoption of this Standard did not have any effect on the financial position or performance of the Group. The Group determined that the operating segments were the same as the business segments previously identified under IAS 14 Segment reporting. The application of other IASB Standards did not have material impact on the consolidated financial statements of the Group. The following IASB Standards and IFRIC Interpretations have been issued/amended but not yet mandatory, and have not been adopted by the Group: IFRS 2: Share-based Payment: Group cash-settlement share-based payment transactions (effective 1 January 2010) IFRS 5: Non current assets held for sale and discontinued operations (Amended) (effective 1 January 2010) IFRS 9: Financial Instruments: Classification and Measurement (effective 2013) IFRIC Interpretation 9: Reassessment of embedded derivatives (effective 1 July 2009) IFRIC Interpretation 16: Hedges of a net investment in a foreign operation (effective 1 October 2009) IFRIC Interpretation 17: Distributions of non-cash assets to owners (effective 1 July 2009) IFRIC Interpretation 18: Transfers of assets from customers (effective 1 July 2009) The IFRS 9 will replace IAS 32 and IAS 39 upon its effective date. The application of IFRS 9 will result in amendments to the classification and measurement of financial assets and liabilities of the consolidated financial statements of the Group. Adoption of other IASB Standards and IFRIC Interpretations will not have material effect on the financial position or financial performance of the consolidated financial statements of the Group. Additional disclosures will be made in the consolidated financial statements when these Standards and Interpretations become effective. Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All material inter-group balances and transactions, including inter-group profits and unrealised profits and losses are eliminated on consolidation. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of the subsidiaries acquired or disposed off during the year are included in the consolidated income statement from the date of acquisition or up to the date of disposal, as appropriate. 10

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Basis of consolidation (continued) The results of the subsidiaries acquired or disposed off during the period are included in the consolidated income statement from the date of acquisition or up to the date of disposal, as appropriate. Non-controlling interests represents the equity in the subsidiaries not attributable directly, or indirectly, to the equity holders of the Bank. Equity and net income attributable to non-controlling interests are shown separately in the consolidated statement of financial position, consolidated income statement, consolidated statement of comprehensive income and consolidated statement of changes in Shareholders equity. When the controlling interest in the subsidiaries is disposed off, the difference between the selling price and the net asset value plus cumulative translation difference and goodwill is recognised in the consolidated income statement. The subsidiaries of the Group are as follows: Name of company Country of incorporation Effective interest as at 31 December 2009 Effective interest as at 31 December 2008 Jordan Kuwait Bank P.S.C. ( JKB ) Jordan 51.1% 51.1% Algeria Gulf Bank S.P.A. ( AGB ) Algeria 65.11% - Burgan International Holding S.A. ( BIH ) Luxembourg 100% 100% Held through JKB United Financial Investments Company Jordan 50.46% 50.46% Arab Orient Insurance Company (note 10) Jordan % Financial instruments Classification of financial instruments The Group classifies financial instruments as "at fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and "financial liabilities other than at fair value through profit or loss". Management determines the appropriate classification of each instrument at the time of acquisition. Recognition/de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive the cash flows from the asset have expired; the Group has transferred its right to receive cash flows from the assets or has assumed an obligation to pay them in full without material delay to a third party under a pass through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group s continuing involvement in the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. 11

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets classified as investments at fair value through profit or loss are recognised in the consolidated income statement. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is evaluated on reliable fair value basis in accordance with documented investment strategy. Interest earned or incurred is accrued as interest income/expense according to the terms of the contract, while dividend income is recorded in Dividend income when the right to receive the payment has been established. After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all changes in fair value recognised in the consolidated income statement. Derivative instruments are categorised as held for trading unless they are designated as hedging instruments. Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold to maturity. After initial recognition, held to maturity financial assets are carried at amortised cost using the effective interest rate method, less impairment losses, if any. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Loans and receivables These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. These are subsequently measured at amortised cost using the effective yield method adjusted for impairment losses, if any. The amortisation is included in Interest income in the consolidated income statement. Losses arising from impairment are recognised in the consolidated income statement. Treasury bills and bonds with CBK and others, due from banks and other financial institutions ( OFIs ), and loans and advances to customers are classified as loans and receivables. Financial assets available for sale These are non-derivative financial assets principally acquired to be held for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. These are subsequently measured at fair value with gains and losses being recognised as other comprehensive income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the financial asset are determined to be impaired at which time the cumulative gains and losses previously reported as other comprehensive income in equity are transferred to the consolidated income statement. Financial assets whose fair value cannot be reliably measured are carried at cost less impairment losses, if any. Financial liabilities other than at fair value through profit or loss These are subsequently measured at amortised cost using the effective yield method. Due to banks, Due to other financial institutions, Deposit from customers, Other borrowed funds, and Other liabilities are classified as financial liabilities other than at fair value through profit or loss. Derivative financial instruments A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index. The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks including exposures arising from forecast transactions. 12

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Derivative financial instruments (continued) Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met. Fair value hedge In relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from re-measuring the hedging instrument is recognised immediately in the consolidated income statement. The hedged items are adjusted for fair value changes relating to the risk being hedged and are also recognised in the consolidated income statement. Where the adjustment relates to a hedged interest-bearing financial instrument, the adjustment is amortised to the consolidated income statement on a systematic basis such that it is fully amortised by maturity. Cash flow hedge In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised initially in equity and any ineffective portion is recognised in the consolidated income statement. The gains or losses on cash flow hedges recognised initially in equity are transferred to the consolidated income statement in the period in which the hedged transaction impacts the consolidated income statement. Where the hedged transaction results in the recognition of an asset or liability, the associated gains or losses that had initially been recognised in equity are included in the initial measurement of the cost of the related asset or liability. For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the hedging instrument are taken directly to the consolidated income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, no longer qualifies for hedge accounting or is revoked by the Group. For cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecasted transaction occurs. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated income statement. If such derivative transactions, while providing effective economic hedges under the Group s risk management policies do not qualify for hedge accounting under IAS 39, they are treated as derivatives held for trading. Derivatives with positive fair values (unrealised gains) are included in other assets and derivatives with negative fair values (unrealised losses) are included in other liabilities. The resultant gains and losses are included in the consolidated income statement. Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through the profit or loss. These embedded derivatives are measured at fair value with the changes in fair value recognised in the consolidated income statement. Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently carried at initial measurement less amortisation. When a payment under the guarantee is likely to become payable, the present value of the expected payments less the unamortised premium, is charged to the consolidated income statement. Fair values The fair value of financial assets and liabilities traded in recognised financial markets is their quoted market price, based on the current bid price. For all other financial assets or liabilities where there is no quoted market price, a reasonable estimate of fair value is determined by reference to the current fair value of another instrument that is substantially the same; recent arm s length market transactions; discounted cash flow analysis; or other valuation techniques commonly used by market participants. 13

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Fair values (continued) The fair value of derivative is the equivalent of the unrealised gain or loss from marking to market the derivative using prevaling market rates or internal pricing models. An analysis of fair values of financial instruements and further details as to how they are measured are provided in note 22. Amortised cost This is computed using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position, when the Bank has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. Impairment of financial assets An assessment is made at each reporting date to determine whether there is an objective evidence that a specific financial asset may be impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is an objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Group assess whether objective evidence of impairment exists on an individual basis for each individual significant assets and collectively for others. The main criteria that the Group uses to determine that there is objective evidence of an impairment consideration include whether any payment of principal or interest are overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. If such evidence or indication exists, any impairment loss is recognised in the consolidated income statement. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. The impairment loss for financial assets carried at amortised cost is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows including amounts recoverable from collateral and guarantees, discounted at the financial asset s original effective interest rate. If a financial asset such as loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. 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 evidence of impairment exists in the case of 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 consolidated income statement, is removed from equity and recognised in the consolidated income statement. Subsequent increases in fair value of equity instruments are not reversed through consolidated income statement. For non equity financial assets, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. In addition, in accordance with Central Bank of Kuwait instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. 14

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loan continues to be subject to an individual or collective impairment assessment calculated using the loan s original effective interest rate. Repurchase and resale agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position. Amounts received under these agreements are treated as interest bearing liabilities and the difference between the sale and repurchase price treated as interest expense using the effective interest rate method. Assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and on current account with banks and OFIs and balances with CBK and due from banks and OFIs with maturities not exceeding thirty days from original maturity. Investment in an associate The Group's investment in its associate is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in an associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group's share of net assets of an associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor separately tested for impairment. The consolidated income statement reflects the share of the results of operations of an associate. Where there has been a change recognised directly in the equity of an associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of comprehensive income. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in an associate. The consolidated financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group's investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in an associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of an associate and its carrying value and recognises the amount in the consolidated income statement. Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis over its estimated useful life. Freehold land is stated at cost less impairment losses. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings Furniture and equipment Motor vehicles Computers 20 to 35 years 4 to 11 years 3 to 7 years 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement. 15

15 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Property and equipment (continued) The carrying amounts of property and equipment are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amounts and the impairment loss is recognised in the consolidated income statement. Intangible assets Intangible assets (other than goodwill) acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in the consolidated income statement in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each financial position date. Changes in the expected useful economic life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement in the other expenses consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful economic lives as follows: Banking licence 30 years Customer relationships and core deposits 10 years Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised. Business combinations and goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity as a result one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of accounting is used to account for business combinations. Under this method, the acquirer recognises, separately from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at the acquisition date. The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. Any non-controlling interests in the acquiree is measured at the non-controlling interest s proportionate share of the acquiree s identifiable net assets. Goodwill arising in a business combination is recognised as of the acquisition date as the excess of : (a) (b) the aggregate of the consideration transferred, the fair value of any non-controlling interests in the acquiree measured at the non controlling interest s proportionate share of the acquiree s identifiable net assets and the acquisition-date fair value of the acquirer s previously held equity interest in the acquiree; over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured at their fair values. 16

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Business combinations and goodwill (continued) Goodwill is allocated to each of the Group s cash-generating units or groups of cash generating units and is tested annually for impairment. Goodwill impairment is determined by assessing the recoverable amount of cashgenerating unit to which goodwill relates. The recoverable value is the value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period. Where goodwill forms part of a cash-generating unit (group of cash generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. End of service indemnity Provision is made for amounts payable to employees under the Kuwaiti Labour Law, employee contracts and applicable labour laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the statement of financial position date. Treasury shares The Bank s holding in its own shares is stated at acquisition cost and is recognised in shareholders equity. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, treasury shares reserve, which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. Share based payment transactions The cost of share based payment transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value of the employee stock options is determined using the Black-Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price, volatility, risk free interest rate and expected dividend yield. The fair value of these options is recognised as an expense over the vesting period with corresponding effect to shareholders equity. Revenue recognition Interest income and expense are recognised in the consolidated income statement for all interest bearing instruments using effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash flows 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, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses. Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the swap. Credit origination fee are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party, at which time it is recognised immediately. Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan. 17

17 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Revenue recognition (continued) Dividend income is recognised when the right to receive such income is established. Foreign currency Foreign currency transactions are recorded in KD at the rates of exchange prevailing on the date of the transaction. Monetary assets and liabilities in foreign currencies are converted into KD at the rates of exchange prevailing on the consolidated statement of financial position date. The resulting exchange gains and losses are taken to the consolidated income statement. Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to KD at the foreign exchange rates ruling on the dates that the values were determined. In case of non-monetary assets whose change in fair values are recognised directly in equity, foreign exchange differences are recognised directly in equity and for non-monetary assets whose change in fair value are recognised directly in the consolidated income statement are recognised in the consolidated income statement. As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank s presentation currency KD at the rate of exchange ruling on the consolidated statement of financial position date, and their income statements are translated at the average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the consolidated income statement. Any goodwill or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the respective subsidiaries and translated at the closing date. Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year. Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation s Board of Directors resolution, which states that the Board of Directors remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December Taxation on overseas subsidiaries Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to the prevailing laws, regulations and instructions of the countries where these subsidiaries operate. Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments. Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable. Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. 18