ING BANK (EURASIA) JSC

Transcription

1 Financial Statements Year ended 31 December 2018 Together with Independent Auditors Report

2 2018 Financial Statements CONTENTS INDEPENDENT AUDITORS REPORT FINANCIAL STATEMENTS Statement of financial position... 9 Statement of profit or loss and other comprehensive income Statement of changes in equity Statement of cash flows NOTES TO FINANCIAL STATEMENTS 1. Principal activities Basis of preparation Significant accounting judgments and estimates Summary of accounting policies Segment information Transition to IFRS Cash and cash equivalents Trading securities Amounts due from credit institutions Reverse repurchase agreements measured at fair value through profit or loss Derivative financial instruments Loans to customers Investment securities Taxation Other assets and liabilities Amounts due to credit institutions Repurchase agreements measured at fair value through profit or loss Amounts due to customers Debt securities issued Subordinated loan Other impairment and provisions Equity Commitments and contingencies Net fee and commission income Personnel and administrative expenses Corporate management and internal control systems Risk management Fair value measurements Transferred financial assets and assets held or pledged as collateral Offsetting of financial instruments Related party disclosures Capital management... 76

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10 2018 Financial Statements STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December 2018 Notes Interest income calculated using the effective interest rate method Amounts due from credit institutions 8,621,818 3,806,807 Loans to customers 2,530,416 3,410,221 Investment securities 1,074,221 1,416,322 12,226,455 8,633,350 Other interest income Reverse repurchase agreements measured at fair value through profit or loss 1,692,808 1,929,577 Trading securities 419,769 1,051,867 14,339,032 11,614,794 Interest expense calculated using the effective interest rate method Amounts due to customers (5,524,200) (5,221,461) Amounts due to credit institutions (1,740,251) (1,297,232) Debt securities issued (928,918) (1,057,276) Subordinated loan (388,428) (273,884) Amounts due to the Central Bank of the Russian Federation - (7,321) (8,581,797) (7,857,174) Other interest expense Repurchase agreements measured at fair value through profit or loss (215,003) (304,435) (8,796,800) (8,161,609) Net interest income 5,542,232 3,453,185 7, 9, Allowance for impairment of debt instruments 12,13 74,294 (20,690) Net interest income after allowance for loan impairment 5,616,526 3,432,495 Fee and commission income 24 1,075,216 1,140,747 Fee and commission expense 24 (267,650) (355,612) Net fee and commission income 807, ,135 Net (loss) gains from trading securities (27,369) 479,208 Net loss from investment securities (21,284) - Net (loss) gains from foreign currency translation (2,763,430) 3,011,348 Net gains from derivatives and dealing in foreign currencies 2,545,390 1,254,876 Non-interest income 540,873 5,530,567 Administrative expenses 25 (2,421,543) (1,980,225) Personnel expenses 25 (1,533,147) (1,523,251) Other provisions (charge) / recovery 21 (3,276) 28,821 Other operating (expenses) / income (73,343) 3,974 Depreciation and amortisation (131,940) (102,651) Non-interest expense (4,163,249) (3,573,332) Profit before income tax expense 1,994,150 5,389,730 Income tax expense 14 (284,027) (1,312,691) Profit for the year 1,710,123 4,077,039 The accompanying notes are an integral part of these financial statements. 10

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14 1. Principal activities ING BANK (EURASIA) JOINT STOCK COMPANY (the Bank ) was established in the Russian Federation in September 1993 and was granted its general banking license in March The principal activities of the Bank are deposit taking, commercial lending, operations with securities, foreign exchange and cash management services. The activities of the Bank are regulated by the Central Bank of the Russian Federation ( the CBR ). The Bank is a part of ING Group, an international financial group headquartered in Amsterdam and operating in over 40 countries. The registered address of the Bank s head office is 36, Krasnoproletarskaya street, , Moscow, Russian Federation. The majority of the Bank s assets and liabilities are located in the Russian Federation and OECD countries in part of derivative financial assets and liabilities. The average number of employees of the Bank during the period was 277 (2017: 269). Starting from December 2004 the Bank is a member of the deposit insurance system. The system operates under the Federal laws and regulations and is governed by State Corporation Agency for Deposits Insurance. Insurance covers the Bank s liability to individual depositors up to 1,400,000 Russian Rubles for each individual in case of business failure and revocation of the CBR banking license. As at 31 December, the following shareholders owned 100% of the outstanding shares Shareholder % 2017 % ING Bank N.V Van Zwamen Holding B.V Total The Bank is 100% owned by ING Group. Related party transactions are detailed in Note 31. Russian business environment The Bank is exposed to the economic and financial risks of the Russian Federation markets, which display emergingmarket characteristics. Legal, tax and regulatory frameworks continue to be developed, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in the Russian Federation. For most of 2018, there was a high volatility of the ruble exchange rate against the background of a general decline in global investors' appetite for emerging market assets caused by the US-China trade tensions, as well as by the growing risks of tougher US and UK sanctions towards Russia. The ruble exchange rate moved from the range of rubles to the dollar observed at the beginning of the year to rubles to the dollar, which did not lead to increased risks of financial stability, but became a factor in the deterioration of inflation expectations in the Russian Federation and forced the Central Bank of Russia to stop the key rate easing cycle. In September and December 2018, the CBR raised the rate from 7.25% to 7.75%, worsening the CPI forecast to 6% for the 1st half of 2019 and % at the end of In case of exceeding these values and in the event of further deterioration of inflation expectations of the population and enterprises in the medium term, it is possible that a further increase in the key rate will happen. As of mid-january 2019, the annual CPI growth rate was close to 5%, reflecting the effects of increasing VAT and weakening the ruble against the US dollar by 17% for The decision of the Central Bank to suspend currency purchases on the market for the Ministry of Finance of the Russian Federation from September to December 2018 mitigated the negative effect on the exchange rate, but did not prevent a weakening due to a new surge in private capital outflow of $37 billion in 4Q18. In 2018, GDP growth rate reached its potential 1.5-2% range, while GDP growth expectations for 2019 are in a more modest range of % mainly due to the effect of increased tax burden amid deteriorating consumer sentiment and limited investment demand. The potential for growth acceleration in the medium term is limited by structural constraints in the Russian economy, which require further action by the authorities to implement structural reforms. The measures announced by the president and the government to boost economic growth, including the growth of CAPEX by the largest companies and the direct state spending, could improve the short-term prospects for investment and consumption, but raise questions regarding the sources of financing and the efficiency of the state spending. 14

15 The budget policy of the Russian Federation on this background remains conservative, which is positively perceived by international rating agencies, but does not lead to an increase in the ratings of the Russian Federation, which are already in the investment category and cannot be increased due to slower economic growth and continuing foreign policy risks. In 2018, according to preliminary data, there was a surplus of the federal budget in the amount of 2.7 trillion rubles (2.7% of GDP) thanks to strong non-oil and gas revenues growth of 15% y/y and modest expenditure growth of 2% y/y. The budget breakeven oil price fell from $60-70 per barrel seen in to $49 per barrel in Russia s strong budget position may raise a question of whether budget could be used as a tool to stimulate economic growth. The discussion on the possibility of easing the budget rule (reducing the amount of oil and gas revenues subject to mandatory savings in the NWF) points to the risks of worsening the budget's oil and gas balance in the medium term, even taking into account the increase in VAT and the completion of the tax maneuver in the oil and gas industry in Basis of preparation Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). General The Bank is required to maintain accounting records and prepare financial statements for regulatory purposes in Russian Rubles in accordance with Russian accounting and banking legislation and related instructions ( RAL ). These financial statements are mainly based on these RAL accounting records and financial statements, as adjusted and reclassified in order to comply with IFRS. Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and financial assets measured at FVOCI are stated at fair value. Functional and presentation currency The functional currency of the Bank is the Russian Rouble ( RUB ) as, being the national currency of the Russian Federation, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The RUB is also the presentation currency for the purposes of these financial statements. Financial information presented in RUB is rounded to the nearest thousand. 3. Significant accounting judgments and estimates The preparation of financial statements in conformity with IFRS 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 could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies includes the following key areas: Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. For more details please see Note

16 Allowance for impairment The Bank regularly reviews its debt instruments to assess impairment. The Bank uses its professional judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and/or there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of debt instruments. The Bank uses its professional judgment to adjust observable data for a group of debt instruments to reflect current circumstances of borrowers. For more details please see Note Summary of accounting policies Changes in IFRS effective in 2018 A number of new or amended standards became applicable for the current reporting period. The Bank changed its accounting policies as a result of adopting IFRS 9 Financial Instruments. The impact of the adoption of IFRS 9 is disclosed in the summary of accounting policies, Note 6 and Note 27. The other standards and amendments, including IFRS 15 Revenue from Contract with Customers, did not have a significant impact on the Bank s financial position. Summary of significant accounting policies The accounting policies set out below are applied consistently to all periods presented in these financial statements except for IFRS 9 Financial instruments. The Bank has applied the classification, measurement, and impairment requirements of IFRS 9 retrospectively as of 1 January 2018 by adjusting the opening statement of financial position and opening equity at 1 January The Bank has not restated comparative periods as permitted by the standard. The Bank early adopted the amendment to IFRS 9, otherwise effective 1 January 2019, which allows financial assets with prepayment features that permit or require a party to a contract either to pay or receive reasonable compensation for the early termination of the contract, to be measured at amortised cost (AC) or at fair value through other comprehensive income (FVOCI). IFRS 9 resulted in changes to IAS 1 for the presentation of Interest income for instruments calculated using the effective interest rate (EIR) method. Similar presentation was applied to interest expense. Financial instruments - Accounting policies applied from 1 January 2018 Recognition and derecognition of financial instruments Recognition of financial assets Financial assets are recognised in the financial position when the Bank becomes a party to the contractual provisions of the instruments. Debt securities financial assets and financial assets measured at fair value through profit or loss that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recognised using trade date accounting. Trade date is the date on which ING commits to purchase or sell the asset. Loans to customers and repurchase agreements are recognised using settlement date accounting. Derecognition of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. The difference between the carrying amount of a financial asset that has been extinguished and the consideration received is recognised in profit or loss. Recognition of financial liabilities Financial liabilities are recognised on the date that the entity becomes a party to the contractual provisions of the instrument. Derecognition of financial liabilities 16

17 Financial liabilities are derecognised from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished and the consideration paid is recognised in profit or loss. Classification and measurement IFRS 9 is built on a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Two criteria are used to determine how financial assets should be classified and measured at amortised cost (AC), fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL): 1. The business model assessment, performed to determine how a portfolio of financial instruments as a whole is managed in order to classify the business model as Hold to Collect (HtC), Hold to Collect & Sell (HtC&S), or other; and 2. The contractual cash flow characteristics test, performed to determine whether the financial instruments give rise to cash flows that are Solely Payments of Principal and Interest (SPPI). A financial asset is measured at amortised cost if: it is held within a HtC business model, the contractual cash flows are solely SPPI, it is not designated as at FVTPL. A financial asset is measured at FVOCI if: it is held within a HtC&S business model, the contractual cash flows are solely SPPI, it is not designated at FVTPL. Financial assets not classified as AC or FVOCI are measured at FVTPL. On initial recognition the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at AC or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Under IFRS 9 derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification. Business model assessment ING s business models are based on the existing management structure of the Bank, and refined based on an analysis of how businesses are evaluated and reported, how their specific business risks are managed and on historic and expected future sales. Financial assets that are held for trading and those that are managed and whose performance is evaluated on a fair value basis will be measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. SPPI test For the purposes of this assessment, principal is defined as the fair value of the financial asset on initial recognition. Interest is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. The SPPI testing was carried out in 2017 after the financial assets within the business models were stratified based on an analysis of product characteristics. In performing the SPPI testing, ING considered the contractual terms of the instruments. This included assessing whether the financial assets contained a contractual term that would change the amount or timing of contractual cash flows such that they would no longer be SPPI compliant. In making the assessment, terms such as the following were considered: Prepayment terms; Leverage features; Terms that limit the Group s claim to cash flows from specified assets; Features that modify consideration for the time value of money. 17

18 Classification of financial liabilities IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. However, under IAS 39 all fair value changes of financial liabilities designated at FVTPL are recognised in the statement of profit or loss and other comprehensive income (SOCI). Impairment The implementation of IFRS 9 has a significant impact on ING s impairment methodology. The Expected Credit Loss (ECL) model is a forward-looking model. The ECL estimates are unbiased, probability-weighted, and include supportable information about past events, current conditions, and forecasts of future economic conditions. ING s ECL model reflects three macroeconomic scenarios via a baseline, up and down scenario and include the time value of money. The model applies to on-balance sheet financial assets accounted for at AC and FVOCI such as loans and debt securities, as well as off-balance sheet items such as undrawn loan commitments, certain financial guarantees, and undrawn committed revolving credit facilities. Three stage approach ING Group applies the IFRS 9 three stage approach to measure expected credit losses: Stage 1: 12 month ECL No significantly increased credit risk Financial assets that have not had a significant increase in credit risk since initial recognition (i.e. no Stage 2 or 3 triggers apply). Assets are classified as stage 1 upon initial recognition (with the exception of purchased or originated credit impaired (POCI) assets) and have an allowance for ECL associated with the probability of default (PD) events occurring with the next 12 months (12 months ECL). For those financial assets with a remaining maturity of less than 12 months, a PD is used that corresponds to the remaining maturity. Stage 2: Lifetime ECL Significantly increased credit risk In the event of a significant increase in credit risk since initial recognition, an allowance is required for the lifetime ECL representing losses over the life of the financial instrument (lifetime ECL). Stage 3: Lifetime ECL Defaulted Financial instruments that move into Stage 3 once credit impaired and purchases of credit impaired assets will require a lifetime allowance. Significant increase in credit risk A financial asset moves from Stage 1 to Stage 2 when there is a significant increase in credit risk since initial recognition. ING Group established a framework which incorporates quantitative and qualitative information to identify this on an asset level applying a relative assessment. Each financial asset will be assessed at the reporting date on the triggers for significant deterioration. ING Group assesses significant increase in credit risk using: Analysis of delta in the lifetime default probability; Forbearance status; Watchlist status. Loans on the watchlist are individually assessed for Stage 2 classification; Intensive control over loans; Internal rating; Arrears; and the More than 30 days past due backstop for Stage 1 to Stage 2 transfers. The delta in lifetime probability of default is the main trigger for movement between Stage 1 and Stage 2. The trigger compares lifetime probability of default at origination versus lifetime probability of default at reporting date, considering the remaining maturity. Assets can move in both directions, meaning that they will move back to Stage 1 or Stage 2 when the Stage 2 or Stage 3 triggers are not applicable anymore. The stage allocation is implemented in the central credit risk systems. Macroeconomic scenarios ING has established a quarterly process whereby forward-looking macroeconomic scenarios and probability weightings are developed for ECL calculation purposes. ING applies predominantly data from a leading service provider enriched 18

19 with the internal ING view. To reflect an unbiased and probability-weighted ECL amount, a baseline, an up-scenario and a down-scenario are determined. As a baseline scenario, ING applies the market-neutral view combining consensus forecasts for economic variables such as GDP growth, commodity prices, and short-term interest rates. Applying market consensus in the baseline scenario ensures unbiased estimates of the expected credit losses. Macroeconomic scenarios based on statistical and estimated figures of the Russian economy development are considered for assessing the Bank s financial assets impairment. The alternative scenarios are based on observed forecast errors in the past, adjusted for the risks affecting the economy today, and the forecast horizon. The probabilities assigned are based on the likelihoods of observing the three scenarios and are derived from confidence intervals on a probability distribution. The scenarios are adjusted on a quarterly basis. As the inclusion of forward-looking macroeconomic scenarios requires judgement, a Macroeconomic scenarios team and a Macroeconomic scenarios expert panel were established. The Macroeconomic scenarios team is responsible for the macroeconomic scenarios used for IFRS 9 ECL purposes with a challenge by the Macroeconomic scenarios expert panel. This ensures that the macroeconomic scenarios are sufficiently challenged and that key economic risks, including immediate short term risks, are taken into consideration when developing the macroeconomic scenarios used in the calculation of ECL. The Macroeconomic scenarios expert panel is a diverse team composed of senior management representatives from the Business, Risk, Finance, and an external party. Measurement ING Bank s expected loss models (PD, LGD, EAD) used for regulatory capital, economic capital and collective provisions are adjusted for removal of embedded prudential conservatism (such as floors), provide forward-looking point in time estimates based on macroeconomic predictions and a 12 months or life time view of credit risk where needed. Lifetime features are default behavior over a longer horizon, full behaviour after the default moment, repayment schedules and early settlements. For most financial instruments, the expected life is limited to the remaining maturity. For overdrafts and certain revolving credit facilities, open ended assumptions are taken as these do not have a fixed term or repayment schedule. To measure ECL, ING Group applies a PD x EAD x LGD approach incorporating the time value of money. For Stage 1 assets a forward looking approach on a 12 month horizon will be applied. For Stage 2 assets a lifetime view on the credit is applied. The Lifetime Expected Loss (LEL) is the discounted sum of the portions of lifetime losses related to default events within each time window of 12 months till maturity. For Stage 3 assets the PD equals 100% and the Loss Given Default (LGD) and Exposure At Default (EAD) represent a lifetime view of the losses based on characteristics of defaulted facilities. Reconciliation of opening and closing loss allowance balances by classes of financial instruments are presented in the respective notes. Definition of default ING Bank has aligned the definition of credit impaired under IFRS 9 (Stage 3) with the definition of default for prudential purposes. This is also the definition used for internal risk management purposes. Within ING, internal Basel compliant models are used to determine PD, EAD and LGD for regulatory and economic capital purposes. These models also form the basis of ING s IFRS 9 loan loss provisioning. For business loans (governments, financial institutions, and corporates), ING classifies the relevant obligors as nonperforming when any of the following default triggers occurs: The borrower has failed in the payment of principal or interest/fees and such payment failure has remained unresolved for the following period: Corporates: failure to pay for more than 90 days; and Financial Institutions and Governments: failure to pay from day 1, however, a research period of 14 calendar days will be observed in order for ING to establish whether the payment default was due to non-operational reasons (i.e. the deteriorated credit quality of the financial institution) or due to operational reasons. The latter does not trigger default. 19

20 ING believes the borrower is unlikely to pay: the borrower has evidenced significant financial difficulty, to the extent that it will have a negative impact on the future cash flows of the financial asset. The following events could be seen as examples of financial difficulty indicators: (1) The borrower (or third party) has started bankruptcy proceedings. (2) NPL status of a group company/co-borrower. (3) Significant fraud (affecting the company s ability to service its debt). (4) There is doubt as to the borrowers ability to generate stable and sufficient cash flows to service its debt. (5) Restructuring of debt. ING has granted concessions relating to the borrower s financial difficulty, the effect of which is a reduction in expected future cash flows of the financial asset below current carrying amount. The ING Group has an individual name approach, using Early Warnings indicators to signal possible future issues in debt service. Forbearance Forbearance occurs when a client is considered to be unable to meet its financial commitments under the contract due to financial difficulties and ING decides to grant concessions towards the client. Forborne exposures are exposures in respect of which forbearance measures have been granted. Forbearance measures can be either modifications to existing contractual terms and conditions or total or partial refinancing. Within ING, forbearance is based on the European Implementing Technical Standards. To identify forbearance, ING assesses clients with Early Warning Signals, Watchlist, Restructuring, Default or Recovery status. ING reviews the performance of forborne exposures at least quarterly, either on a case-by-case (business) or on a portfolio (retail) basis. For corporate customers, ING applies forbearance measures to support clients with fundamentally sound business models that are experiencing temporary difficulties. The aim is to maximize the repayment ability of the clients. Exposures with forbearance measures can be either performing (Risk Ratings 1-19) or non-performing (Risk Ratings 20-22). ING applies criteria to move forborne exposures from non-performing to performing as well as criteria to remove the forbearance status that are consistent with the corresponding EBA standards. An exposure is reported as forborne for a minimum of two years, and a probation period of one year is observed for forborne exposures to move from nonperforming back to performing. Credit impaired financial assets (Stage 3) Financial assets are assessed for credit-impairment at each reporting date and more frequently when circumstances warrant further assessment. Evidence of credit-impairment includes arrears of over 90 days on any material credit obligation, indications that the borrower is experiencing significant financial difficulty, a breach of contract, bankruptcy or distressed restructuring. An asset that is in stage 3 will move back to stage 2 when, as at the reporting date, it is no longer considered to be credit-impaired. The asset will migrate back to stage 1 when its credit risk at the reporting date is no longer considered to have increased significantly since initial recognition. Repurchase transactions and reverse repurchase transactions Securities sold subject to repurchase agreements (repos), securities lending and similar agreements continue to be recognised in the statement of financial position. The counterparty liability is measured at FVTPL (designated) and included in Other financial liabilities at FVTPL if the asset is measured at FVTPL. Otherwise, the counterparty liability is included in Deposits from banks, Customer deposits, or Trading, as appropriate. Securities purchased under agreements to resell (reverse repos), securities borrowings and similar agreements are not recognised in the statement of financial position. The consideration paid to purchase securities is recognised as Loans and advances to customers, Loans and advances to banks, Other financial assets at FVTPL or Trading assets, as appropriate. The difference between the sale and repurchase price is treated as interest and amortised over the life of the agreement using the effective interest method. 20

21 Financial instruments Accounting policies applied before 1 January 2018 Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term; part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; derivative financial instruments (except for a derivative that is a financial guarantee contract or a designated and effective hedging instruments); or upon initial recognition, designated as at fair value through profit or loss. The Bank may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis; the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the Bank has an intention and ability to hold them for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank: intends to sell immediately or in the near term; upon initial recognition designates as at fair value through profit or loss; upon initial recognition designates as available-for-sale; or, may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: the Bank upon initial recognition designates as at fair value through profit or loss; the Bank designates as available-for-sale; or, meet the definition of loans and receivables. Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. Recognition Financial assets and liabilities are recognised in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. 21

22 Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on their sale or other disposal, except for: loans and receivables which are measured at amortized cost using the effective interest method; held-to-maturity investments that are measured at amortized cost using the effective interest method; investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. Amortised cost The amortised 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 amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. 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 transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in profit or loss; a gain or loss on an available-for-sale financial asset is recognised as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments availablefor-sale) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Interest in relation to an available-for-sale financial asset is recognised in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognised in profit or loss when the financial asset or liability is derecognised or impaired, and through the amortisation process. Derecognition The Bank derecognises 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 recognised as a separate asset or liability in the statement of financial position. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. 22

23 The Bank enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. In transactions where the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the Bank continues to recognise 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 assets. If the Bank purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. The Bank writes off assets deemed to be uncollectible. Repurchase and reverse repurchase agreements Sale and repurchase agreements ( repo agreements ) are treated as secured financing transactions. Securities or other financial assets sold under sale and repurchase agreements are not derecognized. The financial assets are not reclassified in the statement of financial position unless the transferee has the right by contract or custom to sell or repledge the financial assets, in which case they are reclassified as financial assets pledged under sale and repurchase agreements (repurchase receivables). The corresponding liability is presented within separate line item in the statement of financial position. The main goal of sale and repurchase agreement concluded by the Bank is short-term profit making. The Bank may also early terminate concluded sale and repurchase agreements in case of changes in the current market situation in order to receive profit from other deals. In this case the Bank will have to pay additional fee for early termination of contract. Repurchase agreements with CBR and held for funding needs and accounted at amortised cost. All other repurchase and reverse repurchase agreements are held for trading and are recorded at fair value. The difference between the sale and repurchase price is treated as interest income/expense and accrued over the life of repo agreements using the effective interest method. Financial assets lent to counterparties are retained in the financial statements in their original statement of financial position category unless the counterparty has the right by contract or custom to sell or repledge the financial assets, in which case they are reclassified and presented separately as loaned financial assets. Financial assets borrowed are not recorded in the financial statements, unless these are sold to the third parties, in which case an obligation to return the financial assets ( short position ) is recorded in Short position in trading securities at fair value through profit or loss in the statement of financial position. The revaluation of this obligation is recorded in the income statement within gains less losses arising from financial instruments at fair value through profit or loss. Derivative financial instruments Derivative financial instruments include swaps, forwards, futures, spot transactions and options in interest rates, foreign exchanges and stock markets, any combinations of these instruments and credit default swaps. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives and all current payments are recognised immediately in profit or loss. Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Derivative financial instruments of the Bank do not qualify for hedge accounting. 23

24 Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank currently has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Bank currently has a legally enforceable right to set off if that right is not contingent on a future event and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the Bank and all counterparties. Impairment The Bank assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the Bank determines the amount of any impairment loss. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of financial asset or Bank of financial assets that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data related to a Bank of assets such as adverse changes in the payment status of borrowers in the Bank, or economic conditions that correlate with defaults in the Bank. In addition, for an investment in an equity security available-for-sale a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Financial assets carried at amortised cost Financial assets carried at amortised cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis. The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan or receivable in a Bank of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data related to similar borrowers. In such cases, the Bank uses its experience and judgment to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognised in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. 24