RIGENSIS BANK AS. Annual report for the year ended 31 December 2012

Transcription

1 Annual report for the year ended

2 CONTENTS Page Report of the Council and the Board 3 Members of the Council and the Board 4 Statement of Management Responsibility 5 Independent Auditors Report 6-7 Financial Statements: Statement of Comprehensive Income 8 Statement of Financial Position 9 Statement of Cash Flows 10 Statement of Changes in Shareholders Equity 11 Notes to the Financial Statements Rigensis Bank AS Annual Report 2

3 REPORT OF THE COUNCIL AND THE BOARD Rigensis Bank AS ( the Bank ) was established in June 2011 and by the end of 2011 the basis has been laid for the Bank s development in the long term: we have created a professional and motivated team and infrastructure based on advanced technologies, we have implemented the main banking products and started providing services to our clients. During 2012 the Bank concentrated on further development of financial services alongside with the improvement of appropriate internal control and risk management system in line with best practice standards. In January 2012 Alexei Gudaytis, whose activities are tightly connected with ICT group of companies (Russia), became a shareholder of the Bank according to the shareholderss extraordinary meeting decision on 5 December to increase the Bank s equity capital by LVL The next increase of the Bank s equity was held by attracting new shareholder Dmitry Sokolov and increasing direct and indirect investments of existing shareholders Igor Tsyplakov and Alexei Gudaytis. At the shareholders extraordinary meeting on 15 November a decision to increase the Bank's equity capital by LVL was taken. Thus, after the combined increase of LVL the Bank s equity capital amounts to LVL The Bank s assets as at amount to LVL 44,4 million and customer deposits to LVL 26,98 million, while assets under trust management amount to LVL 128,7 million. The financial result for the reporting period is a loss of LVL 1,47 million which is primarily connected to the moderate pace in operation volume increase due to gradual development of the Bank s technologies and IT infrastructure alongside with the conservative risk-management policy. During 2012 the range of services proposed to the Bank s customers was widened by loans, documentary operations, security services, trust and brokerage operations, escrow accounts. The Bank is a full-fledged member of SEPA and S.W.I.F.T. and provides payment services through settlement systems EKS, Target2 and SAMS. In 2012 the Bank has completed the tender for the principal contractor selection for its building located in the Old Town Teatra iela 3, and has received the authorization of State Inspection for Heritage Protection and Construction Board of the Riga City to begin the reconstruction operations, which have already been started. Once the reconstruction is over by the third quarter of 2013, the Bank s head office and customer service center will be placed there. The strategy concept for 2013 foresees the further development of the Bank s infrastructure and specialized financial products including remote account servicing, term deposits, trust, brokerage and custody services, currency trading and introduction of payment cards. The Bank s strategic goal is to ensure stable market positions and high competitiveness in the segment of Latvian specialized banks, as well as to provide yield and profitability from These financial statements are freely available from the Bank s web site Rigensis Bank AS Annual Report 3

4 MEMBERS OF THE COUNCIL AND THE BOARD As at, the Members of the Council of the Bank were as follows: Name Position Date of appointment Date of reappointment Armands Šteinbergs Chairman of the Council Yulia Romanenkova Deputy Chairperson of the Council Nikita Monakhov Member of the Council During 2012 the following Members of the Council resigned: Name Position Date of appointment Date of resignation Viktor Piternov Deputy Chairman of the Council Sergey Povolokin Member of the Council On 5 October and 15 November 2012, the shareholders meeting appointed the new members of the Council. On 7 and 29 November 2012 respectively the changes in the Bank s Council were registered with the Register of Enterprises of the Republic of Latvia. As at the date of signing these financial statements, the Members of the Management Board ( Board ) of the Bank were as follows: Name Position Date of appointment Rolands Pētersons Chairman of the Board Nataliya Miheeva Member of the Board Valda Knauere Member of the Board Anton Savin Member of the Board During 2012 the following Members of the Board resigned: Name Position Date of appointment Date of resignation Vladislavs Petrovs Deputy Chairman of the Board On 5 December 2012 and 14 February 2013 respectively the changes in the Bank s Board were registered with the Register of Enterprises of the Republic of Latvia. Rigensis Bank AS Annual Report 4

5 STATEMENT OF MANAGEMENT S RESPONSIBILITY Management of the Rigensis Bank AS is responsible for the preparation of the financial statements of the Bank. The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and comply with legislative requirements of the Republic of Latvia. The financial statements on pages 8 to 60 are prepared in accordance with source data and present fairly the financial position of the Bank as at and the results of its operations and cash flows for the year endedd. The aforementioned financial statements are prepared on a going concern basis, consistently applying accounting policies in conformity with International Financial Reporting Standards as adopted by the European Union. Prudent and reasonable judgments and estimates have been made by the management in the preparation of the financial statements. The management of the Rigensis Bank AS are responsible for the maintenance of a proper accounting system, safeguarding of the Bank s assets, and prevention and detection of fraud and other irregularities. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations of the Financial and Capital Market Commission and the Bank of Latvia, and other laws of the Republic of Latvia applicable to credit institutions. On behalf of the Bank s management, Rigensis Bank AS Annual Report 5

6 Rigensis Bank AS Annual Report 6

7 Rigensis Bank AS Annual Report 7

8 STATEMENT OF COMPREHENSIVE INCOME For the year ended Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Note (date of registration) (144) (5) (28) (1) Net foreign exchange income/(expense) 10 Operating income/(expense) 108 (20) 507 (8) Other income General administrative expensess Other expenses Impairment losses Loss before income tax (1,881) (98) (1) (1,467) 2 (662) (22) - (690) Income tax expense Loss for the period (1,467) (690) Other comprehensive income for the period Revaluation result of available-for-sale instruments 45 - Total comprehensive loss for the period (1,422) (690) The accompanying notes on pages 12 to 60 form an integral part of these financial statements. Rigensis Bank AS Annual Report 8

9 STATEMENT OF FINANCIAL POSITION As at Note ASSETS Balances with the Bank of Latviaa Financial instruments at fair value through profit or loss Loans and advances to financial institutions Available-for-sale instruments Property and equipment Intangible assets Other assets Total Assets , ,014 15,801 1, , ,947-1, ,374 LIABILITIES AND SHAREHOLDERS EQUITY Financial instruments at fair value through profit or loss Deposits and balances due to financial institutions Current accounts and deposits due to customers Provisions Other tax payable Other liabilities Total Liabilities , , , ,522 Share capital Revaluation reserve Retained earnings Total Shareholders Equity Total Liabilities and Shareholders Equity 27 19, (2,157) 17,030 44,414 10,542 - (690) 9,852 13,374 Funds under trust management , The accompanying notes on pages 12 to 60 form an integral part of these financial statements. Rigensis Bank AS Annual Report 9

10 STATEMENT OF CASH FLOWS For the year ended (date 2012 of registration) Note CASH FLOWS FROM OPERATING ACTIVITIES Loss before income tax Depreciation and amortisation Impairment losses Net interest income 19, 20 6, 7 (1,467) (108) (1,473) (690) 7 - (12) (695) Increase in loans and advances to financial institutions (Increase)/decrease in from financial instruments at fair value through profit or loss Increase in available-for-sale instruments Increase in other assets Increase in current account and deposits due from customers Decrease in other liabilities (5,122) (353) (15,714) (11) 23,895 (1) (136) 3,073 Interest paid Interest received Net cash and cash equivalents from operating activities (57) - 1,165 2,377 (36) (2) 1,306 2,375 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment and intangible assets 19, 20 Net cash and cash equivalents from investing activities (606) (1,536) (606) (1,536) CASH FLOWS FROM FINANCIAL ACTIVITIES Contribution into share capital Net cash and cash equivalents from financial activities Net cash flows for the period 27 8,600 10,542 8,600 10,542 9,300 11,381 Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period There were no dividends paid or received during ,381 20,681-11,381 The accompanying notes on pages 12 to 60 form an integral part of these financial statements. Rigensis Bank AS Annual Report 10

11 STATEMENT OF CHANGES IN SHAREHOLDER S EQUITY For the year ended Share capital Revaluation reserve of available-for-sale instruments Accumulated losses Total Transactions with equity holders, recognised directly in equity Share capital contribution Comprehensive income Loss for the period 10, ,542 (690) (690) Balance as at 31 December ,542 - (690) 9,852 Transactions with equity holders, recognised directly in equity Share capital contribution Comprehensive income Other comprehensive income Loss for the period 8, , (1,467) (1,467) Balance as at 2 19, (2,157) 17,030 The accompanying notes on pages 12 to 60 form an integral part of these financial statements. Rigensis Bank AS Annual Report 11

12 1 BACKGROUND Information on the Bank Rigensis Bank AS (the Bank ) was registered with the Register of Enterprises of the Republic of Latvia on 17 June 2011 as a joint stock company. The Bank s registration number is A banking license was issued by the Financial and Capital Market Commission of the Republic of Latvia ( FCMC ) on 20 June 2011 according to which the Bank is allowed to conduct financial services given the following conditions: Continuously maintain the ratio of capital adequacy not less than 20 percent; To provide that not less than 70 percent the Bank s customers segment will consist of large corporate customers specified in the AS Rigensis Bank business development conception ; Not to offer services, using freedom of service offering, in the European Economic Area and not to open branches in foreign countries before The principal activities of the Bank are deposit taking and customer accounts maintenance and issuing guarantees, cash and settlement operations and foreign exchange. The Bank s operations are governed by the Law of the Republic of Latvia on Credit Institutions, the Commercial Law, other laws of the Republic of Latvia, regulations issued by the Financial and Capital Market Commission, and regulations issued by the Bank of Latvia. The average number of the Bank s employees in 2012 was 32 (in the period from 17 June 2011 (date of registration) to 31 December ). Legal and registered address of the Bank is Teātra 3, Rīga, LV 1050, Latvia. Office and mailing address is Mūkusalas 101, Rīga, LV The Bank has no branches or subsidiaries. Shareholders In 2012, the Bank completed two processes of share issue. The sale of the new share issue has increased the Bank s share capital but has not resulted in any changes in the composition of the majority shareholders. The only shareholder of the Bank with a significant shareholding is Igor Tsyplakov (81.20%), a citizen of the Russian Federation, and three new shareholders of the Bank have obtained shares in such numbers that do not qualify for significant shareholding. They are: citizen of the Russian Federation Alexei Gudaytis, a Cyprus registered LORDLINE LIMITED (where Alexei Gudaytis holds 100% shares resulting in his direct and indirect shareholding of the Bank of 9.66%) and citizen of the Russian Federation Dmitry Sokolov (9.14%). Detailed description of shareholders and increase of share capital are described in Note 27. Related party transactions are detailed in Note 32. Rigensis Bank AS Annual Report 12

13 2 BASIS OF PREPARATION Statement of compliance The accompanying financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ( IFRS ) and regulations of the Financial and Capital Market Commission s Regulations on the preparation of annual reports and annual consolidated accounts for banks, investment brokerage firms and investment management companies in force as at the reporting date. The financial statements were approved for issue by the Board on 20 March The shareholders have the right to reject these financial statements and request that new financial statements are prepared. Basis of measurement The accounting system of the Bank is organised in accordance with the legislation of the Republic of Latvia, including requirements applicable to credit institutions operating in Latvia. The financial year of the Bank coincides with the calendar year. The financial statements have been prepared on the historical cost basis for assets and liabilities except for the following: financial instruments at fair value through profit or loss and available for sale assets are stated at fair value. Functional and presentation currency The accompanying financial statements are reported in thousands of lats (), unless stated otherwise, being the Bank s functional currency. Rigensis Bank AS Annual Report 13

14 3 SIGNIFICANT ACCOUNTING POLICIES (a) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated into the respective functional currency of the operation at the exchange rate set by Bank of Latvia at the date of the transaction. Monetary assets and liabilities, including funds under trust management, contingent liabilities and commitments, denominated in foreign currencies at the reporting date are retranslated into the functional currency at the exchange rate set by the Bank of Latvia at the reporting date. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments which are recognised in other comprehensive income. Foreign exchange rates for the key currencies at the end of the reporting period were the following (LVL vs. one unit of foreign currency): Reporting date USD EUR RUB 31 December ,544 0, ,0174 0,531 0, ,0174 (b) Cash and cash equivalents Cash and cash equivalents include unrestricted balances held with central banks and highly liquid financial assets with remaining maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments, less deposits and balances due to financial institutions on demand and with initial maturity less than three months. (c) Financial instruments Classification Upon initial recognition, all financial instruments are classified into one of the following categories: Financial assets and liabilities designated at fair value through profit or loss are: Held-for-trading financial instruments; and Financial assets and liabilities designated at fair value through profit or loss upon initial recognition. A financial instrument is classified as held for trading if it is acquired or incurred principally for the purposes of selling or repurchasing in the near term or it is 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. Derivatives are also categorised as held for trading unless they are designated as hedging instruments for hedge accounting purposes. Rigensis Bank AS Annual Report 14

15 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The financial instrument may be designated at fair value through profit or loss when: Doing so significantly reduces measurement inconsistencies; Certain assets are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis; Financial instruments containing one or more embedded derivatives that significantly modify the cash flows are designated at fair value through profit or loss. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity with respect to which the Bank has the positive intention and ability to hold them to maturity. Held-to-maturity investments include certain debt securities. 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 short-term; Those that the Bank upon initial recognition designates as at fair value through profit or loss or as available-for-sale; Those for which the holder may not recover substantially all of its initial investments, other than because of credit deterioration. Loans and receivables include term deposits due from financial institutions, loans and receivables due from customers, and other financial assets which meet these classification criteria. Available-for-sale financial assets are financial assets classified at inception as available-for-sale or assets other than classified at fair value through profit or loss, held-to-maturity, or loans and receivables. Available-for-sale assets include short-term investments and certain debt and equity securities. Generally, this category is assigned by the Bank to financial assets that are held for an indeterminate period of time and may be sold based on liquidity or interest rate needs, or as a result of changes in exchange rates and security prices. Financial liabilities carried at amortised cost represent financial liabilities of the Bank other than financial liabilities designated at fair value through profit or loss. This category includes term balances due to financial institutions, customer deposits, and other financial liabilities corresponding to such a classification. 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 and sales of financial assets are recognised in the statement of financial position on the settlement date representing the date when the financial asset is delivered. In the period between the dates of transaction and settlement, the Bank accounts for the changes in the fair value of the received or transferred asset based on the same principles as used for any other acquired asset of the respective category. Rigensis Bank AS Annual Report 15

16 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Measurement A financial asset and 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. Subsequent to initial recognition, financial assets are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: Held-to-maturity instruments that are measured at amortised cost using the effective interest rate method; Loans and receivables that are measured at amortised cost using the effective interest rate 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 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 measurement 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 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. Rigensis Bank AS Annual Report 16

17 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss depending on the individual facts and circumstances of the transaction but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Bank has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction. Determination of fair value of financial assets and financial liabilities is detailed in Note 4. 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 in other comprehensive income (except for impairment losses and foreign exchange gains and losses on debt financial instruments) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. For financial assets and liabilities carried at amortised 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 Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire or where the Bank transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognised separately as assets or liabilities. Financial liabilities are derecognised when the obligation is discharged, or cancelled or expire. The Bank also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. Rigensis Bank AS Annual Report 17

18 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Derivative financial instruments Derivative financial instruments include swap, forward, futures and options in interest rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured 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 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 it 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. Although the Bank trades in derivative instruments for risk hedging purposes, the Bank does not adopt hedge accounting. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (d) Property and equipment Items of property and equipment are stated at cost including direct costs, net of accumulated depreciation and impairment losses, if any. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets. Leasehold improvements are depreciated over the remaining lease period. Depreciation commences from the time an asset is completed and ready for use. The estimated useful lives are as follows: Other assets IT equipment 4-5 years 4 years An item of property and equipment is derecognised upon disposal or when the asset is no longer in use and no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset calculated as the difference between the net disposal proceeds and the carrying amount of the item upon disposal is included in the income statement. Depreciation methods, useful lives, and residual values are reviewed annually. Rigensis Bank AS Annual Report 18

19 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Construction in progress Construction in progress comprises costs directly related to the construction of property and equipment including an appropriate allocation of directly attributable costs that are incurred in construction. Depreciation of these assets, on the same basis as for other property and equipment, commences when the assets are put into operation. (e) Intangible assets Intangible assets are identifiable non-monetary assets without physical substance (licenses and software that are separately identifiable from electronic devices, etc.) held for rendering of services or other purposes if it is expected that an economic benefit attributable to these assets will flow to the Bank. Intangible assets are stated at cost less accumulated amortisation and impairment losses and are amortised by equal charges to the income statement over the useful life of the asset. The estimated useful lives are as follows: Software S.W.I.F.T license Other licenses Licenses acquired by the Bank for a period up to one year are expensed as acquired. No amortisation is calculated for intangible assets that are not put into operation. Amortisation methods and useful lives are reviewed annually. (f) Leased assets and lease payments Finance lease 4 years 4 years 4 years Leases where the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at the lower of fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments under finance leases are apportioned between the finance charges and the reduction of the outstanding liability. Finance charges are allocated to each period during the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Operating lease Other leases are operating leases and leased assets are not recognised on the Bank s statement of financial position. Payments under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Rigensis Bank AS Annual Report 19

20 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Impairment and calculation of the recoverable amount Financial assets not carried at fair value through profit or loss The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets not carried at fair value through profit or loss is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition and that event has an impact on the estimated future cash flows that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include but are not limited to: Delinquency in contractual payments of principal and/or interest; Cash flow difficulties experienced by the borrower; Breach of the loan covenant or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; Deterioration in the value of collateral; Downgrading below investment grade level. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for those that are not individually significant. If no objective evidence of impairment is determined for individual assets, whether significant or not, the impairment is tested collectively for groups of assets with similar credit characteristics, excluding assets for which an impairment loss is or continues to be recognised on an individual basis. The amount of the loss is measured as a difference between the asset s carrying amount and its recoverable amount. The carrying amount of the asset is reduced through the use of the allowance account and the amount of the loss is recognised in profit or loss. When an asset is uncollectible, it is written off against the related allowances. Recovered amounts are disclosed in the income statement as a reduction in the allowance for bad debts. The recoverable amount of financial assets not carried at fair value through profit or loss is calculated as the present value of future cash flows including amounts that may be recovered from guarantees and loan securities, discounted at the original effective interest rate. Available-for-sale financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of available-for-sale financial assets is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. The Bank considers more than 20% decline below cost as significant and a decline for more than nine months accounting period as prolonged. If any such evidence exists, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously recognised in profit or loss is reclassified from other comprehensive income to profit or loss in the statement of comprehensive income. Impairment losses recognised in profit or loss on equity instruments are not reversed through the income statement. Rigensis Bank AS Annual Report 20

21 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to the event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement. Other assets The carrying amount of other Bank s assets other than a deferred tax asset is reviewed for impairment on each reporting date. If impairment indications exist, the recoverable amount of the asset is calculated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. All impairment losses are recognised in profit or loss. Treatment of deferred tax asset is detailed in Note 3(k). The recoverable amount of other assets is the larger of the fair value less cost to sell and the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. (h) Provisions Provisions are recognised in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (i) Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit related commitment are included within other liabilities. (j) Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Latvian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Rigensis Bank AS Annual Report 21

22 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Taxation Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity or in other comprehensive income. In accordance with Latvian tax regulations, income tax is applied at the rate of 15% on taxable income generated by the Bank during the taxation period. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (l) Income and expense recognition All income and expense categories, including interest income and expense, are recognised on an accrual basis. Income is recognised only to the extent that an inflow of economic benefits to the Bank is probable and such income is reasonably estimable. Impairment loss is recognised if the receipt of income becomes doubtful. Interest income and expense are recognised in the income statement using the effective interest rate method. Payments made by the Bank to the deposit guarantee fund are disclosed under other interest expense. The one-off initial contribution in the amount of 1.5% of the starting capital made to the Deposit Guarantee Fund after receipt of the license was recognised under prepaid expenses and is being amortised by applying an annual rate of 0.40% (2012 and beyond), and 0.20% (2011) of average quarterly balances of guaranteed deposits, subject to a defined minimum amortisation charge. Loan origination fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related direct costs, are deferred and amortised to interest income over the estimated life of the financial instrument using the effective interest rate method. Commissions on loans issued within trust operations and other commissions that form an integral part of total loan profitability are recorded and amortised in line with the above principle under commission income for trust services. Rigensis Bank AS Annual Report 22

23 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Commission and fee income and expense on non-recurring services are recognised on the transaction date on an accrual basis. Commission and fee income and expense on services provided or received in a certain period of time are accrued and charged to profit or loss over the period of the services received/rendered. Income and expenses from trading in financial instruments is recognised under trading results. The trading result of financial instruments is calculated as the difference between the cost of the financial instruments, which represents the price of the financial instruments and expenses directly attributable to the purchase of the respective financial instruments, and the sales price of the financial instruments that is received or receivable as compensation for the sale of the financial instruments and that is presented net of commission fees and any payments for other services directly connected with the sale of the financial instruments. The cost of debt instruments is determined based on the FIFO method, whereas that of the equity instruments based on the weighted average price. Should it be impossible to determine which costs are directly related to the purchase of the specific financial instrument such costs are expensed. Other fees, commissions and other income and expense items are recognised when the corresponding service has been provided. Dividend income is recognised in profit or loss on the date that the dividend is declared. (m) Use of significant accounting estimates and judgments The preparation of financial statements in conformity with IFRSs as adopted by the EU requires management to make judgments, estimates and assumption that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period, in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Amortisation of the initial contribution to the Deposit Guarantee Fund The Bank amortises the initial one-off contribution to the Deposit Guarantee Fund according to the accounting policy described in Note 3(l) herein. The non-amortised part as at amounts to LVL 57 thousand (31 December to LVL 157 thousand). Due to changes in the regulations, the Bank has reviewed the amortisation rate for 2012 and has changed it from 0.20% to 0.40% p.a. of the average quarterly balances of guaranteed deposits, subject to a pre-defined minimum amortisation charge. The revised rate implies that the balance of the initial contribution will be fully amortised by 31 December Rigensis Bank AS Annual Report 23

24 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Determing fair value The fair value of the currency swaps is measured by the Bank using the methods described in Note 4. Valuation benchmarks and techniques may impact the fair value of the disclosed financial instruments. The table below analyses financial instruments carried at fair value, by valuation method as at : Published price quotations (Level 1) Valuation techniques based on market observable inputs (Level 2) Total Financial assets Available-for-sale instruments 7,091 8,710 15,801 Derivatives ,091 8,927 16,018 As at 31 December 2011: Published price quotations (Level 1) Valuation techniques based on market observable inputs (Level 2) Total Financial liabilities Derivatives (1) Included in this category are financial assets and liabilities that are measured in whole or in part by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm s length basis. Main asset classes included in this category are financial assets for which the fair value is obtained via pricing vendors or binding broker quotes and assets for which the fair value is determined by reference to indices. (2) Included in this category are financial assets and liabilities that are measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions in the same instrument or based on available market data. Main asset classes included in this category are financial assets for which pricing is obtained via pricing services but where prices have not been determined in an active market, financial assets with fair values based on broker quotes, investments in hedge funds private equity funds with fair value obtained via fund managers and assets that are valued using own models whereby the majority of assumptions are market observable. Other estimates and judgments Estimation and assumptions related to depreciation and amortisation rates of equipment and intangible assets and determining the allowance for credit losses are not assumed as significant areas of estimation uncertainty for financial year ended as at. (n) Trust operations The Bank provides trust services by investing customers funds in diversified financial instruments upon the customers instructions. The Bank provides trust services only to customers of the Bank. Trust operations are accounted for separately from the Bank s own operations thus ensuring separate accounting in a separate trust sheet for assets of each customer, by customer and by type of assets under management. The Bank accepts no risk for its trust operations; all risk is retained by its customers. The Bank earns fee income for administration of trust operations. Rigensis Bank AS Annual Report 24

25 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (o) New Standards and Interpretations The following new Standards and Interpretations are not yet effective for the annual period ended 31 December 2012 and have not been applied in preparing these financial statements: Amendments to IFRS 7 and IAS 32 on Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7 Disclosures (effective for annual periods beginning on or after 1 January 2013; to be applied retrospectively) contain new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. Amendments to IAS 32 (effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively) clarify that an entity 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 entity and all counterparties. The Bank does not expect the Amendments to have any impact on the financial statements since the Bank does not apply offsetting to any of its financial assets and financial liabilities and has not entered into master netting arrangements. IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2014; to be applied retrospectively). IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are SPEs in the scope of SIC-12. IFRS 10 introduces new requirements to assess control that are different from the existing requirements in IAS 27 (2008). Under the new single control model, an investor controls an investee when: (1) it is exposed or has rights to variable returns from its involvements with the investee; (2) it has the ability to affect those returns through its power over that investee; and (3) there is a link between power and returns. The new IFRS 10 also includes the disclosure requirements and the requirements relating to the preparation of consolidated financial statements. Under the new IFRS 11, joint arrangements are divided into two types, each having its own accounting model defined as follows: a joint operation is one whereby the jointly controlling parties, known as the joint operators, have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is one whereby the jointly controlling parties, known as joint ventures, have rights to the net assets of the arrangement. IFRS 11 effectively carves out from IAS 31 jointly controlled entities those cases in which, although there is a separate vehicle for the joint arrangement, separation is ineffective in certain ways. These arrangements are treated similarly to jointly controlled assets/operations under IAS 31, and are now called joint operations. IFRS 11 eliminates the free choice of equity accounting or proportionate consolidation; the equity method must always be used in financial statements. IFRS 12 requires additional disclosures relating to significant judgements and assumptions made in determining the nature of interests in an entity or arrangement, interests in subsidiaries, joint arrangements and associates and unconsolidated structured entities. The Bank does not expect that the new standards will have a material impact on the financial statements. Rigensis Bank AS Annual Report 25