B&N BANK (JOINT-STOCK COMPANY) Condensed Interim Consolidated (Unaudited) Financial Information for 6 months ended June 30, 2010

Transcription

1 B&N BANK (JOINT-STOCK COMPANY) Condensed Interim Consolidated (Unaudited) Financial Information for 6 months ended

2 B&N BANK (JOINT-STOCK COMPANY) TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONDENSED INTERIM CONSOLIDATED FINANCIAL INFORMATION FOR 6 MONTHS ENDED JUNE 30, 1 INDEPENDENT AUDITORS REPORT ON REVIEW OF CONSOLIDATED INTERIM FINANCIAL INFORMATION 2 CONDENSED INTERIM CONSOLIDATED FINANCIAL INFORMATION FOR 6 MONTHS ENDED JUNE 30, (UNAUDITED): Condensed interim consolidated statement of comprehensive income (unaudited) 3 Condensed interim consolidated statement of financial position (unaudited) 4 Condensed interim consolidated statement of changes in equity (unaudited) 5 Condensed interim consolidated statement of cash flows (unaudited) 6-7 Notes to the condensed interim consolidated financial statements (unaudited) 8-47

3 B&N BANK (JOINT-STOCK COMPANY) STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONDENSED INTERIM CONSOLIDATED FINANCIAL INFORMATION FOR 6 MONTHS ENDED JUNE 30, Management is responsible for the preparation of the condensed interim consolidated financial information that present fairly the financial position of B&N Bank (the Company ) and its subsidiaries (the Group ) as of, and the results of its operations, cash flows and changes in equity for the six months then ended, in accordance with International Accounting Standard 34, Interim Financial Reporting ( IAS 34 ). In preparing the condensed interim consolidated financial information, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Stating whether IAS 34 have been followed, subject to any material departures disclosed and explained in the condensed interim consolidated financial information; and Making an assessment of the Group's ability to continue as a going concern Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the consolidated financial position of the Group, and which enable them to ensure that the condensed interim consolidated financial information of the Group complies with IAS 34; Maintaining statutory accounting records in compliance with Russia s legislation and accounting standards; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. The condensed interim consolidated financial information of the Group for the 6 months ended was approved by management on October 08, : On behalf of the Management Board: President Shishkhanov Mikail Chief Accountant Zhuravleva Nina October 08, October 08, Moscow Moscow 1

4 ZAO Deloitte & Touche CIS 5 Lesnaya Street Moscow, Russia Tel: +7 (495) Fax: +7 (495) INDEPENDENT AUDITORS REPORT ON REVIEW OF CONDENSED INTERIM CONSOLIDATED FINANCIAL INFORMATION To the Board of Directors of B&N Bank (Joint-Stock Company): We have reviewed the accompanying condensed interim consolidated financial information of B&N Bank (Joint-Stock Company) and its subsidiaries (the Group ), which comprise the condensed interim consolidated statement of financial position as at and the related condensed interim consolidated statement of comprehensive income, changes in equity and cash flows for the six month then ended, and a summary of significant accounting policies and other explanatory notes. Management is responsible for the preparation and fair presentation of this condensed interim consolidated financial information in accordance with International Accounting Standard 34, Interim Financial Reporting ( IAS 34 ). Our responsibility is to express a conclusion on this condensed interim consolidated financial information based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of condensed interim consolidated financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review of the condensed interim consolidated financial information for the six months ended, nothing has come to our attention that causes us to believe that the accompanying condensed interim consolidated financial information is not prepared, in all material respects, in accordance with IAS 34. October 08, Moscow Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please seewww.deloitte.com/ru/about for a detailed description of the legal structure of Deloitte CIS. ZAO Deloitte & Touche CIS. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

5 B&N BANK (JOINT-STOCK COMPANY) CONDENSED INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR 6 MONTHS ENDED JUNE 30, (UNAUDITED) (in thousands of Russian Rubles, except for earnings per share which are in Rubles) Notes 6 months ended (unaudited) 6 months ended (unaudited) Interest income 5, 33 5,031,897 4,528,518 Interest expense 5, 33 (3,797,745) (2,836,256) NET INTEREST INCOME BEFORE PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 1,234,152 1,692,262 Effect of initial recognition of interest bearing assets (12,140) - Provision for impairment losses on interest bearing assets 6, 33 (563,500) (1,364,736) NET INTEREST INCOME 658, ,526 Net gain on financial assets and liabilities at fair value through profit or loss 7 109,343 2,016 Net gain on foreign exchange operations 8 214, ,548 Net gain on precious metals operations 9,301 6,483 Fee and commission income 9, , ,625 Fee and commission expense 9 (163,880) (98,792) Other provisions 6 (114,385) (21,127) Other income 10 27,344 36,850 NET NON-INTEREST INCOME 672, ,603 OPERATING INCOME 1,330,573 1,079,129 OPERATING EXPENSES 11, 33 (2,049,711) (1,597,277) LOSS BEFORE RESULTS OF ASSOCIATES (719,138) (518,148) Share of results of associates 21, 33 (587) - LOSS BEFORE INCOME TAX (719,725) (518,148) INCOME TAX EXPENSE 12 (41,181) (13,178) NET LOSS (760,906) (531,326) Attributable to: Equity holders of the parent (754,050) (664,744) Non-controlling interest (6,856) 133,418 TOTAL COMPREHENSIVE LOSS (760,906) (531,326) LOSS PER SHARE Basic and diluted (RUR) 13 (44.16) (38.93) On behalf of the Management Board: President Shishkhanov Mikail Chief Accountant Zhuravleva Nina October 08, October 08, Moscow Moscow The notes on pages 8-47 form an integral part of these consolidated financial statements. 3

6 B&N BANK (JOINT-STOCK COMPANY) CONDENSED INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT JUNE 30, (UNAUDITED) (in thousands of Russian Rubles) Notes (unaudited) December 31, ASSETS: Cash and balances with the Central Bank of the Russian Federation 14 4,865,851 6,467,134 Precious metals 15 65,020 55,719 Financial assets at fair value through profit or loss 16 11,417,840 9,422,874 Due from banks 17 14,747,516 15,221,837 Loans to customers 18, 33 54,344,342 46,073,696 Investments available-for-sale ,674 35,972 Investments held to maturity 20-1,845,410 Investments in associates 21, 33 29,562 30,149 Property, plant, equipment and intangible assets 22 5,100,652 4,842,708 Current income tax assets 211, ,147 Other assets 23 1,277, ,669 92,693,657 85,098,315 Non-current assets held for sale , ,921 TOTAL ASSETS 93,258,900 85,272,236 LIABILITIES AND EQUITY LIABILITIES: Deposits from the Central Bank of the Russian Federation 25-4,770,000 Due to banks and other financial institutions 26 1,501,339 1,831,236 Customer accounts 27, 33 77,235,581 65,820,207 Debt securities issued 28 3,301,831 2,794,198 Subordinated debt 29, 33 4,679,310 3,024,483 Other liabilities , ,951 Total liabilities 87,341,875 78,579,075 EQUITY: Equity attributable to owners of the parent: Share capital 4,959,052 4,959,052 Share premium 2,500,594 2,500,594 Accumulated deficit (2,217,540) (1,463,490) Total equity attributable to owners of the parent 5,242,106 5,996,156 Non-controlling interest 674, ,005 Total equity 5,917,025 6,693,161 TOTAL LIABILITIES AND EQUITY 93,258,900 85,272,236 On behalf of the Management Board: President Shishkhanov Mikail Chief Accountant Zhuravleva Nina October 08, October 08, Moscow Moscow The notes on pages 8-47 form an integral part of these consolidated financial statements. 4

7 B&N BANK (JOINT-STOCK COMPANY) CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 6 MONTHS ENDED JUNE 30, (UNAUDITED) (in thousands of Russian Rubles) Note Share capital Share premium Retained earnings/ (accumulate d deficit) Total equity attributable to owners of the parent Noncontrolling interest Total equity December 31, ,959,052 2,500, ,219 7,786, ,567 8,490,432 Total comprehensive loss - - (664,744) (664,744) 133,418 (531,326) Dividends paid on ordinary shares (101,045) (101,045) (unaudited) 4,959,052 2,500,594 (337,525) 7,122, ,940 7,858,061 December 31, 4,959,052 2,500,594 (1,463,490) 5,996, ,005 6,693,161 Total comprehensive loss - - (754,050) (754,050) (6,856) (760,906) Dividends paid on ordinary shares (unaudited) (15,230) (15,230) (unaudited) 4,959,052 2,500,594 (2,217,540) 5,242, ,919 5,917,025 On behalf of the Management Board: President Shishkhanov Mikail Chief Accountant Zhuravleva Nina October 08, October 08, Moscow Moscow The notes on pages 8-47 form an integral part of these consolidated financial statements. 5

8 B&N BANK (JOINT-STOCK COMPANY) CONDENSED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS FOR 6 MONTHS ENDED JUNE 30, (UNAUDITED) (in thousands of Russian Rubles) Notes 6 months ended (unaudited) 6 months ended (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Loss from continuing operations before income tax (719,725) (518,148) Adjustments for: Provision for impairment losses on interest bearing assets 563,500 1,364,736 Provision for impairment losses on other transactions 114,385 21,127 Effect of initial recognition of interest bearing assets 12,140 - Loss/(gain) on disposal of property, plan, equipment and intangible assets 3, (Gain)/loss on foreign exchange operations (303,431) 84,645 Revaluation of precious metals (9,301) (6,483) Net change of accrued discount on issued debt securities (91,944) (76,825) Change in accrued commission income (77,578) 12,203 Depreciation and amortization expense 121,315 62,266 Change in interest accruals, net (238,443) (206,503) Share of results of associates Net change in fair value of financial assets and liabilities at fair value through profit or loss other than derivative financial instruments (92,904) 401,279 Impairment of property, plant and equipment, investment property and non-current assets held for sale 35,015 - Cash (outflow)/inflow from operating activities before changes in operating assets and liabilities (682,899) 1,138,594 (Increase)/decrease in operating assets: Minimum reserve deposit with the Central Bank of the Russian Federation (121,159) (90,861) Financial assets at fair value through profit or loss (1,942,229) 4,219,565 Due from banks 418,318 1,131,005 Loans to customers (9,347,109) (1,334,365) Other assets (836,966) (799,302) Increase/(decrease) in operating liabilities Deposit from the Central Bank of the Russian Federation (4,770,000) 2,129,219 Due to banks and other financial institutions (227,914) (797,935) Customer accounts 12,131,991 1,372,581 Debt securities issued/(repaid) in the normal course of business 714,583 (3,501,980) Other liabilities 262,515 81,995 Cash (outflow)/inflow from operating activities before taxation (4,400,869) 3,548,516 Income tax paid (16,219) (23,375) Net cash (outflow)/inflow from operating activities (4,417,088) 3,525,141 6

9 B&N BANK (JOINT-STOCK COMPANY) CONDENSED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR 6 MONTHS ENDED JUNE 30, (UNAUDITED) (in thousands of Russian Rubles) Notes 6 months ended 6 months ended CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (403,149) (1,313,613) Proceeds on sale of property and equipment 10,860 4,503 Purchase of investments available-for-sale (598,702) - Proceeds on redemption of investments held to maturity 1,700,335 - Purchase of investments held to maturity - (1,837,437) Net cash inflow/(outflow) from investing activities 709,344 (3,146,547) CASH FLOWS FROM FINANCING ACTIVITIES: Subordinated debt 1,654,827 - Dividends paid (15,230) (101,045) Net cash inflow/(outflow) from financing activities 1,639,597 (101,045) Effect of changes in foreign exchange rate fluctuations on cash and cash equivalents (37,465) (29,056) NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (2,105,612) 248,493 CASH AND CASH EQUIVALENTS, beginning of period 14 6,927,441 5,983,340 CASH AND CASH EQUIVALENTS, end of period 14 4,821,829 6,231,833 Interest paid and received by the Group during 6 months ended amounted to RUR 3,741,230 thousand and RUR 5,213,825 thousand, respectively. Interest paid and received by the Group during 6 months ended amounted to RUR 2,653,766 thousand and RUR 4,407,159 thousand, respectively. On behalf of the Management Board: President Shishkhanov Mikail Chief Accountant Zhuravleva Nina October 08, October 08, Moscow Moscow The notes on pages 8-47 form an integral part of these consolidated financial statements. 7

10 B&N BANK (JOINT-STOCK COMPANY) NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL INFORMATION FOR 6 MONTHS ENDED JUNE 30, (UNAUDITED) (in thousands of Russian Rubles, unless otherwise indicated) 1. ORGANIZATION B&N Bank (Joint-Stock Company) (the Bank ) is a joint-stock bank, which was incorporated in the Russian Federation (the RF ) in From 1993 to January the Bank s English title was JSC B.I.N. BANK. In February the Bank changed its English title to B&N Bank (Joint-Stock Company). The Bank is regulated by the Central Bank of the Russian Federation (the CBR ) and conducts its business under general license number 2562 and renders a complete package of banking services to corporate clients engaged in various industries as well as to individuals. The registered office of the Bank is located at: 5a Grodnenskaya St., Moscow, , Russian Federation. As at the Bank has 29 branches operating in the Russian Federation, 90 sub-branches and 2 representative offices. As at December 31, the Bank has 29 branches operating in the Russian Federation, 84 sub-branches and 3 representative offices. The Bank is a parent company of a banking group (the Group ) which consists of the following companies consolidated in the financial statements: Proportion or ownership interest/voting rights (%) Name December 31, Country of operation B&N Bank (Joint-Stock Company) Russian Federation Parent company Parent company JSCB Vyatka-Bank Russian Federation 0% (90.03%) 0% (90.03%) LLC Bashinvestbank Russian Federation 76.00% 76.00% Closed-end Mortgage Investment Fund NVK Gorodskaya ipoteka Russian Federation 75.81% 75.81% Closed-end Investment Fund Perviy Kreditniy Russian Federation 100% 100% LLC Standard Development Russian Federation 100% 100% Closed-end Investment Fund Youzhniy Russian Federation 100% - LLC Vyatka-Investicii Russian Federation 100% - Joint-Stock Commercial Bank Vyatka-Bank (JSCB Vyatka-Bank ) is engaged in banking activities within the Russian Federation. The financial statements of JSCB Vyatka-Bank were consolidated into the Bank s financial statements beginning January 1, Though the Bank does not have control over JSCB Vyatka-Bank through direct holding it has the power to govern the financial and operating policies of an investee entity. Limited Liability Company Bashinvestbank (LLC Bashinvestbank ) is engaged in banking activities within the Russian Federation. The financial statements of LLC Bashinvestbank were consolidated into the Group s financial statements beginning December 31, Closed-end Mortgage Investment Fund NVK Gorodskaya ipoteka (CMIF NVK Gorodskaya ipoteka ) is engaged in investment mortgage activities within the Russian Federation. The financial statements of CMIF NVK Gorodskaya ipoteka were consolidated into the Group s financial statements beginning January 1, Closed-end Investment Fund Perviy Kreditniy (CMIF Perviy Kreditniy ) is engaged in loan lending activities within the Russian Federation. The financial statements of CMIF Perviy Kreditniy were consolidated into the Group s financial statements beginning December 31,. Limited Liability Company Standard Development (LLC Standard Development ) is engaged in loan lending activities within the Russian Federation. The financial statements of LLC Standard Development were not consolidated into the Group s financial statements due to immaterial consolidation effect. 8

11 Closed-end Investment Fund Youzhniy (CMIF Youzhniy ) is engaged in real estate investment activities within the Russian Federation. The financial statements of CMIF Youzhniy were consolidated into the Group s financial statements beginning. Limited Liability Company Vyatka-Investicii (LLC Vyatka-Investicii ) is engaged in investment activities within the Russian Federation. The financial statements of LLC Vyatka-Investicii were consolidated into the Group s financial statements beginning. As at and December 31,, the following shareholders owned the ordinary shares of the Group., % December 31,, % First level shareholders: LLC TradeWest 87.07% 87.07% Missola Investments Limited 8.77% 8.36% NVK MC Investment Limited 3.00% 3.00% Other 1.16% 1.57% Total 100% 100% Ultimate shareholders: Shishkhanov Mikail Osmanovich 98.84% 98.43% Other 1.16% 1.57% Total 100% 100% This condensed interim consolidated financial information was authorized for issue by the Management Board of the Bank on October 08,. 2. GOING CONCERN This condensed interim consolidated financial information has been prepared on the going concern basis despite the net loss in amount of RUR 760,906 thousand incurred by the Group for 6 months ended, negative operating cash flow of RUR 4,417,088 thousand for the same period and the negative cumulative liquidity gap between interest bearing financial assets and interest bearing financial liabilities for the maturity period from 3 months to 1 year in amount of RUR 14,757,334 thousand as at. The Group has no intention or need to reduce substantially its business operations. Low business activities and high cash excess in the economy resulted in rigorous price competition among banks for high-grade borrowers. As a result, interest rates for corporate loans have been rapidly decreasing. At present, however, stabilization of loans interest rates is observed. At the same time, due to paying off the liabilities attracted in the period of financial crisis at high interest rates and corresponding increase of new liabilities at lower interest rates, the trend of substantial reduction of the liabilities base cost is observed. The Bank plans to retain this trend in near future. The management of the Group is starting to implement various measures to improve the Group s financial position and profitability, including: Improving loan portfolio quality through higher standards of credit risk assessment at the loan granting stage and further industry diversification; Improving collateral quality and increasing the share of secured loans from 74.9% at December 31, to 77.9% at ; Strengthening the control over borrowers solvency and adequacy of collateral. Currently the Group management observes an improvement in the financial position of borrowers due to overall stabilization of the market environment and recovery of consumer demand which positively affects the borrowers business; Increasing of the client base and income from operating activities by expansion of advertisement and marketing actions, cross-selling, internal motivational programs to those involved in client base expansion and introduction of new types of deposits and optimization of the branch network; Optimization of product lines for decreasing of share of individuals in the funding base in favor of corporate clients and decreasing overall cost of funding. The Group has already achieved a decrease of individuals share in customer accounts from 78.5% at December 31, to 75.8% at. 9

12 The management of the Group plans to introduce further measures: Implementing a set of restructuring schemes with the purpose of reducing the financial burden and optimizing the repayment schedules of private loans debtors as well as an incentive scheme for pursuit of those loans which fall into overdue status; and Reintroducing the retail loans program in second half of the year. The mortgage has already been restarted at. Currently the Group s management has observed an improvement in the financial position of borrowers due to overall stabilization of the market environment and recovery of consumer demand which positively affects the borrowers business. It positively affects the Group s ability to grant new qualitative loans and improves current borrowers solvency and profitability. The Group s negative operating cash flow for 6 months ended is mainly caused by repayment of high interest rate loan from the Central Bank of the Russian Federation. This loan was repaid before the maturity date as a step to decrease funding costs. The Group has no material wholesale debt repayments in the near future. The Group maintains a high current liquidity level: the excess of interest-bearing assets over the interest-bearing liabilities maturing in 3 months amounts to RUR 8,614,804 thousand. Also, management of the Group considers that the maturity gap analysis does not reflect the historical stability of customer accounts. Their liquidation has historically taken place over a longer period than indicated in the maturity gap analysis. The Group also has capacity of additional liquidity, as the Bank has the following limits set by the Central Bank of the Russian Federation: Overdraft and overnight loans amounting to RUR 1,193,700 thousand; Credit facility for 3-month unsecured loans amounting to RUR 8,372,000 thousand; Repo operations amounting to RUR 28,610,391 thousand. Additional liquidity capacity shown above exceeds the RUR 14,757,334 thousand cumulative liquidity gap between interest bearing financial assets and financial liabilities with maturity from 3 months to 1 year. With the aim of adoption of a 10-years development strategy, at the present time the Group is carrying out an analysis of development options and strategy with the support of a leading international consulting agency. As a result of the foregoing management have prepared this condensed interim consolidated financial information under the going concern principle. 3. BASIS OF PRESENTATION Accounting basis This condensed interim consolidated financial information of the Group has been prepared in accordance with International Accounting Standards 34 Interim Financial Reporting ( IAS 34 ). Accordingly, it does not include all of the information required by International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ). This condensed interim consolidated financial information should be read in conjunction with the Group s annual financial statements for the year ended December 31,. Since the results of the Group s operations closely relate to and depend on changing market conditions, the results of the Group s operations for the interim period are not necessarily indicative of the results for the year. The Bank and its consolidated companies, registered in the Russian Federation, maintain their accounting records in accordance with Russian Accounting Standards ( RAS ). This condensed interim consolidated financial information has been prepared from the applicable statutory accounting records and have been adjusted to conform to IFRS. Entered adjustments include certain reclassifications to reflect the economic substance of underlying transactions including reclassifications of certain assets and liabilities, income and expenses to appropriate financial information captions. 10

13 Functional currency Items included in the condensed interim consolidated financial information of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the functional currency ). The functional currency of the condensed interim consolidated financial information is the Russian ruble ( RUR ). 4. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The condensed interim consolidated financial information incorporate the financial information of the Bank and entities (including special purpose entities) controlled by the Bank (its subsidiaries). Control is achieved where the Bank has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Where necessary, adjustments are made to the condensed interim consolidate financial information of subsidiaries to bring the accounting policies used into line with those used by the Group. All significant intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations The assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the consolidated statement of comprehensive income in the period of acquisition. The minority interest is initially measured at the minority s proportion of the fair values of the assets, liabilities and contingent liabilities recognized. The equity attributable to owners of the parent and net income attributable to minority shareholders interests are shown separately in the consolidated statement of financial position and the consolidated statement of comprehensive income, respectively. The Group accounts for increases in ownership of a controlled entity by revaluing all identified assets and liabilities of the subsidiary to fair value at the date of exchange in proportion to the amounts attributable to the additional interest acquired. Goodwill is recognized for any excess of the cost of the increase over the Group s interest in the net fair value of the identifiable assets and liabilities. For a business combination involving an entity or business under common control, all assets and liabilities of the subsidiary are measured at the carrying values recorded in the stand-alone financial statements of the subsidiary. The difference between the carrying value of the acquired share in net assets of the subsidiary and the cost of acquisition are recorded directly in equity attributable to the equity holders of the parent. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. The difference, between the carrying amount of minority interest and the amount received on its purchase is recognized in equity attributable to the owners of the parent. 11

14 Investments in associates An associate is an entity over which the Group is in a position to exercise significant influence, but is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in this condensed interim consolidated financial information using the equity method of accounting. Investments in associates are carried in the consolidated statement of financial position at cost as adjusted by post-acquisition changes in the Group s share of the net assets of the associate, less any impairment in the value of individual investments. Any excess of the cost of acquisition over the Group s share of the fair values of the identifiable assets, liabilities and contingent liabilities of the associate at the date of acquisition is recognized as goodwill. The goodwill is included in the carrying amount of the investment and is assessed for impairment as part of the investment. Any deficiency of the cost of acquisition below the Group s share of the fair values of the identifiable assets, liabilities and contingent liabilities of the associate at the date of acquisition (i.e. discount on acquisition) is credited in the consolidated statement of comprehensive income in the period of acquisition. Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group s interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment. Goodwill Goodwill arising on the acquisition of a subsidiary or jointly controlled entity represents the excess of the cost of acquisition over the Group s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. The Group s policy for goodwill arising on the acquisition of an associate is described under Investments in associates above. The Group tests goodwill for impairment at least annually. An impairment loss recognized for goodwill is not reversed in a subsequent period. If the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the Group: (a) (b) Reassesses the identification and measurement of the Group s identifiable assets, liabilities and contingent liabilities of the company acquired and the measurement of the cost of the combination; and Any excess remaining after such reassessment is recognized immediately in the consolidated statement of comprehensive income. On disposal of an investment, the amount of goodwill attributable is included in the determination of the profit or loss on disposal. Recognition and measurement of financial instruments The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Regular way purchases of financial instruments that will be subsequently measured at fair value between trade date and settlement date are accounted for in the same way as for acquired instruments. Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial 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 financial liability. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below. 12

15 Derecognition of financial assets and liabilities Financial assets A financial asset is derecognized when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset s cash flows; or (b) retains the right to the asset s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group reassesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains in the consolidated statement of financial position. If substantially all of the risks and rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not is has retained control of the asset. If it has not retained control, the asset is derecognized. Where the Group has retained control of the asset, it continues to recognize the asset to the extent of its continuing involvement. Financial liabilities A financial liability is derecognized when the obligation is discharged, cancelled, or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of comprehensive income. Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances on correspondent time deposit accounts with the of the Central Bank of the Russian Federation with original maturity within 90 days, correspondent accounts with banks in countries included in the Organization of Economic Co-operation and Developments ( OECD ), except for margin deposits for operations with plastic cards which may be converted to cash within a short period of time (less than 90 days) as well as government securities denominated in rubles, carried at fair value through profit or loss, with initial maturity period less than 90 days. The minimum reserve deposits with the Central Bank of the Russian Federation are subject to restrictions over its availability and therefore are not included in cash and cash equivalents. Precious metals Assets and liabilities denominated in precious metals are translated at the current rate computed based on the second fixing of the London Metal Exchange rates, using the RUR/USD exchange rate effective on the date. Changes in the bid prices are recorded in net gain/(loss) on operations with precious metals operations. Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities are classified as valued at fair value through profit or loss if they meet any of the following conditions: (1) acquired principally for the purpose of selling them in the near future; (2) which are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent and actual pattern of short-term profit taking; or (3) are designated as derivatives (except for the case when a derivative is defined as an effective hedging instrument). A financial asset other than a financial asset held for trading may be designated at fair value through profit or loss upon initial recognition if: (1) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; (2) the financial asset forms part of a group of financial assets or liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or (3) it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at fair value through profit or loss. 13

16 Financial assets at fair value through profit or loss are initially recorded and subsequently measured at fair value. The Group uses quoted market prices to determine fair value for financial assets and liabilities at fair value through profit or loss. The fair value adjustment on financial assets and liabilities at fair value through profit or loss is recognized in the consolidated statement of comprehensive income for the period. The Group does not reclassify financial instruments in or out of this category while they are held. The Group enters into derivative financial instruments to manage currency and liquidity risks and for trading purposes. These instruments include forwards on foreign currency, precious metals and securities. Derivative financial instruments entered by the Group are not designated as hedges and do not qualify for hedge accounting. Due from banks In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks. Due from banks are initially recognized at fair value. Due from banks are subsequently measured at amortized cost using the effective interest method. Amounts due from credit institutions are carried net of any allowance for impairment losses. Derivative financial instruments In the normal course of business, the Group enters into various derivative financial instruments including forwards, swaps and options on foreign currency, precious metals and securities to manage currency and liquidity risks and for trading purposes. Derivative financial instruments entered into by the Group are not designated as hedges and do not qualify for hedge accounting. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in financial assets and liabilities at fair value through profit or loss in the consolidated statement of financial position. Gains and losses resulting from these instruments are included in net gain/loss from financial assets and liabilities at fair value through profit or loss in the consolidated statement of comprehensive income. Derivative instruments embedded in other financial instruments are treated as separate derivatives if their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value with unrealized gains and losses reported in the consolidated statement of comprehensive income. An embedded derivative is a component of a hybrid (combined) financial instrument that includes both the derivative and a host contract, with the effect that some of the cash flows of the combined instrument vary in a similar way to a stand-alone derivative. Loans to customers Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans to customers granted by the Group are initially recognized at fair value plus related transaction costs that directly relate to acquisition or creation of such financial assets. Where the fair value of consideration given does not equal the fair value of the loan, for example where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized as a loss on initial recognition of the loan and included in the consolidated statement of comprehensive income according to nature of the losses. Subsequently, loans are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment losses. Write off of loans and advances Loans and advances are written off against the allowance for impairment losses when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group and after the Group has sold all available collateral. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the consolidated statement of comprehensive income in the period of recovery. 14

17 Allowance for impairment losses The Group accounts for impairment of financial assets not recorded at fair value when there is objective evidence of impairment of a financial asset or a group of financial assets. The impairment of financial assets represents the difference between the carrying value of the asset and current value of estimated future cash flows including amounts which can be received on guarantees and security discounted using the initial effective interest rate on financial assets recorded at amortized value. If in a subsequent period the impairment amount decreases and such a decrease can be objectively associated with an event occurring after recognition of the impairment then the previously recognized impairment loss is reversed with an adjustment of the provision account. For the financial instruments recorded at cost the impairment represents the difference between the carrying value of the financial asset and current value of the estimated future cash flows discounted using the current market interest rate for a similar financial instrument. Such impairment losses are not reversed. The impairment is calculated based on the analysis of assets subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding financial assets being material individually and on the basis of an individual or joint evaluation of financial assets not being material individually. The change in the impairment is included into profits using the provision account (financial assets recorded at amortized cost) or by a direct write-off (financial assets recorded at cost). Assets recorded in the consolidated statement of financial position are reduced by the amount of the impairment. The factors the Group evaluates in determining the presence of objective evidence of occurrence of an impairment loss include information on liquidity of the debtor or issuer, their solvency, business risks and financial risks, levels and tendencies of default on obligations on similar financial assets, national and local economic tendencies and conditions, and fair value of the security and guarantees. These and other factors individually or in the aggregate represent, to a great extent, an objective evidence of recognition of the impairment loss on the financial asset or group of financial assets. It should be noted that the evaluation of losses includes a subjective factor. Management of the Group believes that the amount of recorded impairment is sufficient to cover losses incurred on assets subject to risks at the reporting date, although it is probable that in certain periods the Group can incur losses greater than recorded impairment. Investments available-for-sale Investments available-for-sale represent debt and equity investments that are intended to be held for an indefinite period of time. Investments available-for-sale are initially recorded at fair value and subsequently measured at fair value, with such re-measurement recognized directly in equity, except for impairment losses, foreign exchange gains/(losses) and interest income accrued using the effective interest method, which are recognized directly in the consolidated statement of comprehensive income. When sold, gain/(loss) previously recorded in equity is recycled through the consolidated statement of comprehensive income. The Group uses quoted market prices to determine fair value of the Group s investments available-for-sale. Non-marketable debt/equity securities are stated at amortized cost/cost less impairment losses, if any, unless fair value can be reliably measured. When there is objective evidence that such securities have been impaired, the cumulative loss previously recognized in equity is removed from equity and recognized in the consolidated statement of comprehensive income for the period. These financial assets are recognized net of impairment loss. Investments held to maturity Investments held to maturity are debt securities with determinable or fixed payments, and where the Group has a positive intent and the ability to hold them to maturity. Such securities are carried at amortized cost using the effective interest method, less any allowance for impairment. Amortized discounts are recognized in interest income over the period to maturity using the effective interest method. 15

18 Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets, acquired after January 1, 2003 are carried at historical cost less accumulated depreciation and any recognized impairment loss, if any. Property, plant and equipment and intangible assets, acquired before January 1, 2003 are carried at historical cost restated for inflation less accumulated depreciation and any recognized impairment loss, if any. Depreciation is charged on the carrying value of property, plant and equipment and is designed to write off assets over their useful economic lives. Depreciation is calculated on a straight line basis at the following annual prescribed rates: Buildings and other real estate 2% Furniture and computer equipment 16.67% Intangible assets 15%-33.3% Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of property and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount, an impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for property and equipment is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life. Investment property Investment property, comprising land, office buildings and capital investment, is held for long-term rental yields or appreciation in value and is not occupied by the Group. Investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, investment property is carried at historical cost net of accumulated depreciation and recognized impairment loss. Depreciation is calculated on a straight line basis over the useful life of the assets. Non-current assets held for sale A non-current asset is classified as held for sale if it is highly probable that the asset s carrying amount will be recovered through a sale transaction rather than through continuing use and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification of an asset as held for sale. Non-current assets held for sale are measured at the lower of its carrying amount and fair value less costs to sell. If the fair value less costs to sell of an asset held for sale is lower than its carrying amount, an impairment loss is recognized in the consolidated statement of comprehensive income as loss from non-current assets held for sale. Any subsequent increase in an asset s fair value less costs to sell is recognized to the extent of the cumulative impairment loss that was previously recognized in relation to that specific asset. Taxation Income tax expense represents the sum of the current and deferred tax expense. The current tax expense is based on taxable profit for the year. Taxable profit differs from net profit before tax as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s current tax expense is calculated using tax rates that have been enacted during the reporting period. 16

19 Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred income tax assets and deferred income tax liabilities are offset and reported net in the consolidated statement of financial position if: The Group has a legally enforceable right to set off current income tax assets against current income tax liabilities; and Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity. The Russian Federation also has various other taxes, which are assessed on the Group s activities. These taxes are included as a component of operating expenses in the consolidated statement of comprehensive income. Deposits from the Central Bank of the Russian Federation, due to banks and other financial institutions, customer accounts, debt securities issued and subordinated debt Deposits form the Central Bank of the Russian Federation, due to banks and other financial institutions, customer accounts, debt securities issued and subordinated debt are initially recognized at fair value. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the consolidated statement of comprehensive income over the period of the borrowings, using the effective interest method. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made. Financial guarantee contracts issued and letters of credit Financial guarantee contracts and letters of credit issued by the Group provide for specified payments to be made in order to reimburse the holder for a loss incurred such that payments are made when a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Such financial guarantee contracts and letters of credit issued are initially recognized at fair value. Subsequently they are measured at the higher of (a) the amount recognized as a provision in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets ; and (b) the amount initially recognized less, where appropriate, cumulative amortization of initial premium revenue received over the financial guarantee contracts or letter of credit issued. 17