JOHN DEERE BANK S.A. CONSOLIDATED ANNUAL FINANCIAL REPORT OCTOBER 31, 2016

Transcription

1 JOHN DEERE BANK S.A. CONSOLIDATED ANNUAL FINANCIAL REPORT OCTOBER 31, 2016

2 TABLE OF CONTENTS Management report Report of the réviseur d entreprises agréé Financial statements Exhibit A

3 John Deere Bank S.A. Consolidated Management report for the financial year ended October 31, 2016

4 John Deere Bank S.A. (Société Anonyme) 43, avenue J.-F. Kennedy, B.P L-1855 Luxembourg Telephone: Facsimile: December 14, 2016 Management Report The General Management of John Deere Bank S.A. (JDBSA) is pleased to present the Consolidated Annual Financial Report for the year ended October 31, The primary mission of JDBSA is to provide financing to support the sale of agricultural, horticultural, and ground-care equipment throughout Western Europe. Activities of JDBSA The events of note during the fiscal year included: November 23, 2015 December 9, 2015 December 15, 2015 January 13, 2016 During an extraordinary meeting the Board of Directors approved the STI & MTI bonus payments of the Company to certain employees for FY15. During a regular meeting, the Board of Directors approved, among other things, (i) the annual (consolidated) accounts, including a dividend payment to JDBSA s shareholder amounting to EUR 27,000,000, (ii) the annual ICAAP / ILAAP report, (iii) the Annual Control Function reports & plans, and (iv) the annual review of the Remuneration Policy. During an extraordinary meeting the Board of Directors approved the LTI bonus payments of the Company to certain employees for FY15. During an extraordinary shareholder meeting, among other things, the annual (consolidated) accounts were approved by the shareholder, the resignation of Bret. C Thomas and Markwart von Pentz were acknowledged and the mandate of all other (at that time) members of Board of Directors was renewed and confirmed as follows: - Stefan von Stegmann, Director and Chairman - Michael Matera, Director - Thomas C. Spitzfaden, Director - Christoph Wigger, Director - James F. Orr, Director February 5, 2016 February 15, 2016 The dividend of EUR 27,000,000 was paid to the shareholder. During the annual shareholder meeting, the members of the Board of Director during FY15 was discharged. 1

5 March 9, 2016 June 8, 2016 September 21, 2016 During this regular meeting, the Board of Directors did not pass any resolutions. During a regular meeting, the Board of Directors approved, among other things, updated versions of the (i) Risk Strategy, (ii) Market Risk Policy, (iii) Interest Rate Risk Management Policy, (iv) Operational Risk Management Policy, (v) Liquidity Risk Policy, (vi) Contingency Funding Plan, (vii) Internal Capital Policy, (viii) Risk Management Charter, (ix) Risk Management Policy, (x) Internal Audit Charter, (xi) Transfer Pricing Policy, and (xii) Signing Authorities Policy. During a regular meeting, the Board of Directors approved, among other things, (i) the appointment of Federico Fitch as Director Wholesale Credit and member of the general management of the Company, effective 1 October 2016, subject to CSSF approval (which was received on 17 October 2016), (ii) the establishment an audit committee for the Company and the respective audit committee charter, and (iii) the updated the JDBSA Group Recovery Plan. There have been no post balance sheet events. Financial Results Net income was EUR 33,064 thousands for the year, was slightly lower compared with EUR 33,283 thousands for last year. The margin related to the difference between the Interest Receivable and the Interest Payable was stable at EUR 66,240 thousands for 2016 compared to EUR 66,082 thousands for last year. The return on assets for the year was 1,79%. General administrative and staff expenses decreased by EUR 422 thousands this year compared to This is primarily related to lower staff expenses. The portfolio of Loans and Leases decreased to EUR 1,723,084 thousands in 2016 compared with an ending balance of EUR 1,767,969 thousands in This decrease in the portfolio is mainly due to a decrease in the receivable balances from retail customers but also from John Deere dealers. The funding at the end of October 2016 was EUR 536,174 thousands of intra-group funding, and EUR 850,000 thousands of Medium Term Notes (MTN) compared to EUR 485,485 thousands of intra-group funding, and EUR 905,366 thousands of MTN at the end of Intangible assets as reported in the annual accounts do not include any research and development costs. The balance of this account consists of consultancy fees and concessions, patents, licenses and similar rights and assets. There were no post balance sheet events that would affect the financial statements as at October 31,

6 Risk Management The JDBSA s continued commitment towards strong controls and a systematic approach to risk management provides assurance that all risks are identified and analyzed according to the recommendations of the banking supervisory authorities and market practices. Specific risk management issues are as follows: Credit Risk Loans and leases to retail customers are approved within the powers set up in the chart of authorities and requests above the specified limits are submitted to the appropriate levels of Senior Management. The majority of retail lending operations are with agricultural customers, reserved for individuals and corporate entities of good financial standing. The risks are mitigated by a selective account opening process and appropriate credit analysis. JDBSA retains as collateral a security interest in the goods associated with the loan and whenever deemed necessary, obtains additional credit securities. Credit and risk management for purchased receivables is administered by JDBSA under documented credit policies and procedures established by JDBSA and approved by Senior Management. Wholesale Credit Managers have been appointed for each John Deere sales branch to administer these credit policies. The Wholesale Credit Managers are supported by local administrative and credit underwriting staff and by central core staff in Luxembourg. Additionally JDBSA has the right to exclude accounts from the monthly receivable purchase that do not meet established credit requirements. By the nature of our business, the portfolio has significant concentrations of credit risk in the agricultural business sector. On a geographic basis, there is not a disproportionate concentration of credit risk in any area in which JDBSA operates. Liquidity Risk JDBSA is required to maintain a liquidity ratio as agreed with CSSF. Quarterly, the calculation of this ratio and the debt maturity schedule are reviewed by the Board of Directors and submitted to CSSF monthly. As JDBSA does not accept customer deposits, it does not need an abundance of liquid assets. JDBSA s primary internal liquidity measure is a funding profile that promotes the use of diversified funding sources including commercial paper (note: as from mid-september these were replaced by an intercompany loan from JDCC to JDBSA), intragroup funding and other forms of term funding. Not less than 50% of JDB s retail (end-customer) portfolio balance shall be funded with residual long term debt and own funds. Since 1 January 2016 JDBSA complies with the 70% LCR requirement. All other debt financing is arranged on a term basis (medium-term notes or term bank loans), which therefore only requires refunding at maturity, which is generally at least one year from the initial date of the financing. Interest Rate Risk on the Banking Book The objective of JDBSA s interest rate risk management policy and strategy is to minimize the variance of financial results due to changes in interest rates. This is accomplished by funding fixed rate assets with fixed rate debt of the same expected maturity and by funding floating rate assets with floating rate debt with similar re-pricing characteristics. JDBSA does not take material interest rate positions that expose its net interest margins to fluctuations in interest rates. Static gap reports are prepared for the portfolio by comparing the runoff of fixed rate assets with the runoff of fixed rate 3

7 liabilities. Management reviews these reports periodically. With the approval of Management, additional interest rate swaps or debt will be issued to minimize the size of the gap. These static gap reports are reviewed with the Board of Directors on a quarterly basis. JDBSA s use of derivative financial instruments is limited exclusively to hedging activities and not trading or speculation. The counterparties used in such transactions are banks with high credit-ratings assigned by international credit-rating agencies or an internal counterparty, which limits JDBSA s settlement risk. Currency Risk JDBSA both lends and borrows in various foreign currencies. Foreign currency transactions create exposures that affect the book value of assets and liabilities. Foreign currency transactions also create transaction exposures when cash inflows and outflows in foreign currencies do not offset each other. To mitigate foreign exchange translation risk, foreign currency assets are funded with a like amount of foreign currency liabilities after deducting allocated equity. Any unhedged exposures will be reviewed by Management on a monthly basis. Material unhedged exposures will be reported to the Board of Directors at the quarterly Board meetings. Operational Risk JDBSA s strategy for the management of operational risk is to use a mix of policies, procedures, control steps and reviews to ensure that risks are appropriately identified, understood, managed, controlled, and where possible, mitigated. JDBSA operates on the basis of strict segregation of duties and application of the four-eyes principle at all levels. The operations of JDBSA are documented in functional procedures manuals, and it is the responsibility of the Internal Auditor (a full time / independent position) to monitor adherence to these procedures, and general risks inherent in the business, and to report findings to the Board. It is the practice of JDBSA to adopt common IT platforms / software, and consistent operational procedures wherever possible. JDBSA has a detailed business recovery plan as well as a disaster recovery plan that mitigates operational risks. This is reviewed on an annual basis, or when circumstances warrant. Internal Control During the year under review JDBSA had in place a full set of policies and procedures for all functional areas of its business. The framework upon which JDBSA has developed a comprehensive manual of policies and procedures is organized along functional lines, as follows: General Management, providing general guidelines for the conduct of JDBSA s business, including code of conduct, conflicts of interest and organization charts. Anti-money laundering policy, business continuity plans, general authority limits and the committee structure for management review of JDBSA s operations. Operations, detailing the procedures for the proposing, underwriting, inception, maintenance and amendment of both retail and wholesale finance contracts. Treasury, stating the general funding policy of JDBSA and detailing the procedures for funding the lending activities of JDBSA, including the approval of counterparties, forecasting 4

8 of funding requirements, carrying out of transactions, monitoring of positions, pricing, record keeping and reporting. Finance and Office Administration, including statutory accounting policy, and the procedures for bank account maintenance, handling and recording of transactions, the performance of reconciliations and the tracking / controlling of company assets and expenditure. Financial Reporting, covering the procedures for regulatory, fiscal and management reporting. Human Resources, detailing policies and procedures in relation to the recruitment, induction, training, performance appraisal and remuneration of staff, in addition to the disciplinary and grievance procedure and health and safety guidelines. Information Technology, detailing policies and procedures in three key areas - user administration, systems administration (including a disaster recovery plan) and systems development / architecture. Compliance Policy, fixing objectives concerning identification and mitigation of risk. Outlook of JDBSA: JDBSA remains focused on meeting the needs of John Deere s equipment customers. We consistently evaluate expanded product offerings and the possibility of entering new markets. The directors, managers and staff of JDBSA look forward to 2017 as an opportunity to build on the existing platform in Luxembourg and to extend operations to other markets in Europe. Jacques Taylor Managing Director Gaëtan Van Wynsberghe Director, Finance & Treasury 5

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11 John Deere Bank S.A. Consolidated Financial statements October 31, 2016

12 Consolidated financial statements for the year ended October 31, 2016 Page Consolidated statement of profit or loss and other comprehensive income 2 Consolidated statement of financial position 3 Consolidated statement of changes in equity 4 Consolidated statement of cash flows 5 Notes to the consolidated financial statements 7 1

13 Consolidated statement of profit or loss and other comprehensive income Amounts in 000 Note Interest income 4 84,431 92,097 Interest expense 5 (18,191) (26,015) Share in profit in investment accounted for under the equity method 1,460 1,060 Fee and commission income 3,978 4,402 Fee and commission expense (1,866) (2,003) Gains (losses) on financial assets & liabilities held for trading 5 (1,072) (1,352) Gains (losses) on hedging instruments 195 (3) Exchange differences, net (958) 568 Gains (losses) on de-recognition of assets other than held for sale (95) (92) Other operating income 6 12,506 12,771 Other operating expenses (1,110) (982) Staff expenses 5, 7, 17 (14,669) (15,452) General and administration expenses (13,348) (12,986) Depreciation and amortization expenses 5, 11, 12 (10,404) (11,731) Impairment of financial assets not measured at FV through P&L 5 (949) (844) Total profit before tax 39,908 39,438 Income tax expense 8 (6,844) (6,155) Profit for the year 33,064 33,283 Other comprehensive income (OCI) for the year Items that will not be reclassified subsequently to profit or loss: Gain (Loss) on Pension recognized in OCI 17 (6,051) 4,151 Income tax on items recognized in OCI 8 1,029 (830) Items that may be reclassified subsequently to profit or loss: Exchange differences arising from translation of foreign operations 20 (22,403) 10,273 Other comprehensive income for the year (27,425) 13,594 Total comprehensive income for the year 5,639 46,877 The notes on pages 7 to 49 are an integral part of these financial statements. 2

14 Consolidated statement of financial position Amounts in 000 Note ASSETS Cash & cash balances with central banks 23, 24 56,245 80,415 Derivatives held for trading 23 7,939 9,646 Loans and receivables 9 1,723,084 1,767,969 Derivatives-Hedge accounting 10, 23, 28-8,068 Tangible assets 11 40,309 51,847 Intangible assets 12 1, Current tax assets Deferred tax assets 8 2,844 2,258 Pension and other retirement benefits 17-2,980 Other assets 13 8,993 6,454 Investment accounted for under the equity method 14 10,885 9,575 Total Assets 1,851,879 1,940,202 LIABILITIES Derivatives held for trading 23 3,266 4,141 Financial liabilities measured at amortized cost 15, 23, 27, 28 1,519,726 1,584,512 Current tax liabilities 8 4,852 9,711 Deferred tax liabilities 8 1,208 1,413 Pension and other retirement benefits 17 3, Other liabilities 16, 28 48,200 47,849 Total Liabilities 1,580,861 1,647,823 EQUITY Issued Capital 18, 22 77,906 77,906 Share premium 19 4,866 4,866 Retained Earnings , ,345 Reserves 17, 20 12,546 37,262 Total Equity 271, ,379 Total Equity and Liabilities 1,851,879 1,940,202 The notes on pages 7 to 49 are an integral part of these financial statements. 3

15 Consolidated statement of changes in equity Amounts in 000 Total Issued Share Retained Equity Capital Premium Earnings Reserves Balance at October 31, ,502 77,906 4, ,393 20,337 Comprehensive income Profit for the year 33, ,283 - Cumulative translation adjustment 10, ,273 Increase in legal reserve (31) 31 Increase in net wealth tax reserve (3,300) 3,300 Gain (Loss) on Pension recognized in OCI 4, ,151 Income tax on items recognized in OCI (830) (830) Total comprehensive income 46,877 Dividends paid (9,000) - - (9,000) - Balance at October 31, ,379 77,906 4, ,345 37,262 Comprehensive income Profit for the year 33, ,064 - Cumulative translation adjustment (22,403) (22,403) Increase in legal reserve (9) 9 Increase in net wealth tax reserve (2,700) 2,700 Gain (Loss) on Pension recognized in OCI (6,051) (6,051) Income tax on items recognized in OCI 1, ,029 Total comprehensive income 5,639 Dividends paid (27,000) - - (27,000) - Balance at October 31, ,018 77,906 4, ,700 12,546 The notes on pages 7 to 49 are an integral part of these financial statements. 4

16 Consolidated statement of cash flows Amounts in 000 Note Cash Flows from Operating Activities Profit for the Year 33,064 33,283 Adjustments for: Provision for credit losses 1, Depreciation and amortization 10,452 11,731 Change in deferred taxes (1,365) 662 Change in accounts payable and accrued expenses (5,119) (947) Change in accrued income tax (4,322) (1,787) Undistributed Earnings of Unconsolidated Affiliates (1,460) (1,060) Investment income recognized in profit and loss Cost of receivables acquired (4,100,005) (3,978,293) Collections of receivables 4,037,183 4,019,653 Cost of equipment on operating leases acquired (15,200) (19,619) Proceeds from sales of equipment on operating leases 8,153 6,467 Other (82,651) 32,792 Net Cash generated by Operating Activities (119,908) 103,730 Cash Flows from Investing Activities Purchase of property and equipment (277) (88) Interest Received (245) (4) Investments in Unconsolidated Affiliates Other (968) (179) Net Cash used in Investing Activities (1,340) (121) Cash Flows from Financing Activities Increase (decrease) in commercial paper - net - (313,989) Increase(decrease) in payable with John Deere - net 174, ,240 Proceeds from issuance of long-term borrowings 250,000 - Payments of long-term borrowings (300,000) - Payment (proceeds) of debt issuance costs (474) 200 Dividends paid to parent (27,000) (9,000) Net Cash used in Financing Activities 97,078 (37,549) Net increase (decrease) in cash and cash equivalents (24,170) 66,060 Cash and cash equivalents at the beginning of the year 80,415 14,355 Cash and cash equivalents at the end of the year 24 56,245 80,415 The notes on pages 7 to 49 are an integral part of these financial statements. 5

17 Consolidated statement of cash flows (continued) Amounts in 000 Net cash generated by / used in operating activities include: Income taxes (paid) received, net (11,473) (7,888) Interest paid (22,004) (24,498) Interest and dividends received 88,240 97,481 The notes on pages 7 to 49 are an integral part of these financial statements. 6

18 Notes to the consolidated financial statements Note Contents 1 Corporate information 2 Summary of accounting policies 3 Critical accounting judgments and key sources of estimation uncertainty 4 Interest income 5 Profit before income tax 6 Other operating income 7 Staff expenses 8 Income taxes 9 Loans and receivables 10 Leases 11 Property, plant and equipment 12 Intangible assets 13 Other assets 14 Investments accounted for under the equity method 15 Financial liabilities measured at amortized cost 16 Other liabilities 17 Retirement plan 18 Issued capital 19 Share premium Reserves Retained earnings Capital Financial instruments Cash and cash equivalents Commitments Aggregate Contractual Obligations Financing facilities Related party transactions Economic dependency Segment information Fees payable to the audit firm Events after the reporting period 7

19 1. Corporate information John Deere Bank S.A. ( the Bank ) was incorporated in Luxembourg on February 3, 2000, as a société anonyme. The Board of Directors is composed of Senior Executives of other entities of Deere & Company. The business policy and valuation principles, unless prescribed by the legal requirements existing in Luxembourg, are determined and monitored by the Board of Directors in accordance with those applied by Deere & Company. The Bank s parent company is John Deere Capital Corporation ( JDCC ). The consolidated accounts of JDCC may be obtained from the following address: 1, East First Street, Reno, Washoe County, Nevada 89501, USA. The Bank s corporate purpose is to perform banking activities in the widest sense permitted by law, both in Luxembourg and abroad, for its own account or for account of its customers. It may, in particular, but not exclusively, borrow or raise money for any of the objects or purposes of the Bank and, from time to time without limit as to amount, to issue, sell, pledge or otherwise dispose of appropriate instruments to evidence such indebtedness, and to secure the payment thereof by mortgage or other lien upon the whole or any part of the property of the Bank, whether at the time owned or thereafter acquired. The Bank may further finance or assist in financing the sale of property by way of leasing or the hire and leasing of goods, articles, commodities, plant, machinery, vehicles, tools and equipment of all and every kind or description. The Bank can establish or take part in finance and other companies or acquire, encumber or dispose of real estate in Luxembourg or abroad, either for its own account or for account of its customers. Besides, the Bank can engage in any kind of business suitable for the enhancement of its interest and for the attainment of its object. To a significant extent, the Bank cooperates with other entities of the John Deere Group. The Bank operates a branch in the United Kingdom in order to perform the same operations that the Bank is permitted to execute. Its activities consist in the provision of credit facilities, such as hire-purchase agreements, operating and financial leases to private customers. The UK being the branch s primary economic environment, the GBP is its functional currency. The Bank offers financing products through its Spanish Branch. The Bank performs factoring arrangements with other entities of Deere & Company through the Luxembourg head-quarter, its UK Branch, and also through its subsidiary in Italy. These consolidated financial statements include the operations of the UK Branch, the Spanish Branch, the Italy and France subsidiaries. 2. Summary of accounting policies Statement of compliance The consolidated financial statements of the Bank for all years presented are prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union. Supplementary disclosure required by Luxembourg laws and rules has been included. The management report prepared pursuant to Luxembourg legal and regulatory requirements is added to these consolidated financial statements. The Bank s accounting years starts on November 1 and ends on October 31. All amounts are shown in thousands of Euro unless otherwise indicated. The consolidated financial statements were authorised for issue by the Directors on December 14,

20 The consolidated financial statements incorporate the financial statements of the Bank and 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 entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Bank. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. An associate is an entity over which the Bank has significant influence and that is neither a subsidiary nor any interest in 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 these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Bank s share of the net assets of the associate, less any impairment in the value of individual investments. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets and financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The consolidated financial statements are prepared on a going concern basis. Income and expenses are recognized on a pro-rata temporis basis; they are shown in the consolidated statement of profit or loss for the period to which they may be assigned in economic terms. Accounting is based on categorization and measurement principles prescribed by IAS 39. An asset is recognized in the consolidated statement of financial position if it is probable that there will be future economic benefits for the Bank, and if its purchase or production costs or another value the asset can be reliably assigned a value. A liability is recognized in the consolidated statement of financial position if it is probable that there will be a future direct outflow of resources with economic benefits as a result of a present obligation and that the amount to be paid can be reliably assigned a value. For financial reporting purposes, fair value measurements are categorized into Levels 1, 2 and 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Derivative financial instruments The Bank enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk, including foreign exchange forward contracts and interest rate swaps. 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 the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately, unless the derivative is designated and effective as a hedging instrument, in which event the timing of recognition in profit or loss depends on the nature of the hedge relationship. 9

21 A derivative with a positive fair value is recognized as a financial asset; a derivative with a negative fair value is recognized as a financial liability. Hedge accounting The Bank designates certain hedging instruments, which include derivatives and non-derivatives in respect of foreign currency risk and interest rate risk, as either fair value hedges or cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the Bank documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Bank documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Note 24 sets out details of the fair values of the derivative instruments used for hedging purposes. Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in the line of the consolidated statement of profit or loss and other comprehensive income relating to the hedged item. Hedge accounting is discontinued when the Bank revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit or loss from that date. Employee benefits A liability is recognized for benefits accruing to employees in respect of wages and salaries, annual leave, sick leave and long service leave and medium term employee benefits, in the period the related service is rendered at the undiscounted amount of the benefits expected to be paid in exchange for that service. Liabilities recognized in respect of short-term employee benefits, are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service. Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method. Under this method each employee s benefits are attributed to years of service, taking into consideration future salary increases and the benefit allocation formula. Thus, the estimated total pension to which each employee is expected to become entitled at retirement is broken down into units, each associated with a year of past or future credited service. The defined obligation is the total present value of the employees attributed benefits for valuation purposes at the measurement date, and the service cost is the total present value of the individuals benefits attributable to service during the year. For defined contribution plans, the Bank pays contributions to publicly or privately managed pension insurance plans on a mandatory, contractual or voluntary basis. The Bank has no further payment obligations once the contributions have been paid. 10

22 Financial assets Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL), held-to-maturity investments, available-for-sale (AFS) financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling it in the near term; or on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. AFS financial assets are non-derivatives that are either designated as AFS or are not classified as loans and receivables, held-to-maturity investments or financial assets at FVTPL. Investments in money market funds by the Bank, which are traded in an active market, are classified as AFS and are stated at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method, and foreign exchange gains and losses on monetary assets, which are recognised in profit or loss. When the investment is derecognized or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Financial instruments issued by the Bank Debt and equity instruments Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. Interest and dividends Interest and dividends are classified as expenses or as distributions of profit consistent with the consolidated statement of financial position classification of the related debt or equity instruments. 11

23 Financial liabilities Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortized cost using the straight line method, which approximates the effective interest method, to amortize issuance discounts and premiums as well as transactions costs. Interest expense is recognized on an effective yield basis. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. De-recognition of financial liabilities The Bank derecognizes financial liabilities when, and only when, the Bank s obligations are discharged, cancelled or they expire. Foreign Currencies Items included in the consolidated financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates (the functional currency), which is the EUR, except for the UK activities where it is the GBP. The EUR is the Bank s reporting currency. The Bank maintains a multi-currency accounting system which records all transactions in the currency or currencies of the transaction on the day on which the contract is concluded. Foreign currency transactions are recorded at the exchange rate in effect at the date of the transaction. At the end of the reporting period, foreign currency monetary items are translated at the exchange rates prevailing at that date, forward foreign-exchange contracts are translated at the forward rate of that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in profit and loss in the year in which they arise. The assets and liabilities of the Bank s UK operations are translated into EUR at exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising are classified as equity and transferred to the Bank s Reserve from currency translation. Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed. Impairment of Financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. The Bank accounts for the particular default risk arising from the lending business by forming allowances or provisions for credit losses at a counterparty-specific level or collectively based. Provision for credit losses are formed for an exposure if it is probable that not all the interest payments and payments of principal can be made as agreed. Counterparty-specific allowances are evaluated based on the borrower s and guarantor s character, overall financial condition, resources and payments records and the realizable value of collateral held. The provision for credit losses corresponds to the difference between the carrying amount of the exposure less the expected future cash flow. All exposures having similar credit characteristics and for which no impairment is identified on a counterparty-specific level are assessed by means of portfolio allowances. The total amount of credit losses for possible loan losses is deducted from the asset items to which it belongs except for provisions for risks in off-balance-sheet items which are shown as provisions. 12

24 If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Unrecoverable amounts are written down. Amounts received on written-down loans are accounted for in the consolidated statement of profit or loss. De-recognition of Financial assets The Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Taxation Current tax The Bank is fully subject to corporate income tax, municipal business tax and net wealth tax in Luxembourg. The Bank is also subject to foreign taxes for the business carried out abroad by the branches/offices. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of profit or loss 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 Bank s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that sufficient taxable profits will be available against which those deductible temporary differences or unused tax losses and tax offsets can be utilized. However, deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on branches, except where the Bank 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 these 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 periodically 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. 13

25 Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Bank intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the year Current and deferred taxes are recognized as an expense or income in profit or loss, except when they relate to items recognized in other comprehensive income (OCI), in which case the tax is also recognized directly in OCI. Intangible assets Internally - generated intangible assets are stated at cost less accumulated amortization and impairment, and are amortized on a straight-line basis over their useful lives. Internally generated software should only be capitalised, if all of the following requirements are met: - the Bank has the feasibility of completing the intangible asset, so that it will be available for use, - the Bank has the intention to complete the intangible asset and to use it, - the Bank has the ability to use the intangible asset, - the intangible asset will generate future economic benefits, - the Bank has adequate resources available to complete the development and to use the intangible asset, - the Bank is able to reliably measure the expenditure attributable to the intangible asset during its development. Leased assets Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Bank as lessor Amounts due from lessees under finance leases are recorded as receivables at the amount of the Bank s net investment in the leases. Finance lease payments are allocated to accounting periods between interest revenue and reduction of the lease receivable in order to reflect a constant periodic rate of return on the Bank s net investment outstanding in respect of the lease. Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. The Bank as lessee Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. Financing lease agreements where the Bank is a lessee are of minor importance. Property, plant and equipment Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the item. 14

26 Depreciation is calculated on a straight-line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at each year-end. Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle the obligation, and the amount of the obligation can be measured reliably. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Revenue recognition Financial services Revenue from the provision of financial services is recognized on a yield to maturity basis on individual contracts. Interest revenue Interest revenue is recognized on a time proportionate basis that takes into account the effective yield on the financial asset. Consolidated statement of cash flows For purposes of the consolidated statement of cash flows, the Bank s cash and cash equivalents include current accounts with banks and highly liquid investments that are readily convertible into cash and which are not subject to significant change in value. Interests paid and received are classified as operating cash flows. The Bank s core primary business is to grant loans, carry out operating and finance lease and perform factoring activities. Cash flows resulting from these activities are part of the operating category. Cash advances and loans made to related parties, cash receipts from related parties, as well as cash flows related to commercial paper issued and medium term notes issued are considered as financing activities. Application of new and revised International Financial Reporting Standards (IFRS) In the current year, there was no new and revised standards and interpretations described below adopted by the EU that are relevant to its operations, as well as effective and endorsed for annual reporting periods beginning on November 1, The adoption of these new and revised standards and interpretations has not resulted in changes to Bank s accounting policies. 15

27 Forthcoming changes in IFRS Standards issued but not yet effective for annual reporting periods beginning on November 1, 2015 are listed below. This listing of standards and interpretations issued are those that the Bank reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Bank intends to adopt these standards when they become effective. IAS 1 Presentation of Financial Statements Disclosure Initiative The amendments clarify that (i) material information should not be obscured by aggregating or by providing immaterial information, (ii) materiality considerations apply to the all parts of the financial statements, and (iii) even when a standard requires a specific disclosure, materiality considerations do apply. The amendments (i) introduce a clarification that the list of line items to be presented in these statements can be disaggregated and aggregated as relevant and additional guidance on subtotals in these statements and (ii) clarify that an entity's share of Other Comprehensive Income of equity-accounted associates and joint ventures should be presented in aggregate as single line items based on whether or not it will subsequently be reclassified to profit or loss. The amendments add additional examples of possible ways of ordering the notes to clarify that understanding and comparability should be considered when determining the order of the notes and to demonstrate that the notes need not be presented in the order so far listed in paragraph 114 of IAS 1. The IASB also removed guidance and examples with regard to the identification of significant accounting policies that were perceived as being potentially unhelpful. The amendments to IAS 1 are effective for annual periods beginning or after January 1, 2016 with earlier application permitted. Application of the amendments does not need to be disclosed. The Bank does not anticipate that the application of IAS 1 will have a significant impact on the Bank s financial statements. IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets Clarification of Acceptable Methods of Depreciation and Amortization The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. The amendments apply prospectively for annual periods beginning or after January 1, 2016 with earlier application permitted. The Bank anticipates that the application of these clarifications will have no impact on the Bank s financial statements. IAS 16 Property, Plant and Equipment and IAS 41 Agriculture Bearer Plants The amendments to IAS 16 and IAS 41 define a bearer plant and require biological assets that meet the definition of a bearer plant to be accounted for as property, plant and equipment in accordance with IAS 16, instead of IAS 41. The amendments apply retrospectively for annual periods beginning or after January 1, 2016 with earlier application permitted. The Bank anticipates that the application of these clarifications will have no impact on the Bank s financial statements. IAS 27 Consolidated and Separate Financial Statements Equity Method in Separate Financial Statements The amendments focus on separate financial statements and allow the use of the equity method in such statements. 16