Russian Standard Bank Group International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report

Transcription

1 International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report 31 December 2013

2 CONTENTS INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position... 1 Consolidated Statement of Profit or Loss and Other Comprehensive Income... 2 Consolidated Statement of Changes in Equity... 3 Consolidated Statement of Cash Flows... 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Introduction Operating Environment of the Group Summary of Significant Accounting Policies Critical Accounting Estimates, and Judgements in Applying Accounting Policies Adoption of New or Revised Standards and Interpretations New Accounting Pronouncements Cash and Cash Equivalents Securities at Fair Value through Profit or Loss Loans and Advances to Customers Investment Securities Available for Sale Premises and Equipment and Intangible Assets Other Assets Due to Other Banks Customer Accounts Debt Securities in Issue Subordinated Debt Other Liabilities Share Capital and Other Reserves Interest Income and Expense Market Fair Value Adjustments and Losses less Gains from Available for Sale Securities Losses less Gains from Operations with Foreign Currencies Income from Insurance Operations Commission Income and Expenses Administrative and Other Operating Expenses Income Taxes Dividends and Other Profit Distribution Segment Analysis Financial Risk Management Management of Capital Contingencies and Commitments Presentation of Financial Instruments by Measurement Categories Derivative Financial Instruments Fair Value of Financial Instruments Related Party Transactions Goodwill Principal Subsidiaries Events after the End of the Reporting Period... 63

3

4

5

6 Consolidated Statement of Profit or Loss and Other Comprehensive Income In millions of Russian Roubles Note Interest income Interest expense 19 (29 589) (17 545) Net interest income Provision for impairment of loans to customers 9 (28 532) (14 409) Net interest income after provision for loan impairment Fee and commission income Fee and commission expense 23 (6 021) (3 930) Net gains from securities at fair value through profit or loss Market fair value adjustments and losses less gains from available for sale securities 20 (1 647) Losses less gains from operations with foreign currencies 21 (2 088) (1 480) Income from insurance operations Other operating income Administrative and other operating expenses 24 (27 900) (22 794) Profit before tax Income tax expense 25 (2 143) (2 250) Profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss: Exchange differences on translation to presentation currency Revaluation of securities available for sale, net of deferred tax 25 (57) (370) Items that will not be reclassified to profit or loss: Revaluation of premises, net of deferred tax 11, Other comprehensive income for the year Total comprehensive income for the year Profit is attributable to: Equity holders of the Bank Non-controlling interest Profit for the year Total comprehensive income attributable to: Equity holders of the Bank Non-controlling interest Total comprehensive income for the year The notes set out on pages 5 to 63 form an integral part of these consolidated financial statements. 2

7 Consolidated Statement of Changes in Equity In millions of Russian Roubles Share capital Attributable to owners of the Bank Additional paid- reserves Other in capital Share premium Retained earnings Total Noncontrolling interest Total equity Balance at 1 January Profit for the period Other comprehensive income Total comprehensive income for Dividends declared and other profit distributions (Note 26) (3 589) (3 589) - (3 589) Other movements (460) (460) - (460) Balance at 31 December Profit for the year Other comprehensive income Total comprehensive income for Contribution from shareholders (Note 18) Other movements - - (43) (12) (109) (164) Balance at 31 December The notes set out on pages 5 to 63 form an integral part of these consolidated financial statements. 3

8 Consolidated Statement of Cash Flows In millions of Russian Roubles Note Cash flows from operating activities Interest received Interest paid (28 944) (16 617) Net trading gains received/ (losses paid) (4 274) Fees and commissions received Fees and commissions paid (6 021) (3 930) Other operating income received Net income received from insurance operations Other administrative and operating expenses paid (26 154) (21 064) Income tax paid (2 378) (3 360) Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities Net increase in mandatory cash balances with the Central Bank of the Russian Federation (167) (857) Net increase in due from other banks (2 641) (546) Net increase in loans and advances to customers (88 052) (91 289) Net decrease/(increase) in securities at fair value through profit or loss (14 617) Net increase in securities available for sale (12 567) (765) Net increase in other assets (1 771) (4 123) Net increase in due to other banks Net increase in customer accounts Net decrease in promissory notes issued (298) (3) Net (decrease)/increase in other liabilities (4 017) Net cash from/(used in) operating activities (15 816) Cash flows from investing activities Acquisition of premises and equipment and intangible assets 11 (3 809) (3 279) Proceeds from disposal of premises and equipment Net cash used in investing activities (3 770) (3 116) Cash flows from financing activities Issue of debt securities, other than promissory notes Repayment of debt securities other than promissory notes (9 818) (9 552) Dividends and other profit distributions paid 26 - (3 589) Issue of subordinated debt Net cash from financing activities Effect of exchange rate changes on cash and cash equivalents (1 135) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes set out on pages 5 to 63 form an integral part of these consolidated financial statements. 4

9 1 Introduction These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2013 for Closed JSC Russian Standard Bank (hereinafter the Bank ) and its subsidiaries and special purpose entities (Note 36), together referred to as the Group or the Russian Standard Bank Group. The Bank was incorporated in 1992 and is domiciled in the Russian Federation. The Bank is a closed joint stock company limited by shares and was set up in accordance with Russian regulations. As at 31 December 2013 and 31 December 2012 the shareholders of the Group were: 31 December December 2012 JSC Russian Standard Corporation ( RSC ) % % JSC Roust Inc % 0.087% Other 0.001% 0.001% Total % % JSC Russian Standard Corporation and JSC Roust Inc. are subsidiaries of Roust Trading Limited ( RTL ). The ultimate controlling shareholder of the Group is Mr. Roustam Tariko. Principal activity. The Group s principal business activity is retail and commercial banking operations within the Russian Federation and Ukraine. The Bank has operated under a full banking license No issued by the Central Bank of the Russian Federation ( CBRF ) since In addition the Bank acts as an agent in relation to sales of insurance policies of the insurance subsidiaries of the Bank (Note 36), to the customers of the Bank. The Bank participates in the State deposit insurance scheme, which was introduced by the Federal Law No. 177-FZ Deposits of individuals insurance in Russian Federation dated 23 December The State Deposit Insurance Agency guarantees repayment of 100% of individual deposits up to RR 700 thousand per individual in case of the withdrawal of a license of a bank or a CBRF imposed moratorium on payments. Registered address and place of business. The Bank s registered address and principal place of business is Tkatskaya Street, 36, , Moscow, Russian Federation. The Bank has 9 branches (31 December 2012: 8) within the Russian Federation. The number of the Group s employees as at 31 December 2013 was (31 December 2012: ). Presentation currency. These consolidated financial statements are presented in millions of Russian Roubles ( RR millions ), unless otherwise stated. 2 Operating Environment of the Group The Group, through its operations, has a significant exposure to the economy and financial markets of the Russian Federation and Ukraine. Russian Federation. The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations (Note 30). The political and economic turmoil witnessed in the region in late 2013 and early 2014, including the developments in Ukraine, could have a negative impact on the Russian economy, including weakening of the Rouble and making it harder to raise international funding. The financial markets are uncertain and volatile. These and other events may have a significant impact on the Group s operations and financial position, the effect of which is difficult to predict. Management determined loan impairment provisions using the incurred loss model required by the applicable accounting standards. These standards require recognition of impairment losses that arose from past events and prohibit recognition of impairment losses that could arise from future events, including future changes in the economic environment, no matter how likely those future events are. Thus final impairment losses from financial assets could differ significantly from the current level of provisions (Note 4). 5

10 2 Operating environment of the Group (Continued) Ukraine. The Ukrainian economy is characterised by relatively high economic and political risks. In 2013, the world demand for Ukraine's main export commodities, steel and iron ore, was weak. The year was marked by one of the record crop harvests; however world prices for wheat, corn and sunflower seed reduced significantly due to peak harvests in other crop producing regions. In 2013, Ukraine's GDP was flat year on year (2012: increase by 0.2%), while industrial output contracted by 4.7% (2012: reduction by 0.5%). The Government of Ukraine introduced a number of restrictions in relation to foreign exchange aiming to support the exchange rate of the national currency, the Ukrainian Hryvnia. In 2013 the national foreign exchange reserves reduced to the level of 3 month imports at year end due to reduced inflows from sale of commodities and agro produce, the need to settle scheduled payments, primarily with International Monetary Fund, and to pay the current and past purchases of natural gas. The association agreement with the European Union was not signed at the end of November as was initially scheduled. The government announced a deal with the Russian Federation for the purchase of Ukrainian government eurobonds up to USD 15 billion, of which USD 3 billion eurobonds were acquired by the Russian Government in December The political system of Ukraine experienced instability in late 2013 and early 2014 with a number of protests against the government, ending with actual fall of the central government and escape of Ukrainian president. The Russian government suspended the purchase of Ukrainian government bonds and Moody s Investors Service in two steps downgraded Ukraine's government bond rating to Caa3 from Caa1 with a negative outlook. In 2014 the Ukrainian Hryvnia devalued against the major world currencies. The Group determined and recorded provision for loan impairment based on circumstances and events as at 31 December Further developments in the circumstances and events after 31 December 2013 might have an impact on financial position of some its Ukrainian subsidiary bank customers (Note 36). These and other events may have a significant impact on the Group s consolidated operations and financial position, the effect of which is difficult to predict. Refer to Note Summary of Significant Accounting Policies Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value and by the revaluation of financial instruments categorised as at fair value through profit or loss. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated, except for premises stated originally at historical cost and revalued at fair value as of 31 December 2013 and Consolidated financial statements. Subsidiaries are those investees, including structured entities, that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor s returns. The existence and effect of substantive rights, including substantive potential voting rights are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holding of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group and are deconsolidated from the date on which control ceases. The aсquisition method of accounting is used to account for the acquisition of subsidiaries. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the business combination date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. 6

11 3 Summary of Significant Accounting Policies (Continued) Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount ( negative goodwill ) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement. The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Bank uses uniform accounting policies consistent with the Group s policies. If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to that Group member s financial statements in preparing the consolidated financial statements to ensure conformity with the Group s accounting policies. Financial instruments key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the Group. This is the case even if a market s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. The price within the bid-ask spread that is most representative of fair value in the circumstances was used to measure fair value, which management considers is the average of actual trading prices on the reporting date. Valuation techniques such as discounted cash flow models or models based on recent arm s length transactions or consideration of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Refer to Note 33. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated statement of financial position. 7

12 3 Summary of Significant Accounting Policies (Continued) The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate (refer to income and expense recognition policy). Initial recognition of financial instruments. Derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date when the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. Derecognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include all interbank placements with original maturities of less than three months. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Mandatory cash balances with the CBRF. Mandatory cash balances with the CBRF are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Group s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows. Securities at fair value through profit or loss. Securities at fair value through profit or loss are securities used for a short-term profit-taking or securities designated irrevocably, at initial recognition, into this category. Management designates securities into this category only if (a) such classification eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or (b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information on that basis is regularly provided to and reviewed by the Bank s key management personnel. Securities at fair value through profit or loss are carried at fair value. Interest earned on securities at fair value through profit or loss calculated using the effective interest method is presented in the consolidated statement of comprehensive income as interest income. All other elements of the changes in the fair value and gains or losses on derecognition are recorded in the period in which they arise. Due from other banks. Amounts due from other banks are recorded when the Group advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. 8

13 3 Summary of Significant Accounting Policies (Continued) Investment securities available for sale. Investment securities are those which the Group intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Investment securities available for sale are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and is recognised in profit or loss. Foreign exchange gains and losses are also recognised in profit or loss. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of investment securities available for sale. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss for the year. Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; the borrower experiences a significant financial difficulty as evidenced by the borrower s financial information that the Group obtains or the borrower considers bankruptcy or a financial reorganisation; there is adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or the value of collateral significantly decreases as a result of deteriorating market conditions. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortized cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. 9

14 3 Summary of Significant Accounting Policies (Continued) Impairment losses are always recognised through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 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 recognised (such as an improvement in the debtor s credit rating), the previously recorded impairment loss is reversed by adjusting the allowance account through profit or loss. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed, the Credit Committee of the Bank has formally recognised assets as uncollectible and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. Credit related commitments. The Group enters into credit related commitments, including letters of credit, undrawn credit lines and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. Sale and repurchase agreements and lending of securities. Sale and repurchase agreements ( repo agreements ) which effectively provide a lender s return to the counterparty are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are not reclassified in the consolidated statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase receivables. The corresponding liability is presented within amounts due to other banks. Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the acquirer s share of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the date of exchange. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination. Such units or group of units represent the lowest level at which the Group monitors goodwill and are not larger than an operating segment. Premises and equipment. Premises are stated at revalued amounts and equipment is stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 31 December 2002 for assets acquired prior to 1 January 2003, less accumulated depreciation and provision for impairment, where required. Cost of equipment of acquired subsidiaries is the estimated fair value at the date of acquisition. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of equipment items are capitalised and the replaced part is retired. Land and premises are subject to revaluation on a regular basis. The frequency of revaluation depends upon the change in fair value. When the fair value of a revalued asset differs materially from its carrying amount further revaluation is performed. Any revaluation surplus is credited to the other comprehensive income and increases premises revaluation reserve, except to the extent that it reverses an impairment of the same asset previously recognised in profit or loss, in which case the increase is recognized in profit or loss. A revaluation deficit is recognised in profit or loss, except for the deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the asset revaluation reserve for premises. 10

15 3 Summary of Significant Accounting Policies (Continued) The land and premises revaluation reserve included in equity is transferred directly to retained earnings when the surplus is realised, i.e. on the disposal of the asset or as the asset is used by the Group; in the latter case, the amount of surplus realized is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. The land and premises were first time revalued to market value at 31 December The revaluations at 31 December 2013 and 2012 were performed based on the report of independent appraiser, who hold a recognized and relevant professional qualification and who have recent experience in valuation of assets of similar location and category. At each reporting date management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the consolidated statement of comprehensive income. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Depreciation. Land is not depreciated. Depreciation on other items is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Premises Office equipment Computers 50 years; 5-10 years; 4 years. The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Intangible assets. The Group s intangible assets other than goodwill have definite useful life and primarily include a license for a merchant acquiring business, capitalised computers software and own trademarks. According to this license, the Bank has the exclusive right in Russia for signing new merchants to accept the American Express Card, to manage relationships with existing American Express merchants in the market and to process transactions on the American Express network in Russia. The license for a merchant acquiring business is amortised on a straight line basis over an expected useful life of 10 years. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software if the inflow of incremental economic benefits exceeding costs is probable. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 10 years, trademarks are amortised over 10 years period (year 2012: 6 years period). Trade receivables. Trade and other receivables are recognised initially at fair value and are subsequently measured at amortised cost. Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. Due to other banks and Customer accounts. Due to other banks and Customer accounts are nonderivative liabilities to banks, state or corporate customers and individuals. They are carried at amortised cost. Debt securities in issue. Debt securities in issue include bonds, loan participation notes, euro commercial papers and promissory notes issued by the Group. Debt securities in issue are stated at amortised cost. If the Group purchases its own debt securities in issue, they are removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recorded within the consolidated statement of comprehensive income. 11

16 3 Summary of Significant Accounting Policies (Continued) Subordinated debt. Subordinated debt is debt which ranks after other debts should the Group fall into liquidation. Recognition and measurement of this category is consistent with the above policy for debt securities in issue. Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts, currency and interest rate swaps and cross currency interest rate swaps are carried at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss. The Group does not apply hedge accounting. Insurance operations. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. As a general guideline, the Group defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the insured event did not occur. Insurance risk exists when the Group has uncertainty in respect of the following matters at inception of the contract: the occurrence of the insurance event, the date of occurrence of the insurance event and the claim value in respect of it. The insurance contracts protect the Group s individual policyholders from the consequences of events, such as death or total permanent disability, that would affect the ability of the policyholder or his/her dependants to pay the outstanding amount of the underlying consumer loan or credit card s balance. There are no maturity or surrender benefits on the Group s insurance products. Gross insurance premiums written. Gross insurance premiums written, which the Group is contractually entitled to receive from the insured in relation to insurance contracts, are recognized when due from a policyholder. Specifically, the Group recognizes premiums for the policies issued during the year and includes an estimate of premiums due but not yet received by the reporting date. Premiums are shown before the deduction of commission if any. Gross insurance premiums written are recognized as result from insurance operations in the consolidated statement of comprehensive income. Provision for unearned premiums. Unearned premiums represent the proportion of premiums written in the year that relate to the unexpired terms of policies in-force as at the reporting date, calculated on a time apportionment basis. For the calculation of the provision for unearned premiums, the Group uses the following method. From the date of policy issue to the date of risk inception the unearned premium is equal to the premium written, from the date of risk inception to the maturity date the Group uses an actuarial method based on estimating the remaining future commitments relative to the total commitments as at the inception of each policy. Provisions for unearned premiums are recognized within Income from insurance operations in the consolidated statement of comprehensive income. Claims paid. Claims and claims handling expenses are charged to the consolidated statement of comprehensive income as incurred based on the evaluated liability for compensation payable to policyholders or third parties. Claims paid are recognized within result from insurance operations in the consolidated statement of comprehensive income. Loss provision. The claims provision represents the accumulation of estimates for ultimate insurance losses and includes the outstanding claims reserve ( OCR ) and provision for losses incurred but not yet reported ( IBNR ). Estimates of the claims handling expenses of 1% of claim indemnity value in 2013 (1% in 2012) are included in both the OCR and the IBNR. The OCR is provided in respect of claims reported but not settled as at the reporting date. The estimation is made on the basis of information received by the Group during investigation of insurance cases as at and after the reporting date. IBNR is actuarially determined by the Group. The changes in OCR and IBNR are recognised as Income from insurance operations in the consolidated statement of comprehensive income. Liability adequacy test. At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related deferred acquisition costs ( DAC ). In performing these tests, the current best estimates of the future contractual cash flows and claims handling and maintenance expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to the consolidated statement of comprehensive income, initially by writing off DAC and by subsequently establishing a provision for losses arising from the liability adequacy tests (the unexpired risk provision). When performing the liability adequacy test, the Group uses a combination of its own as well as externally available statistics and also includes a security margin. Insurance receivables are included as part of this test. 12

17 3 Summary of Significant Accounting Policies (Continued) Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with Russian and Ukrainian legislation enacted or substantively enacted by the reporting date. The income tax charge/credit comprises current tax and deferred tax and is recognised in profit or loss for the year except it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if consolidated financial statements are authorised prior to filing relevant tax returns. Taxes, other than on income, are recorded within administrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the reporting date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. The Group does not recognise a deferred tax liability in respect of temporary differences associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Deferred income tax is provided on post-acquisition retained earnings of subsidiaries and other postacquisition movements in reserves of subsidiaries, except where the Group controls the subsidiary s dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future. Uncertain tax positions. The Group's uncertain tax positions are reassessed by management at every reporting date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the reporting date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management s best estimate of the expenditure required to settle the obligations at the reporting date. Trade and other payables. Trade and other payables are accrued when the counterparty has performed its obligations under the contract and are carried at amortised cost. Share capital. Ordinary shares and non-redeemable preference shares with discretionary dividends are both classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity. Contributions from shareholders other than from share issues. Contributions from shareholders other than from share issues, net of any tax liability arising, where there is no obligation of the Group to return the funds are recorded as additional paid-in capital in equity when received. Treasury shares. Where the Bank or its subsidiaries purchase the Bank s equity instruments, the consideration paid is deducted from equity attributable to the owners of the Bank until equity instruments are reissued, disposed of or cancelled. Where such shares are subsequently disposed of or reissued, any consideration received is included in equity. 13

18 3 Summary of Significant Accounting Policies (Continued) Dividends and other profit distributions. Dividends and other profit distributions are recorded in equity in the period in which they are declared. Any dividends and other profit distributions declared after the reporting date and before the consolidated financial statements are authorised for issue are disclosed in the subsequent events note. The statutory accounting reports of the Bank are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the current year net profit. Income and expense recognition. Interest income and expense are recorded in the consolidated statement of comprehensive income for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as financial liabilities at fair value through profit or loss. When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. Acquiring and interchange commissions. Acquiring and interchange commission represent payments from/to merchants and payment systems for the settlement services provided to the credit cards holders (mainly in points of sale and ATMs) and are service fees not directly attributable to loan origination or servicing thus are not an integral part of the effective interest rate. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Foreign currency translation. The functional currency of each of the Group s consolidated entities is the currency of the primary economic environment in which the entity operates. The Group s presentation currency is the national currency of the Russian Federation, Russian Roubles ( RR ). Monetary assets and liabilities are translated into each entity s functional currency at the official exchange rate of the CBRF at the end of respective reporting period. Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities into each entity s functional currency at year-end official exchange rates are recognised in profit or loss for the year. Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. Non-monetary items measured at fair value in a foreign currency, including equity investments, are translated using the exchange rates at the date when the fair value was determined. Effects of exchange rate changes on nonmonetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss. The results and financial position of each group entity (the functional currency of none of which in 2012 and 2013 was a currency of a hyperinflationary economy) are translated into the presentation currency as follows: (I) (II) (III) assets and liabilities for each statement of financial position presented are translated at the closing rate at the reporting date; income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); components of equity are translated at the historic rate; and all resulting exchange differences are recognised in other comprehensive income. When control over a foreign operation is lost, the previously recognised exchange differences on translation to a different presentation currency are reclassified from other comprehensive income to profit or loss for the year as part of the gain or loss on disposal. On partial subsidiary disposal without loss of control, the related portion of accumulated currency translation differences is reclassified to non-controlling interest within equity. 14

19 3 Summary of Significant Accounting Policies (Continued) As at 31 December 2013 the principal rate of exchange used for translating foreign currency balances was USD 1 = RR (31 December 2012: USD 1 = RR ) and the average exchange rate for the year 2013 was USD 1 = RR (year 2012: USD 1 = RR ). As at 31 December 2013 the principal rate of exchange used for translating foreign currency balances denominated in EUR was EUR 1 = RR (31 December 2012: EUR 1 = RR ) and the average exchange rate for the year 2013 was EUR 1 = RR (year 2012 was EUR 1 = RR ). Non-financial assets are non-current except for Current income tax prepayment and Other non-financial assets (Note 12). Non-financial liabilities are current (Note 17). Fiduciary assets. Assets held by the Group in its own name, but on the account of third parties, are not reported in the consolidated statement of financial position. Commissions received from fiduciary activities are included within fee and commission income. Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Staff costs and related contributions. Group entities do not operate their own pension schemes. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid and unpaid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the period in which the associated services are rendered by the employees of the Group and are included in administrative and other operating expenses. Segment reporting. Operating segments are reported in a manner consistent with the internal reporting provided to the Group s chief operating decision maker. The Chairman of the Board of Directors reviews the financial information prepared on the level of the Bank (before consolidation with insurance and Ukrainian subsidiaries) therefore the Group identified the standalone Bank as an operating segment (Note 27). Changes in accounting estimates. Estimates used for the accounting and financial reporting purposes may be revised if changes occur in the circumstances on which the estimate was based or as a result of new information, more experience or subsequent developments. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change. Reclassification in prior period presented. RR 204 million gain from previously written off bad debts cession to other companies for the year 2012 has been reclassified from Other income to Provision for impairment on loans to customers line in the Statement of profit and loss and other comprehensive income as new presentation better reflects the operations presented. The Group also changed presentation of other assets. Any further changes to these consolidated financial statements require approval of the Group s Management who authorised these consolidated financial statements for issue. 15

20 4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies The Group makes estimates and assumptions that affect the reported amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on Management s experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Group regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers, in a group, or national or local economic conditions that correlate with defaults on assets in the group. The primary factor that the Group considers as objective evidence of impairment is the overdue status of the loan. Provision for loan impairment consists of (i) incurred losses when the loan is over 360 days (31 December 2012: 180 days overdue and (ii) losses when the loan has signs of impairment (missed at least one monthly instalment) as at the reporting date. Such losses are calculated based on the historical statistical data considering the performance of other loans with similar characteristics including further partial recovery through sale to third party debt collection agencies (31 December 2012: no recovery). Were such changes not applied as of 31 December 2013 the provision for loan impairment would be RR million higher. In general, loans where there are no breaches in loan servicing are considered to be individually unimpaired. Given the nature of the borrowers and the loans it is the Group's view and experience that the time lag between a possible loss event that could lead to impairment and the non- or underpayment of a monthly instalment is minimal. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce differences between loss estimates and actual loss experience. In accordance with internal methodology for the provision estimation the Group uses all available loss statistics for the whole period of its operations. Last twelve months of losses statistics history cause the most significant impact on the provision amount. Such approach lets the Group to implement the effect of the latest trends in its model for loss provision calculation. In 2013 under IAS 39 Financial Instruments: Recognition and Measurement the Group revised assumptions used for consumer loans provision estimation to conform with the methodology used for credit card loans. Were such changes applied as of 31 December 2012 the provision for loan impairment would be RR million lower, mainly resulting in provision decrease for personal loans. To the extent that the provision for loan impairment as at 31 December 2013 decrease/increase by 10%, the profit before tax would be approximately RR million higher or RR million lower. To the extent that the provision for loan impairment as at 31 December 2012 decrease/increase by 10%, the profit before tax would be approximately RR million higher or RR million lower. Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits, and is recorded in the consolidated statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on a medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Consolidation of pension fund. Following the adoption of IFRS 10, Management reassessed its judgment in relation to the consolidation of Non State Pension Fund Russian Standard (the Fund ) by the Group, based on the criteria and guidance provided in the standard. In terms of the Russian legislation, the Group currently has no direct access to the net assets of the Fund, however, there appears to be a market in which pension funds can be sold and the Group's ability to sell the fund (although no intention exists at the moment) creates its exposure to variable returns. 16

21 5 Adoption of New or Revised Standards and Interpretations Certain new standards and interpretations became effective for the Group from 1 January 2013: IFRS 10 Consolidated Financial Statements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces all of the guidance on control and consolidation in IAS 27 Consolidated and separate financial statements and SIC-12 Consolidation - special purpose entities. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The Standard did not have any material impact on the Group s consolidated financial statements. IFRS 11 Joint Arrangements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The Standard did not have any material impact on the Group s consolidated financial statements. IFRS 12 Disclosure of Interests in Other Entities (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements previously found in IAS 28 Investments in associates. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgements and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of noncontrolling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The Standard did not have any material impact on the Group s consolidated financial statements. IFRS 13 Fair Value Measurement (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) improved consistency and reduced complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value, which management considers is the average of actual trading prices on the reporting date. The Standard did not have any material impact on the Group s consolidated financial statements. For additional disclosures in these consolidated financial statements as a result of the Standard refer to Note 33. IAS 27 Separate Financial Statements (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013) was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10 Consolidated Financial Statements. The amended standard did not have any material impact on the Group s consolidated financial statements. IAS 28 Investments in Associates and Joint Ventures (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The amended standard did not have any material impact on the Group s consolidated financial statements. Amendments to IAS 1 Presentation of Financial Statements (issued in June 2011, effective for annual periods beginning on or after 1 July 2012) changed the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to statement of profit or loss and other comprehensive income. The amended standard resulted in changed presentation of consolidated financial statements, but did not have any impact on measurement of transactions and balances. 17

22 5 Adoption of New or Revised Standards and Interpretations (Continued) Amended IAS 19 Employee Benefits (issued in June 2011, effective for periods beginning on or after 1 January 2013) makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The amended standard did not have any material impact on the Group s consolidated financial statements. Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that enable users of an entity s consolidated financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The amended standard did not have any material impact on the Group s consolidated financial statements. Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 Borrowing costs, retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that spare parts, stand-by and servicing equipment are classified as property, plant and equipment rather than inventory when they meet the definition of property, plant and equipment. The requirement to account for spare parts and servicing equipment as property, plant and equipment only if they were used in connection with an item of property, plant and equipment was removed because this requirement was too restrictive when compared with the definition of property, plant and equipment. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 now requires disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual consolidated financial statements. The amended standards did not have any material impact on the Group s consolidated financial statements. Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued in June 2012 and effective for annual periods beginning 1 January 2013). The amendments clarify the transition guidance in IFRS 10 Consolidated Financial Statements. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The amended standards did not have any material impact on the Group s consolidated financial statements. 18

23 6 New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2014 or later, and which the Group has not early adopted. IFRS 9 Financial Instruments: Classification and Measurement. Key features of the standard issued in November 2009 and amended in October 2010, December 2011 and November 2013 are: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent payments of principal and interest only (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The amendments made to IFRS 9 in November 2013 removed its mandatory effective date, thus making application of the standard voluntary. The Group does not intend to adopt the existing version of IFRS 9. Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of currently has a legally enforceable right of set-off and that some gross settlement systems may be considered equivalent to net settlement. The Group is considering the implications of the amendment and its impact on the Group. Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The Group does not expect the amendment to have any impact on its consolidated financial statements. IFRIC 21 Levies (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The Group is currently assessing the impact of the amendments on its consolidated financial statements. 19

24 6 New Accounting Pronouncements (Continued) Amendments to IAS 36 Recoverable amount disclosures for non-financial assets (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment. The Group is currently assessing the impact of the amendments on the disclosures in its consolidated financial statements. Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (issued in June 2013 and effective for annual periods beginning 1 January 2014).The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. The Group is currently assessing the impact of the amendments on the disclosures in its consolidated financial statements. Amendments to IAS 19 Defined benefit plans: Employee contributions (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The amendment is not expected to have any material impact on the Group s consolidated financial statements. Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to seven standards. IFRS 2 was amended to clarify the definition of a vesting condition and to define separately performance condition and service condition ; The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss. Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity s assets when segment assets are reported. The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of discounting is immaterial. IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity ( the management entity ), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. The Group is currently assessing the impact of the amendments on its consolidated financial statements. 20

25 6 New Accounting Pronouncements (Continued) Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to four standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The Group is currently assessing the impact of the amendments on its consolidated financial statements. IFRS 14 Regulatory deferral accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). IFRS 14 permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. An entity that already presents IFRS financial statements is not eligible to apply the standard. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group s consolidated financial statements. 21

26 7 Cash and Cash Equivalents In millions of Russian Roubles 31 December December 2012 Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Correspondent accounts and overnight placements with other banks - Russian Federation OECD countries Other countries Settlement accounts with trading systems (Micex) Total cash and cash equivalents Cash and cash equivalents are neither past due nor impaired. The Group uses long-term ratings provided by world-wide recognized rating agencies. Information about credit ratings is disclosed below with Moody s ratings translated to Standard & Poor s/fitch equivalent. Russian Federation sovereign rating as of 31 December 2013 and 2012 was at BBB level. As at 31 December 2013 cash and cash equivalents included RR 704 million which belong to NPF Russian Standard and are held against pension liabilities. Geographical, maturity and interest rate analyses of cash and cash equivalents are disclosed in Note 28. In millions of Russian Roubles 31 December December 2012 AAA to A BBB+ to BBB BB+ to B Below B+ and unrated Total cash and cash equivalents placed in other banks Securities at Fair Value through Profit or Loss In millions of Russian Roubles 31 December December 2012 Bonds issued by Russian banks Bonds issued by Russian companies Bonds issued by the Ministry of Finance of the Russian Federation ( OFZ ) Russian municipal bonds Bonds of International Finance Corporation (IFC) Eurobonds issued by Russian banks Eurobonds issued by Russian companies Total securities at fair value through profit or loss The Group irrevocably designated the above securities that are not part of its trading book, as at fair value through profit or loss. The securities meet the criteria for classification as at fair value through profit or loss because management of the Group assesses performance of these investments based on their fair values in accordance with a documented risk management strategy. Securities at fair value through profit or loss are carried at fair value based on their market quotations which also reflect any credit risk related write-downs. As at 31 December 2013 RR million (31 December 2012: none) securities at fair value through profit or loss were pledged as security under repurchase agreements with the CBRF (Note 13). 22

27 8 Securities at Fair Value through Profit or Loss (Continued) As at 31 December 2013 securities at fair value through profit or loss included RR million, which belong to NPF Russian standard and are held against pension liabilities. Geographical, maturity and interest rate analyses of securities at fair value through profit or loss are disclosed in Note 28. Securities at fair value through profit or loss are neither past due nor impaired. The Group uses long-term ratings provided by world-wide recognized rating agencies. Information about credit ratings (with Moody s ratings translated to Standard & Poor s/fitch equivalent) is disclosed below. In millions of Russian Roubles 31 December December 2012 AAA to A BBB+ to BBB BB+ to B Below B+ and unrated Total securities at fair value through profit or loss Loans and Advances to Customers In millions of Russian Roubles 31 December December 2012 Loans to individuals Credit Card loans Personal loans POS loans Restructured loans Other Loans to legal entities Gross loans and advances to customers Less: Provision for loan impairment (36 317) (18 093) Total loans and advances to customers Credit card loans are issued to the clients using revolving credit cards. Personal loans are issued to the clients credit cards in cash. Included in personal are auto loans amounting to RR 80 million as of 31 December 2013 (RR 256 million as of 31 December 2012), previously reported separately. POS loans are issued to clients directly at the points-of-sale of goods and services. Restructured loans represent loans where conditions were changed according to additional agreement between the borrower and the Bank. The Group applied the portfolio provisioning methodology prescribed by IAS 39 Financial Instruments: Recognition and Measurement and created portfolio provisions for impairment losses that were incurred but have not been specifically identified with any individual loan by the end of the reporting period. The primary factors that the Group considers whether loan is impaired is overdue status and ability to realize related collateral, if any. As a result, the Group presents below an ageing analysis of loans that are individually or collectively accessed for impairment. 23

28 9 Loans and Advances to Customers (Continued) Movements in the provision for loan impairment during 2013 are as follows: In millions of Russian Roubles Credit Card loans POS loans Personal loans Restructured loans Other Loans to legal entities Total Provision for loan impairment at 1 January Provision for impairment during the year Amounts written off during the year as uncollectible (5 894) (1 967) (3 536) (180) - - (11 577) Provision for loan impairment at 31 December Movements in the provision for loan impairment during 2012 are as follows: In millions of Russian Roubles Credit Card loans POS loans Personal loans Restructured loans Other Loans to legal entities Total Provision for loan impairment at 1 January Provision for impairment during the year Amounts written off during the year as uncollectible (3 398) (1 782) (1 001) (144) - - (6 325) Provision for loan impairment at 31 December The provision for impairment during the year differs from the amount presented in the consolidated statement of comprehensive income due to (i) RR 655 million (year 2012: RR million) recovery of amounts previously written off as uncollectible and (ii) RR 614 million (year 2012: 204 million) gain on assignment of the rights of claim on previously written off past due and impaired loans to other companies. These amounts were credited directly to the provisions line in the consolidated statement of profit and loss and other comprehensive income. Loans are written off from the consolidated statement of financial position in accordance with the Group s internal policy. The Group s criteria for loans write off are based on the portfolio behaviour. The Group has the following criteria for writing off loans as uncollectible: loans identified as fraud, and loans overdue more than 360 days (year 2012: loans overdue more than 180 days with principal amount less than RR 50 thousand, loans overdue more than 360 days regardless of the loan principal amount). Were such changes not applied as of 31 December 2013 the amount of non-performing loans would be RR million lower. Information on lending limits as of 31 December 2013 is summarised below. The maximum credit card limit for majority of the clients is RR 150 thousand. For the majority of POS loans, the lending limits range between RR 4 thousand and RR 80 thousand. For the majority of Personal loans the lending limits range between RR 30 thousand and RR 417 thousand. For the majority of Restructured loans, the lending limits range between RR 7 thousand and RR 335 thousand. 24

29 9 Loans and Advances to Customers (Continued) Most of loans to individuals except for auto loans are unsecured. Information about collateral for loans to legal entities at 31 December 2013 and 2012 is as follows: In millions of Russian Roubles 31 December December 2012 Unsecured loans Loans collateralised by real estate Loans collateralised by marketable debt securities Total gross loans and advances to legal entities The fair value of collateral held for the above RR million (31 December 2012: RR million) loans to the legal entity, that were individually assessed for impairment, comprise RR million as of 31 December 2013 (31 December 2012: RR million). Analysis by credit quality of loans outstanding as at 31 December 2013 is as follows: In millions of Russian Roubles Credit Card loans POS loans Personal loans Restructured loans Other Loans to legal entities Total Neither past due nor impaired Total neither past due nor impaired Loans collectively assessed for impairment (gross) - non-overdue or less than 30 days overdue to 90 days overdue Non-performing loans loans more than 90 days overdue Total loans collectively assessed for impairment (gross) Loans individually assessed for impairment (gross) - non-overdue or less than 30 days overdue Non-performing loans Total loans individually assessed for impairment (gross) Less impairment provisions (18 984) (2 353) (9 486) (523) (93) (4 878) (36 317) Total loans and advances to customers

30 9 Loans and Advances to Customers (Continued) Analysis by credit quality of loans outstanding as at 31 December 2012 is as follows: In millions of Russian Roubles Credit Card loans POS loans Personal loans Restructured loans Other Loans to legal entities Total Neither past due nor impaired Total neither past due nor impaired Loans collectively assessed for impairment (gross) - non-overdue or less than 30 days overdue to 90 days overdue Non-performing loans loans more than 90 days overdue Total loans collectively assessed for impairment (gross) Loans individually assessed for impairment (gross) - non-overdue or less than 30 days overdue Non-performing loans Total loans individually assessed for impairment (gross) Less impairment provisions (6 262) (2 031) (5 013) (247) (63) (4 477) (18 093) Total loans and advances to customers Neither past due and not impaired loans to individuals are represented by loans which were issued by the Group in the last month before the reporting date. These loans represent homogeneous population with the similar credit quality. The Group considers other non-overdue or less than 30 days overdue loans collectively assessed for impairment as disclosed above as homogeneous population with similar credit quality. Carrying value of each class of loans and advances to customers approximates its fair value as at 31 December 2013 and 2012 (Note 33). Geographical, currency, maturity and interest rate analyses of loans and advances to customers are disclosed in Note 28. Information on related party balances and transactions is disclosed in Note

31 10 Investment Securities Available for Sale In millions of Russian Roubles Note 31 December December 2012 Unquoted shares of Russian company Bonds issued by Russian companies Eurobonds issued by Russian banks Eurobonds issued by Russian companies Bonds issued by OECD company 20, Total investment securities available for sale Bonds and eurobonds issued by Russian companies and banks are neither past due nor impaired. The Group uses long-term ratings provided by world-wide recognized rating agencies. Information about credit ratings (with Moody s ratings translated to Standard & Poor s/fitch equivalent) of debt securities available for sale is disclosed below. In millions of Russian Roubles 31 December December 2012 BBB+ to BBB BB+ to B Below B+ and unrated Total debt securities available for sale As at 31 December 2013 RR million (31 December 2012: none) investment securities available for sale were pledged as security under repurchase agreements with the CBRF (Note 13). Geographical, maturity and interest rate analyses of investment securities available for sale are disclosed in Note 28. Information on related party balances is disclosed in Note

32 11 Premises and Equipment and Intangible Assets In millions of Russian Roubles Premises and Land Equipment and Leasehold improvement Total Premises and Equipment Intangible assets Total Net book amount as at 31 December Book amount at cost Opening balance Additions Revaluation Disposals - (940) (940) (197) (1 137) Closing balance Accumulated depreciation Opening balance Depreciation and amortisation charge (Note 24) Revaluation (320) - (320) - (320) Disposals - (802) (802) (197) (999) Closing balance Net book amount as at 31 December

33 11 Premises and Equipment and Intangible Assets (Continued) In millions of Russian Roubles Premises and Land Equipment and Leasehold improvement Total Premises and Equipment Intangible assets Total Net book amount as at 31 December Book amount at cost Opening balance Additions Revaluation Disposals - (1 014) (1 014) (218) (1 232) Closing balance Accumulated depreciation Opening balance Depreciation and amortisation charge (Note 24) Revaluation (55) - (55) - (55) Disposals - (926) (926) (197) (1 123) Closing balance Net book amount as at 31 December The original cost of fully depreciated office and computer equipment as at 31 December 2013 was RR million (31 December 2012: RR million). Premises have been revalued at fair value as at 31 December 2013 and The valuations were carried out by an independent appraiser, who hold a recognised and relevant professional qualification and who have recent experience in the valuation of assets in similar locations and in a similar category. Definition of the market value was based on the comparative sales method. The market value of premises was determined by the price which an independent party would pay for an object similar to its quality and use. The market value of premises was estimated based on information on sales of the comparable items that took place in the market. The carrying amount of premises as at 31 December 2013 includes RR 805 million (31 December 2012: RR 715 million) representing revaluation surplus relating to premises of the Bank. The revaluation surplus for the year 2013 was credited to other comprehensive income in the amount of RR 84 million net of RR 21 million deferred tax (year 2013: RR 572 million net of RR 143 million deferred tax). The RR 12 million (net of RR 3 million deferred tax) realized revaluation surplus for the year 2013 was transferred directly to retained earnings being the difference between depreciation based on the revalued carrying amount of premises and depreciation based on their original cost. As at 31 December 2013 the carrying amount of premises would have been RR million (31 December 2012: RR million) had the assets been carried at cost less depreciation. 29

34 12 Other Assets In millions of Russian Roubles Note 31 December December 2012 Other financial and insurance assets Items in the course of settlement with payment systems Derivatives Insurance receivables Other Total other financial and insurance assets Trade receivables Taxes other than income tax prepaid Other Total other non-financial assets Total other assets Other assets are neither past due nor impaired. Geographical and maturity analyses of other financial assets are disclosed in Note Due to Other Banks In millions of Russian Roubles 31 December December 2012 Loans from CBRF under REPO agreements Other loans from CBRF Syndicated loan Loan from EBRD Other short-term loans Total due to other banks Loan facilities from CBRF. As at 31 December 2013 loan facilities from CBRF were attracted in Roubles at fixed interest rates that ranged from 6.75% to 7.5% payable monthly. Those loan facilities were due from March to December As at 31 December 2013 loans from CBRF under REPO agreements were attracted in Roubles at fixed interest rate of 5.5%. Those loan facilities were due and paid in January As at 31 December 2013 RR million (31 December 2012: none) securities at fair value through profit or loss (Note 8) and RR million investment securities available for sale were pledged as collateral under repurchase agreements with the CBRF. RR million gross loans from CBRF under REPO agreements as at 31 December 2013 (31 December 2012: none) were not offsetted in the statement of financial position against financial instruments pledged as collateral for REPO deals. Syndicated loan. In December 2012 the Group received a syndicated loan in the total amount of RR million with maturity in December 2013 with a fixed interest rate of 9.5% payable quarterly. The loan was voluntary fully repaid in September Loan from EBRD. In September 2011 the Group received a floating interest rate amortizing loan from European Bank for Reconstruction and Development ( EBRD ) in the amount of RR million maturing September Loan interest rate was based on 3m MosPrime rate payable quarterly. The loan was voluntary fully repaid in June

35 13 Due to Other Banks (Continued) Other short-term loans. Other short-term loans from other banks balances were mainly represented by loans obtained by the Group from Ukrainian and international banks. Geographical, maturity and interest rate analyses of due to other banks are disclosed in Note Customer Accounts In millions of Russian Roubles 31 December December 2012 Individuals - Current/demand accounts Term deposits State and municipal - Term deposits Legal entities - Current/settlement accounts Term deposits Total customer accounts As at 31 December 2013 customer accounts included RR million which belong to NPF Russian standard and represent pension liabilities. Geographical, maturity and interest rate analyses of customer accounts are disclosed in Note 28. Information on related party balances is disclosed in Note Debt Securities in Issue In millions of Russian Roubles 31 December December 2012 USD denominated USD 525 million 9.25% loan participation notes due July USD 150 million 5.5% euro commercial papers due April CNY denominated CNY million 8% loan participation notes due Feb RR denominated RR million 9.75% bonds due March RR million 9.1% bonds due May RR million 10% bonds due Feb RR million 9.8% bonds due Feb RR million 8.8% bonds due Nov UAH denominated UAH 100 million 20% bonds due Oct UAH 100 million 20% bonds due May UAH 100 million 20% bonds due July Promissory notes issued (Notes 30, 34) Total debt securities in issue

36 15 Debt Securities in Issue (Continued) USD denominated loan participation notes. In July 2012 the Group issued USD 350 million loan participation notes due July 2017 at nominal amount. The holders of these bonds have the right to redeem them at nominal value in July In November 2012, the Group issued additional USD 175 million loan participation notes which were consolidated with the mentioned above USD 350 million loan participation notes due July The holders of these bonds have the right to redeem them at nominal value in July USD denominated euro commercial papers. In April 2012 the Group issued euro-commercial papers in the amount of USD 150 million due April 2013 at discounted value, which were fully repaid at maturity. CNY denominated bonds. In February 2013 the Group issued CNY 500 million 8.0% loan participation notes due February 2015 at nominal amount. In March 2013, the Group issued additional CNY 750 million 8.0% loan participation notes due February 2015 at premium. At the same time the Group entered into cross currency swap agreements for the same period in order to minimize Group s exposure to CNY. In September - October 2013 the Group has partly repurchased these bonds at nominal amount of CNY 402 million. RR denominated bonds. RR bonds due March 2015 were issued in March 2012 at nominal amount of RR million. The holders of these bonds had the right to redeem them at nominal in March In March 2013 the Bank s Board set interest rate on these bonds at 9.75% for periods starting March RR bonds due May 2015 were issued in May 2012 at nominal amount of RR million. The holders of these bonds had the right to redeem them at nominal in November In November 2013 the Group has partly repurchased these bonds at nominal amount of RR million and sold it back in November - December 2013 at nominal amount of RR million. In November 2013 the Bank s Board set interest rate on these bonds at 9.1% for periods starting November RR bonds due in November 2014 were issued in November 2011 at nominal amount of RR million. The holders of these bonds had the right to redeem them at nominal in November In November 2013 the Group has partly repurchased these bonds at nominal amount of RR million and sold them back in December 2013 at nominal amount of RR million. In November 2013 the Bank s Board set interest rate on these bonds at 8.8% for periods starting November RR million 9.8% bonds due February 2016 and RR million 10.0% bonds due February 2016 were issued in February 2013 at nominal amount. The holders of these bonds have the right to redeem them in August 2014 and February 2015 accordingly. UAH denominated bonds. UAH 100 million 20% bonds due May 2016, UAH 100 million 20% bonds due July 2016 and UAH 100 million 20% bonds due October 2016 were issued in May, June and October 2013 at nominal amount. The holders of these bonds have the right to redeem them in May, June and October 2014 accordingly. Promissory notes issued. As at 31 December 2013 included in Debt securities issued are RR 510 million (RR 702 million as of 31 December 2012) promissory notes held as collateral for guarantees granted to the parent company. These notes were partly repurchased by the Group in July and November Refer to Notes 30 and 34. Geographical, currency, interest rate and maturity analyses of debt securities in issue are disclosed in Note 28. Information on debt securities in issue held by related parties is disclosed in Note

37 16 Subordinated Debt In millions of Russian Roubles 31 December December 2012 USD denominated USD 200 million 7.73% loan participation notes due December USD 200 million 7.56% loan participation notes due December USD 350 million 10.75% loan participation notes due April USD 200 million 11.5% loan participation notes due January RR denominated RR million 6.5% loan due December RR million 0.1% loan due July 2039 (Note 18) Total subordinated debt In December 2005 the Bank issued loan participation notes due in December 2015, placed at nominal amount. The notes bore a fixed interest rate of 8,875% until December The interest rate for the period starting from December 2010 was set at 7.73% per annum. In December 2006 the Bank issued loan participation notes due in December 2016, placed at nominal amount. The notes bore a fixed interest rate of 9.75% until December The interest rate for the period starting from December 2011 was set at 7.56% per annum. In July 2009 the Group has obtained a subordinated loan from JSC Russian Standard Corporation in the amount of RR million. In 2012 maturity of the loan was extended from January 2020 to July In December 2012 interest rate on loan was decreased from 6.5% to 0.1%, which resulted in a RR million gain (Note 20). On 25 March 2013 the subordinated loan was prematurely cancelled to finance Shares purchase (Note 18). In October 2009 the Group received a subordinated loan from Vneshekonombank ( VEB ) in the amount of RR million. The Bank was able to obtain loan from VEB due to attraction of subordinated debt from its parent company in the amount that exceeded this loan. According to the Federal law No. 206-FZ dated 27 July 2010 interest rate for the loan was changed from 8.0% to 6.5% starting August In October 2012 the Bank issued subordinated loan participation notes due in April 2018, placed at nominal amount. The notes bear a fixed interest rate of 10.75%. In July 2013 the Group issued USD 200 million 11.5% subordinated loan participation notes due January 2024 at nominal amount callable at par on January In July 2013, the Central Bank of the Russian Federation has issued its final conclusion ( zaklucheniye ) that the subordinated debt mentioned above is eligible for inclusion in Bank s additional capital (within the meaning of Regulation No. 215-P dated 10 February 2003 "On the method of determination of own funds (capital) of credit organisations" and Regulation No. 395-P dated 28 December 2012 "On the methodology for determining the amount and evaluating adequacy of own funds (capital) of credit organisations ("Basel III")"). The claims of the lenders against the Group in respect of the principal and interest on the subordinated notes and subordinated loans are subordinated to the claims of other creditors in accordance with the legislation of the Russian Federation. Geographical, currency, interest rate and maturity analyses of subordinated debt are disclosed in Note 28. Information on subordinated debt issued by related parties is disclosed in Note

38 17 Other Liabilities In millions of Russian Roubles Note 31 December December 2012 Other financial and insurance liabilities Items in the course of settlement with payment systems Trade payables Insurance prepayment received Derivatives Other Total other financial and insurance liabilities Other non-financial liabilities Unearned premium reserve Settlements with employees Loss provision Taxes other than income tax payable Total other non-financial liabilities Total other liabilities Geographical, maturity and interest rate analyses of other liabilities are disclosed in Note 28. Movements in the provision for unearned premiums are as follows: In millions of Russian Roubles Provision for unearned premiums as at 1 January Increase in provision Provision for unearned premiums as at 31 December Movements in the loss provision are as follows: In millions of Russian Roubles Note Loss provision as at 1 January Provision created during the period Insurance claims settled (131) (91) Loss provision as at 31 December

39 18 Share Capital and Other Reserves Authorised, issued and fully paid share capital of the Bank as at 31 December 2013 comprised: In millions of Russian Roubles except for number of shares Authorised Number of shares 000 Nominal amount Issued and fully paid Number of Nominal shares 000 amount Inflation adjusted amount Ordinary shares Preference shares Total share capital Authorised, issued and fully paid share capital of the Bank as at 31 December 2012 comprised: In millions of Russian Roubles except for number of shares Authorised Number of shares 000 Nominal amount Issued and fully paid Number of Nominal shares 000 amount Inflation adjusted amount Ordinary shares Preference shares Total share capital All ordinary shares have a nominal value of RR per share (31 December 2012: RR per share) and rank equally. Each share carries one vote. On 25 January 2013 the extraordinary general shareholders' meeting of the Bank approved an increase of share capital by RR through the issuance of ordinary shares. All Shares were acquired by RSC, parent company of the Bank. RSC used proceeds from RR million subordinated loan due July 2039 prematurely cancelled in March 2013 to finance Shares purchase (Note 16). No cash movement was made in respect of the share purchase transaction. The deal was successfully completed on 25 March RR 123 million were credited to the share capital. The remaining carrying value of the cancelled subordinated loan and related RR 923 million deferred tax (Note 25) were credited to share premium. Excluded from Share Capital are (9.1%) treasury shares purchased in 2010 by the Bank s subsidiary. In accordance with Russian legislation, the Bank distributes profits as dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance with Russian Accounting Rules. The Bank s reserves and retained earnings as disclosed in the Published accounts prepared under Russian Accounting Rules as at 31 December 2013 were RR million (31 December 2012: RR million). A negative translation reserve in the amount of RR 7 million (31 December 2012: negative RR 48 million) represents the result of Bank s Ukrainian subsidiaries financial statements translation from functional currency (Ukrainian Hryvnia) to the presentation currency (Russian Rouble). 35

40 19 Interest Income and Expense In millions of Russian Roubles Interest income Loans to individuals Debt securities Loans to legal entities Cash and cash equivalents and due from other banks Total interest income Interest expense Customer accounts Subordinated debt Foreign currency denominated loan participation notes RR denominated bonds Term placements of other banks Promissory notes issued Total interest expense Net interest income Market Fair Value Adjustments and Losses less Gains from Available for Sale Securities In millions of Russian Roubles Effect from change of interest rate on subordinated loan (Notes 16, 34) Realized loss from operations with securities available for sale (Note 34) - (1 204) Impairment loss on securities available for sale (Notes 10, 34) (1 647) (1 409) Market fair value adjustments and losses less gains from available for sale securities (1 647) In November 2011 companies controlled by Mr. Roustam Tariko, the Group s ultimate shareholder, acquired 9.9% shares of CEDC, one of the world's largest producers of vodka and Central and Eastern Europe's largest integrated spirit beverage company. Mr. Roustam Tariko publicly expressed his interest to increase his stake in CEDC. During the year 2012 he was appointed as non-executive Chairman, then as Interim President of CEDC. In December 2012 CEDC formed an Operating Committee (consisting of three members, including Mr. Roustam Tariko and his nominee) to oversee all day-to-day business and operational management of CEDC including operational finance. As of 31 December 2012 Mr. Roustam Tariko indirectly owned 19.5% shares of CEDC which became a related party in the second half of From November 2011 to February 2012 the Group purchased 3% convertible notes due March 2013 (the Convertible Notes ) issued by CEDC, in the nominal amount of USD million at the average market price of 65% of the nominal amount, for a total amount of USD 67 million (RR million). The conversion option embedded in the Convertible Notes was deeply out of the money as at 31 December 2012 and

41 20 Market Fair Value Adjustments and Losses less Gains from Available for Sale Securities (Continued) In May 2012 the Group purchased at par 3% debt notes due March 2013 (the New Debt ) issued by CEDC in the nominal amount of USD 70 million. During 2012, the market price of the Convertible Notes was volatile and it was fluctuating from 35% to 97% of the nominal amount. As of 31 December 2012, the market price of the Convertible Notes was 49% of the nominal amount thus falling below the cost of their acquisition by the Group. In December 2012 the Group sold all of the New Debt in the nominal amount of USD 70 million at fair value (which approximated market value of the Convertible Notes) to Roust Trading Limited, a parent company of RSC, Group's parent company (Note 1). As a result the Group realised a total RR million loss from investment in the New Debt. The impairment loss from investments in the Convertible Notes amounted to RR million for the year Taking into account the decrease in Group's equity (as a result of investment in CEDC's Convertible Notes and New Debt) in December 2012 RSC decreased the interest rate of its RR million subordinated loan to the Group due July 2039 to 0.1% per annum. The carrying value of the subordinated loan was recalculated at a market interest rate which resulted in RR million gain (Notes 16, 34) recorded in statement of profit and loss and other comprehensive income. As of 31 December 2012, Group's remaining investments in the Convertible Notes amounted to RR million (Notes 10, 34). The Convertible Notes matured in March 2013, however, CEDC failed to repay them at maturity. A financial restructuring plan was proposed by RTL. It was accepted by the majority of the CEDC creditors on 4 April On 7 April 2013 CEDC commenced voluntary proceedings under Chapter 11 of the U.S. Bankruptcy Code to seek confirmation of the restructuring plan. As the restructuring plan finally received all required approvals it resulted in Roust Trading Limited owning 100% of outstanding stock of reorganized CEDC as of 30 June According to the approved restructuring plan in June 2013 the Group received RR 202 million from RTL as its pro rata share in USD 16.9 million cash consideration for holders of CEDC bonds maturing The rest of remaining investment in CEDC bonds was fully provided by the Group in the first half of Losses less Gains from Operations with Foreign Currencies In millions of Russian Roubles Net foreign exchange translation (loss)/gain (3 200) Gains less losses/(losses less gains) from operations with derivatives (3 221) Losses less Gains from Operations with Foreign Currencies (2 088) (1 480) Net result arising from operations with derivatives represents a result from economic hedges of the Group s exposure to currency risk. The Group s exposure to currency risk arises as significant part of the Group s liabilities is denominated in foreign currencies while most of the Group s assets are denominated in Russian Roubles. 22 Income from Insurance Operations In millions of Russian Roubles Note Income from insurance operations Net insurance premiums earned Net insurance claims 17 (566) (604) Total income from insurance operations

42 23 Commission Income and Expenses In millions of Russian Roubles Commission income Acquiring and Interchange commission Commission on settlement transactions Other Total commission income Commission expenses Acquiring and interchange commission (4 820) (2 959) Commission on cash and settlement transactions (326) (327) Commission on cash collection (277) (269) Other (598) (375) Total commission expenses (6 021) (3 930) Net commission income Administrative and Other Operating Expenses In millions of Russian Roubles Note Staff costs Rent expenses Depreciation and amortisation charge Other costs of premises and equipment Taxes other than on income Advertising and marketing Telecommunication Stationery Professional services Security Mail Business trips Charity Statutory duties Other Total administrative and other operating expenses Included in staff costs are statutory social security and pension contributions of RR million (2012: RR million). 38

43 25 Income Taxes Income tax expense comprises the following: In millions of Russian Roubles Current tax charge Deferred tax 312 (1 011) Income tax expense for the year The income tax rate applicable to the majority of the Group s income is 20%. The income tax rate applicable to the majority of subsidiaries and special purpose entities income ranges from 0% to 20%. Reconciliation between the expected and the actual taxation charge is provided below. In millions of Russian Roubles IFRS profit before tax Theoretical tax charge at the applicable statutory rate 20% Tax effect of expenses, which are not deductible for taxation purposes Income tax expense for the year Differences between IFRS and Russian and Ukrainian statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movement in these temporary differences is detailed below and is recorded at the enacted or substantively enacted rates of taxation in the relevant jurisdictions. In millions of Russian Roubles 1 January 2012 Recognised in comprehensive income Other movements 31 December 2012 Recognised in comprehensive income Other movements (Notes ) 31 December 2013 Tax effect of deductible and (taxable) temporary differences - related to items recognised in profit: (200) (312) Accruals (24) Loan impairment provision (200) Foreign exchange forward contracts (15) - 40 Insurance provisions (25) Other differences 476 (661) - (185) (450) related to items recognized in other comprehensive income: (94) (51) - (145) (7) 3 (149) Revaluation of securities available for sale (94) 92 - (2) Revaluation of premises - (143) - (143) (21) 3 (161) Net deferred tax asset (200) (319) In the context of the Group s current structure, Russian and Ukrainian tax legislation, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and the same taxation authority. 39

44 26 Dividends and Other Profit Distribution On 20 April 2012 at the General Meeting of the Bank, the shareholders approved dividends for 2011 in the amount of RR million (RR per share) which were fully paid in April In April 2012 the Bank s Board of Directors approved distribution to shareholders in the amount of RR million which were fully paid in April In April 2012 at the General Meetings of controlled but not owned subsidiaries of the Group the shareholders declared dividends in the amount of RR 424 million which were fully paid in April In 2012 the Bank s subsidiary received financial aid from RSC s subsidiary in the amount of RR 30 million. 27 Segment Analysis Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker ( CODM ) and for which discrete financial information is available. The CODM is the person or group of persons who allocates resources and assesses the performance of the entity. The functions of CODM are performed by the Chairman of the Board of Directors of the Bank (the Chairman ). The Chairman reviews the financial information prepared on the standalone level of the Bank (before consolidation with insurance and Ukrainian subsidiaries) therefore the Group identified the standalone Bank as an operating segment. The Bank measures segment assets, liabilities and profit of the segment based on rules prescribed by particular applicable IFRS. The Chairman of the Board of Directors controls the strategic and operating decisions of the Group and analyses the Management Information Systems reports at least monthly. The Board of Directors informs the Chairman in a timely and comprehensive manner about the issues relevant to the business development of the Group, including the financial information as disclosed below as well as sales volume and risk level on products. The Chairman discusses with the Board of Directors the strategic orientation, makes respective decisions and monitors regularly the status of the strategy implementation at regular intervals. The information is provided to the Chairman of the Board of Directors in a timely manner, enabling him to make well-founded decisions and fulfil his duties. Segment information for the reportable operating segment of the Group for the years ended 31 December 2013 and 2012 is set out below: In millions of Russian Roubles Interest income Interest expense (27 857) (17 018) Net interest income Provision for impairment of loans to customers (27 627) (14 124) Net interest income after provision for loan impairment Insurance commission income Other commission income Fee and commission expense (5 891) (3 830) Net gains from securities at fair value through profit or loss Market fair value adjustments and losses less gains from available for sale securities (1 647) Losses less gains from operations with foreign currencies (2 038) (1 332) Dividends received Other operating income Administrative and other operating expenses (27 915) (23 595) Profit before tax

45 27 Segment Analysis (Continued) A reconciliation of revenue of the reportable segment to the Group s total revenue for the period is as follows: In millions of Russian Roubles Interest income Commission income Dividends received Other operating results Total revenues for reportable segment Adjustments: Consolidation of subsidiaries Total revenues in the consolidated financial statements A reconciliation of the result for reportable segment to the Group s total result before tax for the period is as follows: In millions of Russian Roubles Total reportable segment result before tax for the year Adjustments: Consolidation of subsidiaries (899) 371 Group profit before tax for the year Reportable segments assets and liabilities are reconciled to total assets and liabilities respectively as follows: In millions of Russian Roubles 31 December December 2012 Total reportable segment assets Adjustments: Consolidation of subsidiaries Total assets reported in the consolidated financial statements Total reportable segment liabilities Adjustments: Consolidation of subsidiaries Total liabilities reported in the consolidated financial statements Segment non-current assets are located and revenue is received in the Russian Federation. Segment premises and equipment and intangible assets comprised RR million as at 31 December 2013 (31 December 2012: RR million). Segment depreciation and amortisation charge for the year 2013 amounted to RR million (2012: RR million). 41

46 28 Financial Risk Management The risk management function within the Group is carried out in respect of financial risks (credit, market, geographical, currency, liquidity and interest rate), operational risks and legal risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks. Credit risk. The Group takes on exposure to credit risk which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Group s lending and other transactions with counterparties giving rise to financial assets. The general principles of Group s credit policy are outlined in the Credit Policy approved by the Bank s Board of Directors. This Credit Policy is reviewed at least every two years. This document also outlines credit risk control and monitoring procedures and credit risk management systems. The Group s overall credit risk limits are established by the Credit Committee on the basis of the Credit Policy and are approved on a regular basis by Bank s Board of Directors. Credit limits with respect to consumer loan applications are established either by Bank s PASS (Internal informational center for processing credit application) or by the officers of the Credit Department. The Credit Committee is also responsible for establishing exposure limits on a case-by-case basis with respect to corporate borrowers and financial institutions (on the basis of supporting documentation supplied by either the Corporate Lending Department or Financial Institutions Department, and the Risk Analysis and Control Department). The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by corporate product and borrower are set by the Credit Committee. To manage credit risk attributable to loans to individuals, the Bank applies automated systems for evaluation of borrower s financial position (scoring system). The system is regularly modified to reflect past experience. To manage credit risk during debt servicing the Bank applies the effective system of bad debt prevention (system of collection of overdue loans). The Bank performs monitoring of credit risk during the whole life of the loan. Such practice allows making management decisions in time, to regulate scoring system and procedures of bad debt collection. The Group evaluates its consumer finance portfolio on a regular basis by monitoring both the overall performance of each loan portfolio, the performance of each loan portfolio for each type of good financed as well as each particular consumer loan or credit card product. Establishment of credit cards limits is performed on an individual basis based on a borrower s payments history under prior consumer loans. The Group s maximum exposure to credit risk is reflected in the carrying amounts of financial assets on the consolidated statement of financial position. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. For guarantees and commitments to extend credit, the maximum exposure to credit risk is the amount of the commitment. Refer to Note 30. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same credit policies in making conditional obligations as it does for onbalance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. 42

47 28 Financial Risk Management (Continued) Insurance risk. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable. For a portfolio of insurance contracts where the theory of probabilities is applied to pricing and reserving, the principal risk that the Insurance Company faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur if the frequency or severity of claims and benefits is greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year from the estimate established using actuarial techniques. Factors that aggravate insurance risk include a lack of risk diversification in terms of the type and amount of risk, the geographical location and the type of policyholder base covered. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability of the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected pervasively by a change in any subset of the portfolio. RSI has developed its insurance underwriting strategy to diversify the gender, age and geography of insurance risks accepted and within each of these categories to achieve a sufficiently large population to reduce the variability of the expected outcome. Market risk. The Group takes on exposure to market risks. Market risks arise from open positions in interest rate and currency, all of which are exposed to general and specific market movements. The Assets and liability committee (ALCO) sets limits on the value at risk that may be accepted, which is monitored on a daily basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements. Currency risk. In respect of currency risk, ALCO sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The Treasury department is responsible for monitoring of the net each foreign currency position which is covered using foreign exchange derivatives (Note 32). The table below summarises the Group s exposure to foreign currency exchange rate risk at the reporting date: In millions of Russian Roubles Monetary financial assets At 31 December 2013 At 31 December 2012 Monetary Derivatives Net Monetary Monetary Derivati- financial position financial financial ves liabilities assets liabilities Net position Russian Roubles ( ) (42 840) ( ) (48 783) US Dollars (77 487) (4 496) (64 073) (2 949) EURO (8 837) (8 101) Other (14 362) (4 629) (3 527) Total ( ) ( ) (433) Derivatives in each column represent the fair value, at the reporting date, of the respective currency that the Group agreed to buy (positive amount) or sell (negative amount) before netting of positions and payments with the counterparty. The amounts by currency are presented gross as stated in Note 32. The net total represents fair value of the currency derivatives. 43

48 28 Financial Risk Management (Continued) The above analysis includes only monetary assets and liabilities. Non-monetary assets and liabilities are not considered to give rise to any significant currency risk. The following table presents sensitivities of profit and loss and equity to reasonably possible changes in exchange rates applied at the reporting date, with all other variables held constant: In millions of Russian Roubles At 31 December 2013 At 31 December 2012 Impact on profit or loss Impact on equity Impact on profit or loss Impact on equity US Dollars strengthening by 20% (2012: 10%) (899) (899) (295) (295) US Dollars weakening by 20% (2012: 10%) Euro strengthening by 20% (2012: 10%) Euro weakening by 20% (2012: 10%) (17) (17) (17) (17) The exposure was calculated only for monetary balances denominated in currencies other than the functional currency of the respective entity of the Group. Interest rate risk. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken. The Bank monitors changes of credit quality of borrowers on regular basis. Assets and liability committee (ALCO) monthly analyses effective interest rates for the Group interestearning assets and liabilities. ALCO and Board of Directors monthly analyses net interest margins and makes decisions on further attracting and placing funds at specific interest rates. The table below summarises the Group s exposure to interest rate risks. The table presents the aggregated amounts of the Group s financial assets and liabilities at carrying amounts, categorised by the earlier of contractual interest repricing or maturity dates. In millions of Russian Roubles Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months More than 1 year Total 31 December 2013 Total financial assets Total financial liabilities Net interest sensitivity gap as at 31 December 2013 (12 964) (22 325) December 2012 Total financial assets Total financial liabilities Net interest sensitivity gap as at 31 December (3 346) (20 677)

49 28 Financial Risk Management (Continued) As of 31 December 2013 all of the Group s debt instruments except for RR million subordinated loan denominated in Roubles and RR million subordinated loan denominated in US Dollars (Note 16) reprice within 5 years. As of 31 December 2012 all of the Group s debt instruments except for RR million subordinated loans denominated in Roubles and RR million subordinated loan denominated in US Dollars reprice within 5 years. Financial liabilities of the Group are sensitive to market fluctuations in interest rates. The Group has both fixed interest rate liabilities and floating rate liabilities. For sensitivity analysis the Group has not considered future reinvestments of current long-term financing. At 31 December 2013, if interest rates at that date had been 350 basis points (for Rouble denominated instruments), basis points (for UAH denominated bonds) and 100 basis points (for other currency denominated instruments) lower with all other variables held constant (350, and 100 basis points respectively as at 31 December 2012), profit for the year would have been RR 368 million (31 December 2012: RR 241 million) higher, mainly as a result of lower interest expense on variable interest liabilities (floating rate instruments and RR denominated bonds with expected repricing). If interest rates had been 350 basis points (for Rouble denominated instruments), basis points (for UAH denominated bonds) and 100 basis points (for other currency denominated instruments) higher with all other variables held constant (350, and 100 basis points respectively as at 31 December 2012), profit would have been RR 368 million (31 December 2012: RR 241 million) lower mainly as a result of higher interest expense on variable interest liabilities (floating rate instruments and RR denominated bonds with expected repricing). The Group monitors interest rates for its financial instruments. The table below summarises interest rates based on reports reviewed by key management personnel. For debt securities at fair value through profit or loss, the interest rates represent yields to maturity based on market quotations at the reporting date: 31 December December 2012 In millions of Russian Roubles RR USD Euro RR USD Euro Assets Cash balances with the CBRF Correspondent accounts and overnight placements with other banks Debt securities at fair value through profit or loss Due from other banks Loans and advances to customers - consumer loans credit card loans* direct commercial loans Debt securities available for sale Liabilities Due to other banks Customer accounts - term deposits of legal entities term deposits of individuals Debt securities in issue - RR denominated bonds USD denominated eurocommercial papers and loan participation notes Subordinated debt * Effective rates for credit card loans were calculated based on the assumptions that clients exercise its limit in cash and repay it in accordance with historical repayments statistics. The sign - in the table above means that the Group does not have material respective assets or liabilities in corresponding currency. 45

50 28 Financial Risk Management (Continued) Geographical risk concentration. The geographical concentration of the Group s financial assets and liabilities as at 31 December 2013 is set out below: In millions of Russian Roubles Note Russia OECD Non OECD Total Assets Cash and cash equivalents Mandatory cash balances with the CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Investment securities available for sale Other financial assets Total financial assets Non-financial assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Subordinated debt Other financial liabilities Total financial liabilities Non-financial liabilities Total liabilities Net balance sheet position (41 461) Credit related commitments As of 31 December 2013 and 2012 the Group have no exposure to sovereign bonds other than issued by the Ministry of Finance of the Russian Federation (Note 8). As at 31 December 2013 the Group had RR million (denominated in UAH) loans to individuals living in Ukraine and RR million (more than 90% denominated in UAH) customer accounts of individuals living in Ukraine, all through its Ukrainian subsidiary bank (Note 36). 46

51 28 Financial Risk Management (Continued) The geographical concentration of the Group s assets and liabilities as at 31 December 2012 is set out below: In millions of Russian Roubles Note Russia OECD Non OECD Total Assets Cash and cash equivalents Mandatory cash balances with the CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Investment securities available for sale Other financial assets Total financial assets Non-financial assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Subordinated debt Other financial liabilities Total financial liabilities Non-financial liabilities Total liabilities Net balance sheet position (40 330) Credit related commitments Assets, liabilities and credit related commitments have generally been based on the country in which the counterparty is located. Balances with Russian counterparties actually outstanding to/from off-shore companies of these Russian counterparties are allocated to the caption Russia. Cash on hand and premises and equipment have been allocated based on the country in which they are physically held. 47

52 28 Financial Risk Management (Continued) Liquidity risk. Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guaranties and from margin and other calls on cash settled derivative instruments. The Group does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Liquidity risk is managed by the Asset and Liability Committee of the Bank. Medium and long-term liquidity is monitored by the Asset and Liability Committee through weekly liquidity gap reports which include three-month projections. The Group seeks to maintain a stable funding base comprising primarily amounts due to other banks, debt securities in issue and corporate and retail customer deposits and invest the funds in diversified portfolios of liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The liquidity management of the Group requires considering the level of liquid assets necessary to settle obligations as they fall due; maintaining access to a range of funding sources; maintaining funding contingency plans and monitoring statement of financial position liquidity ratios against regulatory requirements. The Bank calculates liquidity ratios on a daily basis in accordance with the requirement of the Central Bank of Russia. These ratios as disclosed in the Published accounts prepared under statutory accounting rules are: Instant liquidity ratio (N2), which is calculated as the ratio of highly-liquid assets to liabilities payable on demand. The ratio was 48.2 at 31 December 2013 (31 December 2012: 35.9). Statutory minimum required ratio is Current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within 30 calendar days. The ratio was 67.5 at 31 December 2013 (31 December 2012: 89.3). Statutory minimum required ratio is Long-term liquidity ratio (N4), which is calculated as the ratio of assets maturing after one year to regulatory capital and liabilities maturing after one year. The ratio was 51.5 at 31 December 2013 (31 December 2012: 35.8). Statutory maximum allowed ratio is The Treasury Department receives information about the liquidity profile of the financial assets and liabilities. The Treasury then provides for an adequate portfolio of short-term liquid assets, largely made up of short-term liquid trading securities, deposits with banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. Daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the Treasury Department. In addition, the Bank has an alternative opportunity to repay its liabilities on long-term financing by the following means: from the repayments of loans to individuals and from the cash receipts of interest payments of these loans. The table below shows liabilities as at 31 December 2013 by their remaining contractual maturity. The amounts disclosed in the maturity table are the contractual undiscounted cash flows, prices specified in deliverable forward agreements to purchase financial assets for cash, contractual amounts to be exchanged under a gross settled currency swaps, gross loan commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in the consolidated statement of financial position because the statement of financial position amount is based on discounted cash flows. Derivatives are included at the contractual amounts to be paid or received, except for net settled derivatives which are included at the net amounts expected to be paid. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date. Foreign currency payments are translated using the spot exchange rate at the reporting date. 48

53 28 Financial Risk Management (Continued) The maturity analysis of undiscounted financial liabilities, contingencies and commitments as at 31 December 2013 is as follows: In millions of Russian Roubles Demand and less than 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Liabilities Due to other banks Customer accounts Debt securities in issue Subordinated debt Other financial liabilities Derivative liabilities - Inflow Outflow (10 997) (10 997) Loss provision Total potential future payments for financial obligations Contingences and commitments Undrawn credit commitments Guarantees and letters of credit Total potential future payments for financial obligations, contingencies and commitments The maturity analysis of undiscounted financial liabilities, contingencies and commitments as at 31 December 2012 is as follows: In millions of Russian Roubles Demand and less than 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Liabilities Due to other banks Customer accounts Debt securities in issue Subordinated debt Other financial liabilities Derivative liabilities - Inflow Outflow (23 735) (23 735) Loss provision Total potential future payments for financial obligations Contingences and commitments Undrawn credit commitments Guarantees and letters of credit Total potential future payments for financial obligations, contingencies and commitments

54 28 Financial Risk Management (Continued) Guarantees are included in full amount to the earliest time band according to the worst case scenario as prescribed by IFRS 7. However significant outflows are not expected by the Group (Note 30). Undrawn credit commitments are also included in the earliest time band according to the worst case scenario as prescribed by IFRS 7. However most commitments to extend credit are contingent upon customers maintaining specific credit standards (Note 30). The Group does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Group monitors expected maturities of both assets and liabilities, which may be summarised as follows as at 31 December In millions of Russian Roubles Demand and less than 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Assets Cash and cash equivalents Mandatory cash balances with the CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Investment securities available for sale Other financial assets Total financial assets Liabilities Due to other banks Customer accounts Debt securities in issue Subordinated debt Other financial liabilities Total financial liabilities Net liquidity surplus/(gap) (10 138) (8 067) (7 095) Cumulative liquidity surplus (10 138) (3 494)

55 28 Financial Risk Management (Continued) The analysis by expected maturities may be summarised as follows as at 31 December 2012: In millions of Russian Roubles Demand and less than 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Assets Cash and cash equivalents Mandatory cash balances with the CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Investment securities available for sale Other financial assets Total financial assets Liabilities Due to other banks Customer accounts Debt securities in issue Subordinated debt Other financial liabilities Total financial liabilities Net liquidity surplus/(gap) (9 461) (9 882) Cumulative liquidity surplus The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to accrued interest. Loans and advances to customers are allocated on the basis of statistics of issued loans and expected maturities. Management believes that in spite of a substantial portion of customers accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customers accounts provide a long-term and stable source of funding for the Group. Liquidity requirements to support calls under guarantees are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded. Other risk concentrations. The Group did not have any such significant risk concentrations as at 31 December 2013 and

56 29 Management of Capital The Group s objectives when managing capital are (i) to comply with the capital requirements set by the Central Bank of the Russian Federation, (ii) to safeguard the Group s ability to continue as a going concern and (iii) to maintain a sufficient capital base to achieve a capital adequacy ratio based on Basel Accord of at least 8%. The Group considers total capital under management to be equity as shown in the consolidated statement of financial position. The amount of capital that the Group managed as of 31 December 2013 was RR million (2012: RR million). Compliance with capital adequacy ratios set by the Central Bank of the Russian Federation is monitored daily and reported monthly with monthly reports outlining their calculation reviewed and signed by the Bank s Chief Financial Officer and Chief Accountant. Other objectives of capital management are evaluated at least quarterly. Under the current capital requirements set by the Central Bank of Russia banks have to maintain a ratio of regulatory capital to risk weighted assets ( statutory capital ratio ) above a prescribed minimum level. Regulatory capital is based on the Bank s reports prepared under Russian accounting standards. The Group and the Bank are also subject to covenants stated in loan agreements, including capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2005), commonly known as Basel I. The composition of the Group s capital as managed by the Group and calculated in accordance with Basel Accord is as follows: In millions of Russian Roubles 31 December December 2012 Tier 1 capital Share capital Share premium Additional paid-in capital Translation reserve (7) (48) Retained earnings Non-controlling interest Less Goodwill (2 610) (2 610) Total tier 1 capital Tier 2 capital Hybrid instrument (Note 16) Subordinated debt (restricted to 50% of tier 1) Revaluation reserve for premises Revaluation reserve for available for sale securities (49) 8 Total tier 2 capital Total capital The Group and the Bank have complied with all externally imposed capital requirements as at 31 December 2013 and

57 30 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and internal professional advice the Management of the Group is of the opinion that no material losses will be incurred in respect of claims and, accordingly, no provision has been made in these consolidated financial statements. Recently retail banks from time to time face court cases from individuals in respect of some of the commissions charged for credit servicing. All such claims against the Bank in periods prior to presented ones were rejected by the Court. Commissions were abolished by the Bank in August 2007, and during the years ended 31 December 2013 and 2012 there were no cases in the Court in respect of these commissions. The Management believes that the Group does not bear risk of any significant charges and penalties, or significant cash outflows related to returning back such commissions received prior to periods presented. Tax contingencies. Russian tax legislation, which was enacted or substantively enacted at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be challenged by relevant authorities. Russian tax administration is gradually strengthening, including review whether tax transactions are made without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Amended Russian transfer pricing legislation is effective from 1 January The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development. The new legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), provided that the transaction price is not on an arm's length basis. Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible, with the evolution of the interpretation of the transfer pricing rules, that such transfer prices could be challenged. Management believes that its pricing policy is arm's length and it has implemented internal controls (including usage of information received from independent sources such as market prices confirmed by stock exchanges, world-wide recognized information agencies or independent appraisers) to be in compliance with the new transfer pricing legislation. Given that the practice of implementation of the new Russian transfer pricing rules has not yet developed, the impact of any challenge of the Group s transfer prices cannot be reliably estimated. As Russian tax legislation does not provide definitive guidance in certain areas, from time to time, the Group adopts interpretations of such uncertain areas it believes are appropriate according to existing legislation. In disputable situations the Group apply to the respective authorities for clarification. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the relevant authorities. The impact of any such challenge cannot be reliably estimated; however, it could be significant. The Group s Management believes that its interpretation of the relevant legislation is appropriate and the Group s tax, currency legislation and customs position will be sustained. Accordingly, as at 31 December 2013 and 2012 no provision for potential tax liabilities has been recorded. 53

58 30 Contingencies and Commitments (Continued) Capital expenditure commitments. As at 31 December 2013 the Group has contractual capital expenditure commitments in respect of premises and equipment and intangible assets totalling RR 324 million (31 December 2012: RR 246 million). The Group has already allocated the necessary resources in respect of these commitments. The Group believes that future net income and funding will be sufficient to cover this and any similar such commitments. Compliance with covenants. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group. The Group is in compliance with all of these covenants as at 31 December 2013 and The most significant and most important covenants are: to comply with the ratios and requirements of the CBR; to maintain a ratio of capital to risk-weighted assets as defined by the Basel Committee; not to sell, transfer, lease, or otherwise dispose more than 10% of the assets other than in the ordinary course of business; to maintain a portfolio of loans with a term of not less than 6 months issued to priority economy sectors in total amount of not less than the subordinated loan from VEB outstanding; to include VEB nominees in the Bank s management bodies. As at 31 December 2013 and 2012 there was one VEB nominee in the Bank s Board of Directors; and to agree with VEB certain transactions, amount of which exceed 5% of the Bank s capital. Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under non cancellable premises operating leases were as follows: In millions of Russian Roubles 31 December December 2012 Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total operating lease commitments Leasing agreements can be extended over contractual maturity terms if both parties agree to do so. Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. Undrawn credit lines and other commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on undrawn credit lines and commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. 54

59 30 Contingencies and Commitments (Continued) Outstanding credit related commitments of the Group are as follows: In millions of Russian Roubles 31 December December 2012 Undrawn credit lines on credit cards Guarantees issued Undrawn credit lines on loans to customers Import letters of credit Total credit related commitments The total outstanding contractual amount of credit related commitments does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. At 31 December 2013 RR 503 million guarantees granted to the parent company were secured by RR 510 million promissory notes issued. Refer to Notes 15 and 34. Credit related commitments are denominated in currencies as follows: In millions of Russian Roubles 31 December December 2012 Russian roubles US Dollars Euro Total Refer to Note 34 for the information on guarantees issued to related parties. Assets pledged and restricted. Assets pledged by the Group have been disclosed within the notes to the relevant assets and liabilities included in these consolidated financial statements. As at 31 December 2013 the amount of RR million included in Due from other banks balances (31 December 2012: RR million) represents the deposits placed with Ukrainian and international banks as a collateral for the derivative transactions and credit related commitments. As at 31 December 2013 the amount of RR million included in Due from other banks balances (31 December 2012: none) represents the deposit placed with international bank as a collateral for the guaranty granted to the parent company. As at 31 December 2013 RR million securities at fair value through profit or loss and RR million and available for sale securities were pledged as security under RR million repurchase agreements with the CBRF of (Notes 8, 10, 13). As at 31 December 2013 RR 704 million cash and cash equivalents RR million securities at fair value through profit or loss of and RR 537 million due from other banks of are held against RR million pension liabilities of NPF Russian standard (Notes 7, 8, 14). No claims from the Group s other than pension fund clients can be made against these funds according to Russian Federation legislation. 55

60 31 Presentation of Financial Instruments by Measurement Categories For the purposes of measurement, IAS 39, Financial Instruments: Recognition of Measurement, classifies financial assets into the following categories: (a) loans and receivables; (b) available for sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss ( FVTPL ). Financial assets at fair value through profit or loss are assets designated as such upon initial recognition, or assets held for trading (derivatives). As of 31 December 2013 and 2012 all of the Group s financial assets are classified as loans and receivables except for securities designated at fair value through profit or loss in the amount of RR million (31 December 2012: RR million) and held for trading derivatives in the amount of RR 207 million (31 December 2012: RR 66 million) and investment securities available for sale in the amount of RR million (31 December 2012: RR million). As of 31 December 2013 and 2012 all of the Group s financial liabilities except for derivatives held for trading in the amount of RR 3 million (31 December 2012: RR 499 million) are carried at amortized cost. 32 Derivative Financial Instruments Derivative financial instruments. Foreign exchange derivative financial instruments entered into by the Group are generally traded in an over-the-counter market with professional market counterparties on standardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates and other variables relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The Group uses foreign exchange derivative financial instruments for economic hedging purposes. The Group does not apply hedge accounting and carries derivatives at fair value through profit or loss. These instruments represent commitments to purchase foreign and domestic currency after the reporting date. The table below sets out fair values at the reporting date of currencies receivable or payable under derivative contracts entered into by the Group. The table reflects gross positions before the netting of any counterparty positions and payments and covers the contracts with settlement dates after the respective reporting date. Foreign exchange forwards effective as at 31 December 2013 are due from January to December Effective as at 31 December 2012 foreign exchange forwards were due from January to December In millions of Russian Roubles 31 December December 2012 Contracts with Contracts with negative fair positive fair value value Contracts with positive fair value Contracts with negative fair value Foreign exchange forwards: fair values as at the reporting date of - USD receivable on settlement USD payable on settlement (196) (79) (3 409) (650) - Euros receivable on settlement Euros payable on settlement RR receivable on settlement RR payable on settlement (32 196) (10 918) (29 873) (19 558) - Other CCY receivable on settlement Other CCY payable on settlement (3 527) Net fair value of derivatives (Notes 12, 17) 207 (3) 66 (499) 56

61 33 Fair Value of Financial Instruments Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. Where quoted market prices are not available, the Group used valuation techniques described below. Certain valuation techniques required assumptions that were not supported by observable market data. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Cash and cash equivalents are carried at amortised cost, which approximates current fair value. Loans and receivables carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received, discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on currency, maturity of the instrument and the credit risk of the counterparty and ranged mainly from 8% to 53% per annum (31 December 2012: from 8% to 53% per annum). Non-quoted shares. The fair value of non-quoted shares was determined using valuation techniques based on recent market data, including available transaction prices and prevailing expected discounting rates and rates of return on equity for similar financial instruments. The expected monetary long-term growth, inflation and return rates were based on Government macroeconomic forecast. Should the prevailing market growth and expected equity return rates be 50 basis points higher (lower) the fair value of non-quoted shares available for sale would be RR 204 million lower (RR 208 million higher). Due to banks and customer accounts carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used were consistent with the credit risk of the individual entities depending on currency and maturity of the instrument. Debt securities issued and subordinated debt carried at amortised cost. The fair value of traded securities has been determined by reference to published price quotations, if available. The fair value of the rest of the debt was estimated on the basis of discounted cash flows using interest rates for similar instruments. Derivative financial instruments. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Their fair values are determined by using valuation techniques and observable market prices (Level 2). Refer to Note 32. Premises and land. Refer to Note 11 for information of revaluation of premises and reconciliation of movements of premises for the year ended 31 December 2013 and Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. Significance of a valuation input is assessed against the fair value measurement in its entirety. 57

62 33 Fair Value of Financial Instruments (Continued) Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The levels of the fair value hierarchy into which the recurring and non-recurring fair value measurements and disclosed fair values are categorised were as follows as at 31 December 2013: In millions of Russian Roubles Fair value by measurement method: Valuation technique with inputs observable in markets (Level 2) Quoted price in an active market (Level 1) Valuation technique with significant non-market inputs (Level 3) Total fair value Carrying value RECURRING FAIR VALUE MEASUREMENT FINANCIAL ASSETS CARRIED AT FAIR VALUE Securities at fair value through profit or loss Securities available for sale Other financial assets Financial derivatives FINANCIAL LIABILITIES CARRIED AT FAIR VALUE Other financial liabilities Financial derivatives NON-FINANCIAL ASSETS CARRIED AT FAIR VALUE Premises and equipment and intangible assets - Premises and land ITEMS FOR WHICH FAIR VALUE IS DISCLOSED FINANCIAL ASSETS Due from other banks Loans and advances to customers - Credit Card loans POS loans Personal loans Restructured loans Other Loans to legal entities FINANCIAL LIABILITIES Due to other banks Customer accounts - Individuals Legal entities Debt securities in issue: - USD denominated RR denominated EUR denominated CNY denominated UAH denominated Subordinated debt

63 33 Fair Value of Financial Instruments (Continued) The levels of the fair value hierarchy into which the recurring and non-recurring fair value measurements and disclosed fair values are categorised were as follows as at 31 December 2012: In millions of Russian Roubles Fair value by measurement method: Valuation technique with inputs observable in markets (Level 2) Quoted price in an active market (Level 1) Valuation technique with significant non-market inputs (Level 3) Total fair value Carrying value RECURRING FAIR VALUE MEASUREMENT FINANCIAL ASSETS CARRIED AT FAIR VALUE Securities at fair value through profit or loss Securities available for sale Other financial assets Financial derivatives FINANCIAL LIABILITIES CARRIED AT FAIR VALUE Other financial liabilities Financial derivatives NON-FINANCIAL ASSETS CARRIED AT FAIR VALUE Premises and equipment and intangible assets - Premises and land ITEMS FOR WHICH FAIR VALUE IS DISCLOSED FINANCIAL ASSETS Due from other banks Loans and advances to customers - Credit Card loans POS loans Auto loans Personal loans Restructured loans Other Loans to legal entities FINANCIAL LIABILITIES Due to other banks Customer accounts - Individuals State Legal entities Debt securities in issue: - USD denominated RR denominated EUR denominated Subordinated debt

64 34 Related Party Transactions Parties are generally considered to be related if they are under common control or one party has the ability to control the other party, or exercises significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. For the ownership structure of the Group refer to Note 1. Banking transactions are entered into in the normal course of business with shareholders and entities under shareholders control, and with the Directors and Management of the Group. The outstanding balances as at 31 December 2013 with related parties were as follows: In millions of Russian Roubles Note Parent company Entities under common control Key management personnel Loans and advances to customers 9 Loans and advances (contractual interest rate 9%-15%) Investment securities available for sale 10 Shares available for sale (14.5% immediate parent shares purchased from its parent) Customer accounts 14 Term deposits (contractual interest rates: 10.5%-13.5% on deposits denominated in RR, 3%-8% on deposits denominated in USD or EUR) Current accounts (non-interest bearing) Debt securities in issue 15 Promissory notes As at 31 December 2013, other rights and obligations with related parties were as follows: In millions of Russian Roubles Parent company Entities under common control Guarantees issued by the Group fully secured by promissory notes issued by the Bank (Note 30) Other guarantees issued by the Group (Note 30) The results of the transactions with related parties for year ended 31 December 2013 were as follows: In millions of Russian Roubles Parent company Entities under common control or significant influence Key management personnel Interest income (Note 19) Loans and advances to customers Interest expense (Note 19) Customer accounts Subordinated debt Market fair value adjustments and losses less gains from available for sale securities (Note 20) - (1 647) - 60

65 34 Related Party Transactions (Continued) The outstanding balances as at 31 December 2012 with related parties were as follows: In millions of Russian Roubles Note Parent company Entities under common control or significant influence Key management personnel Loans and advances to customers 9 Loans and advances (contractual interest rate 9%-12%) Investment securities available for sale 10 Shares available for sale (14.5% immediate parent shares purchased from its parent) Bonds issued by OECD company Customer accounts 14 Term deposits (contractual interest rates: 9.5%-13.5% on deposits denominated in RR, 4.25%-12.5% on deposits denominated in USD or EUR) Current accounts (non-interest bearing) Debt securities in issue 15 Promissory notes Subordinated debts 16 Subordinated debt As at 31 December 2012, other rights and obligations with related parties were as follows: In millions of Russian Roubles Parent company Entities under common control Guarantees issued by the Group fully secured by promissory notes issued by the Bank (Note 30) Other guarantees issued by the Group (Note 30) - 42 The results of the transactions with related parties for year ended 31 December 2012 were as follows: In millions of Russian Roubles Parent company Entities under common control or significant influence Key management personnel Interest income (Note 19) Loans and advances to customers Interest expense (Note 19) Customer accounts Subordinated debt Market fair value adjustments and losses less gains from available for sale securities (Note 20) (2 613) - In 2013 total remuneration of members of the key management personnel amounted to RR million (2012: RR million). The annual remuneration of the key management personnel includes salaries and other short-term bonuses. 61

66 35 Goodwill As at 31 December 2013 and 2012 goodwill of RR million is allocated to the business of acquired insurance subsidiaries of the Bank representing a cash-generating unit (CGU) being the lowest level within the Group, at which the goodwill is monitored by the management. The recoverable amount of the CGU was determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a three year period and terminal value. Management determined budgeted gross margin based on past performance and its market expectations. The growth rates do not exceed the long-term average growth rate for the banking/insurance sector in Moscow in which the CGU operates. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to RSI. Recoverable amount of RSI significantly exceeds its carrying amount. 36 Principal Subsidiaries Name Nature of Business Percentage of ownership, 31 December 2013 Percentage of ownership, 31 December 2012 Country of registration Subsidiaries: Russian Standard Insurance Insurance company 100.0% 100.0% Russia Bancassurance Company Insurance company 99.8% 99.8% Russia Russian Standard Invest Holding company 100.0% 100.0% Russia Russian Standard Bank Ltd. (Ukraine) Retail banking 100.0% 100.0% Ukraine Russian Standard-Finance Ltd (Ukraine) Holding company 100.0% 100.0% Ukraine Management Company Russian Standard Funds management 100.0% 100.0% Russia Special purpose entities: Russian Standard Capital plc. Euro-Commercial Paper issue 100.0% 100.0% Ireland Russian Standard Finance Eurobonds issue - - Luxembourg Russian Standard Insurance (RSI) and Bancassurance Company (BAC) are insurance companies registered in Russia. RSI and BAC operate under insurance licenses issued by the Federal Authority for Insurance Supervision of the Russian Federation (licensing functions are now carried by the CBRF). They offer several insurance products comprising combinations of death and total permanent disability covers for various loan products and credit cards of the Bank and the insurance of financial and property risks for customers. Russian Standard Invest is a holding company, registered in Russia. Its principal activity is holding the investments in RSI, BAC and other Bank s subsidiaries. Russian Standard Bank Ltd. (Ukraine) ( RSBU ), the bank registered in Ukraine is owned and controlled by the Bank. RSBU holds a banking licence No. 226 issued by the National Bank of Ukraine.The main activity of RSBU is retail banking operations within Ukraine. As of 31 December 2013 the Group issued RR million loan participation notes through Russian Standard Finance which was consolidated as it was specifically set up for the purposes of the Group, and the Group has exposure to substantially all of its risks and rewards. 62

67 37 Events after the End of the Reporting Period In February 2014 at the General Meeting of controlled, but not owned subsidiary of the Group the shareholders declared dividends in the amount of RR 211 million which were fully paid in February In February 2014 the political situation in Ukraine significantly deteriorated with mass protests leading to the actual fall of the central government and escape of the Ukrainian president. The ongoing uncertainty and other risks could have significant negative effects on the Ukrainian financial and corporate sectors. The future economic direction of Ukraine is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by various authorities both within and outside Ukraine (including certain international organizations) together with tax, legal, regulatory, and political developments. An International Monetary Fund (IMF) mission worked in Ukraine in March 2014 and issued press-release stating that an economic reform program can be supported by a two-year Stand-By Arrangement with the IMF while assistance from the IMF can range between USD billion. The decision to provide support is subject to approval by IMF Management and its Executive Board following the required adoption by Ukraine a number of changes in its financial, monetary, fiscal and energy sectors. Management of the Group is unable to predict all developments, which could have an impact on the banking sector and wider economy and consequently what effect, if any, they could have on the future consolidated financial position of the Group. Management believes it is taking all the necessary measures to support the sustainability and development of the Group s business in Ukraine. 63

68