KOMERCIJALNA BANKA A.D., BANJA LUKA. Financial Statements For the Year Ended December 31, 2010 and Independent Auditors Report

Transcription

1 KOMERCIJALNA BANKA A.D., BANJA LUKA Financial Statements For the Year Ended and Independent Auditors Report

2 CONTENTS Page Independent Auditors' Report 1 Financial Statements: Income Statement 2 Balance Sheet 3 Statement of Changes in Equity 4 Cash Flow Statement 5 Notes to the Financial Statements 6 46

3 To the Shareholders of Deloitte d.o.o. Banja Luka Braće Mažar i majke Marije 58 i Banja Luka Republic of Srpska Bosnia and Herzegovina Tel: ; Fax: Municipal Court Banja Luka, Registry File Identification No: ; Business accountsi: ; ; Inscribed and paid capital: BAM 5.000,00 Translation of the auditors report issued in the Serbian language Komercijalna banka A.D., Banja Luka INDEPENDENT AUDITORS REPORT We have audited the accompanying financial statements of Komercijalna banka A.D., Banja Luka (the Bank ), which comprise the balance sheet as of, and the related income statement, statement of changes in equity and cash flow statement for the year than ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the accounting regulations of the Republic of Srpska and regulations of the Republic of Srpska Banking Agency governing financial reporting of banks, as well as for internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and the Law on Accounting and Auditing of the Republic of Srpska. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements of Komercijalna banka A.D., Banja Luka for the year ended December 31, 2010 have been prepared, in all material respects, in accordance with the accounting regulations of the Republic of Srpska and regulations of the Republic of Srpska Banking Agency governing financial reporting of banks. Other Matter The financial statements of Komercijalna banka A.D., Banja Luka as of and for the year ended 2009 were audited by another auditor who expressed an unqualified opinion on those statements on March 2, Banja Luka, February 25, 2011 Žarko Mionić Certified Auditor

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5 BALANCE SHEET As of (Thousands of BAM) Note Audited by Another Auditor ASSETS Cash and balances with the Central Bank 11 92,206 85,026 Due from other banks Loans to customers , ,026 Equipment and intangible assets 13 2,967 3,163 Accrued interest and other assets 14 2,414 2,760 Total assets 236, ,002 LIABILITIES AND EQUITY LIABILITIES Due to banks and other financial institutions 15 12,875 15,307 Due to customers , ,335 Borrowings 17 8,011 1,791 Other liabilities, including tax liabilities 18 2,929 2,945 Long-term provisions for potential losses and commitments 8b Total liabilities 174, ,623 EQUITY Share capital 19 60,000 20,000 Special reserves for credit losses 2.2., 19., 8b Legal reserves Retained earnings Total equity 61,891 21,379 Total liabilities and equity 236, ,002 COMMITMENTS AND CONTINGENT LIABILITIES 20a 21,167 15,835 The accompanying notes form an integral part of these financial statements. 3

6 STATEMENT OF CHANGES IN EQUITY Year Ended (Thousands of BAM) Share capital Outstanding Reserves for Credit Losses Legal Reserves Retained earnings Total Balance, January 1, , ,456 Distribution of prior period profits (391) - Net loss for the year Balance, 2009 Audited by Another Auditor 20, ,674 Special reserves for credit losses (Notes 2.2. and 8b) Restated balance, January 1, , ,379 Distribution of 2009 profit (218) - Increase in share capital 40, ,000 Profit for the year Balance, 60, ,891 The accompanying notes form an integral part of these financial statements. 4

7 CASH FLOW STATEMENT Year Ended (Thousands of BAM) Year Ended Audited by Cash flows from operating activities Another Auditor Interest receipts 13,151 12,490 Interest paid (5,078) (5,471) Fee and commission receipts 2,729 3,234 Fee and commission paid (744) (559) Other receipts from operations Recovery of receivables previously written-off - 87 Cash payments to employees and suppliers (8,882) (9,637) Income taxes paid (10) (72) Net cash flows from operating activities before changes in operating assets and liabilities 1, Changes in operating assets and liabilities: Net increase in loans to customers (17,786) 18,474 Net decrease in amounts due to banks and financial institutions (2,432) (910) Net decrease in amounts due to customers (19,250) (5,702) Net cash provided by operating activities (38,269) 11,983 Cash flows from investing activities Purchases of property and equipment (964) (689) Net cash flows used in investing activities (964) (689) Cash flows from financing activities Share issue in the year 40,000 - Increase in borrowed funds 6,220 1,791 Net cash flows from financing activities 46,220 1,791 Effect of the exchange rate movements on cash and cash equivalents Net increase in cash and cash equivalents 7,180 13,186 Cash and cash equivalents, beginning of year 85,026 71,840 Cash and cash equivalents, end of year 92,206 85,026 Cash and cash equivalents comprise the following balance sheet components: Cash and balances with the Central Bank 92,206 85,026 The accompanying notes form an integral part of these financial statements. 5

8 NOTES TO THE FINANCIAL STATEMENTS 1. BANK S ESTABLISHMENT AND OPERATING POLICY Komercijalna banka a.d., Banja Luka (hereinafter: the Bank ) was founded in September 2008 and on September 15, 2006 it was inscribed into the Court Register based on a relevant Decision issued by the Basic Court in Banja Luka number REG The Bank commenced its operations as in accordance with the Decision of the Banking Agency of the Republic of Srpska number /2006 dated August 28, The Bank s founders are Komercijalna banka a.d., Beograd (99.998%) and the Export Credit and Insurance Fund from Belgrade (0.002%). On May 23, 2009 when the Law on the Expiration of the Law on Export Credit and Insurance Fund (RS Official Gazette number 36-09), the Export Credit Guarantee Agency took over the activities and all assets and liabilities of the Export Credit and Insurance Fund. In the Republic of Srpska, the Bank is licensed to perform a broad range of banking activities that include payment transfers, credit and deposit operations in the country and abroad, and as in accordance with the Republic of Srpska banking legislation, the Bank is to operate based upon the principles of liquidity, solvency and profitability. As of, the Bank was comprised of a head office located in Banja Luka, nine branch offices and six agencies in Gradiška, Brčko, Bijeljina, Pale, Trebinje, Sarajevo, Mrkonjić Grad, Tuzla and Zvornik. At the Bank had 126 employees (2009: 128 employees). 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION 2.1. Basis of Preparation and Presentation of Financial Statements The Bank s financial statements were prepared in accordance with the accounting regulations of the Republic of Srpska, the Law on Banks of the Republic of Srpska, as well as Decisions issued by the Republic of Srpska Banking Agency (the BARS ) regulating the financial reporting of banks throughout the Republic s territory. The financial statements are presented in thousands of Convertible Marks ( BAM ). The Convertible Mark is the functional and reporting currency in the Republic of Srpska and in Bosnia and Herzegovina. In the preparation of its cash flow statement for the business year 2010, the Bank used a direct cash flow reporting method. The financial statements of the Bank are prepared in accordance with the accounting and tax policies of the Republic of Srpska disclosed in Note 3 to the financial statements, based on the accounting and tax regulations of the Republic of Srpska. Regulations, Standards and Interpretations in Effect in the Period The accompanying financial statements have been prepared by applying International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) which were in effect at 2009 and in accordance with accounting regulations of the Republic of Srpska based on these standards. Namely, in accordance with the provisions of the Law on Accounting and Auditing of the Republic of Srpska, currently in force, (Official Gazette of RS numbered 36/09), all legal entities situated on the territory of the Republic of Srpska are under an obligation to fully apply International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA), as well as the Code of Ethics for Professional Accountants and the pronouncements, interpretations and guidelines of the International Accounting Standards Board (IASB) and all pronouncements, interpretations and guidelines of the International Federation of Accountants (IFAC) to its financial statements prepared for the periods commencing on or after January 1, In addition, on July 15, 2010, the Management Board of the Association of Accountants and Auditors of the Republic of Srpska ( AAARS ) enacted the Decision on the Commencement of the Mandatory Application of IAS/IFRS Issues (published until January 1, 2009) based on the Decision on the Authorizations for Translation and Issuance of the concerned Accounting and Auditing Commission of Bosnia and Herzegovina dated March 10, 2006 (Official Gazette of RS number 81/06), granting such authorizations to the AAARS. The aforementioned issue of IAS/IFRS was approved by the International Accounting Standards Committee Foundation as the official translation into the Serbian language for Bosnia and Herzegovina (Republic of Srpska), Serbia and Montenegro. Pursuant to the aforementioned Decision, IAS/IFRS published until January 1, 2009 are mandatorily applied to the financial statements prepared and presented in the Republic of Srpska for the accounting periods commencing on or after January 1,

9 NOTES TO THE FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued) 2.1. Basis of Preparation and Presentation of Financial Statements (Continued) Regulations, Standards and Interpretations in Effect in the Period (Continued) Until the issuance date of the accompanying financial statements, the officially translated and published IAS/IFRS in the Republic of Srpska are the standards (issued by the International Accounting Standards Board) which applied at 2009, listed below: IFRS 1 - First-time Adoption of International Financial Reporting Standards; IFRS 2 - Share-based Payment; IFRS 3 - Business Combination; IFRS 4 - Insurance Contracts IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations; IFRS 6 - Exploration for and Evaluation of Mineral Resources; IFRS 7 - Financial Instruments: Disclosures; IFRS 8 - Operating Segments; IAS 1 - Presentation of Financial Statements; IAS 2 - Inventories; IAS 7 - Cash Flow Statements; IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors; IAS 10 - Events after the Balance Sheet Date; IAS 11 - Construction Contracts; IAS 12 - Income Taxes; IAS 16 - Property, Plant and Equipment; IAS 17 - Leases; IAS 18 - Revenue; IAS 19 - Employee Benefits; IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance; IAS 21 - The Effects of Changes in Foreign Exchange Rates; IAS 23 - Borrowing Costs; IAS 24 - Related Party Disclosures; IAS 26 - Accounting and Reporting by Retirement Benefit Plans; IAS 27 - Consolidated and Separate Financial Statements; IAS 28 - Investments in Associates; IAS 29 - Financial Reporting in Hyperinflationary Economies; IAS 31 - Interests in Joint Ventures; IAS 32 - Financial Instruments: Presentation; IAS 33 - Earnings Per Share; IAS 34 - Interim Financial Reporting; IAS 36 - Impairment of Assets; IAS 37 - Provisions, Contingent Liabilities and Contingent Assets; IAS 38 - Intangible Assets; IAS 39 - Financial Instruments: Recognition and Measurement; IAS 40 - Investment Property; and IAS 41 - Agriculture. Regulations, Standards and Interpretations Issued and Published, but not Yet in Effect in the Republic of Srpska The revisions of the standards and interpretations in effect, issued after January 1, 2009, have not been published and officially adopted in the Republic of Srpska, and were therefore not applied in the preparation of the accompanying financial statements. 7

10 NOTES TO THE FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued) 2.1. Basis of Preparation and Presentation of Financial Statements (Continued) Regulations, Standards and Interpretations Issued and Published, but not Yet in Effect in the Republic of Srpska (Continued) In addition, the accounting regulations of the Republic of Serbia depart from the IAS and IFRS requirements in the following materially significant aspects of financial reporting: During 2009, the Bank calculated an allowance for impairment of financial instruments in accordance with the relevant regulations of the Banking Agency of the Republic of Srpska (Note 2.2. and 8b). The aforementioned accounting policy applied in measuring financial instruments in 2009 caused significant differences compared to allowances for impairment and provisions for potentially uncollectible financial instruments measured by discounting future cash flows applying the original effective interest rate in the moment of their inception, as required under IAS 39 Financial Instruments: Recognition and Measurement. In 2010, the Bank reconciled the values of its financial instruments as of 2009 where the effects of these adjustments were credited/charged to equity (within the line item of Outstanding reserves for credit losses, Note 9a), as in accordance with Decision on Amendments and Supplements to the Decision on Minimum Criteria for Credit Risk Management and Asset Classification in Banks (RS Official Gazette number 136/10), as well as the Guidance on the Changes to the Manner of Establishing, Recording and Reporting Forms for Loan Loss Reserves. The aforementioned accounting policy departs from the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, setting forth that effects of changes in accounting policies be recognized in the period in which the change occurred. The Bank did not make such adjustments of its comparative data in the prior period income statement. Based on legal requirements, loan origination fees are presented within the line item of Fee and commission income and not as a part of the accrual of effective interest rate, as required in IAS 18 Revenues and IAS 39 Financial Instruments: Recognition and Measurement. In the Republic of Srpska, sufficient market experience, stability and liquidity do not exist for the purchase and sale of loans and other financial assets or liabilities, for which published market information is not readily nor reliably available. Accordingly, fair value cannot readily be determined in the absence of an active market, as required by IAS 32, Financial Instruments: Presentation and Disclosure, and IAS 39, Financial Instruments: Recognition and Measurement. Due to the potentially significant effects which the aforementioned explanations may have on the fairness and objectiveness of the Bank s financial statements, as well as the fact that in the period from January 1, 2009 until the preparation of the accompanying financial statements, new and updated standards and interpretations came into force, the Bank s financial statements prepared as of and for the year ended cannot be treated as financial statements prepared in accordance with International Accounting Standards, i.e. International Financial Reporting Standards. The Bank s management analyzes changes in standards and interpretations in effect, as well as the newly adopted standards and interpretations issued after January 1, 2009, and once the standards and interpretations relevant for the Bank have been determined, the Bank s management intends to apply them in the preparation of financial statements as soon as they are officially published and adopted in the Republic of Srpska. Taking into account the provisions comprised in the new and amended standards and interpretations relating to the date of their coming into effect and provisions with regards to the presentation of comparative data, following their adoption and application by the Bank, it may be necessary to make certain changes of data presented in the accompanying financial statements for the year 2010 which will be used as comparative data in the Bank s financial statements for the year

11 NOTES TO THE FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued) 2.2. Change in Regulations of the Republic of Srpska Banking Agency and Reclassification of Certain Balance Sheet Positions in the Prior Reporting Period In 2010, the Republic of Srpska Banking Agency enacted the Decision on Amendments and Supplements to the Decision on Minimum Criteria for Credit Risk Management and Asset Classification in Banks (RS Official Gazette number 136/10), as well as the Guidance on the Changes to the Manner of Establishing, Recording and Reporting Forms for Loan Loss Reserves. The aforementioned Decision and Guidance regulate the following: From January 1, 2010, the Bank applies the methodology for measuring the allowance for impairment of loans and other financial assets as in accordance with IAS and IFRS which mainly differs from the previously applied methodology in respect to collection of collaterals which the Bank holds against loans approved; Items of the Bank s assets being classified and those not being classified; The manner of recording the transition to the new Chart of Accounts in application from January 1, 2010 for receivables classified into E category; the manner of classifying interest on substandard assets; the manner of recording general and special reserves according to the regulatory requirements and requirements defined in IAS and IFRS; and The treatment of outstanding reserves arisen in the transition from an earlier manner of calculating general and special reserves as per the regulatory requirement onto the methodology for measuring impairment of loans and other financial assets pursuant to IAS and IFRS, starting from January 1, Based on the forgoing Decision and Guidance, starting from January 1, 2010, the Bank has applied the methodology for measuring the impairment of loans and of other financial assets in accordance with IAS and IFRS. Also, the Bank reclassified balance sheet positions of general and special reserves presented within equity (Note 8b) onto corresponding balance sheet line items of assets, while the net effect arising from the change in the manner of estimating provisions in accordance with IAS and IFRS was credited to outstanding reserves for credit losses. Pursuant to the aforementioned regulatory requirement, the accompanying financial statements do not include any income statement adjustments in this respect. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Income and Expense Recognition Interest income and expense and other operating income and expenses are accounted for on an accrual basis. Fee and commission receivables, except for loan origination fees, are recognized in full when earned. Loan origination fees are deferred and amortized over the loan repayment period, which, in the opinion of the Bank s management, cannot result in materially significant departures from the amounts calculated by applying the effective interest method. Loan origination fees are presented as an integral part of the effective interest rate income as required by IAS 18 Revenue and IAS 39 Financial Instruments: Recognition and Measurement Foreign Exchange Translation Transactions denominated in foreign currencies are translated into BAM at the Bank s exchange rates prevailing at the date of each transaction. Assets and liabilities denominated in foreign currencies are translated into BAM at the balance sheet date by applying the official rates of exchange in effect on that date. Contingent liabilities denominated in foreign currencies are translated into BAM at the official exchange rates prevailing at the balance sheet date. Foreign exchange gains or losses arising upon translation are credited or charged to the income statement Equipment Equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. The frequency of revaluations depends upon the changes in fair values of the items of equipment being revalued. The revaluation surplus is credited to revaluation reserves being a part of total capital of the Bank. The revaluation decrease is charged to profit and loss for the year. 9

12 NOTES TO THE FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Equipment (Continued) Depreciation of equipment is charged to cost using the straight line method at the beginning of year, which also applies for items of equipment placed in use during the year. The useful lives of certain groups of equipment that were used as a basis of depreciation and the applied depreciation rates for the year ended were the following: Useful Life (Years) Rate (%) Computer equipment 4 25% Vehicles % Furniture and other equipment % % 3.4. Intangible Assets 3.5. Loans Intangible assets are stated at cost net of accumulated amortization and allowance for impairment, if any. Intangible assets include software and licenses. Amortization is calculated on a straight-line basis to the cost of intangible assets by applying an annual rate of 20%. Loans originated by the Bank are stated in the balance sheet at the amount of principal outstanding, less allowance for impairment, which is based on the assessment of specifically-identified exposures and losses that are inherent in the Bank s loan portfolio. The Bank s management applies the methodology that is entirely based on IAS 39 Financial Instruments: Recognition and Measurement in its risk assessment, as disclosed in this Note 3.6. For the purpose of determining amortized cost, i.e. fair value of loans in accordance with IAS/IFRS, the Bank uses contractually agreed effective interest rate that adjusts the net present values of future cash flows to the nominal value of the loan approved, net of principal repaid Allowances for Impairment and Provisions for Contingent Liabilities In 2010, the Bank applied the Rules on Assessing and Recognizing Loans, Receivables and Provisioning setting the criteria for assessing and recognizing loans, receivables and provisions for corporate and retail customers as in accordance with the Bank s internal methodology. The first-time full application of the Bank s internal methodology in making assessments and provisions took place in

13 NOTES TO THE FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.6. Allowances for Impairment and Provisions for Contingent Liabilities (Continued) The Bank reviews the credit portfolio in order to determine allowance for impairment and provisions on a monthly basis. In determining whether the impairment losses on placements should be recognized in the income statement, the Bank assesses whether there is information / evidence indicating the existence of a measurable decrease in the estimated future cash flows on a portfolio basis, before such losses can be identified at the level of individual placements. The information that may indicate the losses in placements include irregularity and defaults in settling liabilities, market and economic conditions on a local level causing defaults in settling liabilities and the like. Management s assessments regarding the impairment in financial placements included in the Bank s portfolio by way of assessing future cash flows are based on actual losses incurred in the past on financial assets with similar causes of impairment. Impairment assessment process is conducted on a case basis, for each materially significant loan, and on a portfolio level, for less significant loans. The amount of impairment is individually assessed as the difference between the carrying amount and the present value of expected future cash flows, and/or receipts from collateral realization, determined by discounting at the effective interest rate of that loan. If there is no objective evidence on loan impairment, regardless of their individual significance, the loan is categorized into credit rating group of customers with similar credit risk exposure and impairment is assessed on a portfolio basis in the amount of weighted average percentage of loss assessed individually. The methodology and assumptions underlying the process of defining the amounts and periods of cash inflows from placements are reviewed on an ongoing basis in order to reduce the difference between estimated and actual losses to the minimum. The amounts of inflows expected from a loan are assessed based on evidence of the borrower s planned income, by analyzing the number of days in default against certain receivables from a debtor, by taking into consideration all relevant evidence about the timeline of earning the planned income by the debtor, as well as historical data about the delays in payment of that particular debtor Cash and Cash Equivalents For purposes of the cash flow statement, cash and cash equivalents refer to cash and balances with the Central Bank and balances on foreign currency accounts with foreign banks and other deposits with up to 3-month maturities from the placement date Taxes and Contributions Income Taxes Current Income Taxes Current income tax is an amount computed and paid in accordance with the Income Tax Law in application from January 1, Current income tax is the amount calculated by applying the 10 percent rate to the base reported in the tax balance being the amount of profit before taxation after allowing for the effects of income and expense reconciliation as provided by the Republic of Srpska tax rules. Such adjustments mostly relate to the following: adding back certain disallowed expenses, adding back the expenses for provisions for potential losses in excess of 20% of the adjusted tax base. The tax regulations effective in the Republic of Srpska do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carryback period. However, any current year tax losses stated in the tax balance, as a negative difference between income and expenses, may be used to reduce or eliminate taxes to be paid in future periods, but only for a duration of no longer than five ensuing years. 11

14 NOTES TO THE FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8. Taxes and Contributions (Continued) Deferred Income Taxes Deferred income tax is determined using the balance sheet liability method, for temporary differences arising between the tax bases of assets and liabilities components, and their carrying values in the consolidated financial statements. The currently-enacted tax rates at the balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for deductible temporary differences, and the tax effects of income tax losses and credits available for carry forward, to the extent that it is probable that future taxable profit will be available against which deferred tax assets may be utilized. Indirect Taxes and Contributions Indirect taxes and contributions include employer contributions, property taxes, and various other taxes and contributions, included under other operating expenses Employee Benefits In accordance with regulatory requirements, the Bank is obligated to pay contributions to government social security funds and pension funds that are calculated by applying specific, legally prescribed percentages. These obligations involve the payment of taxes and contributions on behalf of employees, by the employer, in an amount calculated in accordance with the statutory regulations. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of its employees, to transfer the withheld portions directly to the applicable government funds. These taxes and contributions payable on behalf of the employees and employer are charged as expenses in the period in which they arise. In accordance with the requirements of IAS 19 Employee Benefits, the Bank performs the actuarial valuation of provisions so as to determine the present value of accumulated employee retirement benefits, as well as to calculate accrued liabilities arising from short-term employee receivables. In the calculation of the present value of accumulated employee entitlements to retirement benefits and jubilee awards, a certified actuary used the following assumptions: a discount rate of 8.5% annually, projected salary increase of 4% per annum, years of service necessary for retirement 40 years for men and 35 years for women, projected employee turnover based on data on historical employee turnover in the prior period, officially published mortality rates in the surroundings in the prior period, as well as other terms necessary to exercise rights to a retirement benefit and a jubilee award Fair Value The accompanying financial statements are prepared on a historical cost basis, including adjustments and provisions made to reduce assets to their estimated recoverable amounts. It is the policy of the Bank to disclose the fair value information of those financial assets and financial liabilities for which published market information is readily and reliably available, and whose fair value is materially different from their recorded amounts. Sufficient market experience, stability and liquidity do not exist for the purchase and sale of loans and other financial assets or liabilities, given that published market information is not readily available. Hence, fair value cannot reliably be determined. In management s opinion, the amounts stated in the financial statements represent the fair values, which in particular instances are the most valid and useful for reporting purposes. 12

15 NOTES TO THE FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING ESTIMATES The presentation of the financial statements requires the Bank s management to make best estimates and reasonable assumptions that influence the assets and liabilities amounts, as well as the disclosure of contingent liabilities and receivables as of the date of preparation of the financial statements, and the income and expenses arising during the accounting period. These estimations and assumptions are based on information available to the management, as of the date of preparation of the financial statements. However, actual future amounts may depart from the estimates. Estimates and assumptions are subject to constant review. Changes to accounting estimates are recognized in the period when they are made if their impact is limited to that period or in the future periods in cases where the change impacts future periods as well. Basic assumptions relating to the future events and other significant sources of uncertainties in rendering an estimate as of the statement of financial position date, which bears the risk that may lead to significant restatement of the net book value of assets and liabilities in the ensuing financial year, were as follows: Estimated Useful Life o Equipment and Intangible Assets The estimate of useful life of equipment and intangible assets is founded on the historical experience with similar assets, as well as foreseen technical advancement and changes in economic and industrial factors. The adequacy of the estimated remaining useful life of fixed assets is analyzed annually, or in cases where there are indications of significant changes in certain assumptions. Impairment of Assets At each balance sheet date, the Bank s management reviews the carrying amounts of the Bank s assets for the indications of impairment loss. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount. Allowance for Impairment of Receivables The Bank calculated impairment of items of assets pursuant to the internal methodology reconciled with the requirements of IAS 39 and IAS 37 as well as the regulations of the Republic of Srpska Banking Agency. Fair Value The fair value of instruments for which there is no active market are determined by applying adequate valuation methods. The Bank applies professional judgment when choosing adequate methods and assumptions. 13

16 NOTES TO THE FINANCIAL STATEMENTS 5. INTEREST INCOME AND EXPENSE a) Interest Income Year Ended Balances with the Central Bank Balances with other banks 1,910 1,565 Interest income from corporate customers 8,183 7,245 Interest income from retail customers 3,579 3,541 13,808 12,539 b) Interest expense Year Ended Deposits and borrowings from banks and financial institutions Deposits from corporate customers and other customers 3,189 4,162 Deposits from retail customers 1, ,038 5, FEE AND COMMISSION INCOME AND EXPENSE a) Fee and Commission Income Year Ended Fee and commission income from payment transfers 1,612 1,551 Loan origination fees Fees for issued guarantees and other sureties Commission income from currency conversions Other fee and commission income b) Fee and commission expense 2,859 3,234 Year Ended Fee and commission expense from domestic payment transfers Fees and commissions charged by the Central Bank Fees and commissions charged by the Banking Agency Fee and commission arising on payment card operations Fees and commissions charged by the Central Register Other fee and commission expense

17 NOTES TO THE FINANCIAL STATEMENTS 7. OTHER OPERATING EXPENSES Year Ended Salaries and benefits, net 2,270 2,178 Taxes and contributions to salaries and benefits 1,490 1,221 Other salaries and benefits Materials, fuel and energy Rental of business premises 1,414 1,271 Digital channel and equipment lease Marketing and advertizing Telecommunications Software and equipment maintenance Money transport Property security Deposit insurance premiums Other insurance premiums Sponsorships Other non-production services Entertainment Indirect taxes and contributions and membership fees Depreciation and amortization 1, Other expenses ,079 9, MOVEMENTS IN IMPAIRMENT LOSSES AND PROVISIONS a) Charged/(Credited) to Profit Year Ended Loans to customers Accrued interest and other assets Contingent liabilities and commitments Provisions for employee retirement benefits

18 NOTES TO THE FINANCIAL STATEMENTS 8. MOVEMENTS IN IMPAIRMENT LOSSES AND PROVISIONS (Continued) b) Movements During the Year on Long-Term Provisions for Potential Losses and Commitments Loans to Customers Accrued Interest and Other Assets Contingent Liabilities and Commitments Litigations Provisions for Employee Retirement Benefits Total Balance, January 1, , ,227 Effects of opening balance adjustments based on the newly-adopted BARS regulations: a) Transfer of loans to customers, accrued interest and other assets provided for, from off-balance sheet items into balance sheet assets (Note 2.2.) 1, ,448 b) Effects of transition in provisioning from the BARS regulations to provisioning in accordance with IAS 39 (Note 2.2.) (22) (276) (407) - - (705) Restated Balance, January 1, , ,970 Charge for the year 5, ,111 Reversal of provisions (4,972) (502) (116) - - (5,590) Balance, 5, ,491 16

19 NOTES TO THE FINANCIAL STATEMENTS 9. INCOME TAXES a) Components of income taxes Year Ended Receivables for prepaid income taxes (input tax) b) Reconciliation of the income tax amount before taxation and prescribed interest rates Year Ended Profit before tax Income tax at the statutory tax rate of 10% Tax effect of income and expenses not deductible in determining taxable profit (1,241) (918) Income taxes shown in the income statement BASIC EARNINGS PER SHARE Year Ended Net earnings for the year in thousands of BAM Weighted average number of shares issued 41,808 20,000 Basic (loss) per share (in BAM) In 2010, the Bank s share capital increased through a new share issue aggregating to BAM 40,000 thousand and accordingly, the weighted average number of the Bank s shares was calculated in

20 NOTES TO THE FINANCIAL STATEMENTS 11. CASH AND BALANCES WITH THE CENTRAL BANK Cash on hand: - in BAM 2,043 2,062 - in foreign currencies 1,493 1,361 Balances with the Central Bank in BAM: - Obligatory reserve 19,633 22,688 - Assets in excess of obligatory reserve 65,017 41,885 Balances with foreign banks in foreign currencies 4,014 17,021 Balances with domestic banks in BAM ,206 85,026 Pursuant to the decision of the Central Bank of Bosnia and Herzegovina regarding reserve requirements, the Bank has to calculate and maintain an obligatory reserve of the average balance of the Bank s total deposits (which serve as a basis for computing the obligatory reserve) according to the average balance found at the end of work days of ten calendar days preceding the projection. The obligatory reserve is calculated as the sum of 14% of the total deposits maturing within a year and 7% with over one year maturities. This reserve is available for liquidity purposes. The Central Bank of BiH accrues and pays interest at the rate from 0.20% % to the amount of obligatory reserve, while the amount of resources exceeding the calculated obligatory reserve accrues interest at the rate determined as the average of interest rates realized over the same period by the Central Bank on the market based on its up-to-one month deposits. 12. LOANS TO CUSTOMERS Short-term loans: - in BAM 12,871 23,810 Long-term loans - in BAM 122,873 92,883 - in foreign currency 2,517 4,890 Current portion of long-term loans: - in BAM 5,730 3,643 - in foreign currency , ,511 Less: Allowance for impairment of loans to customers (5,695) (5,485) 138, ,026 The major portion of short-term loans in BAM was placed with domestic and foreign enterprises at an annual interest rate ranging from 4.7% to 12.5% per annum. The majority of these loans are collateralized by mortgages assigned over property, by pledges over movables or by cash deposits. Long-term loans in BAM were placed with enterprises mostly for a period from two to six years at an annual interest rate ranging from 7% to 14.5% annually. The aforementioned loans were collateralized by mortgages assigned over property or by pledges over movables or securities. The geographic sector risk concentrations within the customer loan portfolio are mainly limited to customers headquartered in the Republic of Srpska. 18

21 NOTES TO THE FINANCIAL STATEMENTS 12. LOANS TO CUSTOMERS (Continued) The economic sector risk concentrations within the customer loan portfolio are as follows: Trade 30,771 28,152 Civil engineering 3,352 3,430 Other industrial sectors 13,495 14,583 Retail 44,465 47,863 Banks and financial institutions Other 46,342 25, , , EQUIPMENT AND INTANGIBLE ASSETS Equipment and Other Assets Property under Construction Leasehold Improvements Total Equipment 2010 and 2009 Intangible Assets (Licenses and Programs) Cost Balance, January 1, , ,817 1,146 Additions Transfers 313 (501) 11 (177) 177 Disposals (14) - - (14) - Balance, , ,307 1,323 Balance, January 1, , ,307 1,323 Additions Transfers 332 (667) 39 (296) 297 Disposals (3) - (27) (30) - Balance, 3, ,862 1,620 Accumulated Depreciation and Amortization Balance, January 1, , Charge for the year Disposals (7) - - (7) - Balance, , , Balance, January 1, , , Charge for the year Disposals (3) - (15) (18) - Balance, 2, , Net Book Value 1, , , ,

22 NOTES TO THE FINANCIAL STATEMENTS 14. ACCRUED INTEREST AND OTHER ASSETS In BAM: - Interest receivables 1, Fee and commission receivables Fee and commission receivables Payment card receivables Receivables from employees Inventories of material Non-current assets held for sale Prepaid expenses Receivables for prepaid taxes Other receivables In foreign currencies: - Interest accrued Payment card receivables Other receivables 4 4 2,911 3,000 Less: Allowance for impairment of accrued interest and other assets (497) (240) 2,414 2, DUE TO BANKS AND FINANCIAL INSTITUTIONS Demand deposits in BAM: - domestic financial institutions 2,238 1,335 Demand deposits in foreign currencies: - foreign banks Short-term deposits in BAM: - domestic financial institutions 4,040 4,400 Long-term deposits in BAM: - domestic financial institutions 6,350 8,825 Long-term deposits in foreign currencies: - domestic financial institutions ,875 15,307 20

23 NOTES TO THE FINANCIAL STATEMENTS 16. DUE TO CUSTOMERS Demand deposits in BAM: - Enterprises 34,694 41,442 - Public sector 4,009 1,750 - Foreign entities Citizens 11,354 8,145 - Other customers 1,192 3,026 Demand deposits in foreign currencies: - Enterprises 3,902 4,944 - Public sector Foreign entities Citizens 4,331 3,747 - Other customers 32 8 Short-term deposits in BAM: - Enterprises 13,225 9,545 - Public sector 3, Foreign entities Citizens 5,228 3,417 - Other customers 1, Short-term deposits in foreign currencies: - Enterprises - 8,693 - Public sector 10,404 29,337 - Foreign entities Citizens 18,871 14,013 Long-term deposits in BAM: - Enterprises 19,258 22,158 - Public sector 276 2,385 - Citizens 1,375 1,325 - Other customers 2,398 - Long-term deposits in foreign currencies: - Enterprises 68 1,203 - Public sector 9,779 9,779 - Foreign entities Citizens 3,764 3,603 - Other customers , ,335 Demand deposits of enterprises, public sector and citizens denominated in BAM accrue interest in the range from 0.25% to 4% annually. Demand deposits of enterprises and citizens in foreign currency accrue interest at rates from 0.25% to 2.5% annually. Short-term deposits of enterprises and citizens accrue interest in the range from 0.9% to 6.2% annually. Short-term foreign currency denominated deposits of enterprises and citizens accrue interest in the range from 0.9% to 6.2% annually. Long-term foreign currency denominated deposits of enterprises and citizens accrue interest ranging from 0.28% to 6% annually. Long-term deposits of enterprises and citizens in BAM accrue interest ranging from 0.28% to 6% annually. 21

24 NOTES TO THE FINANCIAL STATEMENTS 17. BORROWINGS 2009 Up to one year Over one year Up to one year Over one year Long-term loans in BAM: - Residential Housing Fund of the Republic of Srpska - financing of the purchase of apartments. The repayment is in accordance with the repayment schedules for ultimate loan beneficiaries. Interest is charged at the rate of 6 month EURIBOR + margin ranging from 0.8 to 2.3 percent Fund for Development of the Eastern Part of the Republic of Srpska - providing support to development projects in the eastern part of Republic of Srpska. The repayment is in accordance with the repayment schedules for ultimate loan beneficiaries. Interest is charged at the rate of 6 month EURIBOR + margin ranging from 0.8 to 2.3 percent Republic of Srpska Development and Employment Fun - financing of development projects. The repayment is in accordance with the repayment schedules for ultimate loan beneficiaries. Interest is charged at the rate of 6 month EURIBOR + margin ranging from 0.8 to 2.3 percent - 6,589-1,550-8,011-1,791 Current maturity of long-term loans in BAM 635 (635) 26 (26) 635 7, , OTHER LIABILITIES, INCLUDING TAX LIABILITIES Liabilities in BAM: - Matured interest Interest not matured Accounts payable Taxes and contributions Prepaid accrued fee and commission income from loans 964 1,062 - Advances received Other liabilities Foreign currency liabilities: - Interest not matured Accounts payable Other liabilities ,929 2,945 22

25 NOTES TO THE FINANCIAL STATEMENTS 19. SHARE CAPITAL The Bank s share capital was formed through initial contributions made by shareholders and new share issues. Shareholders have the right to manage the Bank, as well as to participate in profit distribution. As of, the Bank s share capital was comprised of common shares with the par individual value of BAM 1 thousand. All shares are fully paid in. The structure of the Bank s share capital at and 2009 was the following: (u %) (u %) Komercijalna banka a.d. Beograd, Serbia Serbian Export Credit and Insurance Agency The Bank is required to maintain a minimum capital adequacy ratio of 12%, as established by the Banking Agency of the Republic of Srpska, in accordance with the terms of the Basel Accord. At, the Bank s capital adequacy ratio was 37.1%. Legal Reserves Legal reserves represent allocations from profit as in accordance with Article 51 of the Company Law in the amount of no less than 5% of the profit for the year, until the reserve to share capital proportion is in accordance with the Statute, totaling or exceeding 10% of share capital. If legal reserves decrease, they must be supplemented until they reach the prescribed amount. Special Reserve for Credit Losses Special reserves for credit losses were formed based on the Decision on Amendments and Supplements to the Decision on Minimum Criteria for Credit Risk Management and Asset Classification in Banks (RS Official Gazette number 136/10) enacted by the Republic of Srpska Banking Agency. The Bank cannot allocate profit to other purposes or pay dividends, awards or bonuses to the members of the Bank s bodies, or make any other disbursements from profit until outstanding reserves for credit losses legally required are covered. 20. CONTINGENT LIABILITIES AND COMMITMENTS a) Payment guarantees and performance bonds Guarantees: - Payment guarantees in BAM 4,178 3,678 - Payment guarantees in foreign currency 9,160 3,384 - Performance bonds in BAM 583 2,233 - Performance bonds in foreign currency Irrevocable credit commitments 7,148 6,402 Unsecured nostro letters of credit for payments made abroad ,167 15,835 As of, provisions for potential losses and for contingent liabilities and commitments totaled BAM 52 thousand (restated balance at January 1, 2010: BAM 3 thousand). 23

26 NOTES TO THE FINANCIAL STATEMENTS 20. CONTINGENT LIABILITIES AND COMMITMENTS (Continued) b) Compliance with Regulatory Requirements The Bank is required to maintain certain ratios pertaining to the volume of its activities and composition of risk assets in compliance with the accounting standards and regulations of the Republic of Srpska established by the Banking Agency of the Republic of Srpska. As of, all ratios prescribed by the Banking Agency of the Republic of Srpska were within their prescribed limits. c) Litigations As of, there were four lawsuits filed against corporate and retail customers of the Bank. In the assessment of the Bank s legal sector and its legal representatives, the worth of litigations totaled BAM 47 thousand. The aforementioned amount does not include penalty interest that may be additionally assessed in the resolution of these lawsuits. The Bank s management and its legal representatives anticipate no significant adverse outcomes that could have materially significant effects on the Bank s financial statements and accordingly, the Bank formed provisions for potential losses thereof in the amount of BAM 7 thousand. 21. OPERATING LEASE EXPENSES Year Ended Within a year 1,518 1,540 From one to five years 4,702 5,110 Over 5 years 1,449 2,678 7,669 9,328 During 2010, the Bank leased premises for its Head Office, Branch Offices and outlets on the area where it operated. For the purpose of securing business continuity, the Bank enters into long-term agreement with lessors. For the business premises located in the center of Banja Luka where the Bank s Head Office is seated, a Long-Term Lease Agreement was signed with the entity MG Mind, Mrkonjić Grad. In addition, the Bank paid rents to the following lessors for business premises at the following addresses: Malbašić Kompani d.o.o., Banja Luka Veselina Masleše 1, Banja Luka, Dragan Galić Put srpskih branilaca 31, Zalužani, Ljubo Macanović Nemanjina no number, Laktaši, Potkozarije d.o.o., Gradiška Vidovdanska bb, Gradiška, Mirko Đukić Nova Topola no number, Nova Topola, MB Radić d.o.o., Brčko Uzunovića 15. Brčko, Jovan Ćurčić Jovana Dučića 3, Bijeljina, Adria plus d.o.o., Banja Luka Dušanova 21, Trebinje, Bartula d.o.o, Sokolac Milana Simovića no number, Pale, Nebojša Đurić Svetosavska no number, Vlasenica Executive Professional d.o.o., Sarajevo Valtera Perića 10, Sarajevo, Nedeljko Kesić Svetog Save 1, Mrkonjić Grad, Sakib Poljo Stupine B2, Tuzla, Dejan Ilić Svetog Save no number, Zvornik 24