NLB BANKA SOFIA AD FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION

Transcription

1 Annual Report 2009

2 Contents

3 Contents NLB BANKA SOFIA AD FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION 31 DECEMBER 2009 Contents AD Corporate governance 4 Directors report 6 Statement of comprehens ive income 11 Balance s heet 12 Statement of changes in equity 13 Cas h flow s tatement 14 Notes to the financial s tatements 16 Contact lis t of AD 59 3

4 AD Corporate governance

5 AD Corporate governance SHAREHOLDERS STRUCTURE Nova Ljubljans ka banka d.d., Slovenia % Factor banka d.d., Slovenia 2.99 % SUPERVISORY BOARD Andrej Hazabent Chairman of the Supervisory Board Claude Deroos e Member of the Supervisory Board Boris Pes jak Member of the Supervisory Board Gregor Kais er Member of the Supervisory Board MANAGEMENT BOARD Vito Cigoj President of the Management Board and Executive Director Bojidar Archinkov Member of the Management Board and Executive Director Georgi Georgiev Member of the Management Board and Executive Director 5

6 Directors report

7 Directors report Yearly activity report from the Management of NLB Banka Sofia AD Continued dras tic negative trends in developed financial markets further cons trained bus ines s conditions in This was followed by liquidity and credit s hortages which finally impacted the world economy, although the general liquidity was relatively quickly res tored with an organized and s ubs tantial injection of fres h funds in the banking s ys tem (obvious ly deteriorating the s tates budgets ). While 2009 als o brought firs t pos itive s igns on the macro-economic level, the overall impres s ion is that the cris is is not yet over and 2010 will be a very difficult year. The Bulgarian economy has been mos tly affected by the frozen real es tate and cons truction s ectors due to the withdrawal of foreign inves tors and the fact that many of the bes t export-oriented local companies have los t their developed target markets, all of which led to the increas ed unemployment and inter-company indebtednes s. The Bank s main focus in 2009 was to finalize the harmonization proces s with NLB d.d. s minimal s tandards, es pecially in the field of ris k management, management of credit ris k, and s ecuring capital adequacy. Total as s ets of the Bank compared to end year 2008 s howed a s low downturn, but loans to the non-banking s ector s lightly increas ed. The Bank s cons ervative provis ioning policy res ulted in allocating s ubs tantial amount of provis ions for credit ris k, which led to a negative final res ult for the Bank at the end of Illustration 1: Growth balance sheet size and loan portfolio Ammount (thousands of EUR) Asset size Loan portfolio , , , , , , Year 7

8 Directors report Key events for the Bank in 2009: Bas ed on decis ion taken at an extraordinary General meeting of the s hareholders of NLB Wes t Eas t Bank AD in Augus t 2009 the name of the Bank was changed to AD, the s cope of the activity of the Bank has been amended as per the requirements of the new Law on Credit Ins titutions, the Bank has realized profit in 2008 after taxation in the amount of BGN 1.3 mil, the capital of the Bank has been increas ed with the retained profit from years 2006, 2007 and 2008 in total amount of BGN 3.6 mil by is s uing new ordinary dematerialized s hares, an enlarged Supervis ory Board have been appointed for a new 5-years mandate. All thes e decis ions have been regis tered on 7 September In October 2009, bas ed on decis ion taken by the Supervis ory Board of AD, Mr. Bojidar Archinkov was appointed Member of the Management Board and Executive Director of AD, and s ucceeded the pos ition from Mr. Nabil K. Is s a. Illustration 2: Structure of total assets as of Other assets 0.97 % Cash and balances with Central Bank 4.99 % Securities 0.27 % Placement with banks % Loans to customers % Future plans of the Bank: Bank s bus ines s and financial plans for the period are adjus ted to the s trategic targets and guidelines of NLB Group. The main bus ines s focus in 2010 is to continue its integration within the Group, s trengthening the corporate governance, keeping acceptable credit ris k, and debt collection management. Special efforts will als o be applied in order to grow and divers ify the depos it bas e as well as the loan portfolio. The Bank will focus on improving cus tomer s upport s ervices within the Bank and on the Group level. Financial plan in 2010 will emphas ize the s table operational and s tructural liquidity pos ition, s trong capitalization, high coverage of the loan portfolio with provis ions for credit ris k and control over cos ts. Illustration 3: Loan portfolio by sectors as of Tourism 3.86 % Services 8.35 % Individuals 1.4 % Manufacturing % Construction and real estate % Agriculture % Commerce % 8

9 Directors report Other issues related to the Bank: No s ignificant events occurred after the preparation of the financial s tatements of the Bank. The Board Members do not have the right to acquire s hares and bonds from the Bank. Therefore, the Board members of the Bank do not have any acquired, pos s es s ed or trans ferred s hares and bonds of the Bank in No contracts are s igned by the Board Members or related to the Board Members parties beyond the regular activity of the Bank or s ignificantly different from the market conditions. Total gros s remuneration received from the Management Board Members for the year 2009 amounts to BGN 432 thous and. As per the Bulgarian legis lation the Management is res pons ible for preparation of financial s tatements for each financial year giving true and fair view of the Bank s end of year pos ition and its financial res ults. Illustration 4: Liabilities structure as of Subordinated debts from NLB 7.94 % Others 0.54 % Shareholders capital % Banks % Non-banking clients % The Management has prepared herein attached financial s tatements in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. The Management confirms that it has cons is tently applied an adequate accounting policy and complied with the current IFRS requirements. The financial s tatements are prepared on a going concern bas is. AD will als o in the future continue to be the Bank, which is providing high quality banking s ervices and products to its clients and is s triving to remain the bes t banking partner. 9

10 Statement of comprehensive income Balance sheet Statement of changes in equity Cash flow statement

11 Statement of comprehens ive income Statement of comprehensive income Notes Year ended 31 December Interes t and s imilar income 4 16,920 18,757 Interes t expens e and s imilar charges 4 (5,236) (7,609) Net interest income 11,684 11,148 Fee and commis s ion income 5 1,101 1,406 Fee and commis s ion expens e 5 (163) (33) Net fee and commission income 938 1,373 Net trading income Other operating expens es 7 (4,783) (4,474) Impairment charge for credit los s es 15 (11,900) (7,237) Other operating income (Loss)/profit before income tax (3,720) 1,258 Income tax credit/(expens e) 9-46 (Loss)/profit for the year (3,720) 1,304 Other comprehens ive income - - Total comprehensive income for the year (3,720) 1,304 The notes to the financial statements are integral part of these financial statements. 11

12 Balance s heet Balance sheet Notes As at 31 December ASSETS Cas h and balances with the Central Bank 10 10,320 15,003 Loans and advances to banks 11 23,075 22,745 Trading as s ets 12-1,013 Inves tment s ecurities : - available-for-s ale held-to-maturity ,355 Loans and advances to cus tomers , ,236 Current income tax as s ets Other as s ets Intangible as s ets Property, plant and equipment ,021 Total assets 206, ,512 LIABILITIES Depos its from banks 20 33,355 61,084 Due to cus tomers 21 71,653 33,572 Other borrowed funds 23 76,800 81,383 Debt s ecurities is s ued 22-9,783 Other liabilities 24 1,112 1,231 Deferred income tax liabilities Total liabilities 182, ,053 SHAREHOLDERS EQUITY Share capital 28 25,294 21,650 Res erves 2,165 1,580 (Accumulated los s )/retained earnings (3,720) 4,229 Total shareholders equity 23,739 27,459 Total shareholders equity and liabilities 206, ,512 The notes to the financial statements are integral part of these financial statements. 12

13 Statement of changes in equity Statement of changes in equity Share capital Statutory reserves Retained earnings/ (accumulated loss) Total Balance at 1 January 2008 Transactions with owners 15,800 1,580 6,367 23,747 Increas e of s hare capital 5, ,850 Trans fer from retained earnings to the income s tatement - - (1,860) (1,860) Dividends paid (referring 2007) - - (1,582) (1,582) Comprehensive income Profit for the year - - 1,304 1,304 Balance at 31 December ,650 1,580 4,229 27,459 Balance at 1 January 2009 Transactions with owners 21,650 1,580 4,229 27,459 Increas e of s hare capital 3,644 - (3,644) - Trans fer to res erves (585) - Comprehensive income Loss for the year - - (3,720) (3,720) Balance at 31 December ,294 2,165 (3,720) 23,739 The notes to the financial statements are integral part of these financial statements. 13

14 Cas h flow s tatement Cash flow statement Notes Year ended 31 December Cash flows from operating activities Interes t received 16,235 17,746 Interes t paid (5,490) (8,226) Fees and commis s ions received 1,101 1,406 Fees and commis s ions paid (163) (33) Cas h payments to employees and s uppliers (4,364) (4,105) Income tax paid (66) (453) Cash flow from operating activity before changes in operating assets and liabilities 7,253 6,335 Changes in operating as s ets and liabilities - net decreas e in res erve with the Central bank 3,115 2,691 - net decreas e in trading s ecurities 1, net decreas e in loans to banks - 6,523 - net increas e in loans to cus tomers (13,274) (27,159) - net decreas e in other as s ets net (decreas e)/increas e in depos its from banks (27,729) 13,647 - net increas e/(decreas e) in due to cus tomers 37,883 (18,450) - net decreas e in other liabilities (119) (1,811) Net cash used in operating activities 8,298 (17,853) Cash used in investing activities Proceeds on dis pos al of inves tment s ecurities 4,854 2,364 Purchas e of intangible fixed as s ets (333) (44) Purchas e of property, plant and equipment (86) (238) Net cash used in investing activities 4,435 2,082 Cash flows from financing activities Dividends paid - (1,582) Repayments of borrowed funds (34,935) (13,660) Proceeds from borrowed funds 20,964 37,887 Net cash flow from financing activities (13,971) 22,645 Net increase in cash and cash equivalents (1,238) 6,874 14

15 Cas h flow s tatement Notes Year ended 31 December Cas h and cas h equivalents at beginning of period 25,301 18,427 Cash and cash equivalents at end of period 29 24,063 25,301 The notes to the financial statements are integral part of these financial statements. 15

16 Notes to the financial statements

17 1. General information and summary of significant accounting policies AD (the Bank ) was es tablis hed on 11 November 2002 as a res ult of the foundation meeting held by the following s hareholders : Aktiva Holding B.V., Factor Bank d.d. and LB Maxima D.O.O. The Bank was regis tered as a Bulgarian joint s tock company on 28 Augus t 2003 with the Sofia Court after receiving a licence from the Bulgarian National Bank on 13 Augus t The Bank s tarted its operations on 1 October The Bank is managed and repres ented by Management Board controlled by Supervis ory Board. Management Board incorporates three members elected by Supervis ory Board for up to five years mandate. Supervis ory Board incorporates at leas t three but not more than s even members elected for maximum mandate of five years. The main bus ines s orientation for is extending banking s upport to predominantly Small and Medium Enterpris es (SME) but als o corporate clients, being Slovene companies regis tered in or doing bus ines s with Bulgaria, Bulgarian companies doing bus ines s with Slovenia, clients of other NLB Group s Members or Bulgarian companies doing bus ines s with other countries in the region. The Bank als o offers private banking s upport to Slovene, Bulgarian and other individuals. The Bank s activities are performed through its headquarters in Sofia. Thes e financial s tatements have been approved by the Management Board, MB decis ion 0301/0013 dated The principal accounting policies adopted in the preparation of thes e financial s tatements are s et out below. Thes e policies have been cons is tently applied to all years pres ented, unles s otherwis e s tated. A. Basis of presentation The financial s tatements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The financial s tatements are pres ented in the national currency of Bulgaria, the Leva (BGN). The financial s tatements have been prepared under the his torical cos t convention, as modified by the revaluation of available-for-s ale inves tment s ecurities, financial as s ets and financial liabilities held at fair value through profit or los s. The preparation of financial s tatements in conformity with IFRS requires the us e of certain critical accounting es timates and as s umptions that affect the reported amounts of as s ets and liabilities and dis clos ure of contingent as s ets and liabilities at the date of the financial s tatements, and the reported amounts of revenues and expens es during the reporting period. It als o requires Management to exercis e its judgement in the proces s of applying the Bank s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where as s umptions and es timates are s ignificant to the financial s tatements are dis clos ed under Note 3. (a) Standards, amendments and interpretations effective for periods beginning on 1 January 2009 The Bank has adopted the following new and amended IFRS as of 1 January 2009: IAS 1, Pres entation of Financial Statements (revis ed September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income s tatement by a s tatement of comprehens ive income which als o includes all non-owner changes in equity (earlier pres ented in the s tatement of changes in equity). As the Bank does not have s uch non-owner changes in equity, the financial s tatements are not affected by the amendment except by the pres entation of the s tatement of comprehens ive income ins tead of previous ly s hown income s tatement. 17

18 The following s tandards, amendments and interpretations effective for annual periods beginning on 1 January 2009 for the Bank but are not yet applicable for the Bank s activity and therefore are not analys ed in details : IFRS 8 Operating s egments (effective for annual periods beginning on or after 1 January 2009). Ves ting Conditions and Cancellations Amendment to IFRS 2, Share-bas ed Payment (effective for annual periods beginning on or after 1 January 2009). Puttable financial ins truments and liabilities derived from liquidation - IAS 32 and IAS 1 Amendment (effective for annual periods beginning on or after 1 January 2009). IAS 23, Borrowing Cos ts (effective for annual periods beginning on or after 1 January 2009). Cos t of an Inves tment in a Subs idiary, Jointly Controlled Entity or As s ociate IFRS 1 and IAS 27 Amendment (effective for annual periods beginning on or after 1 January 2009). Improvements to International Financial Reporting Standards (is s ued in May 2008). Improving Dis clos ures about Financial Ins truments - Amendment to IFRS 7, Financial Ins truments : Dis clos ures (effective for annual periods beginning on or after 1 January 2009). IFRIC 13, Cus tomer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008 for financial s tatements prepared under IFRS; adopted by the EU with an effective date pos tponed to annual periods beginning after 31 December 2008). IFRIC 11, IFRS 2 - Company and Treas ury Share Trans actions (IFRIC 11 as adopted by the EU is effective for annual periods beginning on or after 1 March 2008, with early adoption permitted). IFRIC 14, IAS 19 The Limit on a Defined Benefit As s et, Minimum Funding Requirements and their Interaction. [(IFRIC 14 as adopted by the EU is effective for annual periods beginning on or after 31 December 2008, with early adoption permitted). (b) Standards, amendments and interpretations to existing standards that are not yet effective and not adopted earlier by the Bank The following s tandards and amendments to exis ting s tandards have been publis hed and are mandatory for the Bank s accounting periods beginning on or after 1 January 2010 or later periods, but the Bank has not early adopted them: IFRS 9, Financial Ins truments (is s ued in November 2009, effective for annual periods beginning on or after 1 January 2013, with earlier application permitted; not yet adopted by the EU). IFRS 9 replaces thos e parts of IAS 39 relating to the clas s ification and meas urement of financial as s ets. (c) Standards, amendments and interpretations to existing standards that are not yet effective and are not relevant for the Bank s operations The following s tandards, amendments and interpretations are mandatory for the Bank s accounting periods beginning on or after 1 January 2010, but are not relevant for the Bank s operations and there for the Bank has not analys ed them: IFRIC 15, Agreements for the Cons truction of Real Es tate (effective for annual periods beginning on or after 1 January 2009; IFRIC 15 as adopted by the EU is effective for annual periods beginning after 31 December 2009, with early adoption permitted). IFRIC 17, Dis tribution of Non-Cas h As s ets to Owners (effective for annual periods beginning on or after 1 July 2009; IFRIC 17 as adopted by the EU is effective for annual periods beginning after 31 October 2009, with early adoption permitted). IFRS 1, Firs t-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the firs t IFRS financial s tatements for a period beginning on or after 1 July 2009; res tructured IFRS 1 as adopted by the EU is effective for annual periods beginning after 31 December 2009). IFRIC 18, Trans fers of As s ets from Cus tomers (effective pros pectively to trans fers of as s ets from cus tomers received on or after 1 July 2009, earlier application permitted; 18

19 IFRIC 18 as adopted by the EU is effective for annual periods beginning after 31 October 2009, with early adoption permitted). Embedded Derivatives - Amendments to IFRIC 9 and IAS 39 (effective for annual periods ending on or after 30 June 2009; as adopted by the EU are effective for annual periods beginning after 31 December 2009, with early adoption permitted). Improvements to International Financial Reporting Standards (is s ued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010; the improvements have not yet been adopted by the EU). Group Cas h-s ettled Share-bas ed Payment Trans actions - Amendments to IFRS 2, Sharebas ed Payment (effective for annual periods beginning on or after 1 January 2010, not yet adopted by the EU). Additional Exemptions for Firs t-time Adopters - Amendments to IFRS 1, Firs t-time Adoption of IFRS (effective for annual periods beginning on or after 1 January 2010; not yet adopted by the EU). Clas s ification of Rights Is s ues Amendment to IAS 32, Financial Ins truments : Pres entation (effective for annual periods beginning on or after 1 February 2010). IAS 24, Related Party Dis clos ures (amended November 2009, effective for annual periods beginning on or after 1 January 2011; not yet adopted by the EU). IFRIC 19, Extinguis hing Financial Liabilities with Equity Ins truments (effective for annual periods beginning on or after 1 July 2010; not yet adopted by the EU). Prepayments of a Minimum Funding Requirement Amendment to IFRIC 14 (effective for annual periods beginning on or after 1 January 2011; not yet adopted by the EU). (d) Standards, amendments and interpretations that have not yet been endorsed for use in EU IFRS 9 Financial Ins truments. Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement. IFRIC 19 Extinguis hing Financial Liabilities with Equity Ins truments. Amendments to IFRS 2 Group Cas h-s ettled Share-bas ed Payment Trans actions. Amendments to IFRS 1 Firs t-time Adoption of International Financial Reporting Standards. Revis ed IAS 24 Related Party Dis clos ures. B. Foreign currencies (a) Functional and presentation currency Items included in the financial s tatements of the Bank are meas ured and pres ented in BGN, which is the Bank s functional and pres entation currency. (b) Transactions and balances Foreign currency trans actions are trans lated into the functional currency us ing the exchange rates prevailing at the dates of the trans actions. Foreign exchange gains and los s es res ulting from the s ettlement of s uch trans actions and from the trans lation at year-end exchange rates of monetary as s ets and liabilities denominated in foreign currencies are recognis ed in the s tatement of comprehens ive income, except when deferred in equity as qualifying cas h flow hedges and qualifying net inves tment hedges. Trans lation differences on non-monetary items, s uch as equities held at fair value through profit or los s, are reported as part of the fair value gain or los s. Trans lation differences on non-monetary items, s uch as equities clas s ified as available-for-s ale financial as s ets, are included in the fair value res erve in equity. At 31 December 2009, monetary as s ets and liabilities denominated in foreign currency are trans lated into Bulgarian Leva at the official Central Bank exchange rate BGN for EUR 1 and BGN for USD 1 (31 December 2008: BGN for EUR 1 and BGN for USD 1). 19

20 C. Offsetting financial instruments Financial as s ets and liabilities are offs et and the net amount reported in the balance s heet when there is a legally enforceable right to s et off the recognis ed amounts and there is an intention to s ettle on a net bas is, or dis pos e of the as s et and s ettle the liability s imultaneous ly. D. Interest income and expense Interes t income and expens e are recognized in the s tatement of comprehens ive income for all interes t bearing ins truments at amortis ed cos t on an accrual bas is us ing the effective interes t method. The effective interes t method is a method of calculating the amortis ed cos t of a financial as s et or a financial liability and allocating the interes t income or interes t expens e over the relevant period. The effective interes t rate is the rate that exactly dis counts es timated future cas h payments or receipts through the expected life of the financial ins trument or, when appropriate, a s horter period to the net carrying amount of the financial as s et or financial liability. In calculating the effective interes t rate, the Bank es timates cas h flows cons idering all contractual terms of the financial ins trument (for example, prepayment options ) but does not cons ider future credit los s es. The calculation includes all fees and commis s ions paid or received between parties to the contract that are integral part of the effective interes t rate, trans action cos ts and all other premiums or dis counts. Interes t income includes coupons earned on fixed income inves tment and trading s ecurities. When loans become doubtful of collection, they are written down to their recoverable amounts and interes t income is thereafter recognized bas ed on the interes t rate that was us ed to dis count the future cas h flows for the purpos e of meas uring the recoverable amount. E. Fees and commission income Fees and commis s ions are generally recognis ed on an accrual bas is when the s ervice has been provided. Fee and commis s ion income incorporates mainly fees for local and foreign currency money trans fers, cas h operations, and are generally recognis ed on an accrual bas is or at the date of trans action, as appropriate. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct cos ts ) and recognis ed as an adjus tment to the effective interes t rate on the loan. Loan s yndication fees are recognis ed as revenue when the s yndication has been completed and the Bank retained no part of the loan package for its elf or retained a part at the s ame effective interes t rate for the other participants. F. Financial assets The Bank clas s ifies its financial as s ets in the following categories : financial as s ets at fair value through profit or los s ; loans and receivables ; held-to-maturity inves tments ; and available-fors ale financial as s ets. The Management determines the clas s ification of its inves tments at initial recognition. (a) Financial assets at fair value through profit or loss This category includes financial as s ets held for trading. A financial as s et is clas s ified as held for trading if it is acquired or incurred principally for the purpos e of s elling or repurchas ing in the near term or if it is part of a portfolio of identified financial ins truments that are managed together and for which there is evidence of a recent actual pattern of s hort-term profit-taking. Derivatives are als o categoris ed as held for trading. Financial as s ets held for trading are initially recognized at fair value plus trans action cos ts and s ubs equently re-meas ured at fair value bas ed on current bid prices at the reporting date. All related realized and unrealized gains and los s es are included in net trading income in the period in which they aris e. Interes t earned whils t holding financial as s ets held for trading is reported as interes t income. 20

21 (b) Loans and receivables Loans and receivables are non-derivative financial as s ets with fixed or determinable payments that are not quoted at active market, other than: (a) thos e that the entity intends to s ell immediately or in s hort term, which are clas s ified as held for trading, and thos e that the entity upon initial recognition des ignates as at fair value through profit or los s ; (b) thos e that the entity upon initial recognition des ignates as available for s ale; or (c) thos e for which the holder may not recover s ubs tantially all of its initial inves tment, other than becaus e of credit deterioration. (c) Held to maturity Held to maturity inves tments are non-derivative financial as s ets with fixed or determinable payments and fixed maturities that the Bank s Management has the pos itive intention and ability to hold to maturity. Were the Bank to s ell other than an ins ignificant amount of heldto-maturity as s ets, the entire category would be tainted and reclas s ified as available for s ale. Held-to-maturity inves tments are carried at amortis ed cos t us ing the effective interes t method, les s any provis ion for impairment. Interes t earned whils t holding inves tment s ecurities is reported as interes t income. The Bank as s es s es its intention and ability to hold its held-tomaturity inves tments to maturity not only when thos e financial as s ets are initially recognized, but als o at each s ubs equent balance s heet date. (d) Available for sale Available for s ale inves tments are thos e intended to be held for an indefinite period of time, which may be s old in res pons e to needs for liquidity or changes in interes t rates, exchange rates or equity prices. Purchas es and s ales of trading s ecurities, held to maturity and available for s ale are recognis ed on trade-date the date on which the Bank commits to purchas e or s ell the as s et. Financial as s ets are initially recognis ed at fair value together with trans action cos ts for all financial as s ets not carried at fair value through profit or los s. Financial as s ets are derecognis ed when the rights to receive cas h flows from the financial as s ets have expired or where the Bank has trans ferred s ubs tantially all ris ks and rewards of owners hip. Available for s ale financial as s ets and trading s ecurities are s ubs equently carried at fair value. Loans and receivables and held to maturity inves tments are carried at amortis ed cos t us ing the effective interes t method. Gains and los s es aris ing from changes in the fair value of trading s ecurities are included in the s tatement of comprehens ive income in the period in which they aris e. Gains and los s es aris ing from changes in the fair value of available-for-s ale financial as s ets are recognis ed directly in equity, until the financial as s et is derecognis ed or impaired at which time the cumulative gain or los s previous ly recognis ed in equity s hould be recognis ed in profit or los s. However, interes t calculated us ing the effective interes t method is recognis ed in the s tatement of comprehens ive income. The fair values of quoted inves tments at active markets are bas ed on current bid prices. If the market for a financial as s et is not active (als o for unlis ted s ecurities ), the Bank es tablis hes fair value by us ing valuation techniques. G. Impairment of financial assets (a) Assets carried at amortised cost The Bank as s es s es at each balance s heet date whether there is objective evidence that a financial as s et or group of financial as s ets is impaired. A financial as s et or a group of financial as s ets is impaired and impairment los s es are incurred if, and only if, there is objective evidence of impairment as a res ult of one or more events that occurred after the initial recognition of the as s et (a los s event ) and that los s event (or events ) has an impact on the es timated future cas h flows of the financial as s et or group of financial as s ets that can be reliably es timated. Objective evidence that a financial as s et or group of as s ets is impaired includes obs ervable data that comes to the attention of the Bank agains t the following los s events : 21

22 Delinquency in contractual payments of principal or interes t; Cas h flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of s ales ); Breach of loan covenants or conditions ; Initiation of bankruptcy proceedings ; Deterioration of the borrower s competitive pos ition; Deterioration in the value of collateral; Downgrading below inves tment grade level. The Bank initially as s es s es whether objective evidence of impairment exis ts individually for financial as s ets that are individually s ignificant, and individually or collectively for financial as s ets that are not individually s ignificant. If the Bank determines no objective evidence of impairment exis ts for an individually as s es s ed financial as s et, whether s ignificant or not, it includes the as s et in a group of financial as s ets with s imilar credit ris k features and collectively as s es s es them for impairment. As s ets that are individually as s es s ed for impairment and for which an impairment los s is or continues to be recognis ed are not included in a collective as s es s ment of impairment. If there is objective evidence that an impairment los s on loans and receivables or held-tomaturity inves tments carried at amortis ed cos t has been incurred, the amount of the los s is meas ured as the difference between the as s et s carrying amount and the pres ent value of es timated future cas h flows (excluding future credit los s es that have not been incurred) dis counted at the financial as s et s original effective interes t rate. The carrying amount of the as s et is reduced through the us e of an allowance account and the amount of the los s is recognis ed in the s tatement of comprehens ive income. If a loan or held-to-maturity inves tment has a variable interes t rate, the dis count rate for meas uring any impairment los s is the current effective interes t rate determined under the contract. As a practical expedient, the Bank may meas ure impairment on the bas is of an ins trument s fair value us ing an obs ervable market price. The calculation of the pres ent value of the es timated future cas h flows of a collateralis ed financial as s et reflects the cas h flows that may res ult from foreclos ure les s cos ts for obtaining and s elling the collateral, whether or not foreclos ure is probable. For the purpos es of a collective evaluation of impairment, financial as s ets are grouped on the bas is of s imilar credit ris k features (i.e., on the bas is of the Bank s grading proces s that cons iders as s et type, indus try, geographical location, collateral type, pas t-due s tatus and other relevant factors ). Thos e features are relevant to the es timation of future cas h flows for groups of s uch as s ets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the as s ets being evaluated. Future cas h flows in a group of financial as s ets that are collectively evaluated for impairment are es timated on the bas is of the contractual cas h flows of the as s ets in the Bank and his torical los s experience for as s ets with credit ris k features s imilar to thos e in the Bank. His torical los s experience is adjus ted on the bas is of current obs ervable data to reflect the effects of current conditions that did not affect the period on which the his torical los s experience is bas ed and to remove the effects of conditions in the his torical period that do not exis t currently. When a loan is uncollectible, it is written off agains t the related provis ion for loan impairment. Such loans are written off after all the neces s ary procedures have been completed and the amount of the los s has been determined. Subs equent recoveries of amounts previous ly written off decreas e the amount of the provis ion for loan impairment in the s tatement of comprehens ive income. If, in a s ubs equent period, the amount of the impairment los s decreas es and the decreas e can be related objectively to an event occurring after the impairment was recognis ed (s uch as an improvement in the debtor s credit rating), the previous ly recognis ed impairment los s is revers ed by adjus ting the allowance account. The amount of the revers al is recognis ed in the s tatement of comprehens ive income. 22

23 (b) Assets classified as available for sale The Bank as s es s es at each balance s heet date whether there is objective evidence that a financial as s et or a group of financial as s ets is impaired. In the cas e of equity inves tments clas s ified as available-for-s ale, a s ignificant or prolonged decline in the fair value of the financial as s et below its cos t is cons idered in determining whether the as s ets are impaired. If any s uch evidence exis ts for available for-s ale-financial as s ets, the cumulative los s meas ured as the difference between the acquis ition cos t and the current fair value, les s any impairment los s on that financial as s et previous ly recognized in profit or los s is removed from equity and recognized in the s tatement of comprehens ive income. Impairment los s es recognized in profit and los s on equity ins truments, clas s ified as available-for-s ale, are not revers ed through the s tatement of comprehens ive income. If, in a s ubs equent period, the fair value of a debt ins trument clas s ified as available for s ale increas es and the increas e can be objectively related to an event occurring after the impairment los s was recognized in profit or los s, the impairment los s is revers ed through the s tatement of comprehens ive income. (c) Renegotiated loans Loans that are either s ubject to collective impairment as s es s ment or individually s ignificant and whos e terms have been renegotiated are no longer cons idered to be pas t due but are treated as new loans. In s ubs equent years, the as s et is cons idered to be pas t due and dis clos ed only if there is non-compliance with the renegotiated conditions. H. Property, plant and equipment Property and equipment are s tated at his torical cos t les s depreciation. His torical cos t includes expenditure that is directly attributable to the acquis ition of the items. Subs equent cos ts are included in the as s et s carrying amount or are recognis ed as a s eparate as s et, as appropriate, only when it is probable that future economic benefits as s ociated with the item will flow to the Bank and the cos t of the item can be meas ured reliably. All other repairs and maintenance are charged to the s tatement of comprehens ive income when the expenditure is incurred. Depreciation is calculated on the s traight-line method to allocate the cos t of each as s et to its res idual value over its es timated us eful life. The as s ets res idual values and us eful lives are reviewed, and adjus ted if appropriate, at each balance s heet date. The following depreciation rates have been us ed: Buildings 4 % Computers & peripherals 25 % Software 25 % Vehicles 25 % Leas ehold improvements 15 % Other fixed as s ets 15 % As s ets that are s ubject to amortis ation are reviewed for impairment whenever events or changes in circums tances indicate that the carrying amount may not be recoverable. An as s et s carrying amount is written down immediately to its recoverable amount if the as s et s carrying amount is greater than its es timated recoverable amount. The recoverable amount is the higher of the as s et s fair value les s cos ts to s ell and value in us e. Gains and los s es on dis pos al of property and equipment are determined by comparing proceed with carrying amount. Thes e are included in the s tatement of comprehens ive income. 23

24 The depreciation rate adopted under leas ehold improvements is bas ed on the direct renewal of the rent contract of the Bank on the provided termination date. I. Intangible fixed assets Intangible as s ets compris e mainly computer s oftware and are s tated at cos t les s accumulated depreciation and impairment. Depreciation is calculated on the s traight-line method to write off the cos t of each as s et to their res idual values over their es timated us eful life of four years. J. Cash and cash equivalents For the purpos es of the cas h flow s tatement, cas h and cas h equivalents compris e balances with les s than three months maturity from the date of acquis ition including: cas h, balances with Bulgarian National Bank (BNB) excluding the s tatutory minimum required res erves, and amounts due from other banks. K. Deferred income taxes Taxation has been provided for in the financial s tatements in accordance with Bulgarian legis lation currently in force. Current tax is calculated on the bas is of the taxable profit for the year, us ing the tax rates enacted at the balance s heet date. Taxes other than on income are recorded within operating expens es. Deferred income tax is provided us ing the balance s heet liability method, for all temporary differences aris ing between the tax bas es of as s ets and liabilities and their carrying values for financial reporting purpos es. Income tax payable on profit, bas ed on the applicable tax law in the juris diction, is recognis ed as an expens e in the period in which profit aris es. The tax effects as a res ult of income tax los s es available for carry forward are recognis ed as an as s et when it is probable that future taxable profits will be available agains t which thes e los s es can be utilis ed. L. Provisions Provis ions are recognis ed when the Bank has a pres ent legal or cons tructive obligation as a res ult of pas t events, it is more likely that an outflow of res ources will be required to s ettle the obligation, and a reliable es timate of the amount of the obligation is pos s ible to be made. M. Borrowings, including debt securities issued Borrowings are recognis ed initially at fair value, being their is s ue proceeds (fair value of cons ideration received) net of trans action cos ts incurred. Borrowings are s ubs equently s tated at amortis ed cos t; any difference between proceeds net of trans action cos ts and the redemption value is recognis ed in the s tatement of comprehens ive income over the period of the borrowings us ing the effective interes t method. N. Share capital Incremental external cos ts directly attributable to the is s ue of new s hares are deducted from equity net of any related income taxes. O. Operating leases Payments made under operating leas es are charged agains t income in equal ins talments over the period of the leas e. P. Financial guarantee contracts Financial guarantee contracts are contracts that require the is s uer to make s pecified payments to reimburs e the holder for a los s it incurs becaus e a s pecified debtor fails to make payments when due, in accordance with the terms of a debt ins trument. Such financial guarantees are given to banks, financial ins titutions and other bodies on behalf of cus tomers to s ecure loans, overdrafts and other bank facilities. Financial guarantees are initially recognis ed in the financial s tatements at fair value on the date the guarantee was given. Subs equent to initial recognition, the Bank s liabilities under s uch guarantees are meas ured at the higher of the initial meas urement, les s amortis ation calculated to recognis e in the s tatement of comprehens ive income the fee income earned on a s traight line bas is over the life of the guarantee and the bes t es timate of the expenditure required to s ettle 24

25 any financial obligation aris ing at the balance s heet date. Thes e es timates are determined bas ed on experience of s imilar trans actions and his tory of pas t los s es, s upplemented by the judgment of Management. Any increas e in the liability relating to guarantees is cons idered in the s tatement of comprehens ive income under other operating expens es. Q. Sale and repurchase agreements Securities s old s ubject to repurchas e agreements ( repos ) are retained in the financial s tatements as trading s ecurities and are reclas s ified in the financial s tatements as pledged as s ets when the trans feree has the right by contract or cus tom to s ell or repledge the collateral; the counterparty liability is included in amounts due to other banks, or depos its due to cus tomers, as appropriate. Securities purchas ed under agreements to res ell ( revers e repos ) are recorded as loans and advances to other banks or cus tomers, as appropriate. The difference between s ale and repurchas e price is treated as interes t and accrued over the life of repo agreements us ing the effective interes t method. Securities lent to counterparties are als o retained in the financial s tatements. Securities borrowed are not recognis ed in the financial s tatements, unles s thes e are s old to third parties, in which cas e the purchas e and s ale are recorded with the gain or los s included in trading income. The obligation to return them is recorded at fair value as a trading liability. R. Employee benefits (a) Social, pension and health funds The Bank is obliged by the current Bulgarian legis lation to make fixed contribution on behalf of the employees in a s ocial fund operated by the Government. All thos e payments /liabilities are recognis ed as an expens e in the period to which thos e relate. (b) Pension obligations In accordance with article 222, para. 3 of the Bulgarian Labour Code, in the event of termination of a labour contract, after the employee has reached the s tatutory required retirement age, regardles s of the reas on for the termination, the employee is entitled to a compens ation as follows : 2 gros s monthly s alaries in all cas es and 6 gros s monthly s alaries if the employee has been engaged with the Bank for at leas t 10 years. In the end of every reporting period the Bank es timates and recognis es the provis ion for its pens ion obligations. In calculating the provis ion the Bank es timates the pres ent value of its future pens ion obligations cons idering the probability of the employees to retire while employed in the Bank. As at 31 December 2009 and 31 December 2008 the amount of the retirement benefit obligations es timated was immaterial and therefore no provis ion was recognis ed in the financial s tatements. S. Dividends Dividends are recognis ed as a liability when authorized by the General As s embly of the Shareholders. Subs equently they are deducted from equity when dis tributed. Dividends will not be declared according to the long-term s trategy of the Bank. 25

26 2. Financial risk management In performing its activities the Bank is expos ed to variety of financial ris ks : market ris k (including currency ris k, fair value interes t rate ris k, cas h flow interes t rate ris k and price ris k), credit ris k and liquidity ris k. The bank s overall ris k management programme focus es on the unpredictability of financial markets and s eeks to minimis e potential advers e effects on the Bank s financial performance. The Bank s ris k management policies are des igned to identify and analys e thes e ris ks, to s et appropriate ris k limits and controls, and to monitor the ris ks and adherence to limits by means of reliable and up-to-date information s ys tems. The Bank regularly reviews its ris k management policies and s ys tems to reflect changes in markets, products and emerging bes t practice. The process of risk management includes the following stages: Risk Identification definition of its nature and des cription of the ris ks for the Bank. Risk measuring methods for meas uring the ris ks and ens uring of reliable outgoing data for ris k meas uring. Risk Management Department co-ordinates the work of the departments, related to analys is, as s es s ment, s upervis ion, management and control over the ris k; develops and implements an internal rating s ys tem for the cus tomers of the Bank; develops and implements approaches to meet the requirements of the new capital Accord Bas el II and the res pective internal regulation; as s is ts in the proces s of harmonizing the internal rules and procedures of the Bank with the internal rules and procedures of Nova Ljubljans ka Banka d.d. concerning ris k management policy and techniques. Recent volatility in global and local financial markets The ongoing global liquidity cris is which commenced in the middle of 2007 has res ulted in, among other things, a lower level of capital market funding, lower liquidity levels acros s the banking s ector, and, at times, higher interbank lending rates and very high volatility in s tock markets. Indeed the full extent of the impact of the ongoing financial cris is is proving to be impos s ible to anticipate or completely guard agains t. Management is unable to reliably es timate the effects on the Bank s financial pos ition of any further deterioration in the liquidity of the financial markets and the increas ed volatility in the currency and equity markets. Management believes it is taking all the neces s ary meas ures to s upport the s us tainability and growth of the Bank s bus ines s in the current circums tances. Impact on borrowers Borrowers of the Bank may be affected by the lower liquidity s ituation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for borrowers may als o have an impact on management s cas h flow forecas ts and as s es s ment of the impairment of financial and non-financial as s ets. To the extent that information is available, management have properly reflected revis ed es timates of expected future cas h flows in their impairment as s es s ments. The amount of provis ion for impaired loans is bas ed on management s apprais als of thes e as s ets 26

27 at the balance s heet date after taking into cons ideration the cas h flows that may res ult from foreclos ure les s cos ts for obtaining and s elling the collateral. The four general areas of ris k monitoring by the Bank are credit ris k, market ris k, operational ris k and liquidity ris k. A. Credit risk The Bank takes on expos ure to credit ris k which is the ris k that a counterparty will be unable to pay amounts in full when due. Impairment provis ions are provided for los s es that have been incurred at the balance s heet date. Significant changes in the economy, or in the health of a particular indus try s egment that repres ents a concentration in the Bank s portfolio, could res ult in los s es that are different from thos e provided for at the balance s heet date. Management therefore carefully manages its expos ure to credit ris k. The Bank s tructures the levels of credit ris k it undertakes by placing limits on the amount of ris k accepted in relation to one borrower, or groups of borrowers, and the geographical and indus try s egments. Such ris ks are monitored on a revolving bas is and s ubject to an annual or more frequent review. (a) Loans and advances In meas uring credit ris k of loan and advances to cus tomers and to banks at a counterparty level, the Bank reflects three components : the probability of default by the client or counterparty on its contractual obligations ; current expos ures to the counterparty and its likely future development, from which the Bank derives the expos ure at default ; and the likely recovery ratio on the defaulted obligations (the los s given default ). The Bank manages the credit ris k of loans and advances to cus tomers and to banks through a comprehens ive s et of policies and procedures to ens ure that all as pects of credit ris k are adequately covered. Financial ris k is as s es s ed following a detailed analys is of the financial s tatements of the borrower/guarantor(s ) on the bas is of a s ys tem of creditworthines s factors. Market ris k is as s es s ed bas ed on the economic characteris tics /pros pects of the relevant market and the competitive pos ition of the propos ed borrower. Ris k expos ures are evaluated and clas s ified bas ed on the credit ris k level, the period of delay of amounts due, the as s es s ment of the debtor s financial s tate and the main s ources for repayment of the debtor s obligations. As s es s ment of the financial s ituation includes a qualitative and quantitative analys es reflecting all circums tances which may affect debt repayment according to the claus es of the loan agreement. The bank s ris k expos ures are clas s ified into four clas s ification groups according to the criteria bas ed on credit ris k level, as follows : Standard exposures s tandard ris k expos ures s hall be thos e ris k expos ures which are s erviced and information on the debtor s financial s tate gives no ground to as s ume that the debtor will not repay in full his debts. A ris k expos ure s hall be clas s ified as s tandard provided that all of the following conditions obtain: the principal and interes t are repaid in accordance with the contractual agreement terms, or payments on them have been pas t-due up to 30 days, provided the delay is jus tified or accidental; the debtor us es the loan for the purpos es s tipulated in the loan agreement; the Bank has s ufficient updated information on the debtor s financial s tate and on the s ources for repayment of his liabilities, as well as other documents relating to his activity. 27