ABOUT US ProCredit Bank Macedonia

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1 Part of the ProCredit Group ABOUT US ProCredit Bank Macedonia

2 Part of the ProCredit Group The only German Bank in Macedonia The sole owner of ProCredit Bank is ProCredit Holding (ProCredit Holding AG & Co. KGaA) which holds a controlling stake in each ProCredit institution.the main functions of ProCredit Holding with regard to banks in the group are to provide equity and debt financing, to indicate the strategic guidelines for development and supervision. The major shareholder of ProCredit Holiding are credible international institutions, among which KfW the largest German development bank, IFC, a member of the World Bank Group and the largest global development institution and Stichting DOEN, or the DOEN Foundation. IPC - German consulting company in the field of sustainable development of SMEs. IPC offers advices for institutions that offer financial services to SMEs, develop instruments for energy efficiency investments and develop and implement training programs for educational institutions. KFW - German development bank, under the supervision of the German Federal Government. Finances investments in developing countries and enjoys highest AAA credit rating by Fitch Ratings. Other shareholders: DOEN Dutch Foundation focused on achieving green, socially-inclusive and creative society. DOEN supports inspiring initiatives, by issuing subsidies, providing a loan or equity investments.

3 FOREWORD FROM THE MANAGEMENT BOARD We have been operating successfully in Macedonia for the last 12 years, focusing on developmentoriented companies with a long-term vision for growth and expansion. We are a key banking partner to production companies, companies engaged in international trade and expansion activities, agricultural businesses, and companies wishing to invest in new technologies, energy efficiency or renewable energy. Among other reasons, the companies that operate internationally choose us as their main banking partner due to our strong regional presence. Through business-to-business networking meetings with clients of the banks in our network, the system of convenient international payments and cross-border financing benefits, we provide a range of business development benefits. We aim to be a leader in innovations in the banking system in Macedonia. Our primary focus is to adapt our services to make them even more modern, practical and convenient. That s why we decided to make the majority of our transaction services available to our clients 24/7 through our network of 24/7 Zones. We strive to be the number one bank in Macedonia offering clients complete functionality and efficiency. We are the bank of choice for clients who seek experts in understanding their business and who appreciate modern, fast and simple services. We are here to provide excellent service and long-term partnerships. Respectfully yours, Jovanka Joleska Popovska General Manager Emilija Spirovska Member of Management Board Valentina Nikovska Member of Management Board

4 Your stable and internationally assessed banking partner Part of an international network with a strong presence in South Eastern Europe. Supervised by BaFin - The German Federal Financial Supervisory Authority We work in accordance with the best international banking practices and the regu latory standards in Germany, a banking system proven to be the most stable in Europe. Fitch rating BBB - We are the only bank in Macedonia rated by the international rating agency Fitch Ratings to receive a continual rating upgrade since 2005.

5 The leader in modern technologies and innovation in the banking industry First bank that operates 24/7 We opened 24/7 Zones in which almost all transaction services are available to our clients around the clock. 24/7 Zones are available at every ProCredit Bank branch at 21 locations in Macedonia. Efficiency and flexibility for our clients: Electronic signature of contracts with the bank Full range of domestic and international electronic payments through our e-banking system Fast, convenient and electronically issued letters of guarantee

6 Annual Report 2015 ProCredit, Macedonia Annual Report according IFRS, ProCredit Bank 2015 EUR 000 MKD Growth MKD Balance sheet Total assets Gross Loan Portfolio Busines Loan Portfolio ЕУР 10,000 ЕУР 10,000 < EУР 30,000 ЕУР 30,000 < EУР 150,000 ЕУР 150, ,5% 7,3% 4,6% -42,4% -16,4% 4,5% 29,5% Agricultural Loan Portfolio Housing Improvement Loan Portfolio Other Allowance for Impairment on Loans Net Loan Portfolio Liabilities to Customers ,4% -4,5% 212,6% 0,1% 7,6% 8,0% Liabilities to Banks and Financial Institution (excluding PCH) Shareholders Equity ,1% 5,0% Income statement Operating Income Operating Expenses Operating Profit before tax Net Profit ,2% 3,3% 24,5% 27,3% Key ratios Cost/Income ratio ROE Capital Ratio Nonperforming Loans 62,5% 14,7% 13,4% 2,8% 52,9% 9,1% 15,6% 1,9% Operational statistics Number of Clients ,0% out of which Business Clients ,0% Loans Outstanding Number of Deposit Accounts Number of Staff ,8% -13,9% -15,3% Number of Branches and Service Centers/Points ,0% Exchange Rate MKD/EUR 61, ,4814

7 Branch network in Macedonia Tetovo Gostivar Zona Zona 24/7 24/7 Zona Skopje 24/7 Veles Kumanovo Zona Zona 24/7 24/7 Zona Stip 24/7 Struga Zona Ohrid 24/7 Zona Bitola 24/7 Zona Prilep 24/7 Zona 24/7 Kavadarci Zona Gevgelija Zona 24/7 Strumica 24/7 Type Number Head office Outlets for business clients Outlets for business and private clients 24/7 Zones Skopje Other towns

8 Part of the ProCredit Group ProCredit Bank Macedonia Manapo, bb 1000 Skopje Tel.: Fax.: info@procreditbank.com.mk

9 ProCredit Bank AD Skopje Financial Statements prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2015

10 Financial statements for the year ended 31 December 2015 Content Independent auditor s report Pages Income statement 1 Statement of profit or loss and other comprehensive income 2 Statement of financial position (balance sheet) 3 Statement of changes in equity 4-5 Cash flow statement 6 Notes to the financial statements 7-89

11 Independent Auditor s Report

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14 Audited Financial Statements

15 Financial statements for the year ended 31 December 2015 Income statment in '000 MKD Note Interest and similar income 1,240,558 1,298,953 Interest and similar expenses (371,364) (443,933) Net interest income (22, 25) 869, ,020 Allowance for impairment losses on loans and advances (10, 26) (102,110) (170,186) Net interest income after allowances 767, ,834 Fee and commission income 252, ,521 Fee and commission expenses (67,124) (58,384) Net fee and commission income (23, 27) 185, ,137 Result from foreign exchange transactions (28) 41,766 43,137 Net result from available-for-sale financial assets (29) 2,000 13,395 Net other operating income/(expense) (30) (69,794) (88,000) Operating income (26,028) (31,468) Personnel expenses (31) (222,445) (249,147) Other administrative expenses (31) (411,460) (364,412) Operating expenses (633,905) (613,559) Profit before tax 292, ,944 Income tax expense (15, 32) (26,136) (25,672) Profit for the year 266, ,272 The notes on pages 7 to 89 are an integral part of these financial statements 1

16 Financial statements for the year ended 31 December 2015 Statement of profit or loss and other comprehensive income in '000 MKD Note Profit for the year 266, ,272 Change in revaluation reserve from available-for-sale financial assets (3,014) (15,147) Other comprehensive income for the year, net of tax (3,014) (15,147) Total comprehensive income for the year 263, ,125 The notes on pages 7 to 89 are an integral part of these financial statements 2

17 Financial statements for the year ended 31 December 2015 Statement of financial position in '000 MKD Assets Note Cash and cash equivalents (8, 33) 2,617,683 2,767,102 Loans and advances to banks (9, 34) 832, ,849 Available-for-sale financial assets (6, 35) 239,147 64,534 Loans and advances to customers (6, 36) 15,533,821 14,471,592 Allowance for losses on loans and advances to customers (10, 37) (550,572) (549,926) (12, 13, Property, plant and equipment 39) 801, ,174 Intangible assets (11, 38) 2,776 3,596 Deferred tax assets (15, 41) 2,609 1,878 Other financial assets (42) 41,585 18,528 Other non-financial assets (42) 63,512 91,562 Total assets 19,584,719 18,225,888 Liabilities Liabilities to banks (16, 43) 438,497 9,139 Liabilities to customers (16, 44) 13,286,304 12,306,861 Borrowings (45) 3,210,039 3,276,341 Other financial liabilities (46) 62,496 16,912 Other non-financial liabilities (46) 20,084 19,678 (17, 18, Provisions 47) 16,138 16,756 Current tax liabilities (15, 41) 3,729 25,578 Subordinated debt (19, 48) 503, ,060 Hybrid capital (49) 193, ,759 Total liabilities 17,734,536 16,464,084 Share capital , ,625 Share premium 74,633 74,633 Legal reserve 84,505 84,505 Retained earnings 967, ,970 Fair value reserve from available-for-sale financial instruments (35) 57 3,071 Total equity 1,850,183 1,761,804 Total equity and liabilities 19,584,719 18,225,888 The notes on pages 7 to 89 are an integral part of these financial statements 3

18 Financial statements for the year ended 31 December 2015 Statement of Changes in Equity in '000 MKD Attributable to equity holders of the parent company Total Share capital Share premium Legal reserve Retained earnings Fair value reserve Balance at January 1, ,625 74,633 84, ,970 3,071 1,761,805 Total comprehensive income Profit for the year , ,302 Other comprehensive income, net of tax Revaluation of available-for-sale securities (3,014) (3,014) Total comprehensive income for the year (3,014) (3,014) Total comprehensive income ,302 (3,014) 263,288 Transactions with owners of the Bank Contributions and distributions Distributed dividends from profit (174,910) - (174,910) Total contributions and distributions (174,910) - (174,910) Balance at December 31, ,625 74,633 84, , ,850,183 The notes on pages 7 to 89 are an integral part of these financial statements 4

19 Financial statements for the year ended 31 December 2015 in '000 MKD Attributable to equity holders of the bank Total Share capital Share premium Legal reserve Retained earnings Fair value reserve Balance at January 1, ,625 74,633 84, ,011 18,218 1,583,992 Total comprehensive income Profit for the year , ,272 Other comprehensive income, net of tax Revaluation of available-for-sale securities (15,147) (15,147) Total other comprehensive income for the year (15,147) (15,147) Total comprehensive income ,272 (15,147) 194,125 Transactions with owners of the Bank Contributions and distributions Distributed dividends from profit (16,313) - (16,313) Total contributions and distributions (16,313) - (16,313) Balance at December 31, ,625 74,633 84, ,970 3,071 1,761,804 The notes on pages 7 to 89 are an integral part of these financial statements 5

20 Financial statements for the year ended 31 December 2015 Cash Flow Statement In '000 MKD Note Cash flow statement from operating activities Profit for the year 266, ,272 Adjustments for: Depreciation of property and equipment 39 81,320 45,606 Written off property and equipment 39-23,999 Amortisation of intangible assets 38 1,882 5,065 Capital gain from: - Sold property and equipment (1,627) - - Sold repossessed property (19,176) - Capital loss from sold repossessed property Net gain on sale of available-for-sale investments (2,000) - Impairment losses on financial assets , ,186 Impairment losses on non financial assets 4,438 12,800 Interest income 25 (1,240,558) (1,298,953) Interest expenses , ,933 Tax expense 26,136 25,672 (409,588) (362,430) Changes in: Restricted accounts 995 6,786 Balances with the NBRM restricted deposit (46,816) (26,265) Loans and advances to customers (1,166,797) (1,923,991) Other assets 15,394 29,124 Deposits from banks and other financial institutions 429,358 (70) Customers and other depositors 996,032 1,603,191 Other liabilities 45,372 22,936 Interest receipts 1,243,661 2,688,618 Interest paid (396,747 (434,500) Income taxes paid (48,716) (25,672) Net cash from / (used in) operating activities 662,148 1,577,727 Cash flows from investing activities Purchase of property, plant and equipment (385,180) (295,902) Proceeds from the sale of property, plant and equipment 18,290 3,001 Purchase of intangibles (1,061) - Purchase of investment securities (240,220) (1,022,845) Proceeds from investment securities 64, ,250 Net cash (used in) / from investing activities (543,578) (1,131,496) Cash flows from financing activities Proceeds from borrowings 1,604,984 1,406,847 Repayments of borrowings (1,667,820) (1,488,052) Proceeds from subordinated loan 156,516 - Repayments of subordinated loan (246,758) - Devidends paid (174,909) (16,313) Net cash from (used in) / financing activities (327,987) (97,518) Net increase in cash and cash equivalents (209,417) 348,723 Cash and cash equivalents at beginning of year 3,043,147 2,694,424 Cash and cash equivalents at end of year 33 2,833,731 3,043,147 The notes on pages 7 to 89 are an integral part of these financial statements 6

21 Notes to the Financial Statements A. Basis of Preparation 1) Compliance with International Financial Reporting Standards 2) Compliance with local law 3) Use of assumptions and estimates 4) Accounting developments B. Summary of Significant Accounting Policies 5) Measurement basis 6) Financial assets 7) Foreign currency translation 8) Cash and cash equivalents 9) Loans and receivables 10) Allowance for losses on loans and advances and impairment of available-for-sale financial assets 11) Intangible assets 12) Property, plant and equipment 13) Impairment of non-financial assets 14) Leases 15) Income tax 16) Liabilities to banks and customers 17) Debt securities 18) Provisions 19) Post-employment benefits and other employee benefits 20) Subordinated debt 21) Equity capital 22) Interest income and expense 23) Fee and commission income and expenses 24) Dividend income C. Notes to the Income Statement 25) Net interest income 26) Allowance for impairment losses on loans and advances 27) Net fee and commission income 28) Result from foreign exchange transactions 29) Net result from available-for-sale financial assets 30) Net other operating income 31) Personnel and other administrative expenses 32) Income tax expenses D. Notes to the Balance Sheet 33) Cash and cash equivalents 34) Loans and advances to banks 35) Available-for-sale financial assets 36) Loans and advances to customers 37) Allowance for losses on loans and advances 38) Intangible assets 39) Property, plant and equipment 40) Leasing 41) Income taxes 42) Other assets 43) Liabilities to banks 44) Liabilities to customers 45) Borrowings 46) Other liabilities 7

22 47) Provisions 48) Subordinated debt 49) Hybrid capital 50) Equity capital E. Risk Management 51) Management of the overall bank risk profile capital management 52) Management of individual risks 53) Credit risk 54) Financial risks 55) Operational risk F. Additional Notes 56) Fair value of financial instruments 57) Pledged assets 58) Contingent liabilities and commitments 59) Related party transactions 60) Management compensation 61) Significant post-balance sheet events 62) Exchange rates 63) Address and general information 8

23 Notes to the Financial Statements A. Basis of Preparation 1) Compliance with International Financial Reporting Standards ProCredit Bank AD Skopje ( the bank ) prepares its financial statements in accordance with the International Financial Reporting Standards (IFRS). Management prepared these financial statements on a going concern basis. In making this judgement management considered the bank s financial position, current intentions, profitability of operations and access to financial resources and analysed the impact of the recent financial crisis on future operations of the Bank. Functional and presentation currency All amounts are presented in thousands of Macedonian denars (MKD), unless otherwise stated. For computational reasons, the figures in the tables may exhibit rounding differences of ± one unit (MKD, %, etc.). 2) Compliance with local law ProCredit Bank AD Skopje is a joint stock company. For supervisory purposes ProCredit Bank AD qualifies as a bank according to the Macedonian Banking Law and is therefore supervised by the National Bank of the Republic of Macedonia (NBRM). The bank s financial statements for the fiscal year 2015 were approved for issue by the Supervisory Board on 26 April ) Use of assumptions and estimates The bank s financial reporting and its financial results are influenced by accounting policies, assumptions, estimates, and management judgement which necessarily have to be made in the course of preparing the financial statements. All estimates and assumptions necessary for compliance with the IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events and are considered appropriate under the given circumstances. 9

24 Accounting policies and the management s judgement with respect to certain items are especially critical for the bank s results and financial situation due to their materiality in amount. This applies to the following positions: (a) Impairment of credit exposures The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired, on the level of the client exposure including related parties. To determine an allowance for individually significant (large) impaired client exposure, the bank performed a detailed case-by-case analysis of the capacity and willingness of the borrower to service the obligation. To determine the bank-wide rates to be applied for collective loan loss provisioning, the bank and ProCredit Holding performed an evaluation of the quality of the loan portfolio, taking into account historical loss experiences of the Bank and most of the ProCredit institutions. This migration analysis is based on statistical data until 2015 and reflects both, average losses during a period of constant growth and favourable economic environments as well as average losses during the period of global recession in nearly all of the ProCredit group s countries of operation. To the extent that the net present value of estimated cash flows differs by +/- 0.5%, the provision would be estimated MKD 74,916 thousands higher or lower (2014: MKD 69,608 thousands). Further information on the bank s accounting policy on loan loss provisioning can be found in note (10) and note (53). (b) Impairment of repossessed property The Bank assesses the need for impairment of repossessed property yearly. If repossessed property has been impaired, the bank recognizes impairment losses for subsequent write-down of the asset to its fair value less cost to sell. 10

25 4) Accounting developments (a) Standards, amendments and interpretations effective and adopted by the bank in 2015 Amendment to International Accounting Standard 19 Employee Benefits : Defined benefit Plans: Employee Contributions. On 21 November 2013 the International Accounting Standards Board amended the requirements of IAS 19 for the accounting of employee contributions that are linked to service but are independent of the number of years of service. Examples of contributions that are independent of the number of years of service include those that are a fixed percentage of the employee s salary, a fixed amount throughout the service period or dependent on the employee s age. In accordance with this amendment, the entity is permitted to recognise such contributions either as a reduction of service cost in the period in which the related service is rendered (as if a short term employee benefit is recognised) or to continue to attribute them to periods of service. The adoption of the above amendment had no impact on the financial statements of the bank. Improvements to International Accounting Standards: - cycle cycle As part of the annual improvements project, the International Accounting Standards Board issued, on 12 December 2013, non - urgent but necessary amendments to various standards. The adoption of the above amendments had no impact on the financial statements of the bank. (b) Standards, amendments and interpretations issued but not yet effective The following standards, amendments and interpretations are issued by the IASB and will have an impact on the bank s financial statements. These were not applied in preparing these Financial Statements: Amendments to IAS 1: Disclosure Initiative will have a minor impact on the financial statements. The amendments are effective for annual periods beginning on or after 1 January The main amendments are summarized below: - the restriction to disclose only a summary of significant accounting policies is removed; - It is clarified that even when other standards require specific disclosures as minimum requirements, an entity may not provide them if this is considered immaterial. In addition, in case the disclosures required by the IFRS are insufficient to enable users to understand the impact of particular transactions, the entity shall consider whether to provide additional disclosures; - It is clarified that the line items that IFRS require to be presented in the balance sheet and the statements of profit or loss and other comprehensive income are not restrictive and that the entity may present additional line items, headings and subtotals; - It is clarified that in the Statement of Comprehensive Income the share of other comprehensive income of associates and joint ventures accounted for using the equity method shall be separated into: amounts that will not be reclassified subsequently to profit or loss and amounts that will be reclassified subsequently to profit or loss; 11

26 - It is clarified that the standard does not specify the presentation order of the notes and that each entity shall determine a systematic manner of presentation taking into account the understand ability and comparability of its financial statements. IFRS 15 Revenue from Contracts with Customers will have a minor impact on the financial statements. IFRS 15 will be effective for annual periods beginning on or after 1 January IFRS 15 Revenue from Contracts with Customers was issued on 28 May 2014 by the International Accounting Standards Board. The new standard is the outcome of a joint project by the IASB and the Financial Accounting Standards Board (FASB) to develop common requirements as far as the revenue recognition principles are concerned. The new standard shall be applied to all contracts with customers, except those that are in scope of other standards, such as financial leases, insurance contracts and financial instruments. According to the new standard, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A new revenue recognition model is introduced, by applying the following five steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. The performance obligation notion is new and in effect represents a promise in a contract with a customer to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. The new IFRS 15 supersedes: (a) (b) (c) (d) (e) (f) IAS 11 Construction Contracts ; IAS 18 Revenue ; IFRIC 13 Customer Loyalty Programmes ; IFRIC 15 Agreements for the Construction of Real Estate ; IFRIC 18 Transfers of Assets from Customers ;and SIC-31 Revenue Barter Transactions Involving Advertising Services. IFRS 9 Financial Instruments will have an impact on the recognition and measurement of financial instruments. The overall impact of this standard is currently being investigated. IFRS 9 is applicable for annual periods beginning on or after 1 January

27 On 24 July 2014, the International Accounting Standards Board completed the issuance of the final text of IFRS 9: Financial Instruments, which replaces the existing IAS 39. The new standard provides for significant differentiations in the classification and measurement of financial instruments as well as in hedge accounting. An indication of the new requirements is presented below: Classification and measurement Financial instruments shall be classified, at initial recognition, at either amortized cost or at fair value. The criteria that should be considered for the initial classification of the financial assets are the following: i. The entity s business model for managing the financial assets and ii. The contractual cash flow characteristics of the financial assets. In addition, IFRS 9 permits, at initial recognition, equity instruments to be classified at fair value through other comprehensive income. The option precludes equity instruments held for trading. Moreover, with regards to embedded derivatives, if the hybrid contact contains a host that is within the scope of IFRS 9, the embedded derivative shall not be separated and the accounting treatment of the hybrid contact should be based on the above requirements for the classification of the financial instruments. With regards to the financial liabilities, the main difference is that the change in the fair value of a financial liability initially designated at fair value through profit or loss shall be recognised in profit or loss with the exception of the effect of change in the liability s credit risk which shall be recognised directly in other comprehensive income. Impairment Contrary to the existing IAS 39, under which an entity recognizes only incurred credit losses, the new standard requires the recognition of lifetime expected credit losses if the credit risk of the financial instrument has increased significantly since initial recognition. If the credit risk has not increased significantly since initial recognition, 12-month expected credit losses shall be recognized. Hedging The main changes in relation to the current requirements of IAS 39 are summarized below: more items become eligible for participating in a hedging relationship either as hedging instruments or as hedged items, - the requirement for hedge effectiveness tests to be within the range of 80%-125% is removed. Hedge effectiveness test is performed progressively only and under certain circumstances a qualitative assessment is considered adequate, - in case that a hedging relationship ceases to be effective but the objective of risk management regarding the hedging relationship remains the same, the entity shall rebalance the hedging relationship in order to satisfy the hedge effectiveness criteria. It is noted that the new requirements for hedge accounting do not include those that relate to macro hedging, since they have not been finalized yet. Except for the aforementioned modifications, the issuance of IFRS 9 has resulted in the amendment to other standards and mainly to IFRS 7 where new disclosures were added. 13

28 IFRS 16 Leases will have an impact on the recognition and measurement of leasing. The overall impact of this standard is currently being investigated. IFRS 16 is applicable for annual periods beginning on or after 1 January The new standard significantly differentiates the accounting of leases for lessees while essentially maintaining the existing requirements of IAS 17 for the lessors. In particular, under the new requirements, the classification of leases as either operating or finance is eliminated. A lessee is required to recognize, for all leases with term of more than 12 months, the right-of-use asset as well as the corresponding obligation to pay the lease payments. The above treatment is not required when the asset is of low value. IAS 7 Statement of Cash Flows : Disclosure Initiative will have an impact on the recognition and measurement of leasing. The overall impact of this standard is currently being investigated. IFRS 16 is applicable for annual periods beginning on or after 1 January On 29 January 2016 the International Accounting Standards Board issued an amendment to IAS 7 according to which an entity shall provide disclosures that enable users of financial statements to evaluate changes in liabilities for which cash flows are classified in the statement of cash flows as cash flows from financing activities. The changes that shall be disclosed, which may arise both from cash flows and non-cash changes, include: changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries or other businesses, the effect of changes in foreign exchange rates, changes in fair values and other changes. The following standards, amendments or interpretations were issued by the IASB but will not have an impact on the bank s financial statements: Annual Improvements to IFRSs Cycle, Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations, Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation, Amendments to IAS 16, and IAS 41 Bearer plants, IFRS 14 Regulatory Deferral Accounts, Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception, Amendments to IAS 27 Equity Method in Separate Financial Statements. There was no early adoption of any standards, amendments and interpretations not yet effective. 14

29 B. Summary of Significant Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 5) Measurement basis These financial statements were prepared under the historical cost convention, unless IFRS require recognition at fair value. Financial instruments measured at fair value for accounting purposes on an ongoing basis include all instruments classified as available-for-sale. The measurement techniques applied to the balance sheet positions are specified in the accounting policies listed below. A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: a. in the principal market for the asset or liability; or b. in the absence of a principal market, in the most advantageous market for the asset or liability. The IFRS define a so-called hierarchy of fair value determination which reflects the relative reliability of different methods of determining fair value: (a) Active market: Quoted price (Level 1) Observe quoted prices (unadjusted) for identical financial instruments in active markets, that the entity can access at the measurement date. (b) Valuation technique using observable inputs (Level 2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Observe quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets or use valuation models where all significant inputs are observable. (c) Valuation technique with significant non-observable inputs (Level 3) Use valuation models where one or more significant inputs are not observable. Only if the first best method of determining the fair value is not available may the next best determination method be applied. If possible, the bank obtains fair values from quoted market prices; otherwise, the next best available measurement technique is applied. 6) Financial assets The bank classifies its financial assets in the following categories: loans and receivables and available-for-sale financial assets. Management determines the classification of financial assets at initial recognition. 15

30 (a) Loans and receivables from customers Loans and receivables from customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the bank provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans and receivables from customers are initially recognized on the date at which they are originated. Loans and receivables from customers are initially measured at fair value plus, transaction costs that are directly attributable to its acquisition or issue. Loans and receivables to customers are carried at amortized cost using the effective interest method. At each balance sheet date and whenever there is evidence of potential impairment, the bank assesses the value of its loans and receivables. Their carrying amount may be reduced as a consequence through the use of an allowance account (see note (10) for the accounting policy for impairment of credit exposures, and notes (26), (37), and (53) for details regarding impairment of credit exposures). If the amount of the impairment loss decreases, the impairment allowance is reduced accordingly, and the amount of the reduction is recognised in the income statement. The upper limit on the reduction of the impairment is equal to the amortised costs which would have been incurred as of the valuation date if there had not been any impairment. Loans are recognised when the principal is advanced to the borrowers. Loans and receivables are derecognised when the rights to receive cash flows from the financial assets have expired or when the bank has transferred substantially all risks and rewards of ownership. (b) Available-for-sale financial assets Available-for-sale assets are those intended to be held for an indefinite amount of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. At initial recognition, available-for-sale financial assets are recorded at fair value, which is the cash consideration including transaction costs. Subsequently they are carried at fair value. The fair values reported are either observable market prices in active markets or values calculated with a valuation technique based on currently observable market data. For very short-term financial assets it is assumed that the fair value is best reflected by the transaction price itself. Gains and losses arising from changes in fair value of available-for-sale financial assets are recognised directly in equity in other comprehensive income in the position Revaluation reserve from available-for-sale financial assets, until the financial asset is derecognised or impaired (for details on impairment, see note (10)). At this time, the cumulative gain or loss previously recognised in equity in other comprehensive income is recognised in profit or loss as Gains and losses from available-for-sale financial assets. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as availablefor-sale are recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the entity s right to receive the payment is established. Purchases and sales of available-for-sale financial assets are recorded on the trade date. The available-for-sale financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the bank has transferred substantially all risks and rewards of ownership. 16

31 7) Foreign currency translation (a) Functional and presentation currency Items included in these financial statements are measured in Macedonian denars (MKD), which is the functional currency of the bank. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement (trading result). Monetary items denominated in foreign currency are translated with the closing rate as of the reporting date. In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available for sale, a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, while other changes in the carrying amount are recognised in equity. Non-monetary items measured at historical cost denominated in foreign currency are translated with the exchange rate as of the date of initial recognition. The reporting exchange rates and average rates for the period used in the balance sheet and the income statement are listed in section (61) of these notes. 8) Cash and cash equivalents For the purposes of the balance sheet, cash and cash equivalents comprise cash, balances with less than three months maturity from the date of acquisition from the NBRM, treasury bills and other money market instruments that are highly liquid and readily convertible to known amounts of cash with insignificant risk of changes in value and bills of exchange. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months original maturity from the date of acquisition, including: cash and non-restricted balances with central banks (minimum reserve balances are included under restricted balances), non-pledged treasury bills and other bills eligible for refinancing with central banks and loans and advances to banks and amounts due from other banks. 9) Loans and advances to banks The amounts reported under Loans and advances to banks consist mainly of loans and advances issued. In addition to overnight and term deposits, the amounts reported under receivables from banks include current account balances. 17

32 All loans and advances to banks are carried at amortised cost, using the effective interest method. Amortised premiums and discounts are accounted for over the respective terms in the income statement under Net interest income. Impairment of loans and receivables to banks is recognised on separate allowance accounts. For the purposes of the cash flow statement, claims to banks with original maturity of less than three months from the date of acquisition are recognised under Cash and cash equivalents (see note (33). 10) Allowance for losses on loans and advances and impairment of available-for-sale financial assets (a) Assets carried at amortised cost loans and advances Impairment of loans and advances The bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If there is objective evidence that impairment of a credit exposure or a portfolio of credit exposures has occurred, as a result of one or more events that occurred after the initial recognition of the asset (a loss event ), which influences the future cash flow of the financial asset(s), the respective losses, that can be reliabily estimated, are immediately recognised. Depending on the size of the credit exposure, such losses are either calculated on an individual credit exposure basis or are collectively assessed for a portfolio of credit exposures. The carrying amount of the loan is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. (i) Individually assessed loans and advances Credit exposures are considered individually significant if the sum of the on-balance sheet part, and, if approved / authorised, the off-balance sheet part exceeds EUR 30,000. For such credit exposures, it is assessed whether objective evidence for impairment exists, i.e. any factors which might influence the customer s ability to fulfil his or her contractual payment obligations towards the bank: - delinquencies in contractual payments of interest or principal; - breach of covenants or conditions; - initiation of bankruptcy proceedings; - specific information on the customer s business (e.g. reflected by cash flow difficulties experienced by the client) changes in the customer s market environment; - the general economic situation; - the value of collateral significantly decreases as a result of deteriorating market conditions. In exceptional cases, an individual assessment can also be carried out for credit exposures below EUR 30,000 if they show signs of impairment despite being below 30 days in arrears. Additionally, the aggregate exposure to the client and the realisable value of collateral held are taken into account when deciding on the allowance for impairment. 18

33 If there is objective evidence that an impairment loss has been incurred (specific impairment),, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of its estimated future cash flows discounted at the financial asset s original effective interest rate (specific impairment). If a credit exposure has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. Collectively assessed loans and advances: There are two cases in which credit exposures are collectively assessed for impairment: - individually insignificant credit exposures that show objective evidence of impairment; - the group of credit exposures which do not show signs of impairment, in order to cover all losses which have already been incurred but not detected on an individual credit exposure basis. For the purposes of the evaluation of impairment of individually insignificant credit exposures, the credit exposures are grouped on the basis of similar credit risk characteristics, i.e. according to the number of days they are in arrears. Arrears of more than 30 days is considered to be a sign of impairment. This characteristic is relevant for the estimation of future cash flows for the so defined groups of such assets, based on historical loss experiences with loans that showed similar characteristics. The collective assessment of impairment for individually insignificant credit exposures (lumpsum provisions) and for unimpaired credit exposures (portfolio-based provisions) belonging to a group of financial assets is based on a quantitative analysis of historical default rates for loan portfolios with similar risk characteristics in the individual subsidiaries of ProCredit group (migration analysis). After a qualitative analysis of this statistical data, the ProCredit Holding management prescribed appropriate rates to the banks of the ProCredit group as the basis for their portfolio-based and lump-sum impairment allowances. Deviations from this guideline were allowed, if necessitated by the specific situation of a ProCredit institution. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the group to reduce any differences between loss estimates and actual loss experience. If the bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether individually significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment (impairment for collectively assessed credit exposures). 19

34 Reversal of impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. Writing off loans and advances When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the allowance for loan impairment in the income statement. Restructured credit exposures Restructuring is defined as any modification of the terms and conditions of a credit exposure by agreement between the bank and the client to modify the payment plan of a credit exposure agreement in response to an increase in the current or future credit default risk associated with the client. The following changes to the agreed terms and conditions shall be deemed significant aimed at reducing the financial burdening of the person/entity: extension of maturity interest rate reduction de/crease in the amount of the claim (principle and/or due interest and commission) through a write-off; capitalization of interest consolidation of several claims into one claim by changing the agreed terms and conditions other similar activities Restructured credit exposures which show signs of impairment and which are considered to be individually significant are provisioned on an individual basis. The amount of the loss is measured as the difference between the restructured loan s carrying amount and the present value of its estimated future cash flows discounted at the loan s original effective interest rate (specific impairment). Restructured loans with arrears more than 30 days and which are individually insignificant are collectively assessed for impairment (lump-sum provisions). Assets acquired in exchange for loans (repossessed property) Non-financial assets acquired in exchange for loans as part of an orderly realisation are reported in Other assets. The asset acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan at the date of exchange. No depreciation is charged for assets held for sale. Any subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement in Net other operating income. Any subsequent increase in the fair value less costs to sell, to the extent that it does not exceed the cumulative write-down, is also recognised in Net other operating income, together with any realised gains or losses on disposal. b) Assets classified as available-for-sale The bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. In determining whether an available-forsale financial asset is impaired the following criteria are considered: deterioration of the ability or willingness of the debtor to service the obligation; 20

35 a political situation which may significantly impact the debtor s ability to repay the asset; additional events that make it unlikely that the carrying amount may be recovered. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement at any point thereafter and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. The bank primarily invests in government securities with fixed or variable interest rates (e.g. Eurobonds issued by the Macedonian government). Impairments on these investments are recognised when objective evidence exists that the government is unable or unwilling to service these obligations. 11) Intangible assets (a) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Computer software is amortised on a straight line basis over expected useful lives of five years. Main banking software - Customware.net is depreciated over a period of 10 years. 12) Property, plant and equipment Land and buildings comprise mainly branches and offices. All property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Component parts of an asset are recognised separately if they have different useful lives or provide benefits to the enterprise in a different pattern. Subsequent costs are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 40 years 40 years Leasehold improvements 5 years rental contract Computers 4 years 4 years Furniture 5 years 4-10 years Motor vehicles 4 years 4 years Other fixed assets 7 years 7 years 21