BANKA CREDINS SHA. Consolidated Financial Statements for the year ended. 31 December (with independent auditor s report thereon) Page 1 of 75

Transcription

1 BANKA CREDINS SHA Consolidated Financial Statements for the year ended (with independent auditor s report thereon) Page 1 of 75

2 CONTENTS Independent Auditor's Report i-ii Consolidated statement of profit or loss... 1 Consolidated statement of other comprehensive income... 2 Consolidated statement of financial position... 3 Consolidated statement of changes in equity... 4 Consolidated statement of cash flows General information Accounting Policies Net Interest income Net Fee and commission income and expense Net other expenses Personnel expenses Administrative expenses Income tax expense, net Cash and cash equivalents Restricted balances with Central Bank Loans and advances to banks Investment securities held for trading Investment securities available for sale (AFS) Investment in subsidiaries and associates Leasing Loans and advances to customers Repossessed Assets Property and equipment Intangible assets Other assets Deferred tax assets Due to banks and other financial institutions Due to customers Borrowing Subordinated debt Other liabilities Provisions Share Capital Share Premium General Reserve Maturity analysis of assets and liabilities Contingent liabilities and commitments Related party disclosures Events after the statement of financial position date Risk Management... 51

3 Independent Auditor's Report Grant Thornton Sh.p.k. Rr: Sami Frasheri, Kompleksi T.I.D, Shk. B, Floor 1, Tirana, Albania T F To the Shareholders and Board of Directors of Banka Credins Sh.a Opinion We have audited the consolidated financial statements of Banka Credins Sh.a (hereafter referred as the Bank or the Group ) which comprise the consolidated statement of financial position as at, and the consolidated statement of profit or loss, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at, its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Albania, and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other matter The consolidated financial statements of Banka Credins Sh.a for the year ended were audited by another auditor who expressed an unqualified opinion on those consolidated financial statements on 31 May. i

4 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Bank s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank s financial reporting process. Auditor s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ii

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6 ` Consolidated statement of profit or loss for the year ended 1 Notes Year ended Year ended Lek '000 Lek '000 Interest income 3 8,747,753 9,202,233 Interest expense 3 (1,854,250) (2,163,067) Net interest income 3 6,893,503 7,039,166 Fee and commission income 4 843, ,647 Fee and commission expense 4 (117,443) (111,388) Net fee and commission income 4 725, ,259 Other expenses 5 (582,541) (169,600) Other income 5 403, ,064 Profit from foreign exchange transactions 77, ,635 Other banking income (101,445) 307,099 Provision for loan losses 15,16 (2,307,234) (3,080,226) Losses from unrecoverable loans 15,16 (317,647) (1,060,129) Amortization of intangible assets 19 (37,434) (44,974) Depreciation of property and equipment 18 (269,884) (189,011) Personnel expenses 6 (1,202,104) (1,077,732) Administrative expenses 7 (2,040,634) (2,024,036) (6,174,937) (7,476,108) Share of loss of associate 14 (5,300) - Profit before taxes 1,337, ,416 Income tax expense 8 (340,392) (169,587) Deferred tax expense 8, 21 74,604 7,800 Profit for the year, net 1,071, ,629 Attributable to: Equity holders of the parent 1,073, ,941 Non-controlling interests (1,500) (2,312) 1,071, ,629 1 The notes 1 to 35 in the pages 5-70 are integral part of these consolidated financial statement 1

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8 ` Consolidated statement of financial position as at 1 Notes Lek '000 Lek '000 Assets Cash and cash equivalents 9 30,964,607 29,040,607 Restricted balances with Central Bank 10 11,352,440 11,520,723 Loans and advances to banks ,606 1,535,146 Investment securities held for trading ,720 - Investment securities available for sale 13 29,322,957 21,308,475 Investment in subsidiaries and associates 14 15,950 - Goodwill 14 43,371 43,371 Leasing 15 1,065, ,775 Loans and advances to customers 16 97,283,218 93,473,577 Current tax asset - 64,441 Repossessed properties 17 4,764,175 3,608,181 Property and equipment 18 2,721,640 2,465,056 Intangible assets , ,994 Other assets 20 1,153,445 1,279,087 Deferred tax assets ,809 75,673 Total assets 179,581, ,483,106 Liabilities Due to banks and other financial institutions 22 6,099,386 2,492,665 Due to customers ,053, ,805,272 Borrowing , ,861 Subordinated debt 25 6,257,946 5,410,219 Current tax liabilities 209,590 - Other liabilities , ,109 Provisions 27 6,875 2,275 Total liabilities 164,391, ,021,401 Equity Share capital 28 8,083,240 7,307,701 Share premium 29 3,112,906 2,892,166 General reserve 30 1,646,347 1,446,025 Revaluation reserve of investment securities 13 45,075 7,920 Retained earnings 2,293,334 1,798,314 Total equity attributable to equity holders of the parent 15,180,902 13,452,126 Non-controlling interest ( NCI ) 9,479 9,579 Total equity 15,190,381 13,461,705 Total liabilities and equity 179,581, ,483,106 1 The notes 1 to 35 in pages 5 to 70 are integral part of these consolidated financial statement 3

9 Consolidated statement of changes in equity for the year ended 1 Share capital Share premiums General reserve Revaluation reserve Retained earnings Total NCI Total equity Lek '000 Lek '000 Lek '000 Lek '000 Lek '000 Lek '000 Lek '000 Lek '000 Balance at 1 January 6,382,916 2,369,595 1,446,025 92,577 1,606,530 11,897,643 7,318 11,904,961 Profit of the year , ,941 (2,312) 254,629 Other comprehensive income (84,657) - (84,657) 520 (84,137) Total comprehensive income (84,657) 256, ,284 (1,792) 170,492 Appropriation of retained earnings (note 28) 65, (65,157) Increase of paid-up capital 859, , ,382,199-1,382,199 Non-controlling interests arising on a business combination ,053 4,053 Balance at 7,307,701 2,892,166 1,446,025 7,920 1,798,314 13,452,126 9,579 13,461,705 Profit of the year ,073,240 1,073,240 (1,500) 1,071,740 Other comprehensive income ,155-37,155 (520) 36,635 Total comprehensive income ,155 1,073,240 1,110,395 (2,020) 1,108,375 Appropriation of retained earnings (note 28) 377, ,322 - (578,220) Increase of paid-up capital 397, , , ,381 Non-controlling interests arising on a business combination ,920 1,920 Balance at 8,083,240 3,112,906 1,646,347 45,075 2,293,334 15,180,902 9,479 15,190,381 1 The notes 1 to 35 in pages 5 70 are integral part of these consolidated financial statement 4

10 Consolidated statement of cash flows for the year ended 1 Notes Year ended Year ended Lek '000 Lek '000 Cash flows from operating activities Profit before income tax 1,337, ,416 Adjustments for: Depreciation and amortization 18,19 307, ,982 Disposed fixed assets ,298 18,802 Impairment on loans and advances to customers, & leasing 15,16 2,307,234 3,080,226 Other losses from unrecoverable loans 15,16 (317,647) 1,060,129 Share of loss from associate 5,300 - Impairment on repossessed properties ,356 52,000 Net interest income 3 (6,893,503) (7,039,166) Foreign exchange effect to increase subordinated debt - (274,659) Cash flows from operating activities before changes in working capital (2,594,116) (2,452,270) Change in loans and advances to banks 11 1,337, ,742 Change in loans and advances to customers 16 (5,682,474) (12,341,421) Change in leasing 15 (120,002) 19,466 Change in restricted balances with Central bank ,211 (461,480) Change in repossessed properties 17 (1,653,350) 39,700 Change in other assets ,220 (76,704) Change in due to banks and financial institutions 22 3,608, ,276 Change in due to customers 23 7,276,170 20,098,315 Change in other liabilities 26,27 470,055 4,597 Interest received 8,569,061 9,364,532 Interest paid (1,827,053) (1,976,054) Income tax paid (130,802) (101,299) Net cash from operating activities 9,613,089 13,103,400 Cash flows used in investing activities Purchase of investment securities 12,13 (20,514,205) (18,687,077) Sales of investment securities 12,13 3,741,810 1,116,975 Investment securities matured 12,13 8,396,879 15,288,126 Investment in subsidiaries 14 (21,250) - Purchase of property and equipment 18 (677,058) (1,744,778) Proceeds from sale of property and equipment - 1,301 Purchase of intangible assets 19 (32,285) (29,375) Net cash used in investing activities (9,106,109) (4,054,828) Cash flows from financing activities Proceeds from issued subordinated liabilities 25 1,936, ,945 Repayments of subordinated debt 25 (1,125,180) (371,429) Repayments of new financing 24 (13,101) (891,774) Issue of share capital 618,381 1,382,199 Net cash from financing activities 1,417,020 1,102,941 Net increase in cash and cash equivalents 1,924,000 10,151,513 Cash and cash equivalents at 1 January 29,040,607 18,889,094 Cash and cash equivalents at 30,964,607 29,040,607 1 The notes 1 to 35 in pages 5 to 70 are integral part of these consolidated financial statement 5

11 Notes to the consolidated financial statements for the year ended 1 General information Banka Credins sh.a. (hereinafter referred as the Bank or the Group ) is an Albanian financial institution which was incorporated on 1 April 2003 under the Albanian Commercial Law and was licensed by the Bank of Albania on 31 March 2003 to operate as a bank in all fields of banking activity in Albania in accordance with the law No. 8365, On banks in the Republic of Albania, dated July The Group is also subject to law No. 8269, dated December 1997, On the Bank of Albania (Bank of Albania hereinafter referred to as Central Bank ). As at, the Group was operating through a head office located in Tirana, 50 branches located in Tirana, Durres, Fier, Lezha, Elbasan, Vlora, Shkodra, Korca, Shijak, Shkozet, Kavaja, Lushnja, Fushe Kruje, Kukes, Burrel, Ballsh, Berat, and Peshkopi and 8 agencies in Tirana, Shkoder and Durres. (31 December : 49 branches and 8 agencies). The Group s Shareholders have agreed that the Group would acquire 76% of the shares of CREDINS INVEST-sh.a-Shoqeri administruese e Fondeve te Pensionit dhe Sipermarrjeve te Investimeve Kolektive (former Shoqeria Administruese e Fondit te Pensionit SiCRED sh.a. ) from SiCRED sh.a., through a share purchase agreement signed on 22 December for an amount of ALL 65,000 thousand. The approval for the change in the shareholding structure and change in control of of CREDINS INVEST-sh.a- Shoqeri administruese e Fondeve te Pensionit dhe Sipermarrjeve te Investimeve Kolektive former Shoqeria Administruese e Fondit te Pensionit SiCRED sh.a. has been given from the Financial Supervisory Authority on April 28th, This has been registered with the National Registration Center on 10 June 2015, which is the date when the change in control became effective. Subsequently Credins Bank consolidated with Credins Invest since 30th June During the years additional new capital is injected from the Group. During the amount of new capital injected from the Group is LEK 6,080 thousand. The Group s Shareholders have agreed that the Group would acquire 95% of the shares of Regjistri Shqiptar i Titujve ALREG sh.a. for an amount of ALL 3,325 thousand. This has been registered with the National Registration Center on 16 March. The Group s Shareholders have agreed that the Group would acquire 42.5% of the shares of Bursa Shqiptare e Titujve ALSE sh.a. for an amount of ALL 21,250 thousand. This has been registered with the National Registration Center on 28 July. As at the Group had 872 employees ( : 807 employees). The address of the Group s main registered office and principal place of business is Str. Vaso Pasha, Nr. 8, Tirana, Albania. 2 Accounting Policies 2.1 Basis of preparation The Consolidated Financial Statements have been prepared on the historical cost basis, except for availablefor-sale investments which have been measured at fair value. The Consolidated Financial Statements are presented in ALL, which is the Group s functional currency and all values are rounded to the nearest thousand (ALL 000), except when otherwise indicated. (i) Statement of Compliance The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standard Board (IASB). (ii) Presentation of Consolidated Financial Statements The Group presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non current) is presented in note 31. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the statement of comprehensive income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. 6

12 Notes to the consolidated financial statements for the year ended 2. Accounting policies (continued) 2.2 Basis of consolidation The consolidated financial statements comprise the financial statements of the Parent and its subsidiaries as at. Control is achieved when the Parent is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Parent controls an investee if, and only if, the Parent has: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Parent has less than a majority of the voting or similar rights of an investee, the Parent considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement(s) with the other vote holders of the investee Rights arising from other contractual arrangements The Group s voting rights and potential voting rights The Parent re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Parent obtains control over the subsidiary and ceases when the Parent loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Parent gains control until the date the Parent ceases to control the subsidiary. Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Parent loses control over a subsidiary, it de-recognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognized in profit or loss. Any investment retained is recognized at fair value. a) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquire. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquire. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement, is measured at fair value with the changes in fair value recognized in the statement of profit or loss. 7

13 Notes to the consolidated financial statements for the year ended 2. Accounting policies (continued) 2.2 Basis of consolidation (continued) a) Business combinations and goodwill (continued) Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests) and any previous interest held over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Parent re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. 2.3 Significant accounting judgments, estimates and assumptions In the process of applying the Group's accounting policies, management has exercised judgment and estimates in determining the amounts recognized in the Consolidated Financial Statements. The most significant uses of judgment and estimates are as follows: (l) Going concern The Group performs regularly, stress test exercises, to test the possible impact of macroeconomic indicators in Group's key financial position, performance and regulatory compliance. These stress tests are mainly focused on the impact that some outlined macro and microeconomic scenarios might have on the loan portfolio, being the Group's main source of income, financial position including market risk. Official forecast models of the Central Bank and Group s internal risk valuation are used in these exercises. Dynamic tests are performed to evaluate the effect that a similar increase/decrease in customer s shock would have on each of the balance sheet, liability and profit and loss line items, for a specific period of time. The Group s management has made an assessment of the Group s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group s ability to continue as a going concern. Therefore, the Consolidated Financial Statements continue to be prepared on the going concern basis. For additional disclosures on capital adequacy refer to note (ll) Impairment losses on loans and advances The Group reviews its loan portfolios to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the profit or loss, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Group, or national or local economic conditions that correlate with defaults on assets in the Group. The individually impaired loans are those for which exists an objective evidence of impairment such as: - Loans more than 45 days in overdue; - Restructured loans (excluding those restructured in standard and special mention category; - Business loans with rating grade B - or under; - Mortgage loans with credit score 7 or without score; - Loans that have common collateral with individually impaired loans. 8

14 Notes to the consolidated financial statements for the year ended 2. Accounting policies (continued) 2.3 Significant accounting judgments, estimates and assumptions (continued) (ll) Impairment losses on loans and advances (continued) In the calculation of individual loan impairment are considered the following factors: Amount of loan according to IFRS; execution process time; interest rate; collaterals that guarantee the loan; costs of collateral execution. Loans that are not individually tested for impairment and loans that are individually tested for impairment and resulted with no impairment are assessed collectively for impairment. Collectively assessed loans for impairment are those that do not show objective evidences of downgrading, and those which are assessed individually but do not create individual impairment. In the collective impairment are included also the micro loans and individual consumers, which are provisioned by transition matrix. The collective impairment is calculated based on the probability of default for each economic sector. The probability of default is updated biannually. For each industry branch the expected loss coefficient is calculated as the sum of lost exposure and the written off loans, divided by the historical approved amount for each industry branch. (lii) Impairment of available for sale investments The Group reviews its debt securities classified as available for sale investments at each statement of financial position date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances. The Group also records impairment charges on available for sale investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost. 2.4 Changes in accounting policies and disclosures New and amended standards and interpretations The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and the effect of these changes are disclosed below. Although these new standards and amendments applied for the first time in, they did not have a material impact on the annual financial statements of the Group. The nature and the impact of each new standard or amendment is described below: IAS 7 Disclosure Initiative Amendments to IAS 7 The amendment is effective for annual periods beginning on or after 1 January. The amendments to IAS 7 Statement of Cash Flows are part of the IASB s Disclosure Initiative and help users of financial statements better understand changes in an entity s debt. The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). On initial application of the amendment, entities are not required to provide comparative information for preceding periods. Early application is permitted. The amendments are intended to provide information to help investors better understand changes in an entity s debt. The Group is not affected from this amendment. IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses Amendments to IAS 12 The amendment is effective for annual periods beginning on or after 1 January. The IASB issued the amendments to IAS 12 Income Taxes to clarify the accounting for deferred tax assets for unrealized losses on debt instruments measured at fair value. The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Entities are required to apply the amendments retrospectively. 9

15 Notes to the consolidated financial statements for the year ended 2. Accounting policies (continued) 2.4 Changes in accounting policies and disclosures (continued) New and amended standards and interpretations (continued) IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses Amendments to IAS 12 (continued) However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognised in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. Early application is permitted. If an entity applies the amendments for an earlier period, it must disclose that fact. The amendments are intended to remove existing divergence in practice in recognizing deferred tax assets for unrealized losses. This amendment is not applicable to the Group. IFRS Practice Statement 2: Making Materiality Judgements Entities are permitted to apply the guidance in the Practice Statement (PS) to financial statements prepared any time after 14 September. The PS contains non-mandatory guidance to help entities making materiality judgements when preparing general purpose IFRS financial statements. The PS may also help users of financial statements to understand how an entity makes materiality judgements in preparing such financial statements. The PS comprises guidance in three main areas: General characteristics of materiality A four-step process that may be applied in making materiality judgements when preparing financial statements. This process describes how an entity could assess whether information is material for the purposes of recognition, measurement, presentation and disclosure. How to make materiality judgements in specific circumstances, namely, prior period information, errors and covenants and in the context of interim reporting. Furthermore, the PS discusses the interaction between the materiality judgements an entity is required to make and local laws and regulations. The PS includes examples illustrating how an entity might apply the guidance. Since the PS is a non-mandatory document, it does not change or introduce any requirements in IFRS. However, the PS provides helpful guidance for entities making materiality judgements and thus may improve the communication effectiveness of financial statements. The Group has not yet made any materiality judgments. Annual Improvements Cycle (issued in December ) These improvements include: IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of shortterm exemptions for first-time adopters Short-term exemptions in paragraphs E3 E7 of IFRS 1 were deleted because they have now served their intended purpose. The amendment is effective from 1 January This amendment is not applicable to the Bank. IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice The amendments clarify that: An entity that is a venture capital organization, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. If an entity, that is not itself an investment entity, has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate s or joint venture s interests in subsidiaries. This election is made separately for each investment entity associate or joint venture, at the later of the date on which: (a) the investment entity associate or joint venture is initially recognised; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent. The amendments should be applied retrospectively and are effective from 1 January 2018, with earlier application permitted. If an entity applies those amendments for an earlier period, it must disclose that fact. These amendments are not applicable to the Group. 10

16 Notes to the consolidated financial statements for the year ended 2. Accounting Policies (continued) 2.4 Changes in accounting policies and disclosures (continued) New and amended standards and interpretations (continued) Annual Improvements Cycle (issued in December ) (continued) IFRS 12 Disclosure of Interests in Other Entities The amendment provides a clarification of the scope of the disclosure requirements in IFRS 12. The amendments clarify that the disclosure requirements in IFRS 12, other than those in paragraphs B10 B16, apply to an entity s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale. The amendments are effective from 1 January and must be applied retrospectively. The amendment is not applicable to the Group. Annual Improvements Cycle (issued in December ) These improvements include: IFRS 3 Business Combinations - Previously held Interests in a joint operation. The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation. An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January Earlier application is permitted. The amendment is not applicable to the Group. IFRS 11 Joint Arrangements - Previously held Interests in a joint operation. A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured. An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January Earlier application is permitted. The amendment is not applicable for the Group. IAS 12 Income Taxes - Income tax consequences of payments on financial instruments classified as equity. The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events. An entity applies those amendments for annual reporting periods beginning on or after 1 January Earlier application is permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period. However, since the Bank s current practice is in line with the Amendment, the Group does not expect any effect on its financial statements. IAS 23 Borrowing Costs - Borrowing costs eligible for capitalisation. The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after 1 January Earlier application is permitted. The amendment is not applicable to the Group Standards and interpretations in issue not yet adopted The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective become effective. 11

17 Notes to the consolidated financial statements for the year ended 2. Accounting Policies (continued) 2.4 Changes in accounting policies and disclosures (continued) Standards and interpretations in issue not yet adopted (continued) IFRS 9 Financial Instruments In July 2014, the IASB issued IFRS 9 Financial Instruments, the standard that will replace IAS 39 for annual periods on or after 1 January 2018, with early adoption permitted. IFRS 9 standard will apply to the IFRS financial statements starting from 1 January 2018, without a comparative accounting period. In the Group set up an implementation project with members from its Risk Department, Finance Department, I.T. and DPO Departments to prepare the implementation of IFRS 9. This project was sponsored by the CRO and CFO, and is managed within the Group s transformation framework. The project set up individual streams for classification and measurement and impairment which concluded the following stages: the initial assessment and analysis, study, testing the system, parallel running in, and go live in The Finance and Risk teams have assessed the corresponding disclosure requirements. Based on assessments undertaken to date, the total estimated preliminary impact of the adoption of IFRS 9 on the opening balance of the Bank s equity at 1 January 2018 is approximately Lek 461 million, and it is related only to impairment requirements, representing an increase of approximately 2.87% when compared to provisions assessed according to IAS 39. (a) Classification and measurement After completing the preliminary assessment, the Group has concluded that: All the loans and advances to banks, loans and advances to customers, that are classified as loans and receivables under IAS 39 are expected to be measured at amortized cost under IFRS 9; The loan portfolio of the bank is composed mainly from loans granted to retail and corporate clients and banks, with a business model generated as «Hold to collect». All the debt securities classified as available for sale under IAS 39 are expected to be measured FVOCI. The securities portfolio of the bank is composed by Albanian Government treasury bills and governement bonds, with a business model generated as «Hold to collect and sell». (b) Impairment of financial assets IFRS 9 will also fundamentally change the loan loss impairment methodology. The standard will replace IAS 39 s incurred loss approach with a forward-looking expected loss (ECL) approach. The Group will be required to record an allowance for expected losses for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the life of the asset. The Group has established a policy to perform an assessment at the end of each month of whether credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instrument. To calculate ECL, the Group will estimate the risk of a default occurring on the financial instrument during its expected life. ECLs are estimated based on the present value of all cash shortfalls over the remaining expected life of the financial asset, i.e., the difference between: the contractual cash flows that are due to the Group under the contract, and The cash flows that the Group expects to receive, discounted at the effective interest rate of the loan. In comparison to IAS 39, the Group expects the impairment charge under IFRS 9 to be more volatile than under IAS 39 and to result in an increase in the total level of current impairment allowances. The Group groups its loans into Stage 1, Stage 2 and Stage 3, based on the applied impairment methodology, as described below: Stage 1 Performing loans: when loans are first recognized, the Group recognizes an allowance based on 12-month expected credit losses. Stage 2 Underperforming loans: when a loan shows a significant increase in credit risk, the Group records an allowance for the lifetime expected credit loss. 12

18 Notes to the consolidated financial statements for the year ended 2. Accounting Policies (continued) 2.4 Changes in accounting policies and disclosures (continued) Standards and interpretations in issue not yet adopted (continued) IFRS 9 Financial Instruments (continued) (b) Impairment of financial assets (continued) Stage 3 Impaired loans: the Group recognizes the lifetime expected credit losses for these loans. In addition, in Stage 3 the Group accrues interest income on the amortised cost of the loan net of allowances. The Group will record impairment for FVOCI debt securities, depending on whether they are classified as Stage 1, 2, or 3, as explained above. However, the expected credit losses will not reduce the carrying amount of these financial assets in the statement of financial position, which will remain at fair value. Instead, an amount equal to the allowance that would arise if the asset were measured at amortised cost will be recognized in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. For low risk FVOCI debt securities, the Group intends to apply a policy which assumes that the credit risk on the instrument has not increased significantly since initial recognition and will calculate ECL as explained in Stage 1 below. Such instruments will generally include traded, investment grade securities where the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Group will not consider instruments to have low credit risk simply because of the value of collateral. Financial instruments are also not considered to have low credit risk simply because they have a lower risk of default than the Group's other financial instruments. For low risk FVOCI debt securities, the Group intends to apply a policy which assumes that the credit risk on the instrument has not increased significantly since initial recognition and will calculate ECL as explained in Stage 1 below. Such instruments will generally include traded, investment grade securities where the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Group will not consider instruments to have low credit risk simply because of the value of collateral. Financial instruments are also not considered to have low credit risk simply because they have a lower risk of default than the Group's other financial instruments. Stage 1 Under IAS 39 the Group has been recording an allowance for Incurred But Not Identified (IBNI) impairment losses). These are designed to reflect impairment losses that had been incurred in the performing portfolio but have not been identified. Under IFRS 9, the impairment of financial assets that are not considered to have suffered a significant increase in their credit risk will be measured on a 12-month ECL basis. In comparison to the emergence periods of 3, 6 and 12 months under IAS 39, the 12 months ECL allowance amount is expected to be higher than the current IBNI allowance. Based on the analysis performed, the 12- month ECL allowance calculated on the portfolio would have been higher than the IBNI allowance under IAS 39. Stage 2 IFRS 9 requires financial assets to be classified in Stage 2 when their credit risk has increased significantly since their initial recognition. For these assets, a loss allowance needs to be recognized based on their lifetime ECLs. Since this is a new concept compared to IAS 39, it will result in increased allowance as most such assets are not considered to be credit-impaired under IAS 39. If the new standard were applied as at, this would result in a substantial additional increase in the impairment allowance. The Group considers whether there has been a significant increase in credit risk of an asset by comparing the lifetime probability of default upon initial recognition of the asset against the risk of a default occurring on the asset as at the end of each reporting period. In each case, this assessment is based on forward-looking assessment that takes into account a number of economic scenarios, in order to recognize the probability of higher losses associated with more negative economic outlooks. In addition, a significant increase in credit risk is assumed if the borrower falls more than 30 days past due in making its contractual payments, or if the bank expects to grant the borrower forbearance, or the facility is placed on the Group s watch list. 13

19 Notes to the consolidated financial statements for the year ended 2. Accounting Policies (continued) 2.4 Changes in accounting policies and disclosures (continued) Standards and interpretations in issue not yet adopted (continued) IFRS 9 Financial Instruments (continued) (b) Impairment of financial assets (continued) It is the Group s policy to evaluate additional available reasonable and supportive forwarding-looking information as further additional drivers. When estimating lifetime ECLs for undrawn loan commitments, the Group will: Estimate the expected portion of the loan commitment that will be drawn down over the expected life of the loan commitment and Calculate the present value of cash shortfalls between the contractual cash flows that are due to the entity if the holder of the loan commitment draws down that expected portion of the loan and the cash flows that the entity expects to receive if that expected portion of the loan is drawn down. For financial guarantee contracts, the Group will estimate the lifetime ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs less any amounts that the guarantor expects to receive from the holder, the debtor or any other party. If a loan is fully guaranteed, the ECL estimate for the financial guarantee contract would be the same as the estimated cash shortfall estimate for the loan subject to the guarantee. For revolving facilities such as credit cards and overdrafts, the Group measures ECLs by determining the period over which it expects to be exposed to credit risk, taking into account the credit risk management actions that it expects to take once the credit risk has increased and that serve to mitigate losses. The Group intends to apply a policy that if the transfer into Stage 2 had been initially triggered by indicators other than the movement in the probability of default the loan can only return to Stage 1 if the criterion for classification in Stage 2 is lifted. Stage 3 Financial assets will be included in Stage 3 when there is objective evidence that the loan is credit impaired. The criteria of such objective evidence are the same as under the current IAS 39 methodology. Accordingly, the Group expects the population to be generally the same under both standards. Loans in Stage 3, where the Group calculated the IAS 39 impairment on an individual basis will continue to be calculated on the same basis, but collateral values will be adjusted to reflect the amounts that can be expected to be realised, giving consideration to the possibility that these will be lower in more adverse macroeconomic scenarios. It is expected that loans in stage 3 will be the same as those considered to be impaired in accordance with IAS 39. The impairment calculation will be the same as for Stage 2 loans with the probability of default set to 100%. When forbearance results in the derecognition of the original loan, the new loan will be classified as originated credit-impaired. Other than originated credit-impaired loans, loans will be transferred from out of Stage 3 if they no longer meet the criteria of credit-impaired after a probation period of one year. Forward looking information The Group will incorporate forward-looking information in both the assessment of significant increase in credit risk and the measurement of ECLs. The Group considers forward-looking information such as macroeconomic factors (e.g., for non- retail GDP growth, country GDP growth, inflation and interest rates) and economic forecasts. A strong principle used in the IFRS9 Forward-looking framework is the consistency with the Budget framework of the Group. More specifically: IFRS9 will be based on the scenarios and economic variables forecasted by the Economists of the Group. These variables are observed through past observations, forecasts, and forecast updates that will be prepared for IBFS entities by internal economic experts, with quarterly updates. At the time of preparation of the Budget, IFRS 9 assumptions should be consistent with Cost of Risk budgeted for the next years. The Group will derive an ECL on the basis of unbiased (not stressed) view of forecasts; the base case scenario represents the more likely outcome resulting from the bank s normal financial planning and budgeting process. 14