Eurostandard Banka AD, Skopje

Transcription

1 Financial statements and Independent Auditors Report Eurostandard Banka AD, Skopje 31 December 2012 This is an English translation of the original Report issued in Macedonian, in case of any discrepancies between the English and the Macedonian version the Macedonian text shall prevail

2 Contents Page Independent Auditors Report 1 Income Statement 4 Statement of Comprehensive Income 5 Balance Sheet 6 Statement of Changes in Equity and Reserves 8 Statement of Cash Flows 12 Notes to the financial statements 14

3 Independent Auditors Report To the Management and Shareholders of Eurostandard Banka AD, Skopje Grant Thornton DOO M.H.Jasmin 52 v-1/ Skopje Macedonia T +389 (2) F +389 (2) We have audited the accompanying financial statements of Eurostandard Banka AD ( the Bank ) which comprise of the Balance sheet as of 31 December 2012, and the Income statement, Statement of Comprehensive income, Statement of changes in equity and reserves and Statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes, included on pages 4 to 127. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Decision on the Methodology of recording and evaluating accounting items and the preparation of financial statements issued by the National Bank of the Republic of Macedonia, and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. Chartered Accountants Member firm of Grant Thornton International Ltd

4 2 In making those risk assessments, the auditor considers internal control relevant to the Bank s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Basis for qualified opinion As it is disclosed in notes 12 and 16 to the accompanying financial statements, the allowance for impairment of financial assets, on a net basis, for the year then ended 31 December 2012 amounts to Denar 45,876 thousand, and the special reserves for off-balance sheet exposures, on a net basis amounts to Denar 241 thousand. Based on the applied auditing procedures, we identified that the allowance for impairment of the financial assets on a net basis, the carrying amount of the special reserves for off-balance exposures, as well as the carrying amount of the commitments and contingencies as at and for the year then ended 31 December 2012 have been understated, and the financial result and the carrying amount of the loans and advances to customers as at and for the year then ended 31 December 2012 have been overstated by the amount of Denar 46,807 thousand. The Bank has recorded this amount in their financial statements after the reporting date, which is not in accordance with the applied accounting framework which requires expenses and associated provisions to be recognized in the period when they have occurred. Qualified opinion In our opinion, except from the effect on the financial statements from the issue discussed in the Basis for qualified opinion paragraph, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2012, and its financial performance and its cash flows for the year then ended in accordance with the Decision on the Methodology for recording and evaluating accounting items and the preparation of financial statements as of issued by the National Bank of the Republic of Macedonia. Emphasis of matters As disclosed in note 1.5 to the accompanying financial statements, during the year ended 31 December 2012, the Bank was handed measures by the Governor of the National Bank of the Republic of Macedonia: written warning and recommendations. The measures were handed on the basis of findings from the Minutes of partial immediate field control performed by the Bank during On 28 May 2012, the Bank s Managing Board and the Mediation commission of NBRM have made a Protocol for coming to an agreement to remove consequences from violations. Chartered Accountants Member firm of Grant Thornton International Ltd

5 3 Grant Thornton Furthermore, as it is disclosed in note 48 to the accompanying financial statements, after 31 December 2012, the reporting date for the fmancial reports, the Bank has been handed measures by the Governor of NBRM: Decision, written warning and recommendations. Our opinion is not qualified in regards to the matters above. Skopje, 30 April 2013 Grant Thornton DOO ' l t:2cj ~ rtified audita. /Marjan Andonov Chartered Accountants Member finn of Grant Thornton International ltd

6 4 Financial statements 31 December 2012 Income Statement In Denar thousand Notes Interest income 338, ,222 Interest expenses (253,067) (137,564) Net interest income / (expenses) 6 85, ,658 Fee and commission income 62,011 48,709 Fee and commission expenses (16,575) (13,435) Net fee and commission income/(expenses) 7 45,436 35,274 Net trading income Net income from other financial instruments recorded at fair value Foreign exchange gains / (losses), net 10 8,953 9,055 Other operating income 11 5,784 4,714 Participation in income of associates Impairment losses of financial assets, net 12 (45,876) 25,999 Impairment losses of non financial assets, net 13 (1,246) (706) Personnel expenses 14 (64,637) (60,651) Depreciation and amortization 15 (14,082) (16,977) Other operating expenses 16 (117,052) (107,251) Participation in losses of associates Profit/(Loss) before taxation (96,536) 4,115 Income tax 17 (864) (1,221) Profit/ (loss) for the year from continuing operations (97,400) 2,894 Profit / (loss) from group of assets and liabilities held for sale - - Profit / (loss) for the year (97,400) 2,894 Profit / (loss) for the year, attributable to:* Shareholders of the Bank non-controlling interest - - Earnings per share 41 basic (losses) / earnings per share (in Denar) (5,411) 161 diluted earnings / (losses) per share (in Denar) - - * Only for consolidated financial statements See accompanying Notes to the financial statements

7 5 Financial statements 31 December 2012 Statement of Comprehensive Income In Denar thousand Note Profit/ (loss) for the year (97,400) 2,894 Other gains/ (losses) in the period not presented in the Income Statement (before taxation) Revaluation reserve for assets available-for-sale - unrealized net-changes in fair value of assets availablefor-sale realized net-gains/ (losses) from assets available-forsale, reclassified in the Income Statement - - Reserve for instruments for risk protection of cash flows unrealized net-changes in fair value of instruments for risk protection of cash flows realized net-gains/(losses) from instruments for risk protection of cash flows, reclassified in the Income Statement - - Reserve for instruments for risk protection from netinvestments in foreign operations - - Reserve of foreign exchange differences from investment in foreign operations - - Participation in other gains/ (losses) in associates not presented in the Income Statement Other gains/(losses) not presented in the Income Statement - - Income tax from other gains/(losses) not presented in the Income Statement Total other gains/ (losses) in the period not presented in the Income Statement - - Comprehensive income/ (loss) for the year (97,400) 2,894 Comprehensive income/ (loss) for the year, attributable to:* Shareholders of the Bank Non-controlling interest - - * Only for consolidated financial statements See accompanying Notes to the financial statements

8 6 Financial statements 31 December 2012 Balance Sheet In Denar thousand Notes Assets Cash and cash equivalents 18 1,195,593 1,283,729 Assets for trading 19 3,885 - Financial assets at fair value through the Income Statement upon initial recognition Derivative assets held for risk management Loans and advances to banks ,662 Loans and advances to customers ,201,167 2,292,718 Investments in securities ,799 19,990 Investments in associates (recorded according to equity method ) Income tax receivables (Current) ,758 Other receivables 25 28,992 7,006 Pledged assets Foreclosed assets , ,448 Intangible assets 28 9,497 8,427 Property and equipment 29 14,333 21,971 Deferred tax assets Non-current assets held for sale and disposal group , ,606 Total assets 5,363,911 4,339,315 Liabilities Trading liabilities Financial liabilities at fair value through profit and loss upon initial recognition Derivative liabilities held for risk management Due to banks ,389 20,135 Due to customers ,310,018 3,392,983 Debt instruments issued Borrowings ,241 82,862 Subordinated liabilities , ,259 Special reserve and provisions 38 1,247 1,006 Income tax liabilities (Current) Deferred tax liabilities Other liabilities 39 36,035 8,941 Liabilities directly associated with disposal group Total liabilities 4,744,182 3,622,186 See accompanying Notes to the financial statements

9 7 Financial statements 31 December 2012 Balance Sheet (continued) Equity and reserves Subscribed capital Share premium Treasury shares Other equity instruments Revaluation reserves Other reserves Retained earnings/ (Accumulated losses) Total equity and reserves attributable to the shareholders of the Bank Non-controlling interest Total equity and reserves Total liabilities and equity and reserves Notes 40 In Denar thousand ,100,668 1,100,668 25,507 25,073 (506,446) (408,612) 619, , , ,129 5,363,911 4,339,315 Commitments and contingencies Contingent assets , ,632 * Only for consolidated financial statements The financial statements have been approved for issuing by the Bank's Supervisory Board on 29 April2013. Signed on behalf of the Bank by: ~ Nikolce Petkoski President of the Board of Directors ' ieur0. Tt!.NDARD Car;f.c m See accompanying Notes to the financial statements

10 8 Financial statements 31 December 2012 Statement of Changes in Equity and Reserves In Denar thousand Total equity and reserves attributabl e to the Noncontrolling Total equity (Accum. shareho. of and losses the Bank interest * reserves Subscribed capital Share premium (Treas. shares) Equity Revaluation reserves Other reserves Retained earnings Other equity instrum ents Reval. Reserve for assetsavailable - for sale Risk Reserv e Forex reserve Other reser. Statut ory reserv e Capital com. of hyb. fin. Instrum. Attribut. Other to reserve shareho s l Limited for distrib. to sharehol. At 1 January ,100, , ,571 - (412,841) 714, ,235 Opening balance adjustments At 1 January 2011, adjusted 1,100, , ,571 - (412,841) 714, ,235 Comprehensive income/(loss) for the year Profit / (loss) for the year , ,894-2,894 Other gains/ (losses) for the period not presented in the Income Statement Changes in fair value of assets available for sale Changes in fair value of risk protection of cash flows Changes in fair value of risk protection of net investments in foreign operations See accompanying Notes to the financial statements

11 9 Financial statements 31 December 2012 Statement of Changes in Equity and Reserves (continued) Subscribed capital Share premium (Treas. shares) Equity Revaluation reserves Other reserves Retained earnings Other equity instrum ents Reval. Reserve for assetsavailablefor sale Risk Reserv e Forex reserve Other reser. Statutory reserve Capita l com. of hyb. fin. Instru m. Other reserv es Attribut. to shareho l Limited for distrib. to sharehol. (Accum. losses Total equity and reserves attributabl e to the shareho. of the Bank Noncontrollin g interest * In Denar thousand Foreign exchange differences from investments in foreign operations Deferred tax (assets) / liabilities recognized in equity Other gains/(losses) for the period not presented in the Income Statement Total unrealized profit / (loss) recognized in equity and reserves Total comprehensive income/ (loss) for the year , ,894-2,894 Transactions with shareholders, recognized in equity and reserves: Shares issued during the period Distribution to statutory reserve (236) Distribution to other reserves Dividends Purchase of treasury shares Sale of treasury shares Covering loses from previous years (1,335) - 1, Transactions with shareholders, recognized in equity and reserves: (1,571) - 1, At 31 December 2011 / 1 January ,100, , ,894 - (411,506) 717, ,129 Total equity and reserve s See accompanying Notes to the financial statements

12 10 Financial statements 31 December 2012 Statement of Changes in Equity and Reserves (continued) Subscribed capital Share premium (Treas. shares) Equity Revaluation reserves Other reserves Retained earnings Reval. Capital Reserve com. Other for of hyb. Attribut. Limited equity assetsavailable- Risk fin. Other to for distrib. Reserv instrum Forex Other Statutory Instru reserv shareho to ents for sale e reserve reser. reserve m. es l sharehol. (Accum. losses Total equity and reserves attributabl e to the shareho. of the Bank Noncontrollin g interest * In Denar thousand Comprehensive income/(loss) for the year Profit / (loss) for the year (97,400) (97,400) - (97,400) Other gains/(losses) for the period not presented in the Income Statement Changes in fair value of assets available for sale Changes in fair value of risk protection of cash flows Changes in fair value of risk protection of net investments in foreign operations Foreign exchange differences from investments in foreign operations Deferred tax (assets) / liabilities recognized in equity Other profit/ (loss) not recognized in the income statement Total unrealized profit / (loss) recognized in equity and reserves Total comprehensive income/ (loss) for the year (97,400) (97,400) - (97,400) Total equity and reserve s See accompanying Notes to the financial statements

13 11 Financial statements 31 December 2012 Statement of Changes in Equity and Reserves (continued) Subscribed capital Share premium (Treas. shares) Equity Revaluation reserves Other reserves Retained earnings Other equity instru ments Reval. Reserve for assetsavailablefor sale Risk Reserv e Forex reserve Other reser. Statutory reserve Capital com. of hyb. fin. Instru m. Other reserv es Attribut. to shareho l Limited for distrib. to sharehol. (Accum. losses Total equity and reserves attributabl e to the shareho. of the Bank Noncontrollin g interest * In Denar thousand Transactions with shareholders, recognized in equity and reserves: Shares issued during the period Distribution to statutory reserve (434) Distribution to other reserves Dividends Purchase of treasury shares Sale of treasury shares Covering losses from previous years (2,460) - 2, Transactions with shareholders, recognized in equity and reserves (2,894) - 2, At 31 December ,100, , (506,446) 619, ,729 * Only for consolidated financial statements Total equity and reserve s See accompanying Notes to the financial statements

14 12 Financial statements 31 December 2012 Statement of Cash Flows In Denar thousand Notes Cash flow from operating activities Profit / (Loss) before taxation (96,536) 4,115 Adjustment for: Non-controlling interest, included in the consolidated income statement * - - Amortization and depreciation of: Intangible assets 4,544 5,041 Property and equipment 9,538 11,936 Capital gain from: Sale of intangible assets - - Sale of property and equipment - - Sale of foreclosed assets - - Capital loss from: Sale of intangible assets - - Sale of property, plant and equipment - - Sale of foreclosed assets - - Interest income (338,473) (252,222) Interest expense 253, ,564 Net trading (income)/ expenses (349) - Impairment losses of financial assets, net additional impairment losses 264, ,566 release of impairment losses (219,111) (221,565) Impairment losses of non financial assets, net additional impairment losses 1, release of impairment losses - - Special reserve additional provisions 4,149 3,122 release of provisions (3,908) (2,963) Dividend income (2,697) (717) Participation of profit / (loss) of associates - - Other adjustments (8) - Received interest 321, ,145 Paid interest (245,814) (126,182) Profit from operations before changes in operating assets (48,224) (454) (Increase) / decrease of operating assets: Trading assets (3,536) - Derivatives held for risk management - - Loans and advances to banks 122,702 (185,453) Loans and advances to customers (1,038,352) (951,327) Assets pledged as collateral - - Foreclosed assets - 3,375 Obligatory deposit in foreign currency 5,020 (22,932) See accompanying Notes to the financial statements

15 13 Financial statements 31 December 2012 Statement of Cash Flows (continued) In Denar thousand Obligatory deposit held with NBRM according to special regulations - Other receivables (26,551) (3,429) Deferred tax assets - - Non current assets held for sale and disposal group - - Increase / (decrease) in operating liabilities: - - Trading liabilities - - Derivative liabilities held for risk management - - Due from banks (13,734) 8,256 Due form customers 911,349 1,640,356 Other liabilities 25,650 (844) Liabilities related to group or assets for disposal - - Net cash flow from operating activities before taxation (65,676) 487,548 (Paid) / received income tax - - Net cash flow from operating activities (65,676) 487,548 Cash flow from investment activity (Investments in securities) (290,005) (15,052) Inflows from sale of investment in securities - - (Outflows from investment in subsidiaries and associates) - - Inflows from disposal of investment in subsidiaries and associates - - (Purchase of intangible assets) (5,614) (260) Inflows from sale of intangible assets - - (Purchase of property and equipment) (456) (4,142) Inflows from sale of property and equipment - - (Outflows from non - current assets held for sale) - - Inflows from non - current assets held for sale - - (Other outflows from investing activity) - - Other inflows from investing activity 2, Net cash flow from investing activity (293,578) (19,337) Cash flow from financing activity - - (Repayment of debt securities issued) - - Issued debt securities - - (Repayment of borrowings) (19,090) (568) Increase of borrowings 208,891 82,899 (Repayment of issued subordinary debts) - Issued subordinated debts - - Inflows from issued shares / equity instruments during the period - - (Purchase of treasury shares) - - Selling of treasury shares - - (Dividends paid) - - (Other outflows from financing) - - Other inflows from financing - - Net cash flow from financing activity 189,801 82,331 Effect from allowance for impairment of cash and cash equivalents - - Effect from foreign exchange differences of cash and cash equivalents - - Net increase / (decrease) of cash and cash equivalents (169,453) 550,542 Cash and cash equivalents as of 1 January 1,148, ,374 Cash and cash equivalents as of 31 December ,463 1,148,916 * Only for consolidated financial statements See accompanying Notes to the financial statements

16 14 Notes to the financial statements 1 General Eurostandard Banka AD, Skopje ( the Bank ) is a Shareholding Company incorporated in the Republic of Macedonia. The Bank s registered head office is located at: 27 Mart no. 2- Mal ring, Skopje, Republic of Macedonia. The Bank is licensed by the National Bank of the Republic of Macedonia for conducting payment transfers on the territory of the Republic of Macedonia and abroad, and deposit services on the territory of the Republic of Macedonia and abroad and credit services on the territory of the Republic of Macedonia. The Bank owns 66.66% of the shares of Postenska Banka AD, Skopje, with voting right acquired by realization of pledge recorded in these financial statements as non-current assets held for sale. These financial statements have been approved by the Bank s Supervisory Board on 29 April The Bank s shares are not listed on any Stock Exchange. As of 31 December 2012 and 2011, the Bank s total number of employees is 103 and 99, respectively. 1.1 Basis of preparation of financial statements These financial statements are prepared in accordance with the Accounting standards adopted with the Decision on the Methodology of recording and evaluating accounting items and the preparation of financial statements (Official Gazette of RM No. 169/2010) and the Decision on the types and content of financial statements of banks (Official Gazette of RM No. 169/2010, 152/2011 and 54/2012). The financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through the income statement measured at fair value; available-for-sale financial assets measured at fair value; The preparation of financial statements in accordance with accounting standards applicable in the Republic of Macedonia and requires use of estimates and judgements that affect the presented assets and liabilities, contingent assets and liabilities at the date of financial statements and the presented amounts of revenues and expenses during the reporting period. These estimates are based on Management's best knowledge of the current events and activities and are disclosed in Note 1.3.

17 15 Basis of preparation of financial statements (continued) Additional information is presented in accounting policies and appropriate notes to the financial statements. The financial statements have been prepared as of and for the years ended 31 December 2012 and 2011 and present separate, not consolidated financial statements. Current and comparative data stated in these financial statements are expressed in Denar thousand. The Group s reporting and functional currency is the Macedonian Denar ( MKD or Denar ). Where necessary, the presentation of comparative data is adjusted according to changes in presentation in the current year. 1.2 Significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. The determination of the Bank s accounting policies is based on acknowledged, familiar and practical experiences of the provisions of the Decision on the Methodology for recording and valuating of accounting items and for the preparation of financial statements, Rulebook on accounting plan of banks, the Decision on the types and content of financial statements of banks and other legal regulations. These policies have been consistently applied to all the years presented, unless otherwise stated Foreign currency transactions Transactions denominated in foreign currencies have been translated into Denar at rates set by the National Bank of the Republic of Macedonia at the dates of the transactions. Foreign currency translation is transaction which follows a foreign currency or may be converted into foreign currency. Assets and liabilities denominated in foreign currencies are translated into Denars at the balance sheet date using official rates of exchange prevailing on that date, and any foreign exchange gains or losses, resulting from foreign currency translation, are included in the income statement in the period in which they arose. The middle exchange rates used for conversion of the balance sheet items denominated in foreign currencies are as follows: 31 December December EUR Denars Denars 1 USD Denars Denars 1 CHF Denars Denars Offsetting Financial assets and liabilities are offset and reported in the balance sheet on a net basis when there is a legally enforceable right to offset the recognized amounts and when there is intent to either settle on a net basis or to realize the asset and settle the liability simultaneously Interest income and expenses Interest income and expense are recognized in the income statement for all interest bearing financial assets and liabilities using the effective interest method.

18 16 Significant accounting policies (continued) Interest income and expenses (continued) The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts Fee and commission income Fee and commission income, excluding the commission for loans approval, is recognized on an accrual basis when the service has been provided. The commission for loan approval is limited and amortised during the period of the loan, by applying the effective interest rate method Foreign exchange income and expenses Net foreign exchange income and expenses include realized and unrealized foreign exchange differences that are derived from the reconciliation of transactions made in foreign currency, as well as from asset and liability valuation, which are included in the income statement in the period when they occur. Commitments and contingencies denominated in foreign currency are translated in Denar, by applying the official exchange rates that are valid on the balance sheet date Dividend income Dividends are recognized in the income statement when the entity s right to receive payment is established. Dividends are presented as a part of net-revenues from trading or other revenues from operating activities, depending on the appropriate classification of the instrument Financial assets Financial assets are classified in the following categories: loans and receivables, financial assets at fair value through profit and loss, financial assets available-for-sale and financial assets held to maturity. Financial assets classification is done at initial recognition. Loans and receivables Loans and receivables 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 or services directly to a debtor with no intention of trading the receivable. They are recognized when the cash is advanced. Financial assets at fair value through profit and losse This category of financial assets consists of securities held for trading and securities at fair value through profit and losse classified as it at initial recognition. A financial asset is classified as asset held for trading if it is acquired or incurred principally for the purpose of generating profit through short-term fluctuations in the price or if it is included in the portfolio for which a short-term actual form of profit gain exists. As of 31 December 2012 and 2011 the Bank has no assets classified under this category.

19 17 Significant accounting policies (continued) Financial assets (continued) Financial assets available-for-sale Financial assets available-for-sale are non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. Financial assets available-for-sale are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or share prices. Financial assets held to maturity Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s Management has the positive intention and ability to hold to maturity. If the Bank sells a significant amount of the financial assets held to maturity before they reach the maturity date, then the entire category of these assets will be reclassified in financial assets available-for-sale. Initial recognition and derecognition Purchases and sales of financial assets available for sale and held to maturity financial assets are recognized on trade date the date on which the Bank commits to purchase or sell the asset. Loans are recognized when cash is advanced to the borrowers. Financial assets, apart from financial assets at fair value through profit or loss, are initially recognized at fair value plus transaction costs. Financial assets cease to be recognized after the rights to receive cash flows from the funds ends or after their transfer, and the Bank transferred substantially all risks and benefits of ownership. Subsequent measurement After initial recognition, the Bank measures financial assets carried at fair value through profit or loss, or as available-for-sale, at fair values without any deduction for transaction costs it may incur on their sale. The fair value of quoted financial assets is their bid prices at the balance sheet date. If the market on which the financial asset is quoted is not active, the Bank establishes fair values by using a valuation technique. Valuation techniques include the use of recent arm s length market transactions, references to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If the value of equity instruments cannot be reliably measured, they are measured at cost. Investments held to maturity and loans and receivables are measured at amortised cost using the effective interest method, less impairment losses. Realised gains and losses, and unrealised gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss, are included in the profit or loss in the period in which they arise. Net changes in the fair value of financial assets classified as of fair value through profit and loss includes interest income.

20 18 Significant accounting policies (continued) Financial assets (continued) Unrealised gains and losses arising from changes in the fair value of financial assets available-forsale are recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary items such as debt securities, which are recognised in profit or loss. When financial assets available-for-sale are sold or impaired, the cumulative gains or losses previously recognised in comprehensive income are recognised in profit or loss. When financial assets available-for-sale are interest bearing, the interest calculated by using the effective interest method is recognised in profit or loss Impairment of financial assets Assets carried at amortized cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest; Days in arrears for payment of principal or interest; Cash flow difficulties experienced by the borrower; Breach of loan covenants or conditions; Deterioration of the borrower s competitive position; Deterioration in the value of collateral; Initiation of bankruptcy proceedings; Activating the collateral. The Bank assesses the existence of objective evidence for impairment on individual basis. The amount of impairment loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses based on the loan) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance for impairment and the amount of the impairment loss is recognized in the current income statement. When a loan is uncollectible, it is written off against the related provision 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 provision for loan impairment and are recognized as income in the current period. 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 recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the profit or loss as release from impairment (impairment loss).

21 19 Significant accounting policies (continued) Impairment of financial assets (continued) Assets recognized at fair value The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. Significant or prolonged decline in the fair value of the financial asset below its cost is considered as objective evidence in determining whether the assets are impaired. If any such evidence exists for financial assets available-for-sale, the cumulative loss measured as the difference between the acquisition cost and the current fair value is recognized in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-forsale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement Foreclosed assets Foreclosed assets consist of buildings and equipment acquired in exchange for bad and doubtful receivables with an intention for their further sale. They are not used by the Bank for its core operations. These assets are measured at the lower of carrying amount and fair value less costs to sell. The Bank plans to dispose the collected collateral within five years of forced acquisition. For the purposes of subsequent measurement of foreclosed assets in cases where the estimated value of foreclosed asset is less than cost or carrying value, the Bank in the amount of their difference recognizes an impairment loss in the income statement. During June 2012, The National Bank of the Republic of Macedonia issued Decision on amending the Decision on accounting and regulatory treatment of the foreclosed assets, according to which the Bank shall be required to recognize the impairment loss for the already foreclosed asset in the income statement equal at least to the higher amount of: the difference between the appraised value, reduced by the selling costs and the initial accounting value, reduced by the total amount of impairment loss 20% of the initial accounting value reduced by the total amount of impairment loss The Bank is obliged to make the first recognition of impairment loss for these assets no later than 1 January By exception to items above, for the assets foreclosed after 01 January 2010, the deadline and the requirement for impairment loss recognition shall start from 01 July 2014, while the Bank shall be required to make the first recognition of the impairment loss for these assets until 01 January 2015 at the latest. Until 01 July 2014, for these assets the Bank shall be required to recognize impairment loss in the income statement equal to the difference between the appraised value, reduced by the selling costs and the initial accounting value, reduced by the total amount of impairment loss. Provided that the Bank fails to sell the foreclosed assets within five years it shall be required at the end of the fifth year to reduce the value of the already foreclosed asset to zero.

22 20 Significant accounting policies (continued) Intangible assets Computer software Costs associated with development or maintaining computer software programs are recognized as an expense as incurred. Costs directly associated with identifiable and unique software products controlled by the Bank that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Computer software development costs recognized as assets are amortized using the straight-line method over a period of four years. Other intangible assets Costs to acquire rights and licenses are capitalized and amortized using the straight-line method over a period of four years Property and equipment Property, plant and equipment are carried at cost less accumulated depreciation and impairment losses, if any. Cost includes all expenses directly attributable to purchase of assets. Depreciation is charged on a straight - line basis at prescribed rates in order to allocate the acquisition cost of property, building, plant and equipment over their useful lives. The following are approximations of estimated useful life applied to significant items of property, plant and equipment: Transportation assets Furniture and office Other equipment 4 years 5 years 4, 5 and 10 years Subsequent purchases are included in the asset s carrying value or are recognized 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. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement for the period in which they are incurred Non-current assets held for sale and disposal group Non current assets that are expected to be recovered through sale rather than through continuous use are classified as held for sale. Before this classification as held for sale, they are evaluated by the lower of their book value and fair value, less sales expenses. Loss for impairment at their initial recognition as held for sale and losses and profit from subsequent assessment are recognized in the income statement. Gains are not recognized in excess of any cumulative impairment loss Impairment of non-financial assets Assets that are subject to amortization and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of an asset s net selling price and value in use.

23 21 Significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents comprise cash, accounts that represent deposits on demand in banks, accounts in NBRM and term deposits in banks less than three months maturity from the date of acquisition Provision A provision is recognized when the Bank has a present obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. When the effect of the time value of money is material, the amount of provision represents the present value of the expenditures expected to be required to settle the obligation Employees benefits The Bank contributes to its employees as prescribed by the local social security legislation. Contributions, based on salaries, are made to the national Pension Fund and the obligatory private pension funds. There is no additional liability regarding these pension schemes. In addition, all employers in the Republic of Macedonia are obligated to pay to the employees a separate minimum amount regulated by law. The Bank has not made provisions for the employees minimum amount on retirement, as this amount would not have a material effect on the financial statements. The Bank does not operate any pension scheme or retirement benefit plans and consequentially, has no liability for pensions. The Bank is not obliged to provide additional benefits for its current or previous employees Current and deferred income tax Income tax at 10% rate is paid to non deductible items for tax purposes adjusted for tax credit, on less recognized revenues from related parties, as well as on the distributed profit for dividends to legal entities non-residents and to individuals. Undistributed profit (retained earnings) is exempt of taxation. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. The tax rates that are currently valid are used in determination of deferred income tax. Deferred income tax is charged or credited in the profits and losses except when it relates to items charged or credited directly to the equity, in which case the deferred tax is also dealt within the equity. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Bank has not recognized any deferred tax liability or asset as of 31 December 2012 and 31 December 2011, as there are no temporary differences existing at those dates.

24 22 Significant accounting policies (continued) Financial liabilities Financial liabilities are classified in accordance with the substance of the contractual arrangement. Financial liabilities at the reporting dates are classified as other financial liabilities at amortised initial cost and consist of borrowings, subordinated liabilities, deposits and other liabilities. Borrowings and subordinated liabilities Borrowings and subordinated liabilities are initially recognized at fair value, being their issue proceeds (fair value of consideration received) less transaction costs incurred. Borrowings are subsequently carried at amortized cost. Borrowings are derecognized at the moment of their settlement, cancellation or expiration. Deposits Deposits mainly present: current accounts, demand deposits and time deposits to banks, legal entities and individuals. The Bank recognizes deposits in the balance sheet when the Bank becomes a party of contractual provisions of the instrument. The deposits are measured at their objective value, plus transaction costs, which are directly related to the undertaking or issuing of the financial liability. Deposits consequently are measured according to their amortized cost, by using the method of effective interest rate. Deposits are derecognized at the moment of their settlement, cancellation or expiration. Other liabilities Other liabilities are recognized initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. They are subsequently stated at amortized cost. Other liabilities are derecognized at the moment of their settlement, cancellation or expiration Equity, reserves and dividend payments (a) Shareholders capital Share capital represents the nominal value of shares that have been issued. (b) Share issue costs Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. (c) Treasury shares Where the Bank purchases equity share capital, the consideration paid is deducted from total shareholders equity as treasury shares until they are cancelled. Where such shares are subsequently sold, any consideration received is included in shareholders equity. (d) Reserves Reserves, which comprise of statutory reserves, are generated throughout the period, based on distribution of profit in accordance with legal regulation and the Decisions made by the Bank s Assembly. (e) Retained earnings/ accumulated (losses) Retained earnings/ accumulated (losses) comprise the retained earnings and accumulated losses from current and previous periods. (f) Dividends on ordinary shares Dividends on ordinary shares are recognized as liabilities in the period in which they are approved by the Bank s shareholders.

25 23 Significant accounting policies (continued) Lease The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Bank as a lessee Finance leases, which transfers to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased vehicles and equipment or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Payments of the operating leasing are recognized as an expense on a straight-line basis over the lease term. Prepaid rents are recognized as deferred expenses. Bank as a lessor Leases where the Bank retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are presented as deferred expenses in the balance sheet and recognised in profit or loss over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned. Prepaid rents are recognized as deferred income Segment reporting Segment reporting is presented by business activities according operating segments. Operating segments of the Bank are: operations with individuals- loans and deposits, operations with financial institutions- loans and term deposits and other operating segments. Concentration of business activities to significant customers is reported if the Bank earns 10% or more from the total income and expenses of the Bank from certain customer Commitments and contingencies The Bank undertakes liabilities in its operating activities arising from loan placements accounted for in the off balance accounts, which primarily include guarantees and letter of credits. These financial liabilities are accounted for in the balance sheet when they become recoverable. Provision for impairment related to off balance commitments and contingencies are recognized as a liability within the balance sheet Fiduciary activities The Bank usually acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals and other institutions. These assets and income arising there on are excluded from these financial statements, as they are not assets of the Bank.