PIRAEUS BANK ICB International Financial Reporting Standards Financial Statements and Independent Auditor s Report 31 December 2013

Transcription

1 International Financial Reporting Standards Financial Statements and Independent Auditor s Report 31 December 2013

2 CONTENTS INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS Statement of Financial Position...1 Statement of Profit or Loss and Other Comprehensive Income...2 Statement of Changes in Equity...3 Statement of Cash Flows...4 Notes to the Financial Statements 1 Introduction Operating Environment of the Bank Summary of Significant Accounting Policies Critical Accounting Estimates, and Judgements in Applying Accounting Policies Adoption of New or Revised Standards and Interpretations New Accounting Pronouncements Cash and Cash Equivalents and Mandatory Reserves Due from Other Banks Loans and Advances to Customers Investment Securities Available for Sale Investment Properties Premises, Equipment and Intangible Assets Other Financial Assets Other Assets Non-Current Assets Held for Sale Due to Other Banks Customer Accounts Other Financial Liabilities Other Liabilities Subordinated Debt Share Capital Other Comprehensive Income Recognised in Each Component of Equity Interest Income and Expense Fee and Commission Income and Expense Other Operating Income Administrative and Other Operating Expenses Income Taxes Financial Risk Management Management of Capital Contingencies and Commitments Derivative Financial Instruments Fair Value Presentation of Financial Instruments by Measurement Category Related Party Transactions Events After the End of the Reporting Period...61

3 pwc Independent Auditor's Report To the Shareholders and Management of Public Joint Stock Company "": We have audited the accompanying financial statements of Public Joint Stock Company "PIRAEUS BANK ICB" (the "Bank"), which comprise the statement of financial position as of 31 December 2013 and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements 2 Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, 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 3 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 about whether the financial statements are free from material misstatement. 4 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 judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion 6 In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of 31 December 2013, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of matter 7 We draw your attention to Notes 2 and 35 to these financial statements. The operations of the Bank, and those of other entities in Ukraine, have been affected and may continue to be affected for the foreseeable future by the continuing political and economic uncertainties in Ukraine. Our opinion is not qualified in respect of this matter. LLC AF "PricewaterhouseCoopers (Audit)", 75 Zhylyanska St., Kyiu, 01032, Ukraine T: , P ,

4 pwc Other Matter 8 The accompanying financial statements of the Bank as at 31 December 2013 and for the year then ended have also been audited by another auditor, whose report dated 23 April 2014 expressed an unqualified opinion on these financial statements. /92/4084VeklOtarer (14141ty 25 April 2014 Kyiv, Ukraine 2 of 2

5 , Statement of Financial Position as at 31 December 2013 In thousands of Ukrainian hryvnias ASSETS Note 31 December December 2012 Cash and cash equivalents and mandatory reserves 7 713, ,265 Due from other banks 8 5,605 - Loans and advances to customers 9 1,264,578 1,617,054 Investment securities available for sale 10 84, ,760 Investment properties 11 46,800 45,787 Current income tax prepayment 5,521 6,073 Deferred income tax asset , ,008 Intangible assets 12 12,086 13,646 Premises and equipment , ,169 Other financial assets 13 6,559 3,778 Other assets 14 10,361 6,974 Non-current assets held for sale 15 9,750 9,751 TOTAL ASSETS 2,464,343 3,126,265 LIABILITIES Due to other banks , ,140 Customer accounts 17 1,125,189 1,025,063 Due to other financial institutions 9 3,471 1,688 Other financial liabilities 18 18,808 7,758 Other liabilities 19 9,036 7,926 Subordinated debt , ,499 TOTAL LIABILITIES 2,063,813 2,419,074 EQUITY Share capital 21 1,636,915 1,636,915 Additional capital 112, ,149 Revaluation reserve for available-for-sale securities 887 4,538 Revaluation reserve for premises and construction in progress 15,020 16,361 Accumulated deficit (1,364,354) (1,140,772) TOTAL EQUITY 400, ,191 TOTAL LIABILITIES AND EQUITY 2,464,343 3,126,265 Approved for issue and signed on behalf of the Management Board on 23 April Vyacheslav 'oval t, 1,11:-IP.AEirs; Acting Chairman of the B' Tatyana Vasilyeva Chief Accountant The notes set out on pages 5 to 61 form an integral part of these financial statements. 1

6 Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 December 2013 In thousands of Ukrainian hryvnias Note Interest income , ,248 Interest expense 23 (153,760) (144,865) Net interest income 70, ,383 Provision for loan impairment 9 (149,760) (180,172) Net interest margin after provision for loan impairment (79,643) (29,789) Fee and commission income 24 33,943 30,156 Fee and commission expense 24 (6,298) (5,649) (Losses less gains)/gains less losses from financial derivatives (5,305) 9,462 Gains less losses from trading in foreign currencies 2, Foreign exchange translation gains less losses 3,207 8,459 Gains less losses from transactions with securities in the Bank's trading portfolio Gains less losses/(losses less gains) from disposals of investment securities available for sale 36 (124) Losses less gains on revaluation of investment properties 11 (5,744) (9,735) Other operating income 25 3,758 39,059 Administrative and other operating expenses 26 (310,528) (210,403) Loss before tax (363,785) (167,622) Income tax credit 27 45,628 19,307 LOSS FOR THE YEAR (318,157) (148,315) Other comprehensive income: Items that may be reclassified subsequently to profit or loss: Available-for-sale investments: - (Losses less gains)/gains less losses arising during the year (4,057) 947 Income tax recorded directly in other comprehensive income (107) Tax effect of change in income tax rate Items that may not be reclassified subsequently to profit or loss: Revaluation of premises and construction in progress 12 (917) (9,491) Income tax recorded directly in other comprehensive income 27 (7) (29) Other comprehensive loss for the year (4,575) (8,422) TOTAL COMPREHENSIVE LOSS FOR THE YEAR (322,732) (156,737) The notes set out on pages 5 to 61 form an integral part of these financial statements. 2

7 Statement of Changes in Equity for the Year Ended 31 December 2013 In thousands of Ukrainian hryvnias Note Share capital Additional capital Revaluation reserve for available-forsale securities Revaluation reserve for premises and construction in progress Accumulated Total equity deficit Balance at 31 December ,636, ,767 3,440 28,193 (994,769) 820,546 Loss for the year (148,315) (148,315) Other comprehensive (loss)/income for the year ,098 (9,520) - (8,422) Total comprehensive (loss)/income - - 1,098 (9,520) (148,315) (156,737) Gain on initial recognition of financing obtained from the parent company 16-51, ,645 Income tax recorded in equity 27 - (8,263) (8,263) Transfer of revaluation surplus on premises to accumulated deficit (2,312) 2,312 - Balance at 31 December ,636, ,149 4,538 16,361 (1,140,772) 707,191 Loss for the year (318,157) (318,157) Other comprehensive loss for the year (3,651) (924) - (4,575) Total comprehensive loss - - (3,651) (924) (318,157) (322,732) Gain on initial recognition of financing obtained from the parent company 16-19, ,132 Income tax recorded in equity 27 - (3,061) (3,061) Transfer of revaluation surplus on premises to accumulated deficit (417) Transfer of gain on initial recognition of financing obtained from the parent company to accumulated deficit 16 - (94,158) ,158 - Balance at 31 December ,636, , ,020 (1,364,354) 400,530 The notes set out on pages 5 to 61 form an integral part of these financial statements. 3

8 Statement of Cash Flows for the Year Ended 31 December 2013 In thousands of Ukrainian hryvnias Note Cash flows from operating activities Interest received 176, ,992 Interest paid (106,057) (95,203) Fees and commissions received 34,010 30,174 Fees and commissions paid (6,298) (5,649) (Expenses paid)/income received in respect of financial derivatives (5,305) 9,468 Income received from trading in foreign currencies 2, Income received from trading in securities Other operating income received 3,756 38,590 Staff costs paid (87,443) (84,337) Administrative and other operating expenses paid (182,174) (95,145) Income tax refunded Cash flows (used in)/from operating activities before changes in operating assets and liabilities (170,209) 103,964 Net (increase)/decrease in mandatory reserve balances (24,057) 10,908 Net increase in due from other banks (5,605) - Net decrease in loans and advances to customers 243, ,230 Net (increase)/decrease in other financial assets (2,819) 2,912 Net increase in other assets (4,879) (1,508) Net decrease in due to other banks (491,881) (263,162) Net increase/(decrease) in customer accounts 90,158 (118,039) Net increase in other financial liabilities 15,304 1,019 Net increase in other liabilities Net cash (used in)/from operating activities (350,172) 77,324 Cash flows from investing activities Acquisition of investment securities (300,379) (330,115) Proceeds from disposal and redemption of investment securities 387, ,909 Acquisition of premises and equipment (18,458) (10,346) Proceeds from disposal of premises and equipment Acquisition of intangible assets (4,190) (3,723) Proceeds from disposal of investment property 1,277 - Net cash from/(used in) investing activities 65,806 (701) Cash flows from financing activities Net increase in due to other financial institutions 1,778 1,682 Net cash from financing activities 1,778 1,682 Effect of exchange rate changes on cash and cash equivalents 4,030 6,764 Net (decrease)/increase in cash and cash equivalents (278,558) 85,069 Cash and cash equivalents at the beginning of the year 958, ,766 Cash and cash equivalents at the end of the year 7 680, ,835 The notes set out on pages 5 to 61 form an integral part of these financial statements. 4

9 1 Introduction These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) for the year ended 31 December 2013 by Public Joint Stock Company PIRAEUS BANK ICB (the Bank ). The Bank was incorporated and is domiciled in Ukraine. The Bank is a public joint stock company limited by shares and was set up in accordance with Ukrainian regulations. The Bank was founded as an open joint stock company under the laws of Ukraine and registered by the National Bank of Ukraine (the NBU ) in January 1994 under its previous name Bank Levada. In March 1999 the Bank changed its name to OJSC International Commerce Bank. In September 2007 Piraeus Bank S.A., Athens completed the process of acquisition of 99.6% of share capital of OJSC International Commerce Bank. In March 2008 the Bank s name was changed to OJSC. In March 2010 the Bank was reregistered as a public joint stock company in accordance with the requirements of the Law of Ukraine On Joint Stock Companies and changed its name to Public Joint Stock Company. As of 31 December 2013 and 2012 the Bank s immediate and ultimate parent company was Piraeus Bank S.A., Athens. Piraeus Bank S.A., Athens, is a public company. As at 31 December 2013, Hellenic Financial Stability Fund owns 81% of the Bank's shares and the remaining 19% of the Bank's shares are distributed between its shareholders (legal entities and individuals) who do not own, directly or indirectly, more than 5% of its ordinary shares. There are no ordinary shares that provide their holders with any special control rights. Principal activity. The Bank s principal business activity is commercial and retail banking operations within Ukraine. The Bank has operated under a full banking licence issued by the NBU since February The Bank participates in the state deposit insurance scheme (registration No 025), which operates according to the Law 4452-VI On Individuals Deposits Guarantee System dated 23 February 2012 (as amended). Individuals Deposits Guarantee Fund guarantees repayment of individual deposits up to UAH 200 thousand (2012: UAH 200 thousand) per individual in case bank liquidation procedure is started. The Bank has 38 outlets (2012: 38 outlets) within Ukraine. Legal address and place of business. The Bank's legal address and place of business is: 8 Illinska Str., block 7, Kyiv, Ukraine. Presentation currency. These financial statements are presented in Ukrainian hryvnias ("UAH"), unless otherwise stated. 2 Operating Environment of the Bank The Ukrainian economy is considered to be developing and characterised by relatively high economic and political risks. The future stability of the Ukrainian economy is largely dependent upon reforms and the effectiveness of economic, financial and monetary measures undertaken by government, together with tax, legal, regulatory, and political developments. As a developing economy, it is vulnerable to market downturns and economic slowdowns elsewhere in the world. In 2013, the world demand for Ukraine's main export commodities, steel and iron ore, was weak. The year was marked by one of the record crop harvests; however world prices for wheat, corn and sunflower seed reduced significantly due to peak harvests in other crop producing regions. In 2013 Ukraine's GDP was flat year on year (2012: increase by 0.2%), while industrial output contracted by 4.7% (2012: reduction by 0.5%). The Government of Ukraine introduced a number of restrictions in relation to foreign exchange aiming to support the national currency, the Ukrainian Hryvnia. Inflation during the year was close to zero as the National Bank of Ukraine reduced the money supply. The national foreign exchange reserves reduced to the level of 3 month imports at year end due to reduced inflows from sale of commodities and agro produce, the need to settle scheduled payments, primarily with International Monetary Fund, and to pay the current and past purchase of natural gas. The political system of Ukraine experienced instability with a number of protests against the Government s actions in late 2013 and street violence in January - February Continuous political unrest led to volatility of financial markets and sharp depreciation of the national currency against major foreign currencies. The ratings of Ukrainian long-term and short-term sovereign debts have been downgraded by international rating agencies in January - February 2014 with negative outlook. The National Bank of Ukraine, among other measures, imposed certain restrictions on processing client payments by banks and on purchase of foreign currency on inter-bank market. All these factors may lead to deterioration in the quality of the Bank's loan and investment portfolios and foreign exchange losses. 5

10 2 Operating Environment of the Bank (Continued) To stabilise the deteriorating political situation, the Parliament voted return of the 2004 Constitution and dismissed the President. On 26 February, the newly formed Parliament majority coalition appointed a Prime Minister and the Government. During January April 2014, the Ukrainian Hryvnia saw a significant decrease in value against the major world currencies. The new Government called for immediate dialogue with the International Monetary Fund in order to provide financing and avoid possible default. The situation in Ukraine is further jeopardised after decision taken by Crimean parliament on joining the Russian Federation and signing the agreement between the Russian Federation and the Republic of Crimea on the accession of the Republic of Crimea to the Russian Federation on 18 March As at 31 December 2013 the Bank s assets and liabilities related to Crimea are as follows: - Cash and cash equivalents in Crimean branches UAH 9,669 thousand; - Loans and advances to customers (after impairment provision) UAH 21,944 thousand; - Investment property UAH 2,252 thousand; - Premises and equipment UAH 12,872 thousand; - Other assets UAH 30 thousand; - Customer accounts UAH 161,916 thousand. At the date of issue of these financial statements, the management expects that the Bank will incur losses in the amount of UAH 11,233 thousand mainly due to difficulties with recovering assets located in Crimea or outstanding from entities resident in Crimea. Also, as at 31 December 2013 the Bank has significant investments in bonds issued by Ukrainian government in the amount of UAH 84,977 thousand. Timing of settlement of these balances is dependent upon the availability of State funds. The final resolution and the effects of the political and economic crisis are difficult to predict but they may have further severe effects on the Ukrainian economy and the Bank s business. Management determined loan impairment provisions by considering the economic situation and outlook at the end of the reporting period, and applied the incurred loss model required by the applicable accounting standards. These standards require recognition of impairment losses that arose from past events and prohibit recognition of impairment losses that could arise from future events, no matter how likely those future events are. Thus final impairment losses from financial assets could differ significantly from the current level of provisions. Refer to Note 4. Borrowers of the Bank may be adversely affected by the deteriorated financial and economic environment, including devaluation of the Ukrainian Hryvnia in January March As a certain part of loans to customers was issued in foreign currencies, UAH depreciation against these currencies could have a significant impact on borrowers ability to service the loans. Currently management tests loans for impairment with due consideration of the above risk factors. The market in Ukraine for many types of collateral, especially real estate, has been severely affected by the overall situation in the Ukraine economy, resulting in a low level of liquidity for certain types of assets. As a result, the actual realisable value on future foreclosure may differ from the value ascribed in estimating allowances for impairment at the end of the reporting period. The tax, currency and customs legislation within Ukraine is subject to varying interpretations and frequent changes (Note 30). The need for further developments in the bankruptcy laws, formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments continue to contribute to the challenges faced by banks operating in Ukraine. The Tax Code adopted in 2010 provided for the reduction of the corporate tax rate from 19% in 2013 to 16% from 1 January 2014, and the reduction of the VAT rate from 20% to 17% starting from 1 January However, the tax rates were set at a level of 18% for the corporate tax and 20% for VAT according to the law signed by the President of Ukraine on 27 December 2013, which came into effect on 1 January

11 2 Operating Environment of the Bank (Continued) On 27 March 2014, the new Law "On prevention of financial collapse and creation of prerequisites for economic growth of Ukraine" was adopted by the Parliament of Ukraine. The Law sets CPT and VAT rates on a permanent basis at 18% and 20% accordingly, increases excise tax rates for alcohol beverages and tobacco products, cancels VAT refund for exporters of cereal crops, prescribes special tax regime for agricultural producers, establishes progressive personal income taxation ladder (15%, 17%, 20% and 25%), implements a 0.5 % fee for compulsory state pension insurance applicable to the purchase of foreign currency by legal entities and individuals, increases tariffs for subsoil use and reduces the tax exempt limits for import of goods transferred via international mail. Management believes it is taking all necessary measures to support the sustainability and development of the Bank s business in the current business and economic environment. 3 Summary of Significant Accounting Policies Basis of preparation. These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of premises, construction in progress, investment property, available-for-sale financial assets, and financial instruments categorised as at fair value through profit or loss. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated (refer to Note 5). Going concern. Management prepared these financial statements on a going concern basis. Refer to Note 4 for uncertainties relating to events and conditions that may cast a doubt upon the Bank s ability to continue as a going concern. Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the Bank. This is the case even if a market s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (ie an asset) for a particular risk exposure or paid to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date. This is applicable for assets carried at fair value on a recurring basis if the Bank: (a) manages the group of financial assets and financial liabilities on the basis of the Bank s net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the Bank s documented risk management or investment strategy; (b) it provides information on that basis about the group of assets and liabilities to the Bank s key management personnel; and (c) the market risks, including duration of the Bank s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities is substantially the same. Valuation techniques such as discounted cash flow models or models based on recent arm s length transactions or consideration of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Refer to Note 32. 7

12 3 Summary of Significant Accounting Policies (Continued) Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the statement of financial position. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Initial recognition of financial instruments. Derivatives are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date that the Bank commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. The Bank uses discounted cash flow valuation techniques to determine the fair value of currency swaps that are not traded in an active market. Differences may arise between the fair value at initial recognition which is considered to be the transaction price and the amount determined at initial recognition using the valuation technique. Any such differences are amortised on a straight line basis over the term of the currency swaps. Derecognition of financial assets. The Bank derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. All short term interbank placements, beyond overnight placements, are included in due from other banks. Amounts, which relate to funds that are of a restricted nature, are excluded from cash and cash equivalents. Cash and cash equivalents include cash on hand, unrestricted demand and overnight deposits with central and other banks. Cash and cash equivalents are carried at amortised cost. 8

13 3 Summary of Significant Accounting Policies (Continued) Mandatory cash balances with the NBU. Mandatory cash balances with the NBU are carried at amortised cost and represent interest bearing and non-interest bearing mandatory reserve deposits which are not available to finance the Bank s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the cash flow statement. Due from other banks. Amounts due from other banks are recorded when the Bank advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. Loans and advances to customers. Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Bank determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Bank considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: - any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - the borrower experiences a significant financial difficulty as evidenced by the borrower s financial information that the Bank obtains; - the borrower considers bankruptcy or a financial reorganisation; - there is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or - the value of collateral significantly decreases as a result of deteriorating market conditions. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year. 9

14 3 Summary of Significant Accounting Policies (Continued) Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. Credit related commitments. The Bank enters into credit related commitments, including commitments to extend credit, letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. Investment securities available for sale. This classification includes investment securities which the Bank intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Bank classifies investments as available for sale at the time of purchase. Investment securities available for sale are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in profit or loss for the year. Dividends on available-for-sale equity instruments are recognised in profit or loss for the year when the Bank s right to receive payment is established and it is probable that the dividends will be collected. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of investment securities available for sale. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss for the year. Investment property. Investment property is property held by the Bank to earn rental income or for capital appreciation, or both and which is not occupied by the Bank. Investment property is initially recognised at cost, including transaction costs, and subsequently remeasured at fair value updated to reflect market conditions at the end of the reporting period. Fair value of investment property is the price at which the property could be exchanged between knowledgeable, willing parties in an arm s length transaction. A willing seller is not a forced seller prepared to sell at any price. The best evidence of fair value is given by current prices in an active market for similar property in the same location and condition. In the absence of current prices in an active market, the Bank considers information from a variety of sources, including: (a) current prices in an active market for properties of different nature, condition or location, adjusted to reflect those differences; (b) recent prices of similar properties on less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and (c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. 10

15 3 Summary of Significant Accounting Policies (Continued) Market value of the Bank s investment property is determined based on reports of independent appraisers, who hold a recognised and relevant professional qualification and who have recent experience in valuation of property of similar location and category. Investment property that is being developed or redeveloped for use as investment property is also measured at fair value. Earned rental income is recorded in profit or loss for the year within other operating income. Gains and losses resulting from changes in the fair value of investment property are recorded in profit or loss for the year and presented separately. Subsequent expenditure is capitalised to the asset s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Bank and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. Premises and equipment. Premises and equipment are stated at cost, restated to the equivalent purchasing power of the Ukrainian hryvnia at 31 December 2000 for assets acquired prior to 1 January 2001, or revalued amounts, as described below, less accumulated depreciation and provision for impairment, where required. Premises and construction in progress are subject to revaluation with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Increases in the carrying amount arising on revaluation are credited to other comprehensive income and increase the revaluation surplus in equity. Decreases that offset previous increases of the same asset are recognised in other comprehensive income and decrease the previously recognised revaluation surplus in equity; all other decreases are charged to profit or loss for the year. The revaluation reserve for premises and construction in progress included in equity is transferred directly to accumulated deficit when the revaluation surplus is realised on the retirement or disposal of the asset, or as the asset is used by the Bank; in the latter case, the amount of the surplus realised is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. At the date of revaluation accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. Management has updated the carrying value of premises and construction in progress measured in accordance with the revaluation model as at the end of the reporting period using market based evidence and is satisfied that sufficient market based evidence of fair value is available to support the updated fair values. Construction in progress is carried at revalued amounts, as described above. Construction in progress is not depreciated until the asset is available for use. All other items of premises and equipment are stated at cost less accumulated depreciation and impairment losses, if any. Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year to the extent it exceeds the previous revaluation surplus in equity. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses). Depreciation. Land and construction in progress are not depreciated. Depreciation on other items of premises and equipment is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives: Useful lives in years Premises 50 Motor vehicles 7 Computers and office equipment 4-6 Leasehold improvements over the term of the underlying lease 11

16 3 Summary of Significant Accounting Policies (Continued) The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Intangible assets. The Bank s intangible assets have definite useful life and primarily include capitalised computer software. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring them to use. Development costs that are directly associated with identifiable and unique software controlled by the Bank are recorded as intangible assets if an inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 4 years. Operating leases. Where the Bank is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Bank, the total lease payments are charged to profit or loss for the year on a straight-line basis over the period of the lease. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. Non-current assets held for sale. This group includes non-current assets if their carrying amount will be recovered principally through a sale transaction within twelve months after the end of the reporting period. Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Bank s management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for sale at a reasonable price; (d) the sale is expected within one year and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Non-current assets classified as held for sale in the current period s statement of financial position are not reclassified or re-presented in the comparative statement of financial position to reflect the classification at the end of the current period. Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced to the Bank by counterparty banks. The non-derivative liability is carried at amortised cost. If the Bank purchases its own debt, the liability is removed from the balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. When financial liabilities are renegotiated and the renegotiated terms and conditions differ substantially from the previous terms, the new liability is initially recognised at its fair value. Renegotiated terms and conditions of a financial liability differ substantially from previous terms, if the present value of future cash flows under new terms discounted at the original effective interest rate differs from the carrying amount of the liability by more than 10%. The Bank recognises gain on initial recognition of financing obtained from the parent company in the retained earnings or accumulated deficit after completion of transactions resulting in this gain according to the decision of the shareholders' meeting. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Subordinated debt. Subordinated debt represents long-term borrowing agreements that, in case of the Bank s default, would be secondary to the Bank s primary debt obligations. Subordinated debt is carried at amortised cost. Derivative financial instruments. Derivative financial instruments, including currency swaps and forwards, are carried at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss for the year. The Bank does not apply hedge accounting. 12