Financial Statements. and Independent Auditors Report

Transcription

1 KOMERCIJALNA BANKA A.D., BEOGRAD Financial Statements Year Ended and Independent Auditors Report

2 KOMERCIJALNA BANKA A.D., BEOGRAD CONTENTS Page Independent Auditors' Report 1-2 Income Statement 3 Statement of Other Comprehensive Income 4 Balance Sheet 5 Statement of Changes in Equity 6 7 Statement of Cash Flows 8-9 Notes to the Financial Statements Bank s Annual Business Report

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12 1. BANK S ESTABLISHMENT AND ACTIVITY Komercijalna Bank a.d., Beograd (hereinafter the Bank ), was established as at December 1, 1970 and transformed into a shareholding company as of May 6, The Bank was registered with the Commercial Court in Belgrade on July 10, 1991 and later registered with the Serbian Business Registers Agency on April, The Bank was issued its operating license by the National Bank of Yugoslavia on July 3, The principal holders of voting shares in the Bank are as follows: Republic of Serbia 41.74% EBRD, London 24.43% The Bank is registered for performing crediting, depositary and guarantee operations, as well as for payment transfer operations in the country and abroad. As of, the Bank was comprised of the Head Office in Belgrade at the address of no. 14, Svetog Save St., 6 business centers, 5 business and corporate centers, 1 branch and 203 sub-branches in the territory of the Republic of Serbia (December 31, 2016: 23 branches and 208 sub-branches in the territory of the Republic of Serbia). As of, the Bank had 2,806 employees (December 31, 2016: 2,858 employees). The Bank s tax identification number is BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS 2.1. Basis of Preparation and Presentation of Financial Statements The Bank s unconsolidated financial statements (the financial statements ) for 2017 have been prepared in accordance with the International Financial Reporting Standards ( IFRS ). The accompanying financial statements represent the Bank s unconsolidated (separate) financial statement. The Bank separately prepares and presents its consolidated financial statements in accordance with the International Financial Reporting Standards. New and revised standards and interpretations issued that came into effect in the current period are disclosed in Note 2.2, while standards and interpretations in issue but not yet in effect are disclosed in Note 2.3. The accompanying financial statements are presented in the format prescribed under the Decision on the Forms and Contents of the Items in the Forms of Financial Statements of Banks (Official Gazette of RS nos. 71/2014 and 135/2014). These financial statements were prepared at historical cost principle unless otherwise stipulated in the accounting policies presented hereunder. In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3. The Bank s financial statements are stated in thousands of dinars (RSD). Dinar is the official reporting currency in the Republic of Serbia. 10

13 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.2. Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Bank as of 1 January 2017: IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses (Amendments) The objective of the Amendments is to clarify the requirements of deferred tax assets for unrealized losses in order to address diversity in practice in the application of IAS 12 Income Taxes. The specific issues where diversity in practice existed relate to the existence of a deductible temporary difference upon a decrease in fair value, to recovering an asset for more than its carrying amount, to probable future taxable profit and to combined versus separate assessment. The Amendments were not applicable for the Bank. IAS 7: Disclosure Initiative (Amendments) The objective of the Amendments is to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The Amendments specify that one way to fulfil the disclosure requirement is by providing a tabular reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities, including changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries or other businesses, the effect of changes in foreign exchange rates, changes in fair values and other changes. The Amendments were not applicable for the Bank. The IASB has issued the Annual Improvements to IFRSs Cycle, which is a collection of amendments to IFRSs. The following annual improvement has not yet been endorsed by the EU. This improvement did not have an effect on the Bank s financial statements. IFRS 12 Disclosure of Interests in Other Entities: The amendments clarify that the disclosure requirements in IFRS 12, other than those of summarized financial information for subsidiaries, joint ventures and associates, apply to an entity s interest in a subsidiary, a joint venture or an associate that is classified as held for sale, as held for distribution, or as discontinued operations in accordance with IFRS 5. 11

14 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted IFRS 9 Financial Instruments: Classification and Measurement The standard is effective for annual periods beginning on or after 1 January 2018, with early application permitted. The final version of IFRS 9 Financial Instruments reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. Management has made an assessment of the effect of the fist-time adoption of standard and has disclosed it in the Notes to the Financial Statements. IFRS 15 Revenue from Contracts with Customers The standard is effective for annual periods beginning on or after 1 January IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity s ordinary activities (e.g., sales of property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations; changes in contract asset and liability account balances between periods and key judgments and estimates. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements IFRS 15: Revenue from Contracts with Customers (Clarifications) The Clarifications apply for annual periods beginning on or after 1 January 2018 with earlier application permitted. The objective of the Clarifications is to clarify the IASB s intentions when developing the requirements in IFRS 15 Revenue from Contracts with Customers, particularly the accounting of identifying performance obligations amending the wording of the separately identifiable principle, of principal versus agent considerations including the assessment of whether an entity is a principal or an agent as well as applications of control principle and of licensing providing additional guidance for accounting of intellectual property and royalties. The Clarifications also provide additional practical expedients for entities that either apply IFRS 15 fully retrospectively or that elect to apply the modified retrospective approach. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements 12

15 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) IFRS 16: Leases The standard is effective for annual periods beginning on or after 1 January IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer ( lessee ) and the supplier ( lessor ). The new standard requires lessees to recognize most leases on their financial statements. Lessees will have a single accounting model for all leases, with certain exemptions. Lessor accounting is substantially unchanged. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements Amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements IFRS 2: Classification and Measurement of Share based Payment Transactions (Amendments) The Amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, for share-based payment transactions with a net settlement feature for withholding tax obligations and for modifications to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements 13

16 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments) The Amendments are effective for annual periods beginning on or after 1 January The amendments address concerns arising from implementing the new financial instruments Standard, IFRS 9, before implementing the new insurance contracts standard that the Board is developing to replace IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption from applying IFRS 9 and an overlay approach, which would permit entities that issue contracts within the scope of IFRS 4 to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements IAS 40: Transfers to Investment Property (Amendments) The Amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The Amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management s intentions for the use of a property does not provide evidence of a change in use. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements IFRS 9: Prepayment features with negative compensation (Amendment) The Amendment is effective for annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. The Amendment allows financial assets with prepayment features that permit or require a party to a contract either to pay or receive reasonable compensation for the early termination of the contract (so that, from the perspective of the holder of the asset there may be negative compensation ), to be measured at amortized cost or at fair value through other comprehensive income. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements IAS 28: Long-term Interests in Associates and Joint Ventures (Amendments) The Amendments are effective for annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. The Amendments relate to whether the measurement, in particular impairment requirements, of long term interests in associates and joint ventures that, in substance, form part of the net investment in the associate or joint venture should be governed by IFRS 9, IAS 28 or a combination of both. The Amendments clarify that an entity applies IFRS 9 Financial Instruments, before it applies IAS 28, to such long-term interests for which the equity method is not applied. In applying IFRS 9, the entity does not take account of any adjustments to the carrying amount of long- term interests that arise from applying IAS 28. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements 14

17 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) IFRIC INTERPETATION 22: Foreign Currency Transactions and Advance Consideration The Interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognizes a non-monetary asset or a non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The Interpretation states that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements The IASB has issued the Annual Improvements to IFRSs Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2018 for IFRS 1 First-time Adoption of International Financial Reporting Standards and for IAS 28 Investments in Associates and Joint Ventures. Earlier application is permitted for IAS 28 Investments in Associates and Joint Ventures. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements IFRS 1 First-time Adoption of International Financial Reporting Standards: This improvement deletes the short-term exemptions regarding disclosures about financial instruments, employee benefits and investment entities, applicable for first time adopters. IAS 28 Investments in Associates and Joint Ventures: The amendments clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is venture capital organization, or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition. IFRIC INTERPETATION 23: Uncertainty over Income Tax Treatments The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The Interpretation provides guidance on considering uncertain tax treatments separately or together, examination by tax authorities, the appropriate method to reflect uncertainty and accounting for changes in facts and circumstances. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements The IASB has issued the Annual Improvements to IFRSs Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. It is not expected that the requirements of this standard will have significant effect on Bank s financial statements 15

18 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) IFRS 3 Business Combinations and IFRS 11 Joint Arrangements: The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it re-measures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not re-measure previously held interests in that business. IAS 12 Income Taxes: The amendments clarify that the income tax consequences of payments on financial instruments classified as equity should be recognized according to where the past transactions or events that generated distributable profits has been recognized. IAS 23 Borrowing Costs: The amendments clarify paragraph 14 of the standard that, when a qualifying asset is ready for its intended use or sale, and some of the specific borrowing related to that qualifying asset remains outstanding at that point, that borrowing is to be included in the funds that an entity borrows generally. IFRS 9 Financial instruments In July 2014, the IASB issued IFRS 9 Financial Instruments, the standard that will replace IAS 39 for annual periods on or after 1 January In 2016 the Bank set up a project to implement IFRS 9 which is lead by the deputy Chief Executive Officer competent for risk. During the Project, the Bank has analysed effects of IFRS 9 on different processes, including accounting of financial instruments, risk evaluation, IT system, funds placement, development of new products and so on. Bank has engaged consultants to help IFRS 9 to be successfully implemented and the following phases have been conducted: Business model estimation; Classification and measurement; Impairment of financial assets and fair value calculation. Classification and measurement From a classification and measurement perspective, the new standard will require all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity s business model for managing the assets and the instruments contractual cash flow characteristics. According to IFRS 9, financial assets will be measured in one off the following methods: amortised cost, fair Value through profit or loss (FVPL) and fair value through other comprehensive income (FVOCI). The Standard eliminates existing categories under IAS 39, "Recognition and Measurement", heldto-maturity financial assets, loans and receivables and available-for-sale financial assets. Ownership instruments, in non-dependent entities that are not held for trading, can be classified as assets that are valued at fair value through other comprehensive income, without any subsequent reclassification of gains and losses through the Income Statement. Initially, the financial asset is measured at fair value plus the transaction costs, except in the case of financial assets that are measured at fair value through the Income Statement (FVTPL) in which these costs are recognized as cost in the Income Statement. 16

19 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) Classification and measurement (continued) A financial asset is measured at amortized cost unless it is designated as FVTPL and meets the following criteria: the goal of a business model of holding a financial asset is the collection of contracted cash flows and contractual terms of a financial asset lead to cash flows that represent only payments of principal and interest. Debt instruments are valued as FVOCI only if the following criteria are met and are not indicated as FVTPL: The goal of the business model of holding a financial asset is the collection of contracted cash flows and sales, and contractual terms of a financial asset lead to cash flows that represent only payments of principal and interest. Subsequently, gains or losses on the financial assets of the FVOCI will be recognized through the other comprehensive income, except for income or expense on impairment of financial assets and exchange rate differences, until the moment when the recognition of a financial asset ceases or when it is reclassified. When the recognition of a financial asset ceases, the cumulative gain or loss previously recognized in the other comprehensive income will be reclassified from equity to the income statement. Interest calculated using the effective interest rate is recognized in the income statement. IFRS requires that all financial assets, other than derivatives and equity instruments, be analyzed through a combination of the business model of managing a financial asset from one, and the characteristics of contracted cash flows on the other side. The Bank has started the analyses of business models at the portfolio level of financial assets. The existing portfolio policies and strategies, as well as their application in practice, were considered. Also, the information and method of evaluating and reporting on the performance of the portfolio, information on the risks that affect the performance of the portfolio and how they are managed are considered. In addition, the frequency, scope and timing of the sale of financial assets in the past periods, the reasons for the sale as well as the plans for the sale of financial assets in the future period are considered. In assessing whether the contractual cash flows represent only the payment of principal and interest, the Bank has reviewed the contractual terms of financial instruments and whether they contain stipulations that could change the time or amount of contracted cash flows, which would result in fair valuation of instruments. The analysis concluded that there are no credit products of the Bank whose contractual terms and conditions do not lead to cash flows that represent only payments of principal and interest on the principal balance at certain dates, which would require fair value valuation. Based on the conducted analysis, the Bank does not expect that the new classification requirements will materially impact the accounting recognition of receivables, loans, investments in debt securities and equity instruments. The results of the initial assessment indicated that: 17

20 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) Classification and measurement (continued) Loans and placements to customers and banks in accordance with IFRS 9 are assessed continuously as in accordance with IAS 39, at amortized cost; Financial instruments that are traded and whose value is measured at fair value through the Income Statement are still assessed in the same way; Debt instruments classified as available for sale in accordance with IAS 39 are largely estimated at fair value through other Other comprehensive income. Taking into account the nature of the Bank's obligations, the accounting of financial liabilities will be the same as in accordance with the requirements of IAS 39. The Bank does not have a designated financial obligation as FVTPL and does not intend to do so. The conducted analysis does not indicate that there are material effects of the requirements of IFRS 9 regarding the classification of financial liabilities. Impairment of financial assets IFRS 9 will also fundamentally change the loan loss impairment methodology. The standard will replace IAS 39 s incurred loss approach with a forward-looking expected loss (ECL) approach through the inclusion of the impact of the expected movement of macroeconomic variables on the future movement of the probability of loss based on statistically proven interdependencies. The Bank will be required to record an allowance for expected losses for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the life of the asset. The Bank defined the criteria for classifying financial instruments into levels 1, 2 and 3, depending on the degree of increase in credit risk from the moment of initial recognition. The subject of the classification are financial instruments that are measured at amortized cost, as well as financial instruments that are valued at fair value through other comprehensive income. Segment 1 Impairment allowance of financial instruments that are not deemed to have a significant deterioration in credit risk are calculated on the basis of 12-month expected losses (ECL) in accordance with IFRS 9. Segment 1 also includes exposures to the Republic of Serbia, the National Bank of Serbia and other exposures with a credit risk weight of 0, in accordance with the Decision on capital adequacy of the bank, except for the exposure on the basis of mandatory reserve and similar exposures. Segment 2 All financial instruments in which credit risk exacerbation is realized are classified in Segment 2 and impairment allowance are calculated on the basis of expected losses for the entire life of the instrument. The Bank is considering whether there is a significant increase in credit risk by comparing the life probability of probability of default against the initial recognition of the asset in relation to the risk of default at the end of each reporting period. According to the internal policy of the bank, a 18

21 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.3. Standards issued but not yet effective and not early adopted (continued) Classification and measurement (continued) significant increase in credit risk is considered to be a delay of 31 to 90 days, customer restructuring, and clients on the watch list. Segment 3 As in accordance with IAS 39, financial instruments are included in Segment 3, where there is objective evidence of impairment and there is no change in the coverage of loans classified in that segment, with the introduction of multiple collection scenarios. The impairment calculation on an individual basis will continue on the same principle. In the assessment of expected credit losses (ECL), the Bank also included information on the expected trends in macroeconomic parameters for the next three years, for which a statistically significant dependence was established As different levels of impairment result in different ways of calculating the expected credit losses, the Bank has developed a methodology and accounted for risk parameters in accordance with the requirements of IFRS 9. Based on the analysis carried out by the date of these financial statements, the total estimated effect of the first application of IFRS 9 amounts to RSD 1.16 billion, of which RSD 0.2 billion relates to impairment of exposure to the Republic of Serbia and the National Bank of Serbia, mostly on the basis of a portfolio of securities of the value classified as available for sale in accordance with IAS 39. Aforementioned effects are preliminary, due to the fact that the Bank is still in the process of finalizing standard implementation. The effect of the first time adoption of IFRS 9 as of 1 January 2018 is recorded through the retained earnings account. The Bank will not restate comparative data for previous years on the basis of changes relating to classification and valuation as well as impairment. The Bank will recognize differences in the carrying amounts of financial assets that arise from the application of IFRS 9 within equity as at 1 January Going Concern The financial statements were prepared on a going concern assumption entailing the Bank s continuation of operations for an indefinite period in the foreseeable future. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Consolidation The Bank has control over the following legal entities, which are not consolidated into these financial statements: Legal Entity Equity Interest Komercijalna banka a.d. Budva, Montenegro 100% Komercijalna banka a.d. Banja Luka, Bosnia and Herzegovina 99.99% Investment Fund Management Company KomBank Invest a.d. Beograd, Serbia 100% 19

22 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Consolidation (continued) The Bank s consolidated financial statements are prepared and disclosed separately. In Bank s separate financial statements, investments in subsidiaries are measured at cost. (b) Foreign Exchange Translation Transactions in foreign currencies are translated into RSD at the spot middle exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies which are stated at cost, are translated at the rate ruling at the reporting date. Foreign exchange differences arising on translation are recognized in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Exchange rates for major currencies used in the translation of the statement of financial position items denominated in foreign currencies, as determined by the National Bank of Serbia, were as follows: USD EUR CHF JPY (c) Interest Interest income and expense are recognized in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income from non-performing loans is recognized at the net principle, reducing the gross interest accrued by the impairment allowance amount, i.e. the amount that is likely not to be collected. Interest income and expense presented in the statement of comprehensive income include: Interest on financial assets and financial liabilities measured at amortized cost calculated on an effective interest basis; Interest on investment securities available for sale. 20

23 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Interest (continued) Interest income and expenses on all trading assets and liabilities are considered to be incidental to the Bank s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income. (d) Fees and Commissions Fee and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fee and commission income is recognized as the related services are performed. Fee and commission income includes transfer payments in foreign currency, domestic payments transactions, loan administration, guarantee, letter of credit business and other banking services. Other fee and commission expenses relate mainly to transaction and service fees, which are expensed as the services are received. (e) Net Trading Income Net trading income comprises gains less losses, related to trading assets and liabilities, and includes all realized and unrealized fair value changes and foreign exchange differences. (f) Net income from Other Financial Instruments at Fair Value through Profit or Loss Net income from other financial instruments at fair value through profit or loss, relates to financial assets and liabilities designated at fair value through profit or loss and includes all realized and unrealized fair value changes. g) Dividends Income from dividends is recognized at the moment of economic benefits inflow arising from dividends. Dividends are reported under other income. (h) Operating and Finance Lease Payments Payments made during the year under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (i) Tax Expenses Tax expense comprises current taxes and deferred taxes. Current taxes and deferred taxes are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income. (i) Current Income Tax Current tax is expected tax payable or receivable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. 21

24 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (ii) Deferred Income Tax Deferred income tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they write-off, based on the laws that have been enacted by the reporting date. Deferred tax assets and deferred tax liabilities are offset if there is a legal right to offset current tax assets and current tax liabilities and deferred tax assets and deferred tax liabilities relate to the tax on the profits imposed by the same tax authority on the same taxpayer or different taxpayers who intend to either settle current tax liabilities and assets on a net basis or to simultaneously realize assets and settle liabilities in each future period in which a repayment or refund is expected amount of deferred tax liabilities or assets. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that the future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred tax liabilities are recognized on all taxable temporary differences. (iii) Other Taxes and Contributions According to the relevant legislation in the Republic of Serbia, the Bank pays various taxes and contributions, such as VAT, capital gains tax and payroll contributions. These are included under Other operating expenses. (j) Financial assets and liabilities (i) Recognition The Bank initially recognizes loans and receivables, deposits, borrowings and subordinated liabilities on the date which they are transferred to the borrower or received. All other financial assets and liabilities are initially recognized on the date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or liability is measured initially at fair value plus transaction costs that are directly attributable to its acquisition or issue, for items that are not carried at fair value through profit or loss. (ii) Classification The Bank classified its financial assets into the following categories: financial assets held for trading, loans and receivables and investment securities please refer to accounting policies 3(l), 3(m) and 3(n). The Bank classifies its financial liabilities as measured at amortized cost or held for trading please refer to accounting policies. (iii) De-recognition The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risk and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualifies for de-recognition that is created or retained by the Bank is recognized as a separate asset or liability 22

25 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (iii) De-recognition (continued) in the statement of financial position. On de-recognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss. The Bank enters in transactions whereby it transfers assets recognized on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognized. Transfers of assets with retention of all or substantially all risks and rewards include, for example, repurchase transactions. In transactions in which the Bank neither retains nor transfers substantially all the risk and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of transferred asset. (iv) Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions such as in the Bank s trading activity. (v) Amortized Cost Measurement The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, less any impairment. (vi) Fair Value Measurement The fair values stated for financial instruments are the amounts for which the asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and other optional models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument of based on other available observable market data. 23

26 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (vi) Fair Value Measurement (continued) The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in profit or loss depending on the individual facts and circumstances of the transaction but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. Any difference between the fair value at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognized in profit or loss immediately but is recognized over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable. Assets and long positions are measured at a bid price and liabilities and short positions are measured at an asking price. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction. (vii) Identification and Measurement of Impairment At reporting date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets, and that the loss event has an impact on the future cash flows of the assets that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Bank considers evidence of impairment for loans and receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and receivables and held-to-maturity investment securities are assessed for specific impairment. All individually significant loans and receivables and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and receivables and held-to-maturity investment securities with similar risk characteristics. 24

27 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (vii) Identification and Measurement of Impairment (continued) In assessing collective impairment the Bank uses statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modeling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognized by transferring the cumulative loss that has been recognized in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition costs, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. Movements on provisions for impairment losses attributable to the time value are included as a component of the interest rate. If, in a subsequent period, the fair value of an impaired available-for-sale debt security 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, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. The Bank write-off certain loans and receivables and investment securities when they are determined to be uncollectible (refer to note 4.1.1). (k) Cash and Cash Equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the balance sheet. (l) Trading Assets and Liabilities Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognized and subsequently measured at fair value in the statement of financial position, with transaction costs directly recognized in profit or loss. All changes in fair value are recognized as part of net trading income in profit or loss. Trading assets are not reclassified subsequent to their initial recognition, except that non-derivative trading assets, other than those designated at fair value through profit or loss upon initial recognition, may have been reclassified out of the fair value through profit or loss, i.e. trading category, if they were no longer held for the purpose of being sold or repurchased in the near term and either of the conditions below were met: 25