Ameriabank cjsc. Financial Statements for the Year Ended 31 December 2009

Transcription

1 Financial Statements for the Year Ended 31 December

2 Contents Independent Auditors Report... 3 Statement of comprehensive income... 4 Statement of financial position... 5 Statement of cash flows... 6 Statement of changes in equity... 7 Notes to the financial statements... 8

3 ABCD KPMG Armenia cjsc 8 th floor, Erebuni Plaza Business Center, 26/1 Vazgen Sargsyan Street Yerevan 0010, Armenia Telephone (10) Fax (10) Internet

4 Statement of comprehensive income for the year ended 31 December Notes Interest income 4 6,123,933 2,629,452 Interest expense 4 (2,735,069) (560,156) Net interest income 3,388,864 2,069,296 Fee and commission income 5 507, ,954 Fee and commission expense 6 (113,101) (113,845) Net fee and commission income 394, ,109 Net gain/(loss) on financial instruments at fair value through profit or loss 7 2,059 (1,208) Net foreign exchange income 8 628, ,091 Net (loss)/gain on available-for-sale assets (4,612) 7,987 Other operating income/(expenses) 79,999 (3,388) Operating income 4,489,391 2,625,887 Impairment losses 9 (194,569) (320,024) Personnel expenses 10 (1,100,056) (714,803) Other general administrative expenses 11 (1,198,526) (602,225) Profit before taxes 1,996, ,835 Income tax expense 12 (534,633) (221,604) Profit 1,461, ,231 Other comprehensive income/(loss) Revaluation reserve for assets available-for-sale: - Net change in fair value of available-for-sale assets, net of tax (23,321) (40,420) - Net change in fair value of available-for-sale assets transferred to profit or loss, net of tax 3,690 (7,987) Revaluation of property and equipment (83,923) - Other comprehensive loss, net of tax (103,554) (48,407) Total comprehensive income 1,358, ,824 The statement of comprehensive income is to be read in conjunction with the notes to, and forming part of, the financial statements. 4

5 Statement of financial position as at 31 December Notes ASSETS Cash 2,545,062 1,763,368 Due from the Central Bank of Armenia 13 10,298,284 3,183,550 Placements with banks 14 26,163,344 8,187,508 Financial instruments at fair value through profit or loss 15 75, ,260 Amounts receivable under reverse repurchase agreements , ,867 Loans to customers 17 53,564,682 30,764,178 Receivables from finance leases , ,684 Available-for-sale assets - Held by the Bank 19 3,864, ,756 - Pledged under sale and repurchase agreements 19 2,949,202 2,248,918 Assets held for sale ,405 - Property, equipment and intangible assets 21 1,536,395 1,286,960 Deferred tax asset 12 16,473 55,846 Other assets , ,538 Total assets 103,238,090 49,022,433 LIABILITIES Deposits and balances from banks 23 5,968,269 1,771,007 Amounts payable under repurchase agreements 24 3,220,675 2,456,698 Current accounts and deposits from customers 25 62,021,236 23,989,968 Other borrowed funds 26 9,996, ,530 Current tax liability 6,150 32,099 Other liabilities , ,851 Total liabilities 81,490,757 28,633,153 EQUITY Share capital 28 18,200,000 18,200,000 Share premium 28,407 28,407 Revaluation surplus for property - 291,026 Revaluation reserve for available-for-sale assets (126,204) (106,573) Retained earnings 3,645,130 1,976,420 Total equity 21,747,333 20,389,280 Total liabilities and equity 103,238,090 49,022,433 The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 5

6 Statement of cash flows for the year ended 31 December Notes CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 5,797,411 2,465,243 Interest payments (2,001,491) (464,046) Fee and commission receipts 507, ,954 Fee and commission payments (113,101) (113,845) Net receipts from foreign exchange 1,161, ,604 Net (payments)/receipts from available-for-sale assets (4,612) 7,987 Other income/(expenses) 52,370 (3,390) Salaries and other payments to employees (1,087,144) (713,276) Other general administrative expense payments (1,027,262) (487,496) (Increase) decrease in operating assets Due from the Central Bank of Armenia (59,771) (146,580) Placements with banks (12,715,383) (2,408,133) Financial instruments at fair value through profit or loss 244,668 (205,854) Amounts receivable under reverse repurchase agreements (147,467) (475,824) Loans to customers (20,874,811) (28,120,669) Receivables from finance leases (154,803) (135,183) Available-for-sale assets (4,301,594) 2,363,463 Other assets (375,514) (306,397) Increase (decrease) in operating liabilities Deposits and balances from banks 4,016,519 1,760,182 Amounts payable under repurchase agreements 763,837 1,523,005 Current accounts and deposits from customers 28,274,077 14,636,972 Other liabilities 31, ,484 Net cash used in operating activities before income tax paid (2,012,670) (9,831,799) Income tax paid (516,301) (207,379) Cash flows used in operating activities (2,528,971) (10,039,178) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and intangible assets (1,065,144) (652,443) Proceeds from sale of property 560,522 - Dividends received from unquoted equity investments 27,632 - Cash flows used in investing activities (476,990) (652,443) CASH FLOWS FROM FINANCING ACTIVITIES Net receipts of other borrowed funds 9,622, ,047 Proceeds from issuance of share capital - 16,200,000 Cash flows from financing activities 9,622,934 16,430,047 Net increase in cash and cash equivalents 6,616,973 5,738,426 Effect of changes in exchange rates on cash and cash equivalents 5,029,629 (153,261) Cash and cash equivalents as at the beginning of the year 9,167,222 3,582,057 Cash and cash equivalents as at the end of the year 35 20,813,824 9,167,222 The statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements. 6

7 Statement of changes in equity for the year ended 31 December Share capital Share premium Revaluation surplus for property Revaluation reserve for available-forsale assets Retained earnings Total Balance as at 1 January 2000,000 28, ,108 (58,166) 1,182,107 3,470,456 Total comprehensive income Profit , ,231 Other comprehensive loss Net change in fair value of available-for-sale assets, net of tax (40,420) - (40,420) Net change in fair value of available-for-sale assets transferred to profit or loss, net of tax (7,987) - (7,987) Total other comprehensive loss (48,407) - (48,407) Total comprehensive income (48,407) 767, ,824 Shares issued 16,200, ,200,000 Transferred to retained earnings - - (27,082) - 27,082 - Balance as at 31 December 18,200,000 28, ,026 (106,573) 1,976,420 20,389,280 Balance as at 1 January 18,200,000 28, ,026 (106,573) 1,976,420 20,389,280 Total comprehensive income Profit ,461,607 1,461,607 Other comprehensive loss Net change in fair value of available-for-sale assets, net of tax (23,321) - (23,321) Net change in fair value of available-for-sale assets transferred to profit or loss, net of tax ,690-3,690 Revaluation of property and equipment - - (83,923) - - (83,923) Total other comprehensive loss - - (83,923) (19,631) - (103,554) Total comprehensive income - - (83,923) (19,631) 1,461,607 1,358,053 Transferred to retained earnings - - (207,103) - 207,103 - Balance as at 31 December 18,200,000 28,407 - (126,204) 3,645,130 21,747,333 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 7

8 Notes to, and forming part of, the financial statements for the year ended 31 December 1 Background Principal activities (formerly Armimpexbank cjsc) ( the Bank ) was established on 8 September In 2007 the Bank was acquired by TDA Holdings Limited by purchasing a shareholding of 96.15%. The principal activities of the Bank are deposit taking, lending and operations with securities and foreign exchange. The activities of the Bank are regulated by the Central Bank of Armenia ( CBA ). The registered address of the head office is 9 Grigor Lusavorich Street, Yerevan 0015, Republic of Armenia. The majority of the Bank s assets and liabilities are located in Armenia. The number of persons employed by the Bank as at 31 December was 230 (31 December : 175). Shareholders The main shareholder of the Bank as at 31 December is TDA Holdings Limited, owning 99.9% of the shares. The party with ultimate control over the Bank is Ruben Vardanyan. Related party transactions are detailed in note 34. Armenian business environment Armenia is experiencing political and economic change that is affecting, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in Armenia involve risks that typically do not exist in other markets. In addition, the recent contraction in the capital and credit markets has further increased the level of economic uncertainty in the environment. The financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 2 Basis of preparation Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ). Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale assets are stated at fair value and buildings are stated at revalued amounts. 8

9 Notes to, and forming part of, the financial statements for the year ended 31 December Functional and presentation currency The functional currency of the Bank is the Armenian Dram (AMD) as, being the national currency of the Republic of Armenia, it reflects the economic substance of the majority of underlying events and circumstances relevant to the Bank. The AMD is also the presentation currency for the purposes of these financial statements. Financial information presented in AMD is rounded to the nearest thousand. Use of estimates and judgments Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from those estimates. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in note 17 relating to loan impairment estimates, and note 14 relating to gross presentation of loans to and deposits from the same banks with similar terms. 3 Significant accounting policies The following significant accounting policies are consistently applied in the preparation of the financial statements. Changes in accounting policies are described at the end of this note. Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, which are recognised in other comprehensive income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Cash and cash equivalents The Bank includes cash and nostro accounts with the CBA and banks in cash and cash equivalents. 9

10 Notes to, and forming part of, the financial statements for the year ended 31 December Financial instruments Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking derivative financial instruments (except for derivative financial instruments that are designated and effective hedging instruments) or, upon initial recognition, designated as at fair value through profit or loss. The Bank may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed and evaluated on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or, the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale or, may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: the Bank upon initial recognition designates as at fair value through profit or loss the Bank designates as available-for-sale or, meet the definition of loans and receivables. Available-for-sale assets are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. Management determines the appropriate classification of financial instruments at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial asset that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the entity has an intention and ability to hold it for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. 10

11 Notes to, and forming part of, the financial statements for the year ended 31 December Recognition Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: loans and receivables which are measured at amortized cost using the effective interest method held-to-maturity investments that are measured at amortized cost using the effective interest method investments in equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. Where a quoted market price is not available, fair value is determined using valuation techniques with a maximum use of market inputs. Such valuation techniques include reference to recent arm s length market transactions, current market prices for substantially similar instruments, discounted cash flow and option pricing models and other techniques commonly used by market participants to price the instrument. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Bank would receive or pay to terminate the contract at the reporting date taking into account current market conditions and the current creditworthiness of the counterparties and own credit risk. 11

12 Notes to, and forming part of, the financial statements for the year ended 31 December Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss a gain or loss on an available-for-sale asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in relation to an available-for-sale asset is recognized as earned in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process. Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished. The Bank also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. Repurchase and reverse repurchase agreements Securities sold under sale and repurchase (repo) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase prices represents interest expense and is recognized in profit or loss over the term of the repo agreement using the effective interest method. Securities purchased under agreements to resell (reverse repo) are recorded as amounts receivable under reverse repo transactions. The difference between the purchase and resale prices represents interest income and is recognized in profit or loss over the term of the repo agreement using the effective interest method. If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 12

13 Notes to, and forming part of, the financial statements for the year ended 31 December Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for buildings which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Revaluation Buildings are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the buildings being revalued. A revaluation increase on an item of buildings is recognised as other comprehensive income directly in equity except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on an item of buildings is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised directly in equity. Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Leasehold improvements are depreciated over the shorter of the asset s useful life and lease term. Land is not depreciated. The estimated useful lives are as follows: - buildings 20 years - leasehold improvement 5-10 years - computers and communication equipment 1-7 years - fixtures and fittings 5 years - motor vehicles 10 years Intangible assets Intangible assets that are acquired by the Bank are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives of computer software range from 1 to 10 years. Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Bank s accounting policies. Thereafter generally, the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. 13

14 Notes to, and forming part of, the financial statements for the year ended 31 December Impairment Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance 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, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgement to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. 14

15 Notes to, and forming part of, the financial statements for the year ended 31 December Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognized in profit or loss and can not be reversed. Available-for-sale assets Impairment losses on available-for-sale assets are recognised by transferring the cumulative loss that has been recognised 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 cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. For an investment in an equity security available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. 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 recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 15

16 Notes to, and forming part of, the financial statements for the year ended 31 December Provisions A provision is recognised in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences related to the initial recognition of assets or liabilities that affect neither accounting nor taxable profit are not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. 16

17 Notes to, and forming part of, the financial statements for the year ended 31 December A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Income and expense recognition Interest income and expense are recognised in profit or loss using the effective interest method. Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortized to interest income over the estimated life of the financial instrument using the effective interest method. Other fees, commissions and other income and expense items are recognised in profit or loss when the corresponding service is provided. Dividend income is recognised in profit or loss on the date that the dividend is declared. Changes in accounting policies Starting from 1 January the Bank adopted the revised version of IAS 1 Presentation of Financial Statements (effective for annual periods beginning on or after 1 January ). As a result the income statement is replaced by a statement of comprehensive income that also includes all non-owner changes in equity, such as the revaluation of available-for-sale assets and revaluation of property and equipment. The balance sheet is renamed to the statement of financial position and the cash flow statement is renamed to the statement of cash flows. According to the revised IAS 1, a statement of financial position at the beginning of the earliest comparative period is presented whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December, and are not applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the Bank s operations. The Bank plans to adopt these pronouncements when they become effective. The Bank has not yet analysed the likely impact of these pronouncements on its financial statements. Revised IAS 24 Related Party Disclosures () (effective for annual periods beginning on or after 1 January 2011) introduces an exemption from the basic disclosure requirements in relation to related party disclosures and outstanding balances, including commitments, for government-related entities. Additionally, the standard has been revised to simplify some of the presentation guidance that was previously non-reciprocal. The revised standard is to be applied retrospectively. 17

18 Notes to, and forming part of, the financial statements for the year ended 31 December IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January The new standard is to be issued in several phases and is intended to replace IAS 39 Financial Instruments: Recognition and Measurement once the project is completed by the end of The first phase of IFRS 9 was issued in November and relates to the recognition and measurement of financial assets. The Bank recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on the financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. Various Improvements to IFRSs which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January Net interest income Interest income Loans to customers 5,235,798 2,243,651 Placements with banks 426,959 67,983 Available-for-sale assets 390, ,946 Receivables from finance leases 51,831 9,843 Amounts receivable under reverse repurchase agreements 13,700 14,825 Other 5,339 10,204 Interest expense 6,123,933 2,629,452 Current accounts and deposits from customers 2,351, ,012 Other borrowed funds 181,908 - Amounts payable under repurchase agreements 102,192 92,180 Deposits and balances from banks 75,749 38,799 Other 23,948 5,165 2,735, ,156 Net interest income 3,388,864 2,069,296 5 Fee and commission income Guarantees and letter of credit issuance 165,648 1,048 Annual credit card maintenance 129,938 68,247 Money transfers 104,399 73,398 Cash withdrawal and account service 61,041 61,564 Settlement 14,746 2,369 Underwriting - 14,000 Other 31,889 3, , ,954 18

19 Notes to, and forming part of, the financial statements for the year ended 31 December 6 Fee and commission expense Remittances 38,201 36,719 Credit card maintenance 35,479 64,208 Guarantees and letters of credit issuance 33, Other 5,538 12, , ,845 7 Net gain/(loss) on financial instruments at fair value through profit or loss Net gain/(loss) from trading with debt securities 2,059 (1,208) 8 Net foreign exchange income Net gain on spot transactions 1,161, ,626 Net loss from revaluation of financial assets and liabilities (533,409) (56,535) 628, ,091 9 Impairment losses Loans to customers 194, , Personnel expenses Employee compensation 1,020, ,672 Payroll related taxes 79,795 51,131 1,100, ,803 19

20 Notes to, and forming part of, the financial statements for the year ended 31 December 11 Other general administrative expenses Occupancy 343, Advertising and marketing 216, ,331 Depreciation and amortization 171, ,950 Repairs and maintenance 87,662 50,847 Professional services 87,485 82,651 Communications and information services 50,468 31,560 Charity and sponsorship 34,847 10,728 Travel expenses 29,661 15,021 Representative expenses 28,585 17,217 Cash shipment charges 22,355 12,783 Electricity and utilities 19,483 11,145 Insurance 18,799 2,651 Security 17,626 8,276 Office supplies 14,495 8,408 Taxes other than on payroll and income 6,465 6,973 Other 49,770 37,275 1,198, , Income tax expense Current tax expense Current year 490, ,431 Deferred tax expense 490, ,431 Origination and reversal of temporary differences 44,281 (17,827) Total income tax expense 534, ,604 The applicable tax rate for current tax is 20% (: 20%). The Bank applied a 20% deferred tax rate (: 20%). Reconciliation of effective tax rate: % % Profit before tax 1,996, ,835 Income tax at the applicable tax rate 399, , Non-deductible costs 135, , , ,

21 Notes to, and forming part of, the financial statements for the year ended 31 December Deferred tax asset and liability Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax assets as of 31 December and. Assets Liabilities Net Placements with banks - - (49,401) (13,955) (49,401) (13,955) Available-for-sale assets 31,552 26, ,552 26,644 Other assets 15,786 23, ,786 23,033 Other liabilities 39,814 20,124 (21,278) - 18,536 20,124 Recognized net deferred tax assets 87,152 69,801 (70,679) (13,955) 16,473 55,846 Movements in temporary differences during the years ended 31 December and are presented as follows. Balance 1 January Recognised in profit or loss Recognised in equity Balance 31 December Placements with banks (13,955) (35,446) - (49,401) Available-for-sale assets 26,644-4,908 31,552 Other assets 23,033 (7,247) - 15,786 Other liabilities 20,124 (1,588) - 18,536 55,846 (44,281) 4,908 16,473 Balance 1 January Recognised in profit or loss Recognised in equity Balance 31 December Placements with banks (7,183) (6,772) - (13,955) Loans to customers 29 (29) - - Available-for-sale assets 14,542-12,102 26,644 Other assets 15,575 7,458-23,033 Other liabilities 2,954 17,170-20,124 Income tax recognised in other comprehensive income 25,917 17,827 12,102 55,846 The tax effects relating to components of other comprehensive income comprise: Amount before tax Tax Amount Amount Tax benefit net-of-tax before tax benefit Amount net-of-tax Net change in fair value of available-for-sale assets (29,151) 5,830 (23,321) (50,526) 10,106 (40,420) Net change in fair value of available-for-sale assets transferred to profit or loss 4,612 (922) 3,690 (9,983) 1,996 (7,987) Other comprehensive income (24,539) 4,908 (19,631) (60,509) 12,102 (48,407) 21

22 Notes to, and forming part of, the financial statements for the year ended 31 December 13 Due from the Central Bank of Armenia Nostro accounts 10,002,300 2,953,805 Deposited funds in the CBA 295, ,745 10,298,284 3,183,550 The nostro accounts represent balances with the Central Bank of Armenia related to settlement activity. Nostro accounts include non-interest bearing mandatory minimum reserve deposits calculated in accordance with regulations issued by the CBA at 8% to 12% from the attracted funds. Withdrawability of these deposits is not restricted but the Bank may be exposed to penalties if the minimum average balance is not periodically maintained. The deposited funds in the CBA represent a non-withdrawable deposit in the CBA for membership in ArCa. 14 Placements with banks Nostro accounts OECD banks 6,672,818 4,327,160 Rated AA- to AA+ 5,042,648 4,033,849 Rated A- to A+ 1,630, ,311 Other foreign banks 1,405,969 - Rated A- to A+ 1,405,969 - Medium size Russian banks 151, ,889 Medium and small size Armenian banks 35,919 - Total nostro accounts 8,266,462 4,450,049 Loans and deposits OECD banks 14,262, ,585 Rated AA- to AA+ 10,245,127 - Rated A- to A+ 4,017, ,585 Medium and small size Armenian banks 3,470,601 2,574,669 Largest 5 Armenian banks 121, ,000 Other 42, ,205 Total loans and deposits 17,896,882 3,737,459 Total placements with banks 26,163,344 8,187,508 Included in loans and deposits with OECD banks is AMD 1,561,949 thousand (: AMD 140,585 thousand) which represents deposits pledged for letters of credit, guarantees and credit cards. 22

23 Notes to, and forming part of, the financial statements for the year ended 31 December The loans to Armenian banks of AMD 2,631,359 thousand (: AMD 1,014,163 thousand) are secured by term deposits with similar terms pledged at the same banks but in a different currency of AMD 2,591,633 thousand (: AMD 911,064 thousand). The Bank accounts for bank loans secured by term deposits on a gross basis as management believes that: - such accounting achieves a better presentation of cash flows - there is no legal right to offset these term deposits with the loans before maturity Concentration of placements with banks As at 31 December and there are three banks whose balances exceeded 10% of total placements with banks. The gross value of these balances as of 31 December and are AMD 20,187,567 thousand and AMD 6,430,028 thousand, respectively. 15 Financial instruments at fair value through profit or loss Debt and other fixed-income instruments Corporate bonds Not rated 75, ,260 Total corporate bonds 75, ,260 The financial instruments at fair value through profit or loss at 31 December and represent financial instruments classified as held for trading. 16 Amounts receivable under reverse repurchase agreements Amounts receivable from Armenian financial institutions 624, ,065 Amounts receivable from Russian financial institutions - 153, , ,867 Collateral As of 31 December amounts receivable under reverse repurchase agreements are collateralised by securities with the following fair values: Government securities of the Republic of Armenia 621, ,055 23

24 Notes to, and forming part of, the financial statements for the year ended 31 December 17 Loans to customers Loans to parent company 1,931,639 - Loans to legal entities Loans to large corporates 41,965,122 23,709,369 Loans to small and medium size companies 2,320,894 1,585,929 Total loans to legal entities 44,286,016 25,295,298 Loans to individuals Auto loans 3,010,533 2,913,782 Credit cards 2,237, ,627 Mortgage loans 2,072,930 1,718,764 Consumer loans 526, ,006 Other 41,412 26,427 Total loans to individuals 7,889,322 5,816,606 Gross loans to customers 54,106,977 31,111,904 Impairment allowance (542,295) (347,726) Net loans to customers 53,564,682 30,764,178 The loans to the parent company are secured by term deposits from corporate customers with similar terms but in a different currency of AMD 1,889,450 thousand (: nil). The Bank accounts for loans secured by term deposits on a gross basis as management believes that: - such accounting achieves a better presentation of cash flows - there is no legal right to offset these term deposits with the loans before maturity Movements in the loan impairment allowance for the year ended 31 December are as follows: Balance at the beginning of the year 347,726 27,702 Impairment losses 194, ,024 Balance at the end of the year 542, ,726 As at 31 December, interest accrued on impaired loans amounts to AMD 3,301 thousand (31 December : AMD 8,055 thousand). 24

25 Notes to, and forming part of, the financial statements for the year ended 31 December Credit quality of the loans to legal entities portfolio The following table provides information on the credit quality of the loans to legal entities as at 31 December : Loans to large corporates Impairment Impairment Gross loans allowance Net loans to gross loans % Loans without individual signs of impairment 41,965, ,651 41,545, % Total loans to large corporates 41,965, ,651 41,545, % Loans to small and medium size companies Loans without individual signs of impairment 2,301,569 23,015 2,278, % Impaired loans: - not overdue 19,325 1,876 17, % Total impaired loans 19,325 1,876 17, % Total loans to small and medium size companies 2,320,894 24,891 2,296, % Total loans to legal entities 44,286, ,542 43,841, % The following table provides information on the credit quality of the loans to legal entities as at 31 December : Gross loans Impairment allowance Net loans Impairment to gross loans % Loans to large corporate Loans without individual signs of impairment 23,545, ,752 23,311, % Impaired loans: - overdue less than 90 days 164,034 15, , % Total impaired loans 164,034 15, , % Total loans to large corporates 23,709, ,742 23,459, % Loans to small and medium size companies Loans without individual signs of impairment 1,541,906 15,301 1,526, % Impaired loans: - overdue less than 90 days 9, , % - overdue more than 90 days and less than 180 days 34,073 6,600 27, % Total impaired loans 44,023 7,582 36, % Total loans to small and medium size companies 1,585,929 22,883 1,563, % Total commercial loans 25,295, ,625 25,022, % Loan impairment results from one or more events that occurred after the initial recognition of the loan and that have an impact on the estimated future cash flows associated with the loan, and which can be reliably estimated. Loans without individual signs of impairment do not have objective evidence of impairment that can be directly attributed to them. 25