PUBLIC JOINT STOCK COMPANY «OKCI BANK» Financial Statements. For the Year Ended 31 December Together with Independent Auditor s Report

Transcription

1 PUBLIC JOINT STOCK COMPANY «OKCI BANK» Financial Statements For the Year Ended 31 December 2013 Together with Independent Auditor s Report 1

2 TABLE OF CONTENTS PAGE Statement of management s responsibility for preparation and approval of financial statements for the year ended 31 December Independent Auditor s Report... Ошибка! Закладка не определена. Statement of financial position as at 31 December Statement of profit or loss and other comprehensive income for the year ended 31 December Statement on changes in equity for the year ended 31 December Statement of cash flows for the year ended 31 December Note 1. General information about the Bank... 9 Note 2. The economic environment in which the Bank operates Note 3. Basis of preparation Note 4. Summary of significant accounting policies Note 5. Transition to new and revised Standards Note 6. Cash and cash equivalents Note 7. Securities held for trade Note 8. Due from banks Note 9. Loans and advances to customers Note 10. Property, plant, equipment and intangible assets Note 11. Other financial assets Note 12. Other assets Note 13. Non-current assets held for sale and disposal group Note 14. Due to other banks Note 15. Due to clients Note 16. Other borrowed funds Note 17. Other financial liabilities Note 18. Other liabilities Note 19. Share capital and share premium Note 20. Analysis of assets and liabilities based on their maturity Note 21. Interest income and expense Note 22. Commission and income and expense Note 23. Other operational income Note 24. Administrative and other operational expense Note 25. Income tax expense Note 26. Profit/(loss)per ordinary share Note 27. Management of finance risk Note 28. Capital management Note 29. Potential liabilities of the Bank Note 30. Derivatives Note 31. Fair value of financial instruments Note 32. Presentation of financial instruments according to valuation levels Note 33. Operations with related parties Note 34. Events after the reporting date

3 Statement of management s responsibility for preparation and approval of financial statements for the year ended 31 December 2013 The following statement, which should be read in conjunction with the independent auditors responsibilities stated in the independent auditors report, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the financial statements of Public Joint Stock Company OKCI BANK (further - the Bank). Management is responsible for the preparation of the financial statements that present fairly, in all material aspects the financial position of the Bank at 31 December 2013 and results of activities and cash flows for the year ended 31 December 2013, in accordance with International Financial Reporting Standards ( IFRS ). In preparing the financial statements, management is responsible for: - Selecting suitable accounting principles and applying them consistently; - Making reasonable assumptions and estimates; - Compliance with relevant IFRS and disclosure of all material departures in Notes to the financial statements; - Preparing the financial statements on a going concern basis, unless it is inappropriate to presume that the Bank will continue in business for the foreseeable future. The Bank Management is responsible for: - Designing, implementing and maintaining an effective and sound system of the Bank internal controls; - Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Bank, and which enable them to ensure that the financial statements of the Bank comply with IFRS; - Guaranteeing compliance of financial accounting to the legislative regulations and accounting standards in force in Ukraine; - Taking such steps as are reasonably available to them to safeguard the assets of the Bank; and - Preventing and detecting fraud and other irregularities. These financial statements for the year ended 31 December 2012 were approved and signed on behalf of the Bank by: 12 March

4 Independent Auditor s Report To Shareholders and Management of Public Joint Stock Company OKCI BANK We have audited the accompanying financial statements of the Public Joint Stock Company OKCI BANK (the Bank) consisting of the statement of financial position as at 31 December 2013, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, significant accounting policies and other explanatory notes. Management s responsibility for the financial statements Management of the Bank is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards ( IFRS ) and for such internal control as the management deems necessary to ensure the preparation of the financial statements that are free from material misstatements, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material aspects, the financial position of the Bank as at 31 December 2013, and of its financial performance and its cash flows for the year then ended in accordance with IFRS. 4

5 Emphasis of matters Without changing our opinion, we draw your attention to the information disclosed in Note 2 to the financial statements, where it is stated that the Bank operates in the conditions of political and economic crisis that had been escalated in Ukraine, beginning from November Political and economic situation in the country will depend to a great extent on the efficiency of measures to be taken by the Ukrainian government. Therefore, it is impractical today to estimate the effect this political and economic crisis will have on the Bank s financial position and financial performance in future. These annual financial statements include adjustments that would have been made had the Bank been unable to operate as a going concern. 5

6 Financial statements for the year ended 31 December

7 Financial statements for the year ended 31 December 2013 Statement of profit or loss and other comprehensive income for the year ended 31 December 2013 Note Interest income Interest expense 21 (22 774) (15 542) Net interest income Commission income Commission expense 22 (1 041) (844) Gain from operations with securities available for sale Revaluation of other financial instruments through profit or loss (288) 596 Gain from operations with foreign currency Revaluation of foreign currency (344) 69 Provision for impairment of loans 8,9 (620) Provision for impairment of receivables and other 11 3 financial assets (7) Other operational income Administrative and other operational expense 24 (28 730) (29 726) Profit/(loss) before tax Income tax expense 25 (328) (452) Profit/(loss) Total comprehensive income Profit/(loss) per share Net profit/(loss) per share 26 0,0042 0,0093 Diluted net profit/(loss) per ordinary share 26 0,0042 0,0093 7

8 Financial statements for the year ended 31 December

9 Financial statements for the year ended 31 December

10 Notes to the financial statements 1. General information about the Bank Public Joint-Stock Company OKCI Bank (hereafter the Bank) had been incorporated in accordance with the legislation in force and requirements of the National Bank of Ukraine (further - NBU) on 22 September 2009 on the basis of the CB GALS. The Bank was reorganized in Public Joint Stock Company in The Bank is a universal bank performing its activities under the license of the NBU 247 dated 15 November Country of registration: Ukraine. Address of the Bank s headoffice : Ukraine, 79058, Lviv, 17, Gazova str. Legal form: Public Joint-Stock company The main clients of the Bank are non-banking institutions, small and medium-sized businesses, and individuals. Regional Network of the Bank as at 31 December, 2013 comprise six branches. According to the classification of the National Bank of Ukraine PJSC "OCKI BANK" by its assets belongs to the Group IV banks in Ukraine. Membership in the organizations, associations and international organizations. The Bank is a member of several interbank organizations, associations and international organizations, such as: Association of Ukrainian Banks, Association of Banks in Lviv, Ukraine Taxpayers Association, international payment systems MasterCard and Ukrkart, international credit bureaus and others. The Bank actively participates in the interbank foreign exchange market, a member of the international association of interbank financial telecommunications SWIFT. The Bank is a permanent member of the Deposit Guarantee Fund with the certificate number 200 from 3 November, The strategic objective of the Bank The strategic objective of the Bank is to achieve a financially sustainable and competitive position, focused providing banking services of high quality to the target client groups, namely: small and medium-sized companies; corporate clients; individuals, including employees of client companies and organizations of the Bank. Owners of significant influence of the Bank Owners of significant influence (direct and indirect) of the Bank are as follows: Balyash Oksana (Ukraine) 19,3038% 14,8836 % Balyash Oleg (Ukraine) 44,4831% 59,3667% Maleh Larisa (Ukraine) 6,9333% 10,9333% Maleh Petro (Ukraine) 3,3130% 17,3125% Chairman of the Supervisory Board owns 0,7666% of ordinary shares of the Bank. Board members do not have shares in share capital of the Bank. 10

11 During the reporting period, the Bank selling 6,425,000 shares: to Malekh P.I. with par value of UAH 1,120,625; to Balyash O.M. with par value of UAH 2,504,375; to Balyash O.M. with par value of UAH 2,800,000. These financial statements are approved by the Management Board on "12" March The economic environment in which the Bank operates As at 31 December banks had the National Bank of Ukraine license for providing banking services. In a state of liquidation were 19 banks. According to the National Bank of Ukraine total capital of the bank system as at 01 December 2013 amounted to UAH billion, or 14.3% of the banks' equity and liabilities. Paid and authorized capital of banks amounted to UAH billion. Liabilities of the banks at the reporting date amounted to UAH billion, assets UAH 1 081,9 billion, total assets UAH 1 398,1 billion. In 2013 the banking sector of Ukraine observed the following trends: In addition to foreign banks domestic investors joined to the process of sale of banks; to stimulate the economy and development of crediting, the Naitonal Bank during the year has twice reduced the discount rate to 6.5%. the banks continued applying measures to improve assets quality; deterioration in the efficiency of banks together with the reduction in normatives of capitalization and instant liquidity. Investment Climate During 2013 one could observe the natural consequences of the deterioration of the investment climate reduction in share of investment from countries that are not offshore. Reflection of these processes is the fact that foreign investors continue leaving the banking market of Ukraine. This led to a decline in share of foreign capital in the authorized capital of banks. Together with this, the wave of sales of banking institutions has also affected the banks with Ukrainian capital. Following the purchase and sale of banks one should expect increased transformation processes. Given that sold foreign-owned banks were acquired by the Ukrainian investors many of whom are going to combine the acquired bank assets, the trend towards consolidation of banks in the market will strenthen. Foreign Exchange Market During the year foreign exchange reserves continued to decline. To maintain the national currency the regulator has adopted a number of resolutions aimed at strengthening currency regulation. Mandatory requirements were adopted for the implementation of foreign exchange earnings by enterprises, payment in local currency currency transfers in excess of the equivalent of 150 thousand UAH, and the requirements for mandatory reservation of funds in foreign currency were strengthened. These measures have made a restraining influence on the dynamics of the foreign exchange market. Strengthening of existing market trends to deterioration in asset quality and reduction in liquidity can cause increase in devaluation strain on the national currency. In addition, the maintaining of negative dynamics in most sectors of the economy will also contribute to growth in demand for foreign currency on the part of the population, as monetary savings are enjoyed a higher confidence in the unstable economic situation. Capital of banks Despite the increase in regulatory capital in the system as a whole, gradual decrease in capitalization was observed during Such dynamics caused by the fact that the growth rate of assets were more than 2 11

12 times higher than the rate of growth of capital. This took place due to the active placement of client money involved. However, placing the main tools were mostly securities. While the whole system of capital ratios remain at levels exceeding limit values set by regulator, still the continuation of the existing trends will force banks to carry out recapitalization. Assets of banks Measures of the National Bank to support liquidity and relatively high interest rates on deposits of individuals led to a noticeable increase of the banks' resources. However, the possibility of their depositing remains rather limited. Most sectors of the economy demonstrated recession, the share of profitable enterprises has reduced. To reduce interest rates and activate the lending, the NBU discount rate was reduced. However, this step did not make a noticeable impact on the dynamics of banks' loan portfolio. Despite the current demand of customers for loans, banks are hesitant to actively build their portfolios as the financial condition of borrowers carries significant credit risks. In such circumstances, Ukrainian banks deposited its resources primarily in securities and the interbank market. The main sectors of credit loans are on-going activities of businesses and individuals. The growth of the portfolio of individuals continues to restrain substantial reduction of foreign exchange component, due to previously implemented restrictions over foreign currency lending. As for the portfolio of legal entities, the restrictions adopted by the NBU exchange resulted in the growth of demand to foreign currency lending on the part of companies, which had key influence on the dynamics of the loan portfolio. Due to the deteriorating in financial condition of a significant proportion of existing borrowers, the growth rate of outstanding debt is somewhat higher than the growth rate of the loan portfolio. However, the activities carried out by banks as to restructure of bad debts and improvement of procedures and methodologies for assessment of the borrower gave its results - the proportion of arrears in the second year half has started to fall. Liabilities of banks During 2013 client portfolio demonstrated steady growth, the main component of which were retail deposits. Despite the gradual reduction of interest rates on deposits, the increase was maintained with funds in demand accounts. Strengthening of the National Bank requirements set towards obligatory provisioning for attracted funds in foreign currencies resulted in a significant reduction in rates on foreign currency deposits of individuals. The requirement on the sale of foreign exchange earnings contributed to the reduction of entities s foreign exchange balances. The effect was further shift in currency structure of customer portfolio towards the hryvnia, since corporate deposits in foreign currency have decreased, and foreign currency deposits of individuals have practically not changed. Revenues and expenses In general, the results of the 2013 activities of the banking system were profitable, but the second year half performance has decreased significantly. During the year the dynamics of the financial result has been very unstable. During 2013, banks have developed alternative sales channels and were offering additional products and services to the customers in order to increase fee and commission income. However, their share in the revenue structure of banks has not changed. Instead, a share of other operating income has slightly increased. In the cost structure more tangible changes are observed. There was a marked decline in the share of administrative costs. On one hand, this is caused by the ongoing process of optimizing regional networks, in which the number of regional bank subsidiaries has declined by more than 10%. On the other hand, this is a natural result of sale-purchase of banks. Legislation 12

13 The tax, currency and customs legislation in Ukraine are subject to varying interpretations and frequent changes. To the difficulties faced by banks operating in Ukraine, add the need for further development of the laws on bankruptcy, procedures for the registration and enforcement of collateral, and other legal and fiscal drawbacks. Forecasts In the short term, we should expect such changes in the banking system: increase of devaluation pressure on the hryvnia related to the need of external debt repayment and rising demand for foreign currency due to the unstable economic and socio-political situation; NBU denial to follow the policy of fixing and maintaining the hryvnia against golden-currency reserves; deterioration of the portfolio quality may lead to further reduction in the efficiency of banks; significant reduction in bank liquidity and the risk of "problem" financial institutions, as caused by the outflow of funds from the banking system as a result of customer panic population and possible regulatory inspections and law enforcement activities of individual financial institutions due to changes in the political situation in Ukraine. consolidation of the market as a result of purchase and sale, which will be accompanied by a strengthening of the market position of individual banks; The political situation in Ukraine remains tense and unpredictable. Therefore, further economic development of Ukraine will largely depend on the velocity and outcome of political crisis (conflict resolution in the Autonomous Republic of Crimea, the signing of an association agreement with the EU and the likely next exacerbation of political and trade relations with Russia, related to these issues), the effectiveness of economic, financial and monetary measures taken by the Government in a deep economic and political crisis experienced by the country, as well as the successful implementation of the structural reforms in the fiscal, legal, regulatory, political and other fields, as declared by the new country government. This statements reflect management's current estimates of possible effect of economic conditions on the operations and financial position of the Bank. The future events could differ from management's estimates. These financial statements do not include any adjustments that might occur as a result of this uncertainty. Such adjustments will be reported if they become known and can be reliably estimated. 3. Basis of preparation Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter - IFRS). Historical cost The financial statements are prepared on the historical cost basis except for securities, which are stated at fair value. Functional and presentation currency The Bank keeps its accounting records in Ukrainian Hryvnya as it is required by national accounting standards. Based on economical substance of transaction and circumstances of operations, the Bank has set Ukrainian Hryvnya as functional currency. The transactions in currencies other than Hryvnya are considered as foreign currency transactions. Presentation currency for financial statements is also Ukrainian Hryvnya. Financial information presented in Ukrainian Hryvnya has been rounded to the nearest thousand (000 UAH), unless otherwise stated. 4. Summary of significant accounting policies Foreign currency translation 13

14 Transactions in foreign currencies are translated into the functional currency at the exchange rate at the date of the transaction. Monetary assets and liabilities accounted by the Bank in foreign currency at the reporting date are translated to the UAH at the official NBU exchange rate at the reporting date. Exchange differences on monetary items are the difference between the amortized cost in functional currency at the beginning of period adjusted by an interest rate and yearly payments, and amortized cost in foreign currency translated at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to functional currency at the exchange rate at the date that the fair value is determined. As at 31 December 2013 and 2012 the principal exchange rates at the year end determined by the NBU and applied to recalculation into Ukrainian Hryvnya for balances in foreign currencies were as follows: USD Euro RUR As at 31 December As at 31 December ,24497 Average rate for Average rate for Cash and cash equivalents Cash and cash equivalents are cash on hand, balances on correspondent accounts with the NBU and other banks and overnight loans. All short-term amounts due from other banks are recorded in amounts from other banks. In order to maintain the minimal level of liquidity to secure its commitments execution to clients, the Bank holds obligatory reserve deposit with the correspondent account in the National Bank, which guarantees compliance to the regulation as to the obligatory reserve. On a separate account with the NBU the Bank places funds equal to special reserves on loans in foreign currency with borrowers without earnings in foreign currency. The account is restricted for transaction of funds from it. Cash and cash equivalents do not comprise cash with restricted use. Cash in NBU accounts is carried at amortized cost. Cash balances held in correspondent accounts with other banks are reported at amortized cost less provisions for possible impairment losses. Financial assets The Bank classifies its financial assets in the following categories: (i) financial assets at fair value through profit or loss; (ii) loans and receivables; (iii) financial assets held to maturity; (iv) financial assets available for sale The Bank determines the classification of its financial assets at initial recognition. Classification of financial assets at initial recognition depends on the purpose for which they were acquired and their characteristics. In the course of application of the Bank's accounting policy with respect to definition of financial assets recognized in the financial statements, the management used judgments and estimates the most significant of which are presented below. Initial recognition of financial instruments The Bank recognizes financial assets and liabilities on its statement of financial position when it becomes a party to the contractual obligation of the financial instrument. Regular way purchase and sale of the financial assets and liabilities are recognized using trade date accounting. 14

15 Financial assets and liabilities are initially recognized at cost, which is the fair value of the consideration given. Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability that is not classified as at fair value through profit or loss are added to the amount initially recognised. Fair value measurement The fair value for financial instruments traded in active market at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques with a maximum use of market inputs. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Reclassification of financial assets A financial asset classified as available-for-sale that would have met the definition of loans and receivables may be reclassified to the loans and receivables category if the Bank has the intention and ability to hold it for the foreseeable future or until maturity. Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognized in profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. Derecognition of financial assets Financial assets (or, where applicable, a part of a financial assets or a part of a group of similar financial assets) is derecognised where: - the rights to receive cash flows from the asset have expired; - the Bank has transferred its rights to receive cash flows the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party; and - the Bank either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. The control retains, whenever the contractor is not able to sell the entire asset to the nonrelated party without additional restrictions. Where the Bank has transferred its rights to receive cash flows from an asset, and has neither transferred, nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank's continuing involvement in the asset. Continuing involvement, that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration, that the Bank could be required to repay. Financial assets at fair value through profit or loss Financial assets classified as held for trading and those designated at fair value through profit or loss at inception are included in the category investment securities designated at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains or losses on financial assets at fair value through profit or loss are recognised in profit and loss. Financial assets classified in this category are designated by management on initial recognition when the following criteria are met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis or 15

16 the assets are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Financial assets at fair value through profit and loss are not reclassified subsequent to initial recognition. Loans to customers Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Loans to customers are initially recorded at cost, which is the fair value of the consideration given. Subsequently, they are carried at amortized cost using the effective interest rate method less provision for loan impairment. The amortized cost is based on fair value of the issued loan, calculated with respect to market interest rate on similar loans active as at the date of the loan issue. Gains and losses are recognized in profit and loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. Loans to customers are recorded when cash is advanced to borrowers. Loans in other banks The Bank accepts the accounting policy applicable to the loans issued to customers and the provision for loan impairment as applicable to funds of the Bank deposited in other banks. Financial assets available for sale Financial assets available for sale are non-derivative financial assets that are classified as investment securities which management intend to hold for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Bank s management determined the appropriate classification of financial assets at the time of purchase. Financial assets available for sale are initially recognized at cost, which is the fair value of consideration given. Transaction costs that are directly attributable to the acquisition of a financial asset are added to the amount initially recognised. Financial assets, available for sale are subsequently remeasured to fair value, based on quoted bid prices. Certain financial assets available for sale for which there is no available independent quotation have been fair valued by the Bank s management on the basis of results of recent sales of similar financial assets to unrelated third parties, consideration of other relevant information such as discounted cash flows and data of investees and application of other valuation methodologies. Unrealised gains and losses arising from changes in the fair value of financial assets available for sale are recognised in the other comprehensive income. When financial assets available for sale are disposed of, the related accumulated unreleased gains and losses are included in the statement of comprehensive income as gains less losses arising from financial assets at fair value through profit or loss and available for sale, Impairment of previously remeasured assets is reported on equity accounts within the revaluation reserve for financial assets available for sale which was set up earlier. Interest earned on debt securities available for sale is determined using the effective interest method and reflected in the statement of comprehensive income as interest income. Dividends received on equity investments available for sale are recorded within dividends received when the Bank's right to receive dividends is established and dividends are likely to be received. Financial assets held-to-maturity The category includes listed non-derivative financial assets with fixed or determinable payments and defined maturity date, which the Bank intends and has the ability to hold to maturity. The management classifies financial assets held-to-maturity at their original recognition and analyses the appropriateness of 16

17 the classification at each reporting g date. Financial assets held-to-maturity is carried at the amortized cost. Promissory notes purchased Promissory notes purchased are included in financial assets at fair value through profit or loss, financial assets available for sale, due from other banks or loans to customers, depending on their economic substance and are subsequently premeasured and accounted for in accordance with the accounting policies for these categories of assets. Bank metals The Bank buys and sells precious metals to generate profit from short-term price fluctuations. Gold and other precious metals are recognized at the official NBU price for them which approximate their fair values; profits/(loss) arising from transactions are recognized in profit or loss and other comprehensive income. Due to the fact that he Bank recognizes precious metals at fair value, their recognition is not subject of IAS 2 Inventories on measurement. Information on precious metals is presented in Note 18 Other assets. Impairment of financial assets The Bank assesses on each reporting date whether there is any objective evidence that the value of a financial asset item or group of items has been impaired. Impairment losses are recognized in expense as they are incurred as a as a result of one or more events that occurred after the initial recognition of the asset (a loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Impairment of Due from other banks and Loans to customers For amounts Due from other banks and Loans to customers carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant or collectively for financial assets that are not individually significant. Objective evidence that due from other banks and loans to customers are impaired includes observable data that comes to the attention of the Bank about one or more of the following events: - default in any payments due; - significant financial difficulty of the borrower supported by financial information at the Bank's disposal; - it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; - worsening national or local economic environment affecting the borrower; - breach of contract, such as a default or delinquency in interest or principal payments; - the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank s internal grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. The characteristics chosen are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. 17

18 The main criterion used for determining objective evidence of loss from impairment of due from other banks and customer accounts representing collectively measured financial assets is availability of observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through the use of the provision account and the amount of the loss is recognized in the profit or loss. The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate. If a loan has variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralized asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for loss from loans already incurred similar to those in the group or on the basis historical information on collections of past due debts. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss. Uncollectible assets are written off against the related allowance for impairment after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. The carrying value of impaired financial assets is not reduced directly. Financial liabilities Financial liabilities are classified as either financial liabilities at fair value through profit or loss, or financial liabilities carried at amortised cost. Initially, a financial liability is measured by the Bank at its fair value, and in the case of financial liability not at fair value through or loss, transaction costs that are directly attributable to the acquisition or issue of the financial liability. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Financial liabilities measured at amortised cost Financial liabilities carried at amortised cost using the effective interest rate method include due to other banks, customer accounts, debt securities issued. Any related expense is recognized as interest expense in the statement of comprehensive income using the effective interest rate method. Due to other banks. Due to other banks are recorded when money or other assets are advanced to the Bank by other banks. Customer accounts. Customer accounts include non-derivative financial liabilities to individuals, state or corporate customers. Subordinated debt. Subordinated debt includes the agreements on long-term loans, which in the event of insolvency will become secondary regarding to its basic debt liabilities. Subordinated debt is initially measured at fair value less transaction costs, and subsequently measured at amortized cost at that any difference between its value and purchasing value is recognized through the profit or loss using the effective interest method. Based on the authorization of the National Bank of Ukraine ( ) in 2011 the Bank repaid the subordinated debt before the maturity date. The above mentioned subordinated debt was received 18

19 from individual entrepreneur Volodymyr Ornat on 2 September The Bank accomplished the capitalization programme according to Bussiness plan of raising funds from subordinated debt and increased basic capital by increasing of share capital at a rate that far exceeds the amount of funds received from that subordinated debt. Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable tight to offset the recognized amounts, and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously. Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets are reported at acquisition cost less accumulated depreciation and accumulated losses from impairment. Depreciation was accrued under the straight-line method on the assumption of an asset useful life. Rates of depreciation were determined based on useful life of an asset, during which its utilization by the Bank is provided. Capitalized expenses on leasehold are amortized during provided useful life, but not more than term of lease. The estimated useful life of property, plant and equipment is as follows (shown in years): Buildings 50 Vehicles 7 Equipment and computers 5-10 Furniture and office equipment 2-10 Other 2-5 Intangible assets 10 Capital investments to fixed and intangible assets include construction in progress and costs in progress for improvement of fixed assets. Those are accounted at historical cost net of any accumulated losses from impairment. After construction is completed, the assets are included into fixed assets and reported at carrying amount at the moment of transfer. No depreciation is accrued to capital investment objects. Cost of repair of fixed assets is reported through the statement of comprehensive income in period when incurred, except for those cases when such costs are subject to capitalization. The assets residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively, if appropriate. Impairment of 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. Taxation 19

20 Current income tax is determined in accordance with Ukrainian tax legislation. Income tax expense in the financial statements comprises current tax and changes in deferred tax liabilities. Income tax expense is recognised in the profit, except to the extent that it relates to items recognised directly through other comprehensive income. Deferred tax is provided using the balance sheet method, providing for temporary differences that arise between the tax base of assets and liabilities and their carrying amounts used for financial reporting purposes. Deferred tax assets are recognised to the extent there is a probability of receiving taxable income in the future against which recognised deferred tax assets will be utilised. Deferred tax assets and liabilities are provided using tax rates enacted in the period when the respective asset is realised, or the liability is settled, based on regulations in force on the reporting date. Indirect Ukrainian taxes accrued and paid by the Bank in the normal course of business under effective legislation are included in administrative and other operating expenses in the statement of profit or loss and other comprehensive income. Pension and other commitments The Bank contributes to the state pension system of Ukraine. Current accruals and payment of such contributions on behalf of employees are calculated based on total salary. Contribution expenses are expensed in the statement of comprehensive incomes in the period that a respective salary is accrued to an employee. The Bank does not operate any other form of pension schemes. Furthermore, the Bank does not have any additional employee benefit programmes, or other compensation programmes, that require additional expenses or accrual in the financial statements. Operating lease When the Bank acts as the tenant, the amount of payments under the operating lease agreement is reported by the tenant in the statement of comprehensive income using the straight-line method throughout the lease period. If operating lease is terminated prior to expiration of the lease period, any payments due to the lessor are reported as expenses for the period when such lease was terminated. Share capital Issues of share capital are measured at fair value on the transaction date. Own equity instruments are carried at cost. Profits and loss from sale of own bought-out shares are reported in retained earnings. Share capital is divided into ordinary nominal shares. Dividends to shares are recognized in share capital as deduction in the period when declared. Dividends declared after the reporting date are disclosed in notes to the financial statements. Contingent assets and liabilities Contingent assets are not recognised in the statement of financial position but disclosed when an inflow of economic benefits is probable. Contingent liabilities are not recognised in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. Credit related commitments During the ordinary activities the Bank issues guarantees in kind of letters of credit, guarantees and accepts. Guarantee agreements are initially recognized in the financial statements at their fair value. Subsequently, at each reporting date, the commitments are reviewed and revised to obtain the current best estimate. The current best estimate of expenditure required to settle the existing commitment will be the amount that the Bank would either pay to settle the commitment at the statement of financial position date or transfer to a third party at this date. Provisions 20

21 Provisions are accrued when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Recognition of income and expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Interest and similar income and expense For all financial instruments measured at amortised cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income, in particular, belongs to the following category: - Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan. - Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. Earnings per share The Bank presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which may include the issuance of new shares. Summary of significant accounting policies 21