JSC ASIAСREDIT BANK (АЗИЯКРЕДИТ БАНК) Financial Statements for the year ended 31 December 2012

Transcription

1 JSC ASIAСREDIT BANK (АЗИЯКРЕДИТ БАНК) Financial Statements for the year ended 31 December

2 CONTENTS STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS 1 INDEPENDENT AUDITORS REPORT 2-3 FINANCIAL STATEMENTS : Statement of comprehensive income 4 Statement of financial position 5 Statement of cash flows 6 Statement of changes in equity 7-8 Notes to the financial statements 9-59

3

4 INDEPENDENT AUDITORS REPORT To the Shareholders and the Board of Directors of Joint Stock Company AsiaCredit Bank (АзияКредит Банк): Report on the financial statements We have audited the accompanying financial statements of Joint Stock Company AsiaCredit Bank (АзияКредит Банк) ( the Bank ), which comprise the statement of financial position as at 31 December, and the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. 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 and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 auditors consider 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.

5

6

7

8

9 STATEMENT OF CHANGES IN EQUITY Share capital Share premium Revaluation reserve for available-forsale financial assets Revaluation surplus for buildings and land Reserves for general banking risks Statutory reserve Retained earnings Balance as at 1 January 3,676,738 2,333 7, , ,423-1,556,050 6,119,277 Total comprehensive income Profit for the year , ,590 Other comprehensive income Net change in fair value of available-forsale financial assets , ,912 Available-for-sale financial assets reserve transferred to profit or loss on disposal - - (44,759) (44,759) Total other comprehensive income , ,153 Total comprehensive income for the year , , ,743 Issue of ordinary share capital 5,227, ,227,326 Transfer to reserves in accordance with regulatory body requirements ,817 (531,817) - Transfer to reserves for general banking risks ,587 - (60,587) - Write off of reserve on disposal buildings and land (8,358) (8,358) Depreciation of revalued buildings and land (2,766) - - 2,766 - Balance as at 31 December 8,904,064 2, , , , ,817 1,083,002 11,689,988 Total 7

10

11 NOTES TO THE FINANCIAL STATEMENTS 1 BACKGROUND (a) Organisation and operations JSC «AsiaCredit Bank (АзияКредит Банк)» ( the Bank ) was established in Kazakhstan as Open Joint Stock Company Joint Bank LARIBA Bank and was granted its general banking license on 20 October Due to a change in legislation introduced in 2003, the Bank was reregistered as a Joint Stock Company on 2 July 2004 and was granted banking license #75 on 7 December 2007 and on 28 May 2009 the Bank renewed its license. On 27 April 2009 the Bank changed its name to JSC «AsiaCredit Bank (АзияКредит Банк)» The Bank s principal activities are deposit taking and customer accounts maintenance, lending, issuing guarantees, cash and settlement operations and operations with securities and foreign exchange. The activities of the Bank are regulated by the Committee for Control and Supervision of Financial Market and Financial Organizations of the National Bank of the Republic of Kazakhstan ( FMSC previously known as Agency for Regulation and Supervision of Financial Market and Financial Organizations of the Republic of Kazakhstan) and the National Bank of the Republic of Kazakhstan ( the NBRK ). The Bank has a general banking license, and is a member of the state deposit insurance system in the Republic of Kazakhstan. The Bank s registered office is located at 95/70, Gogol Street Almaty, the Republic of Kazakhstan, As at 31 December and, the Bank had four branches in Almaty, Astana, Atyrau and Aktau and two organization departments of Almaty branch. The majority of the Bank s assets and liabilities are located in the Republic of Kazakhstan. As at 31 December and, the Bank had 270 and 212 employees, respectively. The majority shareholder of the Bank is Mr. Sultan Nurbol Sarybayuly, who owns 78.17% as at 31 December (: 78.17%). He also has a number of other business interests outside the Bank. Other shareholders own individually less than 5% of shares of the Bank. (b) Operating environment Emerging markets such as the Republic of Kazakhstan are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in the Republic of Kazakhstan continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of the Republic of Kazakhstan is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Because the Republic of Kazakhstan produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market which fluctuated significantly during and. 9

12 2 BASIS OF PREPARATION (a) Accounting basis These financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ). These financial statements have been prepared on the assumption that the Bank is a going concern and will continue in operation for the foreseeable future. (b) Basis of measurement The financial statements are prepared on the historical cost basis except that derivative financial instruments and available-for-sale financial assets are stated at fair value, buildings and land are stated at revalued amounts. (c) Functional and presentation currency The functional currency of the Bank is the Kazakhstan tenge ( KZT ) as, being the national currency of the Republic of Kazakhstan, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The KZT is also the presentation currency for the purposes of these financial statements. These financial statements are presented in KZT and rounded to the nearest thousand. (d) 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 the following notes: loan impairment estimates - note 16 embedded derivatives note 16(e) buildings and land revaluation estimates - note

13 3 SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below are applied consistently to all periods presented in these financial statements. (a) Foreign currency Transactions in foreign currencies are translated to the respective 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 is determined. Foreign currency differences arising on retranslation are recognised in profit or loss. Non-monetary 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. (b) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances (nostro accounts) held with the NBRK and other banks, and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of short-term commitments. The mandatory reserve deposit with the NBRK is not included as a cash and cash equivalent due to restrictions on its availability. (c) (i) 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; 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, evaluated and reported internally 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. 11

14 Management determines the appropriate classification of financial instruments in this category 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 assets 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 foreseeble 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. 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. Available-for-sale financial assets are those non-derivative 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. (ii) 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. Where regular way purchases of financial instruments will be subsequently measured at fair value, the Bank accounts for any change in the fair value of the asset between trade date and settlement date in the same way it accounts for acquired instruments. (iii) 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; - 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. The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, adjusted to the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. 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. 12

15 (iv) Fair value measurement principles Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms s length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation techniques. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation techniques make maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the riskreturn factors inherent in the financial instrument. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Bank has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction. (v) 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 financial 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 income in relation to an available-for-sale financial asset is recognized 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. 13

16 (vi) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability in the statement of financial position. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Bank enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. In transactions where the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. If the Bank purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. The Bank writes off assets deemed to be uncollectible. (vii) 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 within deposits and balances from banks or current accounts and deposits from customers, as appropriate. 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 within loans and advances to banks or loans to customers, as appropriate. The difference between the purchase and resale prices represents interest income and is recognized in profit or loss over the term of the reserve 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. (viii) Deposits and balances from banks and other financial institutions and current accounts and deposits from customers Deposits and balances from banks and other financial institutions and current accounts and deposits from customers are initially recognized at fair value less transaction costs. Subsequently, are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the statement of comprehensive income over the period of the borrowings using the effective interest method. 14

17 (ix) Derivative financial instruments Derivative financial instruments include swaps, forwards, futures, spot transactions and options in interest rates, foreign exchanges, and any combinations of these instruments. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in profit or loss. Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. (x) 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. (d) Property and equipment (i) Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for buildings and land, 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. (ii) Revaluation Buildings and land are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the buildings and land being revalued. A revaluation increase on a building and land 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 a building and land 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. 15

18 (iii) 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. Land is not depreciated. The estimated useful lives are as follows: Buildings Vehicles Computers Equipment and other assets Leasehold improvements 50 years 5 years 3 to 5 years 3 to 8 years 1 to 3 years (e) Intangible assets Acquired intangible assets 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 range from 1 to 10 years. (f) Foreclosed assets Foreclosed assets are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (g) (i) Impairment Financial assets carried at amortised cost Financial assets carried at amortised 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. 16

19 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 recognised 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. (ii) Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale financial 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. (iii) Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognised by transferring the cumulative loss that is 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. 17

20 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. (iv) 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. (h) 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. (i) 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 commitments are included in other liabilities. 18

21 Loan commitments are not recognised, except for the following: - loan commitments that the Bank designates as financial liabilities at fair value through profit or loss; - if the Bank has a past practice of selling the assets resulting from its loan commitments shortly after origination, then the loan commitments in the same class are treated as derivative financial instruments; or - loan commitments that can be settled net in cash or by delivering or issuing another financial instrument. (j) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Equity reserves The reserves recorded in equity (other comprehensive income) on the Bank s statement of financial position include: Investment available-for-sale reserve which comprises changes in fair value of available-forsale investments; Statutory reserve which reflects the difference between provisions for impairment losses accrued under IFRS and provisions for impairment losses reported to the regulator in accordance with statutory requirements amounted to KZT 1,645,488 thousand. The difference results mostly from fundamental methodological deviations in the calculation of the provision on loans to customers and contingent liabilities including the impact of discounted future cash flows and the impact which certain forms of collateral have on the level of provisions. This reserve is required by legislation of the Republic of Kazakhstan and is created through appropriations of retained earnings. Reserve for general banking risk is created, as required by the statutory regulations of the Republic of Kazakhstan, for general risks, including future losses and other unforeseen risks or contingencies. For the financial statement purposes the Bank has separated these reserves from retained earnings. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Kazakhstani legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. (k) Taxation Income tax expense represents the sum of the current and deferred tax expense. The current income tax expense is based on taxable profit for the year. Taxable profit differs from net profit before tax as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank s current income tax expense is calculated using tax rates that have been enacted during the reporting period. 19

22 Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in calculating taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be used. Such assets and liabilities are not recognised if a temporary difference arises from the initial recognition of other assets and liabilities in a transaction that affects neither tax profit nor accounting profit. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in a statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case deferred tax is also dealt with in equity. Deferred income tax assets and deferred income tax liabilities are offset and reported net in the statement of financial position if: The Bank has a legally enforceable right to set off current income tax assets against current income tax liabilities; and Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity. The Republic of Kazakhstan where the Bank operates also has various other taxes, which are assessed on the Bank s activities. These taxes are included as a component of operating expenses in the statement of comprehensive income. (l) Retirement and other benefit obligations In accordance with the requirements of the legislation of the Republic of Kazakhstan, certain percentages of pension payments are withheld from total disbursements to staff to be transferred to pension funds, such that a portion of salary expense is withheld from the employee income and paid to a pension fund on behalf of the employee. This expense is charged in the period in which the related salaries are earned. Upon retirement, all retirement benefit payments are made by the pension funds as selected by employees. The Bank does not have any pension arrangements other than the pension system of the Republic of Kazakhstan. In addition, the Bank has no post-retirement benefits or other significant compensated benefits requiring accrual. (m) Recognition of interest income and expense Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 20

23 Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in the statement of comprehensive income over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in the statement of comprehensive income on expiry. All other commissions are recognized when services are provided. (n) Adoption of new and revised standards In the previous year, the Bank has adopted all of the new and revised Standards and Interpretations issued by the IASB and the IFRIC that are relevant to its operations and effective for annual reporting periods ending on 31 December. The adoption of these new and revised Standards and Interpretations has not resulted in significant changes to the Bank s accounting policies that have affected the amounts reported for the current or prior years. (o) Standards and interpretations issued and not yet adopted The Bank has not applied the following IFRS and IFRIC that have been issued and that are relevant to its operations: - IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods. - The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under IFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognized in profit or loss. 21

24 The Bank management anticipate that IFRS 9 that will be adopted in the Bank s financial statements for the annual period beginning 1 January 2015 and that the application of the new Standard will have a significant impact on amounts reported in respect of the Bank s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed. - IFRS 13 Fair Value Measurement establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The Standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of IFRS 13 Fair Value Measurement is broad; it applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures amount fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 Fair Value Measurement are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only under IFRS 7 Financial Instruments: Disclosures will be extended by IFRS 13 Fair Value Measurement to cover all assets and liabilities within its scope. All other Standards and Interpretations are not applicable to the Bank s operations. Management believes the adoption of these Standards and Interpretations will not have a significant impact on the results of the Bank s business. 4 NET INTEREST INCOME Interest income comprises: Interest income on financial assets recorded at amortized cost: - interest income on unimpaired financial assets 3,171,265 1,285,585 - interest income on impaired financial assets 418,454 93,906 Interest income on financial assets at fair value 310,746 91,374 Total interest income 3,900,465 1,470,865 Interest income on financial assets recorded at amortized cost comprises: Interest on loans to customers 3,412,770 1,302,289 Interest on placements with banks and other financial institutions 14,743 34,540 Amounts receivable under reverse repurchase agreements 13,023 3,812 Penalties on loans to customers 149,183 38,850 Total interest income on financial assets recorded at amortized cost 3,589,719 1,379,491 Interest income on financial assets at fair value comprises: Interest income on financial assets available-for-sale 310,746 91,374 Total interest income 3,900,465 1,470,865 Interest expense comprises: Interest expense on financial liabilities recorded at amortized cost 1,203, ,383 Interest expense on financial liabilities recorded at amortized cost comprise: Deposits from customers 1,111, ,353 Deposits from banks and other financial institutions 37,006 1,936 Amounts payable under repurchase agreements 28, Debt securities issued 26,133 - Total interest expense on financial liabilities recorded at amortized cost 1,203, ,383 Net interest income 2,697,200 1,279,482 22

25 5 FEE AND COMMISSION INCOME Cash withdrawal 110,676 82,052 Remittance services 87,505 58,850 Guarantee issuance 72,377 23,137 Foreign exchange 57,875 25,817 Settlement 10,995 13,069 Agent services 7,490 1,473 Rent of safe deposit 4,880 5,005 Cash collection services - 1,451 Other 20,859 8, , ,027 6 FEE AND COMMISSION EXPENSE Agent 194,269 12,375 Card transaction 22,608 12,082 Other 27,353 14, ,230 38,873 7 NET GAIN ON DERIVATIVE FINANCIAL INSTRUMENTS Realised gain on embedded derivatives 19,925 52,126 Unrealised loss on revaluation of embedded derivatives (11,181) (13,441) 8,744 38,685 8 IMPAIRMENT LOSSES Net charge/(recovery) for the year: Loans to customers 352, ,254 Property and equipment Placements with banks and other financial institutions - (3,181) Contingent liabilities - 155,149 Other assets - 46, , ,531 23

26 9 PERSONNEL EXPENSES Employee compensation 902, ,083 Payroll related taxes 85,685 59, , , OTHER GENERAL ADMINISTRATIVE EXPENSES Depreciation and amortisation 96,684 67,962 Professional services 96,555 26,811 Advertising and marketing 96,165 12,732 Operating lease expense 85,763 45,837 Security 65,820 53,241 Taxes other than on income 55,054 29,121 Communication and information services 51,497 31,202 Utilities 21,907 17,717 Travel expenses 21,802 13,912 Corporate events 17,547 9,284 Repairs and maintenance 17,060 5,635 Transportation services 14,770 14,682 Membership fees 10,381 8,602 Stationery 9,431 10,058 Encashment services 5,738 3,015 Fund of deposits guarantee 5,688 7,511 Post office services 3,361 2,455 Insurance Other 42,685 36, , , INCOME TAX EXPENSE Current income tax expense Current year 8,417 3,574 8,417 3,574 Deferred income tax expense/(benefit) Origination and reversal of temporary differences 116,981 (8,061) Total income tax expense/(benefit) 125,398 (4,487) 24

27 The Bank s applicable tax rate in and is the income tax rate of 20% for Kazakhstani companies. Year ended 31 December Year ended 31 December Profit before income tax 1,132, ,103 Tax at the statutory tax rate 20% 226,442 22,421 Non-taxable income (109,255) (51,511) Non-deductible expenses 8,211 24,603 Income tax expense/(benefit) 125,398 (4,487) Deferred tax assets and liabilities 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 liabilities as at 31 December and. Movements in temporary differences during the years ended 31 December and are presented as follows: Balance 1 January Recognised in profit or loss Recognised directly in equity Balance 31 December Derivative financial instruments (48,435) 4,943 - (43,492) Loans to customers 249 (120,476) - (120,227) Property, equipment and intangible assets (146,159) (3,365) - (149,524) Other liabilities 1,215 1,917-3,132 (193,130) (116,981) - (310,111) Balance 1 January Recognised in profit or loss Recognised directly in equity Balance 31 December Derivative financial instruments (51,123) 2,688 - (48,435) Loans to customers (653) Property, equipment and intangible assets (153,874) 7,715 - (146,159) Other liabilities 4,459 (3,244) - 1,215 (201,191) 8,061 - (193,130) 25