Public Joint Stock Company STATE SAVINGS BANK OF UKRAINE. Separate Financial Statements for the Year Ended 31 December 2012

Transcription

1 Public Joint Stock Company STATE SAVINGS BANK OF UKRAINE Separate Financial Statements for the Year Ended

2 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 1 INDEPENDENT AUDITOR S REPORT 2-3 SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER : Statement of comprehensive income 4 Statement of financial position 5 Statement of changes in equity 6 Statement of cash flows 7-8 Notes to the separate financial statements 9-72

3 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Management is responsible for the preparation of the separate financial statements that present fairly the financial position of Public Joint Stock Company State Savings Bank of Ukraine (the Bank ) as at, and its financial performance, cash flows, and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes, in compliance with International Financial Reporting Standards ( IFRS ). In preparing the separate financial statements, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable, and understandable information; Providing additional disclosures when compliance with the specific requirements of IFRSs are insufficient to enable users to understand the impact of particular transactions, other events, and conditions on the Bank s financial position and financial performance; Stating whether IFRSs has been followed, subject to any material departures disclosed and explained in the separate financial statements; and Making an assessment of the Bank s ability to continue as a going concern. Management is also responsible for: Designing, implementing, and maintaining an effective and sound system of internal controls, throughout the Bank; Maintaining adequate accounting records that are sufficient to show and explain the Bank s transactions and disclose with reasonable accuracy at any time the financial position of the Bank, and which enable them to ensure that the separate financial statements of the Bank comply with IFRS; Maintaining statutory accounting records in compliance with legislation of 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. The separate financial statements of the Bank for the year ended were approved by the Management Board on 29 March

4 PJSC Deloitte & Touche USC 48-50A, Zhylyanska St. Kyiv Ukraine Tel.: +38 (044) Fax: +38 (044) INDEPENDENT AUDITOR S REPORT To the Shareholder and the Management Board of Public Joint Stock Company State Savings Bank of Ukraine : We have audited the accompanying separate financial statements of Public Joint Stock Company State Savings Bank of Ukraine (the Bank ), which comprise the statement of financial position as at, and the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Separate Financial Statements Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with International Financial Reporting Standards ( IFRS ), and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these separate 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 separate financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the separate 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 separate 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 Bank 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 separate financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see for a detailed description of the legal structure of Deloitte CIS PJSC "Deloitte & Touche USC". All rights reserved.

5 Basis for Qualified Opinion As discussed in Note 2, the Bank has adopted the revaluation model for the subsequent measurement of its buildings which requires it to conduct revaluations with sufficient regularity such that the carrying amounts as at the date of statement of financial position do not differ materially from those using fair values. Buildings in the statement of financial position were revalued as at 1 November 2008 and the Bank had not carried out a valuation till. Revaluation was performed as at. In view of the deterioration of property values in Ukraine as a result of the global economic crisis and in the absence of valuations to support the carrying value of buildings as at 2010, we are unable to determine whether the carrying amount of buildings is fairly stated as at 2010 and respective impact of this matter on the change in revaluation reserve, depreciation expenses and deferred income tax charges for the year ended. Our audit opinion on the separate financial statements for the year ended was modified accordingly. Our opinion on the current period s separate financial statements is modified because of the possible effect of this matter on the comparability of the current period s figures and the corresponding figures. Qualified Opinion In our opinion, except for the effects and possible effects of the matter described in the Basis for Qualified Opinion paragraph, the separate financial statements present fairly, in all material respects, the financial position of the Bank as at, and its financial performance and its cash flows for year then ended in accordance with International Financial Reporting Standards. Emphasis of Matter We draw attention to Notes 27 and 32 of these separate financial statements which disclose a significant concentration of operations with related parties and concentration risk management policy of the Bank. Our opinion is not qualified in respect of this matter. 29 March

6 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER (in Ukrainian Hryvnias and in thousands, except for earnings per share stated in UAH) Notes Year ended Year ended Interest income 4, 27 10,073,525 8,529,964 Interest expense 4, 27 (4,784,711) (3,928,676) NET INTEREST INCOME BEFORE PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 5,288,814 4,601,288 Provision for impairment losses on interest bearing assets 5, 27 (2,675,719) (1,849,640) NET INTEREST INCOME 2,613,095 2,751,648 Fee and commission income 6, 27 1,286,241 1,157,929 Fee and commission expense 6, 27 (246,251) (221,484) Net gain on foreign exchange operations 7 158, ,013 Net realised gain on investments available for sale 95, ,377 Provision for impairment losses on other operations 5 (61,855) (15,687) Net other income 55,162 10,813 NET NON-INTEREST INCOME 1,287,230 1,234,961 OPERATING INCOME 3,900,325 3,986,609 OPERATING EXPENSES 8, 27 (3,165,502) (2,576,565) PROFIT BEFORE INCOME TAX 734,823 1,410,044 Income tax expense 9 (72,179) (318,025) NET PROFIT 662,644 1,092,019 OTHER COMPREHENSIVE INCOME/(LOSS): Net gain/(loss) on revaluation of property, net of deferred income tax effect 4,828 (199,230) Net change in fair value of investments available for sale, net of deferred income tax effect (112,007) 5,368 Reclassification of investments available for sale realized during the year, net of deferred income tax effect (5,368) 9,082 OTHER COMPREHENSIVE LOSS AFTER INCOME TAX (112,547) (184,780) TOTAL COMPREHENSIVE INCOME 550, ,239 EARNINGS PER SHARE Basic and diluted (UAH) 10 45,712 76,724 4

7 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER (in Ukrainian Hryvnias and in thousands) Notes ASSETS: Cash and balances with the National Bank of Ukraine 11, 27 3,870,886 2,215,990 Due from banks 12, 27 14,845,996 9,721,881 Loans to customers 13, 27 51,337,576 50,459,932 Investments available for sale 14, 27 10,073,668 8,657,367 Investments in associates and subsidiaries 15 50,590 - Property, equipment and intangible assets 16 2,985,175 2,466,079 Other assets , ,204 TOTAL ASSETS 83,415,788 73,856,453 LIABILITIES AND EQUITY: LIABILITIES: Due to banks 18, 27 19,224,482 16,450,884 Customer accounts 19, 27 38,888,401 32,600,498 Borrowings from international and other financial institutions 20 5,715,614 5,705,125 Other borrowed funds , ,202 Debt securities issued , ,213 Other liabilities , ,883 Deferred income tax liabilities 9 13,256 55,685 Subordinated debt , ,416 Total liabilities 65,659,397 56,498,906 EQUITY: Share capital 25 14,748,140 14,748,140 Property revaluation reserve 1,333,117 1,329,145 Investments available for sale fair value reserve (112,007) 5,368 Retained earnings 1,787,141 1,274,894 Total equity 17,756,391 17,357,547 TOTAL LIABILITIES AND EQUITY 83,415,788 73,856,453 5

8 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER (in Ukrainian Hryvnias and in thousands) Notes Share capital Property revaluation reserve Investments available for sale fair value reserve Retained earnings Total equity ,144,140 1,528,584 (9,082) 320,846 15,984,488 Issue of ordinary shares , ,000 Distribution of profit based on the financial results of the year (138,180) (138,180) Other comprehensive (loss)/income for the year, net of income tax - (199,439) 14, (184,780) Profit for the year ,092,019 1,092,019 14,748,140 1,329,145 5,368 1,274,894 17,357,547 Distribution of profit based on the financial results of the year (151,253) (151,253) Other comprehensive income/(loss) for the year, net of income tax - 3,972 (117,375) 856 (112,547) Profit for the year , ,644 14,748,140 1,333,117 (112,007) 1,787,141 17,756,391 The amount of other comprehensive income/(loss) for the year, net of income tax relating to property revaluation reserve, includes the property revaluation reserve disposed in the amount of UAH 856 thousand for the year and UAH 209 thousand for the year. 6

9 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER (in Ukrainian Hryvnias and in thousands) Notes Year ended Year ended CASH FLOWS FROM OPERATING ACTIVITIES: Interest received 9,476,751 8,109,624 Interest paid (4,548,445) (3,656,856) Fees and commissions received 1,284,149 1,157,929 Fees and commissions paid (246,092) (221,484) Operations with foreign currency 7 158, ,487 Other operating income received 49,176 2,962 Staff costs paid (2,054,176) (1,803,916) Operating expenses paid (811,633) (570,627) Cash flows from operating activities before changes in operating assets and liabilities 3,308,214 3,221,119 Changes in operating assets and liabilities (Increase)/decrease in operating assets: Restricted balances with the National Bank of Ukraine 11 (449,698) (85,928) Due from banks (4,369,780) (5,929,524) Loans to customers (2,058,365) (9,571,357) Other assets (47,078) (16,446) Increase/(decrease) in operating liabilities: Due to banks 2,719, ,989 Customer accounts 6,094,749 4,113,224 Customer accounts transferred from PJSC Rodovid Bank - 3,835,867 Other liabilities ,517 Net cash inflow/(outflow) from operating activities before tax 5,197,769 (3,600,539) Income tax paid (86,859) (44,434) Net cash inflow/(outflow) from operating activities 5,110,910 (3,644,973) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments available for sale (56,623,939) (104,612,607) Proceeds on sale of investments available for sale 54,224, ,668,213 Purchase of property, equipment and intangible assets (625,160) (574,421) Proceeds on sale of property and equipment 2,493 1,418 Investments in associates and subsidiaries (50,590) - Net cash outflow from investing activities (3,072,736) (2,517,397) CASH FLOWS FROM FINANCING ACTIVITIES: Distribution of profit based on the financial results of the year 25 (151,253) (138,180) Proceeds from issue of ordinary shares ,000 Proceeds from debt securities issued - - Proceeds from borrowings from international and other financial institutions 20-5,536,609 Proceeds on other borrowed funds ,000 Repayment of debt securities issued 22 - (300,000) Net cash (outflow)/inflow from financing activities (151,253) 6,202,429 7

10 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER (CONTINUED) (in Ukrainian Hryvnias and in thousands) Notes Year ended Year ended Effect of change in foreign exchange rates on cash and cash equivalents 4,868 (4,748) NET INCREASE IN CASH AND CASH EQUIVALENTS 1,891,789 35,311 CASH AND CASH EQUIVALENTS, at the beginning of the period 11 4,790,674 4,755,363 CASH AND CASH EQUIVALENTS, at the end of the period 11 6,682,463 4,790,674 During the year ended the increase in customer accounts and investments available for sale in the amount equivalent to UAH 3,835,867 thousand was performed without cash movement, in accordance with Regulation of Cabinet of Ministers of Ukraine and the National Bank of Ukraine dated 30 March 323 About cooperation of Ministry of Finance of Ukraine and the National Bank of Ukraine concerning transfer of liabilities of PJSC Rodovid Bank in relation to deposits of creditors-individuals and assets to JSC State Savings Bank of Ukraine (Note 19). During the year ended, the Bank sold with a gain Ukrainian Government debt securities obtained as result of this transaction and disclosed it as cash inflow from operating activities as Customer accounts transferred from PJSC Rodovid Bank due to the substance of the operation. 8

11 PUBLIC JOINT STOCK COMPANY STATE SAVINGS BANK OF UKRAINE NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER (in Ukrainian Hryvnias and in thousands) 1. ORGANIZATION The Bank was established in accordance with the Decree of the President of Ukraine 106 dated 20 May 1999 and the Resolution of the Cabinet of Ministers of Ukraine 876 dated 21 May 1999, by converting the State Specialized Commercial Savings Bank of Ukraine into the Joint Stock Company State Savings Bank of Ukraine in the form of an open joint stock company. The Open Joint Stock Company State Savings Bank of Ukraine was registered by the National Bank of Ukraine (the NBU ) on 26 May 1999, registration number 4. The change of its name to Public Joint Stock Company State Savings Bank of Ukraine was registered on 7 June. The Bank has been operating under a banking license issued by the NBU starting from 16 January The Bank has a general license issued by the NBU for the accomplishment of foreign currency transactions and license, issued by the Securities and Stock Market National Commission for trading with securities. The Bank s primary business consists of processing banking accounts and attracting deposits from legal entities and individuals, originating loans, transferring payments, trading in securities and foreign currencies. The Bank s strategic objective is to implement modern banking technologies and products to ensure its operating efficiency and well-balanced and sustainable growth in the long-term perspective. The Bank is not a member of the Deposit Guarantee Fund, since all the deposits placed by individuals are guaranteed by the state. As at and 100% of Bank s share capital is state-owned. The registered address of the Bank is: 12G Hospitalna str., Kyiv, Ukraine. As at and, the Bank had 23 regional branches, the Main branch in Kyiv and Kyiv region, the Crimean republican branch, Main operational branch; nil and 99 subbranches, and 5,799 and 5,745 operational outlets within Ukraine, respectively. The number of the Bank s employees as at and was 38,114 persons and 37,980 persons, respectively. These separate financial statements were approved for issue by the Management Board of the Bank on 29 March SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These separate financial statements 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 ). 9

12 Other basis of presentation criteria These separate financial statements have been prepared on the assumption that the Bank is a going concern and will continue in operation for the foreseeable future. Management and the shareholder have the intention to further develop the business of the Bank in Ukraine. Management believes that the going concern assumption is appropriate for the Bank due to its sufficient capital adequacy ratio, the commitment of the shareholder to support the Bank, and based on historical experience that short-term obligations will be refinanced in the normal course of business. These separate financial statements are presented in thousands of Ukrainian Hryvnias, unless otherwise indicated. The separate financial statements have been prepared under the historical cost convention, except for the revaluation of buildings in accordance with IAS 16 Property, Plant and Equipment, which are recorded at revalued amounts, and measurement of certain financial instruments in accordance with IAS 39 Financial Instruments: Recognition and Measurement, which are recorded at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The economy of Ukraine was treated as hyperinflationary until As a result, the Bank applied IAS 29 Financial Reporting in Hyperinflationary Economies. The impact of IAS 29 application relates to the fact that non-monetary items were recalculated to measuring units that were effective as at 2000 by using the respective inflation rates in respect of the relevant historical cost. The Bank maintains its accounting records in accordance with the Ukrainian law. These separate financial statements have been prepared from the accounting records that are maintained in accordance with the regulations of the National Bank of Ukraine and have been adjusted to conform to IFRS. The adjustments introduced to the separate financial statements include certain reclassifications to reflect the economic substance of underlying transactions, including reclassifications of certain assets and liabilities, income and expenses to appropriate separate financial statement captions. Functional currency Items included in the separate financial statements of the Bank are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to the Bank (the functional currency ). The functional currency of these separate financial statements is Ukrainian Hryvnia ( UAH ). All figures are rounded to thousands, unless otherwise indicated. Offsetting Financial assets and liabilities are offset and reported net on the statement of financial position when the Bank has a legally enforceable right to set off the recognized amounts and the Bank intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expense is not offset in the statement of comprehensive income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. In accounting for a transfer of a financial asset that does not qualify for de-recognition, the Bank does not offset the transferred asset and the associated liability. The principal accounting policies are set out below. 10

13 Recognition of income and expense Recognition of interest income and expense Interest income and expense are recognized on an accrual basis using the effective interest rate method. The effective interest rate 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 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. Income is recognized on an effective interest basis for debt instruments, other than those financial assets classified as at fair value through profit or loss. Once a financial asset or a group of similar financial assets has been written off (partly written off) as a result of an impairment loss, interest income is thereafter recognized using the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. Recognition of income on repurchase and reverse repurchase agreements Gain/loss on the sale of these instruments is recognized as interest income or expense in the statement of comprehensive income based on the difference between the repurchase price accreted to date using the effective interest method and the sale price when such instruments are sold to third parties. When the reverse repo/repo is fulfilled on its original terms, the effective yield/interest between the sale and repurchase price negotiated under the original contract is recognized using the effective interest rate method. Recognition of fee and commission income and expense 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. Loan servicing fees are recognized as revenue as the services are provided. Loan syndication fees are recognized in the statement of comprehensive income when the syndication has been completed. All other commissions are recognized when services are provided. Other income is recognized to the statement of comprehensive income when the related transactions are completed. Recognition and measurement 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 instrument. Regular way purchase and sale of the financial assets and liabilities are recognized using settlement date accounting. Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below. 11

14 De-recognition of financial assets and liabilities Financial assets The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognize the financial asset and also recognize a collateralized borrowing for the proceeds received. On de-recognition of a financial asset in its entirety, the difference between the asset s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. On de-recognition of a financial asset other than it is entirety (e.g. when the Bank retains an option to repurchase part of the transferred asset or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the Bank retains control), the Bank allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts. Financial liabilities A financial liability is derecognized when the obligation is discharged, cancelled, or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statement of comprehensive income. Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances on correspondent accounts with the NBU, advances to banks in the countries included in the Organization for Economic Co-operation and Development ( OECD ) and other countries which may be converted to cash within a short period of time, except for guarantee deposits for operations with plastic cards. Obligatory deposit reserves with the National Bank of Ukraine Obligatory deposit reserves are placed with the NBU in accordance with the requirements of the effective legislation and are subject to certain restrictions. Hence, the amount of obligatory deposit reserves are placed with the NBU is not included in cash equivalents. Precious metals Assets and liabilities denominated in precious metals are translated at the official rate set by the National Bank of Ukraine computed based on the first fixing of the London Metal Exchange rates using the UAH/USD exchange rate effective at the date. Changes in the bid prices are recorded in net gain/(loss) on foreign exchange operations. Due from banks In the normal course of business, the Bank maintains advances and deposits for various periods of time with other banks. Due from banks are initially measured at fair value. Due from banks with a fixed maturity term are subsequently measured at amortized cost using the effective interest method. Those that do not have fixed maturities are carried at amortized cost based on maturities estimated by management. Amounts due from banks are carried net of any allowance for impairment losses. 12

15 Loans to customers Loans to customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans to customers with fixed maturity granted by the Bank are initially recognized at fair value, plus related transaction costs. Where the fair value of consideration given does not equal the fair value of the loan, for example, where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized as a loss on initial recognition of the loan and included in the statement of comprehensive income according to nature of the losses. Subsequently, loans are carried at amortized cost using the effective interest rate method. Loans to customers are carried net of any allowance for impairment losses. Repurchase and reverse repurchase agreements In the normal course of business, the Bank enters into sale and purchase back agreements ( repos ) and purchase and sale back agreements of financial assets ( reverse repos ). Repos and reverse repos are utilized by the Bank as an element of its treasury management. A repo is an agreement to transfer a financial asset to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. These agreements are accounted for as financing transactions. Financial assets sold under repo are retained in the financial statements and consideration received under these agreements is recorded as collateralized deposit/loan received within balances due to banks. Assets purchased under reverse repos are recorded in the financial statements as cash placed which is collateralized by securities and other assets and are classified within balances due from banks/loans to customers. The Bank enters into securities repurchase agreements under which it receives or transfers collateral in accordance with normal market practice. Under standard terms for repurchase transactions in Ukraine, the recipient of collateral has the right to sell or re-pledge the collateral, subject to returning those securities on settlement of the transaction. In the event that assets purchased under reverse repo are sold to third parties, the results are recorded with the gain or loss included in net gains/(losses) on respective assets. Any related income or expense arising from the pricing difference between purchase and sale of the underlying assets is recognized as interest income or expense in the statement of comprehensive income. Investments available for sale Investments available for sale represent debt and equity securities that are intended to be held for an indefinite period of time. Such securities are initially recorded at fair value. Subsequently, the securities are measured at fair value, with such remeasurement recognized in other comprehensive income, except for impairment losses, foreign exchange gains or losses and interest income accrued using the effective interest method, which are recognized directly in the statement of comprehensive income. When sold, gain/(loss) previously recorded in equity is recycled through the statement of comprehensive income. The Bank uses quoted market prices to determine the fair value for the investments available for sale. If the market for investments is not active, the Bank establishes fair value by using valuation techniques. Valuation techniques include using recent arm s length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis, and other methods. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Bank uses that technique. Non-marketable debt and equity securities are stated at amortized cost and cost, respectively, less impairment losses, if any, unless fair value can be reliably measured. 13

16 Investments in subsidiaries Investments in subsidiaries are investments in a business entity, in particular, an entity that is not a corporation, e.g. partnership, controlled by another entity (known as a parent). Control is deemed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the entity s voting rights (except for the cases when it is possible to show clearly that the ownership does not result in control). Control also exists when the parent owns half or less voting rights in the entity, but it retains the authority to: а) Govern more than half of voting rights based on the agreement with other investors; b) Define financial and operational policies of the entity based on the Charter or agreement; c) Appoint or remove the majority of the Board of Directors or equivalent governing body, and the control of the entity is exercised through this Board or body; or d) Use the majority of votes at meetings of the Board of Directors or equivalent governing body, and the control of the entity is exercised through this Board or body. Investments in subsidiaries are carried in these separate financial statements of the Bank at their cost at the reporting date. Investments in associates Investments in associates are investments in a business entity, in particular, an entity that is not a corporation, e.g. partnership, over which the Bank has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. In the event the Bank owns, directly or indirectly (through subsidiaries), 20% or more voting rights in the investee, it is assumed that it has a significant influence unless it is proved otherwise. And conversely, if the Bank owns, directly or indirectly (through subsidiaries), less than 20% of voting rights in the investee, it is assumed that it has no significant influence unless the existence of such influence is clearly proved. In the event another investor enjoys a significant influence or holds a majority interest, this does not prevent the Bank from having a significant influence. Evidence of the Bank s significant influence may be the availability of one or more of the following: а) Representation on the Board of Directors or equivalent governing body of the investee; b) Involvement in the processes of policy development, including participation in decision making on dividends or other distributions; c) Significant transactions between the investor and the investee; d) Exchange of management personnel; or e) Providing the required technical information. Investments in associates are carried in these separate financial statements of the Bank at their cost at the reporting date. The Bank recognizes dividends received from a subsidiary or associate in profit or loss of its separate financial statements when its vesting right to such dividends is established. Impairment of financial assets Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets or a group of financial assets are considered to be impaired 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 financial asset ( 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. 14

17 The impairment losses are measured as the difference between carrying value and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the financial asset s original effective interest rate, for financial assets which are carried at amortized cost. 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 recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. For financial assets carried at cost, the impairment losses are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed in subsequent periods. When there is objective evidence that investments available for sale have been impaired, the cumulative loss previously recognized in equity is removed from equity and recognized in the statement of comprehensive income for the period. Reversals of such impairment losses on debt instruments, which are objectively related to events occurring after the impairment, are recognized in the statement of comprehensive income for the period. Reversals of such impairment losses on equity instruments are not recognized in the statement of comprehensive income. The change in the impairment is included into profits using the provision account. Assets recorded in the statement of financial position are reduced by the amount of the impairment. Factors that the Bank considers in determining whether it has objective evidence that an impairment loss has been incurred include information about the debtors or issuers liquidity, solvency and business and financial risk exposures, levels of and trends in delinquencies for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees. These and other factors may, either individually or taken together, provide sufficient objective evidence that an impairment loss has been incurred in a financial asset or group of financial assets. The primary factors that the Bank considers whether a financial asset is impaired are its overdue status and realizability of related collateral, if any. The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred: Any instalment is overdue on the period over two months and the late payment cannot be attributed to a delay caused by the settlement systems; The borrower experiences a significant financial difficulty as evidenced by borrower s financial statements that the Bank obtains; The borrower considers bankruptcy or a financial reorganization; There is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; The value of collateral significantly decreases as a result of deteriorating market conditions. For equity investments available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. If the Bank determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative on the debtors ability to pay all amounts due, according to the contractual terms of the assets being evaluated. 15

18 Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of contractual cash flows of assets, and experience of management in respect of the extent to which amounts will become overdue, as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that do not affect past periods and to remove the effects of past conditions that do not exist currently. The carrying amounts of investments in associates and subsidiaries, if needed, are tested for impairment in accordance with IAS 36 Impairment of Assets by comparing to estimated recoverable amount, which is higher of the fair value, less costs to sell, and value in use. The recognized impairment loss is included in the investment s carrying amount. Reversal of such a loss is recognized in accordance with IAS 36 Impairment of Assets, unless, subsequently, the estimated recovery of the investment increases. It should be understood that evaluation of losses involves an exercise of judgment. While it is possible that in particular periods the Bank may sustain losses which are substantial relative for impairment losses, it is the judgment of management that the impairment losses are adequate to absorb losses incurred on risk assets, at the reporting date. Renegotiated loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. Write off of loans Loans are written off against allowance for impairment losses based on the decision of the Management Board. Such decisions are taken when all available possibilities to collect the amounts due have been exercised and available collateral has been sold. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the statement of comprehensive income in the period of recovery. Derivative financial instruments In the normal course of business, the Bank enters into various derivative financial instruments including foreign exchange contracts concluded by the Bank with other banks to purchase/sale and exchange (conversion) of foreign currency and currency rate swaps to manage currency and liquidity risks. Derivative financial instruments are initially recognized at fair value at the date a derivative contract is entered into, and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in financial assets and liabilities at fair value through profit or loss in the statement of financial position, or if their amounts are immaterial they are included in other assets or liabilities. Gains and losses resulting from these instruments are included in net gain/(loss) from financial assets and liabilities at fair value through profit or loss in the statement of comprehensive income, or if their amounts are immaterial they are included in net gain/(loss) on foreign exchange operations. Derivative financial instruments entered into by the Bank are not designated as hedges and do not qualify for hedge accounting. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value through profit or loss. Property, equipment and intangible assets Property, equipment and intangible assets, other than buildings, are carried at historical cost, less accumulated depreciation and amortization and any recognized impairment loss, if any. 16

19 Depreciation on assets under construction and those not placed in service commences from the date the assets are ready for their intended use. Depreciation of property and equipment and amortization of intangible assets is charged on the historical (revalued) cost of property, equipment and intangible assets and is designed to write off assets over their useful economic lives. It is calculated on a straight line basis at the following annual rates: Buildings 1.5% 5% 2% 3% Furniture, office equipment and motor vehicles 10% 33% 10% 33% Intangible assets 17% 25% 17% 25% In, useful lives of Property, equipment and intangible assets were reviewed but not changed in comparison with the previous year, except for the group of buildings, the depreciation rates on which were modified due to changes in their estimated residual useful lives as determined by an independent appraiser in the course of revaluation held as at. Leasehold improvements are depreciated over the lease term of the related asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. Improvement expenses are capitalized when incurred. The Bank has adopted a revaluation model for the subsequent measurement of its buildings. Buildings are carried in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the reporting date. Any revaluation increase arising on the revaluation of such buildings is credited to the property revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognized as an expense, in which case the increase is credited to the statement of comprehensive income to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the property revaluation reserve relating to a previous revaluation of that asset. The decrease is debited directly in equity to the property revaluation reserve to the extent of any credit balance existing in the property revaluation reserve in respect of that asset. Depreciation on revalued buildings is charged to the statement of comprehensive income. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the property revaluation reserve is transferred directly to retained earnings. The carrying amounts of property, equipment and intangible assets are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount, impairment is recognized in the respective period and is included in the statement of comprehensive income. After the recognition of an impairment loss, the depreciation charge for property, equipment and intangible assets is adjusted in future periods to allocate the assets revised value, less its residual value (if any), on a systematic basis over its remaining useful life. Operating leases Leases of assets under which the risks and rewards of ownership are effectively retained with the lessor are classified as operating leases. Lease payments under operating lease are recognized as expenses on a straight-line basis over the lease term and included into operating expenses. Taxation Income tax expense represents the sum of the current and deferred tax expense. 17