Consolidated and Separate Financial Statements of the Capital Group of Nordea Bank Polska S.A. The first quarter of 2006

Transcription

1 Consolidated and Separate Financial Statements of the Capital Group of Nordea Bank Polska S.A. The first quarter of 2006

2 SELECTED FINANCIAL FIGURES 1 quarter 1 quarter 1 quarter 1 quarter incrementally 2006 incrementally 2005 incrementally 2006 incrementally 2005 period from 01/01/2006 period from 01/01/2005 period from 01/01/2006 period from 01/01/2005 to 31/03/2006 to 31/03/2005 to 31/03/2006 to 31/03/2005 Data concerning the condensed consolidated financial statements 1. Interest income Fee and commission income Total operating income Gross profit (loss) Net profit (loss) Cash flow in operating activities Cash flow in investing activities Cash flow in financing activities Cash flow in the year Total assets Liabilities to banks Liabilities to customers Total equity Share capital Number of shares (pcs.) Book value per share (PLN/EUR) Capital adequacy ratio Earnings per ordinary share (PLN/EUR) Data concerning condensed financial statements 1. Interest income Fee and commission income Total operating income Gross profit (loss) Net profit (loss) Cash flow in operating activities Cash flow in investing activities Cash flow in financing activities Cash flow in the year Total assets Liabilities to banks Liabilities to customers Total equity Share capital Number of shares (pcs.) Book value per share (PLN/EUR) Capital adequacy ratio Earnings per ordinary share (PLN/EUR) teur 2

3 Consolidated Profit and Loss Account 01/01/ /01/2005 note 31/03/ /03/2005 Operating income Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Gains/losses on items at fair value Change in investments in associates accounted for under the equity method Dividends received - - Other income Total operating income OPERATING EXPENSES Administrative expenses staff costs other administrative expenses Depreciation and revaluation of property, plant and equipment Total operating expenses Impairment of loans and advances Sale of fixed assets and intangible assets Gross profit (loss) Icome tax related to the current year's gross profit (loss) Net profit (loss) of the current year

4 Consolidated Balance Sheet AS S E T S N o te 01/01/ /01/ /01/ /01/ /03/ /03/ /12/ /12/2004 C ash in hand and balances with central bank T reasury bills and other debt securities eligible for redisc ounting w ith the central bank R ec eivables from bank s R eceivables from custom ers Bonds and other interest-carrying securities issued by other entities N B P bonds Shares D erivative financial instrum ents Shares and investm ents in subsidiaries or associates Intangible ass ets (including goodw ill) P roperty, plant and equipm ent D eferred tax assets Prepaym ents O ther banking assets T O T AL AS SET S

5 LIABILITIES Note 01/01/ /01/ /01/ /01/ /03/ /03/ /12/ /12/2004 Liabilities to banks Liabilities to customers Liabilities due to debt securities in issue Derivative financial instruments Other liabilities Accruals Deferred tax liabilities Reserves TOTAL LIABILITIES Core equity Share capital Supplementary capital Reserve capital Retained earnings Net profit (loss) for the year Total equity TOTAL LIABILITIES AND EQUITY

6 Statement of Changes in the Consolidated Equity Share Supplementary Reserve Retained Net profit/loss for Total capital capital capital earnings current year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of retained earnings Net result for the current year Measurement of financial assets Balance as of the end of 31 December Share Supplementary Reserve Retained Net profit/loss Total capital capital capital earnings for current year equity Balance as of 1 January Distribution of retained earnings Net profit (loss) for current year Balance as of the end of 31 March

7 Consolidated Cash Flow Statement 01/01/ /01/ /03/ /03/2005 Operating activities Net profit Operating activities Changes in operating assets Change in the value of Treasury bills and other government securities Change in loans to financial institutions Change in advances (lending activity) Change in bonds and other debt securities Change in shares Change in derivative financial instruments Change in other assets except for financial instruments Change in operating liabilities Change in deposits by credit institutions Change in deposits and borrowings from other institutions Change in debt securities in issue - Change in other liabilities Cash flow in operating activities Investing activities Sale of investments in associates - - Acquisition of fixed assets Sale of fixed assets Acquisition of intangible assets Sale of intangible assets - - Change in other financial assets Cash flow in investing activities Financing activities Repayment of loans taken out from financial institutions - - Other Cash flow from financing activities Cash flow for the year Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Balance sheet change in cash

8 Profit and Loss Account 01/01/ /01/ /03/ /03/2005 Operating income Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Gains/losses on items at fair value Change in investments in associates accounted for under the equity method Dividends received - - Other income Total operating income OPERATING EXPENSES Administrative expenses staff costs other administrative expenses Depreciation and revaluation of property, plant and equipment Total operating expenses Impairment of loans and advances Sale of fixed assets and intangible assets Gross profit (loss) Icome tax related to the current year's gross profit (loss) Net profit (loss) of the current year

9 Balance Sheet ASSETS 01/01/ /01/ /01/ /01/ /03/ /03/ /12/ /12/2004 Cash in hand and balances with central bank Treasury bills and other debt securities eligible for rediscounting with the central bank Receivables from banks Receivables from customers Bonds and other interest-carrying securities issued by other entities NBP bonds Shares Derivative financial instrum ents Shares and investments in subsidiaries or associates Intangible assets (including goodwill) Property, plant and equipment Deferred tax assets Prepayments Other banking assets TOTAL ASSETS

10 LIABILITIES 01/01/ /01/ /01/ /01/ /03/ /03/ /12/ /12/2004 Liabilities to banks Liabilities to customers Liabilities due to debt securities in issue Derivative financial instruments Other liabilities Accruals Deferred tax liabilities Reserves TOTAL LIABILITIES Core equity Share capital Supplementary capital Reserve capital Retained earnings Net profit (loss) for the year Total equity TOTAL LIABILITIES AND EQUITY

11 Statement of Changes in Equity Share Supplementar Reserve Retained Net profit/loss for Total capital capital capital earnings current year equity Balance as of 31 December 2004 according to the previously applied accounting principles Change resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of retained earnings Net result of the current year Balance as of the end of 31 December Share Supplementar Reserve Retained Net profit/loss Total capital capital capital earnings for current year equity Balance as of 1 January Distribution of retained earnings Net result of the current year Balance as of the end of 31 March

12 Cash Flow Statement 01/01/ /01/ /03/ /03/2005 Operating activities Net profit Operating activities Changes in operating assets Change in the value of Treasury bills and other government securities Change in loans to financial institutions Change in advances (lending activity) Change in bonds and other debt securities - 13 Change in shares Change in derivative financial instruments Change in other assets except for financial instruments Change in operating liabilities Change in deposits by credit institutions Change in deposits and borrowings from other institutions Change in debt securities in issue - - Change in other liabilities Cash flow in operating activities Investing activities Sale of investments in associates - - Acquisition of fixed assets Sale of fixed assets Acquisition of intangible assets Sale of intangible assets - - Change in other financial assets Cash flow in investing activities Financing activities Repayment of loans taken out from financial institutions - - Other Cash flow from financing activities Cash flow for the year Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Balance sheet change in cash

13 Information on the Nordea Bank Polska S.A. Group The Group of Nordea Bank Polska S.A. ("Capital Group ) comprises: Nordea Bank Polska S.A., Bank parent company, Inwestycje Kapitałowe S.A.- subsidiary. The parent company of the Group is Nordea Bank Polska S.A., a joint stock company registered in Poland. Background information on the Capital Group companies: 1) Nordea Bank Polska S.A. the parent company Nordea Bank Polska Spółka Akcyjna, hereinafter referred to as the Bank, whose registered office is in Gdynia at No. 2, Kielecka St., registered by the District Court in Gdańsk, 16 th Business Division of the National Court Register on November 21, 1991 (register No.: KRS ); sector according to the classification applied by the Warsaw Stock Exchange: BANKS. The basic object of activities of Nordea Bank Polska S.A., based in Gdynia, according to the Polish Business Classification, is other banking activity (PKD A). The Bank provides universal banking services to all entities, both business and non-business, as well as natural persons. The Bank's shares are listed at the Warsaw Stock Exchange. 2) Inwestycje Kapitałowe S.A. subsidiary Nordea Bank Polska S.A. holds 100% of the shares in Inwestycje Kapitałowe Spółka Akcyjna. Inwestycje Kapitałowe Spółka Akcyjna based in Gdańsk operates under its articles of association made in the form of a notarized deed dated 14 October The Company was entered into the Commercial Register under a decision issued by the District Court XII Commercial Register Division in Gdańsk on 4 November 1994 in section B under number RHB The entry in the National Court Register was made on 27 September 2001 under number KRS The core business of the subsidiary is defined as other financial intermediation described in section 6523 of the European Business Classification, secondary operations are defined as advisory services in the area of operations relating to the conducting of business and management, classified in the EBC in section

14 1. Description of the factors and events influencing the profit earned in the first quarter of 2006: In the first quarter of 2006, the Capital Group of Nordea Bank Polska S.A. achieved a net profit of PLN 8,1million. This represents 84,4% of the result generated in the same period of As the statement below shows, with comparable operating income and costs and the gross financial result, the factor that had the biggest influence on the lowering of the net result is the bigger tax burden. This was caused mostly by a significant increase in cash commission income generated from the dynamically growing credit portfolio Selected items of the P&L Account Q Q Change Total operating income 53,2 53,2 0,0% Total operating expenses -43,8-43,1 +1,8% Operating profit 9,3 10,1-7,9% Gross profit 10,1 10,5-3,3% Income tax -2,0-0,8 +140,6% Net profit 8,1 9,7 +15,6% Further favourable factors include: effective compensation of the decreasing interest margin by fee and commission income; effective policy of lowering the Bank s operating costs; good level of income from restructuring and vindication; continuous increase of loan and deposit volumes. Operating income The total income of the Capital Group of Nordea Bank Polska S.A. for the first quarter of 2006 amounted to 53,2 MPLN. This is an analogous amount to that generated in the first three months of The major components of the income were as follows: the net interest income reached 31.8 MPLN, 7.7 % down on the first quarter of The interest income went down by 8.8%, interest expenses dropped by 9.6%. This was mainly due to a significant fall in the interest rates on the domestic market- the average WIBOR rates were more than 2 p.p below the level recorded the year before. This reduction was partly compensated by an increase in business volumes and by favourable changes in the structure of receivables and liabilities towards a greater share of higher-income assets. Also stabilization of term deposits volumes was accompanied by an increased share of cheaper funds on current accounts; the net fee and commission income reached 10.6 MPLN, 44.2% higher than in the previous year. The increase was mainly brought about by higher loan commission earnings (3.1 MLN up, 14

15 including 2.1 MPLN from mortgage loans), and income on international and domestic payment transactions (in total a 1,1 MPLN hike) as well as proceeds from handling payment cards (which grew by 0.3 MPLN); revenues from f/x operations turned out to be 8,5% higher than in the same period of the previous year. This was brought about by a higher result on FX transactions and lower results of the measurement of the portfolio of securities. Operating expenses The operating expenses in the first three months of 2006 reached 43.8 MPLN and were slightly higher (1.8%) than the year before. The main cost components were as follows: staff cost reached a value 18,7% higher than in the first quarter of This is caused by changes in the method of presentation of provisions for bonuses and costs of outstanding vacation entitlements (which in the previous year had been shown in the group of other administrative expenses amounting to around 2,2 PLNM). Taking this into account staff costs increased by 3,7%; administrative expenses are 4,3% lower than in the same period of the previous year, but if we exclude from the amount for the first quarter of 2005 the above-mentioned provisions for staff expenses, we can observe a growth of 8%, resulting mainly from bigger scale of office services and leasing of transport vehicles. This growth is compensated to a large extent by a 11,2% reduction in the costs of depreciation of fixed assets. Impairment losses on loans and advances Both in the first quarter of this year and in 2005 the balance of loans loss provisions and impairment losses was showing that reversed provisions were greater than newly established provisions. This is caused by intensive debt collection activities which, over the period under analysis, brought about a lowering of the volume of irregular loans from 539 to 400 MPLN. This brought down the share of irregular receivables in total receivables to 9.5% (compared to 15.56% at the end of March 2005). Consolidated Balance Sheet The scale of operations of the Bank s Capital Group measured by the balance sheet total at the end of March 2006 reached 5,944.5 MPLN, showing a hike of around 12% compared to the same period last year. It is noteworthy that over the period under analysis, there was a significant increase of business with customers and investments in securities, accompanied by a reduction in the scale of operations with banks. The changes occurring in the selected major components of the balance sheet are presented in the tables below: 15

16 Selected items (MPLN) Change % Balance sheet total 5 944, ,1 +11,9% Gross receivables from customers 4 466, ,2 +21,4% Receivables from banks 647,0 767,9-15,8% Liabilities to customers *) 3 819, ,4 +15,2% Liabilities to banks 1 515, ,7 +11,0% Owners equity 525,9 502,1 +4,7% *) Including liabilities under debt securities in issue The asset portfolio The gross value of the credit portfolio (including debt securities and municipal bonds, without interest) grew by 21.4%. in comparison to the period 12 months before. PLN receivables went 12% up, whereas foreign currency receivables saw a hike of 37%, which is the result of a significant increase in the volume of mortgage loans granted in CHF (their gross balance almost tripled, increasing from 63.6 to MCHF) and of loans granted in EUR to businesses (a hike of 33%), with a simultaneous drop in the demand for dollar loans in the wake of the growing interest rate on the American currency. A review of the dynamics of each segment of the market shows that the highest dynamics was observed in loans to private individuals (a hike of 35%, with the volume of mortgage loans going up by 43%). In fact, a similar dynamic growth could be seen in the whole banking sector. There was also a pronounced increase in receivables from the public sector (up 23%) and from businesses (up 16%), despite their relatively weaker dynamics observable within the whole sector. The amount of receivables from banks went down by 16% due to the fact that the balances on nostro accounts were lower than last year. The volume of securities that constitute the Bank s liquidity buffer (treasury bonds and debt securities eligible for rediscounting at the central bank) went up by 18,3%, with a bigger share of NBP money bills than the one observed 12 months ago. As a result of these changes, the structure of assets in the Capital Group of Nordea Bank Polska S.A. saw a significant shift between receivables from customers and from banks towards a bigger share of the former (up from 68.7% to 72.9%). A certain reduction was also observed in the share of nonworking assets (cash, cash in central bank, fixed assets, other assets, prepayments): from 6.8% to 5.6%. 16

17 The deposit base The value of liabilities to customers (including interest) at the end of March 2006 was 15.3% higher than in March This increase was determined by deposits from businesses (a hike of 33%) and, to a lesser extent, by deposits from households (up 8%). A trend is still observable in the whole Polish financial market, where businesses that operate in a good economic climate possess excess liquidity that they place as deposits with banks, whereas household savings are more and more often invested elsewhere (investment funds, securities, insurance policies). What is positive is also the faster growth of foreign currency deposits (around 62%), than PLN deposits (around 11%) which is a positive phenomenon from the point of view of the management of the Bank s FX position as well as interest costs. Another advantage is also created by the change in the structure of term deposits compared to March 2005, the balance of funds on current accounts grew by 83%, with term deposits decreasing by around 6%. Liabilities to banks grew in the period under analysis by 11%, mostly as a result of a bigger amount of funding received from the Nordea Group for financing the expansion of the credit portfolio. These changes led to a situation where the share of deposits in the balance sheet total grew from 62.3% to 64.2%, and the share of liabilities to banks went down from 25.9% to 25.5%. The debt securities issued by the Bank accounted for just 0.03% of the balance sheet total, whereas at the end of March 2005 they represented 0.09%. In total, the share of liabilities generating interest costs grew in the period under analysis by 1.5 p.p (from 88.3% in March 2005 to 89.8% in March 2006). 2. Significant Accounting Policies (a) Statement of compliance The interim consolidated financial statements of the Capital Group have been drawn up in accordance with the requirements of the International Financial Reporting Standards (IFRS) as approved by the European Union, and as regards issues not provided therein - in accordance with the requirements of the Accounting Act of September 29, 1994 (Official Journal of 2002 No. 76 item 694, as amended) and enforcement regulations issued thereunder and in accordance with the requirements specified in the ordinance of the Council of Ministers dated 19 October 2005 in respect of current and periodical information provided by issuers of securities (Official Journal number 209, item 1744). (b) An earlier application of the standards which are not yet mandatory IFRS 7 Financial Instruments Disclosures, which has been approved by the European Union, is not yet mandatory but will take effect as of 1 January The Bank has not applied IFRS 7 earlier, because in the opinion of the Management Board, the disclosures under IFRS 7, will not differ in any material respect from the disclosures under IAS 32 and IAS 30. Other standards or amendments to the existing standards and interpretations issued by the International Financial Reporting Standards 17

18 Interpretation Committee, both the approved ones and the ones pending approval by the European Commission are either not applicable to the Bank s consolidated financial statements or would not have any material influence on these consolidated financial statements. (c) The bases of preparation of the consolidated financial statements The consolidated financial statements are presented in the Polish zlotys and rounded to the nearest thousand. The Polish zloty is a functional currency and the currency of the Group's presentations. These financial statements incorporate the concept of fair value of financial assets and financial liabilities measured at fair value through profit or loss, including derivative instruments, as well as financial assets classified as available-for-sale, except for such assets whose fair value cannot be reliably measured. Other financial assets and financial liabilities are carried at amortised cost (loans and advances, financial liabilities other than those measured at fair value through profit or loss) or at cost less any impairment losses. The consolidated financial statements were prepared on the historical cost basis, except for the following assets and liabilities that are accounted for at their fair value: financial derivatives, financial assets and liabilities at fair value through profit and loss. The preparation of the consolidated financial statements in compliance with the IFRS requires the management to make judgements, estimates and assumptions influencing its accounting policies and the presentation of the assets and liabilities, as well as the income and expenses. The estimates and assumptions are based on available historical data and a number of other factors that are deemed to be reasonable under the circumstances, the results of which constitute the basis for estimating the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The real values may differ from the estimates. The estimates and the underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period when the estimate is revised, provided that such an estimation affects only that period, or in the period of the revision and in future periods if the revision affects both current and future periods. The accounting policies presented below have been applied to all the reporting periods presented in the consolidated financial statements, as well as in the adjustments to the opening balance according to the IFRS as at January 1, 2004 for the purpose of adoption of the IFRS. The accounting policies have been applied consistently by each of the Group entities. 18

19 (d) The principles of consolidation Subsidiary Subsidiaries are units that are controlled by Nordea Bank Polska S.A. Such control exists if the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain economic benefits from its activities. Special purpose companies are included in consolidation if the type of dependence between the Group and the company indicates that this company is controlled by the Group. The financial statements of subsidiaries are included in the consolidated statements from the date that control commences until the date that control ceases. Acquisition method The acquisition method of accounting is applied to account for the acquisition of subsidiaries by the Group. Merger costs are defined as the sum of fair value as at the date of exchange of assets handed over, equity instruments issued, commitments made or undertaken, and costs directly attributable to business combinations. The assets, liabilities and contingent liabilities assumed in a business combination are initially measured at their fair value as at the acquisition date, irrespective of any minority interests. The excess of the cost of acquisition over the fair value of the Group's interest in net assets acquired is recorded as goodwill. If the costs of acquisition are smaller than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the profit and loss account Associate Associates are entities under significant influence of the Group, but whose financial and operating polices are not controlled by the Group. The consolidated financial statements comprise the Group's share in the gains and losses of the associates on an equity accounted basis from the date that significant influence commences until the date the significant influence ceases. Should the Group's share of losses exceed its interests in an associate, the carrying amount is reduced to nil. Then, no additional loss is recorded, except to the extent that the Group has incurred legal or constructive obligations or made payments made on behalf of an associate. Transactions eliminated on consolidation Intra-group balances and unrealised gains and losses or income and expenses resulting from intragroup transactions are excluded from the consolidated financial statements. Unrealised gains arising from transactions with associates or joint ventures are eliminated proportionally to the Group's interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains unless there is evidence for impairment. 19

20 (e) Transactions in foreign currencies shown in the functional currency measurement Transactions in foreign currencies are translated at the foreign exchange rates applicable at the transaction date. Monetary assets and liabilities denominated in foreign currencies and stated at historical costs resulting from such transactions are translated at the exchange rates effective at that date. Exchange differences arising from translation are recognised in profit or loss. Nonmonetary assets and liabilities denominated in foreign currencies and stated at historical costs are translated at the exchange rates prevailing at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies and stated at fair value are translated into the currency of the financial statements at the foreign exchange rates applicable at the date when their fair value was measured. (f) Hedge accounting and derivative financial instruments The Group does not apply hedge accounting. The Group uses financial derivative instruments to hedge its exposure to foreign exchange and interest rate risks resulting from its operating, financing and investing activities. Derivative financial instruments are initially recognised at fair value. Subsequently, they are measured at fair value without any allowance for transaction costs to be borne to sell them. The best evidence of the fair value of a financial instrument at the initial recognition is the transaction price (i.e. the fair value of the consideration paid or received) unless the fair value of the instrument is evidenced by comparison with other observable current market transactions over the same instruments (i.e. without any modifications) or based on a valuation technique only including data from observable markets. Some derivative instruments embedded in other financial instruments are separated from the basic agreement and treated as derivative instruments provided that the economic properties and risks of such embedded derivative instruments are not strictly related to the economic features and risks of the basic agreement, and the basic agreement is not measured at fair value through profit or loss. Embedded derivative instruments are measured at fair value, and changes in the fair value are taken to profit or loss. (g) Financial assets and financial liabilities Classification The Group classifies financial instruments into the following categories: financial assets or financial liabilities at fair value through profit or loss, and loans and receivables. (a) Financial assets or financial liabilities at fair value through profit or loss These are financial assets and liabilities meeting one of the following criteria. 20

21 (1) They are classified as held-for-trading. Financial assets or financial liabilities are classified as heldfor-trading if they are acquired or incurred mainly for the purpose of being sold or repurchased in near future; they are a part of the portfolio of certain financial instruments managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Derivative instruments are also categorised as held-for-trading unless a derivative is a designated and effective hedging instrument. (2) Upon initial recognition they were designated by the Group as measured at fair value through profit or loss. (b) Loans and receivables Loans and receivables are financial assets other than derivative instruments, whose terms of payment are defined or definable, which are not quoted in an active market. Loans and receivables arise when the Group provides finance to customers for other purpose than short-term profit taking. Loans and receivables comprise loans and advances to other banks and customers, including purchased receivables and investment in debt securities provided that they are not quoted in an active market. (c) Financial liabilities A financial liability is a contractual obligation of the Bank to deliver cash or another financial asset to another entity. Financial liabilities are measured according to the amortised cost method using the effective interest rate. They comprise deposits received from other banks and from customers, as well as debt securities issued. Financial liabilities are measured at initial recognition written up or down for all differences between the initial value and the value at maturity and written down for impairment. The Group does not classify financial assets into the categories: held-to-maturity and available-forsale. Recognition and de-recognition in the balance sheet A standard purchase or sale transaction involving financial assets is accounted for in the balance sheet as of the transaction date. This method is applied consistently for all purchase and sale transactions over financial assets. Loans are recognised when cash is advanced to borrowers. A financial asset is derecognised from the balance sheet when the contractual rights to cash flows from the financial asset expire or when the Group transfers a major part of the risk and benefits connected with the possession of the financial asset. Measurement Upon initial recognition, a financial asset or a financial liability is measured at fair value increased, in the case of financial assets or liabilities not classified at fair value through profit or loss, by transaction costs directly attributable to the acquisition or issue of the financial asset or financial liability. 21

22 Subsequently, the Group measures financial assets, including derivative instruments being assets, at fair value without any deduction for transaction costs to be borne on sale or other disposal, except for loans and receivables, which are measured at amortised cost using the effective interest rate method. After the initial recognition, financial liabilities are measured at amortised cost using the effective interest rate method except for: (a) financial liabilities at fair value through profit or loss. Such liabilities, including derivative instruments being liabilities, are carried at fair value. (b) financial liabilities resulting from the transfer of a financial asset which is not to be derecognised or is recognised based on the approach following from the exposure retention. Gains and losses on subsequent measurement Gains and losses from a change in the fair value of a financial asset or financial liability eligible for being recognised at their fair value through profit or loss, not being a part of a hedging relationship, shall be charged to income or cost. The fair value of investments for which there is an active market is based on current bid prices. If there is no active market for a given instrument or securities are not listed, the Group establishes the fair value based on measurement techniques, including observable market transactions, the analysis of discounted cash flows, option pricing models and other valuation techniques commonly applied by marketplace participants. (h) Impairment of financial assets Financial assets measured at amortised cost As at the balance-sheet date, the Group assesses whether there is any objective evidence for the impairment of any financial asset or a group of financial assets. A financial asset or a group of financial assets is impaired and an impairment loss is incurred only if there is objective evidence of impairment resulting from one or more events occurring after the initial recognition of the asset ('a loss event ), and that loss event (or events) affects the expected future cash flow from the financial asset or the group of financial assets that can be reliably estimated. It may not be possible to indicate a single event generating an impairment loss. An impairment loss may be rather a combined effect of several events. The Group does not recognise loss expected as a result of future events, no matter how likely. The objective evidence of impairment of a financial asset or a group of assets includes information acquired by the owner of the asset concerning the existing loss events: (a) a significant financial difficulty of the issuer or obligor, (b) a breach of contract, e.g. default or delinquency in interest or principal payments, (c) the creditor giving a consent to the borrower, due to economic or legal reasons resulting from the borrower's financial difficulty, which would not be granted otherwise, (d) highly probable bankruptcy of the borrower or other financial reorganisation of the borrower, (e) the disappearance of an active market for a given financial asset because of financial difficulties, or 22

23 (f) information indicating that the drop of estimated future cash flow from the group of financial assets may be measured from the moment of their initial recognition although the drop related to a single financial asset may not be defined, yet, including: (i) adverse changes to the payment status of the borrowers' group, or (ii) national or local economic situation related to defaults on assets in the group. If there is any objective evidence that a loss has been borne as a result of the impairment of loans and receivables carried at amortised cost, the amount of the loss is measured as the difference between the carrying amount of assets and the present value of estimated future cash flows discounted at the original effective interest rate of the financial instrument (i.e. the initial effective interest rate). If a loan, receivable or an investment held to maturity has a variable interest rate, the discount rate applied to estimate its impairment loss shall be the present effective interest rate determined under the contract. The carrying amount of an asset shall be reduced based on the settlement of provisions. The amount of the loss shall be recognised in profit or loss. The Group first assesses whether there is any objective evidence for the impairment of single financial assets that are significant individually, as well as individually or jointly in the case of financial assets that are not significant individually. If the Group observes that there is no objective evidence for the impairment of individually evaluated financial assets, whether they are significant or not, it recognises such assets under the group of financial assets of a similar credit risk and tests them jointly for impairment. Assets tested for impairment individually, in the case of which a company makes a deduction due to such an impairment loss or decides to recognise such a deduction, are not accounted for in the portfolio impairment testing. For the purpose of portfolio impairment testing, financial assets are grouped by similar credit risk characteristics indicating the debtor's ability to repay all amounts due according to the contract (e.g. based on credit risk rating applied by the Group or grading process that consider asset type, industry, a type of collateral, past-due status and other relevant factors). Selected characteristics are essential from the point of view of the evaluation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due in accordance with contractual terms and conditions concerning the asset being measured. The purpose of impairment portfolio tests is to estimate loss that has already been incurred, but cannot be identified in the case of an individual impairment test. Results of an analysis of historical data constituting the basis to establish adequate adjustment deductions will be revised to take account of the impact of current factors that did not exist in the past and to eliminate effects of factors having some impact in the past and not existing at present. If in the subsequent period the impairment loss decreases, and such a decrease is objectively related to an event occurring after the impairment loss recognition, the previously recognised impairment loss is reversed either directly or by revising the allowance account. The amount of the reversal is recognised in profit or loss. 23

24 (i) Property, plant and equipment The Group makes an evaluation based on the cost model. After the initial recognition of property, plant and equipment as assets, the Group carries them at cost less accumulated depreciation and cumulative impairment losses. Own items of property, plant and equipment Items of property, plant and equipment are accounted for at their buying price or production cost reduced by accumulated depreciation and impairment losses. Subsequent costs The Group recognises in the carrying amount of property, plant and equipment and intangible assets the cost of replacing some of such items at the moment such cost is incurred if the Group is likely to obtain future economic benefits related to the item of property, plant and equipment, and the cost to buy or manufacture can be reliably measured. Other costs are charged to the profit and loss account when incurred. Depreciation Depreciation is charged to the profit and loss account on a straight-line over the economic useful life of a given item of property, plant and equipment or an intangible asset. Land is not subject to depreciation. The estimated economic useful lives are as follows: buildings and structures years plant and machinery 3-22 years equipment 5-10 years means of transport 5 years The residual value is subject to annual estimation. (j) Other balance sheet items Goodwill All business combinations are accounted for at acquisition costs. Goodwill is the value resulting from the acquisition of subsidiaries, associates and joint ventures. In the case of acquisitions that took place after January 1, 2003, goodwill represents the difference between the cost of acquisition and the fair value of identifiable assets acquired. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash generating units and it is not subject to depreciation. Goodwill is tested for impairment every year. Software Acquired software licences are capitalised on the basis of the cost incurred to acquire and bring to use the specific software. Expenditure related to software maintenance is charged to costs when incurred 24

25 Other intangible assets Other intangible assets bought by the Group are stated at cost less amortisation and impairment losses. Subsequent costs Expenditure borne at the initial recognition of acquired intangibles is capitalised only when it increases the future economic benefits embodied n the specific asset. All other expenditure is expensed as incurred. Amortization Amortization is accounted for in the profit and loss account on a straight-line basis over the estimated useful life of particular intangible assets if it is not an indefinite period. Goodwill is systematically tested for impairment as at each balance-sheet date. Other intangible assets are amortized as of their commissioning date. The estimated useful lives are as follows: software 5 years licences 2-5 years (k) Other balance sheet items Other trade receivables and other receivables Trade and other receivables are recognised at their cost less impairment losses. Prepaid expenses and deferred income Prepaid expenses are recognised in the balance sheet if they are paid in a different period than the period when they were incurred. Liabilities Liabilities other than held-for-trading financial liabilities are recognised at cost. Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise items maturing within three months of their acquisition date, including: cash in hand and balances with the central bank of unlimited disposal, Treasury bills and other eligible bills (including loans and advances to other banks, receivables from other banks and short-term securities of the State Treasury). 25

26 (l) Impairment of assets other than financial assets The carrying amounts of the Group's assets other than deferred tax assets are reviewed as at the balance-sheet date to define whether there is any indication of impairment. If any, the recoverable amount of assets is estimated. For goodwill and intangible assets of an indefinite useful life and intangible assets not yet available for use, the recoverable amount is estimated at each balance-sheet date. An impairment loss is recognised whenever the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. In the case of cash generating units, impairment losses first reduce the goodwill allocated to these units (group of units), and then proportionally reduce the carrying amount of other assets in the unit (group of units). Calculation of the recoverable amount The recoverable amount of other assets is the higher of their net selling price and value in use. To assess the value in use, estimated future cash flows are discounted to their present value at a pre-tax discount rate reflecting current market assessments of the time money value and the risks specific to the asset. In the case of assets not generating independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the assets belong. Reversal of impairment loss An impairment loss in respect of goodwill is not reversed. In the case of other assets, an impairment loss is reversed if there has been a change in the estimates used to define their recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. (m) Equity Share capital Share capital is shown at its nominal value consistent with the Bank's Statute. Supplementary capital Supplementary capital is established from out-of-profit payments or issue premium earned from the issue of shares less direct costs associated therewith. Reserve capital Reserve capital comprises a fixed assets revaluation reserve, a general banking risk fund and other reserves. The revaluation reserve resulting from the valuation of fixed assets carried out in previous 26

27 years based on separate regulations is transferred to the reserve capital when the fixed asset in question is disposed of (sold, handed over, liquidated or recognised as missing). (n) Employee benefits Employee benefits may be short and long-term. Employee benefits include salaries, bonuses, holiday pay, social insurance premiums and jubilee awards. Employee benefits are recognised as expenses when incurred. The liabilities due to long-term employee benefits constitute the amount of future benefits which an employee will receive in consideration of the work provided during the current period and previous periods. (o) Provisions Provisions are recorded in the balance sheet if the Group has such a legal or constructive obligation as a result of past events, as well as if it is probable that an outflow of economic benefits will be required to settle such an obligation. If the effect is material, the amount of provisions shall be defined based on discounted expected cash flows at a rate before tax, which reflects the current market assessment regarding the time value of money and, if applicable, risks specific to the liability. Provisions for such off-balance sheet liabilities as guarantees, letters of credit and unused credit lines are recognised in pursuance of such principles. (p) Net interest income Interest income and expenses for all financial instruments are recognised in the profit and loss account at amortised costs using the effective interest rate method. The effective interest rate method consists in accruing the amortised cost of a financial asset or a financial liability ( a group of financial assets or financial liabilities) and allocating interest income or expenses over relevant periods. The effective interest rate is the rate that exactly discounts the 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. When calculating the effective interest rate, the Group estimates the cash flows, considering all contractual terms of the financial instrument, however, it does not consider future loan losses. The calculation includes all fees and points paid or received between the parties and items constituting an integral part of the effective interest rate, and all other premiums and discounts. Once a financial asset or a group of similar financial assets has been written down for impairment, interest income is thereafter recognised at the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. 27