The Bank IBA MOSCOW Limited Liability Company. Financial Statements For the Year Ended December 31, 2015

Transcription

1 The Bank IBA MOSCOW Limited Liability Company Financial Statements For the Year Ended

2 The Bank IBA-MOSCOW LLC TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1 INDEPENDENT AUDITORS REPORT 2-5 FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, : Statement of financial position 6 Statement of profit or loss 7 Statement of other comprehensive income 8 Statement of changes in equity 9 Statement of cash flows 10 Notes to the financial statements 11-60

3 The Bank IBA-MOSCOW LLC STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, Management is responsible for the preparation of the financial statements that present fairly the financial position of the The Bank IBA - MOSCOW Limited Liability Company (the Bank ) as at, and the results of its operations, comprehensive income, cash flows and changes in equity for the year then ended, in compliance with International Financial Reporting Standards ( IFRS ). In preparing the 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 in 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 IFRS has been followed, subject to any material departures disclosed and explained in the 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 financial statements of the Bank comply with IFRS; Maintaining statutory accounting records in compliance with legislation and accounting standards of the Russian Federation; 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 financial statements of the Bank for the year ended were authorized for issue by the Bank s Management Board on June 17, 2016: On behalf of the Management Board: E.R. Efendiyev Chairman of the Management Board S.E. Sarjina Chief Accountant June 17, 2016 June 17, 2016 Moscow Moscow 1

4 ZAO Deloitte & Touche CIS 5 Lesnaya Street Moscow, Russia Tel: +7 (495) Fax: +7 (495) INDEPENDENT AUDITOR S REPORT To: the Sole Participant and Board of Directors of the The Bank IBA MOSCOW Limited Liability Company. We have audited the accompanying financial statements of the The Bank IBA MOSCOW Limited Liability Company ( the Bank ) which comprise the statement of financial position as at 31 December and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for, and notes comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of the 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 the fair presentation of these financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion on the fair presentation of these financial statements. 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. 6 2

5 Basis for Qualified Opinion As described in Note 27 to the financial statements as of the date of approval of these financial statements the Bank of Russia is carrying out an inspection of the Bank. As of the date of the audit opinion the inspection is not complete and we were unable to obtain sufficient audit evidence of its potential results. Therefore, we were unable to assess whether any adjustments or additional disclosures are required to be made in the financial statements. Effective from November the International Bank of Azerbaijan (the Parent ) decreased the interest rates on all interbank deposits and subordinated loans issued or to be issued to the Bank to a non-market rate of 0.1% as disclosed in Notes 12 and 16. The modification to the interest rates should result in the Bank, where appropriate, derecognizing the initial deposits or loans and recognizing new deposits or loans discounted either at original or appropriate market interest rates. The Bank did not account for the modifications to interest rates which constitutes a departure from International Financial Reporting Standards. The Bank s records indicate that had management accounted for the modifications, due to banks and subordinated debt as at 31 December would have been decreased by RUB49,685 thousand and RUB1,489,753 thousand, respectively, deferred income tax liability as at 31 December would have been increased by RUB307,888 thousand, additional paid in capital as at 31 December would have been increased by RUB1,241,182 thousand net of deferred tax and net loss after tax for the year ended 31 December would have been increased by RUB9,631 thousand. In the Bank had subordinated debt denominated in US Dollars and Euros which was carried in the statement of financial position at RUB2,496,983 thousand as at 31 December. Management has used average exchange rates for the year to convert the interest expense on subordinated debt. This constitutes a departure from International Financial Reporting Standards as the Ruble fluctuated significantly against major currencies during and the average exchange rate for does not approximate the actual rate at the dates of the transactions. The Bank s records indicate that had management calculated the interest expense on subordinated debt using the spot exchange rates as at the dates of interest expense recognition subordinated debt as at 31 December would have been increased by RUB787,232 thousand and the deferred tax asset would have been increased by RUB157,446 thousand. Accordingly, retained earnings as of 31 December would have been decreased by RUB629,786 thousand and net loss for the year ended 31 December would have been decreased by RUB629,786 thousand. Qualified Opinion In our opinion, except for the effects of the matters described in the Basis for Qualified Opinion paragraphs, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December, and its financial performance and its cash flows for, in accordance with International Financial Reporting Standards. Emphasis of Matter We draw attention to Note 1 to the financial statements, which discloses the information on actions undertaken by the Bank on problematic assets. The Bank s ability to continue as a going concern for the foreseeable future significantly depends on the support of the Bank s sole participant, and its ability to implement measures intended to enhance financial stability of the Bank and to support its activity on an ongoing basis. Our opinion is not qualified in respect of this matter. Report on procedures performed in accordance with the Federal Law No On Banks and Banking Activities dated 2 December 1990 Management of the Bank is responsible for compliance with the obligatory ratios established by the Bank of Russia (the obligatory ratios ), as well as for compliance of the Bank s internal control and risk management systems with the Bank of Russia (the CBRF ) requirements.. 3

6 According to Article 42 of the Federal Law No On Banks and Banking Activities dated 2 December 1990 (the Federal Law ) in the course of our audit of the Bank s annual financial statements for we performed procedures with respect to the Bank s compliance with the obligatory ratios as at 1 January 2016 and compliance of its internal control and risk management systems with the CBRF requirements. We have selected and performed procedures based on our judgment, including inquiries, analysis and review of documentation, comparison of the Bank s policies, procedures and methodologies with the CBRF requirements, as well as recalculations, comparisons and reconciliations of numeric values and other information. We report our findings below: 1. with respect to the Bank s compliance with the obligatory ratios: the obligatory ratios as at 1 January 2016 were within the limits established by the CBRF. We have not performed any procedures with respect to the Bank s financial information other than those we considered necessary to express our opinion on whether the annual financial statements of the Bank present fairly, in all material respects, the financial position of the Bank as at 31 December, its financial performance and its cash flows for in accordance with International Financial Reporting Standards. We note that the matters described in the Basis for Qualified Opinion paragraphs indicate that we were unable to assess whether any non-compliance with the obligatory ratios might be identified based on the results of the CBRF inspection. 2. with respect to compliance of the Bank s internal control and risk management systems with the CBRF requirements: (a) in accordance with the CBRF requirements and recommendations as at 31 December the Bank s internal audit department was subordinated and accountable to the Bank s Board of Directors and the Bank s risk management departments were not subordinated or accountable to the departments undertaking the respective risks, the heads of the Bank s risk management and internal audit departments comply with qualification requirements established by the CBRF; (b) as at 31 December, the Bank had duly approved in accordance with the CBRF requirements and recommendations the internal policies regarding identification and management of significant risks, including credit, operating, market, interest rate, legal, liquidity, and reputational risks, as well as regarding performance of stress-testing; (c) (d) (e) as at 31 December, the Bank had a reporting system with regard to the Bank s significant credit, operating, market, interest rate, legal, liquidity and reputational risks, and with regard to the Bank s capital; Frequency and sequential order of reports prepared by the Bank s risk management and internal audit departments in on management of credit, operating, market, interest rate, legal, liquidity and reputational risks were in compliance with the Bank s internal policies; these reports included results of monitoring by the Bank s risk management and internal audit departments of effectiveness of the Bank s respective methodologies and improvement recommendations; as at 31 December, the authority of the Bank s Board of Directors and the Bank s executive bodies included control over compliance with the risk limits and capital adequacy ratios established by the Bank. In order to control effectiveness and consistency of application of the Bank s risk management policies, during the Bank s Board of Directors {the Supervisory Board} and the Bank s executive bodies have regularly discussed reports prepared by the risk management and internal audit departments and have considered proposed corrective measures. 4

7 We note that the matters described in the Basis for Qualified Opinion paragraphs indicate that we were unable to assess whether any facts might be identified based on the results of the CBRF inspection that indicate potential internal control deficiencies within the Bank. We have carried out the procedures with respect to the Bank s internal control and risk management systems solely to report on the findings related to compliance of the Bank s internal control and risk management systems with the CBRF requirements. June 17, 2016 Moscow, Russian Federation Ekaterina Vladimirovna Ponomarenko, General Director (Qualification Certificate No dated 28 November 2011) ZAO Deloitte & Touche CIS The Bank: Bank IBA-Moscow LLC Certificate of state registration 3395, issued by the Central Bank of Russian Federation. Registration Chamber by Primary State Registration Number: Certificate of registration in the Unified State Register of , issued the Moscow regional department of the Federal Tax Service. Address: , Russia, Moscow, Tverskaya street, 6 building 2. Independent Auditor: ZAO Deloitte & Touche CIS Certificate of state registration , issued by the Moscow Registration Chamber on Primary State Registration Number: Certificate of registration in the Unified State Register of , issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation 39. Certificate of membership in «NP «Audit Chamber of Russia» (auditors SRO) of , ORNZ

8 The Bank IBA-MOSCOW LLC STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, (in thousands of Russian Rubles) Notes ASSETS: Cash and balances with the Central Bank of the Russian Federation Minimum reserve deposits with the Central Bank of the Russian Federation Financial assets at fair value through profit or loss Due from banks 8, Loans to customers 9, Deferred income tax assets Property and equipment Other assets TOTAL ASSETS LIABILITIES AND EQUITY LIABILITIES: Due to banks 12, Customer accounts 13, Debt securities issued by the Bank Current tax liabilities Other liabilities Subordinated debt 16, TOTAL LIABILITIES EQUITY: Charter capital Additional capital Property revaluation reserve Retained earnings TOTAL EQUITY TOTAL LIABILITIES AND EQUITY On behalf of the Management Board: E.R. Efendiyev S.E. Sarjina Chairman of the Management Board Chief Accountant June 17, 2016 June 17, 2016 Moscow Moscow The notes on pages form an integral part of these financial statements. 6

9 The Bank IBA-MOSCOW LLC STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED DECEMBER 31, (in thousands of Russian Rubles) Notes Year ended Year ended Interest income 18, Interest expense 18,23 ( ) ( ) NET INTEREST INCOME BEFORE IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS Impairment losses on interest bearing assets 9,23 ( ) ( ) NET INTEREST (EXPENSE)/INCOME ( ) Net gain/(loss) on financial assets at fair value through profit or loss (28 820) Net (loss)/gain on foreign exchange operations: Dealing (84 774) Translation differences ( ) ( ) Fee and commission income 19, Fee and commission expense 19,23 (42 329) (49 312) Provision of other assets 11 (70 803) - Recovery/(provision)of other operations ( ) Other income NET NON-INTEREST INCOME ( ) OPERATING INCOME Operating expenses 20,23 ( ) ( ) (LOSS)/PROFIT BEFORE INCOME TAX ( ) Income tax expense 21 (8 271) (7 166) (LOSS)/PROFIT FOR THE YEAR ( ) On behalf of the Management Board: E.R. Efendiyev Chairman of the Management Board S.E. Sarjina Chief Accountant June 17, 2016 June 17, 2016 Moscow Moscow The notes on pages form an integral part of these financial statements. 7

10 The Bank IBA-MOSCOW LLC STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, (in thousands of Russian Rubles) Notes Year ended Year ended NET (LOSS)/PROFIT FOR THE YEAR ( ) OTHER COMPREHENSIVE (LOSS)/INCOME Items that will not be reclassified subsequently to profit or loss: Net (loss)/gain resulting on revaluation of property 10 (19 465) Income tax relating to components of other comprehensive income (4 837) (15 572) Other comprehensive (loss)/income after income tax (15 572) TOTAL COMPREHENSIVE (LOSS)/INCOME ( ) On behalf of the Management Board: E.R. Efendiyev Chairman of the Management Board S.E. Sarjina Chief Accountant June 17, 2016 June 17, 2016 Moscow Moscow The notes on pages form an integral part of these financial statements. 8

11 The Bank IBA-MOSCOW LLC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, (in thousands of Russian Rubles) Notes Charter capital Additional capital Property revaluation reserve Retained earnings Total equity January 1, Charter capital contribution Total comprehensive income for the year Total comprehensive loss for the year - - (15 572) ( ) ( ) On behalf of the Management Board: E.R. Efendiyev Chairman of the Management Board S.E. Sarjina Chief Accountant June 17, 2016 June 17, 2016 Moscow Moscow The notes on pages form an integral part of these financial statements. 9

12 The Bank IBA-MOSCOW LLC STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, (in thousands of Russian Rubles) Notes CASH FLOWS FROM OPERATING ACTIVITIES Interest received Interest paid ( ) ( ) Cash paid on financial assets at fair value through profit or loss (1 769) (128) Cash (paid)/received on foreign exchange operations (84 774) Fee and commission income received Fee and commission expense paid (42 092) (48 945) Other operating income received Staff costs paid ( ) ( ) Other operating expenses paid ( ) ( ) CASH FLOWS USED IN OPERATING ACTIVITIES BEFORE CHANGES IN OPERATING ASSETS AND LIABILITIES ( ) ( ) CHANGES IN OPERATING ASSETS AND LIABILITIES Net decrease/(increase) in minimum reserve deposits with the Central Bank of the Russian Federation (17 384) Net decrease in due from banks Net decrease/(increase) in loans to customers ( ) Net decrease/(increase) in financial assets at fair value through profit or loss ( ) Net decrease in other assets Net (decrease)/increase in due to banks ( ) Net (decrease)/increase in customer accounts ( ) Net decrease in other liabilities ( ) ( ) NET CASH USED IN OPERATING ACTIVITIES BEFORE TAXATION ( ) ( ) Income tax paid (88 337) (73 759) NET CASH USED IN OPERATING ACTIVITIES ( ) ( ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment 10 (1 697) (20 384) Proceeds from disposal of property and equipment NET CASH USED IN INVESTING ACTIVITIES (1 616) (19 208) CASH FLOWS FROM FINANCING ACTIVITIES Charter capital contribution Repayment of the Bank s debt securities (62 627) ( ) Proceeds from subordinated debt received NET CASH FROM/(USED IN) FINANCING ACTIVITIES ( ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( ) ( ) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR On behalf of the Management Board: E.R. Efendiyev Chairman of the Management Board S.E. Sarjina Chief Accountant June 17, 2016 June 17, 2016 Moscow Moscow The notes on pages form an integral part of these financial statements. 10

13 The Bank IBA-MOSCOW LLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, (in thousands of Russian Rubles) 1. ORGANIZATION "The Bank IBA-MOSCOW" Limited Liability Company (the Bank ) is a limited liability company, which was incorporated in the Russian Federation (the RF ) in The Bank is regulated by the Central Bank of the Russian Federation (the CBR ) and conducts its business under the general license No The Bank is a member of the obligatory deposit insurance scheme as approved by the Federal Law No. 177-FZ On Insurance of Individual Bank Deposits in the Russian Federation dated December 23, The State Deposit Insurance Agency guarantees the repayment of 100% of individual deposits of up to RUB thousand per individual in case of withdrawal of a Bank s license or the CBR imposed moratorium on payments. The Bank s primary business consists of commercial banking activities, trading with securities and foreign currencies, originating loans and guarantees and money transfers. The registered office of the Bank is located at 6 Tverskaya St., Bld.2, Moscow, , Russian Federation. As at the Bank had 2 branches operating in the RF ( : 2). The total number of employees of the Bank as at and, is 316 and 376 respectively. The sole participant of the Bank is the International Bank of Azerbaijan (the Parent or IBA ). The Bank is ultimately controlled by the Government of Azerbaijan. The Bank continuing as a going concern: In accordance with the decree of the President of Azerbaijan dated July 15, IBA Group implemented actions to revitalize its financial position and to ensure the financial stability of the Group s banks, particularly by the transferring bad assets of Bank to government non-banking specialized structure CJSC "Agrarkredit". On August 11, the International Bank of Azerbaijan (the Parent or IBA ), Agrarkredit CJSC, Ministry of Finance and the Central Bank of Azerbaijan signed a Master Agreement where they agreed in principle that IBA would transfer a part of its loan portfolio to Agrarkredit CJSC in a number of tranches over a number of years from to On July 28, the first Transfer Agreement was signed by IBA and Agrarkredit CJSC where through cession, specific loans and amounts were agreed to be transferred to "Agrarkredit" CJSC. On December 28, IBA received a Guarantee and Commitment letter from Agrarkredit CJSC that it would reimburse IBA in line with the Master Agreement (noted above) for loans on the balance sheets of IBA and the Bank totalling AZN5.7 billion ( : RUB266.4 billion at the rate of the Central Bank of the Russian Federation). On February 24, 2016 the second Transfer Agreement was signed by IBA and "Agrarkredit" CJSC, where through cession, specific loans and amounts of both IBA and the Bank were listed and agreed to be transferred to "Agrarkredit" CJSC. The program provides for the staged transfer and exchange of problematic assets for cash. It is planned to transfer not less than 40 % of the Bank s loan portfolio during 2016 under the program. These loans are currently collateralized by the Parent in the form of guarantees and guarantee deposits. 11

14 Besides purchasing the Bank s distressed assets, IBA will make a contribution to the charter capital of the Bank by cash and by real estate property (building). It plans to contribute charter capital of USD100 million ( : RUB billion at a rate of Central Bank of the Russian Federation). Of these, the first contribution amount of USD30 million ( : RUB billion at a rate of Central Bank of the Russian Federation) has been made on May 18, 2016 by IBA. Also IBA lowered rates from 4.25%-9.0% to 0.10% for all financial resources (Subordinated debt received from IBA for the amount of USD365.2 thousand and EUR60.4 thousand (December 31, : RUB thousand and RUB thousand at a rate of Central Bank of the Russian Federation) provided by IBA to the Bank effective from November 15,. The Bank is formulating a Strategy for the next 3 years, after the increase of the Bank s charter capital and the transfer of problematic assets. The Strategy envisions that the Bank will undertake measures in order to return to profit in 2017 due to the reduction of the negative impact on the financial indicators as result of the high proportion of the impaired and problematic assets. According to the Bank s Strategy the loan portfolio will be increased by RUB30 billion by the end of Besides the raising of funds from the Parent, the Bank will diversify its funding sources by issuing bonds and borrowings under new and existing limits on the interbank market. The increase in the volume of trade between the two countries resulting from the current socio-economic situation in Russia and Azerbaijan creates favorable conditions for implementation of projects that require longterm financial investments. In addition to funding projects related to the development of trade and economic relations between Azerbaijan and Russia, the Bank plans to launch a series of new products related to lending to medium and small business borrowers and also development of a mortgage program. The development of new competitive product ranges and the financing of major projects makes it possible not only to be successful in meeting economic and financial projections for the Bank but also in expansion of the customer base of the Bank. As a result Management believes that it is appropriate to prepare these financial statements on a going concern basis. These financial statements were authorized by the Management Board for issue on June 17, SIGNIFICANT ACCOUNTING POLICIES Statement of Compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Other basis of presentation criteria These financial statements have been prepared on the assumption that the Bank is a going concern and will continue in operation for the foreseeable future. These financial statements are presented in thousands of Russian Rubles ( RUB thousand ), unless otherwise indicated. These financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS

15 In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Functional currency Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). The functional currency of the Bank is the Russian Rubles ( RUB ). The presentational currency of the financial statements of the Bank is the RUB. All values are rounded to the nearest thousands of Russian Rubles, except when otherwise indicated. The Bank maintains its accounting records in accordance with Russian Accounting Standards ( RAS ). These financial statements have been prepared from the statutory accounting records and have been adjusted to conform with IFRS. The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non-current) for financial assets and liabilities is presented in Note 26. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. The principal accounting policies are set out below. Recognition of interest income and expense Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. 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 down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. 13

16 Recognition of fee and commission income 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 profit or loss 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 profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are provided. Loan syndication fees are recognized in profit or loss when the syndication has been completed. All other commissions are recognized when services are provided. Financial instruments The Bank recognizes financial assets and liabilities in its statement of financial position when it becomes a party to the contractual obligation of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Financial assets Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL), held-to-maturity investments (HTM), available-for-sale (AFS) financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at FVTPL Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: It has been acquired principally for the purpose of selling it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss incorporates any dividend or interest earned on the financial asset and is included in the net loss on financial assets at fair value through profit or loss line item. Fair value is determined in the manner described in Note

17 Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables are included within other assets as other financial assets. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Securities repurchase In the normal course of business, the Bank enters into financial assets sale and purchase back agreements ( repos ) and financial assets purchase. 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. The Bank enters into securities repurchase which it transfers collateral in accordance with normal market practice. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For all other financial assets, objective evidence of impairment could include: Significant financial difficulty of the issuer or counterparty; or Breach of contract, such as default and delinquency of interest or principal payments; Default or delinquency in interest or principal payments; or It becoming probable that the borrower will enter bankruptcy or financial re-organization; Disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial assets, such as loans to customers and other financial assets, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Bank s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of an allowance account. When a loan or a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. For financial assets measured 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 investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. 15

18 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 and receivables Loans and receivables are written off against allowance for impairment losses when deemed uncollectible, including through repossession of collateral. Loans and receivables are written off after management has exercised all possibilities available to collect amounts due to the Bank and after the Bank has sold all available collateral. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the income statement in the period of recovery. Derecognition of 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 party. 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 recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition 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 of loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. On derecognition of a financial asset other than in its entirety (e.g. when the Bank retains an option to repurchase part of a transferred asset), 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 recognises 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 recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. Financial liabilities and equity instruments issued Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Bank are recognised at the proceeds received, net of direct issue costs. Repurchase of the Bank s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Bank s own equity instruments. 16

19 Other financial liabilities Other financial liabilities, including deposits by banks and customers, debt securities issued by the Bank and subordinated debt, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Bank derecognizes financial liabilities when, and only when, the Bank s obligations are discharged, cancelled or they expire. 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 derecognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit and loss. Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Financial guarantee contracts issued by the Bank are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of: The amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies. Cash and cash equivalents In the statement of cash flows the cash and cash equivalents, include cash on hand, unrestricted balances on correspondent and term deposit accounts with the CBR and amounts due from the credit institutions, which may be converted to cash within a short period of time (less than 90 days). Repossessed assets In certain circumstances, assets are repossessed following the foreclosure on loans that are in default. Repossessed assets are measured at the lower of carrying amount and fair value less costs to sell. Leases Leases are classified as finance leases whenever the contract terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Bank as lessee Assets held under finance leases are initially recognized as assets of the Bank at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized in profit and loss. Contingent rentals are recognized as expenses in the periods in which they are incurred. 17

20 Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Property and equipment Buildings and other real estate held for use in the supply of services, or for administrative purposes, are stated 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 end of each reporting period. Any revaluation increase arising on the revaluation of such buildings is recognized in other comprehensive income and accumulated in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognized in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such land and buildings is recognized in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is recognized in profit or loss. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the properties revaluation reserve is transferred directly to retained earnings. Market value of property is assessed using three methods: The comparable sales method which involves analysis of market sales prices for similar real estate property; The income-based method which assumes a direct relationship between revenues generated by the property and its market value; The costs method which presumes the value of property to be equal to its recoverable amount less any depreciation charges. Freehold land is not depreciated. Office and other equipment and vehicles are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognized so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straightline method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis at the following annual rates: Buildings 2.5% Office and other equipment and vehicles 20% Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. 18

21 Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Such properties are classified to the appropriate categories of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Impairment of tangible assets At the end of each reporting period, the Bank reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current income tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Bank s liability for current tax is calculated using tax rates that have been enacted. Deferred income tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. 19

22 Current and deferred tax for the year Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Operating taxes The Russian Federation also has various other taxes, which are assessed on the Bank s activities. These taxes are included as a component of operating expenses in the income statement. Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Contingencies Contingent liabilities are not recognized in the statement of financial position but are disclosed in the financial statements unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the statement of financial position but disclosed when an inflow of economic benefits is probable. Fiduciary activities The Bank provides trustee services to its customers. The Bank also provides depositary services to its customers which include transactions with securities on their depositary accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Bank s financial statements. The Bank accepts the operational risk on these activities, but the Bank s customers bear the credit and market risks associated with such operations. Revenue for provision of trustee services is recognized as services are provided. Foreign currencies The financial statements are presented in Russian Rubles which is the Bank s functional currency and the currency of presentation. In preparing the financial statements transactions in currencies other than the entity s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. The exchange rates used by the Bank in the preparation of the financial statements as at year-end are as follows: RUB/US Dollar RUB/Euro Collateral The Bank obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the form of a lien over the customer s assets and gives the Bank a claim on these assets for both existing and future customer liabilities. 20

23 Equity reserves The reserves recorded in equity (comprehensive income) on the Bank s statement of financial position include property revaluation reserve, which is used to record effects of the Bank s property revaluations, net of deferred taxes. Critical accounting judgments and key sources of estimation uncertainties In the application of the Bank s accounting policies management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Impairment of loans and receivables The Bank regularly reviews its loans and other financial assets to assess for impairment. The Bank s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans to customers. The Bank considers accounting estimates related to the allowance for impairment of loans to customers as a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Bank s estimated losses and actual losses would require the Bank to record provisions which could have a material impact on its financial statements in future periods. The Bank uses management s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Bank uses management s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. The allowances for impairment of financial assets in the financial statements have been determined on the basis of existing economic and political conditions. The Bank is not in a position to predict what changes in conditions will take place in the Russian Federation and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. As at and the gross loans to customers totaled RUB thousand and RUB thousand respectively and allowance for impairment losses amounted to RUB thousand and RUB thousand, respectively (Note 9). Property and equipment carried at revalued amounts Buildings and real estate are measured at revalued amounts. The date of the latest appraisal was. The next revaluation is preliminary scheduled for The carrying value of revalued property as at and amounted to RUB thousand and RUB thousand respectively (Note 10). The Bank engages independent appraisers to provide fair value assessments of its buildings. 21

24 The assessment of the Bank s property portfolio involves judgment due to specifics of each item of property, its location and expected future rental income from it. As a result, the Bank s assessment of the value of its property portfolio involves some uncertainty, and is based on assumptions that may be inaccurate. Segment reporting The segments are identified on the basis used by the Bank s chief operating decision maker (Chairman of the Management Board) to allocate resources and evaluate performance, in accordance with IFRS 8 Operating Segments. The Chairman of the Board of Directors reviews discrete financial information for each of its segments, including measures of operating results, assets and liabilities. The segments are managed primarily on the basis of their results, which excludes certain unallocated costs related to provision for impairment losses on interest bearing assets, net gain/loss on financial assets at fair value through profit or loss, net gain/loss on foreign exchange operations, fee and commission income, fee and commission expense, other income, operating expenses. Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are ten per cent or more of all the segments are reported separately. The Bank has not reported geographical segments as all operations are performed in Russia. Application of new and revised International Financial Reporting Standards (IFRSs) Amendments to IFRSs affecting amounts reported in the financial statements. In the current year, the following new and revised Standards and Interpretations have been adopted and do not have affected the amounts reported in these financial statements. Annual Improvements to IFRSs Cycle; Annual Improvements to IFRSs Cycle; Annual Improvements to IFRSs Cycle. The Annual Improvements to IFRSs Cycle include a number of amendments to various IFRSs, which are summarized below. The amendments to IFRS 2 change the definition of vesting condition and market condition and add definitions for performance condition and service condition which were previously included within the definition of vesting condition. The amendments to IFRS 3 clarify that contingent consideration that is classified as an asset or liability should be measured at fair value at each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IAS 39 or IFRS 9 or a nonfinancial asset or liability. The amendments to IFRS 8 require an entity to disclose the judgments made by management in applying the aggregation criteria to operating segments and clarify that a reconciliation of the total of the reportable segments assets to the entity s assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker. The amendments to the basis for conclusions of IFRS 13 clarify that the issue of IFRS 13 and consequential amendments to IAS 39 and IFRS 9 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting, if the effect of discounting is immaterial. These amendments are considered to be effective immediately. The amendments to IAS 16 and IAS 38 remove perceived inconsistencies in the accounting for accumulated depreciation/ amortization when an item of property, plant and equipment or an intangible asset is revalued. The amended standards clarify that the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/ amortization is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses. The amendments to IAS 24 clarify that a management entity providing key management personnel services to a reporting entity is a related party of the reporting entity. Consequently, the reporting entity should disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required. 22

25 The management of the Bank does not anticipate that the application of these amendments will have a significant effect on the financial statements. Annual Improvements to IFRSs Cycle. The Annual Improvements to IFRSs Cycle include the following amendments to various IFRSs. The amendments to IFRS 3 clarify that the standard does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself. The amendments to IFRS 13 clarify that the scope of portfolio exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis includes all contracts that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts do not meet the definitions of a financial assets or financial liabilities within IAS 32. The amendments to IAS 40 clarify that IAS 40 and IFRS 3 are not mutually exclusive and application of both standards may be required. Consequently, an entity acquiring investment property must determine whether the property meets the definition of investment property in terms of IAS 40, and whether the transaction meets the definition of a business combination under IFRS 3. The management of the Bank does not anticipate that the application of these amendments will have a significant effect on the financial statements. New and revised IFRSs in issue but not yet effective The Bank has not applied the following new and revised IFRSs that have been issued but are not yet effective: IFRS 9 Financial Instruments 2 ; IFRS 14 Regulatory Deferral Accounts 1 ; IFRS 15 Revenue from Contracts with Customers 2 ; IFRS 16 Leases 3 ; Amendments to IFRS 11 - Accounting for Acquisition of Interests in Joint Operations 1 ; Amendments to IAS 1 Disclosure initiative project 1 ; Amendments to IAS 16 and IAS 38 - Clarification of Acceptable Methods of Depreciation and Amortisation 1 ; Amendments to IAS 16 and IAS 41 - Agriculture: Bearer Plants 1 ; Amendments to IAS 27 - Equity Method in Separate Financial Statements 1 ; Amendments to IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 1 ; Amendments to IAS 12 - Recognition of Deferred Tax Assets for Unrealised Losses 3 ; Amendments to IAS 7 - Disclosure Initiative 3 ; Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception 1 ; Annual Improvements to IFRSs Cycle 1. 1 Effective for annual periods beginning on or after 1 Jabuary 2016, with earlier application permitted. 2 Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. 3 Effective for annual periods beginning on or after 1 January 2017, with earlier application permitted. IFRS 9 Financial Instruments. IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. In July IASB issued a finalised version of IFRS 9 mainly introducing impairment requirements for financial assets and limited amendments to the classification and measurement requirements by introducing a fair value through other comprehensive income (FVTOCI) measurement category for certain simple debt instruments. IFRS 9 is aiming at replacing IAS 39 Financial Instruments: Recognition and Measurement. 23

26 The key requirements of IFRS 9 are: Classification and measurement of financial assets. Financial assets are classified by reference to the business model within which they are held and their contractual cash flow characteristics. Specifically, debt instruments that are held within the business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost after initial recognition. The version of IFRS 9 introduces a fair value through other comprehensive income category for debt instruments held within the business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset giving rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding which are measured at fair value through other comprehensive income after initial recognition. All other debt and equity investments are measured at their fair values. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. Classification and measurement of financial liabilities. Financial liabilities are classified in a similar manner to under IAS 39, however there are differences in the requirements applying to the measurement of an entity s own credit risk. IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability s credit risk are not subsequently reclassified to profit or loss. Impairment. The version of IFRS 9 introduces an expected credit loss model for the measurement of the impairment of financial assets, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before a credit loss is recognized. Hedge accounting. The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an economic relationship. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity s risk management activities have also been introduced. Derecognition. The requirements for the derecognition of financial assets and liabilities are carried forward from IAS 39. The standard is effective from 1 January 2018 with early application permitted. Depending on the chosen approach to applying IFRS 9, the transition can involve one or more than one date of initial application for different requirements. The management of the Bank anticipates that the application of IFRS 9 in the future may have a significant impact on amounts reported in respect of the Bank s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed. IFRS 14 Regulatory Deferral Accounts. IFRS 14 permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for regulatory deferral account balances in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. The application of IFRS 14 will not have any impact on the Bank s financial statements in the future as the Bank is not an IFRS first-time adopter. IFRS 15 Revenue from Contracts with Customers. In May, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. 24

27 The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Specifically, the standard provides a single, principles based five-step model to be applied to all contracts with customers. The five steps in the model are as follows: Identify the contract with the customer; Identify the performance obligations in the contract; Determine the transaction price; Allocate the transaction price to the performance obligations in the contracts; Recognise revenue when (or as) the entity satisfies a performance obligation. Under IFRS 15, an entity recognizes revenue when or as a performance obligation is satisfied, i.e. when control of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added on topics such as the point in which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various related matters. Furthermore, extensive disclosures are required by IFRS 15. The management of the Bank anticipates that the application of IFRS 15 in the future may have a significant impact on amount and timing of revenue recognition. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until a detailed review has been completed. IFRS 16 Leases. IFRS 16 Leases brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained. Under IFRS 16 a lessee recognises a right-of-use asset and the lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease, or if that cannot be readily determined, the lessee shall use their incremental borrowing rate. As with IAS 17, lessors classify leases as operating of finance in nature. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise, a lease is classified as an operating lease. For finance leases a lessor recognises finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the net investment. A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis. The management of the Bank doesn t anticipate that the application of IFRS 16 in the future may have a significant impact on the amount of assets and liabilities due to recognition of all leases for contracts where the Bank can be a lessee. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 16 until a detailed review has been completed Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations. The amendments to IFRS 11 provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined in IFRS 3 Business Combinations. Specifically, the amendments state that the relevant principles on accounting for business combinations in IFRS 3 and other standards (e.g. IAS 12 Income Taxes regarding the recognition of deferred taxes at the time of acquisition and IAS 36 Impairment of Assets regarding impairment testing of a cashgenerating unit to which goodwill on acquisition of a joint operation has been allocated) should be applied. The same requirements should be applied to the formation of a joint operation if and only if an existing business is contributed to the joint operation by one of the parties that participate in the joint operation. The management of the Bank does not anticipate that the application of these amendments will have a material impact of the Bank s financial statements. 25

28 Amendments to IAS 1 Disclosure initiative project The amendments clarify the principles of disclosing information. The definition of materiality is expanded. It specifies the requirements of aggregation and disaggregation of data, clarifies that materiality applies to all parts of financial statements and even in those cases when the standards require specific disclosures materiality criteria do apply. The standard also provides more guidance on presenting the information in the statement of financial position and statement of comprehensive income as well as on the order of the notes in the financial statements. The amendments to IAS 1 are effective for annual periods beginning on or after 1 January The management of the Bank does not anticipate that the application of these amendments will have a significant effect on the financial statements. Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation. The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. This presumption can only be rebutted in the following two limited circumstances: when the intangible asset is expressed as a measure of revenue; or when it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated. The amendments apply prospectively for annual periods beginning on or after 1 January Currently, the Bank uses straight-line method for depreciation and amortization of its property, plant and equipment and intangible assets, respectively. The management of the Bank does not anticipate that the application of these amendments will have a material impact on the Bank s financial statements. Amendments to IAS 27 Equity Method in Separate Financial Statements. The amendments to IAS 27 allows entities to apply the equity method as one of the option for accounting for its investments in subsidiaries, joint ventures and associates in its separate financial statements. The amendments are effective from 1 January 2016 with earlier application permitted. The management of the Bank does not expect any impact of these amendments on the financial statements as the Bank does not prepare its separate financial statements. Amendments to IAS 12 - Income Taxes. Unrealised losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument s holder expects to recover the carrying amount of the debt instrument by sale or by use. The carrying amount of an asset does not limit the estimation of probable future taxable profits. Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences. An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type. The management of the Bank does not anticipate that the application of these amendments will have a material impact on the Bank s financial statements. Amendments to IAS 7 - Statement of Cash Flows clarify that entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The management of the Bank does not anticipate that the application of these amendments will have a material impact on the Bank s financial statements. Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent s profit or loss only to the extent of the unrelated investors interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent s profit or loss only to the extent of the unrelated investors interests in the new associate or joint venture. 26

29 The amendments apply prospectively to transactions occurring in annual periods beginning on or after 1 January 2016 with early application permitted. The management of the Bank does not anticipate that the application of these amendments will have a material impact on the Bank s financial statements. Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception. The amendments to IFRS 10, IFRS 12 and IAS 28 clarify that the exemption from preparing consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity, even if the investment entity measures all its subsidiaries at fair value in accordance with IFRS 10. The amendments also clarify that the requirement for an investment entity to consolidate a subsidiary providing services related to the former s investment activities applies only to subsidiaries that are not investment entities themselves. The management of the Bank does not anticipate that the application of these amendments to IFRS 10, IFRS 12 and IAS 28 will have a material impact on the Bank s financial statements as the Bank is not an investment entity and does not have any holding company, subsidiary, associate or joint venture that qualifies as an investment entity. Annual Improvements to IFRSs Cycle. The Annual Improvements to IFRSs Cycle include the following amendments to various IFRSs. The amendments to IFRS 5 clarify that reclassification of an asset or a disposal group from held for sale to held to distribution to owners or vice versa should not be considered changes to a plan of sale or a plan of distribution to owners and that the classification, presentation and measurement requirements applicable to the new method of disposal should be applied. In addition, amendments clarify that assets that no longer meet the criteria for held for distribution to owners and do not meet the criteria for held for sale should be treated in the same way as assets that cease to be classified as held for sale. The amendments should be applied prospectively. The amendments to IFRS 7 provide additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purposes of the disclosures required in relation to transferred assets. In addition, amendments to IFRS 7 were made to clarify that the disclosure requirements on offsetting financial assets and financial liabilities are not explicitly required to be included in the condensed interim financial statements for all interim periods, however, the disclosures may need to be included in condensed interim financial statements to comply with IAS 34. The amendments should be applied retrospectively. The amendments to IAS 19 clarify that the high quality corporate bonds used to estimate the discount rate for post-employment benefits should be issued in the same currency as the benefits to be paid. The amendments apply from the beginning of the earliest comparative period presented in the financial statements in which the amendments are fist applied. The amendments to IAS 34 clarify that information required by IAS 34 that is provided elsewhere within the interim financial report but outside the interim financial statements should be incorporated by way of a cross-reference from the interim financial statements to the other part of the interim financial report that is available to users on the same terms and at the same time as the interim financial statements. The management of the Bank does not anticipate that the application of these amendments will have a significant effect on the financial statements. 3. RECLASSIFICATIONS Certain reclassifications have been made in the statement of cash flows for the year ended December 31, to conform to the presentation for the year ended as current year presentation provides better view of changes in cash flows of the Bank. Below are the details of adjustments made in the statement of cash flows. As previously reported Reclassification amount As reclassified Interest received Net increase in loans to customers ( ) ( ) ( ) 27

30 4. SEGMENT REPORTING The Bank discloses information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. This matter is regulated by IFRS 8 Operating segments and other standards that require special disclosures in the form of segmental reporting. IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity: That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity); Whose operating results are reviewed regularly by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and For which discrete financial information is available. Information reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance focuses on types of services delivered or provided. The Bank s reportable segments under IFRS 8 are therefore as follows: Corporate banking representing maintenance of current accounts, attracting deposits, overdrafts, loan and other credit facilities, foreign currency transactions for corporate customers. Retail banking banking services, private customer current accounts, savings, deposits, custody, credit and debit cards, consumer loans. The results of reportable segments are reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. The Chairman of the Management Board assesses the performance of the operating segments based on a measure of profit before income tax. The segment information reported to the chief operating decision maker is prepared in accordance with statutory management accounts. Segment information for the reportable segments is set out below: Corporate banking Retail banking Unallocated Year ended Interest income Interest expense ( ) ( ) ( ) ( ) Provision for impairment losses on interest bearing assets - - ( ) ( ) Net loss on financial assets at fair value through profit or loss Net gain on foreign exchange operations Fee and commission income Fee and commission expense - - (96 189) (96 189) Other income OPERATING INCOME ( ) ( ) Operating expenses - - ( ) ( ) PROFIT/(LOSS) BEFORE INCOME TAX ( ) ( ) ( ) Segment assets Segment liabilities ( ) ( ) ( ) ( ) Other segment items Depreciation charge on property and equipment - - (29 896) (29 896) Capital expenditure

31 A reconciliation of segment information to IFRS profit before income tax is set out below: Year ended LOSS BEFORE INCOME TAX UNDER RAS ( ) Adjustments for IFRS impairment provisions Net adjustment for accrued income and expenses ( ) LOSS BEFORE INCOME TAX UNDER IFRS ( ) TOTAL ASSETS UNDER RAS Adjustment for IFRS impairment provisions Other adjustments TOTAL ASSETS UNDER IFRS TOTAL LIABILITIES UNDER RAS ( ) Accrued interest expense (2 882) Deferred tax liabilities Provision for guarantees (66 729) Other adjustments 209 TOTAL LIABILITIES UNDER IFRS ( ) Corporate banking Retail banking Unallocated Year ended Interest income Interest expense ( ) ( ) ( ) ( ) Provision for impairment losses on interest bearing assets - - ( ) ( ) Net loss on financial assets at fair value through profit or loss - - (28 153) (28 153) Net gain on foreign exchange operations Fee and commission income Fee and commission expense - - (87 492) (87 492) Other income OPERATING INCOME ( ) ( ) Operating expenses - - ( ) ( ) PROFIT/(LOSS) BEFORE INCOME TAX ( ) ( ) Segment assets Segment liabilities ( ) ( ) ( ) ( ) Other segment items Depreciation charge on property and equipment - - (25 275) (25 275) Capital expenditure

32 A reconciliation of segment information to IFRS profit before income tax is set out below: Year ended PROFIT BEFORE INCOME TAX UNDER RAS Adjustments for IFRS impairment provisions ( ) Net adjustment for accrued income and expenses PROFIT BEFORE INCOME TAX UNDER IFRS TOTAL ASSETS UNDER RAS Adjustment for IFRS impairment provisions (6 491) Other adjustments TOTAL ASSETS UNDER IFRS TOTAL LIABILITIES UNDER RAS ( ) Accrued interest expense Deferred tax liabilities Provision for guarantees ( ) Other adjustments TOTAL LIABILITIES UNDER IFRS ( ) 5. CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION Cash Correspondent account with the Central Bank of the Russian Federation Total cash and balances with the Central Bank of the Russian Federation Cash and cash equivalents for the purposes of the statement of cash flows comprise: Cash and correspondent account with the Central Bank of the Russian Federation Correspondent accounts (Note 8) Total cash and cash equivalents MINIMUM RESERVE DEPOSITS WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION As at the Bank maintained mandatory balances of RUB thousand with the CBR ( : RUB thousand). The Bank is obliged to maintain minimum reserve deposits with the CBR at all times. 30

33 7. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets at fair value through profit or loss include financial assets held for trading and comprise: Ruble denominated debt securities Average contract rate Fair value Average contract rate Fair value JSC VTB bank bonds % JSC «Rosselkhozbank» bonds % Bonds of the Ministry of Finance of RF % JCV «FGC UES» bonds % JSCB «UniCredit Bank» bonds % JSC «Gazprom neft» % JSC «Tatfondbank» bonds % JSCB «NOVIKOMBANK» bonds % JSCB «ROSBANK» bonds % JSCB «RUSSLAVBANK» bonds Total financial assets at fair value through profit or loss As at financial assets at fair value through profit or loss corporate bonds, bonds of the Ministry of Finance of RF of RUR thousand, were pledged under repurchase agreements with the CBR (Note 12). 8. DUE FROM BANKS Due from banks comprise: Correspondent accounts with banks Time deposits Promissory notes Total due from banks As at and as at the Bank didn t have balances due from banks (including correspondent accounts) which individually exceeded 10% of the Bank s equity. As at included in due from banks were RUB thousand (30% of total due to banks) (as at : RUB thousand, 7% respectively) that were placed with the Parent (Note 23). 9. LOANS TO CUSTOMERS The Bank uses the following classification of loans by classes: Loans to legal entities: Medium-sized enterprises loans. Loans to individuals: Consumer loans. 31

34 Loans to customers comprise: Loans to legal entities Medium-sized enterprises Loans to individuals Consumer loans Gross loans to customers Less: allowance for impairment losses ( ) ( ) Total loans to customers As at the Bank granted loans to 8 borrowers totaling RUB thousand (24% of total loans to customers) ( : 6 borrowers totaling RUB thousand, 29% of total loans to customers ), which individually exceeded 10% of the Bank s equity. As at 50% of total loans to customers ( : 49%) is granted to companies operating in the RF, which represents a significant geographical concentration in one region. As at loans to customers included loans totaling RUB thousand and RUB thousand ( : RUB thousand and RUB thousand respectively) that were secured by IBA guarantees and guarantee deposits, respectively (Notes 12, 23). The table below summarizes an analysis of loans to customers by impairment: Carrying value before allowance Allowance Allowance for Carrying for impairment Carrying value before impairment losses value allowance losses Carrying value Loans to customers individually determined to be impaired ( ) ( ) Loans to customers collectively determined to be impaired ( ) ( ) Unimpaired loans Total ( ) ( ) As at loans to customers included loans totaling RUB thousand ( : RUB thousand), which terms were renegotiated. Otherwise these loans would be past due or impaired. 32

35 Analysis by credit quality of loans to medium-sized enterprises outstanding at 31 December was as follows: Medium-sized enterprises As at Gross loans Provision for impairment Net loans Provision for impairment to gross loans Unimpaired loans Collectively assessed Not past due ( ) % Overdue: up to 30 days (85 743) % 31 to 60 days (30 775) % 61 to 90 days (3 523) % 91 to 180 days (8 859) % over 180 days (34 117) % Total collectively assessed loans ( ) % Individually assessed Not past due ( ) % Overdue: up to 30 days ( ) % 31 to 60 days (81 161) % 61 to 90 days to 180 days over 180 days ( ) % Total individually assessed loans ( ) % Total medium-sized enterprises ( ) % Analysis by credit quality of loans to medium-sized enterprises outstanding at 31 December was as follows: Medium-sized enterprises As at Gross loans Provision for impairment Net loans Provision for impairment to gross loans Unimpaired loans Collectively assessed Not past due ( ) % Overdue: up to 30 days (1 017) % 31 to 60 days (235) % 61 to 90 days to 180 days 167 (5) % over 180 days (12 342) % Total collectively assessed loans ( ) % Individually assessed Not past due ( ) % Overdue: up to 30 days to 60 days to 90 days to 180 days over 180 days ( ) % Total individually assessed loans ( ) % Total medium-sized enterprises ( ) % 33

36 Analysis of consumer loans by days overdue as at 31 December is presented as follows: Consumer loans As at Gross loans Provision for impairment Net loans Provision for impairment to gross loans Unimpaired loans Collectively assessed Not past due ( ) % Overdue: up to 30 days (32 125) ,3% 31 to 60 days (62 748) % 61 to 90 days (19 984) % 91 to 180 days (95 922) % over 180 days (70 875) % Total collectively assessed loans ( ) % Individually assessed Not past due (60 019) % Overdue: up to 30 days (17 623) % 31 to 60 days (4 964) % 61 to 90 days to 180 days over 180 days ( ) % Total individually assessed loans ( ) % Total consumer loans ( ) % Analysis of consumer loans by days overdue as at 31 December is presented as follows: Consumer loans As at Gross loans Provision for impairment Net loans Provision for impairment to gross loans Collectively assessed Not past due (7 463) % Overdue: up to 30 days (1 294) % 31 to 60 days (2 570) % 61 to 90 days (933) % 91 to 180 days (5 196) % over 180 days ( ) % Total collectively assessed loans ( ) % Individually assessed Not past due Overdue: up to 30 days to 60 days to 90 days to 180 days over 180 days (19 890) % Total individually assessed loans (19 890) % Total consumer loans ( ) % 34

37 The analysis of changes for loan impairment is presented in the table below: Medium-sized enterprises Consumer loans Total As at January 1, ( ) ( ) ( ) Provision charge ( ) (18 719) ( ) Foreign currency revaluation effect ( ) - ( ) Bad debt written-off As at ( ) ( ) ( ) Provision charge (65 494) ( ) ( ) Foreign currency revaluation effect ( ) (76 894) ( ) Bad debt written-off As at ( ) ( ) ( ) The table below summarizes carrying value of loans to customers analyzed by type of collateral obtained by the Bank: Loans collateralized by IBA guarantees (Note 23) Loans collateralized by IBA guarantee deposits (Notes 12, 23) Loans collateralized by other assets Loans collateralized by pledge of real estate Loans collateralized by pledge of equipment Unsecured loans Less: allowance for impairment losses ( ) ( ) Total loans to customers As at loans totaling RUB thousand ( : RUB thousand), that were individually determined to be impaired were collateralized by real estate, equipment, inventories, promissory notes and secured by guarantees totaling RUB thousand ( : RUB thousand). The table below summarizes carrying value of loans to customers analyzed by type of economic sectors: Analysis by sector: Trade Services Individuals Real estate Manufacturing Construction Finance lease Other Less: allowance for impairment losses ( ) ( ) Total loans to customers

38 10. PROPERTY AND EQUIPMENT Property and equipment comprise: Buildings Office and other equipment and vehicles Leasehold improvements Total At historical/revalued cost Additions Revaluation Disposals - (6 990) (2 565) (9 555) Additions Revaluation (19 465) - - (19 465) Disposals - (3 465) (2 363) (5 828) Accumulated depreciation 2013 (68 538) (90 845) (4 532) ( ) Depreciation charge (14 534) (18 583) (975) (34 092) Eliminated on disposals (83 072) ( ) (3 470) ( ) Depreciation charge (14 158) (18 817) (1 616) (34 591) Eliminated on disposals (97 230) ( ) (3 546) ( ) Net book value As at included in property and equipment were fully depreciated assets totaling RUR thousand ( : RUR thousand). In 2013 the Bank entered into a 3-year finance lease agreement as a lessee for a vehicle with initial cost of RUR thousand. The vehicle is pledged as collateral for the finance lease obligation (Note 15). As at the Bank s buildings are recognized at revalued amounts. Revaluation was performed by an independent appraiser as at and was based on the observable prices for similar properties in the market. Revalued amounts of these buildings as at totaled RUB thousand ( : RUB thousand). If the buildings were recorded at historical cost less accumulated depreciation, their carrying value as at December 31, would be RUB thousand ( : RUB thousand). The fair value of the buildings was determined based on the market comparable approach that reflects recent transaction prices for similar properties. There has been no change to the valuation technique during the year. 36

39 Details of the Bank s buildings and information about the fair value hierarchy as at 31 December are as follows: Level 1 Level 2 Level 3 Fair value as at Buildings in following region: -Moscow Saint-Petersburg Yekaterinburg Total Level 1 Level 2 Level 3 Fair value as at Buildings in following region: -Moscow Saint-Petersburg Yekaterinburg Total There were no transfers between Levels 1 and 2 during the year. 11. OTHER ASSETS Other assets comprise: Other financial assets Receivables on penalties Receivables on commissions Receivables on other transactions Less: allowance for impairment losses (70 803) Other non-financial assets Prepaid expenses Prepayments Intangible assets Tax settlements, other than income tax Other Total other assets The movements in allowance for impairment losses on other assets were as follows: - Provisions (70 803) (70 803) 37

40 12. DUE TO BANKS Due to banks comprise: Loans from banks and other financial institutions Correspondent accounts of other banks Loans under repurchase agreements Total due to banks Fair value of assets pledged and carrying value of loans under repurchase agreements as at comprise: Fair value of Carrying value collateral of loans Carrying value of loans Fair value of collateral Corporate bonds Bonds of the Ministry of Finance of the RF Total All the agreements that were outstanding at were settled by the parties before January 14,. As at included in due to banks were RUB thousand (90 % of total due to banks) ( : RUB thousand, 38% respectively) that were due to IBA, which represents a significant concentration (Note 23). 38

41 Creditor Contract amount (in thousands of contract currency) Contract currency Rate, % Issue date Maturity date in thousands of contract currency In thousands of RUB in thousands of contract currency In thousands of RUB IBA USD 0.10% October December September November January July January April IBA EUR 0.10% JSC Russian Agricultural Bank RUR 14.75% February February OJSC Bank ZENIT RUR 11.25% December January Banque Pictet & Cie SA USD 3.25% October April Rietumu Banka RUR 12.00% December January Bayerische Landesbank 197 EUR 4,00% March 2011 January Syndicated loan by JSCB "NOVIKOMBANK" USD 4.50% October October Syndicated loan by JSCB "NOVIKOMBANK" USD 4.50% November November PC «Sviaz-Bank» USD 4.50% July July PC «MDM Bank» EUR 8.50% December June PC «Sberbank of Russia» USD 5.50% October September SME Bank JSC RUR 18.00% December January PC «Sberbank of Russia» EUR 5.20% October September RUSSLAVBANK JSC RUR 30.00% December January Eximbank of Russia RUR 28.00% December January PC «MDM Bank» RUR 23.00% December January COMMERZBANK USD 3.80% November June Banque Pictet & Cie SA 500 EUR 4.50% September March Raiffeisen Zentralbank Österreich AG 415 EUR 5.00% August June JCB "Baltic International Bank" 300 USD 4.00% August February Raiffeisen Zentralbank Österreich AG 138 EUR 5.10% July June Total

42 IBA lowered rates from 4.25% to 0.10% for all financial resources from November 15,. There are a number of financial and non-financial covenants on funds from banks under the terms of the contracts such as the observance of compulsory requirements of the Bank of Russia, a positive financial result on the reporting dates and reporting deadlines under the terms of the contracts. The Bank has breached one covenant - a positive financial result as at but in February 2016 the loan from JSC Russian Agricultural Bank for the amount of RUB thousand which contained covenants was repaid at maturity date. The Bank has not breached these covenants as at. Certain deposits received from IBA totaling RUB thousand ( : RUB thousand) were pledged against loans issued by the Bank (Note 9). 13. CUSTOMER ACCOUNTS Customer accounts comprise: Time deposits Current accounts Total customer accounts As at the Bank had 3 customers ( : 6) with balances exceeding 10% of the Bank s equity. As at these customer balances totaled RUB thousand, which represents 17% of the total customer accounts ( : RUB thousand, 32%). Analysis by economic sector/customer type: Individuals Construction and real estate Trade Manufacturing Insurance Services Transport and communication Mass media Other Total customer accounts DEBT SECURITIES ISSUED Debt securities issued comprise: Maturity date month/year Annual coupon/ interest rate % Promissory notes February May % Certificates of deposit June % Rouble-denominated bonds June % Total debt securities issued In June and in December the Bank repaid in part Series 1 of the Ruble-denominated bonds for the amount of RUB thousand and RUB thousand respectively. 40

43 15. OTHER LIABILITIES Other liabilities comprise: Other financial liabilities: Provision for guarantees Settlements on other operations Payable to employees on unused vacations Net payables under finance lease Total other liabilities The movements in other provisions were as follows: Guarantees January 1, ( ) Provisions ( ) ( ) Recoveries of provisions (66 729) The components of net payables under finance lease as at and comprise: Not later than one year Later than one year not later than five years - - Total minimum lease payments Less: deferred finance expenses Net payables under finance lease Current portion Long-term portion - - Net payables under finance lease The finance lease obligation is secured by the vehicle with an initial cost of RUB thousand (Note 10). 16. SUBORDINATED DEBT Subordinated debt received from IBA comprises: Currency Maturity date Effective Interest rate % USD September % USD July % USD March % USD September % USD March % USD October % EUR September % USD April % USD February % Total

44 IBA lowered rates from 9.0% to 0.1% for all financial resources including subordinated debt received from IBA from November 15,. In accordance with the Subordinated Debt Agreements, in the event of bankruptcy or liquidation of the Bank, repayment of these debts is subordinate to the repayments of the Bank s liabilities to all other creditors. For the purposes of RAS capital adequacy calculations, the carrying amount of subordinated debt is included in the amount of additional capital (Note 25). 17. EQUITY The Bank has the legal form of a limited liability company with a sole participant, IBA (Note 1). In accordance with the Russian legislation, participants in limited liability companies may unilaterally withdraw from the company. In such cases the company will be obliged to pay to the withdrawing participant the value of his share of net assets of the company, determined on the basis of statutory financial statements for the year of withdrawal, in cash or, subject to consent of the participant, by an in-kind transfer of assets. The payment should be made no later than six months after the end of the year of the withdrawal. In accordance with the Bank s Charter its participants can sell or otherwise transfer their shares (or part thereof) to third parties without consent of other participants. According to the Charter the sole participant is not allowed to withdraw its share from the capital of the Bank. On September 25, IBA made a contribution to charter capital of RUB thousand. As at and the balance of additional capital of RUB 46,272 thousand, represents the net exchange difference resulting from the capital contributions made in a foreign currency (AZN). 18. NET INTEREST INCOME Year ended Year ended Interest income comprises: Interest income on financial assets recorded at amortized cost, including: - interest income on unimpaired loans interest income on impaired loans Interest income on financial assets at fair value through profit and loss, including: - interest income on financial assets at fair value through profit and loss (trading securities) Total interest income Interest income on financial assets recorded at amortized cost comprises: Interest on loans to customers Interest on due from banks Total interest income on financial assets recorded at amortized cost Interest expense on financial liabilities recorded at amortized cost comprises: Interest on due to banks ( ) ( ) Interest on customer accounts ( ) ( ) Interest on subordinated debt ( ) ( ) Debt securities issued (15 335) ( ) Total interest expense on financial liabilities recorded at amortized cost ( ) ( ) Net interest income before impairment losses on interest bearing financial assets

45 19. FEE AND COMMISSION INCOME AND EXPENSE Fee and commission income and expense comprise: Year ended Year ended Fee and commission income: Settlements Plastic cards Cash operations Agency fee on operations with securities Other Total fee and commission income Fee and commission expense: Plastic cards (31 098) (33 474) Settlements (10 285) (13 719) Other (946) (2 119) Total fee and commission expense (42 329) (49 312) 20. OPERATING EXPENSES Operating expenses comprise: Year ended Year ended Staff costs ( ) ( ) Unified social tax (82 329) (80 014) Operating leases (80 298) (61 499) Professional services (70 055) (70 972) Insurance (56 646) (42 364) Depreciation (34 591) (34 092) Taxes, other than income tax (33 049) (52 535) Security services (30 501) (39 630) Property and equipment maintenance (26 855) (49 162) Telecommunications (15 648) (10 669) Advertising (5 926) (9 099) Business trips (4 116) (6 862) Charity (99) (99) Other (41 872) (47 680) Total operating expenses ( ) ( ) 21. INCOME TAXES The Bank provides for income taxes based on statutory tax accounts maintained and prepared in accordance with the tax regulations of the RF, which may differ from IFRS. The Bank is subject to certain permanent tax differences due to the non-tax deductibility of certain expenses. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at and relate mostly to different methods of income and expense recognition as well as to carrying values of certain assets and liabilities. The tax rate used for the reconcilations below is the corporate tax rate of 20% payable by corporate entities in the Russian Federation on taxable profits (as defined) under the tax law in that jurisdiction. Temporary differences as at and mainly relate to difference in methods/timing of recognition of income and expenses, and temporary differences due to difference in tax and accounting base of some assets. 43

46 Tax effect of temporary differences as at and comprise: Deferred tax assets/(liabilities) in relation to: Loans to customers Other assets (4 304) Property and equipment (82 735) (94 458) Subordinated debt 3 (77 559) Other liabilities Net deferred tax assets Deferred tax assets not recognized - (9 384) Net deferred tax assets The effective tax rate reconciliation is as follows for the years ended and : Year ended Year ended (Loss)/profit before income tax ( ) Tax at the statutory tax rate (20%) (1 635) Tax effect of permanent differences: Interest accrual ( ) (14 915) Change in deferred tax assets not recognized (9 384) Income tax expense (8 271) (7 166) Current income tax expense (52 120) ( ) Deferred tax benefit Income tax expense (8 271) (7 166) Deferred income tax assets/(liabilities) As at January 1 deferred tax assets/(liabilities) ( ) Changes in deferred income tax balances recognized in other comprehensive income (4 837) Change in deferred income tax balances recognized in profit or loss As at December 31 deferred tax assets Income tax effects related to comprehensive income: Amount before tax Tax Amount after tax Amount before tax Tax Amount after tax Property revaluation (19 465) (15 572) (4 837)

47 22. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank becomes a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the statement of financial position. The Bank uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations. As at provision for losses on contingent liabilities amounted to RUB thousand ( : RUB thousand). As at and contingent liabilities comprise: Credit commitments Guarantees issued and similar commitments Letters of credit and other transaction related contingent obligations Less provision for impairment (66 729) ( ) Total credit commitments Extension of loans to customers within credit line limits is approved by the Bank on a case-by-case basis and depends on the borrowers financial performance, debt service and other conditions. As at such unused credit lines amounted to RUB thousand ( : RUB thousand). Legal proceedings during the Bank did not have any claims from its customers and counterparties and accordingly no provisions were formed in its financial statements. Taxation Commercial legislation of the RF and countries where the Bank operates, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management s judgment of the Bank s business activities, was to be challenged by the tax authorities, the Bank could be assessed additional taxes, penalties and interest. Such uncertainty may relate to the valuation of financial instruments, provision for impairment losses and the market pricing of deals. Additionally such uncertainty may relate to the valuation of temporary differences on the provision and recovery of the provision for impairment losses on loans to customers and other financial assets, as an underestimation of the taxable profit. The management of the Bank believes that it has accrued all tax amounts due and therefore no allowance has been made in the financial statements. Generally, taxpayers are subject to tax audits with respect to the three calendar years preceding the year of the audit. However, completed audits do not exclude the possibility of subsequent additional tax audits performed by upper-level tax inspectorates reviewing the results of tax audits of their subordinate tax inspectorates. Also according to the clarification of the RF Constitutional Court the statute of limitation for tax liabilities may be extended beyond the three year term set forth in the tax legislation, if a court determines that the taxpayers has obstructed or hindered a tax inspection. In, amendments were introduced into the Russian tax legislation in respect of taxation of profit of controlled foreign companies. The Bank doesn t control any foreign company. Russian transfer pricing legislation was amended starting from January 1, 2012 to introduce additional reporting and documentation requirements. The new legislation allows the tax authorities to impose additional tax liabilities in respect of certain transactions, including but not limited to transactions with related parties, if they consider transaction to be priced not at arm s length. As the practice of implementation of the new transfer pricing rules has not yet developed and wording of some clauses of the rules is unclear, the impact of challenge of the Bank s transfer pricing positions by the tax authorities cannot be reliably estimated. 45

48 Economic situation The Bank s principal business activities are within the RF. Laws and regulations affecting the business environment in the RF are subject to rapid changes and the Bank s assets and operations could be at risk due to negative changes in the political and business environment. Operating Environment Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Russia continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Because Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market. During - and then in the first quarter of 2016, the oil price decreased significantly, which led to substantial decrease of the Russian Ruble exchange rate. In the first quarter of two international credit agencies downgraded Russia s long-term foreign currency sovereign rating to the speculative level with the negative outlook. The above mentioned events have led to reduced access of the Russian businesses to international capital markets, increased inflation, economic recession and other negative economic consequences. The impact of further economic developments on future operations and financial position of the Bank is at this stage difficult to determine. 23. TRANSACTIONS WITH RELATED PARTIES Details of transactions between the Bank and its related parties are disclosed below: Related party transactions Total Related party transactions Total category as per the financial category as per the financial IBA IBA- Georgia Management Board statements caption IBA IBA- Georgia Management Board statements caption Due from banks Loans to customers, gross Allowance for impairment of loans to customers - - (1 282) ( ) - - (1 905) ( ) Due to banks Customer accounts Subordinated debt Guarantees received* *Guarantees received represent guarantees received from IBA as a pledge against loans issued by the Bank to third parties (Note 9). The remuneration of the Bank s management was as follows: Year ended Year ended Total category as per the financial Total category as per the financial Related party transactions statements caption Related party transactions statements caption Key management personnel compensation: Short-term employee benefits (17 707) ( ) (26 021) ( ) Total (17 707) ( ) (26 021) ( ) 46

49 Included in the income statement for the years ended and are the following amounts which arose due to transactions with related parties: Year ended Year ended Related party transactions Total Related party transactions Total IBA IBA- Georgia Management Board category as per the financial statements caption IBA IBA- Georgia Management Board category as per the financial statements caption Interest income Interest expense ( ) - (2 600) ( ) ( ) - (1 103) ( ) Impairment recovery/(losses) on interest bearing assets ( ) - - (134) ( ) Fee and commission income Fee and commission expense (42 329) (451) (116) - (49 312) Operating expenses (9 302) - (17 707) ( ) (8 623) - (26 021) ( ) 24. FAIR VALUE OF FINANCIAL INSTRUMENTS IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 1. Fair value of the Bank s financial assets and financial liabilities measured at fair value on a recurring basis. Some of the Bank s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique(s) and inputs used). Non-derivative financial assets at fair value through profit or loss are classified as Level 1 instruments as the technique of quoted prices in an active market is used for valuation. 2. Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required). Except as detailed in the following table, the Bank considers that the carrying amounts of financial assets and financial liabilities recognised in the financial statements approximate their fair values. Net carrying Net carrying amount Fair value amount Fair value Financial assets Cash and balances with the Central Bank of the Russian Federation Minimum reserve deposit with the Central Bank of the Russian Federation Financial assets at fair value through profit or loss Due from banks Loans to customers Other financial assets Financial liabilities Due to banks Customer accounts Debt securities issued by the Bank Subordinated debt Other financial liabilities

50 The fair values of financial assets and financial liabilities are determined as follows. The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices. The fair values of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments. The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Statement of financial position Category Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash and balances with the Central Bank of the Russian Federation Minimum reserve deposit with the Central Bank of the Russian Federation Financial assets at fair value through profit or loss Due from banks Loans to customers Other financial assets Due to banks Customer accounts Debt securities issued by the Bank Subordinated debt Other financial liabilities The fair values of the financial assets and financial liabilities included in level 2 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties 25. CAPITAL RISK MANAGEMENT The Bank manages its capital to ensure that the Bank will be able to: (i) comply with capital requirements established by the CBR; (ii) ensure that the Bank continues as a going concern. The Bank manages capital to continue as a going concern while maximizing the return by optimizing debt and equity structure. The adequacy of the Bank s capital is monitored using, among other measures, the ratios established by the CBR in supervising the Bank. During the past year, the Bank had complied in full with all its externally imposed capital requirements. Compliance with the minimum capital adequacy ratios set by the CBR is monitored on a daily and monthly basis and reports are prepared, which contain the relevant calculations checked and signed by the Chairman of the Management Board and the Chief Accountant of the Bank. The capital structure of the Bank consists of subordinated debt disclosed in Note 16 and the Bank s equity comprising charter capital, reserves and retained earnings as disclosed in the statement of changes in equity. 48

51 The Bank s overall capital risk management policy remains unchanged from. The following table analyzes the Bank s regulatory capital resources for capital adequacy purposes in accordance with the requirements of the Russian legislation: Composition of regulatory capital: Tier 1 capital: Year ended Year ended Charter capital Share premium Reserve fund Retained earnings and net income for the year Total qualifying tier 1 capital Additional capital Total equity Less: intangible assets (388) (339) Total regulatory capital Capital ratio (N1 ratio): 17.2% 15.3% Quantitative measures established by the capital adequacy regulation require the Bank to maintain minimum amounts and ratios of total capital (10%) to total risk weighted assets. 26. RISK MANAGEMENT POLICIES Management of risk is fundamental to the Bank s banking business and is an essential element of the Bank s operations. The main risks inherent to the Bank s operations are those related to: Credit risk; Liquidity risk; Market risk; Operational risk. The Bank recognizes that it is essential to have efficient and effective risk management processes in place. To enable this, the Bank has established a risk management framework, whose main purpose is to protect the Bank from risk and allow it to achieve its performance objectives. The risk management function is an integral part of the Bank s centralized internal control system. The Bank s risk management policies and approach aim to identify, mitigate and manage risks faced by the Bank. This is accomplished through setting appropriate risk limits and controls, continuous monitoring of risk levels and adherence to limits and procedures, and ensuring that business processes are correctly formulated and maintained. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and ensure that best practices are implemented. The Bank, as part of its risk management culture, emphasizes integrity, standards of professional behaviour and management in order to maintain and continuously improve a conservative control model. Risk management policy, assessment, approval, monitoring and control are conducted by specialized business units of the Bank which also monitor compliance with risk management policies. The Bank has established executive bodies, committees and departments in accordance with the Russian legislation and the best industry practices. The Management Board of the Bank is subordinated to the IBA General Meeting. The Bank s authorized working groups include the Asset and Liability Committee (ALCO), Risk Management Committee (RMC), Strategy Committee and the Credit Committee. The members of the committees are appointed by and report to the Management Board. 49

52 The Risk Management Committee is chaired by a Member of the Management Board, Deputy Chairman of the Management Board. The Committee is responsible for the development of risk management methodologies and ensuring that the risk appetite of the Bank is correctly reflected in strategic and business plans of the Bank. It is the main forum for discussing changes and recommendations with regard to risk management approaches and procedures to be submitted to the Management and Supervisory Boards. Therefore, the Risk Management Committee, Credit Committee and ALCO, as well as the Management Board, address all potential risks facing the Bank and report on these issues to the Supervisory Board. The Credit Committee consists of five members elected by the Supervisory Board. The Credit Committee manages and approves, or recommends for approval, corporate, retail and financial organizations counterparty credit risk exposures within its credit approval authority. It also continuously reviews and makes recommendations as to credit risk methodology and portfolio quality, including overall structure, diversification and pricing. The Credit Committee is one of the bodies, which ensures approval of limits of authority and compliance of the Bank with high quality standards for risk analysis and assessment. ALCO is responsible for the management and optimization of the Bank s asset and liability structure. It is an integral part of the risk management process that focuses on market risks, including liquidity, foreign currency and interest rate risks. ALCO s functions include making recommendations on strategies, policies and limits associated with the aforementioned risks. The Committee is also responsible for the provision of up-to-date and reliable information and reports regarding the above risks. ALCO assists in setting pricing policies and funding strategies. The Committee is also responsible, along with other risk management and controlling units of the Bank, for ensuring that the Treasury Department and other relevant units comply with the parameters set by ALCO, Risk Management Committee, Management Board and the Supervisory Board. The Internal Audit Department reports directly to the Supervisory Board. The Internal Audit Department s working plans, schedule of audits and its reports, including unplanned audits, are closely reviewed and approved by the Supervisory Board. Credit risk The Bank is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Risk management and monitoring are performed within set limits of authority by the Credit Committee and the Management Board of the Bank. Daily risk management is performed by the Head of the Division of Credit and Guarantee Transactions. The Bank controls credit risk by setting limits on a borrower or on a group of related borrowers. Such risks are monitored on a regular basis and are revised at least once a year. The Bank s Credit Committee, the Committee on Bank Cards and Small Credit Committee considers and set the following credit limits for borrowers within its competence. The Credit Committee considers and approves limits of up RUB thousand. The Credit Committee on Bank Cards considers and approves credit limits for amounts below RUB thousand. The Small Credit Committee considers and approves limits for amounts below RUB thousand. The Committee meets on a regular basis. It is also responsible for issuing guidance to lower level credit committees. The Management Board takes decisions with regard to credit risk on loan applications of upwards of RUB thousand. The Supervisory takes decisions to credit risk on loan applications over RUB thousand. Loan applications originated by the relevant client relationship managers are passed on to the Credit Committee for the approval of details of deal and credit limits. In the case of most loans, the Bank obtains collateral and guarantees and guarantee deposits of the participant, as well as corporate and personal guarantees. However, certain loans are not secured and such risks are monitored on a continuous basis and analyzed not less than once per 3 months. 50

53 Commitments to extend credit represent unused portions of credit in the form of loans, guarantees or letters of credit. The credit risk on off-balance sheet financial instruments is defined as a probability of losses due to the inability of a counterparty to comply with the contractual terms and conditions. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of the loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank applies the same credit policy to the contingent liabilities as it does to the balance sheet financial instruments, i.e. the policy based on the procedures for approving loan issuance, limits to mitigate credit risks, and current monitoring. The Bank monitors the term to maturity of off balance sheet contingencies because longer term commitments generally have a greater degree of credit risk than short-term commitments. In order to monitor credit risk exposures, regular reports are produced by officers of the Division of Credit and Guarantee Transactions based on a structured analysis of the client s business and financial performance. Any significant exposures against clients with deteriorating creditworthiness are reported to and reviewed by the Management Board. The Bank uses formalized internal credit ratings to monitor exposures to credit risk. The Division of Credit and Guarantee Transactions performs an ageing analysis of loans and follows up past due issues. All information about passt due issues reported to the Credit Committee monthly. All corporate and large retail loan past-due issues are individually reported to the Credit Committee. With collateral is an important mitigating factor in assessing the credit risk, it is the Bank s policy to establish that loans are within the client s capacity to repay rather than to rely solely on security. Collateral is considered as a secondary source of repayment. The Bank has in place various limits on unsecured loans of its portfolio. Maximum credit risk exposure The Bank s maximum exposure to credit risk varies significantly and is dependent on both individual risks and general market conjuncture. The following table presents the maximum exposure to credit risk on balance sheet and off-balance sheet financial assets. For balance sheet financial assets, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral. The Bank s maximum exposure to credit risk under contingent liabilities and commitments to extend credit, in the event of nonperformance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments. Maximum exposure Collateral pledged * Net exposure Balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Due from banks Loans to customers Other financial assets Guarantees issued and similar commitments Letters of credit and other transaction related contingent obligations Balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Financial assets at fair value through profit or loss Due from banks Loans to customers Other financial assets Guarantees issued and similar commitments Letters of credit and other transaction related contingent obligations (*) The value of collateral pledged is determined on the basis of the carrying amount of loans for which it is provided. 51

54 Off-balance sheet risk The Bank applies fundamentally the same risk management policies for off-balance sheet risks as it does for its on-balance sheet risks. In the case of commitments to lend, customers and counterparties will be subject to the same credit management policies as for loans and advances. Collateral may be sought depending on the strength of the counterparty and the nature of the transaction. Geographical concentration ALCO exercises control over the legislative risk and assesses its influence on the Bank s activity. This approach allows the Bank to minimize potential losses from the RF investment climate worsening. The geographical concentration of assets and liabilities is set out below: RF Other non-oecd countries OECD countries Total NON-DERIVATIVE FINANCIAL ASSETS Cash and balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Due from banks Loans to customers Other financial assets TOTAL NON-DERIVATIVE FINANCIAL ASSETS NON-DERIVATIVE FINANCIAL LIABILITIES Due to banks Customer accounts Debt securities issued by the Bank Subordinated debt Other financial liabilities TOTAL NON-DERIVATIVE FINANCIAL LIABILITIES NET POSITION ON NON-DERIVATIVE FINANCIAL INSTRUMENTS ( )

55 RF Other non-oecd countries OECD countries Total NON-DERIVATIVE FINANCIAL ASSETS Cash and balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Financial assets at fair value through profit or loss Due from banks Loans to customers Other financial assets TOTAL NON-DERIVATIVE FINANCIAL ASSETS NON-DERIVATIVE FINANCIAL LIABILITIES Due to banks Customer accounts Debt securities issued by the Bank Subordinated debt Other financial liabilities TOTAL NON-DERIVATIVE FINANCIAL LIABILITIES NET POSITION ON NON-DERIVATIVE FINANCIAL INSTRUMENTS ( ) ( ) Collateral The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: For commercial lending, charges over real estate properties, moveable properties, machinery and equipment and deposits and guarantees of the Parent bank; For retail lending, mortgages over residential properties, motor vehicles, corporate and personal guarantee. Management monitors market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The following table details credit quality of financial assets: Financial asset class as at Neither past due nor individually impaired Past due Total High Standard Substandar but not Individually Impairment carrying quality quality d quality impaired impaired allowance value Cash and balances with the CBR Minimum reserve deposits with the CBR Due from banks Loans to customers ( ) Other financial assets ( )

56 Financial asset class as at Neither past due nor individually impaired Past due Total High Standard Substandar but not Individually Impairment carrying quality quality d quality impaired impaired allowance value Cash and balances with the CBR Minimum reserve deposits with the CBR Financial assets at fair value through profit or loss Due from banks Loans to customers ( ) Other financial assets ( ) High quality financial assets pertain to the financial assets where the borrower s (counterparty s) financial position and debt service are assessed as excellent; Standard quality financial assets pertain to the financial assets where the borrower s (counterparty s) financial position and debt service are assessed as good/adequate; Substandard financial assets pertain to the financial assets where the borrower s (counterparty s) financial position and debt service are assessed as average/poor or where the counterparties are not rated by international rating agencies. Renegotiated loans and advances Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Bank offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be individually impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. In other cases, renegotiation will lead to a new agreement, which is treated as a new loan. Carrying amount by class of financial assets whose terms have been renegotiated which otherwise would be past due or impaired: The table below shows the carrying amount of renegotiated financial assets, by class: Financial asset class December, 31 December, 31 Loans to customers: loans to legal entities loans to individuals Liquidity Risk Liquidity risk management Liquidity risk refers to the availability of sufficient funds to meet cash withdrawals and other financial commitments associated with financial instruments as they actually fall due. The Bank s liquidity management issues are the responsibility of ALCO which controls liquidity risk by means of maturity analysis, determining the Bank s strategy for the next financial period. Current liquidity is managed by the Treasury Department, which deals in the money markets for current liquidity support and cash flow optimization. Liquidity risk is managed by the Bank s Risk Management Committee. In order to manage liquidity risk, the Bank performs daily monitoring of future expected cash flows on clients and banking operations, which is a part of assets/liabilities management process. In the process of assets and liabilities management, ALCO sets optimal ratio between the Bank s assets and liabilities to cover deposit withdrawals at unexpected levels of demand. 54

57 The Bank seeks to maintain a stable funding base comprising primarily amounts due to other banks, individual deposits and invest the funds in diversified portfolios of liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The Treasury Department then provides for an adequate portfolio of short-term liquid assets, largely made up of deposits with banks and other inter-bank facilities. An analysis of the liquidity and interest rate risks is presented in the following table. The table below is based upon the information provided internally to the Bank s key management personnel. Weighted average effective interest rate Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Total NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Due from banks 13.4% Loans to customers 12.4% * Total fixed interest bearing financial assets Non-interest bearing financial assets Cash and balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Due from banks (correspondent accounts) Other financial assets Total non-interest bearing financial assets Total non-derivative financial assets NON-DERIVATIVE FINANCIAL LIABILITIES Fixed interest rate instruments Due to banks 1.2% Customer accounts 9.4% Debt securities issued by the Bank 8.7% Subordinated debt 0.1% Total fixed interest bearing financial liabilities Non-interest bearing financial liabilities Due to banks Customer accounts Other financial liabilities Total non-interest bearing financial liabilities Total non-derivative financial liabilities Interest sensitivity gap ( ) ( ) ( ) Cumulative interest sensitivity gap ( ) Liquidity gap ( ) ( ) ( ) Cumulative liquidity gap ( ) *- as of the date of approval of these financial statements there is information about the transfer of a part of the loan portfolio to Agrarkredit CJSC. 55

58 Weighted average effective interest rate Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Total NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Financial assets at fair value through profit or loss 8.5% Due from banks 2.2% Loans to customers 10.2% Total fixed interest bearing financial assets Non-interest bearing financial assets Cash and balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Due from banks (correspondent accounts) Other financial assets Total non-interest bearing financial assets Total non-derivative financial assets NON-DERIVATIVE FINANCIAL LIABILITIES Fixed interest rate instruments Due to banks 7.7% Customer accounts 10.0% Debt securities issued by the Bank 7.7% Subordinated debt 6.6% Total fixed interest bearing financial liabilities Variable interest rate instruments Due to banks 5.3% Total variable interest bearing financial liabilities Non-interest bearing financial liabilities Due to banks Customer accounts Other financial liabilities Total non-interest bearing financial liabilities Total non-derivative financial liabilities Interest sensitivity gap ( ) ( ) Cumulative interest sensitivity gap Liquidity gap ( ) ( ) ( ) Cumulative liquidity gap ( ) In the tables above, the terms to maturity correspond to the contractual terms. However, individuals are entitled to terminate their deposit agreements ahead of schedule according to effective laws. The amounts included above for variable interest rate instruments for both non-derivative financial assets and liabilities are subject to change if changes in variable interest rates differ from those estimates of interest rates determined at the end of the reporting period. 56

59 The following tables detail the Bank s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Bank can be required to pay. The tables include both interest and principal cash flows. Fixed interest rate instruments Weighted average effective interest rate Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Total Due to banks 1.2% Customer accounts 9.4% Debt securities issued by the Bank 8.7% Subordinated debt 0.1% Total fixed interest bearing financial liabilities Non-interest bearing instruments Due to banks Customer accounts Other financial liabilities Guarantees issued and similar commitments Letters of credit and other transaction related contingent obligations Other credit related commitments Total non-interest bearing financial liabilities and commitments Total financial liabilities and commitments Fixed interest rate instruments Weighted average effective interest rate Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Total Due to banks 7.7% Customer accounts 10.0% Debt securities issued by the Bank 7.7% Subordinated debt 6.6% Total fixed interest bearing financial liabilities Variable interest rate instruments Due to banks 5.3% Total variable interest bearing financial liabilities Non-interest bearing instruments Due to banks Customer accounts Other financial liabilities Guarantees issued and similar commitments Letters of credit and other transaction related contingent obligations Other credit related commitments Total non-interest bearing financial liabilities and commitments Total financial liabilities and commitments The amounts included above for financial guarantee contracts are the maximum amounts the Bank could be forced to settle under the arrangement for the full guaranteed amount if that amount is claimed by the counterparty to the guarantee. Based on expectations at the end of the reporting period, the Bank considers that it is more likely than not that no amount will be payable under the arrangement. However, this estimate is subject to change depending on the probability of the counterparty claiming under the guarantee which is a function of the likelihood that the financial receivables held by the counterparty which are guaranteed suffer credit losses. 57

60 Financing facilities Market risk Market risk is that the risk that the Bank s earnings or capital or its ability to meet business objectives will be adversely affected by changes in the level or volatility of market rates or prices. Market risk covers interest rate risk, currency risk and credit spread risk to which the Bank is exposed. There have been no changes as to the way the Bank measures risk or to the risk it is exposed. The management sets limits on the level of exposure which are monitored daily. The Bank does not enter into transactions with derivatives. The ALCO also manages interest rate and market risks by matching the Bank s interest rate position, which provides the Bank with a positive interest margin. The management conducts monitoring of the Bank s current financial performance, estimates the Bank s sensitivity to changes in interest rates and its influence on the Bank s profitability. The majority of the Bank s loan contracts and other financial assets and liabilities that bear interest are either variable or contain clauses enabling the interest rate to be changed at the option of the lender. The Bank monitors its interest rate margin and consequently does not consider itself exposed to significant interest rate risk or consequential cash flow risk. Market risk exposures are measured using sensitivity analysis. Interest rate sensitivity The Bank is exposed to interest rate risk because it makes certain borrowings at fixed interest rates. The management sets limits on the level of exposure by inconsistency of rate renegotiation periods, which are monitored daily. The sensitivity analyses below have been determined based on the exposure to interest rates for financial instruments at the end of the reporting period. For fixed rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 500 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management s assessment of the reasonably possible change in interest rates. If interest rates had been 500 basis points higher/lower and all other variables were held constant, the Bank s: Equity and profit for the year ended wouldn t decrease/increase (: would decrease/increase by RUB thousand). Currency risk Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank s Management Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions. The Treasury Department performs daily monitoring of the Bank s open currency position with the aim to match the requirements of the CBR. 58

61 The Bank s exposure to foreign currency exchange rate risk is presented in the table below: RUB USD 1 = RUB EUR 1 = RUB Other currencies Total Non-derivative financial assets Cash and balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Due from banks Loans to customers Other financial assets Total non-derivative financial assets Non-derivative financial liabilities Due to banks Customer accounts Debt securities issued by the Bank Subordinated debt Other financial liabilities Total non-derivative financial liabilities OPEN BALANCE SHEET POSITION ( ) RUB USD 1 = RUB EUR 1 = RUB Other currencies Total Non-derivative financial assets Cash and balances with the CBR Minimum reserve deposits with the Central Bank of the Russian Federation Financial assets at fair value through profit or loss Due from banks Loans to customers Other financial assets Total non-derivative financial assets Non-derivative financial liabilities Due to banks Customer accounts Debt securities issued by the Bank Subordinated debt Other financial liabilities Total non-derivative financial liabilities OPEN BALANCE SHEET POSITION ( ) ( )

62 Currency risk sensitivity The following table details the Bank s sensitivity to a 40% (: 25%) increase and decrease in the RUB against the relevant foreign currencies. 40% (: 25%) is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 40% (: 25%) change in foreign currency rates. A positive number below indicates an increase in profit and other equity where the RUB strengthens 40% against (: 25%) the relevant currency. For a 40% (: 25%) weakening of the RUB against the relevant currency, there would be a comparable impact on the profit and other equity, and the balances below would be negative. USD impact EUR impact Other equity/profit before tax (63 646) (29 270) (7 530) (7 293) There is no additional effect on the Bank s funds other than the above effect on profit and loss. Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Bank s assets and liabilities are actively managed. Additionally, the financial position of the Bank may vary at the time that any actual market movement occurs. For example, the Bank s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value on in the statement of financial position. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Bank s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion. Operational Risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes. 27. SUBSEQUENT EVENTS On February 29, 2016 a routine inspection by the Bank of Russia began at the Bank. As of the date of approval of these financial statements the results of this inspection are still unknown for the Bank including the expected level of the increase in the provision for impairment losses on loans to customers. The management of the Bank does not expect that the results of this inspection by the Central Bank of the Russian Federation would have a significant impact on the financial statements and would lead to substantial changes in the Bank s activities. Following the decision taken on April 18, 2016 by IBA an additional contribution to charter capital of RUB thousand was registered on May 15,

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