MOŽNOSTI SAVINGS HOUSE DOO Skopje. Financial statements. for the year ending on 31 st December 2010

Transcription

1 MOŽNOSTI SAVINGS HOUSE DOO Skopje Financial statements for the year ending on 31 st December

2 Table of contents Page Independent audit findings (i)- (ii) Profit and loss sheet 1 Balance sheet 2 Report on changes in equity and provisions 3 Cash flow report 4 Comments to the financial statements 6-115

3 INDEPENDENT AUDITOR FINDINGS To the Board of Directors of the Možnosti Savings House DOO Skopje We have conducted an audit of the submitted financial statements of the Možnosti Savings House DOO Skopje, including the balance sheet as of 31st December, as well as the profit and loss sheet, the report on changes in principal and the cash flow report for the year ending then, and the overview of notable accounting policies, and other explanatory notes. Management responsibility for financial statements The management is responsible for preparing and presenting objectively such financial statements in line with the laws and regulations applied in the Republic of Macedonia, as well as maintaining internal control relevant for the preparation and objective presentation of financial statements free of material misrepresentation, regardless whether it is due to fraud or mistake. Auditor responsibility It is our responsibility to express our opinion on these financial reports on the basis of our audit. We have conducted our audit in line with the International Standards on Auditing. These standards require that we observe ethical requirements and plan and execute the audit so as to obtain reasonable assurance as to whether the financial statements are free of material misrepresentation. The audit includes procedures for obtaining auditing evidence of the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risk of material misrepresentation of financial statements, be they the result of fraud or mistake. In making such risk assessments, the auditor reviews the internal control relevant for the preparation and objective presentation of the financial statements of the entity in order to form auditing procedures fitting the circumstances, but not in order to state an opinion regarding the effectiveness of the entity's internal control. The audit also includes an assessment of the adequacy of the applied accounting policies and of the reasonability of the accounting estimates made on the part of the management, as well as an assessment of the overall presentation of financial statements. We believe that the auditing evidence we have gathered is sufficient and adequate to provide the basis for our audit opinion. (i)

4 Opinion As far as our opinion is concerned, the financial statements provide an accurate and objective image of the financial state of the Možnosti Savings House DOO Skopje, as of 31 st December, as well as of its financial success and its cash flow for the year ending then, in line with the laws and regulations applied in the Republic of Macedonia. Manager Ljube Gjorgjievski Authorised auditor Ljube Gjorgjievski Pricewaterhouse Coopers AUDIT DOO Skopje, 28 th April 2011 (ii)

5 Balance sheet for the to period Note Previous year current year 2009 Interest revenue Interest expenditure ( ) ( ) Net interest revenue/(expenditure) Revenue from commission and fees Expenditure for commissions and fees ( 7.548) (8.587) Net revenue/(expenditure) from commission and fees 7 (3.859) (6.111) Net trading revenue Net revenue from other financial instruments recorded at objective value Net revenue/(expenditure) from Fx rate differences 10 (1.127) (1.483) Other operative revenue Share in the profit of associated companies Impairment of financial assets, net based 12 (14.549) (58.185) Loss due to damage to non-financial assets, net based Personnel expenditure 14 (54.440) (47.808) Depreciation 15 (13.878) (12.685) Other operative expenditure 16 (47.003) (45.171) Share in the loss of associated companies Profit/(loss) before tax Profit tax 17 (611) (384) Profit/(loss) for the fiscal year with uninterrupted operation Profit/(loss) from the group of assets and liabilities kept for sale* - - Profit/(loss) for the fiscal year Profit/(loss) for the period, assigned to*: bank shareholders - - minority share - - Yield per share principal yield per share (in denars) - - diluted yield per share (in denars) - - The notes in pages 6 through 119 are a constituent part of these financial statements 1

6 Balance sheet as of Note current year previous year 2009 Assets Cash and cash equivalents Trading assets Financial assets at objective value through the profit and loss sheet designated as such at the initial acknowledgement Derivative assets maintained for risk management Loans to and receivables from banks Loans to and receivables from other clients Investments in securities Investments in associated companies (registered in accounting according to the principal method) Receivables for profit tax (current) Other receivables Assets under collateral* Foreclosed assets pursuant to unpaid receivables Intangible assets Real estate and equipment Deferred tax assets Non-current assets kept for sale and group for sale Total assets Liabilities Trading liabilities Financial assets at objective value through the profit and loss sheet designated as such at the initial acknowledgement Derivative liabilities maintained for risk management Bank deposits Deposits of other clients Issued debt securities Loan liabilities Subordinated liabilities Special reserve and provisions Profit tax liabilities (current) Deferred tax liabilities Other liabilities Liabilities directly linked with the group of assets for sale Total liabilities Equity and provisions Registered capital Share premiums - - Own shares - - Equity component of hybrid financial instruments - - Other ownership instruments - - Revaluation provisions - - Other provisions Retained profit/(accumulated loss) Total equity and provisions, belonging to the bank shareholders Minority share* - - Total equity and provisions Total liabilities and equity and provisions Potential liabilities Potential assets The notes in pages 6 through 119 are a constituent part of these financial statements 2

7 Report on changes in equity and reserves for the to period In MKD,000 Registered capital Share premiums (Own shares) Equity Other provisions Revaluation provisions Retained profit Capital component of hybrid financial instruments Other ownership instruments Mandatory reserve Other provisions Revaluation provisions for assets available for sale As of 1 st January 2009 (previous year) Risk contingency provisions Fx difference provisions Other revaluation provisions Correction of initial balance As of 1 st January 2009 (previous year), corrected Changes in the objective value of the assets available for sale Changes in the objective value of cash flow risk contingencies Change in the objective value of risk contingencies for net investments in foreign operations Fx rate differences acknowledged in equity Deferred tax (assets)/liabilities acknowledged in equity Other Available for distribution to shareholders earmarked for distribution to shareholders Accumulated loss Total equity and provisions belonging to the bank shareholders Minority share* Total equity and provisions Total unrealised profit/(loss) acknowledged in equity Issued shares in the period in question Profit/(loss) for the fiscal year Earmarked funds for mandatory reserve (4.310) Earmarked funds for other provisions Dividend Purchase of own shares Own shares sold Other changes in equity and provisions (4.311) (4.311) As of 31 st December 2009 (previous year)/1 st January (current year) Changes in the objective value of assets available for sale Changes in the objective value of cash flow risk contingency Changes in the objective value of the risk contingency for net investments in foreign operations Fx rate differences acknowledged in equity Deferred tax (assets)/liabilities acknowledged in equity Other Total unrealised profit/(loss) acknowledged in equity Issued shares in the period in question Profit/(loss) for the fiscal year Earmarked funds for mandatory reserve (2.428) Earmarked funds for other provisions Dividend Purchase of own shares Own shares sold Other changes in equity and provisions (606) (606) As of 31 st December (current year) *For consolidated financial statements only The notes from page 6 through 119 are a comprising part of these financial statements 3

8 Cash flow statement for the to period Core operation cash flow Note current year previous year 2009 Profit/(loss) before tax Corrected for: minority share, included in the consolidated profit and loss sheet* Depreciation of: intangible assets real estate and equipment Capital gain from: sale of intangible assets 11 (308) - sale of real estate and equipment - - sale of foreclosed assets on the basis of unpaid receivables Capital loss from: sale of intangible assets sale of real estate and equipment sale of foreclosed assets on the basis of unpaid receivables - - Interest revenue 6 ( ) ( ) Interest expenditure Net trading revenue Impairment of financial assets, net based 12 additional impairment released impairment (73.979) (54.556) Loss from damage to non-financial assets, net based 13 additional losses due to damage - - released losses due to damage - - Special reserve additional provisions released provisions 38 (9) (11) Revenue from dividends - - Share in the profit/(loss) of associated companies - - Other corrections Collected interest Paid interest ( ) ( )) Operative profit before changes in business assets (Increase)/reduction of business assets: Trading assets - - Derivative assets maintained for risk management - - Loans to and receivables from banks - - Loans to and receivables from other clients Assets under collateral - - Foreclosed assets on the basis of unpaid receivables (5.939) (2.837) Mandatory foreign exchange reserve - - Mandatory deposit at the Central Bank in line with special regulations - - Other receivables (592) Deferred tax assets - - Non-current assets maintained for sale and group for sale - - The notes from page 6 through 119 are a comprising part of these financial statements 4

9 Cash flow statement for the to period (continued) In MKD,000 Note previous year current year 2009 Increase/(reduction) of business liabilities: Trading liabilities - - Derivative liabilities maintained for risk management - - Bank deposits - - Deposits from other clients (21.573) Other liabilities (5.324) (10.935) Liabilities directly linked to the group of assets for sale - - Net cash flow from core operations before tax (Paid)/rebate on profit tax - - Net cash flow from core operations Cash flow from investment operations (Investments in securities) (19.913) - Income from sale of investments in securities - - (Expenditure for investment in subsidiaries and associated companies) - - Income from sale of investments in subsidiaries and associated companies - - (Procurement of intangible assets) (1.755) (1.869) Income from sale of intangible assets - - (Procurement of real estate and equipment) (12.958) (13.374) Income from sale of real estate and equipment (Expenditure for non-current assets maintained for sale) - - Income from non-current assets maintained for sale - - (Other expenditure for investment operations) - - Other income from investment operations - - Net cash flow from investment operations (34.145) (15.243) Financing cash flow (Repayment of issued debt securities) - - Income from issued debt securities - - (Repayment of loan liabilities) ( ) ( ) Increase in loan liabilities (Repayment of issued subordinated liabilities) - - Income from issued subordinated liabilities - - Income from issued shares/ownership instruments in the period in question - - (Purchase of own shares) - - Own shares sold - - (Paid dividends) - - (Other financing expenditure) - - Other financing income - - Net financing cash flow ( ) ( ) Effects of impairment of cash and cash equivalents - - Effects of Fx rate differences on cash and cash equivalents - - Net increase/(reduction) of cash and cash equivalents Cash and cash equivalents as of 1 st January Cash and cash equivalents as of 31 st December *for consolidated financial statements only The notes from page 6 through page 119 are a comprising part of the financial statements 5

10 Number of Note Note 1 Note 2 Risk management 2.1 Credit risk 2.2 Liquidity risk 2.3 Market risk Analysis of interest rate alignment Currency risk 2.4 Other operative risks 3 Capital adequacy 4 Reports per segments 5 Objective value of financial assets and liabilities Profit and loss sheet 6 Net interest revenue (expenditure) 7 Net revenue (expenditure) from commissions and fees 8 Net trading revenue 9 Net revenue from other financial instruments registered at objective value 10 Net Fx rate difference revenue (expenditure) 11 Other operative revenue 24 Share in the profit/(loss) of associated companies 12 Impairment of financial assets, net based 13 Loss due to damage to non-financial assets, net based 14 Personnel expenditure 15 Depreciation 16 Other business expenditure 17 Profit tax Balance sheet Assets 18 Cash and cash equivalents 19 Trading assets 20 Financial assets at objective value through the profit and loss sheet, designated as such at initial acknowledgement 21 Derivative assets maintained for risk management 22.1 Loans to and receivables from banks 22.2 Loans to and receivables from other clients 23 Investments in securities 24 Investments in associated companies 25 Other receivables 26 Assets under collateral 27 Foreclosed assets on the basis of unpaid receivables 28 Intangible assets 29 Real estate and equipment 30 Deferred tax assets 31 Non-current assets maintained for sale and group for sale Liabilities, equity and provisions 32 Trading liabilities 33 Financial liabilities at objective value through the profit and loss sheet, designated as such at initial acknowledgement 21 Derivative liabilities maintained for risk management 34.1 Bank deposits 34.2 Deposits by other clients 35 Issued debt securities 36 Loan liabilities 37 Subordinated liabilities 38 Special reserve and provisions 30 Deferred tax liabilities 39 Other liabilities 31 Liabilities directly linked to the group of assets for sale 40 Registered capital Other disclosure 41 Yield per share 42 Potential liabilities and potential assets 43 Operations on behalf of and for the account of third parties/commission work 44 Transactions with associated parties 45 Lease 46 Payments for shares 6

11 1. Note a) General information (i) Name of the savings house, as per the Savings House Charter and the court registration of the savings house The Savings House MOŽNOSTI DOO, Skopje (hereinafter: the Savings House) is a limited liability company with registered offices in the Republic of Macedonia. The primary organisation and founder of the Savings House is the Možnosti Centre for Education and Entrepreneurship, a partner organisation of Opportunity International. The Savings House operates in line with the regulations of the National Bank of the Republic of Macedonia and conducts all its business operations according to licence 02-14/ (ii) Address of the Savings House head office 111 Jane Sandanski blvd Skopje Republic of Macedonia (iii) (iv) (v) (vi) Primary operations of the Savings House - Accepting monetary deposits in denars from physical persons - Approving loans to physical and legal entities in line with the regulations - Taking loans from local banks - Placing assets in government securities - Fx operations List of subsidiaries The Savings House has no subsidiaries. Stock exchange where the bank shares are listed and its listing code The Savings House is registered as a limited liability company and is not listed on the stock exchange. Date of approval for issuing financial statements from the Savings House Board of Directors Such reviewed financial statements have been approved for issuing by the Savings House Board of Directors on 20 th April

12 Directors The names of the directors working at top positions during the fiscal year are presented hereafter: CEO Finance, Accounting and Treasury Division Director Business Development and Risk Department Division Director Branch Network Director Director of the Payment Systems, Sales and Logistics Division Snežana Andova Emilija Krajčeva Ilija Belevski Darko Nedelkovski Ana Kuzmanovska 8

13 b) Basis for preparing the financial statements (i) Statement of conformity The management is responsible for the preparation and objective presentation of the financial statements in line with the regulations applied in the Republic of Macedonia. The financial statements of the MOŽNOSTI Savings House DOO, Skopje, have been prepared in line with: The Company Act (Official Gazette of RM 28/2004), the Law on Banks (Official Gazette of RM 67/2007), the Law Regulation issued by the National Bank of R. Macedonia, hence the Decision on the conditions and operation of savings houses (Official Gazette 79/2007), the Methodology for recording and assessing accounting items, and preparing financial statements (Official Gazette 118/2007). (ii) Type of financial statements (individual or consolidated) The presented financial statements are an overview of the results of the operations of the Savings House as an individual entity. (iii) Type of numerical presentation of the information in the financial statements The information in the financial statements is presented in,000 Macedonian denars (MKD). (iv) Reporting and functional currency of the Savings House The reporting and functional currency of the Savings House is the Macedonian denar (MKD). 9

14 c) Important accounting policies The principal accounting policies applied in the compilation of the financial reports are provided further on in the text: (i) Cash and cash equivalents Cash encompasses the money in the treasury and on the account, and the demand deposits. Cash equivalents are short-term, highly liquid investments that mature within three months or less from the day of acquisition. Cash and cash equivalents are recorded at depreciated purchase value, usually equal to their nominal value, and they are readily converted into cash with insignificant risk of change in value. The definition of cash includes: -Bank notes and coins in the treasury -Money on the transfer account -Mandatory reserve in denars in the NBRM The definition of cash equivalents includes: -Bank deposits up to 3 months -State bills up to 3 months (ii) Foreign currency assets The assets and the sources of assets presented in foreign currency have been converted into denars as per the average exchange rate of the NBRM at the end of the accounting period. The positive and negative Fx rate differences occurring thereupon have been included in the profit and loss sheet. Fx rate: 31 st December 31 st December 2009 MKD MKD USD 46,31 42,67 EUR 61,50 61,17 CHF 49,30 41,12 10

15 (iii) Loans and impairment for dubious receivables The loans derived from approving money directly to the borrower are categorised as loans approved by the Savings House, and they are presented in the Balance sheet less the impairment for loan receivables. Expenditure to third parties, such as court fees incurred for securing the loan, is treated as transaction costs. All approved undisbursed loans are stated off-balance. All loans are stated on-balance when the cash has been disbursed to the borrowers. On each date of the Balance sheet the Savings House carries out an assessment whether objective evidence is present that the financial assets or group of assets should be damaged. The financial assets or group of financial assets will be regarded damaged and a loss has been done due to the damage solely if there is objective evidence for damage due to one or more circumstances arising from the prior assets acknowledgement ( case of loss ) or such case/cases affect the future assessed cash flow of financial assets or group of assets that could adequately be assessed. Criteria used by the Savings House in order to establish whether there is present objective evidence stating damage to financial assets include: Significant financial difficulties of the issuer of financial instrument or the debtor; Concrete violation of agreement, such as avoiding payment or being overdue regarding payment per interest or principal; The creditor grants an abatement programme to the debtor, due to financial difficulties of the latter, a programme that otherwise would not be given to other parties; Strong possibility that the debtor will enter a bankruptcy procedure or other type of financial reorganization; Disappearance of an active market for the financial asset due to financial difficulties; or Information indicating that a measurable decrease in assessed future cash flows from a group of financial assets, since the primary acknowledgement of the stated, even though the decrease can not be individually linked to the financial assets including: -negative changes in debtor s solvency (for instance an increased number of overdue payments or increased number of debtors per credit cards reaching their maximum allowed limit while paying minimal monthly amount; or 11

16 (iii) Loans and impairment for dubious receivables(continued) -national or local economic conditions in proportion to damage of assets (for instance increase of unemployment rate in the geographic region of the debtor, decrease of property prices in the stated region, the latter is used as security, decrease of price of oil for credits of oil producers or negative changes in the industrial conditions affecting the debtors). The Savings House primarily carries out an assessment whether the objective evidence for damage is present for individual financial assets with individual significance, and individually or collectively, for financial assets not individually significant. Should the Savings House establish that no objective evidence for damage is present regarding the individually assessed financial assets, regardless of their significance, it includes the assets within a group of financial assets with similar features of credit risk and carries out a group assessment of their damage. Assets being individually assessed for damage and for which the loss due to damage either are or continue to be acknowledged, are not included within the group assessment of damage. Should the amount of impairment of dubious receivables decrease due to a certain event consequent to the conducted impairment, releasing the impairment is reflected in the profit and loss sheet at time of occurrence of the stated event. (iv) The Savings House writes off receivables that it knows are uncollectible, where all legal avenues for collection have been exhausted. Write-offs are kept on off-balance accounts. Tangible and intangible investments Tangible and intangible investments are recorded at purchase value less accumulated depreciation. Current investments are recorded at their purchase value including the costs increasing their value. No depreciation is calculated for current investments. By activating current investments all accumulated expenditure is transformed into the corresponding categories of tangible and intangible investments subject to calculation of depreciation according to the corresponding stipulated annual rates for the respective category of assets. The reduction of tangible investments and intangible investments entails their sale and decommissioning less their accumulated depreciation. Capital gain or loss derived from such transactions is presented in the profit and loss sheet. The depreciation of tangible investments and intangible investments is calculated according to the linear method, from the day of activation of the asset. The depreciation rates are stipulated so that the value of tangible and intangible assets is spread into expenditure over the estimated period of its use according to years of service, as presented below. Years of service Buildings Furniture and equipment 40 years 4-10 years 12

17 (v) Foreclosed assets on the basis of unpaid receivables Foreclosed assets are all tangible assets (land, buildings, equipment, movable property) foreclosed on the basis of unpaid receivables, with the exception of foreclosed securities and shares. An asset is deemed foreclosed at the time when the legal basis for registering ownership is obtained. The date when the legal basis for foreclosing the asset is obtained is considered the date of foreclosure. The acquisition of ownership of the collateral and the time (date) of acquisition of ownership are registered in Minutes, signed by the notary public handling the foreclosure and the lien creditor (Možnosti). Initially, at the date of foreclosure the asset is registered in the Savings House books at initial book value. The initial book value is the lesser amount of the following: 1. Appraised value less expected (future) sale costs to be borne by the Savings House, and 2. Purchase value of the foreclosed asset For the needs of consequent measurement of the foreclosed assets, the amount of the lowest assessment carried out by three authorised appraisers is regarded as the appraised value. In case when the appraised value of the foreclosed asset is lower than the purchase or book value, the Savings House presents a loss for damage in the profit and loss sheet at the amount of difference between the two values. (vi) Employee benefits The Savings House pays employee contributions towards pension and health insurance, employment and personal income tax calculated on the basis of gross salaries, in line with the regulations. The Savings House pays such contributions to the Pension and Disability Insurance Fund of the Republic of Macedonia, and to the Health Insurance Fund of the Republic of Macedonia, at the legally prescribed rates. Regulated contributions are part of the personnel expenditure for the current year. The expenditure for such payments is presented in the profit and loss sheet in the same period when the expenditure for employee net salaries is stated. The Savings House pays off three average salaries to the employees when they are retired, in compliance with the criteria established in the Law on Labour Relations and the General Collective Agreement. The long-term employee benefits are being discounted in order to establish their current net value. (vii) Profit tax Profit tax is assessed and paid in accordance with the provisions of the Law on Profit Tax. Monthly tax is paid in advance. The total tax at a 10% rate (2009:10%) is assessed on the basis of the net balance of unrecognised expenditure in the current year, less tax credit for expenditure with deferred recognition, tax abatement and exemption and avoidance of double taxation. 13

18 (viii) Client deposits The Savings House only accepts denar savings deposits from physical persons. Legal entities and charity organisations may not open savings accounts. The Možnosti Savings House is a member of the Deposit Insurance Fund, and all savings deposits with the Savings House are insured with the Deposit Insurance Fund. According to their term, the savings deposits may be: Demand deposits Term savings deposits They are initially recorded at their objective value, increased by the transactional expenditure directly linked to undertaking or issuing of the financial liability. The deposits are measured according to the depreciated purchase value, by applying the effective interest rate method. (ix) Loan liabilities Loan liabilities consist of transactions with other parties with whom the Savings House has signed a loan agreement. Loan liabilities are initially recorded at their purchase value, being the objective value of the received moneys on the effective date. They are then measured according to the depreciated purchase value, using the effective interest rate method. (x) Other liabilities The liabilities for advance payments, liabilities to suppliers, liabilities to employees, tax liabilities, salary contributions and other levies, result related liabilities, as well as other shortterm and long-term liabilities are presented in the value presented at the corresponding accounting document. Liabilities stated in foreign currency are calculated according to the NBRM middle rate on the last day of the month. Liabilities with an Fx clause are calculated according to the NBRM middle rate on the last day of the month. (xi) Equity and provisions Registered capital is stated on a separate account in the amount registered with the Trade Registry at incorporation, i.e. the change in the value of the capital. The provisions are stated at nominal value, and separately: legally required reserves, statutory provisions and other provisions. In the legally required reserves, the Savings House allocates 15% of the profit, until the amount of the legally required reserve reaches one fifths of the principal. If the reserve created is reduced, it must be compensated for until it reaches the stipulated minimum. The legally required reserve may be used to cover loss. 14

19 (xii) Profit or loss The financial result for the current year is established pursuant to the regulations. Profit or loss for the current year is stated after tax as profit (net profit) for distribution, i.e. total loss from operations in the business year. Achieved net profit for the current year is carried over and allocated the following year, in accordance with a decision by the Savings House Board of Directors. (xiii) Interest revenue and expenditure Interest revenue and expenditure is stated as calculated revenue and expenditure based on all interest-bearing receivables and liabilities. Interest revenue and expenditure is calculated and collected pursuant to a contract between the creditor and the debtor, and in line with the regulations of the Republic of Macedonia. Revenue and expenditure is stated via the effective interest rate method when: -it is likely that the economic benefits of the transaction will present revenue/expenditure for the Savings House; -there is a possibility for reliable measurement of interest revenue/expenditure. The effective interest rate is the rate that accurately discounts assessed future cash flows for the expected duration of the financial instrument. If an analysis determines that the fees for financial services, related to interest-bearing instruments that are not measures at objective value through the profit and loss sheet, are a constituent part of the effective interest rate of the financial instrument, then they adjust the effective interest rate and are subdivided just as the interest revenue/expenditure. Interest is adjusted when the collection of assessed interest is dubious. (xiv) Revenue and expenditure from commissions and fees Revenue from commissions and fees is effective at the time of performing the respective service. Expenditure for commissions and fees is effective when it is registered in accounting. The first thing to distinguish is whether the commissions and fees are: -A comprising part of the effective interest rate - and they are treated as interest revenue/expenditure and registered and recognised as interest revenue and expenditure. -Earned at the moment of providing the services, such commissions and fees are registered as revenue/expenditure from commissions and fees at the moment when the respective service has been rendered, and -Earned during some substantial operation, such commissions and fees are registered as revenue/expenditure from commissions and fees when the respective operation is concluded. 15

20 (xv) Loss due to damage/impairment of financial assets The Savings House adjusts the value of active balance sheet receivables by establishing the present value of the future cash flows that will occur for such receivables. The amount of impairment is determined as the difference between the book value of the receivables and their preset value. The impairment (loss due to damage) is established and registered: individually, for financial assets representing individually significant items; on a group basis, for the small loans portfolio (xvi) Netting financial instruments The financial assets and liabilities are netted and their net value is stated in the balance sheet as net, if there are legally applicable rights to net and possibilities to state a net basis. 16

21 d) Using evaluations and appraisals (i) The preparation of financial statements is in compliance with the generally accepted accounting policies and it requires the use of appraisals and assumptions affecting presented assets and liabilities, potential assets and liabilities on the day of the financial statements, and the presented amounts of revenue and expenditure for the reporting period. Such appraisals are based on the best knowledge of the management of current events and operations. Additional information is stated in the accounting policies and the corresponding notes to the financial statements. e) Changing accounting policies, accounting evaluation and error correction The positions in the financial statements and the notes thereto have been filled out in line with the Methodology for recording and valuing accounting items, and preparing financial statements. f) Alignment with regulations (i) (ii) The Savings House management is responsible for implementing full alignment of the Savings House operations with the NBRM regulations. In the course of field control of the Savings House operations was carried out by NBRM. Hence it provided a Minutes by which the Savings House prepared an action plan to eliminate the identified differences and weaknesses. 17

22 2) Disclosure for risk management In its operation, the Savings House is exposed to a variety of financial risks, making adequate risk management a chief objective of the Savings House. There are perpetual efforts to maintain an adequate balance between an acceptable level of risk, on one hand, and stability and profitability in operations, on the other. In this respect, operative risk entails its continuous monitoring, assessment and management. The most important types of risk are credit risk, liquidity risk, market risk, and operative risk. Market risk includes interest risk and currency risk. Risk management framework The Board of Directors is fully responsible for the establishment and monitoring of the risk management framework. It appoints the management body, the Credit Board, and the Assets and Liabilities Management Committee. These bodies are responsible for monitoring and developing the risk management policies in particular areas. As regards the organizational structure of the Savings House, the Risk and Bad Loan Management Department is in charge of monitoring, reporting and managing the overall credit risk exposure, whereas the organisational units of the Savings House creating risk exposure are responsible for the acceptance and operative management of credit risk, in line with the Credit Risk Management Policy and the Portfolio Management Policy. Internal Audit is responsible for independent reporting with respect to risk management. In line with the Savings House risk management policies, including a set of adequate risk limits and controls, certain risks are identified, existing risks are continuously monitored and analysed daily. 18

23 2.1 Credit risk Nature of and exposure to risk The Savings House is exposed to credit risk, a risk that the client might not be able to settle partially or fully their liabilities when due. Credit risk is the most important risk in the Savings House operation. Therefore, the Savings House manages its exposure to credit risk carefully. In principle, credit exposure arises from lending. Credit risk follows the operation from the very outset, i.e. from the moment of submission of the loan application, and up until the end, until the client settles their liabilities in full. In the approval process a decision is made whether the Savings House is prepared to accept the risk and place assets under certain terms. The approval process entails several stages, analyses, visits, and is concluded with a decision. All of these stages are an inextricable part of a complex process that needs to be concluded within the shortest time possible in the interest of the client. Any credit exposure represents a risk. All credit exposure is regularly monitored through information systems, contact is established with each and every client, reports are prepared, and corrective actions are taken. Managing the risk portfolio is an inevitable part of regular operations. The purpose of this exercise is to reduce the adverse effects and collect receivables, as well as to introduce corrections in the Savings House Credit Policy on the bases of established deficiencies Credit risk management (Goals, policies and processes of the Savings House, and methods for measuring risk) Credit risk management is handled as follows: 1 The Board of Directors is in charge of creating and implementing the Credit Policy and the procedures for monitoring the implementation of that policy, and the procedures for evaluating loans and their management. All credit exposure exceeding EUR 30,000 is approved by the Credit Board appointed by the Savings House Board of Directors. The maximum amount the Savings House should not exceed is 5% of the Savings House own assets, for bank credit exposures, savings houses, foundation organizations, insurance companies, leasing companies, local self-government units and other legal persons regulated by special laws, i.e. EUR 200,000 in denar equivalent for other physical and legal persons, to a person associated with them, which is within the exposure limit of 10% of own assets, in line with the Decision for the conditions and operation of savings houses. 2 The Credit Board reviewing client applications is in charge of approving all applications submitted by clients and relating to changes in the repayment of a loan (change of the interest rate, extension of the term of repayment, restructuring remaining debt etc.). 3 The Savings House Credit Board approves the credit exposure, in line with the decision by the Board of Directors to establish operative Credit Boards allowing functionality, flexibility and promptness in the decision making process. 4 Pursuant to the Law on Banks and the regulations of the National Bank of the Republic of Macedonia (the Central Bank), the Board of Directors is competent to 19

24 make decisions regarding writing off Savings House receivables and foreclosing assets on the basis of unpaid receivables Credit risk assessment Loans When assessing the credit risk involved in approving loans to physical and legal persons, the Savings House uses three components: (1) the probability that the debtor will not settle their liabilities adequately (expected cash flow); (2) appraisal of loss at the time of occurrence of delinquency in meeting liabilities; (3) the value and the quality of the collateral securing the exposure. (1) The Savings House assesses the probability of default by individual clients using internal assessment tools adapted to the various client categories. They have been developed internally and are a combination of statistical analyses and the individual assessment of the loan officer, and, if possible, they are verified by comparison to externally available data. In the process of preparing a loan application, as well as in the loan approval process, there are multiple analyses carried out that allow for the assessment of the credit risk. It implies an analysis of the principal parameters of the applicant, and analysis of official financial statements, an analysis of cash flows, projections of future cash flows and the development component of operations, the attractiveness of the industry and the quality of the collateral. At this stage of assessing credit risk, the subject of analysis in the loan application is, as follows: -analysis of credit exposure to a client for whom the Savings House, based on an creditworthiness assessment, has assessed that the cash flows are going to be sufficient to regularly settle due liabilities, regardless of the presented current financial deficiencies, seeing that there are no signs of future exacerbation of the client's state; -analysis of the client s cash flows that would allow them to settle their liabilities within the due term; -analysis of available information, i.e. the required paperwork for keeping loan files; -analysis of client liquidity and solvency. (2) The losses at the time of delinquency in settling liabilities represent the expectations of the Savings House regarding the level of loss from unpaid receivables. It is presented as a percentage loss per unit of exposure and it usually varies depending on the type of the client, the type of the receivable, and the availability of collateral or other credit security. Loan receivables are ranked in 5 risk categories. 20

25 2.1.4 Internal ranking in the Savings House Risk category A in the Savings House includes: - Claims from the National Bank of the Republic of Macedonia and the Republic of Macedonia, the European Central Bank and the governments of the central banks of European Union member states, Switzerland, Canada, Japan, Australia, Norway and the USA; - Credit exposure to a client who settles their liabilities to the Savings House within the due term or with delay of up to 30 days, and for whom the Savings House has not restructured receivables within the last two years; - Credit exposure fully secured by first-class collateral instruments, as defined in the Decision for credit risk management. - Credit risk exposure to a client whose present financial state and projected future cash flows do not jeopardise the regular settlement of liabilities to the Savings House. Risk category B in the Savings House includes: - Credit exposure to a client who usually settles their liabilities with up to 60 days delay. - A client for whom the Savings House has not restructured receivables within the last six months. Risk category C includes: - Credit exposure to a client who usually settles their liabilities with 61 to 120 days delay. - credit exposure to clients whose liabilities have been restructured. Risk categories D and E include: - Credit exposure to a client who is subject to a motion for liquidation or receivership with the competent court, and from whom the Savings House rightfully expects partial or full settlement of its receivables for placements; - Credit exposure to a client, where such exposure is subject to a court dispute and is not secured with a quality collateral instrument; - Credit exposure to a client who usually settles their liabilities with 120 to 270 days delay, and credit exposure to a client who usually settles their liabilities with more than 270 days delay or does not settle them at all. (3) The value and the quality of the collateral depend on its type (real estate, movable property-stock, receivables) and the probability for its activation in order to collect the receivables. The Savings House compulsorily assesses the market value of the property subject to collateral (real estate or movable) with an authorised appraiser. 21

26 2.1.5 Control of risk exposure limits and risk protection policies The Savings House manages and controls credit risk concentration individually and in groups, as well as by sectors. The Savings House structures the level of accepted credit risk by an analysis of the level of acceptable risk per borrower, or group of borrowers, as well as per geographic and sectoral segments. Such risks are continuously monitored on the basis of internal databases, and they are the subject of daily analysis. The management of credit risk exposure is enabled by the regular analysis of the creditworthiness of loan beneficiaries and potential loan beneficiaries regarding the fulfilment of their liabilities to the Savings House, as well as by altering credit limits, where necessary. Collateral and potential liabilities of the loan beneficiary are prescribed in the internal Savings House acts for regulating credit operations and procedures as a method for the measurement and specific control of credit risk reduction. (a) Collateral The collateral is always considered a secondary factor in assessing creditworthiness. The collateral alone, without the ability to generate cash flow, is insufficient to justify the approval of the loan. The principal types of collateral for securing loans are: (1) For legal entities Deposits Real estate Movable property (equipment, motor vehicles) Stock Receivables Guarantees (bank guarantees and guarantees by legal entities) Physical persons - guarantors Bills of exchange (2) For physical persons Deposits Movable property (equipment, motor vehicles) Real estate Guarantees (guarantees by legal entities) Physical persons - guarantors Bills of exchange 22

27 2.1.6 Policies for damage and impairment The Savings House has established a method of establishing impairment, consisting of an assessment of losses in its credit portfolio. In line with the Savings House policy, there are five internal ranking categories. The greater part of the impairment originates from the bottom two categories Maximum exposure to credit risk without taking into account collateral or other loan collateral The management is convinced of the possibility to control and maintain minimum exposure to credit risk arising from loans, all due to the sustained high quality of the credit portfolio (categories A and B) Loans a) Outstanding loans and bank placements not subject to impairment In line with the procedure for the categorisation of exposure and the assessment of impairment individually and in groups, the Savings House assesses impairment on a group basis for outstanding loans, as well when in the process of discounting cash flows there is a negative difference established between the book value and the present value of the receivable. The Savings House assesses no impairment for outstanding receivables for placements to other banks. b) Loans due, without impairment In line with the procedure for the categorisation of exposure and the assessment of impairment individually and in groups, the Savings House, as a rule, assesses impairment for all due loans. In the event when in the process of discounting cash flows there is a negative difference established between the book value and the present value of the receivable, where such receivable is ranked in risk category A, the Savings House assesses impairment of value in groups. c) Loans subject to individual impairment and loans subject to group impairment Receivables due and unpaid for longer than 90 days are subject to individual impairment, according to an internal evaluation, carried out pursuant to the provisions of the legal regulations. d) Restructured loans Restructured loans are loans that are restructured as a result of the worsened financial condition of the client, or when the Savings House estimates that it cannot be treated differently. Once a loan is restructured, it is assigned to risk category C for at least six months following the restructuring, and for an additional eighteen months to risk category B. Following restructuring a loan may not be assigned to risk category A for at least 24 months thereafter. An exception to this rule is when the restructuring comes as a result of 23

28 market reasons, rather than the worsened financial conditions of the client. 24

29 2.1.8 Concentration of risk from financial assets with credit risk exposure (a) Industry Overall credit exposure is analysed and categorised by industry. (b) Location In line with the legal regulations and the Savings House policy, all actions for categorising credit exposure by geographic regions are carried out on the territory of the Republic of Macedonia. 25