JUBMES BANKA AD, BELGRADE. Financial Statements for the year ended 31 December 2017 and Independent Auditor s Report

Transcription

1 JUBMES BANKA AD, BELGRADE Financial Statements for the year ended 31 December 2017 and Independent Auditor s Report This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestions arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail. MOORE STEPHENS Revizija i Računovodstvo d.o.o., Beograd, Studentski trg 4/V Tel: , , Fax: office@revizija.co.rs Matični broj , PIB ,

2 JUBMES BANKA AD, BELGRADE CONTENT Pages INDEPENDENT AUDITOR S REPORT 1-2 FINANCIAL STATEMENTS Income statement 3 Statement of other comprehensive income 4 Balance sheet 5 Statement of changes in equity 6 Cash flow statement

3 INDEPENDENT AUDITOR S REPORT Privredno društvo za reviziju računovodstvo i konsalting MOORE STEPHENS Revizija i Računovodstvo d.o.o. Studentski Trg 4/V, Beograd, Srbija Tel: +381 (0) , ; Fax: office@revizija.co.rs, Matični broj/id: ; PIB/VAT: This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail. To the shareholders of "Jubmes banka" a.d., Belgrade Report on the Financial Statements We audited the accompanying financial statements of "Jubmes banka" a.d., Belgrade (the Bank), which comprise the balance sheet as at 31 December 2017, the income statement, statement of other comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and note, 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 Report Standards and the regulations of the National Bank of Serbia governing financial reporting of banks and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the 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. Opinion In our opinion, the financial statements, in all material respects, give a true and fair view of the financial position of "Jubmes banka" a.d., Belgrade as at 31 December 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

4 INDEPENDENT AUDITOR S REPORT To the shareholders of "Jubmes banka a.d., Belgrade - Continued Report on Other Legal and Regulatory Requirements We reviewed compliance of the attached annual business report of "Jubmes banka" a.d., Belgrade for 2017 with audited financial statements for the year ended 31 December In accordance with the Law on Accounting and the Law on the Capital Market of the Republic of Serbia, Management of the Bank is responsible for the preparation of the accompanying annual business report, which is not an integral part of financial statements. In accordance with the Law on Auditing of the Republic of Serbia our responsibility is to express an opinion on consistency of the annual business report with the financial statements for year ended 31 December In our opinion, the financial information published in the annual business report of the Bank for 2017 are in line with the accompanying financial statements for the year ended 31 December Belgrade, 06 March 2018 MOORE STEPHENS Revizija i Računovodstvo d.o.o., Beograd Bogoljub Aleksić Managing Partner

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13 1. CORPORATE INFORMATION JUBMES BANKA a.d. Belgrade (hereinafter the Bank ) was established on 26 June 1979, in accordance with the Federal Law, as a specialised bank for financing and insurance of exportrelated operations, encouraging and enhancing long-term economic and financial cooperation between domestic and foreign companies, which is also the date when it was registered with the Commercial Court in Belgrade. The Bank operated based on the Federal Law until 1997 when the Law on Cancellation of the Law on the Yugoslav Bank for International Economic Cooperation (Official Gazette of the Federal Republic of Yugoslavia, number 29/97) was passed. According to this Law, the Bank was under obligation to reconcile its organization and operations with the law governing the organization and operations of banks and other financial institutions. In the aforementioned process of harmonizing with the Law on Banks and Other Financial Institutions, as well as with the accompanying decisions, the Bank's founders executed Articles of Incorporation on 15 September 1997, and the Bank's Assembly enacted the Articles of Association and other relevant formal documents requisite for the Bank's business activities. The Bank commenced its operations in accordance with the regulations applied to commercial banks as of 1 July The Bank is registered in the Republic of Serbia to provide banking services associated with foreign and domestic payment operations, credit and deposit activities in the country and abroad, and in accordance with the Law on Banks, it is obligated to operate based on the principles of liquidity, security of placements and profitability, for the purposes of generating profit. The Bank's principal activities involve payment operations domestically and abroad, credit and deposit operations, as well as exchange transactions. Other activities include guarantee issuance, opening of letters of credit and other banking operations. Pursuant to the Law on Banks ( RS Official Gazette no. 107/2005), the Bank's Assembly adopted Amendments to the Articles of Incorporation and new Articles of Association in With these changes, the name of the Bank was changed from Yugoslav Bank for International Economic Cooperation, Shareholding Company ( Jugoslovenska banka za medjunarodnu ekonomsku saradnju a.d. ) into JUBMES banka a.d. Belgrade. The adoption of the afore cited formal documents and amendments was performed based on the approval obtained from the National Bank of Serbia. The Bank is the founder of the Humanitarian Foundation Za decije srce. As of 31 December 2017, the Bank had 124 employees (31 December 2016: 130 employees). The Bank s seat is in no. 121, Bulevar Zoran Djindjic, in Belgrade. The Bank s tax identification number is

14 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements The accompanying financial statements of the Bank as of and for the year ended 31 December 2017 have been prepared in accordance with International Financial Reporting Standards in accordance with the Law on Accounting of the Republic of Serbia ( RS Official Gazette, no. 62/2013). In accordance with the Law on Accounting recognition, valuation, presentation and disclosure of items in the financial statements, large legal entities, entities which have the obligation to prepare consolidated financial statements (parent companies), public companies or companies preparing to become public, irrespective of their size, apply International Financial Reporting Standards ( IFRS ). IFRS, in the sence of the Law on Accounting, include the following: Conceptual Framework for Financial Reporting, International Accounting Standards - IAS, International Financial Reporting Standards - IFRS and related interpretations issued by the International Financial Reporting Interpretations Committee, subsequent amendments to these standards and related interpretations, approved by the International Accounting Standards Board, the translation of which was determined and published by the ministry responsible for finance. Pursuant to the Resolution of the Ministry of Finance of the Republic of Serbia no / dated 13 March 2014 ( RS Official Gazette, no. 35/2014) the official translation of the Conceptual Framework for Financial Reporting and basic texts of IAS, and IFRS issued by the International Accounting Standards Board ( IASB ), as well as the interpretations of the standards issued by International Financial Reporting Interpretations Committee ( IFRIC ) have been determined in the form in which they are issued, i.e., adopted, which will be applicable from the financial statements prepared as of 31 December However, given that the Law on Banks stipulates that financial statements should be prepared applying IFRS from the date on which the competent international body designates as the date of implementation, IFRS in force should be also applied although translation is not provided. For all prior periods, the Bank prepared financial statements in accordance with the Law on Accounting, Law on Banks and other relevant by-laws of the National Bank of Serbia. In accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, the Bank prepared the first financial statements in accordance with IFRS for the year ended 31 December The accompanying financial statements have been prepared under the historical cost convention, except for the measurement at market value of items subject to hedging. The financial statements have been prepared under the going concern principle, which assumes that the Bank will continue to operate in the foreseeable future. The accounting policies and estimates adopted in the preparation of these financial statements are consistent with those followed in the preparation of the Bank s annual financial statements for the year ended 31 December

15 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements (Continued) a) New Standards, Interpretations and Amendments to Existing Standards that are in Force in the Current Period Not Yet Officially Translated and Adopted in RS The application of the following standards, IFRICs and amendments to existing standards, which are mandatory for the first time for the financial year beginning on 01 January 2017, did not result in a significant change in the accounting policies of the Bank nor the effect on the accompanying financial statements of the Bank: Amendment to IAS 7 "Cash Flow Statement" - disclosure initiative. The amendment to IAS 7 clarifies that the entity should provide disclosures that enable users of financial statements to evaluate / assess changes in liabilities arising from financial activities. Amendments to IAS 12 "Income Taxes" - recognition of deferred tax assets for unused losses. The amendments to IAS 12 clarify the following aspects: unrealized losses on debt instruments measured at fair value and valued at cost for tax purposes result in deductible temporary differences regardless of whether the holder of the debt instrument expects to recover the carrying amount of the debt instrument through sale or use. the carrying amount of the asset does not limit estimation of probable future taxable profit. estimates for future taxable profits exclude tax deductions resulting from the abolition of deductible temporary differences. entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax legislation (law) limits the use of tax losses, the entity should assess the deferred tax asset in combination with other deferred tax assets of the same type. Annual improvement of IFRS "Cycle " -IFRS 12 Amendments to IFRS 12 "Disclosure of investments in other entities" explains the scope of standard, stating that requirements of disclosure in standard applicable to investment entities that are classified as held for sale, distribution or as an investment in a business that is discontinued in accordance with IFRS 5 " Non-current Assets Held for Sale and Discontinued Operations". (b) Published standards and interpretations in force in the previous and current period that have not yet been officially translated and adopted Until the date of adoption of the accompanying financial statements, the following IAS, IFRS and interpretations that are an integral part of the standards, and amendments thereto, issued by the International Accounting Standards Board or the Committee on International Financial Reporting Interpretations, came into force and as such are applicable to the financial statements for 2017, although they have not yet been officially translated and adopted in the Republic of Serbia: Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014); Amendments to IFRS 10 "Consolidated Financial Statements", IFRS 12 "Disclosure of Shares in Other Entities" and IAS 27 "Separate Financial Statements" - exemption of subsidiaries from consolidation under IFRS 10 (effective for annual periods beginning on or after 1 January 2014); Amendments to IAS 36 Impairment of Assets - Recoverable Amount Disclosures for Non- Financial Assets (effective for annual periods beginning on or after 1 January 2014); 11

16 Amendments to IAS 39 Financial Instruments: Recognition and Measurement Novation of Derivatives and Continuation of Hedge Accounting (effective for annual periods beginning on or after 1 January 2014); IFRIC 21 Levies (effective for annual periods beginning on or after 1 January 2014); Amendments to IAS 19 "Employee Benefits" - Defined contribution plans (effective for annual periods beginning on or after 01 July 2014). Amendments to various standards (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38) and interpretations to standards are part of the IASB s annual improvements project Cycle , primarily through the elimination of inconsistencies and explanations of the text (effective for annual periods beginning on or after 01 July 2014); Amendments to various standards (IFRS 1, IFRS 3, IFRS 13 and IAS 40) and interpretations to standards are part of the IASB s annual improvements project Cycle published by IASB in December 2013, primarily through the elimination of inconsistencies and explanations of the text (effective for annual periods beginning on or after 01 July 2014); Amendments to IFRS 11 "Joint Arrangements" - Accounting for acquisition of participation in joint businesses (effective for annual periods beginning on or after 1 January IFRS 14 "Accounts regulatory prepayments" - effective for annual periods beginning on or after 1 January Amendments to IAS 16 "Property, Plant and Equipment" and IAS 38 "Intangible Assets" - Interpretation of the accepted methods of depreciation (effective for annual periods beginning on or after 1 January 2016). Amendments to IAS 16 "Property, Plant and Equipment" and IAS 41 "Agriculture" - - Industrial plants (effective for annual periods beginning on or after 1 January 2016). Amendments to IAS 27 "Separate Financial Statements" - Equity method in separate financial statements (effective for annual periods beginning on or after 1 January 2016). Amendments to IFRS 10 "Consolidated Financial Statements" and IAS 28 "Investments in Associates and Joint Ventures" - The sale or transfer of assets between the investor and its associates or joint ventures (effective for annual periods beginning on or after 1 January 2016). Amendments to IFRS 10 "Consolidated Financial Statements", IFRS 12 "Disclosure of interests in other entities" and IAS 28 "Investments in Associates and Joint Ventures" - investing companies: exception of application for consolidation (effective for annual periods beginning on or after 1 January 2016). Amendments to IAS 1 "Presentation of Financial Statements" - Initiative for disclosure (effective for annual periods beginning on or after 1 January 2016). Amendments to various standards "Improvements IFRS" (for period from 2012 to 2014), which are the result of Project annual improvement IFRS (IFRS 5, IFRS 7, IAS 19, IAS 34) primarily through the elimination of inconsistencies and explanations of the text (effective for annual periods beginning on or after 1 January 2016). Amendments to IAS 7 "Cash Flow Statement" - disclosure request that enables report users to change liabilities arising from financing activities (effective from 1 January 2017). Clarifications related to IAS 12 "Income Tax" aimed at reducing the diversity in practice of deferred tax assets arising from unrealized losses (effective from 1 January 2017). Amendments to IFRS 12 - Disclosures in Shares in Other Entities (effective from 1 January 2017). 12

17 c) New Standards, Interpretations and Amendments to Existing Standards that are not yet effective Until the date of preparation of the accompanying financial statements, the following IAS, IFRS and interpretations which are their integral parts, as well as their amendments, issued by International Accounting Standards Board and International Financial Reporting Interpretations Committee, have not became effective: Amendments to various standards (IAS 28, IAS 40 and IFRS 2) shall take effect from 1 January IFRS 9 "Financial Instruments" and subsequent amendments, which replaces requirements of IAS 39 "Financial Instruments: Recognition and Measurement" relating to the classification and measurement of financial assets. Standard eliminates the existing categories of IAS 39 - Assets held to maturity, available for sale and loans and receivables. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, earlier application is permitted. According to IFRS 9, financial assets will be classified into one of two categories at the initial recognition: at amortized cost or fair value. Financial asset will be recognized at amortized cost if the following two criteria are met: assets relate to business model based on the business model for managing the financial assets and their contractual cash flow characteristics. All other assets will be measured at fair value. Gains and losses arising from measurement of financial assets at fair value will be recognized in the income statement, except investments in equity instruments hot held for trading, where IFRS 9 permits, at initial recognition, subsequent unchangeable choice that all changes in fair value are recognized within other gains and losses in the statement of other comprehensive income. The amount that will be recognized in the statement of comprehensive income will not be able to be recognized in the income statement subsequently. 13

18 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements (Continued) c) New Standards, Interpretations and Amendments to Existing Standards that are not yet effective IFRS 15 "Revenue from contracts with customers", which defines framework for recognition of revenue. IFRS 15 replaces IAS 18 "Revenue", IAS 11 "Construction Contracts", IFRIC 13 "Customer Loyalty Programs", IFRIC 15 "Agreements for the Construction of Real Estate" and IFRIC 18 "Transfers of assets from customers" and SIC - 31 "Revenue Barter Transactions Involving Advertising Services". IFRS 15 is effective for annual periods beginning on or after 1 January 2017, earlier application is permitted. IFRIC 22 - The Interpretation relates to foreign exchange transactions where the entity recognizes non-monetary asset or liability for the payment or receipt of advance, before the entity recognizes asset, expense or income, after which the non-monetary asset or liability are recognized again. Interpretation becomes effective on or after 1 January 2018, earlier application is permitted. IFRS 16 "Lease" which was published in January 2016, application for periods beginning on or after 1 January The standards will replace current IAS 17 standard. IFRS 3 "Business Combinations" - amendment relating to clarifications when one party acquires control in a previous joint venture. The change shall enter into force for business combinations whose date of purchase is on or after the first annual reporting period beginning on or after 1 January It may be contrary to amendments to IFRS 11. Amendments to IFRS 4 related to IFRS 9 and are applied before applying IFRS 17 to replace IFRS 4. Amendments to IFRS 7 related to IFRS 9. IFRS 11 related to transactions in which an entity obtains joint control at or after the commencement of the first annual reporting period beginning on or after 1 January This may be in conflict with IFRS 3. IFRS 17 replaces IFRS 4 - application to Financial Statements Beginning 1 January Early application was conditioned by adoption and application of IFRS 9 and IFRS 15. IFRIC 23 - interpretation relating to IAS 12 shall enter into force on or after 1 January 2019, but an earlier application is permitted. The content and form of financial statements and Content of the prescribed Decision on Form and Content of the Financial Statements of Banks ( RS Official Gazette, no. 71/2014 and 135/2014), which is applied starting from the preparation of the financial reports for the year ended 31 December 2014 and which is in line with the revised IAS 1 "Presentation of Financial Statements. In the preparation of these financial statements, the Bank has adhered to the principal accounting policies further described in Note 3, which are in conformity with the accounting, banking and tax regulations prevailing in the Republic of Serbia. The Bank s financial statements are stated in thousands of Dinars, unless otherwise stated. The Dinar (RSD) is the functional and official reporting currency in the Republic of Serbia. All transactions in currencies that are not functional currency are considered to be transactions in foreign currency. 14

19 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements (Continued) d) Implementation status of IFRS 9 in the Bank The Bank has launched a project of implementation of IFRS 9 at the beginning of 2017, which is regularly monitored by the Bank. During the project, the Bank has analyzed the impact of IFRS 9 on a variety of processes, including accounting for financial instruments, risk assessment, information systems, placement of loans and product development. The project is divided into two flows, classification and evaluation and impairment. The project is in the final stage of implementation. Classification and valuation In order to determine classification and valuation, IFRS 9 requires that all financial assets, other than derivatives and equity instruments, shall be analyzed through combination of a business model of managing the financial asset on one hand, and characteristics of contracted cash flows on the other. The Bank has accessed the analysis of business models at the portfolio level. The current policies and strategies related to the portfolio, as well as their application in practice, are considered. In addition, information about portfolios evaluation and reported and information about the risks that affect the performance and how they are managed are considered. In addition, the frequency, scope and timing of the sale of financial assets in the past periods, the reasons for the sale and plans for the sale of financial assets in the future period are examined. In assessing whether contractual cash flows represent only interest and principal payments, the Bank considers financial instruments contractual terms and whether they contain provisions that could change time or amount of contractual cash flows, which would result in fair valuation of instruments. The final conclusion is that there are no credit products that contractual terms do not give rise to cash flows that are solely principal and interest payments on the principal balance at specific dates, which would require valuation at fair value. Based on conducted analysis, the Bank does not expect that new classification requirements will materially impact recognition of receivables, loans, investments in debt securities and equity shares. In addition, no material effects of IFRS 9 requirements regarding classification of financial liabilities. Impairment According to the requirements of the IFRS 9, the Bank defined criteria for classification financial instruments into impairment levels (Level 1, 2 and 3) depending on degree of credit risk increasing from initial recognition. The subject of this classification are financial instruments that are measured at amortized cost, as well as financial instruments valued at fair value through other result (FVOCI). Level 3 corresponds to previous bad (NPL) receivables, Level 1 and Level 2 represent "subclasses" within Performing, whereby Level 2 compiling Performing receivables with a significant increase in credit risk in relation to initial recognition. The criteria pointing to a substantial increase in credit risk after initial recognition are: 1) overdue more than 30 days, 2) change in rating of 2 or more categories, for companies and 2 categories according to the classification of NBS for banks, businesses, local governments and public administration bodies and 2 external rating for state and central bank, 3) receivable is not default, but it is restructured. 15

20 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements (Continued) d) Implementation status of IFRS 9 in the Bank (Continued) Due the different impairment levels result in different ways of calculating potential credit losses (12-month potential credit losses are accounted for receivable from Level 1, while for receivables from Level 2 and Level 3 accounted "lifetime" for credit losses). The Bank has developed an internal methodology for calculating impairment for companies and has calculated risk parameters (EAD, PD, LGD) in accordance with the requirements of IFRS 9. The discount rate used in calculation is valid effective interest rate of a single contract. In accounting "lifetime" for potential credit losses, the Bank has developed the methodology for determining EAD (Exposure at Default) for all periods until the final maturity of financial instrument. For products that are depreciated and for which repayment plans are available, future EAD is determined on the basis of repayment plans Credit conversion factors, depending on the type of product and segment, may be regulated or internally calculated on the basis of historical data. For Low Default Portfolio segment (countries and banks), the annual PDs published by the Moody's rating agency as well as the LGD in accordance with the Capital Adequacy Decision (45%) are used for the purposes of impairment calculation, given that the Bank in this part of the portfolio does not have enough historical data. For classification and calculation of expected credit losses, the Bank uses applicative solution Select 9. It implementation is in the final stage. First-time adoption of IFRS 9 Changes in accounting policies arising from adoption of IFRS 9 will generally be applied retrospectively, with the following exceptions: The Bank plans to take advantage of an exemption whereby it is permissible not to adjust comparative data for previous years on the basis of changes relating to classification, valuation and impairment. Differences in the carrying amounts of financial assets and financial liabilities will be recognized within equity as at 1 January Disclosure IFRS 9 will require new, extended disclosures, particularly in hedge accounting, credit risk and expected losses. Banks conducts an analysis that would determine deviations of requirement for new data compared to existing processes. Implementation of changes in system and controls was initiated, which are necessary in order to provide required data. 16

21 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.2. Comparative Information Comparative information represent financial statements for 2016, prepared in accordance with International Financial Reporting Standards Going Concern The accompanying financial statements of the Bank are prepared in accordance with the going concern principle, which assumes that the Bank will continue its operations in the foreseeable future, which includes a period of at least twelve months from the date of the financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Interest Income and Expense Interest income and expense, including default interest and other income and other expenses from interest bearing assets, i.e. liabilities are recognized on an accrual basis based on obligatory terms defined by a contract signed between the Bank and a customer. Interest income and expense are recognized in the income statement using the effective interest method, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation of the effective interest rate includes all paid or received fees and expenses, which are an integral part of the effective interest rate. Fees from approved loans are deferred based on the interest calculation algorithm by applying the effective interest rate, so that the portion of deferred income from fees follows the status of the principal debt on the loan. Income from loan origination fees is recognized in the income statement as interest income. Interest expenses on deposits are deferred and recognized in the income statement in the period to which they relate. The Bank will, upon the recognition of loan impairment, recognise the interest income in the amount that is obtained by applying the effective interest rate used to discount future cash flows when measuring the impairment loss (original or current in case of application of a variable interest rate) on the carrying value of investments, i.e., the net carrying value. The Bank will use the approach that continues with the calculation and recognition of interest on impaired loans, as well as the calculation of allowance for impairment on that basis, with subsequent adjustment, in the income statement. For all financial instruments that are interest bearing, interest income or interest expense are recorded in the income statement using the effective interest rate applicable, which is the rate that exactly discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, over the shorter period, to the net carrying amount of the financial asset or financial liability. 17

22 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.1. Interest Income and Expense (Continued) For financial assets carried at amortised value, interest income is calculated and recorded using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash flows. The calculation takes into account the contractual terms of the financial asset (for example, prepayment options) and includes all fees and other costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but does not take into account the future credit losses. In the event that a financial asset is impaired on the basis of impairment loss, interest income continues to be calculated using the effective interest rate used to discount future cash flows for the purpose of measuring and calculating the impairment loss. Loan origination fees, which are included in interest income, are calculated and charged as a onetime advance and deferred on a proportionate basis over the period of the loan. Fees based on approved loans are deferred based on the interest calculation algorithm by applying the effective interest rate, so that the maturity of deferred income from fees follows the balance of the loan principal Fee and Commission Income and Expense The Bank earns/pays fee and commission from rendering and using the banking services are generally recognized on an accrual basis when the service has been provided, i.e. rendered. Fees and commissions mostly comprise fees for payment operations services, issued guarantees and other banking services. Loan origination fees which are included in interest income are calculated and charged as a onetime advance and differed on a proportionate basis over the period of the loan (Note 6). Deferral using the straight-line method is not different materially from the effective yield method Foreign currency translation and accounting treatment of exchange gains/losses and effects of foreign currency clause application Balance sheet and income statement items stated in the financial statements are valued by using currency of primary economic environment (functional currency). As disclosed in Note 2.1., the accompanying financial statements are stated in thousands of Dinars (RSD), which represents the functional and official reporting currency of the Bank. Monetary assets and liabilities denominated in foreign currency are translated into Dinars at the median official exchange rate of the National Bank of Serbia, prevailing at the balance sheet date (Note 51). Transactions denominated in foreign currency are translated into Dinars at the official median exchange rate determined in the Interbank Foreign Currency Market, prevailing at the transaction date. Foreign exchange gains or losses arising upon the translation of assets, liabilities and transactions are credited or debited as appropriate, to the income statement, as foreign exchange gains or losses. Dinar assets hedged by a currency clause, i.e., indexed to the RSD-EUR and RSD-USD exchange rate as of the balance sheet date, are converted in dinars at the rate determined on the Interbank foreign exchange market for that day, except for loans which are contractually hedged by the stipulation that receivables cannot be stated at the exchange rate lower than the exchange rate of EUR/USD as of the loan origination date. 18

23 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Foreign currency translation and accounting treatment of exchange gains/losses and effects of foreign currency clause application (Continued) Foreign exchange gains/losses, arising on translation of balance sheet items denominated in foreign currency and transactions in foreign currency, as well as gains and losses arising from the application of the foreign currency clause, are credited/debited against the income statement, as appropriate (Note 10). Commitments and contingencies denominated in foreign currency are translated into dinars at the official median exchange rate of NBS prevailing at the balance sheet date Financial Instruments All financial instruments are initially recognized at fair value including any directly attributable incremental costs of acquisition or issue, except for financial assets and financial liabilities at fair value through profit or loss, which are directly attributable to the acquisition or issue of a financial asset or financial liability. Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions on the market, are recognized on the trade date or settlement date, i.e., on the date when the Bank commits to purchase or sell the assets or the date when the Bank commits to receive or transfer the assets). Financial assets and financial liabilities are recognized in the Bank s balance sheet on the date upon which the Bank becomes counterparty to the contractual provisions of a specific financial instrument. All regular way purchases and sales of financial assets are recognized on the settlement date, i.e. the date the asset is delivered to the counterparty. Day 1 Profit When the transaction price in a non-active market is different to the fair value from other observable current market transaction in the same instrument or based on a valuation technique the variables of which include data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value ( Day 1 profit) in the income statement. Derecognition of Financial Assets and Financial Liabilities Financial assets cease to be recognized when the Bank loses control of the contractual rights governing such instruments; which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. 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, and the difference in the respective carrying amounts is recognized in the income statement. 19

24 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Classification of Financial Instruments The Bank s management determines the classification of its investments at initial recognition. Classification of financial instruments upon initial recognition depends on the purposes for which financial instruments have been obtained and their characteristics. The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity securities and held-for-sale securities. The subsequent measurement of financial assets depends on their classification, as follows: Financial assets at fair value through profit or loss This category includes two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss. Financial assets are classified as held for trading if they have been primarily acquired for the purpose of selling or repurchasing them in the near term, for generating profit from short-term price fluctuations. The above mentioned assets are stated in the balance sheet at fair value. Changes in fair values of securities and other placements at fair value through profit or loss are credited or debited to the Income Statement of the period, as appropriate. As of 31 December 2017, securities held for trading include shares Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and advances to banks and customers approved by the Bank are recorded in the balance sheet once disbursed to the loan beneficiary. As of the balance sheet date, loans are stated at amortised cost by applying the effective interest rate less any allowance for impairment and direct write-offs. Amortised cost is the amount recognized upon initial acquisition of assets, net of repayments of principal and increased by the accrued, and reduced by the collected interest using the effective interest rate on the difference between the initial amount and the amount at the maturity date and net of any allowance for impairment. Loans are stated in the balance sheet at the amount of principal outstanding, including all interest receivable, fees and commissions as well as prepayments and accruals relating to receivables accrued on these grounds, net of the principal repayments, accruals of the fees that are included in the calculation of effective interest rates and allowance for impairment based on an estimate of the risks identified for individual loans, as well as the risk for which the Bank's experience shows are contained in the loan portfolio. To assess these risks, the Bank's management applies the internally adopted methodology. 20

25 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Loans and Receivables (Continued) Interest income and receivables in respect of these instruments are recorded and presented under interest income, i.e., interest receivables. Interests which are part of effective yield on these instruments are recognized as deferred income and credited to the income statement as interest income over the life of a financial instrument. Loans in dinars, with contracted foreign currency clause, i.e. Dinar-EUR and Dinar-USD foreign exchange rate, are revalued in accordance with the contract signed for each loan. The difference between the carrying amount of a loan and the amount calculated applying the foreign currency clause is disclosed within loans and advances. Income and expenses resulting from the application of foreign currency clause are recorded in the income statement, as gains/losses from changes in value of assets and liabilities. In accordance with the Bank's internal policies, at each reporting date the Bank assesses whether there are any indications of the impairment of a financial asset or group of financial assets. Impairment losses are calculated only if there is objective evidence of impairment which resulted from one or several events that occurred after the initial recognition of an asset and when these events influence the estimated future cash flows from financial assets or a group of financial assets and effects can be reliably measured. The indicators based on which the Bank assesses whether there is objective evidence of impairment in loans and advances include the following: defaults in settling the agreed amount of principal or interest, financial difficulties of the debtor, including the possible bankruptcy or any other form of financial reorganization of the debtor, violation of contractual terms, deterioration of the debtor's creditworthiness, decrease in values of loan collaterals, as well as other indicators which point to the fact that there is a measurable decrease in the future cash flows, such as changes in the national and economic conditions directly related with the failure to fulfil the contractual liabilities. In accordance with the policy adopted, the Bank first estimates whether there is objective evidence of impairment of financial assets which are individually significant, and individually and on a portfolio basis for financial assets with no individual significance. Should the Bank come to the conclusion that there is no objective evidence of impairment for an individual financial asset, material or not, the aforementioned asset is included in the group of financial assets with similar characteristics of credit risk and the impairment is assessed on a portfolio basis. The assets assessed individually for impairment and for which the impairment loss is recognized or continues to be recognized, are not included in the assessment of impairment on portfolio basis. In case there is objective evidence of impairment, the amount of loss is determined as a difference between the loan carrying amount and its recoverable amount, which is considered to be the net present value of the estimated future cash flows, discounted at the initial effective interest rate contracted for that particular financial asset. The calculation of the net present value of the estimated future cash flows arising from a collateralized financial asset, reflects the cash flows contingent on realization of the instrument's securitization. In case a loan or a placement held to maturity bears a variable interest rate, the discount rate for measuring any impairment loss is the current interest rate stated in the respective agreement. 21

26 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Loans and Advances (Continued) For the purposes of assessing the impairment loss on portfolio basis, financial assets are aggregated based on their similar characteristics of credit risk and internal classification system applied in the Bank according to the assets' nature, branch of industry, geographical location, type of collaterals, the status of matured, but uncollected loans and the like. The future cash flows for the group of financial assets collectively classified are estimated based on the Bank's historical experience with losses on assets with similar characteristics of credit risk. Historical data on incurring loss for the purposes of assessing impairment on portfolio basis are adjusted based on the currently available data reflecting the effects of current circumstances which influenced the period from which the forgoing experience with losses dates, as well as to remove the effects of the past circumstances, which are non-existent in the current period. The assessment of future cash flows for the group assets reflect and are directly commensurate with the changes of certain ratios from year to year (changes in the unemployment rates, prices of real estate, status of payments or other changes which point to the changes in the probability of losses for the Bank, as well as their proportions). The Bank regularly verifies and reconsiders the methodology and assumptions used to decrease the differences between the estimated losses and actual losses incurred. Impairment losses arising from the impairment of value of loans and receivables, as well as other financial assets, are recorded in the income statement as impairment of placements (Note 15). The write-off of irrecoverable receivables is performed based on a court decision, decisions enacted by the Bank's Assembly, Management Board or Executive Board when there is no real possibility to collect the receivable and when all collaterals have been exhausted. In case the amount of impairment loss on loans in the forthcoming period reverses due to the event which took place after the initial allowance for the impairment was made, such allowance is adjusted by the amount of reversal and the amount of adjustment is credited to the income statement as release of allowance for impairment. Rescheduled Loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment period as well as changes in the loan conditions. The management continuously reviews rescheduled 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, using the original effective interest rate Securities Held-to-Maturity Securities held-to-maturity comprise financial assets with fixed payments or payments which can be determined, having fixed maturities, for which there is a positive intention and ability to hold to maturity. 22

27 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Securities Held-to-Maturity (Continued) Upon initial recognition, securities held-to-maturity are recorded at amortised cost by applying the effective interest method less any allowance for impairment, i.e., accumulated impairment losses. The amortised cost is calculated by taking into account all discounts or premiums realized in the purchase, as well as fees and commissions which are an integral part of the contracted interest rate in the maturity period. The Bank performs individual assessment in order to determine whether there is objective evidence on impairment of the investment into securities held-to-maturity. If there are objective evidence that such securities have been impaired, the amount of impairment loss for investments held to maturity is calculated as the difference between the investments' carrying amount and the present value of expected future cash flows discounted at the investment's original effective interest rate, and it is charged to the Income Statement (Note 13). If, in a subsequent year, the amount of the estimated impairment loss decreases as a consequence of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced and effects are credited to the income statement. Interest income is calculated using the effective interest rate, and is recorded within interest income. Fees that are part of the effective yield from these instruments are deferred and recognized in the income statement during the life of the instrument Held-for-sale Securities Securities for which there is intention to hold them for an indefinite time period, and which can be sold to meet liquidity need or due to fluctuation in the interest rates, foreign exchange rates or prices of capital, are classified as held-for-sale securities. Securities are comprised of equity instruments of banks and other legal entities, as well as of other securities held-for-sale. Upon initial recognition, securities held-for-sale, are stated at fair value. The fair value of securities quoted in the market is based on the currently offered prices. Unrealized gains and losses arising from securities held-for-sale are credited or charged to revaluation reserves, until the security is sold, collected or in any other way realized, or until such security is permanently impaired. When securities held-for-sale are disposed or their value is impaired, the accumulated fair value adjustments, recognized within equity, are credited/charged to the income statement. Equity investments in other legal entities which do not have quoted price in an active market are not measured at fair value and are stated at cost less any allowance for impairment. Dividends earned whilst holding held-for-sale financial instruments are recognized in the income statement as dividend income when the right to receive payment is established. 23