Nordea Bank Polska S.A. Annual Report 2011

Transcription

1 Nordea Bank Polska S.A. Annual Report 2011 This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation.

2 Selected figures EUR thousand Statement of Comprehensive Income period period period period 01/01/ /01/ /01/ /01/ /12/ /12/ /12/ /12/ Interest income Commission income Profit before income tax Profit for the period Decrease in cash and cash equivalents Earnings per share (PLN/EUR) 5,35 5,21 1,29 1,30 The following exchange rates were applied in order to convert financial figures in the profit and loss account into EUR: For figures relating to the period from 01/01/2011 to 31/12/2011: , i.e. the exchange rate calculated as the average of the rates quoted by the National Bank of Poland (NBP), prevailing on the last day of each month in that period. For figures relating to the period from 01/01/2010 to 31/12/2010: , i.e. the exchange rate calculated as the average of the rates quoted by the NBP, prevailing on the last day of each month in that period. EUR thousand Statement of Financial Position Period Period Period Period 31/12/ /12/ /12/ /12/ Loans and advances to banks Loans and advances to customers Total assets Deposits from banks Deposits from customers Total liabilities Total equity Number of shares Book value per share (PLN /EUR) 38,71 33,36 8,76 8,42 10 Capital adequacy ratio 9,55 10, For conversion of items of the statement of financial position into EUR, the Bank used the NBP s exchange rate of quoted on 31/12/2011 and the NBP s rate of quoted on 31/12/

3 Nordea Bank Polska S.A. Annual Financial Statements

4 Table of Contents Title Nordea Bank Polska S.A. Annual Financial Statements Page Statement of Comprehensive Income... 6 Statement of Financial Position... 7 Statements of Changes in Equity... 8 Statement of Cash Flows... 9 NOTES TO THE FINANCIAL STATEMENTS General information about the Issuer Significant Accounting Policies Important accounting estimates and judgements Segment Reporting Management of financial risks Net interest income Net commission income Instruments at fair value through profit or loss and revaluation Other operating income Administrative expenses Depreciation and amortisation Impairment on loans and advances Income tax Earnings per share Cash and balances with central bank Loans and advances to banks Loans and advances to customers Financial assets designated at initial recognition as at fair value through profit or loss Financial assets and financial liabilities held for trading Intangible assets Property, plant and equipment Deferred tax assets and liabilities Other assets Deposits from banks Deposits from customers Debt securities issued Other liabilities Provisions

5 29. Subordinated liabilities Equity Classification of financial instruments Management of equity Fair Value Contingent Liabilities Assets pledged for collateral Operating lease Statement of cash flows supplementary information Related parties Share-based payment programme Events after the reporting period

6 Statement of Comprehensive Income OPERATING INCOME 01/01/ /01/2010 Note 31/12/ /12/2010 Interest income Interest expenses 6 ( ) ( ) Net interest income Commission income Commission expenses 7 (35 884) (37 225) Net commission income Instruments at fair value through profit or loss and revaluation Other operating income Total operating income OPERATING EXPENSES Administrative expenses 10 ( ) ( ) - staff costs ( ) ( ) - other administrative expenses ( ) ( ) Depreciation 11;20;21 (46 224) (37 999) Total operating expenses Impairment on loans and advances 12 (56 272) (20 630) Impairment of property, plant and equipment (4 943) - Profit before income tax Income tax 13 (85 309) (67 573) Profit for the period Total earnings for the period arnings per share iluted earnings per share 01/01/ /01/ /12/ /12/ Diluted earnings are equal ordinary earnings per share because there are no factors causing dilution. The notes presented on pages are an integral part of the financial statements. 6

7 Statement of Financial Position ASSETS Note 31/12/ /12/2010 Cash and balances with central bank Loans and advances to banks Loans and advances to customers Financial assets at fair value through profit or loss Financial assets held for trading Financial assets designated at initial recognition as at fair 18 value through profit or loss Intangible assets Property, plant and equipment Deferred tax assets, net Other assets including current tax TOTAL ASSETS LIABILITIES 31/12/ /12/2010 Deposits from banks Deposits from customers Debt securities issued Financial liabilities at fair value through profit or loss Financial liabilities held for trading Other liabilities including current tax Subordinated liabilities Reserves TOTAL LIABILITIES Share capital Other reserve capital Profit for the year TOTAL SHAREHOLDERS EQUITY TOTAL LIABILITIES AND EQUITY The notes presented on pages are an integral part of the financial statements. 7

8 Statements of Changes in Equity Share capital Reserve capital Core capital Gener al risk fund Other capital Retained earnings and profit for the period Total Retained Profit for earnings the period 1 January Total comprehensive income for the period Bank s equity - - (300) (157) Share-based payment Profit appropriation ( ) - 31 December Name Share capital Reserve capital Core capital General Risk Fund Other capital Retained earnings and profit for the period Total Profit for the period 1 January Total comprehensive income for the period Capital increase Share-based payment Profit appropriation ( ) - 31 December The notes presented on pages constitute an integral part of the financial statements. 8

9 Statement of Cash Flows Nota 01/01/ /12/ /01/ /12/2010 Operating activities Profit for the period Adjustment for the reconciliation of the net profit against net cash from operating activities (40 712) (54 382) Interest paid and received (8 022) Income tax ( ) (85 519) Effect of exchange differences on operating activities Depreciation Changes in operating assets ( ) ( ) Change in loans to financial institutions (30 347) (19 258) Change in advances (lending activity) ( ) ( ) Change in derivative instruments ( ) Change in other assets except financial instruments Changes in operating liabilities Change in deposits by financial institutions Change in deposits and advances by other institutions Change in other liabilities Cash flow in operating activities Investing activities Acquisition of non-current assets (90 993) (25 604) Acquisition of intangible assets (5 890) (4 539) Change in other financial assets ( ) (57 192) Cash flow in investing activities ( ) (87 335) Financing activities Proceeds from issue of shares Issue of debt securities Redemption of debt securities ( ) - Repayment of long-term bank loans - ( ) Other, including loans received Cash flow in financing activities ( ) Decrease in cash and cash equivalents Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Balance sheet change in cash and cash equivalents Interest paid Interest received The notes presented on pages constitute an integral part of the financial statements. 9

10 NOTES TO THE FINANCIAL STATEMENTS 1. General information about the Issuer Information about Nordea Bank Polska S.A. Nordea Bank Polska S.A. is a bank with the registered seat in Poland: Gdynia, 2, Kielecka Street, Tax Identification Number (NIP) , REGON , registered by the District Court in Gdańsk-North in Gdańsk, 8th Commercial Division of the National Court Register under number KRS: The Bank provides a wide range of universal banking services to retail and institutional customers in accordance with the scope of services listed in its Statutes. The Bank's shares are listed on the Warsaw Stock Exchange. 2. Significant Accounting Policies Statement of compliance The annual separate financial statements of Nordea Bank Polska S.A. for the period ended on 31 December 2011 have been drawn up in accordance with the International Financial Reporting Standards adopted by the European Union, and other applicable regulations. The financial statements have been approved by the Management Board for publication on 8 February The financial statements will be finally approved by the General Meeting of the Shareholders. An earlier application of standards that are not yet mandatory as well as amendments to the existing standards and interpretations issued by the International Financial Reporting Standards Interpretation Committee (IFRSIC). The Bank has not followed any standards that are not mandatory yet. The following is a list of standards and interpretations approved by the EU which have not come into effect yet as well as standards and interpretations pending approval by the EU, including amendments to such standards and interpretations as well as an assessment of the impact, if any, of such standards and interpretations on the financial statements of Nordea Bank Polska S.A. Amendments to IFRS 7 Financial Instruments: Disclosure. Offsetting of financial assets and financial liabilities. The amendments to the Standard taking effect on 1 January 2013 will not affect the financial statements because the Bank does not doe offsetting in regard to its financial assets and liabilities not has it entered into any master agreement in regard to offsetting. 10

11 IFRS 9 Financial Instruments. It is expected that upon initial application, the new standard will affect financial statements due to its retroactive application. However, the Bank will not be able to assets the impact on its financial statements until it applies it for the first time. IFRS 10 Consolidates Financial Statements will take effect as of 1 January The Bank will not be able to assets the impact on its financial statements until it applies it for the first time. New standard IFRS 11 Joint Arrangements, which will take effect as of 1 January 2013, regulates the settlement of joint arrangements, classifying them as either joint operations or joint ventures. The standard will not affect the financial statements. New standard IFRS 12 Disclosure of Interests in Other Entities which will come into effect as of 1 January 2013, regulates disclosures of the Bank s interests in subsidiaries, affiliates, joint ventures or unconsolidated structured entities. The new regulation should not have an effect on the financial statements. IFRS 13 Fair Value Measurement, effective as of 1 January The Bank does not expect the standard to have any material impact on the financial statements. Amendments to IAS 1 Presentation of Financial Statements. Presentation of Other Comprehensive Income, will take effect as of 1 July 2012 and they will not affect the Bank s financial statements as the Bank does not have any other comprehensive income. Amendments to IAS 12 Taxes Deferred Income Tax: Future Realization of an Asset effective as of 1 January 2012 do not apply to the financial statements of the Bank because it does not have any investment property measured at fair value on accordance with IAS 40. Amendments to IAS 19 Employee Benefits effective as of 1 January 2013 will not have any material effect on the financial statements of the Bank. Amendments to IAS 27 Consolidated and Separate Financial Statements effective as of 1 January 2013 will not have any effect on the financial statements of the Bank as they will not result in any changes in the Bank s accounting policy. Amendments to IAS 28 Investments in Associates and Joint Ventures, effective as of 1 January 2013 will not have any material effect on the financial statements of the Bank, because the Bank does not have any investments in subsidiaries or any joint ventures which said amendments would apply to. Amendments to IAS 32 Financial Instruments: Presentation. - Offsetting of financial assets and financial liabilities. will take effect on 1 January They will not affect the financial statements because the Bank does not doe offsetting in regard to its financial assets and liabilities not has it entered into any master agreement in regard to offsetting. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine, effective as of 1 January Owing to the nature of the Bank s business, the standard will not affect its financial statements. 11

12 Comparability with previous periods In the annual report 2011, the Bank changed the presentation of cash in transit and cash in ATMs. The changes are as follows: the Statement of Financial Position in the comparable period (31/12/2010); the presentation of the following items has been changed accordingly: o Cash and balances with central bank (previously: PLN 628,834 thousand; now: PLN 757,511 thousand) o Other assets (was PLN 158,881 thousand; now: PLN 30,204 thousand) the Statement of Cash Flows in the comparable period (31/12/2010) the relevant items were changed. o Changes in other assets except financial instruments (previously: PLN 85,518 thousand; now: PLN 128,762 thousand) o Decrease in cash and cash equivalents (previously: PLN 619,030 thousand; now: PLN 700,273 thousand) o Opening balance of cash and cash equivalents (previously: PLN 1 998,603 thousand; now: PLN 2,046,037 thousand) o Closing balance of cash and cash equivalents (previously: PLN 2,617,633 thousand; now: PLN 2,746,310 thousand) The basis of preparation of the financial statements These financial statements for the period from 1 January 2011 to 31 December 2011 contain comparable data for the period from 1 January 2010 to 31 December The financial statements are presented in the Polish zloty (PLN) and all the figures are rounded to the nearest thousand, unless expressly stated otherwise. The following accounting principles have been applied to all the reporting periods presented in these financial statements. These financial statements have been prepared using the fair value concept regarding financial assets and financial liabilities measured at fair value through profit or loss, including derivative instruments, as well as financial assets classified as available for sale, except such assets whose fair value cannot be reliably established. Other financial assets and financial liabilities (including loans and advances) are carried at amortised cost determined with the use of the effective interest rate, reduced by impairment allowances or at cost less any impairment allowances. Application of estimates The preparation of the financial statements in compliance with the IFRS requires that management make subjective judgements, estimates and assumptions influencing its accounting policies and the presentation of the assets and liabilities, as well as income and expenses. Such estimates and assumptions are based on available historical data and a number of other factors that are deemed to be reasonable under the circumstances, the results of which constitute the basis for estimating the carrying amounts of assets and liabilities that are not readily apparent from other sources. 12

13 The estimates and the underlying assumptions are subject to review. Revisions to accounting estimates are recognised in the period when the estimate is revised, provided that such an estimation affects only that period, or in the period of the revision and in future periods if the revision affects both current and future periods. Transactions in foreign currencies Transactions in foreign currencies are translated at the average exchange rates quoted by the central bank at the transaction date. Monetary assets and liabilities resulting from such transactions, denominated in foreign currencies (stated at historical cost), are translated at the exchange rates effective at that date. Any exchange differences arising from translation are recognised in profit or loss. Non-monetary assets and liabilities denominated in foreign currencies which are stated at historical cost are translated at the average exchange rates quoted by the central bank at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies which are stated at fair value are translated into the presentation currency of the financial statements at the average exchange rates quoted by the central bank at the date when their fair value was determined. Financial assets and financial liabilities Classification The Bank classifies financial instruments into the following categories: - financial assets or financial liabilities at fair value through profit or loss, - loans and receivables, - other financial liabilities. The Bank does not classify financial assets into the categories of held-to-maturity or available-for-sale. (a) Financial assets or financial liabilities at fair value through profit or loss These are financial assets and liabilities meeting one of the following criteria: (1) They are classified as held-for-trading. Financial assets or financial liabilities are classified as heldfor-trading if they are acquired or incurred mainly for the purpose of being sold and repurchased in the short term; they are a part of the portfolio of certain financial instruments managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Derivative instruments are also categorised as held-for-trading unless the derivative is a designated and effective hedging instrument. (2) Upon initial recognition they were designated by the Bank as measured at fair value through profit or loss. The Bank applies such a designation when one of the following conditions is met: - the designated financial asset or financial liability is a compound instrument containing one or more embedded derivative instruments eligible for separate recognition and the embedded derivative instrument considerably changes the cash flows originating from the underlying agreement or the separation of the derivative instrument is prohibited; - such a qualification of the asset or the liability eliminates or considerably reduces inconsistency in measurement or recognition (the so-called accounting mismatch due to the 13

14 different method of measurement of assets or liabilities or different recognition of related profits or losses); - the group of financial assets or financial liabilities or of both of these categories is appropriately managed and their results are measured at fair value, in line with documented principles of risk management or the Bank s investment strategy. (b) Loans and receivables Loans and receivables are financial assets other than derivative instruments, whose terms of payment are defined or definable, which are not quoted in an active market, other than: - financial assets which the entity intends to sell immediately or in the near future, which it has qualified as held for trading and those that after initial recognition were designated by the entity as measured at fair value through profit or loss; - financial assets designated by the entity upon initial recognition as available for sale; or - financial assets the holder of which may not recover a substantially complete original investment for a reason other than deterioration in credit quality, which are qualified as available for sale. (c) Other financial liabilities Other financial liabilities are contractual obligations of the Bank to deliver cash or another financial asset to another entity, other than those that are held for trading or designated to be measured at fair value through profit or loss. This category includes deposits from other banks, deposits from customers and debt securities issued. Recognition The Bank recognises a financial asset or a financial liability when and only when it becomes a party to the agreement for the given instrument. The Bank recognises a regular way purchase or sale of a financial asset using settlement date accounting. Loans and receivables are recognised when cash is advanced to the borrowers. Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers the contractual rights to receive the cash flows from the transaction transferring a material part of the risk and rewards of ownership of the financial assets. The Bank derecognises a financial liability (or a part of it) when and only when the liability has expired, that is when the contractual obligation has been discharged, cancelled or when it has expired. Measurement Upon initial recognition, a financial asset or a financial liability is measured at fair value increased, in the case of a financial asset or financial liability not classified at fair value through profit or loss, by 14

15 transaction costs if directly attributable to the acquisition or issue of the financial asset or financial liability. Subsequently, the Bank measures financial assets, including derivatives being assets, at fair value without any deduction for transaction costs to be borne on sale or other disposal, except for: - loans and receivables (loans and advances to banks and to customers, NBP bonds), which are measured at amortised cost using the effective interest rate method. After the initial recognition, financial liabilities are measured at amortised cost using the effective interest rate method except for financial liabilities measured at fair value through profit or loss (derivative financial instruments). The fair value of equity financial instruments in an active market is based on current bid prices. If there is no active market for a given instrument or for unlisted securities, the Bank establishes the fair value using valuation techniques, which include recent market transactions, an analysis of discounted cash flows, option pricing models and other valuation techniques commonly applied by marketplace participants. If it is impossible to obtain a reliable fair value measurement, unlisted financial instruments are recognised at cost and periodically tested for impairment. The fair value of debt instruments traded in active markets is measured on the basis of the current market prices for such instruments. The Bank measures the fair value of derivative financial instruments using valuation techniques. All the models are approved before use and adjusted in order to ensure that the results achieved reflect the actual data and comparable market prices. All the models use observable data only, taken from an active market. The Bank has the following derivative instruments: - forward FX transactions, currency swaps, interest rate swaps, cross-currency swaps and FRAs; such instruments are measured at fair value based on models that discount future cash flows. - currency options: option transactions are measured at fair value with the use of option measurement models. Gains and losses on subsequent measurement Gains and losses on a change in the fair value of a financial asset or financial liability eligible for being recognised at their fair value through profit or loss, not being a part of a hedging relationship, are recognized in profit or loss. Offsetting financial instruments A financial asset and a financial liability are offset and the net amount is presented in the balance sheet when and only when there is a legally enforceable legal right to set off the recognised amounts and when the settlement is to be carried out on a net basis or the asset is realised and the liability settled simultaneously. 15

16 Hedge accounting The Bank does not apply hedge accounting. Impairment of financial assets Financial assets measured at amortised cost At the end of each reporting period, the Bank assesses whether there is any objective evidence of impairment of any financial asset (or a group of financial assets). What may serve as objective evidence of impairment of a financial asset or a group of financial assets is a single event or a cumulative effect of several events. Evidence of impairment may include: - significant financial difficulties of the issuer or obligor, - a breach of contract such as a default or delinquency in payment of interest or the principal amount, - a concession made by the Bank to the borrower which the Bank would not otherwise have considered if it hadn t been for the Borrower s financial or legal difficulties; - probable bankruptcy or other financial reorganisation of the obligor caused by its difficult situation; - the disappearance of an active market for a given financial asset caused by financial difficulties, or - observable data indicating that there has been a measurable decrease in the estimated future cash flows related to a group of financial assets since their original recognition even though such a decrease cannot yet be attributed to any specific financial assets in the group, including: - adverse changes in the payment status of the debtors (e.g. increasing number of delayed payments), or - adverse changes in the domestic or local market that are correlated with (may contribute to) the impairment of assets coming within such a group (e.g. an increase in the unemployment rate, adverse economic or legal changes in a given sector of economy). The above list presents examples and does not exhaust all possible situations that may be considered as sufficient evidence of impairment. The Bank tests all its credit exposures for impairment. Exposures for which evidence of impairment has been found are subject to impairment testing on an individual basis. This process makes it possible to classify all the Bank s customers into the proper risk categories and to determine whether a loss has been incurred (a given exposure has become impaired). Exposures where no evidence of impairment has been found are subject to tests for incurred but not reported impairment losses ( IBNR ). The purpose of portfolio IBNR tests is to estimate the losses that have already been incurred (and which have affected future cash flows that were to be settled in accordance with the agreement), but are still unidentifiable under individual impairment tests. To carry out portfolio tests, credit exposures are grouped in such a manner as to maintain an approximate specification of credit risk of individual 16

17 sub-portfolios. The basic factors taken into account are: customer type, product type and sector and delinquency in payment. The Bank excludes from portfolio testing the customers exposures in whose case objective evidence of impairment has been found. The results of historical data analyses serving as the basis for provisioning are further adjusted to take account of the impact of current factors which did not exist in the past, and to eliminate the impact of the factors that existed in the past and do not exist now. If there is objective evidence of impairment of a credit exposure, the amount of the impairment loss is calculated as the difference between the carrying amount of the asset and the present value of estimated future cash flows. The time factor (a loss in the value of money over time) is taken into account in the process of calculation of estimated future cash flows both when additional payments are expected and when certain effects of debt collection (enforcement of collateral) are assumed. When valuating the collateral held, the Bank takes into account the price that can be obtained in a forced sale. Such a price is further reduced by expected costs of enforcement, sales, storage, etc. With regard to exposures towards business entities, to assess risks and carry out impairment tests, the Bank uses an internal rating system which in principle is supposed to reflect the probability of default. When the probability of recovery of loan receivables with recognised impairment does not increase and the recovery of the receivables is in practice impossible, the amount of a specific loan receivable is written off against the related impairment provision. Receivables that were previously written off and subsequently recovered decrease the impairment charge in the income statement. Provisions for off balance sheet liabilities such as: guarantees, LCs and unused credit lines are recognised in accordance with these principles. Property, plant and equipment Items of property, plant and equipment are initially measured at cost. After the initial recognition of items of property, plant and equipment as assets, the Bank carries them at cost less accumulated depreciation/amortisation and any accumulated impairment losses. Intangible assets Goodwill All business combinations are accounted for under the acquisition method. Goodwill is the difference between the acquisition price and the fair value of the acquired identifiable assets. Goodwill is allocated to cash generating units and it is not subject to depreciation but is tested for impairment on an annual basis. Licences and software Licences and software are initially measured at cost, and after the initial recognition as assets; the Bank carries them at cost less accumulated depreciation and any cumulative impairment losses. 17

18 Subsequent expenses Regarding items of property, plant and equipment and intangible assets, the Bank recognises - in the carrying amount - the cost of replacing some of such items at the moment such a cost is incurred if the Bank is likely to obtain future economic benefits related to such items, and the cost to buy or manufacture of the asset may be reliably measured. Other costs are recognized in the profit and loss account when incurred. Depreciation and amortisation Depreciation and amortisation is charged to the profit and loss account according to the straight-line method over the economic useful life of a given item of property plant and equipment or an intangible asset. Land is not subject to depreciation. The estimated economic useful lives are as follows: buildings and structures machinery and equipment fittings vehicles computer software licences years 3-22 years 5-10 years 5 years 5 years 2-5 years The residual value and the useful life of an asset are subject to annual estimation. Other receivables Trade and other receivables are carried at cost less any impairment losses. Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise items maturing within three months of their acquisition date, including: cash and balances with the central bank of unlimited negotiability, Treasury bills and other eligible bills (i.a. money bills) and loans and advances to other banks, deposits from other banks and short-term securities of the State Treasury. Impairment of assets other than financial assets The carrying amounts of the Bank's assets other than deferred tax assets are reviewed as at the end of the reporting period to determine whether there is any indication of impairment. If so, the recoverable amount of the assets is estimated. For goodwill and intangible assets of an indefinite useful life and intangible assets not yet available for use, the recoverable amount is estimated at the end of each reporting period. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds the recoverable amount. Impairment losses are recognised in the profit and loss account. In the case of cash generating units, impairment losses first reduce the goodwill allocated to these units (group of units), and then proportionally reduce the carrying amount of other assets in the unit (group of units). 18

19 Calculation of the recoverable amount The recoverable amount of other assets is the higher of an asset s net selling price and its value in use. To assess the value in use, estimated future cash flows are discounted to their present value at a pre-tax discount rate reflecting current market assessments of the time value of money and the risks specific to the asset. In the case of assets not generating independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the assets belong. Reversal of an impairment allowance An impairment allowance in respect of goodwill is not reversible. In the case of other assets, an impairment allowance is reversed if there has been a change in the estimates used to define their recoverable amount. An impairment allowance is reversed only to the extent that the assets' carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment allowance had been recognised. Lease agreements and lease payments The Bank is a party to operating lease arrangements where the leased assets are not recognised in the Bank s balance sheet. Payments made under operating leases are recognised on a straight-line basis as cost in the income statement over the term of the lease. Equity Share capital The share capital is shown at its nominal value consistent with the Bank s statues. Other capital Supplementary capital Supplementary capital is established from appropriation of profits or share premium from the issue of shares less direct costs of the issue. Reserve capital Reserve capital comprises the general banking risk fund and other reserves. Employee benefits Employee benefits may be short and long term. Short term employee benefits include salaries, bonuses, paid holidays, social insurance premiums and service anniversary awards. These benefits are measured on an undiscounted basis and are expensed as the related service is provided. Liabilities due to long-term employee benefits constitute the amount of future benefits which an employee will receive in consideration of the work provided during the current period and previous periods. Provisions Provisions are recognised in the balance sheet if the Bank has such a legal or constructive obligation as a result of past events, and if it is probable that an outflow of economic benefits will be required to settle such an obligation. If the effect is material, the amount of provisions is determined based on 19

20 discounted expected cash flows at a before-tax rate which reflects the current market assessment regarding the time value of money and, if applicable, risks specific to the liability. Net interest income Interest income and expenses regarding all financial instruments are recognised in the income statement in amounts resulting from measurement at amortised cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument, or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates the cash flows, considering all the contractual terms of the financial instrument, however, it does not consider any future loan losses. The calculation includes all the fees and points paid or received between the parties and items constituting an integral part of the effective interest rate, as well as all other premiums and discounts. Fee and commission income and expenses Fee and commission income and expenses arise from the provision of financial services offered by the bank and include lending, fees for the Bank s undertaking to provide credit, card fees, cash management fees, fees for brokerage services, investment banking services, project finance services, financial transaction structuring services and asset management services. Fees and commission directly related to the creation of financial assets or liabilities (both income and expense) are recognised in the income statement as an adjustment in the calculation of the effective interest rate. Fees and commission received for the granting of renewable loans, credit lines, credit cards, guarantees and Letters of Credit are accounted for in the income statement using the straightline method during the period until maturity and are presented as commission income. Other fees and commission connected with the services offered by the Bank, such as cash management fees, fees for brokerage services, investment advice, financial planning, investment banking services and financial transaction structuring are recognised in the income statement when the service is performed. Gains (losses) on financial instruments at fair value and revaluation This category of result comprises: - gains and losses on the disposal of or a change in the fair value of assets and liabilities at fair value through profit or loss (including derivative financial instruments). Interest and amortisation of premiums from and discount of securities designated as at fair value are presented under net interest income. - gains and losses from the measurement of financial assets and liabilities denominated in foreign currencies (revaluation of the balance sheet position) as well as realized and unrealized gains and losses on foreign exchange transactions. 20

21 Other income and expenses Other income and expenses comprise any profit or loss made by the Bank on its activities not related directly to the financial activity. These include income and expenses on the sale of non-current assets, salary costs, and administrative expenses. Income tax expense Income tax expense comprises current and deferred tax. Income tax expenses is recognised in the income statement. Current tax is the expected tax payable on the taxable income for the year at the tax rate effective as at the end of the reporting period, and any adjustments to the tax liabilities of previous years. Deferred tax assets and reserve are calculated using the balance sheet method by calculating temporary differences between the carrying amounts of assets and liabilities and their amounts used for taxation purposes. Deferred tax assets relating to all the negative temporary differences are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be set off. The carrying amount of deferred tax assets is reviewed at each reporting date and is reduced to the extend that it is no longer probable that the related economic benefit will be realised. 3. Important accounting estimates and judgements The Bank makes estimates and judgements that have some impact on the value of the assets and liabilities to be recognised in the following period. Such estimates and judgements, reviewed on a regular basis, are based on past experience and other factors, including expectations as to future events that seem justified under the circumstances. Impairment of loans and advances At the end of each reporting period, Nordea Bank Polska S.A. assesses whether there is any objective evidence of impairment of any financial asset or a group of financial assets. Recognition of assets as impaired assets is not limited to situations where a loss can be deemed as irreversible. What may serve as objective evidence of impairment of a financial asset or a group of financial assets is a single event or a cumulative effect of several events. Nordea Bank Polska S.A. includes the following examples of events in the list of objective evidence of impairment: - significant financial difficulties of the issuer or obligor; - a breach of contract such as a default or delinquency in payment of interest or principal amount; - a concession made by Nordea Bank Polska to the borrower which the Bank would not otherwise have considered if it hadn t been for the Borrower s financial or legal difficulties; - probable bankruptcy or other financial reorganisation of the debtor caused by its difficult situation; - the disappearance of an active market for a given financial asset caused by financial difficulties; or - observable data indicating that there has been a measurable decrease in the estimated future cash flows related to a group of financial assets since their original recognition even though such a decrease cannot yet be attributed to any individual financial assets in the group, including: 21

22 - adverse changes in the payment status of the debtors (e.g. increasing number of delayed payments); or - adverse changes in the domestic or local market that are correlated (may contribute to) with the impairment of assets coming within such a group (e.g. growth of an unemployment rate, unfavourable economic or legal changes in a given sector of economy). The above list presents examples and does not exhaust all possible situations that may be considered as sufficient evidence of impairment. Nordea Bank Polska tests all credit exposures for impairment on an individual basis. Exposures where no evidence of impairment has been found are subject to tests for incurred but not reported impairment losses ( IBNR ). The purpose of portfolio IBNR tests is to estimate the losses that have already been incurred (and which have affected future cash flows that were to be settled in accordance with the agreement), but are still unidentifiable under individual impairment tests. To carry out portfolio tests, credit exposures are grouped in such a manner as to maintain an approximate specification of credit risk of individual sub-portfolios. The basic factors taken into account are: customer type, product type and sector and delinquency in payment. The Bank excludes from portfolio testing the customers exposures in whose case objective evidence of impairment has been found. The results of historical data analyses serving as the basis for provisioning are further adjusted to take account of the impact of current factors which did not exist in the past, and to eliminate the impact of the factors that existed in the past and do not exist now. If there is objective evidence of impairment of a credit exposure, the amount of the impairment loss is calculated as the difference between the carrying amount of the asset and the present value of estimated future cash flows. The time factor (the loss of the value of money over time) is taken into account in the process of calculation of estimated future cash flows both when additional payments are expected and when certain effects of debt collection (enforcement of collateral) are assumed. When valuating the collateral held, the Bank takes into account the price that can be obtained in a forced sale. Such a price is further reduced by expected costs of enforcement, sales, storage, etc. With regard to exposures towards business entities, to assess risks and carry out impairment tests, the Bank uses an internal rating system which in principle is supposed to reflect the probability of default. There is a number of financial instruments whose fair values cannot be obtained directly from quoted market prices or indirectly - using valuation techniques or models supported by observable market prices or rates. This is generally the case for investments in unlisted securities, private equity funds, hedge funds, and both more complex or less active markets supplying input to the technique or model for OTC derivatives, certain complex or structured financial instruments and illiquid bonds. 22

23 4. Segment Reporting The operating activities of Nordea Bank Polska S.A. are divided into three basic segments: Retail Banking, Corporate Banking and Financial Segment. The Retail Banking segment comprises transactions (other than markets transactions) made at the Bank s branch network, the Internet Branch and the Call Centre as well as the bank outlets being part of the Retail Banking Centre Main Branch. Retail services concern the following groups of customers: small businesses, sole proprietors and private customers. The Corporate Banking segment comprises transactions made with corporate customers (companies of high turnover), Nordic customers, municipalities, hospitals, as well as debt paper trading. It also offers markets products to customers (foreign exchange transactions). The Financial Segment comprises money market transactions, foreign exchange transactions, transactions in derivative instruments and debt securities performed on the interbank market. The banking income and expenses of a segment are income and expenses earned/incurred on sales to external customers, as well as internal settlements between the Bank's segments. External banking income and expenses were allocated to segments based on the allocation of groups of customers to specific segments (so called customer responsible units). The internal banking result is based on defined assumptions on internal transfer prices. Segment operating expenses are costs of operation of a given segment that may be directly assigned or allocated to the segment. Internal transfer prices used in sales transactions between the segments are based on market prices with appropriate mark-ups The Bank's assets and liabilities are allocated to segments based on the so called customer responsibility. The Corporate and Retail Divisions are assigned the customer deposits and loans for which they are respectively responsible. The assets and liabilities that are not allocated to the separate segments are accounted for under "unallocated assets" and "unallocated liabilities". Nordea Bank Polska S.A. operates exclusively in Poland. No material differences in the risk resulting from the geographical location of its outlets have been identified, therefore no geographical segment information is provided. 23

24 The statement of financial position of Nordea Bank Polska S.A. (at 31/12/2011) ASSETS 31/12/2011 Total LIABILITIES 31/12/2011 Total Corporate Segment Corporate Segment Retail Segment Retail Segment Financial Segment 1. Segment s assets including non-current assets and intangible assets Other assets (unallocated) TOTAL ASSETS Financial Segment 1. Segment s liabilities Equity TOTAL LIABILITIES AND EQUITY The income statement of Nordea Bank Polska S.A. (01/01/ /12/2011) Total Corporate Segment Retail Segment Financial Segment Exclusions Total segment s income ( ) Segment s income (external) Segment s income (internal) ( ) Total segment s costs ( ) ( ) ( ) ( ) Segment s costs (external) ( ) ( ) ( ) (81 751) Segment s costs (internal) - ( ) ( ) (33 075) Depreciation (46 224) (5 320) (40 152) (752) - Dividends received Change in impairment allowances for receivables (61 215) (4 254) (58 802) Impairment allowances (68 443) (6 761) (61 682) - - Impairment reversals Segment s profit (loss) Other income (unallocated) Other costs (unallocated)) (27 523) Profit before income tax Income tax (85 309) Profit for the period

25 The statement of financial position of Nordea Bank Polska S.A. (at 31/12/2010) ASSETS 31/12/2010 Total Corporate Segment Retail Segment Financial Segment 1. Segment s assets including non-current assets and intangible assets Other assets (unallocated) TOTAL ASSETS LIABILITIES 31/12/2010 Total Corporate Segment Retail Segment Financial Segment 1. Segment s liabilities Equity TOTAL LIABILITIES AND EQUITY The income statement of Nordea Bank Polska S.A. (01/01/ /12/2010) Total Corporate Segment Retail Segment Financial Segment Exclusions Total segment s income ( ) Segment s income (external) Segment s income (internal) ( ) Total segment s costs ( ) ( ) ( ) (79 764) Segment s costs (external) ( ) ( ) ( ) (47 037) Segment s costs (internal) - ( ) ( ) (32 018) Depreciation (37 999) (5 367) (31 923) (709) - Dividends received Change in impairment allowances for receivables (20 630) (11 107) (9 894) Impairment allowances (26 284) (12 373) (13 911) - - Impairment reversals Segment s profit (loss) Other income (unallocated) Other costs (unallocated)) (21 361) Profit before income tax Income tax (67 573) Segment s profit (loss)