SKYE BANK PLC CONSOLIDATED ANNUAL REPORT AND FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED ANNUAL REPORT AND FINANCIAL STATEMENTS 31 DECEMBER

2 Table of Content Page Directors Report i Report of the Audit Committee 2 Responsibility for Consolidated Financial Statements 3 Auditors Report 4 Consolidated Statements of Profit or Loss 5 Consolidated Statements of Comprehensive Income 6 Consolidated Statements of Financial Position 7 Consolidated Statements of Changes in Equity 8 Consolidated Statements of Cash Flows 9 Statement of Prudential Adjustment 10 Notes to the Consolidated Financial Position 11 Statement of Value Added 120 Financial Summary 122 Enterprise Risk Management 125 1

3 REPORT OF THE AUDIT COMMITTEE FOR THE YEAR ENDED 31 DECEMBER 2012 In accordance with the Provisions of sections 359(3)(4) and (6) of the Companies and Allied Matters Act, CAP C20 Laws of the Federation of Nigeria 2004, we have received the Independent Auditors report for the year ended 31 December 2012 and hereby state as follows: i. In our opinion the scope and planning of the audit were adequate. ii. iii. iv. The accounting and reporting policies of the Bank conformed to statutory requirements and agreed ethical practices. The effectiveness of the bank s system of accounting and internal control is being reviewed; and The external auditors management report received satisfactory response from management. Mr. Jackson Edah Chairman Audit Committee Lagos, Nigeria 25 March, 2013 Members of the Committee 1. Mr. Jackson Edah(Chairman/shareholder) 2. Alhaji J.A. Abass (Shareholder) 3. Mrs. Temilade Durojaiye(Shareholder) 4. Mr. Victor S. Adenigbagbe (Non-executive director) 5. Mr. Babajide Agbabiaka (Non-executive director) 6. Mr. Abdul Bello (Non-executive director) 2

4 RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 The Companies and Allied Matters Act and the Banks and Other Financial Institutions Act, require the directors to prepare financial statements for each financial year that gives a true and fair view of the state of financial affairs of the Bank at the end of the year and of its profit or loss. The responsibilities include ensuring that the Bank: i. keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the bank and comply with the requirements of the Companies and Allied Matters Act and the Banks and Other Financial Institutions Act; ii. iii. establishes adequate internal controls to safeguard its assets and to prevent and detect fraud and other irregularities; and prepares its financial statements using suitable accounting policies supported by reasonable and prudent judgments and estimates that are consistently applied. The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with, - International Financial Reporting Standards; - Prudential Guidelines for Licensed Banks; - Relevant circulars issued by the Central Bank of Nigeria; - The requirements of the Banks and Other Financial Institutions Act; and - The requirements of the Companies and Allied Matters Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Bank and Group and of the profit for the year. The directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control. Nothing has come to the attention of the directors to indicate that the Bank will not remain a going concern for at least twelve months from the date of this statement Mr. Olatunde Ayeni Mr. Kehinde Durosinmi-Etti Chairman Group Managing Director 3

5 Independent Auditors Report to the Members of SKYE BANK PLC Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of SKYE BANK PLC and its subsidiaries which comprise the consolidated statements of financial position as at 31 December 2012, 31 December, 2011 and 1 January, 2011 the consolidated income statement, statement of changes in equity, cash flow statement for the years ended 31 December 2012 and 31 December, 2011, a summary of significant accounting policies and other explanatory information set out on pages 5 to 124. Directors Responsibility for the Consolidated Financial Statements The Directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the International Financial Reporting Standards, the Companies and Allied Matters Act CAP C20 LFN 2004, the Banks and other Financial Institutions Act CAP B3 LFN 2004, the Financial Reporting Council of Nigeria Act No 6, 2011, and for such internal control as the Directors determine are necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated 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 auditors 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 auditors consider internal controls 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 Directors, 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 audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of SKYE BANK PLC and its Subsidiaries as at 31 December 2012, 31 December 2011 and 1 January, 2011 and the financial performance and cash flows for the year then ended 31 December 2012 and 31 December 2011 in accordance with the International Financial Reporting Standards, the Companies and Allied Matters Act Cap C20 LFN 2004 and the Financial Reporting Council of Nigeria Act No 6, Other reporting responsibilities The bank has complied with the requirements of the relevant circulars issued by Central Bank of Nigeria. In accordance with circular BSD/1/2004 issued by the Central Bank of Nigeria, details of insider-related credits are as disclosed in note 49. During the year the bank contravened certain sections of BOFIA and CBN circulars/guidelines, the details of the contravention and the related penalty are as disclosed in Note 13.1 to the consolidated financial statements. Chartered Accountants Lagos, Nigeria 12 April 2013 FRC number: 4

6 CONSOLIDATED STATEMENT OF PROFIT OR LOSS Continuing operations Group Bank Note N'million N'million N'million N'million Interest income 5 101,032 74, ,495 74,617 Interest expense 6 (56,530) (29,784) (56,424) (29,330) Net interest income 44,502 45,122 44,071 45,287 Fee and commission income 7 23,950 21,786 23,779 21,759 Fee and commission expense 8 (1,355) (830) (1,354) (761) Net fee and commission income 22,595 20,956 22,425 20,998 Net trading income and other investment income 9 1,407 5,245 1,405 5,067 Net gain on foreign exchange translation - (141) - (141) Share of associate income Other income 10 1, Impairment charges and provisions for other liabilities and charges 11 (13,121) (26,591) (13,100) (27,192) (10,373) (20,921) (11,351) (21,832) Net operating income 56,724 44,857 55,145 44,453 Employee benefit and compensation cost 12 (16,228) (14,408) (16,107) (14,163) Administration and general expenses 13 (18,776) (21,893) (18,257) (21,423) Depreciation of property, plant and equipment 14 (5,208) (6,014) (5,006) (5,890) Total operating expenses (40,214) (42,315) (39,370) (41,476) Profit before tax from continuing operations 16,510 2,842 15,775 2,977 Tax expense 40 (3,114) (203) (3,078) (350) Profit for the year from continuing operations 13,396 2,639 12,697 2,627 Discontinued operations Loss before tax from discontinued operations 27.3,16 (752) (1,241) - - Tax expense relating to discontinued operations - (98) - - (752) (1,339) - - Total profit after tax for the year 12,644 1,300 12,697 2,627 Attributable to: Owners 12,646 1, Non-controlling interest (2) (295) ,644 1, Earnings per share (kobo) From continuing operations Basic and diluted (kobo per share) From discontinued operations Basic and diluted (kobo per share) (6) (10) - - 5

7 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Group Bank Note N'million N'million N'million N'million Profit for the period 12,644 1,300 12,697 2,627 Actuarial gains\losses on retirement benefit obligation 5-5 Net change in fair value on available-for-sale financial assets (591) (100) (591) (100) Exchange difference on translation of foreign subsidiaries - (6) - - Net loss/gain recognised directly in equity Gains on available for sale securities transferred to profit or loss on sale Tax on items transferred to profit or loss Net transfers to profit Total other comprehensive expense/income for the year before tax Tax relating to components of other comprehensive expense/ income for the year Total comprehensive income for the year 12,058 1,194 12,111 2,527 Attributable to : Equity holders of the parent 12,058 1,

8 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Group Bank 31 December 31 December 1 January 31 December 31 December 1 January Note N'million N'million N'million N'million N'million N'million ASSETS Cash and Balances with Central Bank ,666 80,615 28, ,987 80,321 27,284 Due from other financial institutions 18 96,671 90,183 76,483 95,874 87,185 63,679 Loans and receivables from customers , , , , , ,463 Trading portfolio assets 20 2, ,834 2, ,834 Equity Securities 21 6,434 8,753 8,033 6,434 8,045 4,901 Investment security held to maturity , ,556 87, , ,226 85,630 Loans and receivables securities 23 34,709 14,866 5,941 34,709 15,153 5,941 Other financial asset 25 16, , Insurance receivable , Investment in subsidiaries ,980 7,274 8,166 Investment in associates ,133 2, ,790 2,462 Prepayment, accrued income & other assets 29 24,153 8,632 18,681 25,159 9,141 6,141 Intangible assets 30 1, ,238 1, Investment properties 31 1,627 1,842 3,410 1, Property plant and equipment 32 29,337 31,107 36,785 28,793 29,948 34,772 Deferred tax asset Assets classified as held for sale 33-39, TOTAL ASSETS 1,073, , ,815 1,071, , ,170 LIABILITIES Customer deposit & other deposits , , , , , ,093 Due to other financial institutions 35 2,506 15,650 32,462 2,629 15,650 32,460 Other financial liabilities 36 16, , Liability on investment contract , Liability on insurance contract , Borrowings from foreign & local banks ,208 85,248 30, ,208 85,248 30,945 Current tax liability 40 1, ,404 1, Deferred tax liability 41 1, , Accruals, deferred income & other liabilities 42 38,999 29,368 29,588 38,368 28,825 19,724 Retirement benefit liability 43 1, , Liabilities directly associated with assets classified as held for sale 33-36, TOTAL LIABILITIES 966, , , , , ,123 EQUITY Ordinary share capital 45 6,609 6,609 6,609 6,609 6,609 6,609 Share premium account 45 65,548 65,548 65,548 65,548 65,548 65,548 Other reserves 33,899 25,145 28,806 35,931 27,125 29, ,056 97, , ,088 99, ,047 Non-controlling interests ,804 2, TOTAL EQUITY 106, , , ,088 99, ,047 TOTAL LIABILITIES AND EQUITY 1,073, , ,815 1,071, , ,170 Contingent liability 50c 156, , , , , ,021 The financial statements were approved by the Board of Directors on 25 March, 2013 and signed on its behalf by: Olatunde Ayeni - Chairman Kehinde Durosinmi-Etti - GMD/CEO Bamidele Ogunnaike - Chief Financial Officer The notes are an integral part of these financial statements. 7

9 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY A. Group Available Total Non Share Share Capital Statutory SMIEIS for sale Revaluation Translation Contingency Treasury Equalization Retained Other controlling Total Capital premiu reserve reserve reserve reserve reserve Reserve reserve reserve reserve earnings reserves interest Equity N'million N'million N'million N'million N'million N'million N'million N million N'million N million N'million N'million N'million N'million N'million Balance at 1 January 2011 (as previously - 111,27 reported) 6,609 65,548 7,503 9,341 1,854-3, ,765 36,639 2,481 7 First time IFRS adoption adjustments (2,811) (3,127) (6) - (2,129) (405) 639 (7,833) - (7,833) Balance at 1 January 2011 (restated) 6,609 65,548 7,503 9,341 1,854 (2,811) - (6) 650 (2,129) - 14,404 28,806 2, ,44 Profit for the year ,592 (295) 1,297 IFRS adjustment - (777) Dividend paid to equity holders (5,292) (5,292) - (5,292) Additions to non-controlling interest Additions to retained earnings from - reclassified subsidiary Other comprehensive income (100) (100) - (100) Balance at 31 December 2011 (restated) 6,609 65,548 7,503 10,125 1,854 (2,911) - (6) - (2,129) - 10,709 25,145 2, ,10 Profit for the year , ,748 12,645 (2) 12,643 Other comprehensive income Total comprehensive income for the year 6,609 65,548 7,503 12,022 1,854 (2,911) - (6) - (2,129) - 21,462 37,795 2, ,75 Payment of dividend (3,305) (3,305) - (3,305) Recognition of AFS and treasury reserve (591) (591) - (591) Adjustments on other reserves (1,964) (1,964) Balance at 31 December ,609 65,548 7,503 12,022 1,854 (3,502) - (6) - (2,129) - 18,157 33, ,89 B. Bank Other reserves Available Total Share Share Capital Statutory SMIEIS for sale Revaluation Equalization Retained Other Total Capital premium reserve reserve reserve reserve reserve reserve Earnings Equity N'million N'million N'million N'million N'million N'million N'million N'million N'million N'million N'million Balance at 1 January 2011 (as previously 6,609 65,548 7,503 9,193 1,854-2, ,819 35, ,754 First time IFRS adoption adjustments (2,811) (2,823) (405) 332 (5,707) (5,707) Balance at 1 January 2011 (restated) 6,609 65,548 7,503 9,193 1,854 (2,811) ,151 29, ,047 Profit for the year ,631 2,627 2,627 Dividend paid to equity holders (5,292) (5,292) (5,292) Other comprehensive income (100) (100) (100) Balance at 31 December 2011 (restated) 6,609 65,548 7,503 10,189 1,854 (2,911) ,490 27,125 99,282 Profit for the year , ,792 12,697 12,697 Other comprehensive income Total comprehensive income for the year 6,609 65,548 7,503 12,094 1,854 (2,911) ,287 39, ,984 Payment of dividend (3,305) (3,305) (3,305) Recognition of AFS and treasury reserve (591) (591) (591) Adjustments on other reserves Balance at 31 December ,609 65,548 7,503 12,094 1,854 (3,502) ,982 35, ,088 8

10 CONSOLIDATED CASHFLOW STATEMENTS Operating activities Group Bank Notes N'million N'million N'million N'million Cash from operations 47 44,713 (42,025) 36,929 (3,187) Income tax paid 40 (1,468) (3,160) (1,453) (2,991) Defined contribution paid (856) (667) (854) (667) Defined benefit paid (595) - (595) - Net cash flows from operating activities 41,794 (45,852) 34,027 (6,178) Investing activities Purchase of property and equipment 32 (5,420) (3,938) (5,018) (758) Sale of property, plant and equipment 1, Other investment income Purchase of FGN Bonds- held for trading (1,591) 332 (1,591) 332 Purchase of Equity investment (719) (3,144) Purchase of state and corporate bonds-htm (19,843) (8,925) (19,556) (9,212) Additions to intangible assets 30 (1,601) (504) (225) (459) Disposal of Intangible Assets 1,355 Investment in subsidiaries - - (567) (103) Purchase of investment property 303 Proceed from disposal of Investment Property (1,870) Proceeds on disposal of subsidaries - - 6, Proceeds from disposal of associates 2,103 1,172 1,760 1,172 Reclass to Associate (536) Proceed from disposal of treasury bills 15,438 15,438 Dividend income Purchase/Proceeds of treasury bills-htm (39,749) (14,391) (38,481) (15,328) Proceeds on disposal of FGN Bonds-HTM 4,361 3,382 4,375 3,368 Net cash flows used in investing activities (60,231) (7,903) (51,647) (7,617) Financing activities Proceeds from long term borrowings 28,960 54,303 28,960 54,303 Dividends paid to equity holders of the parent 46.5 (3,305) (5,292) (3,305) (5,292) Net cash flows from financing activities 25,655 49,011 25,655 49,011 Net increase/(decrease) in cash and cash equivalents 7,219 (4,743) 8,035 35,216 Net foreign exchange difference Cash and cash equivalents at 1 January 125, , ,076 86,860 Cash and cash equivalents at 31 December , , , ,076 9

11 STATEMENT OF PRUDENTIAL ADJUSTMENT 31 December 31 December 1 January Note N'million N'million N'million Loan loss Impairment in line with IFRS ,362 37,235 39,723 Loan loss provision in line with the CBN prudential guideline (21,987) (21,944) (31,562) Excess of IFRS impairment over prudential provision 4,375 15,291 8,161 The IFRS loan impairment was higher than the CBN prudential guideline provision as of 31 December 2012, 31 December 2011 and 1 January There was therefore no transfer made to the non-distributable regulatory reserve. 10

12 1 The reporting entity The accompanying financial statements comprise the financial statements of Skye bank PLC (referred to as the Bank ) and its subsidiaries (referred to as "the Group"). The Bank is a company incorporated in Nigeria under the Companies and Allied Matters Act CAP C20 LFN The address of the Bank s registered office is 3 Akin Adesola Street, Victoria Island, Lagos. The Bank is regulated by the Central Bank of Nigeria and the Securities and Exchange Commission and it is primarily involved in wholesale, corporate and retail banking and mortgage financing. 2 Going concern These financial statements have been prepared on the going concern basis. The Group has no intention or need to reduce substantially its business operations. The management and shareholders have the intention to further develop the business of the Group. The management believes that the going concern assumption is appropriate for the Group due to its sufficient capital adequacy ratio and projected liquidity, and based on historical experience that short-term obligations will be refinanced in the normal course of business. Liquidity ratio and continuous evaluation of the current ratio of the Group is carried out by the Group to ensure that there are no going concern threats to the operations of the Group. 3 Basis of presentation The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. i) Compliance with International Financial Reporting Standards The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRSs), as published by the International Accounting Standards Board (IASB), and the interpretations of these standards, issued by the International Financial Reporting Interpretations Committee (IFRIC). These are the first financial statements of the Group prepared in accordance with IFRS and IFRS 1, First-time Adoption of IFRS (IFRS 1) has been applied for all periods presented beginning 1st January The principal accounting policies applied in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied. ii) Significant estimates and management s judgment The preparation of the Group s consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the reporting date and the reported amount of income and expenses during the period ended. Management evaluates its estimates and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The following estimates and judgments are considered key significant judgments and estimation uncertainty in relation to the financial position and performance of the Group. iii) Functional and presentation currency Items included in the consolidated financial statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the functional currency ).These consolidated financial statements are presented in Nigerian Naira ( N ), which is the Bank s functional currency. The financial information has been rounded to the nearest million, except as otherwise indicated. 11

13 iv) Offsetting Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. 3.1 Adoption of new and revised standards Standards and Interpretations effective in the current period The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period: Amendments to IFRS 1 First-time Adoption of IFRS - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for annual periods beginning on or after 1 July 2011), Amendments to IFRS 7 Financial Instruments: Disclosures - Transfers of Financial Assets (effective for annual periods beginning on or after 1 July 2011), Amendments to IAS 12 Income Taxes - Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after 1 January 2012). The adoption of these amendments to the existing standards and interpretations has not led to any changes in the Group s accounting policies. Standards and Interpretations in issue not yet adopted At the date of authorisation of these financial statements the following standards, revisions and interpretations were in issue but not yet effective: IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2015), IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2013), IFRS 11 Joint Arrangements (effective for annual periods beginning on or after 1 January 2013), IFRS 12 Disclosures of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2013), IFRS 13 Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013), IAS 27 (revised in 2011) Separate Financial Statements (effective for annual periods beginning on or after 1 January 2013), IAS 28 (revised in 2011) Investments in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2013), 12

14 Amendments to IFRS 1 First-time Adoption of IFRS - Government Loans (effective for annual periods beginning on or after 1 January 2013), Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2013), Amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures - Mandatory Effective Date and Transition Disclosures, Amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of Interests in Other Entities - Transition Guidance (effective for annual periods beginning on or after 1 January 2013), Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosures of Interests in Other Entities and IAS 27 Separate Financial Statements - Investment Entities (effective for annual periods beginning on or after 1 January 2014), Amendments to IAS 1 Presentation of financial statements - Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after 1 July 2012), Amendments to IAS 19 Employee Benefits - Improvements to the Accounting for Postemployment Benefits (effective for annual periods beginning on or after 1 January 2013), 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 various standards Improvements to IFRSs (2012) resulting from the annual improvement project of IFRS published on 17 May 2012 (IFRS 1, IAS 1, IAS 16, IAS 32, IAS 34) primarily with a view to removing inconsistencies and clarifying wording (amendments are to be applied for annual periods beginning on or after 1 January 2013), IFRS 9 Financial Instruments published by IASB on 12 November On 28 October 2010 IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. Standard uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. The new requirements on accounting for financial liabilities address the problem of volatility in profit or loss arising from an issuer choosing to measure its own debt at fair value. The IASB decided to maintain the existing amortised cost measurement for most liabilities, limiting change to that required to address the own credit problem. With the new requirements, an entity choosing to measure a liability at fair value will present the portion of the change in its fair value due to changes in the entity s own credit risk in the other comprehensive income section of the income statement, rather than within profit or loss. 13

15 IFRS 10 Consolidated Financial Statements published by IASB on 12 May IFRS 10 replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2) exposure, or rights, to variable returns from its involvement with the investee; and 3) the ability to use its power over the investee to affect the amount of the returns. IFRS 11 Joint Arrangements published by IASB on 12 May IFRS 11 introduces new accounting requirements for joint arrangements, replacing IAS 31 Interests in Joint Ventures. The option to apply the proportional consolidation method when accounting for jointly controlled entities is removed. Additionally, IFRS 11 eliminates jointly controlled assets to now only differentiate between joint operations and joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities. A joint venture is a joint arrangement whereby the parties that have joint control have rights to the net assets. IFRS 12 Disclosures of Interests in Other Entities published by IASB on 12 May IFRS 12 will require enhanced disclosures about both consolidated entities and unconsolidated entities in which an entity has involvement. The objective of IFRS 12 is to require information so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated structured entities and non-controlling interest holders' involvement in the activities of consolidated entities. IFRS 13 Fair Value Measurement published by IASB on 12 May IFRS 13 defines fair value, provides guidance on how to determine fair value and requires disclosures about fair value measurements. However, IFRS 13 does not change the requirements regarding which items should be measured or disclosed at fair value. Amendments to IFRS 1 First-time Adoption of IFRS - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters published by IASB on 20 December The first amendment replaces references to a fixed date of 1 January 2004 with the date of transition to IFRSs, thus eliminating the need for companies adopting IFRSs for the first time to restate derecognition transactions that occurred before the date of transition to IFRSs. The second amendment provides guidance on how an entity should resume presenting financial statements in accordance with IFRSs after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation. Amendments to IFRS 1 First-time Adoption of IFRS - Government Loans published by IASB on 13 March This amendment addresses how a first-time adopter would account for a government loan with a below-market rate of interest when transitioning to IFRSs. It also adds an exception to the retrospective e application of IFRS, which provides the same relief to first-time adopters granted to existing preparers of IFRS financial statements when the requirement was incorporated into IAS 20 Accounting for Government Grants and Disclosure of Government Assistance in Amendments to IFRS 7 Financial Instruments: Disclosures - Transfers of Financial Assets published by IASB on 7 October The objective of the amendments is to improve the quality of the information reported about financial assets that have been transferred but are still, at least partially, recognised by the entity because they do not qualify for derecognition; and financial assets that are no longer recognised by an entity, because they qualify for derecognition, but with which the entity continues to have some involvement. 14

16 Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities published by IASB on 16 December The amendments require information about all recognised financial instruments that are set off in accordance with paragraph 42 of IAS 32. The amendments also require disclosure of information about recognised financial instruments subject to enforceable master netting arrangements and similar agreements even if they are not set off under IAS 32. Amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures - Mandatory Effective Date and Transition Disclosures published by IASB on 16 December Amendments defer the mandatory effective date from 1 January 2013 to 1 January The amendments also provide relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9. This relief was originally only available to companies that chose to apply IFRS 9 prior to Instead, additional transition disclosures will be required to help investors understand the effect that the initial application of IFRS 9 has on the classification and measurement of financial instruments. Amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of Interests in Other Entities - Transition Guidance published by IASB on 28 June The amendments are intended to provide additional transition relief in IFRS 10, IFRS 11 and IFRS 12, by limiting the requirement to provide adjusted comparative information to only the preceding comparative period. Also, amendments were made to IFRS 11 and IFRS 12 to eliminate the requirement to provide comparative information for periods prior to the immediately preceding period. Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosures of Interests in Other Entities and IAS 27 Separate Financial Statements - Investment Entities published by IASB on 31 October The amendments provide an exception to the consolidation requirements in IFRS 10 and require investment entities to measure particular subsidiaries at fair value through profit or loss, rather than consolidate them. The amendments also set out disclosure requirements for investment entities. Amendments to IAS 1 Presentation of financial statements -Presentation of Items of Other Comprehensive Income published by IASB on 16 June The amendments require companies preparing financial statements in accordance with IFRSs to group together items within OCI that may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. Amendments to IAS 12 Income Taxes - Deferred Tax: Recovery of Underlying Assets published by IASB on 20 December IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will, normally be, be through sale. Amendments to IAS 19 Employee Benefits - Improvements to the Accounting for Postemployment Benefits published by IASB on 16 June The amendments make important improvements by: (1) eliminating an option to defer the recognition of gains and losses, known as the corridor method, improving comparability and faithfulness of presentation; (2) streamlining the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements to be presented in other comprehensive income, thereby separating those changes from changes that many perceive to be the result of an entity s day-to-day operations; (3) enhancing the disclosure requirements for defined benefit plans, providing better 15

17 information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans. IAS 27 Separate Financial Statements (revised in 2011) published by IASB on 12 May The requirements relating to separate financial statements are unchanged and are included in the amended IAS 27. The other portions of IAS 27 are replaced by IFRS 10. IAS 28 Investments in Associates and Joint Ventures (revised in 2011) published by IASB on 12 May IAS 28 is amended for conforming changes based on the issuance of IFRS 10, IFRS 11 and IFRS 12. Amendments to IAS 32 Financial instruments: presentation - Offsetting Financial Assets and Financial Liabilities published by IASB on 16 December Amendments provide clarifications on the application of the offsetting rules and focus on four main areas (a) the meaning of currently has a legally enforceable right of set-off ; (b) the application of simultaneous realisation and settlement; (c) the offsetting of collateral amounts; (d) the unit of account for applying the offsetting requirements. Amendments to various standards Improvements to IFRSs (2012) published by IASB on 17 May Amendments to various standards and interpretations resulting from the annual improvement project of IFRS (IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34) primarily with a view to removing inconsistencies and clarifying wording. The revisions clarify the required accounting recognition in cases where free interpretation used to be permitted. The most important changes include new or revised requirements regarding: (i) Repeated application of IFRS 1, (ii) Borrowing costs under IFRS 1, (iii) Clarification of the requirements for comparative information, (iv) classification of servicing equipment, (v) tax effect of distribution to holders of equity instruments, (vi) Interim financial reporting and segment information for total assets and liabilities. 16

18 4. Significant Accounting Policies 4.1 Consolidation The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank (its subsidiaries) made up to 31 December for the year ended 31 December Subsidiaries are consolidated from the date that the Bank gains control. The acquisition method of accounting is used when subsidiaries are acquired by the Bank. The cost of an acquisition is measured at the fair value of the consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are recognised as an expense in the income statement in the period in which they are incurred. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of non-controlling interest and the fair value of Bank s previously held equity interest, if any, over the net of the amounts of the identifiable assets acquired and the liabilities assumed. The amount of non-controlling interest is measured at the noncontrolling interest s proportionate share of the acquiree s identifiable net assets. In a business combination achieved in stages, the previously held equity interest is re-measured at the acquisition date fair value with the resulting gain or loss recognised in the income statement. In the event that the amounts of net assets acquired is in excess of the aggregate of the consideration transferred, the amount of non-controlling interest and the fair value of the Bank s previously held equity interest, the difference is recognised immediately in the income statement. Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are treated as transactions between equity holders and are reported in equity. Entities that are controlled by the Group are consolidated until the date that control ceases. Intra-bank transactions and balances are eliminated on consolidation and consistent accounting policies are used throughout the Group for the purposes of consolidation. The Group manages and administers assets held in unit trusts and other investment vehicles on behalf of investors. These structures constitute Special Purpose Entities ( SPE s). In the event that the relationship with an SPE indicates in substance control of such SPE, such entities would be consolidated. The following indicators may indicate that the Group has established in substance control of the entity: The Group performs a re-assessment of consolidation whenever there is a change in the substance of the relationship between Skye Bank Plc and an SPE. The consolidated financial statements of the group also include the attributable share of the results and reserves of investments in associates. An associate is an entity in which the Bank has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over these policies. Significant influence is generally demonstrated by the Group holding between 20% and 50%, of the voting rights. The Group has taken into account the effect of significant transactions or events that occur in the lag periods that would have a material effect on its results. a) Business Combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. From 1 January 2010, acquisition-related costs are recognised in profit or loss as incurred. 17

19 At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests proportionate share of the recognised amounts of the acquiree s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS. Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are treated as transactions between equity holders and are reported in equity. Entities that are controlled by the Group are consolidated until the date that control ceases. From 1 January 2010, the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement; the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not re-measured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is re-measured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognised in profit or loss. For acquisitions before 1 January 2010, contingent consideration was recorded when its amount become probable and reliably measurable. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date. b) Associate The Group s share of results of the associate entity is included in the consolidated income statement. Investments in associates are carried in the consolidated balance sheet at cost plus the Group s share of post-acquisition changes in the net assets of the associate. Investments in associates are reviewed for any indication of impairment at least at each reporting date. The carrying amount of the investment is tested for impairment, where there is an indication that the investment may be impaired. When the Group s share of losses or other reductions in equity in an associate equals or exceeds the recorded interest, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the entity. 18

20 The excess of the cost of an acquisition over the Group s share of the fair value of the identifiable net assets acquired is recorded as goodwill. Goodwill is included in the carrying amount of the investment and assessed for impairment as part of the investment. A gain on acquisition is recognised immediately in profit or loss if there is an excess of the Group s share of the fair value of the identifiable net assets acquired over the cost of the acquisition. In the separate financial statements of the Group, investments in associates are stated at cost less accumulated impairment losses, if any. 4.2 Foreign Currency Translation i) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using their functional currency, being the currency of the primary economic environment in which the entity operates. The financial statements are presented in Nigeria Naira which is the functional currency of the parent Bank and the presentation currency for the financial statements. ii) Foreign currency transactions Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currencies are retranslated at the rate prevailing on the balance sheet date. Foreign exchange gains and losses resulting from the retranslation and settlement of these items are recognised in the income statement. Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Exchange differences on non-monetary items held at fair value are reported as part of the fair value gain or loss. Non-monetary items that are measured under the historical cost basis are not retranslated. iii) Foreign operations The results and financial position of Skye Bank (Sierra Leone and Gambia) Limited, wholly owned subsidiaries, which has Leone and Dalasi respectively as functional currencies, are translated into the Bank s presentation currency as follows: assets and liabilities of each foreign operation are translated at the rates of exchange ruling at balance date; income and expenses of each foreign operation are translated at the average exchange rate for the period, unless this average is not a reasonable approximation of the rate prevailing on transaction date, in which case revenue and expenses are translated at the exchange rate ruling at transaction date; and all resulting exchange differences are classified as equity and recognised in the foreign currency translation reserve and other comprehensive income. On transition to IFRS, the Group brought forward a nil opening balance on the foreign currency translation reserve arising from the retranslation of foreign operations, which is shown as a separate item in equity. On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Bank are reclassified to profit or loss. 19

21 In the case of a partial disposal that does not result in the Group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. reductions in the Group's ownership interest in associates or jointly controlled entities that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss. Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in equity. The exchange rates used by the Group in the preparation of the financial statements as at year end are as follows: 31 December December December 2010 Average Closing Average Closing Average Closing rate rate rate rate rate rate Naira/Leone Naira/Dalasi Naira/Guinean franc Interest, Fees and Commission i) Interest Interest is recognised in interest income and interest expense in the income statement for all interest bearing financial instruments classified as available for sale, Held to maturity or other loans and receivables. Interest is recognised in Interest income and Interest expense respectively in the income statement using the effective interest method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or liability (or Group of assets and liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the expected future cash payments or receipts through the expected life of the financial instrument, or when appropriate, a shorter period, to the net carrying amount of the instrument. The application of the method has the effect of recognising income (and expense) receivable (or payable) on the instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating effective interest, the Group estimates cash flows considering all contractual terms of the financial instrument but excluding future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the effective rate of a financial instrument, including transactions costs and all other premiums and discounts. Where it is not possible to otherwise estimate reliably the cash flows or the expected life of a financial instrument, effective interest is calculated by reference to the payments or receipts specified in the contract, and the full contractual term. Interest on impaired financial assets is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. ii) Fees and Commission Fee income is earned from a diverse range of services provided by Skye Bank PLC to its customers. Fee income is accounted for as follows: income earned on the execution of a significant transaction is recognised as revenue when the transaction is completed (for example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third-party, such as an arrangement for the acquisition of loans, shares or other securities); 20

22 income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees, wealth management, financial planning and custody services); and income which forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate (for example, certain loan commitment, arrangement and processing fees.) and recorded in Interest income Commitment fees, together with related direct costs, for loan facilities where drawdown is probable are deferred and recognized as an adjustment to the effective interest on the loan once drawn. Commitment fees in relation to facilities where drawdown is not probable are recognised over the term of the commitment iii) Net trading income Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with the related interest income, expense and dividend. Income arises from the margins which are achieved through market making and customer business and from changes in fair value caused by movements in interest and exchange rates, equity prices and other market variables. iv) Dividend from subsidiaries In the separate financial statements of Skye Bank Plc., dividend from subsidiaries is recognised when the right to receive payment is established. 4.4 Determination of fair value All financial instruments are recognised initially at fair value. In the normal course of business, the fair value of a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration given or received). In certain circumstances, however, the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When such evidence exists, the Group recognizes a trading gain or loss on inception of the financial instrument, being the difference between the transaction price and the fair value. When unobservable market data have a significant impact on the valuation of financial instruments, the entire initial difference in fair value indicated by the valuation model from the transaction price is not recognised immediately in the income statement but is recognised over the life of the transaction on an appropriate basis, or when the inputs become observable, or the transaction matures or is closed out, or when the Group enters into an offsetting transaction. Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. When independent prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Fair values of financial instruments may be determined in whole or in part using valuation techniques based on assumptions that are not supported by prices from current market transactions or observable market data, where current prices or observable market data are not available. Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include for example, the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the market place, the maturity of market modelling and the nature of the transaction (bespoke or generic). To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can be more subjective, depending on the significance of the unobservable input to the overall valuation. Unobservable inputs are determined based on the best 21

23 information available, for example by reference to similar assets, similar maturities or other analytical techniques. If the fair value of a financial asset measured at fair value becomes negative, the financial instrument is recorded as a financial liability until the fair value becomes positive, at which time the financial instrument is recorded as a financial asset 4.5 Financial assets and financial liabilities All financial assets and liabilities (including regular way purchases or sales) are recognised in the Group s financial position on trade date. i ii Financial assets Financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as fair value through profit or loss, which are initially recognised at fair value. Financial asset classes and initial recognition The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments and available-for-sale financial assets. Management determines the classification of financial assets and liabilities at the time of initial recognition and the classification is dependent on the nature and purpose of the financial assets. iii Held to maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and where the Group has the positive intention and ability to hold to maturity. They are initially recorded at fair value plus any directly attributable transaction costs, and subsequently measured at amortized cost, using the effective interest method less accumulated impairment losses. iv Financial instruments at fair value through profit and loss Financial instruments are classified in this category if they are held for trading, or if they are designated by management under the fair value option. Instruments are classified as held for trading if they are: a) acquired principally for the purposes of selling or repurchasing in the near term; b) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or c) a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument. v Valuation of Financial Instruments Our accounting policy for determining the fair value of financial instruments is as described above. The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employ only observable market data and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of management judgment to calculate a fair value than those based wholly on observable inputs. 22

24 Valuation techniques used to calculate fair values are discussed above. The main assumptions and estimates which management consider when applying a model with valuation techniques is the likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed by the terms of the instrument, although judgment may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive to changes in market rates. Financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as fair value through profit or loss, which are initially recognised at fair value. vi Financial asset classes and initial recognition The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments and available-for-sale financial assets. Management determines the classification of financial assets and liabilities at the time of initial recognition and the classification is dependent on the nature and purpose of the financial assets. i. Held to maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and where the Group has the positive intention and ability to hold to maturity. They are initially recorded at fair value plus any directly attributable transaction costs, and subsequently measured at amortized cost, using the effective interest method less accumulated impairment losses. ii. Financial instruments at fair value through profit and loss Financial instruments are classified in this category if they are held for trading, or if they are designated by management under the fair value option. Instruments are classified as held for trading if they are: a) acquired principally for the purposes of selling or repurchasing in the near term; b) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or c) a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument. iii. Available for sale Available-for-sale assets are non-derivative financial assets that are classified as available for sale and are not categorized into any of the other categories described above. Available-forsale financial assets are initially measured at fair value plus direct and incremental transaction costs and subsequently measured at fair value, and changes therein are recognised in other comprehensive income in Available-for-sale investments fair value gains/(losses) until the financial assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative gains or losses previously recognised in other comprehensive income are recognised in the income statement as Net realized gain on sale of investments AFS. Interest calculated using the effective interest rate method calculated over the asset s expected life. Premiums and/or discounts arising on the purchase of dated investment securities are included in the calculation of their effective interest rates. Foreign exchange gains and losses on securities AFS are recognised in profit or loss within other income. Dividend on available for sale equity instruments are recognised in profit or loss when the Group s right to receive the dividend is established. 23

25 A financial asset classified as available for sale that would have met the definition of loans and receivables on initial recognition may only be transferred from the available for sale classification where the Group has the intention and the ability to hold the asset for the foreseeable future or until maturity. At each reporting date an assessment is made of whether there is any objective evidence of impairment in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. Where such evidence exists, the difference between the financial asset s acquisition cost (net of any principal repayments and amortization) and the current fair value, less any previous impairment loss recognised in the income statement, is removed from other comprehensive income and recognised in the income statement. Impairment losses for available-for-sale equity securities are recognised within Impairment charges and provisions for other liabilities and charges in the income statement. iv. Impairment of available-for-sale financial assets Our accounting policy for impairment of available-for-sale financial assets is described above. Management is required to exercise judgments in determining whether there is objective evidence that an impairment loss has occurred. Once impairment has been identified, the amount of impairment loss is measured with reference to the fair value of the asset. More information on assumptions and estimates requiring management judgment relating to the determination of fair values of financial instruments is provided above in Valuation of financial instruments. Deciding whether an available-for-sale debt security is impaired requires objective evidence of both the occurrence of a loss event and a related decrease in estimated future cash flows. The degree of judgment involved is less when cash flows are readily determinable, but increases when estimating future cash flows requires consideration of a number of variables, some of which may be unobservable in current market conditions. There is no single factor to which the Group s charge for impairment of available-for-sale debt securities is particularly sensitive, because of the various types of securities we hold, the range of geographical areas in which those securities are held, and the wide range of factors which can affect the occurrence of loss events and the cash flows of securities, including different types of collateral. The most significant judgments concern investment in unquoted securities, as these securities are not traded on notionally recognized stock exchanges and there is no open market information on them. The Group carried most of the un-quoted equities at cost and subsequently tested for impairment based on available Group information. It is possible that outcomes in the next financial year could be different from those modelled when seeking to identify impairment on available-for-sale debt securities. In this event, impairment may be identified in available-for-sale debt securities which had previously been determined not to be impaired, potentially resulting in the recognition of material impairment losses in the next financial year. 24

26 v. Other financial assets Securities may be sold subject to a commitment to repurchase them (a repo). Such securities are retained on the balance sheet when substantially all the risks and rewards of ownership remain with the Group. The transactions are treated as collateralized borrowing and the counterparty liability is presented separately on the balance sheet as repurchase agreements and other similar secured borrowing. Similar secured borrowing transactions including securities lending transactions and collateralized short-term notes are treated and presented in the same way. Similarly, the Group borrows or purchases securities subject to a commitment to resell them (a reverse repo). Such securities are not included on balance sheet as the Group does not acquire the risks and rewards of ownership. The transactions are treated as collateralized loans and the counterparty asset is presented separately on the balance sheet as reverse repurchase agreements and other similar secured lending. Where the Group enters into similar secured lending transactions, such as securities borrowing, these are also treated and presented in the same way. These secured financing transactions are initially recognised at fair value, and subsequently valued at amortized cost, using the effective interest method. Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, at which point the obligation to repurchase the securities is recorded as a trading liability at fair value. 4.6 Derivative financial asset Derivatives are recognised initially, and are subsequently re-measured, at fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are obtained using valuation techniques, including discounted cash flow models and option pricing models. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Derivative assets and liabilities arising from different transactions are only offset where there is a legal right of offset of the recognised amounts and the parties intend to settle the cash flows on a net basis, or realize the asset and settle the liability simultaneously. The method of recognizing fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement. When derivatives are designated as hedges they may be classified as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (fair value hedges ); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedges ); or (iii) a hedge of a net investment in a foreign operation (net investment hedges ). Hedge accounting is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge provided certain criteria are met. 4.7 Embedded derivatives Hybrid contracts contain both a derivative and a non-derivative component. In such cases, the derivative component is termed an embedded derivative. Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract itself is not carried at fair value through profit or loss, the embedded derivative is bifurcated and measured at fair value with gains and losses being recognised in the income statement. 25

27 4.8 De-recognition of financial assets The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received. 4.9 Financial liabilities recognition i. Classes of Financial liabilities Financial liabilities are either classified as financial liabilities at fair value through profit or loss or other liabilities. ii. Financial liabilities at fair value through profit and loss See financial instrument at fair value through profit or loss above. iii. Other financial liabilities Other financial liabilities, including borrowings, are measured at amortized cost using the effective interest rate method (see accounting policy f(i)), except for held for trading liabilities and liabilities designated at fair value, which are held at fair value through profit or loss. iv. De-recognition of financial liabilities The Group derecognizes financial liabilities when, and only when, the Group s obligations are discharged, cancelled or expire. Where valuations include significant unobservable inputs, the transaction price is deemed to provide the best evidence of initial fair value for accounting purposes Impairment of financial assets i. Identification and measurement The Group assesses at each financial reporting date whether there is objective evidence that a financial asset or group of financial assets, other than those held at fair value through profit or loss, are impaired. These are impaired, and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and prior to the balance sheet date (a loss event ) and that loss event or events has had an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include: a) Significant financial difficulty of the issuer or obligor; b) A breach of contract, such as a default or delinquency in interest or principal payments; c) The lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider d) It becomes probable that the borrower will enter bankruptcy or other financial reorganization; 26

28 e) The disappearance of an active market for that financial asset because of financial difficulties; f) Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: Adverse changes in the payment status of borrowers in the portfolio; National or local economic conditions that correlate with defaults on the assets in the portfolio. ii. Loans and advances Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or portfolio of loans has occurred. Impairment allowances are calculated on individual loans and on group of loans assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses expected from future events are not recognised. Loans and advances include loans and advances to Banks and customers originated by the Group which are not classified as either held for trading or designated at fair value. Loans and advances are recognized when cash is advanced to a borrower. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortized cost, using the effective interest method, less any impairment losses. The Group may commit to underwrite loans on fixed contractual terms for specified period of time, where the drawdown of the loan is contingent upon certain future events outside the control of the Group. Where the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative and measured at fair value through profit or loss. On drawdown, the loan is classified as held for trading and measured at fair value through profit or loss. Where it is not the Group s intention to trade but hold the loan, a provision on the loan commitment is only recorded where it is probable that the Group will incur a loss. This may occur, for example, where a loss of principal is probable or the interest rate charged on the loan is lower than the cost of funding. On inception of the loan, the loan to be held is recorded at its fair value and subsequently measured at amortized cost using the effective interest method. However, where the initial fair value is lower than the cash amount advanced (for example, due to the rate of interest charged on the loan being below the market rate of interest), the write-down is charged to the income statement. The write-down will be recovered over the life of the loan, through the recognition of interest income using the effective interest method, unless the loan becomes impaired. The write-down is recorded as a reduction to other operating income iii Individually assessed loans and advances For all loans that meet the criteria for individual assessment, the Group assesses on a case-bycase basis at each balance sheet date whether there is any objective evidence that a loan is impaired. For those loans where objective evidence of impairment exists, impairment losses are determined considering the following factors: aggregate exposure to the customer; the viability of the customer s business model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations; the amount and timing of expected receipts and recoveries; the likely dividend available on liquidation or bankruptcy; 27

29 the extent of other creditors commitments ranking ahead of, or pari passu with, the Group and the likelihood of other creditors continuing to support the Group; the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident; the realizable value of security (or other credit mitigants) and likelihood of successful repossession; the likely deduction of any costs involved in recovery of amounts outstanding; the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency; and when available, the secondary market price of the debt. Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the resultant present value with the loan s current carrying amount. iv. Collectively assessed loans and advances Impairment is assessed on a collective basis in two circumstances: to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment; and for homogeneous Groups of loans that are not considered individually significant Incurred but not yet identified impairment Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective loss. This reflects impairment losses that the Group has incurred as a result of events occurring before the balance sheet date, which the Group is not able to identify on an individual loan basis, and that can be reliably estimated. These losses will only be individually identified in the future. As soon as information becomes available which identifies losses on individual loans within the Group, those loans are removed from the group and assessed on an individual basis for impairment. The collective impairment allowance is determined after taking into account: historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product); the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate allowance against the individual loan; and management s experienced judgment as to whether current economic and credit conditions are such that the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested by historical experience. The period between a loss occurring and its identification is estimated by local management for each identified portfolio. v. Homogeneous banks of loans and advances Statistical methods are used to determine impairment losses on a collective basis for homogeneous group of loans that are not considered individually significant, because individual loan assessment is impracticable. Losses in these banks of loans are recorded on an individual basis when individual loans are written off, at which point they are removed from the group. Due to limitations of empirical information management utilized a combination of a basic formulaic approach based on historical loss rate experience and roll rate methodology where appropriate empirical information is available. This methodology employs statistical analyses of historical data and experience of delinquency and 28

30 default to estimate the amount of loans that will eventually be written off as a result of the events occurring before the balance sheet date which the Group is not able to identify on an individual loan basis, and that can be reliably estimated. Under this methodology, loans are grouped into ranges according to the number of days past due and statistical analysis is used to estimate the likelihood that loans in each range will progress through the various stages of delinquency and ultimately prove irrecoverable. In normal circumstances, historical experience provides the most objective and relevant information from which to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less relevant information about the inherent loss in a given portfolio at the balance sheet date, for example, where there have been changes in economic, regulatory or behavioural conditions, such that the most recent trends in the portfolio risk factors are not fully reflected in the statistical models. These additional portfolio risk factors may include recent loan portfolio growth and product mix, unemployment rates, bankruptcy trends, geographic concentrations, loan product features (such as the ability of borrowers to repay adjustable-rate loans where reset interest rates give rise to increases in interest charges), economic conditions such as national and local trends in housing markets and interest rates, portfolio seasoning, account management policies and practices, current levels of write-offs, changes in laws and regulations and other items which can affect customer payment patterns on outstanding loans, such as natural disasters. These risk factors, where relevant, are taken into account when calculating the appropriate level of impairment allowances by adjusting the impairment allowances derived solely from historical loss experience. Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate. vi. Write-off of loans and advances Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realization of security. In circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write off may be earlier. Subsequent recoveries of amounts previously written off are credited to the income statement. vii Reversals of impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. viii Assets acquired in exchange for loans Non-financial assets acquired in exchange for loans as part of an orderly realization are recorded as assets held for sale and reported in Other assets. The asset acquired is recorded at the lower of its fair value (less costs to sell) and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement, in Other operating income. Any subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative write-down, is also recognised in Other operating income, together with any realized gains or losses on disposal ix Allowance for impairment of loans Management is required to exercise judgment in making assumptions and estimations when calculating loan impairment allowances on both individually and collectively assessed loans. The Group regularly reviews its loans to assess for impairment. The Group s impairment provisions are 29

31 established to recognize incurred impairment losses in its portfolio and loans receivables. The methods used to calculate collective impairment allowances on homogeneous banks of loans that are not considered individually significant are disclosed in the note. These provisions are subject to estimation uncertainty, in part because it is not practicable to identify losses on an individual loan basis because of the large number of individually insignificant loans in the portfolio. The methods involve the use of statistically assessed historical information which is supplemented with significant management judgment to assess whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. In normal circumstances, historical experience provides the most objective and relevant information from which to assess inherent loss within each portfolio, though sometimes it provides less relevant information about the inherent loss in a given portfolio at the balance sheet date, for example, when there have been changes in economic, regulatory or behavioural conditions which result in the most recent trends in portfolio risk factors being not fully reflected in the statistical models. In these circumstances, the risk factors are taken into account by adjusting the impairment allowances derived solely from historical loss experience. Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographical concentrations, loan product features, economic conditions such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations, and other influences on customer payment patterns. Different factors are applied in different regions and countries to reflect local economic conditions, laws and regulations. The methodology and the assumptions used in calculating impairment losses are reviewed regularly in the light of differences between loss estimates and actual loss experience. For example, roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate. However, the exercise of judgment requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which our loan impairment allowances as a whole are sensitive. It is not possible to transfer a financial instrument out of this category whilst it is held or issued with the exception, from 1st July 2008, of non-derivative financial assets held for trading which may be transferred out of this category after initial classification where: a) in rare circumstances, they are no longer held for the purpose of selling or repurchasing in the near term, or b) they are no longer held for the purpose of trading, and they would have met the definition of loans and receivables on initial classification and the Group has the intention and ability to hold them for the foreseeable future or until maturity. Financial instruments included in this category are recognised initially at fair value and transaction costs are taken directly to the income statement. Gains and losses arising from changes in fair value are included directly in the income statement. Financial assets backing insurance contracts and financial assets backing investment contracts are designated at fair value through profit or loss because the related liabilities have cash flows that are contractually based on the performance of the assets or the related liabilities are insurance contracts whose measurement incorporates current information. The fair value option is used in the following circumstances 30

32 a) valuing the assets through profit and loss significantly reduces the recognition inconsistencies that would arise if the financial assets were classified as available for sale; b) financial assets, loans to customers, financial liabilities, financial guarantees and structured notes may be designated at fair value through profit or loss if they contain substantive embedded derivatives; c) financial assets, loans to customers, financial liabilities, financial guarantees and structured notes may be designated at fair value through profit or loss where doing so significantly reduces measurement inconsistencies that would arise if the related derivatives were treated as held for trading and the underlying financial instruments were carried at amortized cost; and d) certain private equity and other investments that are managed, and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. Regular way purchases and sales of financial instruments held for trading or designated under the fair value option are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. x. Renegotiated loans If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. These renegotiated loans are segregated from other parts of the loan portfolio for the purposes of collective impairment assessment, to reflect their risk profile. Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired or should be considered past due. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or de-recognition. Equity securities acquired in exchange for loans in order to achieve an orderly realization are accounted for as a disposal of the loan and an acquisition of equity securities. Where control is obtained over an entity as a result of the transaction, the entity is consolidated. Any further impairment of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an impairment of the original instrument. xi Collateral and netting The Group enters into master agreements with counter parties whenever possible and, where appropriate, obtains collateral. Collateral The Group obtains collateral where appropriate, from customers to manage their credit risk exposure to the customer. The collateral normally takes the form of a lien over the customer s assets and gives the Group a claim on these assets for both existing and future customer in the event that the customer defaults. The Group may also use other credit instruments, such as stock borrowing contracts, and derivative contracts in order to reduce their credit risk. Collateral received in the form of securities is not recorded on the financial position. Collateral received in the form of cash is recorded on the financial position with a corresponding liability. These items are assigned to deposits received from Group or other counterparties. Any interest payable or receivable arising is recorded as interest expense or interest income respectively except for funding costs relating to trading activities which are recorded in net trading income. 31

33 Netting Master agreements provide that, if an event of default occurs, all outstanding transactions with the counterparty will fall due and all amounts outstanding will be settled on a net basis. Financial assets and liabilities are offset and the net amount reported in the financial position if, and only if, there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realize an asset and settle the liability simultaneously. In many cases, even though master netting agreements are in place, the lack of an intention to settle on a net basis results in the related assets and liabilities being presented gross in the financial position Tax, including deferred taxes Income tax Income tax comprises current tax and deferred tax. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years and is recognised as an expense in the period in which profits arise. Current tax assets and liabilities are offset when the Group intends to settle on a net basis and the legal right to offset exists. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits. Deferred tax Deferred income tax is provided in full, using the liability method, on temporary differences arising from the differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates and legislation enacted or substantially enacted by the balance sheet date and is expected to apply when the deferred tax asset is realized or the deferred tax liability is settled. Deferred tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Recognition of deferred tax assets is as described above. The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. Recognition of deferred tax assets is based on the evidence available about conditions at the balance sheet date, and requires significant judgments to be made regarding projections of loan impairment charges and the timing of recovery in the economy. These judgments take into consideration the effect of both positive and negative evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and the availability of loss carry backs. Projections of future taxable income are based on business plans, future capital requirements and ongoing tax planning strategies. These projections include assumptions general economic and political economic conditions, including unemployment levels and their impact on loan impairment charges, and availability of capital support from financial markets. These forecasts are consistent with the assumption that it is probable that the results of future operations will generate sufficient taxable income to support the deferred tax assets. If any of these assumptions turned out to be materially incorrect, the full recovery of the deferred tax asset may no longer be probable and could result in a significant reduction of the deferred tax asset which would be recognised as a charge in the income statement 32

34 4.12 Earnings per share The Group presents basic earnings per share (EPS) for its ordinary shares. Basic EPS is calculated by dividing the profit or loss to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period Segment reporting The Group s operating segments are organized by the nature of the operations and further by geographic location into geographical regions; local and foreign to highlight the contributions of foreign operations to the Group. Due to the nature of the Group, Skye Bank s chief operating decision-maker regularly reviews operating activity on a number of bases, including by geographical region, customer Group and business activity by geographical region. A segment is a distinguishable component of the Group that is engaged in providing related products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risk and rewards that are different from those of other segments. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The Group s operating segments were determined in a manner consistent with the internal reporting provided to the Executive Committee, which represents the chief operating decision-maker ( CODM), as this is the information CODM uses in order to make decisions about allocating resources and assessing performance. Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group s accounting policies prepared in accordance with Statements of Accounting Standards used by Nigerian Accounting Standards Board ( Nigerian GAAP). All transactions between business segments are conducted on an arm s length basis, with intrasegment revenue and costs being eliminated in Head office. Income and expenses directly associated with each segment are included in determining business segment performance Cash and cash equivalents For the purposes of the cash flow statement, cash comprises cash on hand and demand deposits and cash equivalents comprise highly liquid investments that are convertible into cash with an insignificant risk of changes in value with original maturities of less than three months Trust activities The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group. The Group accepts the operational risk on these activities, but the Group s customers bear the credit and market risks associated with such operations. Revenue for provision of trustee services is recognized as services are provided. Impairment losses are recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is thereby impaired Determining whether a lease agreement is a finance or an operating lease requires judgment on various aspects that include the fair value of the leased asset, the economic life of the leased asset, whether or not to include renewal options in the lease term, and determining an appropriate discount rate to calculate the present value of the minimum lease payments. 33

35 4.16 Employee benefits i) Post-employment benefits The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation. For defined contribution schemes, the Group recognizes contributions due in respect of the accounting period in the income statement. Any contributions unpaid at the balance sheet date are included as a liability. ii) Short-term employee benefits Short-term employee benefits, such as salaries, paid absences, and other benefits, are accounted for on an accruals basis over the period which employees have provided services in the year. Bonuses are recognised to the extent that the Group has a present obligation to its employees that can be measured reliably. All expenses related to employee benefits are recognised in the income statement in staff costs Provisions Provisions are recognised for present obligations arising as consequences of past events where it is probable that a transfer of economic benefit will be necessary to settle the obligation, and it can be reliably estimated. The amount recognized is the best estimate of the expenditure required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognizes any impairment loss on the assets associated with that contract. When a leasehold property ceases to be used in the business or a demonstrable commitment has been made to cease to use a property where the costs exceed the benefits of the property, provision is made, where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income and other benefits. Provision is made for the anticipated cost of restructuring, including redundancy costs when an obligation exists. An obligation exists when the Group has a detailed formal plan for restructuring a business and has raised valid expectations in those affected by the restructuring by starting to implement the plan or announcing its main features. The provision raised is normally utilized within nine months. Provision is made for undrawn loan commitments and similar facilities if it is probable that the facility will be drawn and results in the recognition of an asset at an amount less than the amount advanced. Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of the Group; or present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of settlement is remote. 34

36 4.18 Issued debt and equity securities Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavorable or to satisfy the obligation otherwise than by the exchange of a fixed amount of cash or another financial asset for a fixed number of equity shares. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Group. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component Share capital i) Share issue costs Incremental costs directly attributable to the issue of new shares or options including those issued on the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. ii) Dividend on ordinary shares 4.20 Leases Dividend on ordinary shares is recognised in equity in the period in which they are approved by the Group s shareholders. Dividend declared after the balance sheet date is dealt with in the subsequent period. Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Leases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Leases where the Group does not assumes substantially all the risks and rewards of ownership, are classified as operating leases. Group is the lessee When acting as a lessee, finance leases are capitalized at the inception of the lease at lower of the fair value of the leased asset and the present value of the minimum lease payments. Lease payments are separated using the interest rate implicit in the lease agreement to identify the finance cost, which is charged to the income statement, and the capital repayment, which reduced the liability recorded on the balance sheet. When the Group is a lessee under operating leases Payments made under the leases are recorded as rental expense on a straight line basis over the period of the lease including, as applicable, any rent-free period during which the Group has the right to use the asset. Payments made to Group representing incentives to sign a new lease or representing reimbursements for leasehold improvements are deferred and recognized on a straight-line basis over the term of the lease as reductions to rental expense. When an operating lease is terminated before the lease period has expired, any penalty payments resulted from early termination of the lease is recognised as an expense in the period in which the termination takes place. For leases with renewal options where the renewal is reasonably assured, the lease term used to (i) determine the appropriate lease classification, (ii) compute periodic rental expense, and (iii) depreciate leasehold improvements (unless their economic lives are shorter) includes the periods of expected renewals. 35

37 Group is the lessor When acting as lessor under finance lease, the present value of the minimum lease payments discounted at the rate of interest implicit in the lease is recognized as a receivable. The difference between the total payments receivable under a finance lease and the present value of the receivable is recognised as an unearned income, and subsequently recorded as finance income over the life of the lease. Finance charges earned are computed using effective interest method which reflects a constant periodic return on the investment in the finance lease. Initial direct costs paid are capitalized to the value of the lease amounts receivable and accounted for over the lease term as an adjustment to the effective rate of return Computer software Computer software is stated at cost, less amortization and accumulated impairment losses, if any. The identifiable and directly associated external and internal costs of acquiring and developing software are capitalized where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Costs associated with maintaining software are recognised as an expense during the period when they are incurred Capitalized computer software is amortized on the straight-line basis over 1 to 2 years Impairment of intangible and tangible assets excluding goodwill At each balance sheet date, or more frequently where events or changes in circumstances dictate, tangible and intangible assets, are assessed for indications of impairment. If indications are present, these assets are subject to an impairment review. For the purpose of conducting impairment reviews, cash-generating units are the lowest level at which management monitors the return on investment on assets. The impairment review includes the comparison of the carrying amount of the asset with its recoverable amount. The recoverable amount of the assets is the higher of the assets or the cashgenerating unit s net selling price and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm s length transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset s continued use, including those resulting from its ultimate disposal, at a market-based discount rate on a pre-tax basis. The carrying values of tangible and intangible assets, excluding goodwill, are written down by the amount of any impairment and this loss is recognised in the income statement in the period in which it occurs. In subsequent years, the Group assesses whether indications exist that impairment losses previously recognized for tangible and intangible assets other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amount of that asset is recalculated and, if required, its carrying amount is increased to the revised recoverable amount. The increase is recognized in operating income as an impairment reversal. An impairment reversal is recognized only if it arises from a change in the assumptions that were used to calculate the recoverable amount. The increase in an asset's carrying amount due to an impairment reversal is limited to the depreciated amount that would have been recognized had the original impairment not occurred 4.23 Financial guarantees Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognised in the financial statements at fair value on the date that the guarantee was given. Other than where the fair value option is applied, subsequent to initial recognition, the Group s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization recognised in the income statement, and any financial obligation arising as a result of the guarantees at the reporting date. 36

38 Any increase in the liability relating to guarantees is taken to the income statement. Any liability remaining is recognised in the income statement when the guarantee is discharged, cancelled or expires. Provision for guarantees and other off-balance sheet commitments The accounting estimates and judgments related to the provision for off-balance sheet commitments is an area of significant management judgment because the underlying assumptions used for both the individually and collectively assessed impairment can change from period to period and may significantly affect the Group s results of operations. selecting an appropriate discount rate for the instrument. The determination of this is based on the assessment of what a market participant would regard as the appropriate spread of the rate for the instrument over the appropriate rate; and judgment to determine what model to use to calculate fair value in areas where the choice of valuation model is particularly subjective, for example, when valuing complex derivative products. When applying a model with unobservable inputs, estimates are made to reflect uncertainties in fair values resulting from a lack of market data inputs, for example, as a result of illiquidity in the market. For these instruments, the fair value measurement is less reliable. Inputs into valuations based on unobservable data are inherently uncertain because there is little or no current market data available from which to determine the level at which an arm s length transaction would occur under normal business conditions. However, in most cases there is some market data available on which to base a determination of fair value, for example historical data, and the fair values of most financial instruments are based on some market observable inputs even when unobservable inputs are significant. Given the uncertainty and subjective nature of valuing financial instruments at fair value, it is possible that the outcomes in the next financial year could differ from the assumptions used, and this could result in a material adjustment to the carrying amount of financial instruments measured at fair value Property, plant and equipment i) Recognition and measurement Land and buildings are stated at historical cost at the date of transition to IFRSs ( deemed cost ), less any impairment losses and depreciation calculated to write-off the assets over their estimated useful lives. Equipment, fixtures and fittings are stated at cost less any impairment losses and depreciation calculated on a straight-line basis to write-off the assets over their useful lives. Construction cost in respect of offices is carried at cost as work in progress. On completion of construction, the related amounts are transferred to the appropriate category of property and equipment. Payments in advance for items of property and equipment are included as prepayments in other assets and upon delivery are reclassified as additions in the appropriate category of property and equipment. No depreciation is charged until the assets are put into use. 37

39 4.25 Depreciation Depreciation is provided on the depreciable amount of items of property, plant and equipment on a straight-line basis over their estimated useful economic lives. The depreciable amount is the gross carrying amount, less the estimated residual value at the end of its useful economic life. Freehold land is not depreciated. The Group uses the following annual rates in calculating depreciation: Freehold buildings Leasehold buildings - 50 years from date of use - 50 years and above - Over expected life in case of leases under 50 years Motor vehicles Computer hardware equipment Computer software Furniture and fittings Plant and machinery - 4 years - 3 years - 3 years - 5 years - 5 years Depreciation rates, methods and the residual values underlying the calculation of depreciation of items of property, plant and equipment are kept under review to take account of any change in circumstances When deciding on depreciation rates and methods, the principal factors the Group takes into account are the expected rate of technological developments and expected market requirements for, and the expected pattern of usage of, the assets. When reviewing residual values, the Group estimates the amount that it would currently obtain for the disposal of the asset after deducting the estimated cost of disposal if the asset were already of the age and condition expected at the end of its useful economic life. Property, plant and equipment is subject to an impairment review if there are events or changes in circumstances which indicate that the carrying amount may not be recoverable Investment property Investment property, which is property held to earn rentals and/or for capital appreciation (including property under construction for such purposes), is measured initially at its cost, including transaction costs. Subsequent to initial recognition, the Group has elected to carry investment property at cost De-recognition Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the assets and are recognised in the income statement during the period in which they were incurred Intangible assets i. Goodwill Goodwill arises on the acquisition of subsidiary and associated entities, and represents the excess of the cost of acquisition, over the fair value of the Group s share of the assets acquired, and the liabilities and contingent liabilities assumed on the date of the acquisition. For the purpose of calculating goodwill, fair values of acquired assets, liabilities and contingent liabilities are determined by reference to market values or by discounting expected future cash flows to present value. This discounting is either performed using market rates or by using risk-free rates and riskadjusted expected future cash flows. Goodwill is initially recognised as an asset at cost and subsequently measured at cost less accumulated impairment losses, if any. Goodwill is reviewed for impairment at each balance sheet date and whenever there is an indication of potential impairment. Any impairment loss is immediately recognised in profit or loss. 38

40 4.29 IFRS 1 First time adoption As these financial statements represent our initial presentation of our results and financial position under IFRS, they were prepared in accordance with IFRS 1, First Time Adoption of International Financial Reporting Standards ( IFRS 1 ). IFRS 1 requires retrospective application of all IFRS standards, with certain optional exemptions and mandatory exceptions, which are described further in this Note. The accounting policies described in Note 1 have been applied consistently to all periods presented in our Financial Statements with the exception of the optional exemptions elected and the mandatory exceptions required. At 1 January 2011 ( the Transition Date ), an opening balance sheet was prepared under IFRS. The most significant IFRS impact for the Group resulted from the implementation of IAS 39, which requires financial assets to be measured at fair value or at amortized cost (using the effective interest method) if certain criteria are met. As well as requirement to measure the impairment of financial assets only in case where there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset. Our 2011 Financial Statements were previously prepared in accordance with Nigerian SAS. In this Note our transition to IFRS is explained through the following: First time adoption optional exemptions and mandatory exceptions to retrospective application of IFRS This section describes the standards for which IFRS was not applied retrospectively as available in IFRS. Reconciliations of total equity and comprehensive income from Nigerian SAS to IFRS Quantitative and qualitative explanations are included in this section to explain the differences between Nigerian SAS and IFRS in total equity and comprehensive income. Reconciliation of statement of financial position from Nigerian SAS to IFRS This section explains quantitatively and qualitatively the impact and differences between Nigerian SAS and IFRS First time adoption optional exemptions and mandatory exceptions to retrospective application of IFRS As previously noted, IFRS 1 requires retrospective application of all IFRS standards with certain optional exemptions and mandatory exceptions. The optional exemptions elected and the mandatory exceptions to retrospective application of IFRS are described below and the quantification of these is discussed in Note 2.2. Optional exemptions a. Cumulative foreign currency translation differences Retrospective application of IFRS would require us to determine cumulative foreign currency translation differences in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, from the date a subsidiary or equity method investee was formed or acquired. IFRS 1 permits cumulative translation differences to be reset to zero at the Transition Date. We have elected to reset all cumulative foreign currency translation differences in accumulated OCI to zero with an offset to retained earnings as at the Transition Date. 39

41 b. Financial instruments IAS 39, Financial Instruments: Recognition and Measurement ( IAS 39ǁ) sets out the classification and designation requirements for financial instruments at the date of initial recognition, which is the date the entity becomes a party to the contractual provisions of the financial instrument. However, IFRS 1 allows for revised designation of financial instruments held at the Transition Date as AFS or FVTPL. The revised designations have been done primarily to reduce measurement inconsistencies or accounting mismatch. c. Business combinations The retrospective application of IFRS 3, Business Combinations ( IFRS 3ǁ), would require the restatement of all business combinations that occurred prior to the Transition Date. IFRS 1 provides an option not to apply IFRS 3 retrospectively to acquisitions that occurred before the Transition Date and we have elected this optional exemption. Therefore, no adjustments were required to retained earnings or other balances as a result of the adoption of IFRS 3. As we have elected not to apply IFRS 3 retrospectively, we will apply the accounting requirements in IAS 27, Consolidated and Separate Financial Statements ( IAS 27ǁ), for transactions with non-controlling interests prospectively from the Transition Date. d. Assets and liabilities of subsidiaries and associates IFRS 1 allows the Group and its subsidiary to adopt IFRS at different dates for strategic or regulatory reasons. This exemption allows a subsidiary to measure its assets and liabilities either at the carrying amounts included in its parent s consolidated IFRS financial statements or on the basis of IFRS 1 as applied to its statutory financial statements at its own date of transition. When a subsidiary elects to use the carrying amounts in its parent s consolidated financial statements, those carrying amounts are adjusted, where relevant, to exclude consolidation and acquisition adjustments. Goodwill on acquisitions of associates is included in the amount of the investment. Gains and losses on the disposal of an entity include the carrying amount of the goodwill relating to the entity sold. e. Leases IFRIC 4, Determining Whether an Arrangement Contains a Lease, requires an assessment of whether a contract or arrangement contains a lease. The assessment should be carried out at the inception of the contract or arrangement. First-time adopters must apply IFRIC 4, but can elect to make this assessment as of the date of transition based on the facts at that date, rather than at inception of the arrangement. We had elected to take this exception and did not assess arrangement according to IFRIC 4 prior to Transition Date. f. Fair value measurement of financial assets and financial liabilities at initial recognition The current guidance in IAS 39 states the transaction price of a financial instrument is generally the best evidence of fair value, unless fair value is evidence by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market. At initial recognition, an entity may recognize as a gain or loss on the difference between this fair value measurement and the transaction price (i.e., day one gain or loss) only if the measurement of fair value is based entirely on observable market inputs without modification. Otherwise, IAS 39 does not allow the recognition of a day one gain or loss and force initial recognition at the transaction price, which is considered the best evidence of fair value. Subsequent measurement and recognition would follow the guidance as defined by IAS 39. We had re-measured certain AFS securities to fair value as of the Transition Date and applied this exemption prospectively. 40

42 g. Investment in subsidiaries and associates In separate financial statement (i.e. stand-alone, unconsolidated parent-company only financial statements) IAS 27 requires a company to account for its investment in subsidiary, jointly controlled entities and associates either at cost or at fair value in accordance with IAS 39. In the opening IFRS balance sheet of their separate financial statements, first-time IFRS adopters can measure their investment in one of the following manners: At cost, determined in accordance with IAS 27 At deemed cost, which is defined as: Fair value (determined in accordance with IAS 39) as the company s IFRS transition date, or Previous GAAP carrying amount at the IFRS transition date. h. Mandatory exceptions De-recognition of financial assets and liabilities exception Financial assets and liabilities derecognized before 1st January 2011 are not rerecognized under IFRS. Estimates Non-controlling interests Classification and measurement of financial assets All other mandatory exceptions in IFRS 1 were not applicable because there were no significant differences in management s application of Nigerian SAS in these area. 41

43 The table below sets out the carrying amounts of the bank's financial assets and liabilities and their financial instrument categories: A. Group Fair value Fair Value Total Fair value Fair Value Held for Through Amortized Fair Value Carrying Held for Through Amortized Fair Value Carrying ASSETS trading OCI Cost Designated amount trading OCI Cost Designated amount N'million N'million N'million N'million N'million N'million N'million N'million N'million N'million Cash and Balances with Central Bank , , ,615-80,615 Due from other financial institutions ,671-96, ,262-90,262 Trading portfolio assets 2, , Equity Securities - 6, ,434-8, ,045 Investment security held to maturity , , , ,638 Loans and receivables securities ,709-34, ,185-15,185 Loans and receivables from customers , , , ,109 Insurance receivables Investment in associates ,133 Investment in subsidiaries Other financial asset , , Prepayment, accrued income & other assets , ,723 Intangible assets , Investment property , ,844 Property plant and equipment , ,759 Deferred tax asset 762 2,264 6,434 1,003, ,073, , , ,945 LIABILITIES Customer deposit & other deposits , , , ,468 Due to other financial institutions - - 2,506-2, ,650-15,650 Borrowings from foreign & local banks , , ,249-85,249 Other financial liabilities , , Accruals, deferred income & other liabilities , ,374 Current tax liability Claims payable Deferred tax liability Retirement benefit liability 1, , , , ,560 Total 42

44 Classification of Financial Assets and Liabilities The table below sets out the carrying amounts of the bank's financial assets and liabilities and their financial instrument categories: B. Bank Fair value Fair Value Total Fair value Fair Value Total Held for Through Amortized Fair Value Carrying Held for Through Amortized Fair Value Carrying ASSETS trading OCI Cost Designated amount trading OCI Cost Designated amount N'million N'million N'million N'million N'million N'million N'million N'million N'million N'million Cash and Balances with Central Bank , , ,615-80,615 Due from other financial institutions ,874-95, ,262-90,262 Trading portfolio assets 2, , Equity Securities - 6, ,434-8, ,045 Investment security held to maturity , , , ,638 Loans and receivables securities ,709-34, ,185-15,185 Loans and receivables from customers , , ,109 Insurance receivables Investment in associates ,133 Investment in subsidiaries , Other financial asset , , Prepayment, accrued income & other assets , ,723 Intangible assets , Investment property , ,844 Property plant and equipment , ,759 Deferred tax asset 762 2,264 6, , ,070, , , ,945 LIABILITIES Customer deposit & other deposits , , , ,468 Due to other financial institutions - - 2,629-2, ,650-15,650 Borrowings from foreign & local banks , , ,249-85,249 Other financial liabilities , , Accruals, deferred income & other liabilities , ,374 Current tax liability , Claims payable Deferred tax liability , Retirement benefit liability 1, , , , ,560 43

45 Valuation of financial instruments The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements Level 1 Quoted market price (unadjusted) in an active market for an identical instrument. Level 2 Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3 Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the bank determines fair values using valuation techniques. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, Black-Scholes and polynomial option pricing models and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm s length. The bank uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like interest rate and currency swaps that use only observable market data and require little management judgement and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, exchange traded derivatives and simple over the counter derivatives like interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised 31 December 2012 Level Level Level Total N'm N'm N'm N'm Trading portfolio assets 2, ,264 Quoted equity investment 2, ,662 Currency swap derivative - 16,275-16,275 4,926 16,275-21,201 44

46 31 December 2011 Level 1 Level 2 Level 3 Total Trading portfolio assets Quoted equity investment 3, Currency swap derivative , ,220 5 Interest income Group Bank Note N'million N'million N'million N'milli Loans and advances 68,189 56,520 68,119 56,423 Advance finance lease 1,755 1,010 1, Bonds and treasury bills 19,950 9,952 19,600 9,771 AMCON bond 7,548 3,881 7,548 3,881 Investment bonds Money at call and other remittances in transit 3,590 3,130 3,473 3, ,032 74, ,495 74,617 6 Interest expense Savings Deposits (310) (380) (303) (283) Time Deposits (33,851) (15,003) (33,755) (15,172 Interbank takings (7,659) (2,702) (7,656) (2,775) Borrowed funds (4,805) (1,864) (4,805) (1,863) Demand Deposits (1,227) (1,057) (1,227) (1,050) Bond trading - (4,449) - (4,449) Other interest expense (8,678) (4,329) (8,678) (3,738) (56,530) (29,784) (56,424) (29,330) Net interest income 44,502 45,122 44,071 45,287 7 Fee and commission income Commission on turnover 5,479 5,567 5,460 5,506 Foreign exchange commission 6,714 7,810 6,715 7,795 Commission on Off-balance sheet Remittances fees 2,017 1,785 2,017 1,785 Letters of credit commission and fees 1,911 1,491 1,911 1,491 Commission on cheque book issued Handling fees Card related commission 1, , Other Fees and Commissions 5,526 4,050 5,384 4,109 23,950 21,786 23,779 21,759 45

47 Group Bank N'million N'million N'million N'million 8 Fee and commission expense Revenue collection expenses (326) (442) (326) (373) NEFT/NIBSS transfer charges (56) (99) (56) (99) Bank Charges paid to other banks (973) (289) (972) (289) (1,355) (830) (1,354) (761) Net fee and commission income 22,595 20,956 22,425 20,998 Net fee and commission income excludes amounts included in determining the effective interest rate on financial assets measured at amortized cost and liabilities that are not fair value through profit or loss but includes fee income of N5,576m relating to such assets which have been earned at the performance of a significant act. 9 Net trading income and other investment income N'million N'million N'million N'million Dividend income on equity securities that are carried at fair value through other comprehensive income Gain on sale of Treasury bills measured at fair value 5 5, ,833 Net fair value loss arising from derivative instrument (350) - (350) - Other investment income Gain/(loss) on fair value change in Bonds classified as held for trading 609 (415) 609 (415) Gain on fair value change of Treasury bills classified as held for trading Net trading income and other investment income (loss) 1,407 5,245 1,405 5,067 Dividends on equity securities measured at fair value through other comprehensive income and those carried at cost less impairment relate to CDL, KDH, IHS and NIBSS investments held at the end of the reporting year. Assets relating to gains on fair value change of treasury bills that are classified as held for trading were fully sold during the year 46

48 Group Bank N'million N'million N'million N'million 10 Other income Foreign exchange gain/(loss) 61 - (179) - Sundry income 2, , Other losses (1,129) - (1,882) - Rental income (10.1) Profit on sale of fixed assets Recoveries Total other income 1, This represents income generated from bank s property. 11 Impairment charges and other provisions Loans and advances to customers - Specific impairment (Note 19) (1,967) 2,552 (1,946) 2,552 - Collective impairment (Note 19) (11,990) (26,814) (11,990) (26,814) Impairment charges on loans and advances (13,957) (24,262) (13,936) (24,262) Impairment charges and provisions for other liabilities and assets: Other provisions (other assets) (258) (1,845) (258) (1,851) Impairment in value of investment 1,145 (505) 1,145 (1,100) Impairment for available for sale assets - (181) - (181) Reversal of provisions for previously written off accounts Uncollectible cash and short term funds (51) 183 (51) 183 Total impairment charges and provisions (13,121) (26,591) (13,100) (27,192) 12 Employee Benefit and Compensation Cost Wages and Salaries (14,278) (12,668) (14,159) (12,491) Other employee benefit expense (1) (233) - (233) Pension cost : Defined Contribution (282) (267) (282) (266) Defined Benefit (1,667) (1,240) (1,666) (1,173) Performance related payments : Staff training Shares Other post retirement benefit schemes Total Employee Benefit and Compensation Cost (16,228) (14,408) (16,107) (14,163) 47

49 Group Bank N'million N'million N'million N'million 13 Administration and General Expenses Advertising and business promotion 1,813 1,055 1,090 1,050 Communication cost Insurance costs Legal and professional fees NDIC insurance premium 2,247 1,870 2,247 1,806 PP&E Maintenance 1,968 2,115 1,961 2,115 Transport, travel, accommodation Stationery and printing 1, , Other administrative expenses 1,620 4,327 1,604 4,296 Security expenses Training expenses Other operating expenses 2,741 2,659 2,441 2,468 Operating lease expense Charities and Donations Fraud and Defalcation Directors related expenses AMCON sinking fund expenses 2,630 2,040 2,630 2,040 Utilities Office expenses 671 1, Newspapers and periodicals Rents and rates 761 1, Miscellaneous Auditors remuneration CBN penalties Total Administration and General Expenses 18,776 21,893 18,257 21,423 48

50 13.1 Contravention of Banks and other financial Institutions Act, CAP B3 LFN 2004 (BOFIA) The bank contravened certain sections of the Banks and Other Financial Institutions Act (BOFIA) CAP B3, LFN 2004, and Other Regulatory guidelines during the year as stated below: Penalties Banking legislation Nature of Contravention N'million A Section 15(4) of the CACS guideline Contravention of CACS guideline (Undisbursed funds ) 84 B Section 60 (1) BOFIA Failure to comply with Non-disclosure of '=N=83m contravention in the 2011 financial CBN's directives statement (Contravention of section 15(4) of the CACS guideline) 2 C Section 60 (1) BOFIA 1991 as amended Investments of USD 15m in a company without obtaining prior CBN approval 2 D Regulation on scope of banking activities and Failure to obtain CBN prior approval for the promotion of 11 Ancillary Matters N0: senior Management staff members 22 E Section 60 (1) BOFIA 1991 as amended Failure to obtain CBN prior approval for the promotion of 19 senior Management staff members (2m each) 38 F Regulation on scope of banking activities and Failure to return Bank's Universal banking license in exchange for Ancillary Matters N0: a new license before 14 May G Section 60 (1) BOFIA 1991 as amended Foreign Exchange Examination of SKYE Bank Plc 1st August, 2011 to 31st March failure to return un-utilized WDAS totaling $4,957, within 5 working days from the date of receipt of funds H Section 60 (1) BOFIA 1991 as amended Failure to raise within 24 hours 28 certificate of capital importation (CCI) after receipt of the capital inflow 2 I Section 60 (1) BOFIA 1991 as amended Payments of bills for collection based on documents/remittance instruction received directly from supplies contrary to the provision of section 6.2(b) of Memorandum 10 of the CBN FX manual 2 J Section 60 (1) BOFIA 1991 as amended K L M 5(b) ( C ) of the CBN Foreign Exchange Manual Section 9 of the Manufacturing Intervention Funds guideline Section 7(2) of the Manufacturing Intervention Funds guideline Selling of $4000 PTA twice on the 15th and 25th August, 2011 to a customer in excess of the set limit. The requirement is for the Bank to return the excess sum of $4000 to the CBN with an interest of 1% above LIBOR The Bank exceeded its approved Net Open Position Limit 27 times during the review period in contravention of section 4( C) of Memorandum 5 of the CBN FEM Contravention of the Manufacturing Intervention Funds guidelines (applying funds lesser to customer than the amount collected ) Contravention of Manufacturing Intervention Funds guidelines (Charging interest rate higher to customer than the rate prescribed ) - N Section 25 (1) BOFIA 1991 as amended Late rendition of daily returns to the CBN Item A to E above relates to contravention of prior years. 49

51 Group Bank N'million N'million N'million N'million 14 Depreciation and amortization Depreciation of property, plant and equipment (4,565) (5,419) (4,890) (5,663) Amortization of intangibles (643) (595) (116) (227) 15 Earnings per share (5,208) (6,014) (5,006) (5,890) Basic earnings per share (EPS) is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. Where a stock split has occurred, the number of shares in issue in the prior year is adjusted to achieve comparability. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares Profit from continuing operations N'million 13,396 2,639 12,697 2,627 Profit from discontinued operations N'million (752) (1,339) - - Number of ordinary shares in issue as at year end 'million 13,219 13,219 13,219 13,219 Time weighted average number of ordinary shares 13,219 13,219 13,219 13,219 Basic and diluted earnings per share (kobo) continuing operations Basic and diluted earnings per share (kobo) discontinued operations (6) (10)

52 16. Operating activities relating to discontinued operations 2011 N'million Interest income 284 Interest expense (566) Net interest income (282) Fee and commission income 511 Fee and commission expense - Net fee and commission income 511 Net income on investment 184 Underwriting profit 1,353 Other income or loss 1,963 Impairment charges and provisions for other liabilities and charges (1,473) Net operating income 2,256 Employee benefit and compensation cost (359) Administration and general expenses (2,779) Depreciation of property, plant and equipment (359) Total operating expenses (3,497) Loss before tax from discontinued operations (1,241) Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 17 Cash and Balances at Central Bank Cash and foreign monies 25,495 28,027 21,618 25,015 27,936 21,433 Operating account with the Central Bank 9,692 6,986 2,854 9,222 6,950 1,743 Cash reserve with CBN 75,796 45,430 4,453 75,796 45,430 4,108 Other accounts Allowance for impairment (note 17.2) (46) - - (46) ,666 80,615 28, ,987 80,321 27, Cash and cash equivalent Balances with Central bank 85,488 52,416 7,307 85,018 52,380 5,851 Less restricted reserves with Central Bank (75,796) (45,430) (4,453) (75,796) (45,430) (4,108) 9,692 6,986 2,854 9,222 6,950 1,743 Cash and foreign monies 25,495 28,027 21,618 25,015 27,936 21,433 Placements with banks and discount houses 23,952 46,200 51,976 23,642 45,000 40,657 Other accounts 73,448 44,155 24,512 72,232 42,190 23, , , , , ,076 86,860 Cash and cash equivalent does not include restricted cash with CBN which is not available for use by the bank for normal day to day cash operations. Cash and cash equivalent also include term placement or investments which can be realised in 90 days or less. 51

53 17.2 Reconciliation of allowance for impairment Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million Balance at 1 January Reversal of impairment Increase in impairment allowances (46) - - (46) - - Foreign currency translation and other adjustments At 31 December (46) - - (46) Due from other financial institutions Current account balances within Nigeria , ,828 - Current account balances outside of Nigeria 72,329 31,128 23,641 72,232 29,357 23,022 Placements with other banks and discount houses 23,952 46,200 51,976 23,642 45,000 40,657 96,671 90,183 76,483 95,874 87,185 63,679 A. Group 19 Loans and receivables to customers 31 December 31 December 1 January N'million N'million N'million Loan and advances to customers: Term loans 442, , ,366 Overdraft 96, ,495 83,959 Finance lease receivables 28,014 5,942 7, , , ,535 Impairment allowance (26,362) (37,235) (39,899) Loan and advances to customers net of impairment allowance 540, , ,636 52

54 Analysis of loans and advances by category of impairment - Gross Carrying Loans & Carrying Loans & value Allowance advances Value Allowance Advances before for net before for net impairment of impairment of impairment impairment impairment impairment N'million N'million N'million N'million N'million N'million Incurred but not yet observed 538,676 (13,017) 525, ,101 (24,534) 483,567 Collectively impaired 3,516 (2,170) 1,346 3,252 (2,767) 485 Specific impairment 24,550 (11,175) 13,375 12,788 (9,934) 2,854 Gross Loans 566,742 (26,362) 540, ,140 (37,235) 486, Movement in impairment allowance Specific impairment Allowance Collective Impairment Allowance Total N'million N'million N'million N'million N'million N'million At 1 January 2011 (9,934) (11,814) (27,301) (27,909) (37,235) (39,723) Written off in the year (note ) 5,616-16,384 27,422 22,000 27,422 Recovered during the year (4,911) (672) 7,720-2,809 (672) Charge for the year (1,946) 2,552 (11,990) (26,814) (13,936) (24,262) At 31 December (11,175) (9,934) (15,187) (27,301) (26,362) (37,235) 53

55 19.2.1During the year certain loans and advances amounting to N21,988 million (2011: N27,431 million) was written off the loan portfolios. The directors believe the cashflow recovery from such loans and advances are not likely. However, they have been transferred to the memorandum record. 31 December 31 December 1 January N'million N'million N'million Analysis by security Secured against real estate 213, , ,202 Otherwise secured (shares, cash collateral, guarantees) 349, , ,632 Unsecured 3,436 3,177 2,701 Total Loans 566, , ,535 Analysis of loans and advances by Sector N'million N'million N'million Agriculture 5,002 4,626 3,932 Association/NGOs 1,328 1,228 1,044 Aviation 3,997 3,697 3,142 Building & construction 40,659 37,602 31,963 Education & educational services 19,665 18,187 15,460 Financial services 21,063 19,480 16,558 General commerce 89,858 83,103 70,640 Health & medical services 1,496 1,384 1,176 Hospitality 24,380 22,548 19,166 Information technology 8,371 7,742 6,581 Manufacturing companies 26,669 24,664 20,965 Maritime 27,509 25,441 21,626 Media & entertainment 1,920 1,776 1,509 Mining & quarrying Oil & gas 137, , ,032 Power 3,171 2,932 2,493 Professional services 32,315 29,886 25,404 Public sector 47,606 44,028 37,425 Real estate 38,243 35,368 30,064 Retail 9,026 8,347 7,095 Telecommunications 23,825 22,034 18,729 Transportation 2,954 2,732 2,322 Total by sector 566, , ,535 Analysis of loans and advances by maturity Less than one year 190, , ,011 Between one and five years 235, , ,198 Over five years 140,602 96,851 82,326 Gross loans 566, , ,535 54

56 B Bank 31 December 31 December 1 January N'million N'million N'million 19 Loans and receivables to customers Loan and advances to customers: Term loans 442, , ,145 Overdraft 96, ,414 83,070 Finance lease receivables 28,014 5,934 7, , , ,272 Impairment allowance (26,294) (36,639) (39,809) Loan and advances to customers net of impairment allowance 540, , ,463 55

57 19.1 Analysis of loans and advances by category of impairment - Gross N'million N'million Carrying Loans & Carrying Loans & value Allowance advances value Allowance Advances before for net before for net impairment of impairment of impairment impairment impairment impairment Incurred but not yet observed 549,251 (13,016) 536, ,862 (23,966) 465,896 Collectively impaired 3,422 (2,168) 1,254 4,106 (3,323) 783 Specific impairment 13,657 (11,110) 2,547 31,922 (9,350) 22,572 Gross Loans 566,330 (26,294) 540, ,890 (36,639) 489, Movement in impairment allowance Specific impairment Allowance Collective Impairment Allowance Total N'million N'million N'million N'million N'million N'million At 1 January 2011 (9,350) (11,902) (27,289) (27,907) (36,639) (39,809) Written off in the year (note ) 5,614-16,384 27,431 21,998 27,431 Recovered during the year (5,428) 2,552 7,711-2,283 2,552 Charge for the year (1,946) - (11,990) (26,813) (13,936) (26,813) At 31 December (11,110) (9,350) (15,184) (27,289) (26,294) (36,639) 56

58 During the year certain loans and advances amounting to N21,988 million (2011: N27,431 million) was written off the loan portfolios. The directors believe the cashflow recovery from such loans and advances are not likely. However, they have been transferred to the memorandum record. Analysis by security 31 December 31 December 1 January N'million N'million N'million Secured against real estate 213, , ,858 Otherwise secured (shares, cash collateral, guarantees) 349, , ,702 Unsecured 3,434 3,188 2,712 Total Loans 566, , ,272 Analysis of loans and advances by Sector N'million N'million N'million Agriculture 4,999 12,179 20,958 Association/NGOs 1, ,697 Aviation 3,994 2,798 2,698 Building & construction 40,629 37,619 24,178 Education & educational services 19,651 19,841 19,707 Financial services 21,048 18,311 35,101 General commerce 89,793 47,535 44,651 Health & medical services 1,495 2,565 2,130 Hospitality 24,363 22,407 19,512 Information technology 8,365 7,183 7,050 Manufacturing companies 26,650 14,740 14,643 Maritime 27,489 12,200 22,173 Media & entertainment 1,918 4, Mining & quarrying Oil & gas 137,322 59,326 78,650 Power 3,168 1,971 1,949 Professional services 32,291 10,189 13,367 Public sector 47,572 30,565 25,863 Real estate 38,215 47,411 51,887 Retail 9, ,704 35,911 Telecommunications 23,807 19,100 16,231 Transportation 2,952 5,946 7,694 Total by sector 566, , , December 31 December 1 January Analysis of loans and advances by maturity N'million N'million N'million Less than one year 190, , ,557 Between one and five years 235, , ,068 Over five years 140,500 97,174 82,647 Gross loans 566, , ,272 57

59 19.3 Finance lease receivables Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million Current finance lease receivables , ,140 Non current finance lease receivables 27,646 5,945 6,095 27,646 5,945 5,942 Leasing arrangements 28,062 5,973 7,235 28,062 5,965 7,082 Amounts receivable under Finance Lease Later than five years 25,284 3,996 3,517 25,284 3,996 3,364 Later than one year and not later than five 2,362 1,949 2,578 2,362 1,949 2,578 years Not later than one year , ,140 Less: Unearned income (48) (31) (25) (48) (31) (25) Present value of minimum lease payments receivable 28,014 5,942 7,210 28,014 5,934 7, Trading Portfolio Assets Treasury bills , ,438 Federal Government of Nigeria Bonds 2, , Total 2, ,834 2, ,834 Trading securities (Federal Government of Nigeria bonds) are fair valued through profit or loss. They were acquired principally for the purpose of trade in the near term and to take advantage of favourable fluctuations in the market price of the asset. Gains or losses relating to Federal Government of Nigeria bonds that are measured at fair value are included in note 9. Treasury bills traded were fully sold within the year. 21 Equity Securities Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million I H S Investment 2,565 3,156 3,314 2,565 3,156 3,314 Underwritten irredeemable preferential shares investment 3,111 4,146-3,111 4,146 - Quoted equity investment measured at fair value through other comprehensive income 97-2, Investment in unquoted securities carried at cost (note 22.1) 661 1,451 1, ,061 Investment held in Portfolio fund Total 6,434 8,753 8,033 6,434 8,045 4,901 Included in available for sale investment is the sum of N2,565million representing value of IHS shares which were the unsubscribed portion of shares underwritten by Skye bank Equity securities are classified as Available for sale. Differences in fair valuation of equity securities are reported in Available for sale reserves. Unquoted equity securities are carried at cost because the fair values of the securities could not be reliably ascertained due to the unavailability of reliable market information and valuation inputs as at the end of the reporting period. The securities have been subjected for impairment by determining the discounted expected cash flows and comparing with the carrying amount. 58

60 21.1 Other unquoted equity securities carried at cost include: Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million Kakawa Discount house limited Express Discount Limited Valucard Nigeria Plc Afrexim Consolidated Discount Limited Nigerian Interbank Settlement Systems Plc Other unquoted equity securities Cocoa Products Limited Investment in SMEs (note 22.2) Impairment (183) (57) (330) (183) (57) (363) 661 1,451 1, , Investment in SMEs Millennium harvest limited Emel Hospital National e-government Medrugs Limited Amalgamated capital funds Coop industries limited PCI Resins limited Enterprise and financial support company Leavesgreen school fund disbursement Turtle car investment limited Skye shelter funds Impairment (181) (256) - (181) (256) Though the bank have percentage stake in these SMEs that would ordinarily suggest that the investments should be treated as associates or subsidiaries, however, the bank do not have any significant influence or control over any of the SMEs. Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 22 Investment Securities held to Maturity Treasury bills 68,453 28,704 14,313 65,840 27,360 12,032 Federal Government of Nigeria Bonds (note 22.3) 60,042 64,403 67,785 60,042 64,417 67,785 AMCON Bonds (note 22.2) 80,023 55,449 5,813 80,023 55,449 5,813 Total 208, ,556 87, , ,226 85, Investment securities consist of financial assets classified as Held to Maturity in accordance with IAS 39 and measured at amortized cost using the effective interest rate method. The bank is committed to retaining these financial assets and collecting all of its contractual cashflows, irrespective of the impact of changes in market interest rates on the asset's fair value Asset Management Corporation of Nigeria (AMCON) bond relates to impaired loans with carrying amount of N95,290m which was derecognized from the books by the bank when they were exchanged through a regulatory induced debt factoring transaction with AMCON. The consideration for the factoring of N79,109m are discount bonds issued by AMCON to the bank at different times within the year. 59

61 22.3 Analysis of FGN Bond held to maturity - Bank Coupon rate Maturity date Face value Carrying amount Carrying amount Carrying amount 31 December 31 December 1 January N'million N'million N'million 3rd FGN Bond Series % 28-Apr-11 1, ,535 3rd FGN Bond Series % 26-May-13 1,500 1,522 1,522 1,520 3rd FGN Bond Series % 29-Sep rd FGN Bond Series % 27-Oct rd FGN Bond Series % 24-Nov rd FGN Bond Series % 22-Dec th FGN Bond Series % 30-Mar-14 2,300 2,405 2,436 2,466 4th FGN Bond Series % 27-Jul th FGN Bond Series % 31-Aug-12 1,550-1,597 1,673 5th FGN Bond Series % 25-Jan th FGN Bond Series % 28-Nov-13 7,700 7,932 8,094 8,379 6th FGN Bond Series % 22-May-12 3,400-3,489 3,558 6th FGN Bond Series % 22-May-29 6,300 9,220 9,305 9,391 7th FGN Bond Series % 19-Feb-13 8,900 9,071 9,010 9,038 7th FGN Bond Series % 23-Mar-15 7,800 7,336 7,133 7,546 7th FGN Bond Series % 23-Jul-30 21,900 21,401 20,674 21,413 Total 64,082 60,042 64,417 67,785 Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 23 Loans and receivables securities State Government of Nigeria Bonds(note 23.1) 26,995 8,825 5,941 26,995 9,112 5,941 Corporate Bonds (note 23.2) 7,714 6,041-7,714 6,041-34,709 14,866 5,941 34,709 15,153 5, Analysis of State Government Bonds - Bank Coupon rate Maturity date Face value Carrying amount Carrying amount Carrying amount 31 December 31 December 1 January N'million N'million N'million Bayelsa state government bond 13.75% 30-Jun-17 3,094 2,869 3,094 3,500 Ebonyi state government bond 13.50% 30-Sep-15 1,387 1,145 1,387 1,924 Lagos state government bond 13.00% 9-Feb Edo state government bond 14.60% 30-Dec-18 2,500 2,500 2,500 - Ekiti state government bond 14.50% 16-Dec-18 7,098 7, Ondo state government bond 15.50% 14-Feb-19 2,700 2, Gombe state government bond 15.50% 2-Oct-19 1,000 1, Lagos state government bond 14.40% 21-Nov-19 8,000 8, Osun state government bond 14.75% 12-Dec-19 1,000 1, ,995 7,481 5,941 60

62 23.2 Analysis of Corporate Bonds - Bank Coupon rate Maturity date Face value Carrying amount Carrying amount Carrying amount 31 December 31 December 1 January N'million N'million N'million Flour Mills 12.00% 9-Dec-15 5,400 5,439 6,041 - Dana 19.00% 1-Apr-18 2,000 2, FMBN 17.25% 15-Sep ,714 6, Pledged assets In connection with the bank s financing and trading activities, the bank has pledged assets to secure its borrowings. The bank is not allowed to pledge these assets as security for other borrowings or to sell them to another entity. At 31 December 2012, 2011 and 2010, the carrying values of the significant components of pledged assets recognized on the Bank s statement of financial position include: Group 31 December 31 December 1 January Bank 31 December 1 January N'million N'million N'million N'million N'million N'million Federal Government of Nigeria Bonds 20,811 19,900 4,500 20,811 19,900 4,500 Treasury bills 6,903 8,100 7,800 6,903 8,100 7,800 State Government of Nigeria Bonds 9, , ,888 28,000 12,300 36,888 28,000 12,300 In addition, included in cash and due from banks at 31 December 2012 and 2011 are N7.68 billion and N298 million, respectively, of cash to collateralize the bank's obligations under an interest rate swap, MasterCard and Visa program and other borrowings. Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 25 Other financial assets Cross currency swap (note 25.1) 15, , Derivative asset (note 25.2) , ,

63 25.1 This represents a cross currency swap transaction between the bank and Standard Chartered Bank Nigeria Limited to exchange the sum of $100 Million for N Billion, the initial exchange was on 2 April 2012 with a final exchange date of 2 April The initial exchange involves Skye Bank receiving US Dollar for Naira while at the final exchange, Skye Bank would receive Naira and part with US Dollars. The Naira fixed rate on the transaction is 16% while the USD spread is USD-LIBOR- BBA % with interest payable every 3 months The derivative asset represents the net present value of the embedded derivative on the cross currency swap transaction between the bank and Standard Chartered Bank Nigeria Limited which was $3,540,901 as at 31 December Derivative instruments All derivatives are classified as either derivatives held-for-trading or derivatives held-for-hedging. a) Use and measurement of derivative instruments In the normal course of business, the group enters into a variety of derivative transactions for both trading and hedging purposes. Derivative financial instruments are entered into for trading purposes and for hedging foreign exchange and interest rate exposures. Derivative instruments used by the group in both trading and hedging activities include swaps, forwards and other similar types of instruments based on foreign exchange rates and interest rates. The risks associated with derivative instruments are monitored in the same manner as for the underlying instruments. Risks are also measured across the product range in order to take into account possible correlations. The fair value of all derivatives is recognised on the statement of financial position and is only netted to the extent that there is both a legal right of set-off and an intention to settle on a net basis. Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. The major types of swap transactions undertaken by the group are as follows: (i) (ii) Foreign exchange swaps are contractual obligations between two parties to swap a pair of currencies. Foreign exchange swaps are tailor-made agreements that are transacted between counterparties in the OTC market. Forwards are contractual obligations to buy or sell financial instruments or commodities on a future date at a specified price. Forward contracts are tailor-made agreements that are transacted between counterparties in the OTC market b) Derivatives held-for-trading The group trades derivative instruments on behalf of customers and for its own positions. The group transacts derivative contracts to address customer demand by structuring tailored derivatives for customers. The group also takes proprietary positions for its own account. Trading derivative products include the following derivative instruments i. Foreign exchange derivatives Foreign exchange derivatives are primarily used to hedge foreign currency risks on behalf of customers and for the group s own positions. Foreign exchange derivatives primarily consist of foreign exchange forwards. 62

64 ii. iii. Interest rate derivatives Interest rate derivatives are primarily used to modify the volatility and interest rate characteristics of interest-earning assets and interest-bearing liabilities on behalf of customers and for the group s own positions. Interest rate derivatives primarily consist of swaps. Day one profit or loss Where the fair value of an instrument differs from the transaction price and the fair value of the instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation model whose variables include only data from observable markets the difference, commonly referred to as day one profit or loss, is recognised in profit or loss immediately. If not, any resulting difference between the transaction price and the valuation model is deferred and subsequently recognised in accordance with the group s accounting policies. A. Group 31 December 31 December 1 January N'million N'million N'million 26 Insurance receivables Due from contract holders - - 3,147 Due from agents and brokers Due from reinsurers Impairment allowance - - (1,966) Reconciliation of impairment allowance - - 1,494 At 1 January - 1,966 1,377 Additional Release - (1,966) - - 1,966 63

65 B. Bank 27 Investment in Subsidiary Cost Impairment Carrying Amount N'million N'million N'million At 1 January ,614 (1,340) 7,274 Additions Reversal - 1,100 1,100 Reclassification (57) - (57) Disposals (6,144) 240 (5,904) At 31 December ,980-2,980 At 1 January ,271 (105) 8,166 Additions 103 (1,340) (1,237) Reversal Reclassification Disposals (288) - (288) At 31 December ,614 (1,340) 7, Information on subsidiaries Principal subsidiary Nature of business % Interest held Country of incorporati on or registration 31 December 2012 N'million 31 December 2011 N'million 1 January 2011 N'million Skye Mortgage Bankers Limited Mortgage lending 100 Nigeria - 1,102 1,102 Skye Stockbrokers Ltd (formerly PSL Stockbrokers Ltd) Stockbroking 100 Nigeria Law Union & Rock Insurance Plc Insurance 51 Nigeria - 1,915 1,915 Apex Integrated Technologies Limited Information Technology 100 Nigeria Skye Trustees Limited Fund Custodian 100 Nigeria Skye Financial Services Limited Financial Advisory 100 Nigeria - 2,000 2,000 Skye Bank (Sierra Leone) Limited Banking 95 Sierra Leone 1, Skye Bank (Gambia) Limited Banking 80 Gambia Skye Xchange (BDC) Limited Bureau de change 100 Nigeria Skye Xchange (BDC) Limited Bureau de change 100 Nigeria Skye Resources Limited HR Outsourcing 100 Nigeria Skye Bank (Guinea) Limited Banking 100 Guinea 1,146 1,120 1,017 Yes Media & Global Entertainment Ltd Entertainment 100 Nigeria Cocoa Products Limited Manufacturing 100 Nigeria ,980 8,614 8,271 64

66 27.2 Other information on subsidiaries i. Skye Bank (Sierra Leone) Limited was incorporated on 10 August 2007 in Sierra Leone and its registered office is 31 Siaka Stevens Street, Freetown. It provides retail, corporate and commercial banking services in Sierra Leone. It commenced operation on 1 October ii. Skye Bank (Gambia) Limited was incorporated on 4 July 2008 in Gambia as a subsidiary of Skye Bank Plc to provide commercial banking services to the general public in accordance with the regulations of the Central Bank of The Gambia and the Banking Act It commenced operations on 13 July iii. Skye Bank (Guinea) Limited was incorporated on 18 August 2008 in Guinea as a subsidiary of Skye Bank Plc to provide commercial banking services to the general public in accordance with the regulations of the Central Bank of the Republic of Guinea and the Banking Act It commenced operations on 28 March

67 27.3 The bank disposed of its investment in the underlisted non-banking subsidiaries in line with the Central Bank of Nigeria Regulation on the Scope of Banking Activities and Ancillary Matters requiring banks to divest from all non banking subsidiaries and apply for a new banking license: Skye Stockbrokers Limited Law Union & Rock Insurance Plc Apex Integrated Technologies Limited Skye Trustees Limited Skye Financial Services Limited Skye Resources Limited Total N'million N'million N'million N'million N'million N'million N'million Assets Cash and Balances with Central Bank Due from other financial institutions 6 1, , ,578 Trading portfolio assets Investment security held to maturity 14 1, ,874 Loans and receivables securities Insurance receivable - 1, ,495 Prepayment, accrued income & other assets ,864 5, ,473 Investment property - 1, ,093 Property plant and equipment , ,382 7, ,081 Liabilities Due to other financial institutions Liabilities on investment contracts ,824 5,833-12,657 Liabilities on insurance contracts - 1, ,053 Current tax liability Deferred tax liability Accruals, deferred income & other liabilities 177 1, , ,587 Retirement benefit liability , ,458 6, ,848 Net assets disposed of 170 4, , ,234 Carrying value of asset 118 1, , (7,234) Gain on disposal of subsidiaries Consideration received 136 2, ,820 Carrying value of assets 118 1, , ,572 Non-controlling interests Expense incurred to disposed Gain/(loss) on disposal (1) 254 (1,100) (10) (752) 66

68 27.4 In compliance with the Central Bank of Nigeria Regulation on the Scope of Banking Activities and Ancillary Matters requiring banks the following assets and liabilities of Skye Mortgage Bankers Limited were absorbed by Skye Bank Plc based on the decision of the Bank's Board of Directors: Skye Mortgage Bankers Limited N'million Assets Cash and Balances with Central Bank 519 Due from other financial institutions - Loans and receivables from customers 877 Trading portfolio assets - Equity Securities - Investment security held to maturity - Loans and receivables securities 10 Insurance receivable - Prepayment, accrued income & other assets 248 Intangible assets 2 Investment property 1,671 Property plant and equipment 116 Deferred tax asset - Total assets 3,443 Liabilities Customer deposit & other deposits 793 Due to other financial institutions 1,499 Current tax liability - Deferred tax liability - Accruals, deferred income & other liabilities 186 Retirement benefit liability - Total liabilities 2,478 Net assets/liability absorbed 965 Carrying value of the subsidiaries 1,102 Loss on absorption (137) 67

69 28 Investment in Associate Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million At 1 January 2,133 2,779 1,260 1,790 2,462 1,260 Share of post-tax results Share of tax - (10) (35) Reclassification , ,172 Disposals (2,103) (1,172) 30 (1,760) (1,172) December 30 2,133 2, ,790 2,462 Group Bank Associates Principal activity 31 December Proportion 2012 of ownership N'million 31 December 2011 N'million 1 January 2011 N'million 31 December 2012 N'million 31 December 2011 N'million 1 January 2011 N'million Equity life Insurance Insurance - - 1,260 1,260-1,260 1,260 Skye shelter fund Mortgage Knight Rook Construction - - 1, ,172 Coop savings and loans Banking 27% ,790 2, ,790 2,462 Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 29 Prepayment, accrued income and other assets Inventories 1,815 3, ,809 2, Interbranch ,445 1,004 1,073 Employee benefit prepayment - 1,608 1,437-1,608 1,437 Other prepayments Accounts receivable clearing house 1,349 1, ,349 1, Accrued interest receivable Prepayment - rent 1,331 1,587 2,053 1,326 1,580 2,014 Managed Funds ,387 Due from related companies Deferred acquisition expenses Other accounts receivable (note 29.2) 22,257 3,100 3,068 22,404 3,055 2,634 Prepaid interest charges Due from clients Due from related parties Allowance for impairment (note 29.1) (4,055) (3,525) (2,672) (4,055) (3,484) (2,625) 24,153 8,632 18,681 25,159 9,141 6, Reconciliation of allowance for impairment At 1st January (3,525) (2,672) (2,672) (3,484) (2,625) (2,625) Charge to profit or loss (258) (1,845) - (258) (1,851) - Reversal of impairment Reclassification of impairment (313) - - (313) - - Impairment written-off At 31 December (4,055) (3,525) (2,672) (4,055) (3,484) (2,625) Included in the other account receivable is an amount of N12.8billion which represents the Naira value of foreign currency sourced on behalf of customers. The corresponding liability is included in other liabilities. 68

70 30 Intangible assets Group Bank 31 December 31 December 1 January December 1 January N'million N'million N'million N'million N'million N'million At 1 January 1,610 2,461-2,920 2,461 - Additions 1, Reclassification - - 2,461-2,461 Disposals - (1,355) Total 3,211 1,610 2,461 3,145 2,920 2,461 Accumulated amortization/impairment At 1 January (804) (1,564) - (1,791) (1,564) - Impairment - 1, Reclassification - - (1,564) - - (1,564) Charge for the year (643) (595) - (116) (227) - At 31 December (1,447) (804) (1,564) (1,907) (1,791) (1,564) Net Book Value 1, ,238 1, Investment Properties At 1 January 1,842 3,409 3, Additions Revaluation , Transfer - non current asset held for sale (1,161) Disposals (215) (709) (807) At 31 December 1,627 1,842 3,410 1, Investment properties relate to 2 plots of land in Ahmadu Bello way (16,590 sq.m.) and Pinnock Beach Estate - Lekki Peninsula (3.382 sq.m.), 4 units of 3 bedroom flats in Gbagada and 12 units of 3 bedroom flats in Oko Oba, Lagos. These properties are held to earn rentals and for capital appreciation. The bank measures its investment properties at cost; and the market value of the investment properties as at 31 December 2012 was N4.407 Billion. The market value of the bank s investment property was arrived at on the basis of valuations carried out on respective dates by Foluke Ismail & Associates (A-1454), Gbenga Olayinka & Associates (A-1000), Adegbonmire & Associates (A-1901), and Jide Taiwo & Co (A-256), independent valuers not related to the bank. These valuers are members of the institute of The Nigerian Institute of Estate Surveyors and Valuers, and they have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The valuations were arrived at by reference to direct market evidence; this is by recourse to analysis of recent sales transaction of similar properties in similar or comparable location, due adjustment having been made for special features of the property where applicable. 69

71 32. Property Plant and Equipment A. Group Leasehold Information Property land and Leasehold Plants & Office House Motor technology under buildings Improvements equipment furniture furniture vehicles equipment construction Total N'million N'million N'million N'million N'million N'million N'million N'million N'million Cost: At 1 January ,256 13,873 15,493 2, ,581 9,969 6,632 60,671 Impairment (552) (552) Discontinued Operations (560) (334) (262) - (317) (237) - (1,710) Additions during the year 1, , ,484-5,420 Reclassifications - - (89) Disposals during the year (4) (58) (102) (5) - (569) (156) (891) (1,785) At 31 December ,630 14,264 16,360 2, ,179 9,665 5,189 62,044 Accumulated depreciation: At 1st January ,406 9,813 1, ,654 9,441-29,564 Charge for the year , ,565 Discontinued Operations (28) (176) (234) - (194) (20) - (652) Reclassifications - - (7) Disposals - (42) (96) (3) - (519) (110) - (770) At 31 December ,151 3,044 11,782 2, ,765 9,605 32,707 Net book value at 31 December ,479 11,221 4, , ,189 29,337 Net book value at 31 December ,264 11,467 5, ,632 31,107 70

72 B. Bank Leasehold Information land and Leasehold Plants & Office House Motor technology Property buildings Improvements equipment furniture furniture vehicles equipment construction under Total N'million N'million N'million N'million N'million N'million N'million N'million N'million Cost: At 1 January ,257 13,235 15,616 2, ,632 8,270 6,415 58,032 Impairment (320) (320) Additions during the year 1, ,003 1,133-5,018 Reclassifications - - (89) Disposals during the year - (58) (102) (5) - (569) (156) (891) (1,781) At 31 December ,467 13,870 16,258 2, ,066 9,336 5,204 60,949 Accumulated depreciation: At 1st January ,343 9,908 1, ,578 8,225-28,084 Charge for the year , ,202-4,890 Reclassifications - - (7) Disposals - (42) (96) (5) - (519) (155) - (817) At 31 December ,071 2,898 11,867 2, ,687 9,279 32,156 Net book value at 31 December ,397 10,972 4, , ,204 28,793 Net book value at 31 December ,323 10,892 5, , ,415 29,948 71

73 33. Further analysis of Non-current asset held for sale Assets of subsidiaries classified as held for sale 31 December 2011 N'million Cash and balances with central banks 433 Due from banks and other financial institutions 8,259 Investment security held to maturity 717 Equity Securities 1,593 Loans and receivables securities 11,185 Loans and receivables from customers 287 insurance receivables 1,937 Prepayment, accrued income & other assets 10,499 Investment property 1,161 Property and equipment 3,651 39,722 Liabilities of assets classified as held for sale Due to other banks 76 Liability on investment contracts 27,310 Liabilities on insurance contracts 1,032 Claims payable 405 Short term borrowing 4,302 Current income tax 118 Other liabilities 3,064 Deferred tax liabilities 6 Retirement benefit obligations ,489 The Central Bank of Nigeria in 2010 gave a directive to all banks to divest their controlling interest in nonbanking subsidiaries by way of sale or adopt the holding company structure. The Group s management had decided to put these subsidiaries for sale and classify them as Non-current assets held for sale. 72

74 Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 34 Customer deposits and other deposits Current and demand accounts 328, , , , , ,880 Savings account 78,386 75,879 62,447 77,888 75,186 61,451 Time deposits 228, ,197 92, , ,349 90,442 Domiciliary accounts 99,501 45,961 75,796 98,133 45,193 75,400 Bankers acceptances 55,358 30,220 24,920 55,358 30,220 24, , , , , , ,093 The maturity profile of deposit liabilities is as follows: Under 1 month 588, , , , , , months 172, , , , , , months 23,323 19,161 14,197 23,323 19,160 14, months 5,992 4,923 3,648 5,993 4,924 3,648 Over 12 months , , , , , , Due to other financial institutions In Nigeria 2,496 15,650 1,636 2,629 15,650 1,634 Other Banks outside Nigeria 10-30, ,826 2,506 15,650 32,462 2,629 15,650 32, Other financial liabilities Cross currency swap (note 41.1) 15, , Derivative liability (note 41.1) , , The derivative liability represents the net present value of the interest rate swap transaction between the bank and JP Morgan which was $5,795,281 as at 31 December

75 37 Borrowings from foreign and local banks Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million African Finance Corporation (note 1) 10,000 10,690-10,000 10,690 - First Rand Bank SA (note 2) 9, , Nationwide (note 3) 5, , Standard Chartered Bank (note 4) 15,547 23,481 7,697 15,547 23,481 7,697 Sumitomo Mitsui Banking Corporation Europe Ltd (note 5) 11, , Commerzbank (note 6) 4, , Afrexim Bank/Citi Bank (note 7) 19, , Afrexim Bank (note 8) 4,351 13,552 4,880 4,351 13,552 4,880 UBA (note 9) - 3, , Standard Bank (note 10) - 2,829 2,770-2,829 2,770 CBN/BOI intervention fund (note 11) 18,551 15,947 14,753 18,551 15,947 14,753 African Export Import Bank - Tier II (note 12) 15,500 15,619-15,500 15,619 - Atlantic Forfaitierungs AG ,208 85,248 30, ,208 85,248 30,945 Borrowings: Local 18,551 15,947 14,753 18,551 15,947 14,753 Foreign 95,657 69,301 16,192 95,657 69,301 16, ,208 85,248 30, ,208 85,248 30,945 Current 62,407 3,130 1,136 62,407 3,130 1,136 Non-Current 51,801 82,118 29,809 51,801 82,118 29, ,208 85,248 30, ,208 85,248 30,945.1 This represents short term facilities of $36.8 million availed to Skye Bank Plc by Africa Finance Corporation on 22nd February 2012 for 365 days with an interest rate of 6.5% per annum and a $25 million on 1st August 2012 for 180 days with an interest rate of 6% per annum. The bank also repaid short term facilities of $40 million and $25 million availed on 22 February 2011 and 7 January 2011 for 360 days with interest rates of 5.75% and 6% per annum respectively.".2 This represents a short term facility of $36 and $24 million availed to Skye Bank Plc by FirstRand Bank Ltd on 8th August 2012 for 365 days with interest rates of LIBOR +4.25% and +2.5% per annum respectively with interest paid every 3 months..3 This represents a $35.6 million bills of exchange issued by Nationwide at the interest rate of 5.5% per annum. The bills were issued on the 14 February 2012 and have a tenor of 340days after which the facility can be rolled over..4 This represents a $100 Million facility granted by Standard Chartered Bank for a period of one year; with interest payable every 3 months at 2% + LIBOR. The current tenor was renewed on 19 December The facility is backed by Federal Government of Nigeria Treasury Bonds. 74

76 The short term facility of $50 million obtained from Standard Chartered Bank Mauritius on 19 October 2010 for a period of 360 days (with 90 days cycle) at the rate of % (2.5% + Libor) per annum was fully repaid in October This represents a $73.5 million facility granted to the bank by Sumitomo Mitsui Banking Corporation at the interest rate of LIBOR + 3.5% per annum. The loan was granted on the 9 October 2012 and has a tenor of 360 days with interest payable on semi-annual basis..6 This represents a trade finance facility availed to the Skye Bank on 17th December 2012 by Commerzbank for a period of 2 years an interest rate of Libor % with interest payable every 3 months..7 This represents a $150 million Syndicated facility granted on 9th May 2012 for a period of 5 years with an interest rate of LIBOR + 6% with Afrexim, Atlantic Forfaitieirungs, Citibank, Ecobank Nigeria Limited, Ghana International Bank Plc and Standard Bank as the borrowers. Interest and principal are payable quarterly with an outstanding balance of $134,078, This facility is backed by western union inflows..8 This represent short trade finance facility of $25 million granted by African Export-Import Bank on 22nd June 2011 renewable every 3 months at the rate of LIBOR + 6% per annum with an outstanding of $22,727, The current tenor was renewed on 18 December 2012; and a short term note purchase facility of $11 million in favour of a customer; Avalon Intercontinental Nigeria Limited granted on 23rd July 2010 for a period of 3 months with roll over option, which was rolled over on 22nd October 2012 with an interest rate of LIBOR % per annum with an outstanding of $4,812,500. The bank also repaid short term bridge facility of $4 million and $50 Million in February and May 2012 respectively.".9 This represents facilities of $4 and $16 million granted to the bank by United Bank for Africa Plc New York at the interest rate of 4.00% and 4.25% per annum respectively. The facilities were granted on 9 and 16 December 2011 and repaid in December This amount represents the convertible currency dollar facility granted by Standard Bank London on the 16 August 2007 for a period of 5 years. The loan is convertible into ordinary shares of the bank at any time between the date of borrowing the loan and its settlement date. The borrowing matured in August The Central Bank of Nigeria in a bid to unlock the credit market in Nigeria during the financial year 2010 approved for disbursement a total sum of N500 billion Debenture Stock through the Bank of Industry to various participating banks for onward lending to Nigerian SME/Manufacturing sector. In the first instance, the sum of N300 billion will be applied to power projects and N200 billion to the refinancing/ restructuring of banks existing loan portfolios to Nigerian SME/Manufacturing Sector. The bank accessed this fund to the tune of N9.2 billion for Agricultural financing, N9.1 billion for Manufacturing/SME funds and N263 million on Aviation with a term of 15 years at the rate of 1% per annum.".12 This amount represents a term loan facility granted by African Export-Import Bank on the 30th of December 2011 for a period of 7 years. The $100 million was obtained to fund the Bank's customers engaged in trade and project related activities. The borrowing is to mature in 2018 with interest payment on a quarterly basis in arrears and principal to be repaid in full on final maturity date. Interest rate of 6.1% per annum plus matching LIBOR for 3 months deposit in US dollars. The bank during the year obtained approval dated 7 August 2012 and referenced BSD/BCS/CON/SKY/02/189 from the Central Bank of Nigeria to categorize this borrowing as part of its tier II capital. 75

77 A. Group 31 December 31 December 1 January N'million N'million N'million 38 Liability on investment contract Deposit administered funds (secured funds) Other managed funds , Liability on insurance contract ,657 Life assurance contracts Non-life insurance contracts - - 1, ,053 Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 40 Current tax liability Per profit and loss account Current income tax (712) (622) (1,645) (712) (639) (1,604) Education tax (68) (12) (372) (68) (12) (360) Technology tax (158) (79) (127) (158) (79) (114) Capital gain tax (693) - (9) (683) - - Prior year under/(over) provision (1) (28) (75) Income tax charge (1,632) (741) (2,228) (1,621) (730) (2,078) Deferred Tax (1,482) 538 (37) (1,457) 380 (59) Share of associate - - (35) (3,114) (203) (2,300) (3,078) (350) (2,137) Per balance sheet At 1 January 984 3,404 1, ,079 1,392 Skye Mortgage Tax Payments during the year (1,468) (3,160) (567) (1,453) (2,991) (391) Prior year over/under provision Income tax charge 1, ,228 1, ,078 At 31 December 1, ,404 1, ,079 The charge for taxation in these financial statements is based on the provisions of the Companies Income Tax Act CAP C21 LFN 2004 as amended and the Education Tax Act, CAP E4 LFN Group Bank 41 Deferred tax liability 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million Movement in deferred taxation: At 1 January (81) 456 2, Charge for the year 1,482 (537) 37 1,457 (380) 59 Adjustment due to conversion - - (1,628) ,401 (81) 456 1,

78 Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 42 Accruals, deferred income and Other liabilities Manager's cheque 2,275 4,453 4,998 2,274 4,453 4,998 AMCON sinking fund 2,630 2,040-2,630 2,040 - Outstanding claims Unearned income Accruals , Deposit for shares Other creditors 6,947 2,956 2,516 6,235 2,508 7,978 Customer deposits for letters of credit 8,206 1,158-8,206 1,158 - Due to related parties Deposit for foreign company Interest payable Account payable 9,234 9,445 14,354 9,442 9,373 6,268 Uncleared effects 4,392 6,730 5,462 4,392 6,730 - Cash card collection settlement 3,825 1,235-3,825 1,235-38,999 29,368 29,588 38,368 28,825 19, Retirement benefit liability Defined contribution plan (note 43.1) Defined benefit plan (note 43.2) 1, , Movement in defined contribution liability recognised in the balance sheet 1, , At 1 January Charge to profit and loss Funds recalled during the year Payment of ex-staff (withdrawals) Contributions remitted (PFAs/trustees) (854) (667) (537) (854) (667) (489) At 31 December

79 43.1 Defined contribution plan The Bank operates a defined retirement benefit plan for all qualifying employees in its service. The assets of the plans are held by government regulated publicly or privately administered pension fund administrators (PFA). The Bank is required to contribute a specified percentage of payroll costs to the PFAs to fund the benefits. There are no further legal or constructive obligations with respect to the retirement benefit plan. The total expense recognised in profit or loss of N840 million (2011:N685million) represents contributions payable to these PFAs by the Bank at rates specified in the Pension Reform Act As at 31 December 2012, contributions of N424 million (2011:N404 million) due in respect of the 2012 (2011) reporting period had not been paid over to the plans. The amounts were paid subsequent to the end of the reporting period." 43.2 Defined benefit plan The Bank operates an unfunded defined benefit plans for qualifying employees in her service. Under the plans, the employees having served at least 5 years are entitled to a Gratuity of 10% of Annual Gross Salary for each year of service rendered after the fifth year with effect from 1 June, No other postretirement benefits are provided to these employees. The most recent actuarial valuations of the present value of the defined benefit obligation were carried out at January 2013 by O.O. Okpaise, Associate, of Actuaries of America and Fellow, Institute of Actuaries of England working with HR Nigeria Limited." The principal assumptions used for the purpose of the actuarial valuations were as follows: 31 December 31 December 1 January % % % Long term average discount rate (p.a.) Average pay increase (p.a.) Average rate of inflation (p.a.) Amounts recognised in profit or loss in respect of these defined benefit plans are as follows: N million N million N million Current service cost 1, Interest cost , Amounts recognised in Other Comprehensive Income in respect of these defined benefit plans are as follows: N million N million N million Actuarial (gains)/losses change in assumption Actuarial (gains)/losses experience (187) - - (5)

80 The amount included in the consolidated statement of financial position arising from the entity's obligation in respect of its defined benefit plans is as follows. 31 December 31 December 1 January N'million N'million N'million (Accrued)/ prepaid benefit cost at beginning of the year (498) - - Benefit expense recognised in profit or loss account in the financial year (1,666) - - Benefit paid directly by company in the financial year Amount recognised in SOCI during the financial year (Accrued)/ prepaid benefit cost at end of the year (1,564) (498) - 44 Non-controlling interest At 1 January 2,804 2,481 - Transfer from profit and loss (2) (295) - Release from non-current asset held for sale (1,964) - - Additions to NCI At end of year 838 2,804 2, Share Capital 31 December December 2011 Number N'million Number N'million Millions Millions Authorised: 25 Billion ordinary shares of 50K each 25,000 12,500 25,000 12,500 Issued and fully paid: At 1 January 13,219 6,609 13,219 6,609 Arising during the year: At 31 December 13,219 6,609 13,219 6,609 Share Premium At 1 January 65,548 65,548 Arising during the year - - At 31 December 65,548 65,548 79

81 46 Other reserves Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 46.1 Capital reserve 7,503 7,503 7,503 7,503 7,503 7,503 The sum of N7,503 million represents the surplus of nominal value of the reconstructed shares transferred from the share capital. The consolidation 3,751,522,394 ordinary shares of N1.00 each was sub-divided into 7,503,044,788 ordinary shares of 50 kobo each and were credited as fully paid, and rank paripassu in all respect in the capital of the Bank. The reconstructed shares were allocated to shareholders in the ratio of one (1) reconstructed ordinary shares of 50 kobo each for every three (3) ordinary shares of 50 kobo each previously held by them. Group Bank 31 December 31 December 1 January 31 December 31 December 1 January 46.2 Statutory Reserve N'million N'million N'million N'million N'million N'million At 1 January 10,125 9,341 7,797 10,189 9,193 7,797 Transfer from profit and loss account 1, ,544 1, ,396 At 31 December 12,022 10,125 9,341 12,094 10,189 9,193 Nigerian banking regulations require the bank to make an annual appropriation to a statutory reserve. As stipulated by S16(1) of the Bank and Other Financial Institutions Act, CAP B3 Laws of the Federation of Nigeria (amended), an appropriation of 30% of profit after taxation is made if the statutory reserve is less than the paid-up share capital and 15% of profit after taxation if the statutory reserve is greater than the paid up share capital. 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 46.3 SMIEIS reserve 1,854 1,854 1,854 1,854 1,854 1,854 The Small and Medium Industries Entity Investment Scheme (SMIEIS) reserve is maintained to comply with the Central Bank of Nigeria (CBN) requirement that all licensed banks set aside a portion of the profit after taxation in a fund to be used to finance equity investments in qualifying small and medium scale enterprises. Under the terms of the guideline (amended by CBN letter dated 11 July 2006), the contributions will be 10% of profit after taxation and shall continue after the first 5 years but banks contributions shall thereafter reduce to 5% of profit after taxation. However, this is no longer mandatory. The small and medium scale industries equity investment scheme reserves are non-distributable Available for sale reserve 31 December Group 31 December 1 January 31 December Bank 31 December 1 January N'million N'million N'million N'million N'million N'million At 1 January (2,911) (2,811) - (2,911) (2,811) - Transfer from other comprehensive income (591) (100) (2,811) (591) (100) (2,811) At 31 December (3,502) (2,911) (2,811) (3,502) (2,911) (2,811) The investments revaluation reserve represents the cumulative gains and losses arising on the revaluation of available-for-sale financial investments that have been recognised in other comprehensive income, net of amounts reclassified to profit or loss when those assets have been disposed of or are determined to be impaired. 80

82 Group Bank 31 December 31 December 1 January 31 December 31 December 1 January N'million N'million N'million N'million N'million N'million 46.5 Retained earnings At 1 January 10, ,404 10,490 14,151 14,151 Transfer from other comprehensive income Adjustments to retained earnings IFRS adjustment Dividend paid (3,305) (5,292) - (3,305) (5,292) - Profit for the year 10, ,792 1,631 - At 31 December 18,157 10,709 14,404 17,982 10,490 14,151 Retained earnings comprise the undistributed profits from previous years which have not been reclassified to other reserves 81

83 47. Cash generated/(used in) from operations Cash generated from operations Group Bank N'Milliom N'Milliom N'Milliom N'Milliom Reconciliation of loss after tax to cash generated from operations: Operating profit before taxation 16,512 2,842 15,775 2,977 Taxation 3, , ,626 3,045 18,853 3,327 Adjustment for non-cash item Dividend income (379) (206) (379) (206) Other investment income (114) (407) (112) (407) Gain/(loss) on fair value change in Bonds classified as held for trading (609) 415 (609) 415 Write off of equity investments 2, ,611 Net fair value loss arising from derivative instrument Net fair value gain arising from fair value treasury bills (5,243) (5,047) (3,647) (10,997) Loan Written off in the year (note ) (22,000) (27,431) (21,998) (27,431) Loan impairment provision released during the year (2,830) 317 (2,283) (2,552) Loan impairment provision charge for the year 13,957 24,626 13,936 26,813 Impairment reversal on subsidiaries - - (1,340) 1,340 Impairment released on insurance receivable 1,966 Impairment on other assets Impairment on intangible assets Impairment charge on PPE Define contribution charge to profit or loss Defined benefit charged to profit or loss 1,132 1, Depreciation charge for the year 4,565 5,419 4,890 5,663 Adjustment on other reserves (1,964) (3,661) ,379 1,533 12,789 (1,414) Change in operating assets and liabilities (Increase)/decrease in restricted reserves with CBN (30,366) (40,977) (30,366) (41,322) (Increase)/decrease in other assets (15,061) 9,196 (17,230) 3,859 (Increase)/decrease in AMCON Bonds-HTM (24,574) (49,636) (24,574) (49,636) (Increase)/decrease in loans and receivable from customers (42,602) (78,605) (40,440) (78,618) Increase/(decrease) in customer and other deposit 145, , , ,653 Increase/(decrease) in accruals, deferred income & other liabilities 8,856 (220) 8,557 9,101 Increase/(decrease) insurance receivable 3, Increase/(decrease) Investment contract (12,657) Increase/(decrease) Insurance contract (1,053) Increase/(decrease )in discontinued operations 1,058 (20,206) - - Net increase/(decrease) in asset and liabilities of subsidiaries classified 3,232 (3,232) - - as held for sale (Decrease)/increase in amount due to other financial institutions (13,144) (16,812) (13,021) (16,810) Net Cashflows from operations 44,713 (42,025) 36,929 (3,187) 82

84 48. Operating Segment a By geographical segment - Group The Group s business is organized along two main geographical areas. i. Nigeria ii. West Africa Transactions between the business segments are on normal commercial terms and conditions. Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on the Group s cost of capital. There are no other material items of income or expense between the business segments. Internal charges and transfer pricing adjustments have been reflected in the performance of each segment. Revenue sharing agreements are used to allocate external customer revenues to a segment on a reasonable basis. Nigeria West Total 31 December 2012 Africa N'million N'million N'million Gross earnings 100, ,032 Operating profit 55,145 1,579 56,724 Profit before taxation 15, ,510 Income tax expense (3,078) (36) (3,114) Profit for the year 12, ,396 Reportable segment assets 1,071,311 2,517 1,073,828 Reportable segment liabilities 963,223 3, ,934 Nigeria West Total 31 December 2011 Africa N'million N'million N'million Gross earnings 74, ,906 Operating profit 44, ,157 Profit before taxation 2, ,842 Income tax expense (202) (1) (203) Profit for the year 2, ,639 Reportable segment assets 908,195 6, ,265 Reportable segment liabilities 810,904 3, ,159 83

85 Nigeria West Total 31 December 2012 Africa N'million N'million N'million Cash flows from: Operating activities 34,027 7,767 41,794 Investing activities (51,647) (8,584) (60,231) Financing activities 25,656-25,656 Increase in cash and cash equivalents 8,036 (817) 7,219 Cash balance, beginning of year 122,076 3, ,368 Effect of exchange difference Cash balance, end of year 130,112 2, ,587 Nigeria West Total 31 December 2011 Africa N'million N'million Cash flows from : Operating activities (6,178) (39,673) (45,851) Investing activities (7,617) (286) (7,903) Financing activities 49,011-49,011 Increase in cash and cash equivalents 35,216 (39,959) (4,743) Cash balance, beginning of year Effect of exchange difference 86,860 43, ,111 Cash balance, end of year 122,076 3, ,368 b. By business segment - Group The Group is divided into three main business segments on a worldwide basis: Retail banking incorporating private banking services, private customer current accounts, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages. Commercial banking incorporating direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products. Treasury, corporate and investment banking incorporating financial instruments trading, structured financing and corporate leasing. 84

86 Retail Commercial Treasury Total 31 December, 2012 Banking Banking Corporate N'million N'million N'million N'million Profit before taxation 5,566 8,108 2,836 16,510 Income tax expense (1,001) (1,399) (714) (3,114) Profit for the year 4,565 6,709 2,122 13,396 Reportable segment assets 143, , ,047 1,073,828 Reportable segment liabilities 123, , , ,934 Retail Commercial Treasury Total 31 December 2011 Banking Banking Corporate N'million N'million N'million N'million Profit before taxation 1,193 1, ,842 Income tax expense (96) (68) (39) (203) Profit for the year 1,097 1, ,639 Reportable segment assets 159, , , ,265 Reportable segment liabilities 121, , , ,159 85

87 C. By business segment Bank Retail Commercial Treasury Total 31 December 2012 Banking Banking Corporate N'million N'million N'million N'million Profit before taxation 5,318 7,747 2,710 15,775 Income tax expense (989) (1,383) (706) (3,078) Profit for the year 4,329 6,364 2,004 12,697 Reportable segment assets 143, , ,622 1,071,311 Reportable segment liabilities 123, , , ,223 Retail Commercial Treasury Total 31 December, 2011 Banking Banking Corporate N'million N'million N'million N'million Profit before taxation 1,047 1, ,977 Income tax expense (166) (85) (99) (350) Profit for the year 881 1, ,627 Reportable segment assets 138, , , ,527 Reportable segment liabilities 125, , , , Related party transactions A number of banking transactions were entered into with related parties in the normal course of business. These include loans, deposits and foreign currency transactions. The volumes of relatedparty transactions and outstanding balances at the year-end are as follows: (a) Risk assets outstanding as at 31 December 2012 Direct credit assets Included in loans and advances is an amount of N31.52 billion (2011: 35.6 billion) representing credit facilities to companies in which certain directors and shareholders have interests. The balances as at 31 December 2012 are as follows: 86

88 Name of Company/Director Relationship Facility type N' million Status Ase River Transport Company Limited Dr Jason Fadeyi Term Loan 129 Performing Demanta Nigeria Limited Mrs Ibiye Ekong Advance 271 Performing Dv Media Nigeria Limited Mrs Ibiye Ekong Advance 50 Performing Finicky World Limited Mrs Onasanya (Ex-Director) Term Loan 328 Performing Brig. Gen Anthony Ukpo (Rtd) (Ex- Ikaba Hotels Limited Director) Term Loan 247 Performing Joint Aviation Services Ltd-A/C Iii Mr Olatunde Ayeni Overdraft 33 Performing Masco Agro Allied Industries Limited Vinay Tuteja Term Loan 15,941 Performing Mawe Services Limited Mr. Olatunde Ayeni Term Loan 62 Performing Media Link Limited Gbenga Ademulegun Term Loan 128 Performing Newcross Petroleum Limited Dr Jason Fadeyi Term Loan 3,503 Performing Nofson Nigeria Limited Kehinde Durosinmi-Etti Term Loan 109 Performing Ocean Marine Security Limited Mr. Olatunde Ayeni Term Loan 1,598 Performing Brig. Gen Anthony Ukpo (Rtd) (Ex- Ogeyi Place Hotel Limited Director) Term Loan 1,889 Performing Onas Farm Limited Mrs Onasanya (Ex-Director) Term Loan 55 Performing Pan Ocean Oil Corporation Dr Jason Fadeyi Term Loan 15,479 Performing Pasture Travels & Tours Dotun Adeniyi Bank Guarantee 20 Performing Premiere Academy International Limited Akinsola Akinfemiwa (Ex-Director) Term Loan 1,260 Performing Segun Oloketuyi Segun Oloketuyi (Ex-Director) Term Loan 91 Performing Stallion Nigeria Limited Vinay Tuteja Term Loan 8,153 Performing Swanlux Nigeria Limited Princess Adeniran (Ex-Director) Overdraft 543 Performing Westwood International Limited Mr Olatunde Ayeni Overdraft 73 Performing TOTAL 49,963 (b) Deposits outstanding as at 31 December 2012 Name of company/director Name of Related Director Type of deposit N million N million Mr. Ademulegun Olugbenga Mr. Ademulegun Olugbenga Current Account 10 6 Mr Adeniyi Dotun Mr. Adeniyi Dotun Current Account 12 9 Mr Durosinmi-Etti K. Mr. Durosinmi Etti K. Current Account Mrs Ekong Ibiye Asime Mrs. Ekong Ibiye Asime Current Account 8 2 Dr. Jason Fadeyi Dr. Jason Fadeyi Current Account 13 - Mr. Kola Awodein (SAN) Mr. Kola Awodein Current Account 3 - Ikaba Hotels Limited Brig. Gen. Anthony Ukpo Current Account 5 7 Mr John Olatunde Ayeni Mr. Olatunde Ayeni Current Account 1 10 Ocean Marine Security Limited Mr. Olatunde Ayeni Current Account Ogeyi Place Hotels Ltd Brig. Gen. Anthony Ukpo Current Account 10 3 Mr Oguntayo T.A. Mr. Oguntayo T. A Current Account 8 7 Pan Ocean Oil Corporation Dr. Jason Fadeyi Current Account Stallion Nig. Ltd. F Mr. Vinay Tuteja Current Account

89 (c) Director's deposits outstanding as at 31 December 2012 N million N million Pan Ocean Oil Corporation Dr. Jason Fadeyi Term deposit Dr. Jason Fadeyi Dr. Jason Fadeyi Term deposit 11 - Mr. Kola Awodein (SAN) Mr. Kola Awodein (SAN) Term deposit (d) Director's off balance sheet engagements Included in off balance sheet engagements is an amount of N3.8 billion (2011: N17.1 billion) representing unconfirmed letters of credit, advance payment guarantee and performance bond to companies in which certain directors and shareholders have interests. The balances as at 31 December, 2012 are as follows: Name of company/individual Relationship Facility type N million Status Security Hyundai Motors Nig Limited Vinay Tuteja Letter of Credit 50 Opened In place Popular Foods Limited Vinay Tuteja Letter of Credit 2,186 Opened In place Premium Seafoods Ltd Vinay Tuteja Letter of Credit 1,191 Opened In place Qingqi Motorcycle Manufacturing Vinay Tuteja Letter of Credit 367 Opened In place Stallion Group Vinay Tuteja Letter of Credit 41 Opened In place 3, Contingent liabilities and commitments a. Legal proceedings The group in the ordinary course of business is presently involved in 380 (2011: 161) litigation suits none of which may give rise to any material contingent liability. There were contingent liabilities in respect of claims and litigations against the group as at 31 December 2012 amounting to N69.8 million (2011: N801 million). These claims arose in the normal course of business and are being contested by the bank. The directors having sought the advice of professional legal counsel are of the opinion that no significant liability will crystallize from these cases hence no provision are therefore deemed necessary. The Directors are of the opinion that none of the aforementioned cases is likely to have a material adverse effect on the bank and are not aware of any other pending or threatened claims and litigations. b. Capital commitments At the financial position date, the group had capital commitments to the tune of N3.1 billion (2011: N3.2 billion) in respect of authorized and contracted capital projects. c. Off balance sheet engagements In the normal course of business, the Group is party to financial instruments with offbalance sheet risk. The instruments are used to meet the credit and other financial requirements of customers. The contractual amounts of the off-balance sheet financial instruments are: 88

90 Group Bank N million N million N million N million Performance bonds and guarantees 111,075 98, ,075 98,435 Letters of credit 45,855 43,555 45,855 43, , , , , Employees and Directors Group Bank a. Employees The average number of persons employed by the Group during the year was as follows: Number Number Number Number Executive Directors Management Non-management 2,563 2,446 2,364 2,247 2,768 2,668 2,517 2,417 Compensation for the above staff (excluding executive Directors): N million N million N million N million Salaries and wages (note 12) 14,279 12,901 14,159 12,724 Pension costs - Defined contribution plans (note 46) Defined benefit plans (note 46) 1, ,666 1,173 1,949 1,507 1,948 1,439 16,228 14,408 16,107 14,163 89

91 Gender diversity Analysis of total employees by gender Gender Gender Male Female Total Male Female Number Percentage Employees 1,681 1,087 2,768 61% 39% Analysis of board and top management staff by gender Gender Gender Male Female Total Male Female Number Percentage Board Members ( Executive and Non-Executive Directors) % 18% Top Management Staff (AGM- GM) % 32% % 28% Further Analysis of board and top management staff by gender Gender Gender Male Female Total Male Female Number Percentage Assistant General Managers % 27% Deputy General Managers % 40% General Managers % 40% Board Members(Non-Executive Directors) % 9% Board Members(Executive Directors excluding MD/CEO) % 40% Managing Director/CEO % 0% % 28% 90

92 The number of employees of the Group, other than Directors, who received emoluments in the following ranges (excluding pension contributions), were: Group Bank Number Number Number Number N300,001 - N2,000, N2,000,001 - N2,800, N2,800,001 - N3,500, N3,500,001 - N4,000, N4,000,001 - N5,500, N5,500,001 - N6,500, N6,500,001 - N7,800, N7,800,001 - N9,000, N9,000,001 - and above ,762 2,662 2,511 2,411 b. Directors Remuneration paid to the Directors was: Group Bank N million N million N million N million Fees and sitting allowances Executive compensation Other Director expenses and benefits Fees and other emoluments disclosed above include amounts paid to: The Chairman The highest paid Director The number of Directors who received fees and other emoluments (excluding pension contributions) in the following ranges was: Number Number Number Number Below N1,000, N1,000,000 - N2,000, N2,000,001 - N3,000, N5,500,001 - and above

93 52. Events after the reporting period There are no post-balance sheet events that could have had a material effect on the state of affairs of the group as at 31 December 2012 which have not been adequately provided for or disclosed. 53. Dividend In respect of the current year, the Directors propose that a dividend of 50 kobo per ordinary Share of 50 kobo each will be paid to Shareholders after the Annual General Meeting. This proposed dividend is subject to the approval by Shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend is subject to a withholding tax at the appropriate tax rate and is payable to Shareholders whose names appear on the Register of Members at the close of business 14 days before the Annual General Meeting. The total estimated dividend is N6.6 billion and is payable out of the profit for the year. 54. Customers complaint In the course of the 2012 Financial year, a total number of twenty thousand, six hundred and six (20,606) complaints were received from customers in the ordinary course of business. A total of twenty thousand, one hundred and twenty three (20,123) which represent 98% were satisfactorily resolved while a total of four hundred and eighty three (483) representing 2% were pending resolution as at December 31, Financial Year Customers' Complaint Description Total Number of Complaints Satisfactory Complaints Resolved Pending Resolution Numbers 20,606 20, Percentage Distribution (%) 100% 98% 2% 92

94 2012 Monthly Customers Complaint Customers complaints include but not limited to the following; Third party ATM/POS issues, Cash retract Card related issues Card retrieval, Delayed SMS alert Complain Resolution Channels: Yes Centre/Customer Engagement Department/ Branches: These are the Bank s dedicated platforms for receipt of customers complaints and resolution among other channels. The Bank s Yes Centre operates 24/7 services. Customers are encouraged to escalate their complaints to the Yes Centre/Customer Engagement Department after which customers are responded to via the appropriate channel. The complaints are immediately investigated and resolution made as appropriate with the outcome communicated to the Executive Management periodically. The outcome of resolution helps in the constant review of processes to meet and surpass our customers expectations. In order to reduce customer complaints, the Bank drives the process via; 1. Mystery shoppers and Service Auditors 2. Shop floor management 3. Customer forums and surveys 4. Business visitation and relationship management 5. Employee training on Business Processes and Complaints Management In line with The Central Bank of Nigeria s requirement, the bank has also set up a consumer protection council department. 93