Bank of Syria and Overseas S.A. Consolidated Financial Statements. 31 December 2016

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7 Consolidated statement of financial position As at Notes ASSETS Cash and balances with Central Bank of Syria 3 26,932,720,261 20,396,884,588 Balances due from banks 4 105,923,538,475 90,500,771,696 Placements due from banks 5 52,720,534,804 22,190,679,271 Financial investments-held for trading 6 1,278,538 1,032,783 Loans and advances (net) 7 4,150,351,257 5,857,660,792 Financial investments-available for sale 8 75,215,000 79,875,000 Property and equipment 9 2,741,211,167 2,227,600,125 Intangible assets 10 39,832,311 45,305,669 Other assets ,076, ,312,552 Deferred tax assets 17-70,387,044 Statuary blocked funds with Central Bank of Syria 12 2,024,818,756 1,392,779,147 TOTAL ASSETS 195,223,577, ,122,288,667 LIABILITIES AND EQUITY LIABILITIIES Due to banks 13 54,458,653,432 38,141,543,494 Due to customers ,920,744,405 84,169,306,902 Cash margins 15 2,020,772,233 1,387,283,746 Provisions 16 5,071,006,460 3,479,808,158 Deferred tax liabilities 18 6,303,750 7,468,750 Income tax provision ,864,865 - Other liabilities 19 2,240,594,058 1,663,715,577 TOTAL LIABILITIES 173,151,939, ,849,126,627 EQUITY Equity attributable to equity holders of the parent Share capital 20 4,000,000,000 4,000,000,000 Statutory reserve ,648, ,718,811 Special reserve ,648, ,718,811 General reserve for credit risk ,986, ,986,709 Accumulated change in the fair value of available for sale financial investments 22 18,911,250 22,406,250 Accumulated realized losses 23 (396,950,518) (1,350,292,517) Unrealized retained earnings 23 16,638,647,648 10,166,723,648 21,906,891,273 14,109,261,712 Minority interest (Non-controlling interest) 164,746, ,900,328 TOTAL EQUITY 22,071,638,085 14,273,162,040 TOTAL LIABILITIES AND EQUITY 195,223,577, ,122,288,667 Chairman General Manager The attached notes 1 to 39 form part of these consolidated financial statements. 2

8 Consolidated income statement For the year ended Notes Interest and similar income 24 3,082,749,572 2,686,331,011 Interest and similar expense 25 (1,119,989,139) (960,064,533) Net interest income 1,962,760,433 1,726,266,478 Fees and commission income ,374, ,593,811 Fees and commission expense 26 (12,574,120) (43,444,352) Net fees and commission income 931,799, ,149,459 Net interest, fees and commission income 2,894,560,379 2,470,415,937 Net gain arising from dealing in foreign currencies 690,713, ,308,224 Unrealized foreign exchange gain on structural position 6,471,924,000 4,965,102,000 Loss on held for trading financial investments ,755 (73,580) Gain on available for sale financial investments 27 3,500,000 5,000,000 Other operating income - 3,037,985 Total operating income 10,060,943,326 8,034,790,566 Personnel expenses 28 (1,062,631,788) (803,018,715) Depreciation of property, plant and equipment 9 (97,635,085) (105,265,388) Amortization of intangible assets 10 (5,473,358) (6,495,121) Credit loss recovery (expense) ,885,224 (126,607,690) Provisions 4,16 (316,564,120) (80,349,119) Other operating expenses 30 (665,460,905) (428,703,482) Total operating expenses (1,708,880,032) (1,550,439,515) PROFIT BEFORE TAX 8,352,063,294 6,484,351,051 Income tax expense 17 (550,092,249) (83,338,182) PROFIT FOR THE YEAR 7,801,971,045 6,401,012,869 Attributable to: Equity holders of the parent 7,801,124,561 6,398,041,483 Minority Interest (Non-controlling interest) 846,484 2,971,386 7,801,971,045 6,401,012,869 Basic and diluted earnings per share for equity holders of the parent The attached notes 1 to 39 form part of these consolidated financial statements. 3

9 Consolidated statement of comprehensive income For the year ended Notes Net profit for the year 7,801,971,045 6,401,012,869 Other comprehensive income to be reclassified to consolidated income statement in subsequent periods : Accumulated change in fair value of available for sale financial investments 22 (4,660,000) (6,575,000) Deferred tax liabilities on available for sale financial investments 22 1,165,000 1,643,750 Total comprehensive income for the year 7,798,476,045 6,396,081,619 Attributable to: Equity holders of the parent 7,797,629,561 6,393,110,233 Minority interest (Non-controlling interest) 846,484 2,971,386 7,798,476,045 6,396,081,619 The attached notes 1 to 39 form part of these consolidated financial statements. 4

10 Consolidated statement of changes in equity For the year ended 2016 Accumulated change in the fair value of available for sale Total equity attributable to Minority interest Special General reserve financial Profit for Accumulated Unrealized retained equity holders of (Non-controlling Share capital Statutory reserve reserve for credit risk investments the year realized losses earnings the parent interest) Total equity Balance at 1 January ,000, ,718, ,718, ,986,709 22,406,250 - (1,350,292,517) 10,166,723,648 14,109,261, ,900,328 14,273,162,040 Total comprehensive income (3,495,000) 7,801,124, ,797,629, ,484 7,798,476,045 Transferred to reserves - 187,929, ,929, (375,858,562) Appropriation of profit for the year (7,425,265,999) 953,341,999 6,471,924, Balance at 4,000,000, ,648, ,648, ,986,709 18,911,250 - (396,950,518) 16,638,647,648 21,906,891, ,746,812 22,071,638, Balance at 1 January ,000,000, ,091, ,091, ,986,709 27,337,500 - (2,479,976,466) 5,201,621,648 7,716,151, ,928,942 7,877,080,421 Total comprehensive income (4,931,250) 6,398,041, ,393,110,233 2,971,386 6,396,081,619 Transferred to reserves - 151,627, ,627, (303,255,534) Appropriation of profit for the year (6,094,785,949) 1,129,683,949 4,965,102, Balance at 31 December ,000, ,718, ,718, ,986,709 22,406,250 - (1,350,292,517) 10,166,723,648 14,109,261, ,900,328 14,273,162,040 The attached notes 1 to 39 form part of these consolidated financial statements. 5

11 Consolidated statement of cash flows For the year ended Notes Operating activities Profit before tax 8,352,063,294 6,484,351,051 Adjustments for: Depreciation 9 97,635, ,265,388 Amortization 10 5,473,358 6,495,121 Credit loss (recovery) expense 29 ( 438,885,224) 126,607,690 Miscellaneous provision expense (net of recoveries) 4,16 316,564,120 80,349,119 (Gain) loss from held for trading financial investments 27 ( 245,755) 73,580 loss (Gain) on disposal/sale of fixed assets 334,426 (2,887,986) Operating profit before working capital adjustments 8,332,939,304 6,800,253,963 Decrease in deposits with the Central Bank of Syria 381,014,164 1,255,829,385 Increase in placements due from banks ( 17,175,172,411) (2,287,459,169) Increase in due to banks 206,972,000 - Decrease in loans and advances 2,181,477,453 1,034,750,411 Change in other assets ( 133,122,854) 67,783,201 Change in cash margins 157,969,010 (188,462,538) Decrease in customers' deposits ( 7,941,928,379) (15,192,515,917) Change in other liabilities ( 106,802,164) ( 226,293,895) Cash flows used in operations ( 14,096,653,877) (8,736,114,559) Income tax paid 17 ( 45,840,340) (66,002,622) Net cash flows used in operating activities ( 14,142,494,217) (8,802,117,181) Investing activities Maturity of available for sale financial investments - 1,758,320,000 Purchase of fixed assets ( 611,580,553) (255,605,199) Sale of fixed assets - 2,888,000 Net cash flows (used in) from investing activities ( 611,580,553) 1,505,602,801 Financing activities Distributed dividends for prior years ( 73,936) (78,683) Net cash flows used in financing activities ( 73,936) (78,683) Net foreign exchange differences 19,252,210,603 19,862,668,098 Net increase in cash and cash equivalents 4,498,061,897 12,566,075,035 Cash and cash equivalents at 1 January 68,350,004,351 55,783,929,316 Cash and cash equivalents at 31 December 32 72,848,066,248 68,350,004,351 Operational cash flows from interest and dividends Interest received 2,916,720,746 2,628,907,974 Interest paid 1,035,430,433 1,004,675,449 Dividends received 3,500,000 5,000,000 The attached notes 1 to 39 form part of these consolidated financial statements. 6

12 1 Corporate information Bank of Syria and Overseas S.A. (the Bank ) was established as a public shareholding company based on the decision of the presidency of the council of ministers number 20/M.W on 30 April 2003, according to private and joint banks law number 28 for 2001, and commercial registration number (13900) dated 29 January The Bank was registered as a private bank at the government commission directorate on 7 January 2004 under number 9. The registered and paid in capital equals the amount of 4,000,000,000 distributed over 40,000,000 shares with a par value of 100 as at and 31 December The Bank was established with a capital of 1,500,000,000 distributed over 3,000,000 shares with a par value of 500 per share. Bank s capital increased gradually to reach 3,600,000,000 at 31 December 2010 distributed over 7,200,000 shares with a par value of 500 per share. On 4 April 2011, the General Assembly of shareholders has approved the increase in capital by distributing part of retained earnings amounting 400,000,000 as stock dividends to shareholders according to their ownership percentages. Share capital became 4,000,000,000 divided into 8,000,000 shares with a par value of 500 per share as at 31 December During the meeting held by the General Assembly of shareholders on 24 April 2012, it has been approved that the Bank's shares shall be split into 40,000,000 shares with a par value of 100 per share. The Bank provides several banking services through its headquarter and branches that are 27 branches as at 31 December 2016 distributed in the Syrian Arab Republic in various locations: Damascus, Damascus country side, Aleppo, Latakia, Hama, Homs, Tartous, Daraa, Sweida and Hasaka. The bank s branch Number 28, located in Lattakia, was registered in The project has not commenced operations yet. Operations are continued in the Mahata branch located in Homs city during 2014, accordingly the number of temporarily suspended branches is now eight branches that are located in Homs, Damascus country side (Adra), Aleppo, Daraa and Hasaka. The Bank is 49% owned by BLOM Bank SAL. The Bank s shares are listed in Damascus Securities Exchange. BLOM Bank SAL provides the following services to Bank of Syria and Overseas: 1- Assistance in the establishment of main policies. 2- Assistance in the selection of key personnel. 3- Assistance in developing the Information Technology department. 4- Training. 5- Human Resources development. 6- Outsourcing basic activities and programs. And that is according to the administrative and technical support agreement signed with BLOM Bank SAL and in force since 2004, and approved for renewal by the General Assembly of the Bank during its meeting held on 6 July 2014 for a period of two years ended on 11 November A new technical support agreement was signed on 4 February 2016, which was ended by the General Assembly at its meeting on 27 April 2016, The Bank is currently working on completing the necessary procedures in order to obtain the approval of the Central Bank of Syria to renew this agreement in accordance with the applicable laws and regulations. Bank of Syria and Overseas S.A. owns 52% in Syria and Overseas Financial Services LLC which commenced its operations on 25 October 2009 by Decision No. 105 / M issued by the Syrian Commission on Financial Markets and Securities. The consolidated financial statements of the Group as of were authorized for issuance in accordance with the resolution of the Board of Directors number 111 dated 17 February 2017, to be authorized later by the General Assembly of shareholders. 7

13 2 Basis of preparation and significant accounting policies 2.1 Basis of preparation - Consolidated financial statements have been prepared under the historical cost basis, except for held for trading and available for sale financial investments as they are measured at fair value at the consolidated statement of financial position date. - Consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and its interpretations, and the resolutions of the Credit and Monetary Counsel. - The consolidated financial statements are presented in Syrian Pounds (), which is the functional currency of the Group. - Consolidated financial statements include the financial statements of Bank of Syria and Overseas S.A and its subsidiary as at. - Taking into account the latest available official Consumer Price Index and other qualitative indicators, the economy in which the Group predominantly operates is not considered as hyperinflationary. - The consolidated financial statements do not represent the statutory financial statements of the Group and have been prepared for management use only and a separate statutory financial statements have been issued. - The Group presents the consolidated statement of financial position in the order of liquidity. Financial assets and financial liabilities are normally recognized in the consolidated statement of financial position in the consolidated statement of financial position and are disclosed and disclosed only net, as provided in the summary of significant accounting policies in Note 2.5. Basis of consolidation The consolidated financial statements comprise the activities of the Bank and its subsidiary, Syria and Overseas Financial Services LLC. Syria and Overseas Financial Services main operations are providing consultancies, analysis and dissemination of information related to securities in addition to buying and selling securities for the Company and for customers and managing IPOs and investments. Syria and Overseas Financial Services, LLC was established on 25 October 2009 as per the commercial registration No The Bank s ownership percentage in this company is 52%. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights results in control. However, under individual circumstances, the Bank may still exercise control with less than 50% shareholding or may not be able to exercise control even with ownership over 50% of an entity s shares. When assessing whether it has power over an investee and therefore controls the variability of its returns, the Bank considers all relevant facts and circumstances, including: The purpose and design of the investee The relevant activities and how decisions about those activities are made and whether the Bank can direct those activities Contractual arrangements such as call rights, put rights and liquidation rights Whether the Bank is exposed, or has rights, to variable returns from its involvement with the investee, and has the power to affect the variability of such returns Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the noncontrolling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group s accounting policies. All intra-group assets, liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. 8

14 2 Basis of preparation and significant accounting policies (continued) 2.1 Basis of consolidation (continued) A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, noncontrolling interest and other components of equity while any resultant gain or loss is recognized in the consolidated income statement. Any investment retained is recognized at fair value. 2.2 Changes in accounting policies and disclosures New and amended standards and interpretations The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and the effect of these changes are disclosed below. Although these new standards and amendments applied for the first time in 2016, they did not have a material impact on the annual consolidated financial statements of the Group. IFRS 14 Regulatory Deferral Accounts IFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-regulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of IFRS. Entities that adopt IFRS 14 must present the regulatory deferral accounts as separate line items on the statement of financial position and present movements in these account balances as separate line items in the income statement and OCI. The standard requires disclosure of the nature of, and risks associated with, the entity s rate-regulation and the effects of that rate-regulation on its financial statements. Since the Group is an existing IFRS preparer and is not involved in any rate-regulated activities, this standard does not apply. Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 Business Combinations principles for business combination accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation if joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are applied prospectively. These amendments do not have any impact on the Group as there has been no interest acquired in a joint operation during the period. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation The amendments clarify the principle in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is a part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are applied prospectively and do not have any impact on the Group, given that it has not used a revenue-based method to depreciate its non-current assets. Amendments to IAS 27: Equity Method in Separate Financial Statements The amendments allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in their separate financial statements have to apply that change retrospectively. These amendments do not have any impact on the Group s consolidated financial statements. Annual Improvements Cycle These improvements include: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 7 Financial Instruments: Disclosures IAS 19 Employee Benefits IAS 34 Interim Financial Reporting These amendments do not have any impact on the Group. 9

15 2 Basis of preparation and significant accounting policies (continued) 2.2 Changes in accounting policies and disclosures (continued) Amendments to IAS 1 Disclosure Initiative The amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify: The materiality requirements in IAS 1 That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated That entities have flexibility as to the order in which they present the notes to financial statements That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and OCI. These amendments do not have any impact on the Group. Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception The amendments address issues that have arisen in applying the investment entities exception under IFRS 10 Consolidated Financial Statements. The amendments to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. Furthermore, the amendments to IFRS 10 clarify that only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 Investments in Associates and Joint Ventures allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. These amendments are applied retrospectively and do not have any impact on the Group as the Group does not apply the consolidation exception. 2.3 IASB Standards and Interpretations issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. Classification and measurement The new standard will require all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity s business model for managing the assets and the instruments contractual cash flow characteristics. Hedge accounting IFRS 9 allows entities to continue with the hedge accounting under IAS 39 even when other elements of IFRS become mandatory on 1 January Impairment of financial assets The standard will replace IAS 39 s incurred loss approach with a forward-looking expected loss (ECL) approach. 10

16 2 Basis of preparation and significant accounting policies (continued) 2.3 IASB Standards and Interpretations issued but not yet effective (continued) IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January Early adoption is permitted. Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. IAS 7 Disclosure Initiative Amendments to IAS 7 The amendments to IAS 7 Statement of Cash Flows are part of the IASB s Disclosure Initiative and require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. On initial application of the amendment, entities are not required to provide comparative information for preceding periods. These amendments are effective for annual periods beginning on or after 1 January 2017, with early application permitted. Application of amendments will result in additional disclosure provided by the Group. IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses Amendments to IAS 12 The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognised in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. These amendments are effective for annual periods beginning on or after 1 January 2017 with early application permitted. If an entity applies the amendments for an earlier period, it must disclose that fact. These amendments are not expected to have any impact on the Group. IFRS 2 Classification and Measurement of Share-based Payment Transactions Amendments to IFRS 2 The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods beginning on or after 1 January 2018, with early application permitted. The Group is assessing the potential effect of the amendments on its consolidated financial statements. 11

17 2 Basis of preparation and significant accounting policies (continued) 2.3 IASB Standards and Interpretations issued but not yet effective (continued) IFRS 16 Leases IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees leases of low-value assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from today s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard s transition provisions permit certain reliefs. In 2017, the Group plans to assess the potential effect of IFRS 16 on its consolidated financial statements. 24. Significant accounting judgments and estimates The preparation of the Group s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the notes to the consolidated financial statements and the disclosures of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the assets or liabilities that are affected in future periods. It s possible for these main assumptions, related to future estimation for uncertain events, to lead to material adjustments in assets and liabilities balances as follows: Going concern The Group s management has made an assessment of the Group s ability to continue as a going concern. Despite the current events that the Syrian Arab Republic is experiencing and the inherently uncertain future outcomes of these events, the Group s management is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt on the Group s ability to continue as going concern. Therefore, the consolidated financial statements continue to be prepared on a going concern basis. Fair value of financial instruments The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal market at the measurement date. When the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial position date cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observing markets where possible, but where this is not feasible, estimation is required in establishing fair values. 12

18 2 Basis of preparation and significant accounting policies (continued) 24. Significant accounting judgments and estimates (continued) Effective Interest Rate (EIR) method The Bank s EIR methodology recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected behavioural life of loans and deposits and recognises the effect of potentially different interest rates charged at various stages and other characteristics of the product life cycle (including prepayments and penalty interest and charges). Impairment losses on loans and advances The Bank reviews its loans and advances on quarterly basis to assess whether an allowance for impairment should be recorded in the consolidated income statement. The Bank s impairment methodology for assets carried at amortised cost results in the recording of provisions for: Specific impairment losses on individually significant or specifically identified exposures; Collective impairment of: Individually not significant exposures Incurred but not yet identified losses (IBNI) In particular, judgment by management is required in the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses. These estimates driven by a number of factors, the changing of which can result in different levels of allowances. Impairment of available for sale financial investments The Bank reviews its debt securities classified as available for sale investments at each reporting date to assess whether they are impaired. This assessment, including estimated future cash flows and other inputs in to the discounted cash flow model and in the case of equity instruments, the interpretation of what is significant or prolonged requires judgement. Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available against which the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax-planning strategies. Provisions and other contingent liabilities The Bank operates in a regulatory and legal environment that, by nature, has a heightened element of litigation risk inherent to its operations. As a result, it is involved in various litigation, arbitration and regulatory investigations and proceedings, arising in the ordinary course of the Bank s business. When the Bank can reliably measure the outflow of economic benefits in relation to a specific case and considers such outflows to be probable, the Bank records a provision against the case. Where the probability of outflow is considered to be remote, or probable, but a reliable estimate cannot be made, a contingent liability is disclosed. Given the subjectivity and uncertainty of determining the probability and amount of losses, the Bank takes into account a number of factors including legal advice, the stage of the matter and historical evidence from similar incidents. Significant judgement is required to conclude on these estimates. 13

19 2 Basis of preparation and significant accounting policies (continued) 25. Summary of significant accounting policies (continued) The consolidated financial statements are prepared based on the following most significant accounting policies: Foreign Currencies Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Syrian Pounds at the functional currency rate of exchange at the statement of financial position date as declared by the Central Bank of Syria. All differences are taken to the consolidated income statement. Financial instruments initial recognition and subsequent measurement Date of recognition Financial assets and liabilities, with the exception of loans and advances to customers and balances due to customers, are initially recognised on the trade date, i.e., the date that the Bank becomes a party to the contractual provisions of the instrument. Loans and advances to customers are recognised when funds are transferred to the customers account. The Bank recognises due to customer balances when funds reach the Bank. Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair values plus any related acquisition costs, except for financial instruments that are measured at fair value through profit and loss. Financial assets or financial liabilities held for trading The Bank classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short term profit making through trading activities or form part of a portfolio of financial instruments that are managed together for which there is evidence of a recent pattern of short-term profit taking. Held for trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in net trading income. Interest and dividend income or expense is recorded in net trading income according to the terms of the contract, or when the right to payment has been established. The effective interest rate method The effective interest rate (EIR) is the rate that exactly discounts estimated 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 financial asset or financial liability. The amortised cost of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted amortised cost is calculated based on the original or latest re-estimated EIR and the change in is recorded as Interest and similar income for financial assets and Interest and similar expense for financial liabilities. The accounting policies for the EIR method vary by instruments. Day 1 profit or loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique with the variables include only data from observable markets, the Bank immediately recognises the difference between the transaction price and fair value (a Day 1 profit or loss) in net trading income. In case where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the income statement when the inputs become observable, or when the instrument is derecognized. 14

20 2 Basis of preparation and significant accounting policies (continued) 25. Summary of significant accounting policies (continued) Financial instruments initial recognition and subsequent measurement (continued) Available for sale financial investments Available for sale investments include equity and debt securities. Equity investments classified as Available for sale financial investments are those which are neither classified as held for trading nor as designated at fair value through the income statement. Debt securities in this category are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity or in response to changes in market conditions. After initial recognition, available for sale financial investments are subsequently measured at fair value. Unrealized gains and losses are recognized directly in OCI in the available-for-sale reserve. When the investment is disposed of, the cumulative gain or loss previously recognized in equity is recognized in the income statement in other operating income. Where the Bank holds more than one investment in the same security, they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available for sale financial investments is reported as interest income using the effective interest rate method. Dividends earned from holding available for sale financial investments are recognised in the income statement as Other operating income when the right of the payment has been established.the losses arising from impairment of such investments are recognized in the income statement in Impairment losses on financial investments and removed from the available-for sale reserve. Held to maturity financial investments Held to maturity financial investments are non derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and the ability to hold to maturity. After initial measurement, held to maturity financial investments are subsequently measured at amortized cost using the EIR method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization is included in Interest and similar income in the income statement. The losses arising from impairment of such investments are recognized in the income statement within investment impairment loss. Due from banks and loans and advances to customers Balances due from banks and Loans and advances to customers include non derivative financial assets with fixed or determinable payments and that are not quoted in an active market, other than: Those that the Bank intends to sell immediately or in the near term and those that the Bank, upon initial recognition, designates as at FVPL Those that the Bank, upon initial recognition, designates as available-for-sale Those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration After initial measurement, amounts Due from banks and Loans and advances to customers are subsequently measured at amortized cost using the Effective Interest Rate method, (EIR), less allowance for impairment. 15

21 2 Basis of preparation and significant accounting policies (continued) 25. Summary of significant accounting policies (continued) Financial instruments initial recognition and subsequent measurement (continued) Financial assets and financial liabilities designated at fair value through profit or loss Financial assets and financial liabilities classified in this category are those that have been designated by management upon initial recognition. Management may only designate an instrument at FVPL upon initial recognition when one of the following criteria are met, and designation is determined on an instrument-byinstrument basis: The designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis, or The assets and liabilities are part of a group of financial assets, financial liabilities, or both, which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, or The financial instrument contains one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited. Financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in net gain or loss on financial assets and liabilities designated at FVPL. Interest earned or incurred is accrued in interest income or interest expense, respectively, using the EIR, taking into account any discount/premium and qualifying transaction costs being an integral part of instrument, while dividend income is recorded in other operating income when the right to the payment has been established. Derecognition of financial assets and financial liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when the rights to receive cash flows from the asset have expired. The Bank also derecognises the assets if it has both transferred the asset, and the transfer qualifies for derecognition. The Bank has transferred the asset if, and only if, either: The Bank has transferred its contractual rights to receive cash flows from the asset, or It retains the rights to the cash flows, but has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass through arrangement. A transfer only qualifies for derecognition if either: The Bank has transferred substantially all the risks and rewards of the asset, or The Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank s continuing involvement in it. In that case, the Bank also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. continued involvement that takes the form of the a guarantee over the transferred asset, is measured at the the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss. 16

22 2 Basis of preparation and significant accounting policies (continued) 25. Summary of significant accounting policies (continued) Determination of Fair value In order to show how fair values have been derived, financial instruments are classified based on a hierarchy of valuation techniques, as summarised below: Level 1 financial instruments Those where the inputs used in the valuation are unadjusted quoted prices from active markets for identical assets or liabilities that the Bank has access to at the measurement date. Level 2 financial instruments Those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over the entire period of the instrument s life. Such inputs include quoted prices for similar assets or liabilities in active markets. Level 3 financial instruments Those that include one or more unobservable input that is significant to the measurement as whole. The Bank periodically reviews its valuation techniques including the adopted methodologies and model calibrations. The Bank evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary based on the facts at the end of the reporting period. Impairment of financial assets The Bank assesses at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets, is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include: a) indications that the borrower or a group of borrowers is experiencing significant financial difficulties, b) the probability that they will enter bankruptcy or other financial reorganization, c) default or delinquency in interest or principal payments and d) where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial assets carried at amortised cost The Bank s impairment methodology for assets carried at amortised costs comprises: A. Specific impairment losses for individually significant or specifically identified exposures B. Collective impairment of: i. Individually not significant exposures ii. Incurred but not yet identified losses (IBNI) For financial assets carried at amortised cost (such as due from banks, loans and advances to customers as well as held to maturity investments), the Bank first assesses whether an objective evidence of impairment exists for financial assets that are individually significant, or are already under specific work out by management. If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the credit loss expense in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and and advances together with the associated allowances are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after impairment was recognised, the previously recognised impairment loss is increased or reduced (but only up to the extent of the carrying amount had the impairment not been recognised) by adjusting the allowance account. If a future write off is later recovered, the recovery is credited to credit loss expense. The present value of the estimated future cash flows is discounted by the financial asset s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 17