ALPHA BANK ALBANIA SH.A

Transcription

1 Financial Statements for the year ended 31 December 2015 (with independent auditors report thereon)

2 Contents Independent Auditors Report Page Financial statements for the year ended 31 December 2015: Statement of profit or loss and other comprehensive income 1 Statement of financial position 2 Statement of changes in equity 3 Statement of cash flows 4 Notes to the financial statements 5-62

3 KPMG Albania Shpk "Deshmoret e Kombit" Blvd Twin Towers Buildings Building 1, 13th tloor Tirana, Albanra Telephone Teletax lnternet \ a +355{4) al-ollice@kpmg.com Independent Auditors' Report To the shareholder of Alpha Bank Albania Sh.a. Tirana, 19 May 2016 We have audited the accompanying financial statements of Alpha Bank Albania Sh.a. ("the Bank"), which comprise the statement of financial position as at 3 I December 20 I 5, the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible forthe preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Audi tors' Re spon s i bi lity Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our 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, we consider internal control relevant to the entity's preparation and fair presentation ofthe 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 ofthe entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects the financial position of the Bank as at 3 I December 2015, and its financial performance and its cash flows for the year in accordance with International Financial Reporting Standards. Statutory Auditor KPMG Albania Shpk "Deshmoret e Kombit" Blvd. Twin Towers Buildings Building I, l3th floor Tiran4 Albania KPMG Albanra Shpk, an Albanian lrmited liabitrty company and a m6mbsr lirm ol th KPMG nemork ol ind p nd nl momber rirms aliiat6d wlh KPMG lntsmational Cooperatrv6 ('KPMG Inlernational'). a Swss ntity. Begrsl6r d rn th National Bog stat on Ceni r wth VAF Numb r J9l D

4 Statement of profit or loss and other comprehensive income for the year ended 31 December (Amounts in LEK 000) Notes Interest income 6 3,271,874 4,049,056 Interest expense 6 (683,999) (1,689,861) Net interest income 2,587,875 2,359,195 Fee and commission income 7 262, ,970 Fee and commission expense 7 (68,694) (39,716) Net fee and commission income 193, ,254 Gains less losses on financial transactions 8 (1,473,812) 440,588 Other operating income 11,749 14,539 Total income 1,319,431 3,038,576 Personnel expenses 9 (717,680) (617,228) Depreciation and amortization 17, 18 (124,693) (151,333) Operating expenses 10 (1,161,765) (1,140,983) Total operating expenses (2,004,138) (1,909,544) Net impairment loss on loans to customers 16 (964,380) (649,610) (Loss)/Profit before income tax (1,649,087) 479,422 Income tax (93,675) (Loss)/Profit for the year (1,648,426) 385,747 Other comprehensive income/(loss): Items that may be reclassified to profit or loss Revaluation of AFS financial assets 15 (483,368) (885,593) Reclasified from equity to profit or loss 15 1,444,507 (288,575) Income tax 11 (144,171) 176,125 Revaluation of AFS financial assets, net of tax 816,968 (998,043) Other comprehensive income/(loss) for the year 816,968 (998,043) Total comprehensive loss for the year (831,458) (612,296) The statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 5 to 62. 1

5

6 Statement of changes in equity for the year ended 31 December (Amounts in LEK 000) Share Legal Other Retained earnings/ Total Notes Capital Reserves Reserves (Accumulated Loss) Balance at 1 January ,960, ,483 1,897 (226,420) 11,553,080 Profit for the year , ,747 Revaluation of AFS financial assets, net - - (998,043) - (998,043) Total comprehensive loss for the year - - (998,043) 385,747 (612,296) Balance at 31 December ,960, ,483 (996,146) 159,327 10,940,784 Loss for the year (1,648,426) (1,648,426) Revaluation of AFS financial assets, net , ,968 Total comprehensive loss for the year ,968 (1,648,426) (831,458) Sale of securities above fair value ,397,411 1,397,411 Balance at 31 December ,960, ,483 (179,178) (91,688) 11,506,737 The statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 5 to 62. 3

7 Statement of cash flows for the year ended on 31 December (Amounts in LEK 000) Notes Cash flows from operating activities: (Loss)/Profit before taxes (1,649,087) 479,422 Adjustments for: Depreciation and amortization 17,18 124, ,333 Gain on sale of property and equipment (304) (692) Property and equipment written off 17 12,879 18,236 Impairment losses , ,610 Loss from sale of available for sale securities 15 47,096 - Interest income 6 (3,271,874) (4,049,056) Interest expense 6 683,999 1,689,861 (3,088,218) (1,061,286) Changes in: Compulsory reserve 1,158, ,472 Loans and advances to customers (1,734,852) (733,412) Other assets ,347 (356,563) Due to banks 20 (60,285) (58,080) Due to customers 21 (9,808,283) (2,125,177) Other liabilities 23 (230,733) 164,956 Interest paid (929,746) (1,875,265) Interest received 3,485,764 3,701,211 Net cash flows used in operating activities before income tax (10,999,041) (2,062,144) Income taxes paid (59,588) (207,763) Net cash flows used in operating activities (11,058,629) (2,269,907) Cash flows from investing activities: Purchase of property, equipment and intangibles 17,18 (37,573) (54,633) Proceeds from sale of property and equipment 2, Net sales/(purchases) of investment securities 18,390,963 (5,431,786) Net cash flows from/(used in) investing activities 18,355,687 (5,485,693) Sale of securities above fair value 15 1,397,411 - Net cash flows from financing activities 1,397,411 - Net increase/(decrease) in cash and cash equivalents 8,694,469 (7,755,600) Cash and cash equivalents, beginning of the period 4,368,278 12,123,878 Cash and cash equivalents, end of the period 26 13,062,747 4,368,278 The statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 5 to 62. 4

8 1. General Alpha Bank A.E. Tirana Branch was established in 1998 as a branch of Alpha Bank A.E., Athens ( Head Office ), which is the ultimate parent of the Alpha Bank Group of companies. As of 19 December 2006 the Head Office s Board of Directors approved a change in the name of the Bank to Alpha Bank Albania ( the Bank ). The Bank s registered offices are located at Rruga e Kavajes, Business Center G Kam, 2 nd floor, Tirana, Albania. On 29 February 2012 the Bank was transformed to a subsidiary based on the Decision no. 14 of the Supervisory Council of Bank of Albania (hereinafter refered to as Central Bank ) and was licensed on 17 May 2012 for rendering payment transfers, credit and deposit activities, and other activities according to the Banking Law (No dated 2 July 1998, amended on 18 December 2006) and the Law on the Bank of Albania (No dated 23 December 1997) and changed the name to Alpha Bank Albania SHA. The Bank has 40 branch offices throughout the country (2014: 40 branch offices), with 11 branches being in Tirana (2014: 11 branches). 2. Basis of preparation (a) Statement of Compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). (b) Basis of preparation The financial statements have been prepared on the historical cost basis, except for the following assets which were measured at fair value: Available-for-sale financial assets (c) Functional and presentation currency The financial statements are presented in Lek, which is the Bank s functional currency and all values are rounded to the nearest thousand (Lek 000), except when otherwise indicated. (d) Significant accounting judgments, estimates and assumptions The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in the following paragraphs. In the process of applying the Bank's accounting policies, management has exercised judgment and estimates in determining the amounts recognised in the financial statements. The most significant uses of judgment and estimates are as follows: i. Going concern The Bank has reported accumulated loss of Lek 91,688 thousand (2014: retained earnings of 159,327 thousand) at 31 December The Bank s management has made an assessment of the Bank s ability to continue as a going concern and is satisfied that the Bank has the resources to continue its business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank s ability to continue as a going concern. Therefore, the financial statements were prepared on the going concern basis. 5

9 2. Basis of preparation (continued) (d) Significant accounting judgments, estimates and assumptions (continued) ii. Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but if this is not available, judgement is required to establish fair values. The judgements include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset-backed securities. The Bank's accounting policy on fair value measurement is described in significant accounting policies 3.(e). 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. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist and based on a current yield curve appropriate for the remaining term to maturity. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums 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, which would have been determined by market participants acting at arm's length. 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 judgment 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 fair value of financial instruments is disclosed in note 5. 6

10 2. Basis of preparation (continued) (d) Significant accounting judgments, estimates and assumptions (continued) iii. Impairment losses on loans and advances The Bank reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in the profit or loss. In particular, management judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of assumptions and actual results may differ, resulting in future changes to the allowance. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, credit utilisation, loan to collateral ratios, etc.), and judgments to the effect of concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual groups). If in a subsequent period after the recognition of the impairment loss, events occur which require the impairment loss to be reduced, or there has been a collection of amounts from loans and advances previously written-off, the recoveries are recognized in profit and loss in impairment losses and provisions to cover credit risk. The impairment loss on loans and advances is disclosed in more detail in Note 16. iv. Impairment of available for sale investments The Bank reviews its debt securities classified as available for sale investments at each reporting date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances. The Bank determines that available-for-sale investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Bank evaluates, among other factors, duration and extent to which the fair value of an investment is less than its cost. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. v. Deferred tax assets Deferred tax assets are recognised in respect of certain temporary differences and tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized or temporary differences reversed. 3. Summary of significant accounting policies (a) Changes in accounting policy and disclosures The accounting policies for the preparation of financial statements have been consistently applied by the bank in the years 2014 and 2015, after taking into account the following amendments to standards and interpretations, as issued by the International Accounting Standards Board (IASB) and applied on 1 January 2015: Amendment to International Accounting Standard 19 Employee Benefits : Defined benefit Plans: Employee Contributions. On 21 November 2013, the International Accounting Standards Board amended the requirements of IAS 19 for the accounting of employee contributions that are linked to service but are independent of the number of years of service. Examples of contributions that are independent of the number of years of service include those that are a fixed percentage of the employee s salary, a fixed amount throughout the service period or dependent on the employee s age. In accordance with this amendment, the entity is permitted to recognise such contributions either as a reduction of service cost in the period in which the related service is rendered (as if a short term employee benefit is recognised) or to continue to attribute them to periods of service. The adoption of the above amendment had no impact on the financial statements of the Bank. 7

11 (3) Summary of significant accounting policies (continued) (a) Changes in accounting policy and disclosures (continued) Improvements to International Accounting Standards: - cycle cycle As part of the annual improvements project, the International Accounting Standards Board issued, on , non- urgent but necessary amendments to various standards. The adoption of the above amendments had no impact on the financial statements of the Bank. (b) Foreign currency transactions In preparing the financial statements, transactions in currencies other than the Bank's functional currency are recognized at the spot rates of exchange prevailing at the dates of the transactions. Transactions in foreign currencies are translated into the respective functional currency of the operation at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the spot exchange rate at the end of the period. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (c) Financial instruments initial recognition and subsequent measurement (i) Date of recognition All financial assets and liabilities are initially recognized at the date that the Bank becomes a party to the contractual provisions of the instrument. (ii) Initial measurement of financial instruments The Bank initially recognizes loans and advances, deposits, debt securities issued and subordinated liabilities on the date at which they are originated. Regular way purchases and sales of financial assets are recognized on the trade date at which the Bank commits to purchase or sell the asset. All other financial assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. 8

12 3. Summary of significant accounting policies (continued) (c) Financial instruments initial recognition and subsequent measurement (continued) (iii) Classification of financial assets Financial assets are classified into the following specified categories: Loans and receivables Held-to-maturity investments Available-for-sale investments Financial assets at fair value through profit or loss The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. (iv) Classification of financial liability and equity Classification as debt or equity Debt and equity instruments issued by the Bank are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of the financial liability and equity instruments. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Bank after deducting all of its liabilities. Equity instruments issued by the Bank are recognized at the proceeds received, net of direct issue costs. (v) Loans and advances to customers and to Banks Loans and advances to customers and to Banks include non derivative financial assets with fixed or determinable payments that are not quoted in an active market, and that the Bank does not intend to sell immediately or in the near term 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 fair value through profit or loss; Those that the Bank, upon initial recognition, designates as Available-for-sale. When the Bank is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of an asset to the lessee, the arrangement is presented within loans and advances. When the Bank purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date ( reverse repo or stock borrowing ), the arrangement is accounted for as reverse repo transactions (pledged securities), and the underlying asset is not recognized in the Bank s financial statements. (vi) Investment securities Investment securities are accounted for depending on their classification, as either held-to-maturity, fair value through profit or loss, or available-for-sale. (1) Held-to-maturity Financial Assets Held-to-maturity investment securities are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which are not designated at fair value through profit or loss or as available-for-sale. Held-to-maturity investment securities are carried at amortised cost using the effective interest method. A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments as Available-for-sale, and would prevent the Bank from classifying investment securities as held-to-maturity for the current and the following two financial years. 9

13 3. Summary of significant accounting policies (continued) (c) Financial instruments initial recognition and subsequent measurement (continued) (1) Held-to-maturity Financial Assets (continued) However, sales and reclassifications in any of the following circumstances would not trigger a reclassification: sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset s fair value; sales or reclassifications after the Bank has collected substantially all of the asset s original principal; or sales or reclassifications attributable to non-recurring isolated events beyond the Bank s control that could not have been reasonably anticipated. (2) Available-for-sale Financial Assets Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost. All other available-for-sale investments are carried at fair value. Interest income is recognized in profit or loss using the effective interest method. Foreign exchange gains or losses on available-for-sale debt security investments are recognized in profit or loss. Other fair value changes are recognized directly in other comprehensive income until the investment is sold or impaired and the cumulated gain or loss is recognized in profit or loss. (3) Financial Assets at fair value through profit or loss Financial Assets at fair value through profit or loss include trading securities and other securities that the Bank decides, at their initial recognition, to measure them at fair value through profit or loss. Trading securities are those securities that the Bank acquires principally for the purpose of selling in the near term. Trading securities are initially recognised and subsequently measured at fair value with transaction costs taken directly to profit or loss. All changes in fair value are recognised in profit or loss. Trading assets and liabilities are not reclassified subsequent to their initial recognition, except that non-derivative trading assets, other than those designated at fair value through profit or loss upon initial recognition, may be reclassified out of the fair value through profit or loss category if they are no longer held for the purpose of being sold or repurchased in the near term and the following conditions are met: If the financial asset would have met the definition of loans and receivables, then it may be reclassified if the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of loans and receivables, then it may be reclassified out of the trading category only in rare circumstances. (vii) Other financial liabilities Subordinated debt Financial instruments issued by the Bank, that are not designated at fair value through profit or loss, are classified as liabilities under Subordinated Debt, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. After initial measurement, debt issued and other borrowings are subsequently measured at amortized cost using the effective interest rate ( EIR ) method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. An analysis of the Bank s issued debt is disclosed in Note

14 3. Summary of significant accounting policies (continued) (c) Financial instruments initial recognition and subsequent measurement (continued) (vii) Other financial liabilities (continued) Deposits from customers Deposits and other financial liabilities are part of the Bank s sources of debt funding. When the Bank sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date ( REPO ), the arrangement is accounted for as a deposit, and the underlying asset continues to be recognised in the Bank s financial statements. The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Deposits and other financial liabilities are initially measured at fair value plus directly attributable transaction costs, and subsequently measured at their amortised cost using the effective interest method. (d) Derecognition of financial assets and financial liabilities (i) Financial assets The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. Any interest in transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability. The Bank enters into transactions whereby it transfers assets recognized on its statement of financial position, but retains either all risks or rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognized from the statement of financial position. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to repurchase transactions. In transactions where the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognizes the asset if control over the asset is lost. The rights and obligations retained in the transfer are recognized separately as assets and liabilities as appropriate. In transfers where control over the asset is retained, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. In certain transactions the Bank retains rights to service a transferred financial asset for a fee. The transferred asset is derecognized in its entirety if it meets the derecognition criteria. (ii) Financial Liabilities The Bank derecognizes financial liabilities when, and only when, the Bank's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss. An asset or liability is recognized for the servicing rights, depending on whether the servicing fee is more than adequate to cover servicing expenses (asset) or is less than adequate for performing the servicing (liability). (e) Determination of fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its nonperformance risk. 11

15 3. Summary of significant accounting policies (continued) (e) Determination of fair value (continued) When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. (f) Impairment of financial assets Financial assets, other than cash and cash equivalents, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortized cost) with similar risk characteristics. Objective evidence that the financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In assessing collective impairment the Bank uses statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modeling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. (i) Financial Assets at amortized cost Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. 12

16 3. Summary of significant accounting policies (continued) (f) Impairment of financial assets (continued) (ii) Available for-sale financial investments For available for sale financial investments, the Bank assesses at each reporting date whether there is objective evidence that an investment is impaired. Impairment losses on available-for-sale investment securities are recognized by transferring the cumulative loss that has been recognized in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. (iii) Restructured loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Management continually reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. In case of individual assessment, mainly the wholesale portfolio, the loans are calculated using the loan s original contractual/nominal interest rate, while for the retail portfolio impairment is calculated through the collective assessment procedure. (g) Offsetting financial instruments Financial assets and liabilities are set off and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Bank s trading activity. (h) Financial instruments amortized cost measurement The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. (i) Lease The Bank is a leasee in both operating and finance leases. i. Operating leases Leases which do not transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognized as an expense in the profit or loss on a straight line basis over the lease term. Contingent rental payable are recognized as an expense in the period in which they are incurred. Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. ii. Finance leases For finance leases, the leased asset is recognized as property and equipment and a respective liability is recognized in other liabilities. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. 13

17 3. Summary of significant accounting policies (continued) (i) Lease (continued) ii. Finance leases (continued) The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. (j) Recognition of income and expenses Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. (i) Interest income and expense Interest income and expense are recognized in the profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability. The calculation of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense presented in profit or loss include interest on financial assets and liabilities at amortized cost on an effective interest rate basis. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as Other operating income. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest income and expense presented in profit or loss include: interest on financial assets and liabilities at amortised cost calculated on an effective interest basis interest on all trading assets and liabilities Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank s trading operations and are presented in net interest income or expense. (ii) Fee and commission income and expense Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis. 14

18 3. Summary of significant accounting policies (continued) (j) Recognition of income and expenses (continued) (ii) Fee and commission income and expense (continued) Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as account servicing fees, sales commission, placement fees, or the arrangement of the acquisition of other securities, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. (k) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with the Central Bank and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. (l) Investments securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity, fair value through profit or loss, or available-for-sale. (m) Intangible assets Software acquired by the Bank is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use. The estimated useful life of software is four years. Amortisation methods, useful lives and residual values are reassessed at the reporting date and adjusted if appropriate (n) Property and equipment (i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognised net within other income in profit or loss. (ii) Subsequent costs The cost of replacing a part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. 15

19 3. Summary of significant accounting policies (continued) (n) Property and equipment (continued) (iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. The estimated useful lives for the current and comparative periods are as follows: Furniture and other equipment 5 years Vehicles 5 years Computers 4 years Leasehold improvements the shorter of useful life and lease term Depreciation methods, useful lives and residual values are reassessed at the reporting date and adjusted if appropriate. (o) Reposessed assets Repossessed properties comprise non-financial repossessed assets acquired through enforcement of security over non-performing loans and advances to customers that do not earn rental, and are not used by the Bank and are intended for disposal in a reasonably short period of time, without significant restructuring. Reposessed assets are initially recognised and subsequently remeasured at the lower of their carrying amount and net realizable value and are classified as other assets. Any loss arising from the above measurement is recorded in profit or loss and can be reversed in the future. Assets in this category are not depreciated. Gains or losses from the sale of these assets are recognized in the profit or loss. (p) Impairment of non financial assets The carrying amounts of the Bank s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognized in profit or loss. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. 16