FINANCE BANK ZAMBIAPLC CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

Transcription

1 FINANCE BANK ZAMBIAPLC CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014

2 Annual Report and Table of Contents Page No Directors report 1-2 Statement of directors responsibilities 3 Report of the independent auditor 4-5 Financial statements: Consolidated Statement of profit or loss 6 Consolidated Statement of other comprehensive income 7 Consolidated statement of financial position 8 Statement of financial position for the Bank 8 Consolidated Statement of changes in equity 9 Statement of changes in equity for the Bank 10 Consolidated Statement of cash flows 11 Notes Shareholders information 74

3 Directors Report The directors submit their report together with the audited financial statements for the year ended 31December 2014, which disclose the state of affairs of Finance Bank Zambia Plc ( the Bank ) and its subsidiaries Micro Finance Zambia Limited,Finance Building Society and Leasing Finance Company (together the Group ). PRINCIPAL ACTIVITIES The Bank is engaged in the business of banking and the provision of related services. The Bank has continued with its network expansion programme during the year. RESULTS AND DIVIDEND The profit for the year of K169.7million (2013: K68.9million) has been added to retained earnings. No interim dividend was paid during the year (2013: nil). The directors do not recommended the approval of a final dividend (2013: K30 million). SHARE CAPITAL During the year the bank issued preference shares worth K200 million as consideration for the acquisition of Leasing Finance Company. There were no other changes to the authorized and issued share capital during the year. DIRECTORS The directors who held office during the year and to the date of this report were: Dr Rajan L Mahtani Mr Barkat Ali Mr Patrick S Chamunda,OGDS Mrs Joan Craven Mr Brian Curtis,MBE Mr White B Kumwenda Mr Tom M D Mtine,OGDS Mr William B Nyirenda. SC Mrs Mary Schultz - Chairman -Managing Director AVERAGE NUMBER OF EMPLOYEES AND REMUNERATION The total remuneration of employees during the year amounted to K123.1 million (2013: K113.2 million) and the average number of employees was as follows: Month Number Month Number January 811 February 810 March 795 April 795 May 817 June 821 July 826 August 837 September 865 October 850 November 856 December 877 The Bank has policies and procedures to safeguard the occupational health, safety, and welfare of its employees. 1

4 Directors Report GIFTS AND DONATIONS During the year the Group made donations of K1.4million (2013: K0.4 million) to charitable organisations and events. PROPERTY, PLANT AND EQUIPMENT The Group purchased propertyand equipment amounting to K25.3million (2013: K18.7million) during the year. In the opinion of the directors, the carrying value of property, plant and equipment is not less than their recoverable value. RESEARCH AND DEVELOPMENT During the year the Group did not incur any research and development costs. RELATED PARTY TRANSACTIONS Related party transactions are disclosed in Note 40 of the financial statements. DIRECTORS EMOLUMENTS AND INTERESTS Directors emoluments and interests are disclosed in Note 40 to the financial statements. PROHIBITED BORROWINGS OR LENDING There were no prohibited borrowings or lendings as defined under sections 72 and 73 of the Banking and Financial Services Act, 1994(as amended). RISK MANAGEMENT AND CONTROL The Group through its normal operations is exposed to a number of risks, the most significant of which are credit, market, operational and liquidity risks. The Group s risk management objectives, policies and strategies are disclosed in Note 4 of the financial statements. COMPLIANCE FUNCTION The Group has a compliance function whose responsibility is to monitor compliance with the regulatory environment and the various internal control processes and procedures. KNOW YOUR CUSTOMER AND MONEY LAUNDERING POLICIES The Group has well established Know Your Customer (KYC) policy and Money Laundering policies and adheres to current legislation in these areas. AUDITOR The auditor, PricewaterhouseCoopers, has indicated its willingness to continue in office and a resolution for its reappointment will be proposed at the annual general meeting. By order of the Board SECRETARY

5 Statement of Directors Responsibilities The Zambia Companies Act requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Group and of the company as at the end of the financial year and of the Group s financial performance. It also requires the directors to ensure that the company keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the company. They are also responsible for safeguarding the assets of the company. The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable estimates, in conformity with International Financial Reporting Standards and the requirements of the Zambia Companies Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial position of the Group and of the company of the Group s financial performance in accordance with International Financial Reporting Standards. The directors further accept responsibility for such internal control, as the management determines necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error. Nothing has come to the attention of the directors to indicate that the Group will not remain a going concern for at least twelve months from the date of this statement. Director Director

6 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF FINANCE BANK ZAMBIA PLC Report on the consolidated financial statements We have audited the accompanying financial statements of Finance Bank Zambia Plc (the Bank) and its subsidiaries (together, the Group) which comprise the consolidated statement of financial position as at 31December 2014 and the consolidated statements of profit or loss, other comprehensive income, changes in equity and cash flows for the year then ended together with the statement of financial position of the Bank standing alone as at 31December 2014 and the statement of changes in equity of the Bank for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Directors responsibility for the financial statements The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and with the requirements of the Zambia Companies Act and the Zambia Banking and Financial Services Act for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion the financial statements give a true and fair view of the financial position of the Finance Bank Zambia Plc and its subsidiaries as at 31December 2014 and of their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and with the requirements of the Zambia Companies Act and the Zambia Banking and Financial Services Act. PricewaterhouseCoopers, PwC Place, Stand No 2374, Thabo Mbeki Road, P.O. Box 30942, Lusaka, Zambia T: +260 (211) , F: +260(211) , A list of Partners is available from the address above 4

7 Report on other legal requirements The Zambia Companies Act requires that in carrying out our audit we consider whether Finance Bank Zambia Plc and its subsidiary have kept proper accounting records, other records and registers required by this Act. In our opinion, based on our examination of those records, Finance Bank Zambia Plc and its subsidiaries have maintained proper accounting records, other records and registers as required by the Zambia Companies Act. In addition, the Zambia Banking and Financial Services Act require that our audit report should state whether, among other matters, Finance Bank Zambia Plc has complied with the provisions of the Act. We confirm that: In accordance with the requirements of the Zambian Banking and Financial Services Act, we confirm that: i) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; ii) iii) iv) no transactions or conditions affecting the well-being of the Group have come to our attention that in our opinion are not satisfactory and require rectification; we are not aware of any transaction that has not been within the powers of the Bank or which was contrary to the Zambia Banking and Financial Services Act. the Bank had no non-performing or restructured loans whose individual values exceeded 5% of the its regulatory capital; v) the Bank has complied with the provisions of the Zambia Banking and Financial Services Act and the regulations, guidelines and prescriptions issued under the Act. PricewaterhouseCoopers Chartered Accountants Lusaka Nasir Ali Practicing Certificate Number: M/PC Partner signing on behalf of the firm PricewaterhouseCoopers, PwC Place, Stand No 2374, Thabo Mbeki Road, P.O. Box 30942, Lusaka, Zambia T: +260 (211) , F: +260(211) , A list of Partners is available from the address above 5

8 Consolidated statementofprofit or loss Notes K 000 K 000 Interest and similar income 6 316, ,577 Interest and similar expense 7 (114,908) (61,413) Net interest income 201, ,164 Loan impairment (charges) 17 (3,884) (5,213) Net interest income after loan impairment charges 198, ,951 Fee and commission income 8 163, ,256 Foreign exchange income 74,217 40,711 Other income 9 94,095 17,919 Operating expenses 10 (263,955) (227,968) Profit before tax 265, ,869 Income tax expense 11 (95,766) (39,997) Profit for the year 169,726 68,872 Basic earnings per share (kwacha) The notes on pages 12 to 73 are an integral part of these financial statements. 6

9 Consolidated statement ofother comprehensive income Notes K 000 K 000 Profit for the year 169,726 68,872 Other comprehensive income: Items that will not be reclassified subsequently to profit or loss Gain on revaluation of buildings 20-11,531 Deferred tax arising on gain on revaluation of 29 - (4,035) buildings Loss on acquisition-finance Building Society - (17,011) Other comprehensive income for the year - (9,915) Total comprehensive income for the year 169,726 59,357 The notes on pages 12 to 73 are an integral part of these financial statements. 7

10 Statement of financial position Group Bank Notes K 000 K 000 K 000 K 000 ASSETS Cash and balances with Central Bank , , , ,042 Balances with other banks , , , ,868 Derivative financial instruments 15 1, , Held-to-maturity investments , , , ,809 Loans and advances to customers 17 1,538, ,536 1,380, ,626 Net Investment in finance leases 18 6, Deferred income tax assets 29 7,806 10, Investments accounted for using the equity method 36 4,673-4,673 - Investment in subsidiary ,000 30,000 Investment property 22 39, Intangible assets 21 5,884 6,086 1,525 1,049 Property and equipment 20 98,889 82,636 95,439 79,773 Goodwill , Current income tax ,242-12,242 Other assets , , ,611 99,847 TOTAL ASSETS 3,393,225 2,369,921 3,257,077 2,290,184 LIABILITIES Customer deposits 24 2,523,855 1,994,869 2,515,215 1,946,411 Deposits from other banks 25 11, Current income tax liabilities 11 46,958-46,930 - Debentures 27 21, Finance lease obligation 26-1, Borrowings 28 47,449 42, Deferred income tax liabilities 29 38,491 21,305 26,696 21,305 Other liabilities 30 96,434 43,026 42,216 31,211 TOTAL LIABILITIES 2,787,058 2,103,480 2,630,057 1,998,927 EQUITY Share capital , , , ,000 Preference shares , ,000 - Statutory reserves 33 18,630 3,630 18,630 3,630 Regulatory reserves 34 21,232 28,554 14,225 27,709 Revaluation reserves 35 23,319 23,917 23,319 23,917 Retained earnings 232, , , ,001 TOTAL EQUITY 606, , , ,257 TOTAL EQUITY AND LIABILITIES 3,393,225 2,369,921 3,257,077 2,290,184 The notes on pages 12 to 73 are an integral part of these financial statements.the financial statements on pages 6to 11 were approved for issue by the Board of Directors on 2015 and signed on its behalf by: Director Director Director Secretary 8

11 Consolidated statement of changes in equity At 31 December 2013 Share capital Preference Shares Statutory Reserves Revaluation Reserves Regulatory Reserve Retained earnings Total K'000 K 000 K'000 K'000 K'000 K'000 K'000 At start of year 3,630-3,630 16,421 83,749 99, ,084 Profit for the year ,872 68,872 Other comprehensive income Loss on acquisition-finance Building Society (17,011) (17,011) Revaluation Surplusbuildings ,531-11,531 Deferred tax on revaluation (4,035) - - (4,035) Total Comprehensive Income Conversion of Retained Earnings Total transactions with Owners Transfer from regulatory reserves ,496-51,861 59, , (106,370) - 106, (106,370) (55,195) 55,195 - At end of year 110,000-3,630 23,917 28, , ,441 At 1 December 2014 At start of year 110,000-3,630 23,917 28, , ,441 Profit for the year , ,726 Other Comprehensive income Transfer of excess (1,026) - 1,026 - depreciation Deferred tax on excess (428) - depreciation Total comprehensive income (598) - 170, ,726 Transfer to paid statutory , (15,000) - reserve Transfer from regulatory (7,322) 7,322 - reserve Issuance of preference - 200, ,000 shares Dividends paid (25,500) (25,500) Withholding tax on (4,500) (4,500) dividends Total transactions with (30,000) (30,000) owners At end of year 110, ,000 18,630 23,319 21, , ,167 The notes on pages 12 to 73 are an integral part of these financial statements. 9

12 Bank statement of changes in equity At 31 December 2013 Share capital Preference shares Statutory Reserves Revaluation Reserves Regulatory Reserve Retained earnings Total K'000 - K'000 K'000 K'000 K'000 K'000 At start of year 3,630-3,630 16,421 83, , ,258 Comprehensive income Profit for the year ,503 74,503 Other Comprehensive income Revaluation surplus-buildings , ,531 Deferred tax on revaluation (4,035) - - (4,035) surplus Total comprehensive income 7,496 74,503 81,999 Conversion of retained earnings 106, (106,370) - Total transactions with owners 106, (106,370) - Transfer from regulatory reserves (56,018) 56,018 - At end of year 110,000-3,630 23,917 27, , ,257 Year ended 31 December 2014 At start of year 110,000-3,630 23,917 27, , ,257 Profit for the year , ,763 Other Comprehensive income Transfer of excess depreciation (1,026) - 1,026 - Deferred tax on excess (428) - depreciation Total comprehensive income (598) - 165, ,763 Transfer to statutory reserve , (15,000) - Transfer to regulatory reserve (13,484) 13,484 - Issuance of preference shares - 200, ,000 Dividend paid (25,500) (25,500) Withholding tax on dividend paid (4,500) (4,500) At end of year 110, ,000 18,630 23,319 14, , ,020 The notes on pages 12 to 73 are an integral part of these financial statements. 10

13 Consolidated statement of cash flows Cash flows from operating activities Notes K 000 K 000 Interest Income 6 316, ,577 Interest expense 7 (114,908) (61,413) Net fee and commission receipts , ,175 Net trading and other income 39 74,617 41,111 Payments to employees and suppliers (250,117) (215,366) Income tax paid 11 (28,834) (44,431) Cash flows from operating activities before changes in operating assets and liabilities 167,280 82,653 Changes in operating assets and liabilities: - loans and advances to customers (564,377) 22,260 - cash reserve requirements (219,060) 63,070 - other assets 19,600 60,466 -Finance lease obligations (755) - - customer deposits 528, ,662 - other liabilities 34,851 (1,197) -derivative financial instruments (861) Held to maturity investments 71,758 (143,950) Net cash from operating activities 37, ,532 Cash flows from investing activities Acquisition of subsidiary, net of cash acquired 37 (5,042) 2,954 Purchase of property and equipment 20 (25,255) (18,680) Purchase of intangible assets 21 (1,441) (3,385) Proceeds from sale of property and equipment Investment in associate (4,673) - Net cash used in investing activities (36,291) (19,107) Cash flows from financing activities Long term borrowings repaid 28 (18,000) (9,214) Repayment of Finance leases 26 - (384) Proceeds from long term borrowings 28 27,000 20,000 Dividends paid (30,000) - Net (cash used in)/from financing activities (21,000) 10,402 Net (decrease) /increase in cash and cash equivalents (19,870) 477,827 Cash and cash equivalents at start of year 710, ,136 Effect of exchange rate fluctuations on cash held 39 (2,333) 1,847 Cash and cash equivalents at end of year , ,810 The notes on pages 12 to 73 are an integral part of these financial statements. 11

14 Notes 1 General information Finance Bank Zambia plc ( the bank ) and its subsidiaries (together, the group ) is incorporated in Zambia under the Zambia Companies Act as a limited liability company, and is licensed to carry out the business of banking under the Banking and Financial Services Act. The bank is a public limited company, which is incorporated and domiciled in Zambia. The address of its registered office is: Plot 226,Finsbury House Buteko Avenue, Ndola Zambia The financial statements for the year ended 31 December 2014 have been approved for issue by the Board of Directors. Neither the entity s owners nor others have the power to amend the financial statements after issue 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and the IFRS interpretations Committee (IFRS IC) applicable to companies reporting under IFRS. The Financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available for sale financial assets, and financial assets and liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the directors to exercise judgement in the process of applying the group s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note Changes in accounting policy and disclosures (i) New and amended standards adopted by the Company The following standards have been adopted by the company for the first time for the financial year beginning on 1 January 2014 and have a material impact on the company: Amendment to IAS 32, Financial instruments: Presentation on offsetting financial assets and financial liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment did not have a significant effect on the company financial statements. Amendment to IAS 39, Financial instruments: Recognition and measurement on the novation of derivatives and the continuation of hedge accounting. This amendment considers legislative changes to over-the-counter derivatives and the establishment of central counterparties. Under IAS 39 novation of derivatives to central counterparties would result in discontinuance of hedge accounting. The amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument meets specified criteria. The company has applied the amendment and there has been no significant impact on the company financial statements as a result. 12

15 2. Summary of significant accounting policies (continued) (i) New and amended standards adopted by the Company(continued) IFRIC 21, Levies, sets out the accounting for an obligation to pay a levy if that liability is within the scope of IAS 37 Provisions. The interpretation addresses what the obligating event is that gives rise to pay a levy and when a liability should be recognised. The Company is not currently subjected to significant levies so the impact on the Company is not material. (ii) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1January 2014, and have not been applied in preparing these financial statement. None of these is expected to have a significant effect on the financial statements of the Company, except the following set out below: IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January Early adoption is permitted. The company is yet to assess IFRS 9 s full impact. IFRS 15, Revenue from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted. The company is assessing the impact of IFRS 15. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 13

16 2. Summary of significant accounting policies (continued) 2.1 Consolidation (a) Subsidiaries Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest s proportionate share of the recognised amounts of acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. The excess of the consideration transferred the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. When necessary amounts reported by subsidiaries have been adjusted to conform with the group s accounting policies. Subsidiaries are accounted for at cost in the separate financial statements 14

17 2 Summary of significant accounting policies(continued) 2.2 Consolidation (continued) (c) Disposal of subsidiaries When the group ceases to have control any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. (d) Associates Associates are all entities over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor s share of the profit or loss of the investee after the date of acquisition. The group s investment in associates includes goodwill identified on acquisition. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate The group s share of post-acquisition profit or loss is recognised in the income statement, and its share of postacquisition movements in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. The group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount adjacent to share of profit/(loss) of associates in the income statement. Profits and losses resulting from upstream and downstream transactions between the group and its associate are recognised in the group s financial statements only to the extent of unrelated investor s interests in the associates. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the group. Associates are accounted for using the equity method in the separate financial statements prepared by the group. 15

18 2 Summary of significant accounting policies(continued) 2.3 Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within interest income or interest expense respectively in profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate 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. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss. 2.4 Fees and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. 2.5 Foreign currency translation i) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency ), the Zambian Kwacha (K). The financial statements are presented in Kwacha ( K ) which is the company s functional currency. ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currency are translated with the closing rate as at the reporting date. If several exchange rates are available, the forward rate is used at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred. Non-monetary items measured at historical cost denominated in a foreign currency are translated with the exchange rate as at the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value was determined. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. 16

19 2 Summary of significant accounting policies(continued) 2.6 Financial assets and liabilities Financial assets (a) Financial assets at fair value through profit or loss The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables and held-to-maturity. The directors determine the classification of its financial assets at initial recognition. The Group uses trade date accounting for regular way contracts when recording financial asset transactions. The Group designates certain financial assets upon initial recognition as at fair value through profit or loss (fair value option). This designation cannot subsequently be changed and can only be applied when the following conditions are met: the application of the fair value option reduces or eliminates an accounting mismatch that would otherwise arise or the financial assets are part of a portfolio of financial instruments which is risk managed and reported to senior management on a fair value basis or the financial assets consist of debt host and an embedded derivatives that must be separated. This category comprises two sub-categories: financial assets classified as held for trading, and financial assets designated by the Group at fair value through profit or loss upon initial recognition. A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial instruments included in this category are recognised initially at fair value; transaction costs are taken directly to profit or loss. Interest income and expense on financial assets held for trading are included in 'Net interest income'. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the Group intends to sell immediately or in the short term, which are classified as held for trading, and those that the Group upon initial recognition designates as at fair value through profit or loss; (b) those that the Group upon initial recognition designates as available-for-sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. 17

20 2. Summary of significant accounting policies (continued) (b) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the directors have the positive intention and ability to hold to maturity, other than: (i) those that the Group upon initial recognition designates as at fair value through profit or loss; (ii) those that the Group designates as available-for-sale; and (iii) those that meet the definition of loans and receivables. Held-to-maturity investments are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortized cost, using the effective interest method Financial liabilities The Group s holding in financial liabilities represents mainly deposits from Group companies and customers and other liabilities. Such financial liabilities are initially recognised at fair value and subsequently measured at amortised cost. Determination of fair value Fair value is determined using valuation techniques. In these techniques, fair values are estimated from observable data in respect of similar financial instruments, using models to estimate the present value of expected future cash flows or other valuation techniques, using inputs (for example, LIBOR yield curve, FX rates, volatilities and counterparty spreads) existing at the reporting dates.the Group uses widely recognised valuation models for determining fair values of non-standardised financial instruments of lower complexity, such as options or interest rate and currency swaps. For these financial instruments, inputs into models are generally market-observable. Derecognition Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. 18

21 Notes (Continued) 2 Summary of significant accounting policies(continued) 2.6 Financial assets and liabilities (continued) The Group may choose to reclassify a non-derivative financial asset held for trading out of the held-fortrading category if the financial asset is no longer held for the purpose of selling it in the near-term. Financial assets other than loans and receivables are permitted to be reclassified out of the held for trading category only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the nearterm. In addition, the Group may choose to reclassify financial assets that would meet the definition of loans and receivables out of the held-for-trading or available-for-sale categories if the Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification. Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows adjust effective interest rates prospectively. On reclassification of a financial asset out of the at fair value through profit or loss category, all embedded derivatives are re-assessed and, if necessary, separately accounted for. 19

22 2. Summary of significant accounting policies (continued) 2.6 Financial assets and liabilities (continued) Classes of financial instruments The Group classifies the financial instruments into classes that reflect the nature of information and take into account the characteristics of those financial instruments. The classification made can be seen in the table as follows: Category (as defined by IAS 39) Class (as determined by the Group) Subclasses Financial assets Financial assets designated at fair value through profit or loss Financial assets designated at fair value through profit or loss at initial recognition Derivatives - non hedging Balances with other banks Loans to individual (retail) Over drafts Personal loans Loans and receivables Loans and advances to customers Staff loans Other Loans to corporate entities Overdrafts Commercial loans Other Held to maturity investments Investment securities- Debt securities listed Financial liabilities Financial liabilities at amortised cost Deposits from other banks Customer deposits Savings deposits Demand deposits Term deposits Off balance sheet financial instruments Loan commitments Guarantees, acceptance and other financial facilities 20

23 2. Summary of significant accounting policies (continued) 2.7 Impairment of financial assets (a) Assets carried at amortised cost The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the group uses to determine that there is objective evidence of an impairment loss include: 1. significant financial difficulty of the issuer or obligor; 2. a breach of contract, such as a default or delinquency in interest or principal payments; 3. the lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to 4. the borrower a concession that the lender would not otherwise consider; 5. it becomes probable that the borrower will enter bankruptcy or other financial reorganization; 6. the disappearance of an active market for that financial asset because of financial difficulties; 7. observable data indicating that there is a measurable decrease in the estimated future cash flows 8. from a portfolio of financial assets since the initial recognition of those assets, although the 9. decrease cannot yet be identified with the individual financial assets in the portfolio, including: i) adverse changes in the payment status of borrowers in the portfolio; and ii) national or local economic conditions that correlate with defaults on the assets in the portfolio. The estimated period between a loss occurring and its identification is determined by the directors for each identified portfolio. In general, the periods range up to 3 months. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 21

24 2. Summary of significant accounting policies (continued) 2.7 Impairment of financial assets (continued) (a) Assets carried at amortised cost (continued) The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. If a loan or held-tomaturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument s fair value using an observable market price. 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. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (that is, on the basis of the Group s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Impairment charges relating to loans and advances to Groups and customers are classified in loan impairment charges whilst impairment charges relating to investment securities (held-to-maturity and loans and receivables categories) are classified in 'Net gains/ (losses) on investment securities'. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in profit or loss. 22

25 2 Summary of significant accounting policies(continued) 2.7 Impairment of financial assets (continued) (b) Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the renegotiated terms apply in determining whether the asset is considered to be past due. 2.8 Impairment of non-financial assets Assets that have an indefinite useful life for example, goodwill, are not ready to use- are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. 2.9 Property and equipment Buildings comprise mainly branches and offices. All property and equipment is initially stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of these assets. Buildings are subsequently recognised at market value, based on regular valuation by external independent valuers, less depreciation based on market values. Increases in carrying amounts arising on revaluation are credited to a revaluation reserve. Decreases on the same asset are offset against the revaluation reserve only to the extent of previous increases credited to the revaluation reserve; excess is charged to the income statement. The revaluation reserves are non-distributable though they form part of profit or loss. Depreciation of fixed assets is calculated on the straight line basis to allocate their cost less their residual values over their estimated useful lives, as follows: Buildings Fixtures, fittings and equipment Motor vehicles 40 years 5-10 years 5 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. The Group assesses at each reporting period whether there is any indication that any item of property and equipment is impaired. If any such indication exists, the Group estimates the recoverable amount of the relevant assets. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are included in profit or loss. When revalued assets are sold, the amounts included in revaluation reserve relating to that asset are transferred to retained earnings. 23