JUBMES BANKA AD, BELGRADE. Financial Statements for the year ended 31 December 2015 and Independent Auditor s Report

Transcription

1 JUBMES BANKA AD, BELGRADE Financial Statements for the year ended 31 December 2015 and Independent Auditor s Report This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestions arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail. Beograd, April 2016 MOORE STEPHENS Revizija i Računovodstvo d.o.o., Beograd, Studentski trg 4/V Tel: , , Fax: office@revizija.co.rs Matični broj , PIB ,

2 JUBMES BANKA AD, BELGRADE CONTENT Page INDEPENDENT AUDITOR S REPORT 1-2 FINANCIAL STATEMENTS Income statement 3 Statement of other comprehensive income 4 Balance sheet 5 Statement of changes in equity 6 Cash flow statement 7-8 NOTES TO THE FINANCIAL STATEMENTS 9-120

3 INDEPENDENT AUDITOR S REPORT Privredno društvo za reviziju računovodstvo i konsalting MOORE STEPHENS Revizija i Računovodstvo d.o.o. Studentski Trg 4/V, Beograd, Srbija Tel: +381 (0) , ; Fax: office@revizija.co.rs, Matični broj/id: ; PIB/VAT: This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail. To the shareholders of "Jubmes banka" a.d., Belgrade Report on the Financial Statements We audited the accompanying financial statements of "Jubmes banka" a.d., Belgrade (the Bank), which comprise the balance sheet as at 31 December 2015, the income statement, statement of other comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and note, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Report Standards and the regulations of the National Bank of Serbia governing financial reporting of banks 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. 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 and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by 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 qualified audit opinion. Opinion In our opinion, the financial statements, in all material respects, give a true and fair view of the financial position of "Jubmes banka" a.d., Belgrade as at 31 December 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

4 INDEPENDENT AUDITOR S REPORT To the shareholders of "Jubmes banka a.d., Belgrade - Continued Other Matter The financial statements of "Jubmes banka" a.d., Belgrade as of 31 December 2014 were audited by another auditor, whose Report dated 9 March 2015 expressed a unqualified audit opinion on those financial statements. Report on Other Legal and Regulatory Requirements We reviewed compliance of the attached annual business report of "Jubmes banka" a.d., Belgrade for 2015 with audited financial statements for the year ended 31 December In accordance with the Law on Accounting and the Law on the Capital Market of the Republic of Serbia, Management of the Bank is responsible for the preparation of the accompanying annual business report, which is not an integral part of financial statements. In accordance with the Law on Auditing of the Republic of Serbia our responsibility is to express an opinion on consistency of the annual business report with the financial statements for year ended 31 December In our opinion, the financial information published in the annual business report of the Bank for 2015 are in line with the accompanying financial statements for the year ended 31 December Belgrade, 11 April 2016 MOORESTEPHENS Revizija i Računovodstvo d.o.o., Beograd BogolјubAleksić, Managing Partner

5 INCOME STATEMENT for the period from 01 January to 31 December 2015 JUBMES BANKA a.d., BELGRADE Note Interest income 542, ,160 Interest expense (112,590) (223,680) Net interest income 6 429, ,480 Fee and commission income 124, ,533 Fee and commission expense (17,889) (14,787) Net fee and commission income 7 106, ,746 Net loss from financial assets available for sale 8 (630) - Net loss from hedging 9 (4,392) (653) Net loss on financial assets initially recognised at fair value through profit or loss 10 (2,808) (2,390) Net gain/(loss) arising from financial assets available for sale 11 (632) 459 Net foreign exchange gains and effects of contracted currency clause 12 33,951 54,916 Other operating income 13 37,783 33,367 Net impairment loss on financial assets and provisions for credit risk-weighted off-balance sheet items 14 (1,786,459) (652,591) NET OPERATING INCOME (1,186,322) 23,334 Salaries, wages and other personal expenses 15 (308,331) (335,689) Depreciation costs 16 (39,546) (41,346) Other expenses 17 (255,876) (245,196) (LOSS)/GAIN BEFORE INCOME TAXES (1,790,075) (598,897) INCOME TAXES 18 Deferred tax income Deferred tax expense (82) (419) (LOSS)/GAIN AFTER INCOME TAXES (1,790,157) (599,316) Date: 28 February 2016 The notes on pages 9 to 120 are an integral part of these financial statements. Tatjana Savic, Miloš Vujnović Rajko Perić Head President of Member of Finance and Back Office Dept. the Executive Board the Executive Board 3

6 STATEMENT OF OTHER COMPREHENSIVE INCOME for the period from 01 January to 31 December 2015 JUBMES BANKA a.d., BELGRADE (LOSS)/PROFIT FOR THE YEAR (1,790,157) (599,316) Other comprehensive income Other comprehensive income of the period Components of other comprehensive income that cannot be reclassified to profit and loss: Increase in revaluation reserves arising from intangible assets and fixed assets - - Components of other comprehensive income that cannot be reclassified to profit and loss: Positive effects of the fair value change arising from financial assets available for sale - - Unrealised losses arising from securities available for sale (434) (609) Loss arising from taxes related to other comprehensive income of the period (93) (131) Components of other comprehensive income that can be reclassified to profit and loss Total negative other comprehensive result of the period (527) (740) Total positive other comprehensive result of the period - - TOTAL COMPREHENSIVE LOSS/PROFIT FOR THE YEAR (1,790,684) (600,056) Date: 28 February 2016 The notes on pages 9 to 120 are an integral part of these financial statements. Tatjana Savic, Miloš Vujnović Rajko Perić Head President of Member of Finance and Back Office Dept. the Executive Board the Executive Board 4

7 BALANCE SHEET as of 31 December 2015 JUBMES BANKA a.d., BELGRADE Note 31/12/ /12/ /01/2014 ASSETS Cash and balances with central bank 19 2,687,098 2,745,723 5,523,886 Pledged financial assets 102, ,600 - Financial assets initially recognised at fair value through profit or loss 20 8,756 34,279 21,893 Financial assets held-for-sale ,291 28,083 Financial assets held-to-maturity 22 1,077, , ,663 Loans and advances to banks and other financial organizations 23 2,061,488 3,298,517 2,965,086 Loans and advances to customers 24 2,928,790 5,303,274 4,115,599 Receivables from financial derivatives intended to hedge Investments in associates and joint ventures 26 99,936 85,082 82,638 Investments in subsidiaries Intangible assets 28 4,702 7,775 11,192 Property, plant and equipment 28 1,305,757 1,327,034 1,337,597 Investment properties 29 17,246 16,681 - Current tax assets 10,443 10,443 7,528 Non-current assets held for sale and discontinued operations ,368 Other assets , , ,316 TOTAL ASSETS 10,416,109 14,088,093 14,773,962 Liabilities arising from financial derivatives intended to hedge - 1,624 - Deposits from banks, other financial organizations and central bank , , ,787 Deposits from other customers 32 6,657,242 8,530,471 8,422,485 Provisions ,570 65,433 37,123 Deferred tax liabilities 18c 90,432 90,257 89,707 Other liabilities , , ,485 TOTAL LIABILITIES 7,244,940 9,127,294 9,214,587 EQUITY Share capital 35 3,100,833 3,100,833 3,100,833 Treasury shares Retained earnings 276, , ,311 Accumulated losses (1,790,157) (599,316) - Reserves 1,584,182 2,182,971 2,182,231 TOTAL EQUITY 3,171,169 4,960,799 5,559,375 TOTAL LIABILITIES AND EQUITY 10,416,109 14,088,093 14,773,962 The notes on pages 9 to 120 are an integral part of these financial statements. Tatjana Savic, Miloš Vujnović Rajko Perić Head President of Member of Finance and Back Office Dept. the Executive Board the Executive Board 5

8 STATEMENT OF CHANGES IN EQUITY for the period from 01 January to 31 December 2015 () JUBMES BANKA a.d., BELGRADE Share capital Other capital (state-owned and other capital) Treasury shares Share premium Reserves from profit Revaluation reserves fixed assets Revaluation reserves securities unrealized losses Profit for the year Profit from prior years Loss from prior years Loss for the year Total Balance as of 31 December ,763,976 20,536 (50,500) 171,183 1,654, ,730 (15,909) 159, , ,345,069 Regular share issue (XIX issue) 181, (181,113) Payment to shareholders in cash (3,143) Transfer to retained earnings from prior years (159,408) 159, Increase - - (3,252) 3, ,279 14, ,266 Decrease (32,956) - 53,752 (6,277) - - (11,160) ,359 Deferred taxes (36,495) (572) (37,067) (3,143) Payment of profit to - employees (11,000) - (11,000) Profit for the year , ,891 Balance as of 31 December ,912,133 20, ,164 1,654, ,514 (12,660) 6, , ,559,375 Transfer to retained earnings from prior years (6,891) 6, Decrease Result for the year (599,316) Balance as of 31 December ,912,133 20, ,164 1,654, ,514 (11,920) - 276,311 (599,316) - 4,960,799 Transfer to retained earnings from prior years , ,316 Increase Decrease (596,316) (599,316) Result for the year (1,790,157) (1,790,157) Balance as of 31 December ,912,133 20, ,164 1,055, ,415 (11,393) - 276,311 - (1,790,157) 3,171,169 The notes on pages 9 to 120 are an integral part of these financial statements. Tatjana Savic, Miloš Vujnović Rajko Perić Head President of Member of Finance and Back Office Dept. the Executive Board the Executive Board 6

9 CASH FLOW STATEMENT for the period from 01 January to 31 December 2015 JUBMES BANKA a.d., BELGRADE CASH FLOWS FROM OPERATING ACTIVITIES Cash inflow from operating activities 731, ,129 Interest receipts 545, ,453 Fee and commission receipts 171, ,042 Receipts from other operating activities 10,384 13,975 Dividend received and profit shares 4,562 4,659 Cash outflow from operating activities (740,011) (918,075) Interest paid (110,248) (238,541) Fees and commission paid (11,076) (17,520) Payments for gross salaries, compensations and other personal expenses (312,061) (333,312) Taxes, contributions and other duties paid (69,779) (80,602) Outflow for other operating expenses (236,847) (248,100) Net cash flows used in operating activities before increase or decrease in placements and deposits (8,811) (93,946) Decrease in placements and increase in deposits and other liabilities 384,878, ,344,305 Decrease in loans and placements to banks, other financial organizations, central banks and customers 281,097, ,206,732 Decrease in other non-investments securities 35,118,927 98,000,160 Increase in deposits from banks, other financial organizations, central banks and customers 68,661,567 82,137,413 Increase in placements and decrease in deposits and other liabilities (385,993,043) (385,886,673) Increase in loans and placements to banks, other financial organisations, central banks and customers (278,179,714) (203,803,108) The increase in financial assets initially recognized at fair value through profit or loss, financial assets held for trading and other securities that are not intended for investment (35,602,205) (96,937,458) Decrease in deposits and other liabilities from banks, other financial organizations, central banks and customers (72,211,124) (85,146,107) Net cash flows from operating activities before income taxes (1,123,376) 2,363,686 Income taxes paid - (2,916) Dividends paid (65) (2,305) Net cash flows from operating activities (1,123,441) 2,358,465 CASH FLOWS FROM INVESTING ACTIVITIES Cash inflow from investing activities - 1,024 Purchase of intangible assets and property, plant and equipment - Proceeds from the sale of investment property 1,024 Net cash flows used in investing activities (6,575) (11,236) Outflows for the purchase of intangible assets, property, plant and equipment (6,010) (11,236) Outflows for the purchase of investment property Net cash flows used in investing activities (6,575) (10,212) 7

10 CASH FLOW STATEMENT for the period from 01 January to 31 December 2015 JUBMES BANKA a.d., BELGRADE CASH FLOWS FROM FINANCING ACTIVITIES Cash inflow from financing activities - - Proceeds from sales of treasury shares - - Cash outflow from financing activities - - Cash outflows from repurchase of treasury shares - - Net cash flow from financing activities - - Total cash inflows 385,609, ,169,458 Total cash outflows 386,739, ,821,205 Net increase in cash and cash equivalents (1,130,016) 2,348,253 Cash and cash equivalents at the beginning to the year 3,351, ,870 Net foreign exchange gains 25,552 32,778 Cash and cash equivalents at the end of the year 2,247,437 3,351,901 Date: 28 February 2016 The notes on pages 9 to 120 are an integral part of these financial statements. Tatjana Savic, Miloš Vujnović Rajko Perić Head President of Member of Finance and Back Office Dept. the Executive Board the Executive Board 8

11 1. CORPORATE INFORMATION JUBMES banka a.d,. Belgrade (hereinafter the Bank ) was established on 26 June 1979, in accordance with the Federal Law, as a specialised bank for financing and insurance of exportrelated operations, encouraging and enhancing long-term economic and financial cooperation between domestic and foreign companies, which is also the date when it was registered with the Commercial Court in Belgrade. The Bank operated based on a special law until 1997 when the Law on Cancellation of the Law on the Yugoslav Bank for International Economic Cooperation (Official Gazette of the Federal Republic of Yugoslavia, number 29/97) was passed. According to this Law, the Bank was under obligation to reconcile its organization and operations with the law governing the organization and operations of banks and other financial institutions. In the aforementioned process of harmonizing with the Law on Banks and Other Financial Institutions, as well as with the accompanying decisions, the Bank's founders executed Articles of Incorporation on 15 September 1997, and the Bank's Assembly enacted the Articles of Association and other relevant formal documents requisite for the Bank's business activities. The Bank commenced its operations in accordance with the regulations applied to commercial banks as of 1 July The Bank is registered in the Republic of Serbia to provide banking services associated with foreign and domestic payment transfers, credit and deposit activities in the country and abroad, and in accordance with the Republic of Serbia Law on Banks, it is obligated to operate based on the principles of liquidity, security of placements and profitability, for the purposes of generating profit. The Bank's principal activities involve payment transfers domestically and abroad, credit and deposit operations, as well as exchange transactions. Other activities include guarantee issuance, opening of letters of credit and other banking operations. Pursuant to the Law on Banks ( RS Official Gazette no. 107/2005), the Bank's Assembly adopted Amendments to the Articles of Incorporation and new Articles of Association in With these changes, the name of the Bank was changed from Yugoslav Bank for International Economic Cooperation, Shareholding Company ( Jugoslovenska banka za međunarodnu ekonomsku saradnju a.d. ) into JUBMES banka a.d. Belgrade. The adoption of the aforecited formal documents and amendments was performed based on the approval obtained from the National Bank of Serbia. The Bank is the founder of the Humanitarian Foundation Za dečije srce. Furthermore, the Bank is one of the founders of the factoring company JUBMES factor d.o.o. Belgrade. As of 31 December 2015, the Bank had 131 employees (31 December 2014: 127 employees). The Bank s seat is in no. 121, Bulevar Zoran Djindjic, in Belgrade. The Bank s tax identification number is

12 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements The accompanying financial statements of the Bank as of and for the year ended 31 December 2015 have been prepared in accordance with International Financial Reporting Standards. In accordance with the Law on Accounting of the Republic of Serbia ( RS Official Gazette, no. 62/2013), for recognition, valuation, presentation and disclosure of items in the financial statements, large legal entities, entities which have the obligation to prepare consolidated financial statements (parent companies), public companies or companies preparing to become public, irrespective of their size, apply International Financial Reporting Standards ( IFRS ). IFRS, in the sense of the Law on Accounting, include the following: Conceptual Framework for Financial Reporting, International Accounting Standards - IAS, International Financial Reporting Standards - IFRS and related interpretations issued by the International Financial Reporting Interpretations Committee, subsequent amendments to these standards and related interpretations, approved by the International Accounting Standards Board, the translation of which was determined and published by the ministry responsible for finance. Pursuant to the Resolution of the Ministry of Finance of the Republic of Serbia no / dated 13 March 2014 ( RS Official Gazette, no. 35/2014) the official translation of the Conceptual Framework for Financial Reporting and basic texts of IAS, and IFRS issued by the International Accounting Standards Board ( IASB ), as well as the interpretations of the standards issued by International Financial Reporting Interpretations Committee ( IFRIC ) have been determined in the form in which they are issued, i.e., adopted, which will be applicable from the financial statements prepared as of 31 December For all prior periods, including the year ended 31 December 2014, the Bank prepared financial statements in accordance with the Law on Accounting, Law on Banks and other relevant bylaws of the National Bank of Serbia. In accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, the Bank prepared the first financial statements in accordance with IFRS for the year ended 31 December The accompanying financial statements have been prepared under the historical cost convention, except for the measurement at fair value of items subject to hedging. The financial statements have been prepared under the going concern principle, which assumes that the Bank will continue to operate in the foreseeable future. The accounting policies and estimates adopted in the preparation of these financial statements are consistent with those followed in the preparation of the Bank s annual financial statements for the year ended 31 December

13 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements (Continued) a) New Standards, Interpretations and Amendments to Existing Standards that are in Force in the Current Period Not Yet Officially Translated and Adopted in RS Until the date of preparation of the accompanying financial statements, the following IAS, IFRS and interpretations which are their integral parts, as well as their amendments, issued by International Accounting Standards Board and International Financial Reporting Interpretations Committee, became effective as of 1 January 2015 or prior to that date, and are, as such, applicable to the accompanying financial statements, but have not been translated and adopted in the Republic of Serbia for the reporting periods then beginning: Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014); Amendments to IFRS 10 Consolidated Financial Reports, IFRS 12 and IAS 27- Investment Entities (effective for annual periods beginning on or after 1 January 2014); Amendments to IAS 36 Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets (effective for annual periods beginning on or after 1 January 2014); Amendments to IAS 39 Financial Instruments: Recognition and Measurement Novation of Derivatives and Continuation of Hedge Accounting (effective for annual periods beginning on or after 1 January 2014); IFRIC 21 Levies (effective for annual periods beginning on or after 1 January 2014); Amendments to various standards (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38) and interpretations to standards resulting from the IASB s annual improvements project Cycle published by IASB in December 2013, primarily through the elimination of inconsistencies and explanations of the text (effective for annual periods beginning on or after 01 July 2014); Amendments to various standards (IFRS 1, IFRS 3, IFRS 13 and IAS 40) and interpretations to standards resulting from the IASB s annual improvements project Cycle published by IASB in December 2013, primarily through the elimination of inconsistencies and explanations of the text (effective for annual periods beginning on or after 01 July 2014); Amendments to IAS 19 "Employee Benefits" - Defined contribution plans (effective for annual periods beginning on or after 01 July 2014). b) New Standards, Interpretations and Amendments to Existing Standards that are not yet effective Until the date of preparation of the accompanying financial statements, the following IAS, IFRS and interpretations which are their integral parts, as well as their amendments, issued by International Accounting Standards Board and International Financial Reporting Interpretations Committee, have not became effective, translated and adopted in the Republic of Serbia and have not been applied by the Bank: Amendments to various standards (IFRS 5, IFRS 7, IAS 19 and IAS 34) resulting from the annual improvement of standards, Cycle, published by the IASB in September 2014, primarily through removing inconsistencies and clarifying wording (effective for annual periods beginning on or after 01 January 2016); 11

14 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.1. Basis of Preparation and Presentation of the Financial Statements (Continued) b) New Standards, Interpretations and Amendments to Existing Standards that are not yet effective Amendments to IFRS 11 "Joint Arrangements" - Accounting for acquisition of interests in joint arrangements (effective for annual periods beginning on or after 01 January 2016); IFRS 14 "Regulatory Deferral Accounts" (effective for annual periods beginning on or after 01 January 2016); Amendment to IAS 1 "Presentation of Financial Statements" - initiative regarding disclosure (clarification effective for annual periods beginning on or after 01 January 2016); Amendments to IAS 16 "Property, Plant and Equipment" and IAS 38 "Intangible Assets" - of acceptable methods of depreciation and amortisation (effective for annual periods beginning on or after 01 January 2016); Amendments to IAS 16 "Property, Plant and Equipment" and IAS 41 "Agriculture" - Bearer Plants (effective for annual periods beginning on or after 1 January 2016); Amendments to IAS 27 Separate Financial Statements - Equity Method in Separate Financial Statements (effective for annual periods beginning on or after 1 January 2016); Amendments to IAS 28 Investments in Associates and Joint Ventures and IFRS 10 Consolidated Financial Statements Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective for annual periods beginning on or after 1 January 2016); Amendments to IAS 28 "Investments in Associates and Joint Ventures", IFRS 10 "Consolidated Financial Statements" and IFRS 12 "Disclosure of interests in other entities" - Application of exemption from consolidation (effective for annual periods beginning on or after 1 January 2016); IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018); IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 01 January 2018); The Forms and Content of Items in Financial Statement Forms are prescribed by the Decision on Forms and Content of Items in Financial Statement Forms to Be Completed by Banks ( RS Official Gazette, no. 71/2014 and 135/2014), which is applied starting from the preparation of the financial reports for the year ended 31 December 2014 and which is in line with the revised IAS 1 "Presentation of Financial Statements. In the preparation of these financial statements, the Bank has adhered to the principal accounting policies further described in Note 3, which are in conformity with the accounting, banking and tax regulations prevailing in the Republic of Serbia. The Bank s financial statements are stated in thousands of Dinars, unless otherwise stated. The Dinar (RSD) is the functional and official reporting currency in the Republic of Serbia. All transactions in currencies that are not functional currency are considered to be transactions in foreign currency. 12

15 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.2. Comparative Information Comparative information represents financial statements for 2014, prepared in accordance with International Financial Reporting Standards Going Concern The accompanying financial statements of the Bank are prepared in accordance with the going concern principle, which assumes that the Bank will continue its operations in the foreseeable future, which includes a period of at least twelve months from the date of the financial statements. 13

16 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Interest Income and Expense Interest income and expense, including default interest and other income and other expenses from interest bearing assets or liabilities are recognized on an accrual basis based on obligatory terms defined by a contract signed between the Bank and a customer. Interest income and expense are recognized in the income statement using the effective interest method, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation of the effective interest rate includes all paid or received fees and expenses, which are an integral part of the effective interest rate. Fees from approved loans are deferred based on the interest calculation algorithm by applying the effective interest rate, so that the portion of deferred income from fees follows the status of the principal debt on the loan. Income from loan origination fees is recognized in the income statement as interest income. Interest expenses on deposits are deferred and recognized in the income statement in the period to which they relate. The Bank will, upon the recognition of loan impairment, recognise the interest income in the amount that is obtained by applying the effective interest rate used to discount future cash flows when measuring the impairment loss (original or current in case of application of a variable interest rate) on the carrying value of investments, i.e., the net carrying value. The Bank will use the approach that continues with the calculation and recognition of interest on impaired loans, as well as the calculation of allowance for impairment on that basis, with subsequent adjustment, in the income statement. For all financial instruments that are interest bearing, interest income or interest expense are recorded in the income statement using the effective interest rate applicable, which is the rate that exactly discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, over the shorter period, to the net carrying amount of the financial asset or financial liability. 14

17 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.1. Interest Income and Expense (Continued) For financial assets carried at amortised value, interest income is calculated and recorded using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash flows. The calculation takes into account the contractual terms of the financial asset (for example, prepayment options) and includes all fees and other costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but does not take into account the future credit losses. In the event that a financial asset is impaired on the basis of impairment loss, interest income continues to be calculated using the effective interest rate used to discount future cash flows for the purpose of measuring and calculating the impairment loss. Loan origination fees, which are included in interest income, are calculated and charged as a one-time advance and deferred on a proportionate basis over the period of the loan. Fees based on approved loans are deferred based on the interest calculation algorithm by applying the effective interest rate, so that the maturity of deferred income from fees follows the balance of the loan principal Fee and Commission Income and Expense The Bank earns/pays fee and commission from rendering and using the banking services are generally recognized on an accrual basis when the service has been provided, i.e. rendered. Fees and commissions mostly comprise fees for payment operations services, issued guarantees and other banking services. Loan origination fees which are included in interest income are calculated and charged as a onetime advance and defered on a proportionate basis over the period of the loan (Note 7). Deferral using the straight-line method is not different materially from the effective yield method Foreign currency translation and accounting treatment of exchange gains/losses and effects of foreign currency clause application Balance sheet and income statement items stated in the financial statements are valued by using currency of primary economic environment (functional currency). As disclosed in Note 2.1., the accompanying financial statements are stated in thousands of Dinars (RSD), which represents the functional and official reporting currency of the Bank. Monetary assets and liabilities denominated in foreign currency are translated into Dinars at the median official exchange rate of the National Bank of Serbia, prevailing at the balance sheet date (Note 51). Transactions denominated in foreign currency are translated into Dinars at the official median exchange rate determined in the Interbank Foreign Currency Market, prevailing at the transaction date. Foreign exchange gains or losses arising upon the translation of assets, liabilities and transactions are credited or debited as appropriate, to the income statement, as foreign exchange gains or losses. Dinar assets hedged by a currency clause, i.e., indexed to the RSD-EUR and RSD-USD exchange rate as of the balance sheet date, are converted in dinars at the rate determined on the Interbank foreign exchange market for that day, except for loans which are contractually hedged by the stipulation that receivables cannot be stated at the exchange rate lower than the exchange rate of EUR/USD as of the loan origination date. 15

18 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Foreign currency translation and accounting treatment of exchange gains/losses and effects of foreign currency clause application (Continued) Foreign exchange gains/losses, arising on translation of balance sheet items denominated in foreign currency and transactions in foreign currency, as well as gains and losses arising from the application of the foreign currency clause, are credited/ debited against the income statement, as appropriate (Note11). Commitments and contingencies denominated in foreign currency are translated into dinars at the official median exchange rate of NBS prevailing at the balance sheet date Financial Instruments All financial instruments are initially recognized at fair value including any directly attributable incremental costs of acquisition or issue, except for financial assets and financial liabilities at fair value through profit or loss, which are directly attributable to the acquisition or issue of a financial asset or financial liability. Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions on the market, are recognized on the trade date or settlement date, i.e., on the date when the Bank commits to purchase or sell the assets or the date when the Bank receives or transfers the assets). Financial assets and financial liabilities are recognized in the Bank s balance sheet on the date upon which the Bank becomes counterparty to the contractual provisions of a specific financial instrument. All regular way purchases and sales of financial assets are recognized on the settlement date, i.e. the date the asset is delivered to the counterparty. Day 1 Profit When the transaction price in a non-active market is different to the fair value from other observable current market transaction in the same instrument or based on a valuation technique the variables of which include data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value ( Day 1 profit) in the income statement. Derecognition of Financial Assets and Financial Liabilities Financial assets cease to be recognized when the Bank loses control of the contractual rights governing such instruments; which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability followed by concurrent recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement. 16

19 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Classification of Financial Instruments The Bank s management determines the classification of its investments at initial recognition. Classification of financial instruments upon initial recognition depends on the purposes for which financial instruments have been obtained and their characteristics. The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity securities and held-for-sale securities. The subsequent measurement of financial assets depends on their classification, as follows: Financial assets at fair value through profit or loss This category includes two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss. Financial assets are classified as held for trading if they have been primarily acquired for the purpose of selling or repurchasing them in the near term, for generating profit from short-term price fluctuations. The above mentioned assets are stated in the balance sheet at fair value. Changes in fair values of securities and other placements at fair value through profit or loss are credited or debited to the Income Statement of the period, as appropriate. As of 31 December 2015 and 2014, securities held for trading include bonds of the Republic of Serbia in respect of the citizens' foreign currency savings and shares Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and advances to banks and customers approved by the Bank are recorded in the balance sheet once disbursed to the loan beneficiary. As of the balance sheet date, loans are stated at amortised cost by applying the effective interest rate less any allowance for impairment and direct write-offs. Amortised cost is the amount recognized upon initial acquisition of assets, net of repayments of principal and increased by the accrued, and reduced by the collected interest using the effective interest rate on the difference between the initial amount and the amount at the maturity date and net of any allowance for impairment. Loans are stated in the balance sheet at the amount of principal outstanding, including all interest receivable, fees and commissions as well as prepayments and accruals relating to receivables accrued on these grounds, net of the principal repayments, accruals of the fees that are included in the calculation of effective interest rates and allowance for impairment based on an estimate of the risks identified for individual loans, as well as the risk for which the Bank's experience shows are contained in the loan portfolio. To assess these risks the Bank's management applies the internally adopted methodology. 17

20 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Loans and Receivables (Continued) Interest income and receivables in respect of these instruments are recorded and presented under interest income, i.e., interest receivables. Interests which are part of effective yield on these instruments are recognized as deferred income and credited to the income statement as interest income over the life of a financial instrument. Loans in dinars, with contracted foreign currency clause, i.e. RSD-EUR and RSD-USD foreign exchange rate, are revalued in accordance with the contract signed for each loan. The difference between the carrying amount of a loan and the amount calculated applying the foreign currency clause is disclosed within loans and advances. Income and expenses resulting from the application of foreign currency clause are recorded in the income statement, as exchange gains/losses and gains/losses from effects of foreign currency clause application. In accordance with the Bank's internal policies, at each reporting date the Bank assesses whether there are any objective evidence of the impairment of a financial asset or group of financial assets. Impairment losses are calculated only if there is objective evidence of impairment which resulted from one or several events that occurred after the initial recognition of an asset and when these events influence the estimated future cash flows from financial assets or a group of financial assets and effects can be reliably measured. The indicators based on which the Bank assesses whether there is objective evidence of impairment in loans and advances include the following: defaults in settling the agreed amount of principal or interest, financial difficulties of the debtor, including the possible bankruptcy or any other form of financial reorganization of the debtor, violation of contractual terms, deterioration of the debtor's creditworthiness, decrease in values of loan collaterals, as well as other indicators which point to the fact that there is a measurable decrease in the future cash flows, such as changes in the national and economic conditions directly related with the failure to fulfil the contractual liabilities. In accordance with the policy adopted, the Bank first estimates whether there is objective evidence of impairment of financial assets which are individually significant, and individually and on a portfolio basis for financial assets with no individual significance. Should the Bank come to the conclusion that there is no objective evidence of impairment for an individual financial asset, material or not, the aforementioned asset is included in the group of financial assets with similar characteristics of credit risk and the impairment is assessed on a portfolio basis. The assets assessed individually for impairment and for which the impairment loss is recognized or continues to be recognized, are not included in the assessment of impairment on portfolio basis. In case there is objective evidence of impairment, the amount of loss is determined as a difference between the loan carrying amount and its recoverable amount, which is considered to be the net present value of the estimated future cash flows, discounted at the initial effective interest rate contracted for that particular financial asset. The calculation of the net present value of the estimated future cash flows arising from a collateralized financial asset, reflects the cash flows contingent on realization of the instrument's securitization. In case a loan or a placement 18

21 held to maturity bears a variable interest rate, the discount rate for measuring any impairment loss is the current interest rate stated in the respective agreement. For the purposes of assessing the impairment loss on portfolio basis, financial assets are aggregated based on their similar characteristics of credit risk and internal classification system applied in the Bank according to the assets' nature, branch of industry, geographical location, type of collaterals, the status of matured, but uncollected loans and the like. The future cash flows for the group of financial assets collectively classified are estimated based on the Bank's historical experience with losses on assets with similar characteristics of credit risk. Historical data on incurring loss for the purposes of assessing impairment on portfolio basis are adjusted based on the currently available data reflecting the effects of current circumstances which influenced the period from which the forgoing experience with losses dates, as well as to remove the effects of the past circumstances, which are non-existent in the current period. The assessment of future cash flows for the group assets reflect and are directly commensurate with the changes of certain ratios from year to year (changes in the unemployment rates, prices of real estate, status of payments or other changes which point to the changes in the probability of losses for the Bank, as well as their proportions). The Bank regularly verifies and reconsiders the methodology and assumptions of future cash flows in order to decrease the differences between the estimated losses and actual losses incurred. Impairment losses arising from the impairment of value of loans and receivables, as well as other financial assets, are recorded in the income statement as impairment of placements (Note 14). The write-off of irrecoverable receivables is performed based on a court decision, decisions enacted by the Bank's Assembly, Board of Directors or Executive Board when there is no real possibility to collect the receivable and when all collaterals have been exhausted. In case the amount of impairment loss on loans in the forthcoming period reverses due to the event which took place after the initial allowance for the impairment was made, such allowance is adjusted by the amount of reversal and the amount of adjustment is credited to the income statement as release of allowance for impairment. Rescheduled Loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment period as well as changes in the loan conditions. The management continuously reviews rescheduled loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment Securities Held-to-Maturity Securities held-to-maturity comprise financial assets with fixed payments or payments which can be determined, having fixed maturities, for which there is a positive intention and ability to hold to maturity. Upon initial recognition, securities held-to-maturity are recorded at amortised cost by applying the effective interest method less any allowance for impairment, i.e., accumulated impairment losses. The amortised cost is calculated by taking into account all discounts or premiums realized in the purchase, as well as fees and commissions which are an integral part of the contracted interest rate in the maturity period. 19

22 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) Securities Held-to-Maturity (Continued) The Bank performs individual assessment in order to determine whether there is objective evidence on impairment of the investment into securities held-to-maturity. If there are objective evidence that such securities have been impaired, the amount of impairment loss for investments held to maturity is calculated as the difference between the investments' carrying amount and the present value of expected future cash flows discounted at the investment's original effective interest rate, and it is charged to the Income Statement (Note 14). If, in a subsequent year, the amount of the estimated impairment loss decreases as a consequence of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced and effects are credited to the income statement. Interest income is calculated using the effective interest rate, and is recorded within interest income. Fees that are part of the effective yield from these instruments are deferred and recognized in the income statement during the life of the instrument Held-for-sale Securities Securities for which there is intention to hold them for an indefinite time period, and which can be sold to meet liquidity need or due to fluctuation in the interest rates, foreign exchange rates or prices of capital, are classified as held-for-sale securities. Securities are comprised of equity instruments of banks and other legal entities, as well as of other securities held-for-sale. Upon initial recognition, securities held-for-sale, are stated at fair value. The fair value of securities quoted in the market is based on the currently offered prices. Unrealized gains and losses arising from securities held-for-sale are credited or charged to revaluation reserves, until the security is sold, collected or in any other way realized, or until such security is permanently impaired. When securities held-for-sale are disposed or their value is impaired, the accumulated fair value adjustments, recognized within equity, are credited/charged to the income statement. Equity investments in other legal entities which do not have quoted price in an active market are not measured at fair value and are stated at cost less any allowance for impairment. Dividends earned whilst holding held-for-sale financial instruments are recognized in the income statement as dividend income when the right to receive payment is established. 20