Universal Investment Bank AD Skopje. Financial Statements for the year ended 31 December 2007

Transcription

1 for the year ended 31 December 2007

2 Contents Auditors' report Balance sheet 1 Income statement 2 Statement of changes in equity 3 Statement of cash flows 4 Notes to the financial statement 5

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6 Income statement For the year ended 31 December In thousands of denars Note Interest income 7 596, ,190 Interest expense 7 (241,412) (139,530) Net interest income 355, ,660 Fee and commission income 8 159, ,593 Fee and commission expense 8 (47,568) (32,302) Net fee and commission income 111,699 75,291 Net foreign exchange gain 29,498 22,085 Other operating income 9 16,386 19,463 Operating income 512, ,499 Net impairment loss on financial assets 16 (21,752) (32,586) Personnel expenses 10 (143,753) (118,661) Depreciation and amortisation 18,19 (31,305) (24,103) Other expenses 11 (214,341) (140,743) Profit before income tax 101,580 62,406 Income tax expense 12 (1,486) - Profit for the period 100,094 62,406 Basic and diluted earnings per share The notes on pages 5-50 are an integral part of these financial statements. 2

7 Statement of changes in equity For the year ended 31 December In thousands of denars Share capital Share premium Other Reserves Revaluation reserve for investment securities availablefor-sale Retained earnings Total Balance at 1 January , ,437 58,114 (2,537) (543,763) 562,658 Change in fair value of investment securities available-for-sale (14) - (14) Total income and expense recognised in equity (14) - (14) Profit for the period ,406 62,406 Total recognised income and expense (14) 62,406 62,392 Balance at 31 December , ,437 58,114 (2,551) (481,357) 625,050 Balance at 1 January , ,437 58,114 (2,551) (481,357) 625,050 Profit for the period , ,094 Total recognised income and expense , ,094 Appropriation to retained earnings - - (134) Treasury shares sold 1,580 3, ,740 Balance at 31 December , ,597 57,980 (2,551) (381,129) 729,884 The notes on pages 5-50 are an integral part of these financial statements. 3

8 Statement of cash flows For the year ended 31 December In thousands of denars Note Cash flows from operating activities Profit for the period 100,094 62,406 Adjustments for: Depreciation and amortisation 18,19 31,305 24,103 Gain on sale of property and equipment (228) (55) Gain on sale of assets acquired through foreclosure procedure (291) (998) Gain on sale of investment securities available-for-sale - (3,317) Loss on sale of assets acquired through foreclosure procedure 9,990 1,715 Net impairment loss on financial assets 16 21,752 32,586 Impairment loss on other assets 5, Impairment provision for off balance sheet items 2,347 9,988 Net interest income (355,148) (261,660) Dividend income (4,230) (1,151) Income tax expense 1,486 - (187,561) (136,147) Obligatory reserves in NBRM (51,052) (68,228) Change in loans and advances to banks 48,165 (33,313) Change in loans and advances to customers (2,084,011) (1,443,395) Change in assets acquired through foreclosure procedure 49,836 7,901 Change in other assets (44,395) (47,684) Change in deposits from banks and other financial institutions 34, ,930 Change in deposits from customers 2,373,568 1,577,887 Change in other liabilities and impairment provision related to off balance sheet items 18,909 22, ,711 13,153 Interest received 634, ,496 Interest paid (241,412) (139,530) Income tax paid (713) - Net cash used in operating activities 550, ,119 Cash flows from investing activities Purchase of property and equipment 18 (57,300) (32,589) Proceeds from the sale of property and equipment Purchase of intangible assets 19 (10,206) (6,264) Proceeds from investment securities 35,935 - Acquisition of invesment securities - (62,870) Net cash used in investing activities (31,243) (100,735) Cash flows from financing activities Proceeds from sale of treasury shares 4,740 - Proceeds from other borrowed funds 10,400 8,935 Repayment of other borrowed funds (77,995) (32,695) Net cash from financing activities (62,855) (23,760) Net increase in cash and cash equivalents 455, ,624 Cash and cash equivalents at 1 January 824, ,411 Cash and cash equivalents at 31 December 14 1,297, ,035 The notes on pages 5-50 are an integral part of these financial statements. 4

9 1. Reporting entity Universal Investment Bank AD Skopje ( the Bank ) is a joint stock company incorporated and domiciled in the Republic of Macedonia. The address of the Bank s registered office is as follows: St. Maksim Gorki Skopje Republic of Macedonia The Bank is licensed to perform all banking activities in accordance with the law. The main activities include commercial lending, receiving of deposits, payment operation services in the country and abroad, foreign exchange deals, trust activities and other services. 2. Basis of preparation (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). During the period the Bank adopted IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Capital Disclosures, which increased the level of disclosure in respect of financial instruments and capital, but had no impact on the reported profits or financial position of the Bank. In accordance with the transitional requirements of the standards, the Bank has provided full comparative information. (b) Basis of measurement The financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through profit or loss are measured at fair value; available-for-sale financial assets are measured at fair value; (c) Functional and presentation currency These financial statements are presented in Macedonian denar ( MKD ), which is the Bank s functional currency. Except as indicated, financial information, presented in MKD has been rounded to the nearest thousand. 5

10 2. Basis of preparation (continued) (d) Use of estimates and judgments The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in note Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. The foreign currencies the Bank deals with are predominantly Euro (EUR) and United States Dollars (USD). The exchange rates used for translation at 31 December 2007 and 2006 were as follows: MKD MKD 1 EUR USD

11 3. Significant accounting policies (continued) (b) Interest Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense presented in the income statement include: interest on financial assets and liabilities at amortised cost on an effective interest rate basis; interest on available-for-sale investment securities on an effective interest rate basis; Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income. (c) Fees and commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including financial services provided by the Bank in respect of foreign currency settlements, guarantees, letters of credit, domestic and foreign payment operations and other services, are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised as an income at the moment of payment. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. (d) Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value changes, interest, dividends and foreign exchange differences. (e) Dividends Dividend income is recognised when the right to receive income is established. Dividends are reflected as a component of net trading income, or dividend income based on the underlying classification of the equity instrument. 7

12 3. Significant accounting policies (continued) (f) Lease payments made Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. (g) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (h) (i) Financial assets and liabilities Recognition The Bank initially recognises loans and advances, deposits and borrowings on the date that they are originated at cost. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. (ii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets, if any that is created or retained by the Bank is recognised as a separate asset or liability. 8

13 3. Significant accounting policies (continued) (h) (ii) Financial assets and liabilities (continued) Derecognition (continued) The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (iii) Offsetting Financial assets and liabilities are set off and the net amount is presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Bank s trading activity. (iv) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. (v) Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices for financial instruments traded in active markets. For all other financial instruments fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models. (vi) Identification and measurement of impairment At each balance sheet date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably. The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. 9

14 3. Significant accounting policies (continued) (h) (vi) Financial assets and liabilities (continued) Identification and measurement of impairment (continued) Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to profit or loss. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income. (vii) Designation at fair value through profit or loss The Bank has designated financial assets and liabilities at fair value through profit or loss when either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis; the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. Financial assets that have been designated at fair value through profit or loss include financial assets held-for-trading. 10

15 3. Significant accounting policies (continued) (i) Cash and cash equivalents Cash and cash equivalents include cash balance on hand, demand deposits with banks, unrestricted cash deposited with the National Bank of the Republic of Macedonia ( NBRM ) and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the balance sheet. (j) Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the balance sheet with transaction costs taken directly to profit or loss. All changes in fair value are recognised as part of net trading income in profit or loss. Trading assets and liabilities are not reclassified subsequent to their initial recognition. (k) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. (l) Investment securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification. (i) Held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a significant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Bank from classifying investment securities as held-to-maturity for the current and the following two financial years. 11

16 3. Significant accounting policies (continued) (l) (ii) Investment securities (continued) Available-for-sale Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost, less impairment losses. All other available-for-sale investments are carried at fair value. Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in profit or loss. Other fair value changes are recognised directly in equity until the investment is sold or impaired and the balance in equity is recognised in profit or loss. (m) (i) Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. (ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. (iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. 12

17 3. Significant accounting policies (continued) (m) (iii) Property and equipment (continued) Depreciation (continued) Depreciation rates, based on the estimated useful lives for the current and comparative periods are as follows: Buildings 2.5 Equipment The depreciation method, estimated useful lives and residual value are reassessed on each reporting date. % (n) (i) Intangible assets Recognition and measurement Intangible assets acquired by the Bank are stated at cost less accumulated amortisation and accumulated impairment losses. (ii) Subsequent expenditure Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iii) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the intangible assets, from the date that it is available for use. The amortisation rates based on the estimated useful lives for the current and comparative periods are as follows: Software 20 Rights and licences 20 % 13

18 3. Significant accounting policies (continued) (o) Leased assets lessee Leases in terms of which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Bank s balance sheet. (p) Impairment of non-financial assets The carrying amounts of the Bank s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses in respect of cashgenerating units are allocated to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (q) Deposits Deposits are the Bank s sources of debt funding. The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. Deposits are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective interest method. 14

19 3. Significant accounting policies (continued) (r) Provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. (s) (i) Employee benefits Defined contribution plans The Bank contributes to its employees' post retirement plans as prescribed by the national legislation. Contributions, based on salaries, are made to the national organisations responsible for the payment of pensions. There is no additional liability in respect of these plans. Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss when they are due. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (t) (i) Share capital and reserves Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of equity instruments are recognised as a deduction from equity. 15

20 3. Significant accounting policies (continued) (t) (ii) Share capital and reserves (continued) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold subsequently the amount received is recognised as an increase on equity, and the resulting surplus or deficit of the transaction is transferred to/from share premium. (iii) Dividends Dividends are recognised as a liability in the period in which they are declared. (u) Earnings per share The Bank presents basic and diluted earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. (v) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these consolidated financial statements: Revised IFRS 2 Share-based Payment (effective from 1 January 2009). The revised Standard will clarifies the definition of vesting conditions and non-vesting conditions. Based on the revised Standards failure to meet non-vesting conditions will generally result in treatment as a cancellation. Revised IFRS 2 is not relevant to the Bank s operations as the Bank does not have any share-based compensation plans. 16

21 3. Significant accounting policies (continued) (v) New standards and interpretations not yet adopted (continued) Revised IFRS 3 Business Combinations (effective for annual periods beginning on or after 1 July 2009). The scope of the revised Standard has been amended and the definition of a business has been expanded. The revised Standard also includes a number of other potentially significant changes including: All items of consideration transferred by the acquirer are recognised and measured at fair value as of the acquisition date, including contingent consideration, Transaction costs are not included in the acquisition accounting, The acquirer can elect to measure any non-controlling interest at fair value at the acquisition date (full goodwill), or at its proportionate interest in the fair value of the identifiable assets and liabilities of the acquiree, Acquisitions of additional non-controlling equity interests after the business combination must be accounted for as equity transactions, Revised IFRS 3 is not relevant to the Bank s operations as the Bank does not have any interests in subsidiaries that will be affected by the revisions to the Standard. IFRS 8 Operating Segments (effective from 1 January 2009). The Standard requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. IFRS 8 will be effective for the financial statements in The Bank has not yet completed its analysis of the impact of the standard. Revised IAS 1 Presentation of (effective from 1 January 2009). The revised Standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. Items of income and expense and components of other comprehensive income may be presented either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). The Bank is currently evaluating whether to present a single statement of comprehensive income, or two separate statements. Revised IAS 23 Borrowing Costs (effective from 1 January 2009). The revised Standard will require the capitalization of borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Revised IAS 23 is not relevant to the Bank s operations as the Bank does not have any qualifying assets for which borrowing costs would be capitalised. 17

22 3. Significant accounting policies (continued) (v) New standards and interpretations not yet adopted (continued) Revised IAS 27 Consolidated and Separate (effective for annual periods beginning on or after 1 July 2009). In the revised Standard the term minority interest has been replaced by non-controlling interest, and is defined as "the equity in a subsidiary not attributable, directly or indirectly, to a parent". The revised Standard also amends the accounting for non-controlling interest, the loss of control of a subsidiary, and the allocation of profit or loss and other comprehensive income between the controlling and non-controlling interest. Revised IAS 27 is currently not relevant to the Bank`s operations. IFRIC 11 IFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). The Interpretation requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. It also provides guidance on whether share-based payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity s parent should be accounted for as cash-settled or equity-settled in the entity s financial statements.the Interpretation is not relevant to the Bank s operations, since the Bank has no share payment transactions. IFRIC 12 Service Concession Arrangements (effective from 1 January 2008) The Interpretation provides guidance to private sector entities on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. The Interpretation is not relevant to the Bank`s operations. IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). The Interpretation explains how entities that grant loyalty award credits to customers who buy other goods or services should account for their obligations to provide free or discounted goods or services ( awards ) to customers who redeem those award credits. Such entities are required to allocate some of the proceeds of the initial sale to the award credits and recognise these proceeds as revenue only when they have fulfilled their obligations. The Bank does not expect the Interpretation to have any impact on the financial statements. IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset. Minimum Funding Requirements and their interactions (effective for annual periods beginning on or after 1 January 2008). The interpretation addresses when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available, how a minimum funding requirements (MFR) might affect the availability of reductions in future contributions and when a MFR might give rise to a liability. No additional liability need be recognised by the employer under IFRIC 14 unless the contributions that are payable under the minimum funding requirement cannot be returned to the company. The Bank does not operate in countries where there are restrictions on the capabilities of the employer in refunding or reducting contributions. 18

23 4. Financial risk management (a) Introduction and overview The Bank has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risks. This note presents information about the Bank s exposure to each of the above risks, the Bank s objectives, policies and processes for measuring and managing risk, and the Bank s management of capital. Risk management framework The Managing Board has overall responsibility for the establishment and oversight of the Bank s risk management framework. The Managing Board has established the Asset and Liability Committee ( ALCO ), Credit Committee and the Supervisory Board has established Risk Management Committee which are responsible for developing and monitoring Bank s risk management policies in their specified areas. All committees report regularly to the Managing Board and Supervisory Board respectively. The Bank s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and procedures and policies for management, aims to develop a constructive control environment, in which all employees understand their roles and obligations. The Bank s Risk Management Committee is responsible for monitoring compliance with the Bank s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank and the Bank`s compliance with the requirements of the NBRM related to the risk management. The Bank s Risk Management Committee is assisted in these functions by the Internal Audit. The Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. 19

24 4. Financial risk management (continued) (b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank s loans and advances to customers and other banks, issued garantees and letters of credits and investment securities. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual debtor s default risk, country and sector s risk). Management of credit risk The Managing Board has delegated responsibility for the management of credit risk to its Credit Committee that approves all credit exposures up to EUR 250 thousand. All credit exposures over EUR 250 thousand must be approved by the Supervisory Board. Separate Bank s Credit departments (Department for Corporate Loans and Retail Department) in close cooperation with Risk Management Department are responsible for oversight of the Bank s credit risk, including: Formulating credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements. Reviewing and assessing credit risk. Credit departments assess all credit exposures in excess of designated limits, prior to facilities being committed to customers. Limiting concentrations of exposure to geographies and industries (for loans and advances), and by issuer, credit rating assessment by respective institutions, market liquidity and country (for investment securities). Banks s credit risk gradings in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the risks. The risk grading system is used in determining where impairment losses may be required. The current risk grading framework consists of six grades reflecting various degrees of risk of default and the availability of collateral. Reviewing compliance with agreed exposure limits, including those for industries, country risk and product types. Regular reports for the credit exposure, risk grading and allowance for impairment are provided to the Risk Management Committee, and appropriate corrective action is taken. 20

25 4. Financial risk management (continued) (b) Credit risk (continued) Credit departments are required to implement credit policies and procedures and in assistance with the Risk Management Department are responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios. Regular audits of Credit departments processes are performed by the Internal Audit. Exposure to credit risk Note Loans and advances to customers Loans and advances to banks Investment securities In thousands of denars Carrying amount 15,16,17 5,187,230 3,162, , , , ,465 Individually impaired Grade A 4,765,747 2,757, Grade B 372, , Grade C 142, , Grade D 33,530 22, Grade E 69,094 44, Gross amount 5,383,518 3,337, Allowance for impairment (196,288) (174,536) Carrying amount 5,187,230 3,162, Neither past due nor impaired Grade A , , , ,465 Carrying amount , , , ,465 Total carrying amount 5,187,230 3,162, , , , ,465 Impaired loans and securities Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities agreement(s). These loans are graded A to E in the Bank s internal credit risk grading system. 21

26 4. Financial risk management (continued) (b) Credit risk (continued) Past due but not impaired loans Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security / collateral available or the stage of collection of amounts owed to the Bank. Loans with renegotiated terms Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower s financial position and where the Bank has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category independent of satisfactory performance after restructuring. Allowances for impairment The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Bank writes off a loan/security balance (and any related allowances for impairment) when the Supervisory Board determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer s financial position such that the borrower / issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. The Bank can also write off a loan/security balance (and any related allowances for impairment) on the base of a court decision when all other means for collection had expired. Set out below is an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by risk grade. 22

27 4. Financial risk management (continued) (b) Credit risk (continued) Loans and advances to customers In thousands of denars Gross Net 31 December 2007 Individually impaired Grade A 4,765,747 4,728,261 Grade B 372, ,060 Grade C 142, ,144 Grade D 33,530 16,765 Grade E 69,094 - Total 5,383,518 5,187, December 2006 Individually impaired Grade A 2,757,031 2,722,568 Grade B 294, ,197 Grade C 218, ,823 Grade D 22,211 11,106 Grade E 44,895 - Total 3,337,230 3,162,694 The Bank holds collateral against loans and advances to customers in the form of mortgage, movable property, other registered securities over assets, cash deposits, lien over shares, guarantees, etc. Estimates of fair value are based on the value of collateral assessed at the time of lending. Collateral generally is not held over loans and advances to banks. Collateral usually is not held against investment securities, and no such collateral was held at 31 December 2007 or According the Credit policy, depending on pledged collateral the Bank has the following types of loans: Mortgage loans; Loans with lien of movable property; Lombard loans with pledged shares; Loans with pledged shares; Loans with L/Gs; Loans covered by cash deposit; Other types of loans, including rights of tangible and intangible assets with determined price. 23

28 4. Financial risk management (continued) (b) Credit risk (continued) The Bank monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk at the reporting date is shown below: Note Loans and advances to customers Loans and advances to banks Investment securities In thousands of denars Carrying amount 15, 16, 17 5,187,230 3,162, , , , ,465 Concentration by sector Corporate 2,478,543 1,773, Bank , ,497 13,854 11,568 Retail 2,708,687 1,389, Public sector , ,897 5,187,230 3,162, , , , ,465 Concentration by location EU countries 230 1,297 96, ,866 1,917 3,137 Republic of Macedonia 5,186,983 3,161,371 83,481 30, , ,328 Other , ,187,230 3,162, , , , ,465 Concentration by location for loans and advances is measured based on the location of the borrower. Concentration by location for investment securities is measured based on the location of the issuer of the security. (c) Liquidity risk Liquidity risk is the risk that the Bank will not be able to meet its financial obligations as they Management of liquidity risk The Bank s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank s reputation. Treasury and Dealing Department receive information from other departments regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Treasury and Dealing Department then maintain a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, to ensure that sufficient liquidity is maintained within the Bank. 24

29 4. Financial risk management (continued) (c) Liquidity risk (continued) The daily liquidity position and market conditions are regularly monitored. All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports cover the liquidity position of the Bank. Liquidity reports are submitted monthly to the NBRM. Exposure to liquidity risk The Bank has access to a diverse funding base. Funds are raised using a broad range of instruments including deposits and share capital. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Bank strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Bank strategy. In addition the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy. In thousands of denars Residual contractual maturities of financial liabilities Note Carrying amount Gross nominal inflow / (outflow) Less than 1 month 1-3 months 3 months to 1 year 1-5 years More than 5 years 31 December 2007 Non-derivative liabilities Deposits from banks and other financial institutions ,357 (688,357) (294,233) (165,223) (217,362) (11,539) - Deposits from customers 22 5,906,554 (5,906,554) (2,816,422) (809,538) (1,722,870) (557,724) - Other borrowed funds 23 27,109 (27,109) (1,636) (398) (4,053) (21,022) Other liabilities 25 79,645 (79,645) (79,645) ,701,665 (6,701,665) (3,191,936) (975,159) (1,944,285) (590,285) - Unrecognised loan commitments 990,958 (990,958) (693,391) (66,513) (202,141) (28,913) - 7,692,623 (7,692,623) (3,885,327) (1,041,672) (2,146,426) (619,198) - 31 December 2006 Non-derivative liabilities Deposits from banks and other financial institutions ,105 (654,105) (290,401) (158,848) (204,856) - - Deposits from customers 22 3,532,986 (3,532,986) (1,507,173) (705,281) (953,166) (367,366) - Other borrowed funds 23 94,704 (94,704) (45,018) - (18,955) (30,731) - Other liabilities 25 60,736 (60,736) (60,736) ,342,531 (4,342,531) (1,903,328) (864,129) (1,176,977) (398,097) - Unrecognised loan commitments 477,441 (477,441) (305,862) (18,452) (125,910) (27,217) - 4,819,972 (4,819,972) (2,209,190) (882,581) (1,302,887) (425,314) - 25