THE ECONOMIC COOPERATION ORGANIZATION TRADE AND DEVELOPMENT BANK FINANCIAL STATEMENTS AT 31 DECEMBER 2013 TOGETHER WITH AUDITOR S REPORT

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1 THE ECONOMIC COOPERATION ORGANIZATION TRADE AND FINANCIAL STATEMENTS AT 31 DECEMBER 2013 TOGETHER WITH AUDITOR S REPORT

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4 CONTENTS PAGE BALANCE SHEET... 1 STATEMENT OF COMPREHENSIVE INCOME... 2 STATEMENT OF CHANGES IN EQUITY... 3 STATEMENT OF CASH FLOWS NOTE 1 GENERAL INFORMATION... 5 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NOTE 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES NOTE 4 FINANCIAL RISK MANAGEMENT NOTE 5 CASH AND CASH EQUIVALENTS NOTE 6 DERIVATIVE FINANCIAL INSTRUMENTS NOTE 7 LOANS AND ADVANCES TO BANKS NOTE 8 LOANS AND ADVANCES TO CUSTOMERS NOTE 9 INVESTMENT SECURITIES NOTE 10 INTANGIBLE ASSETS NOTE 11 PROPERTY AND EQUIPMENT NOTE 12 OTHER ASSETS NOTE 13 DEPOSITS FROM BANKS NOTE 14 RETIREMENT BENEFIT OBLIGATIONS NOTE 15 OTHER LIABILITIES NOTE 16 SHARE CAPITAL AND SHARE PREMIUM NOTE 17 NET INTEREST INCOME NOTE 18 NET FEE AND COMMISSION INCOME NOTE 19 OPERATING EXPENSES NOTE 20 COMMITMENTS AND CONTINGENT LIABILITIES NOTE 21 SEGMENT ANALYSIS NOTE 22 RELATED PARTY TRANSACTIONS NOTE 23 POST BALANCE SHEET EVENTS... 43

5 BALANCE SHEET AT 31 DECEMBER 2013 ASSETS Notes Loans and advances to banks 7 332, ,254 Loans and advances to customers 8 88,670 89,932 Investment securities: Available-for-sale 9 21,793 1,729 Derivative financial instruments 6 1, Intangible assets Property and equipment 11 10, Other assets Total assets 454, ,403 LIABILITIES Deposits from banks , ,706 Derivative financial instruments 6 1,238 2,096 Retirement benefit obligations 14 1,358 1,067 Other liabilities Total liabilities 128, ,682 EQUITY Share capital , ,000 Revaluation reserve - Reserve for available-for-sale investment securities (555) 2 Other reserves 20,719 13,929 Retained earnings 4,440 6,790 Total equity 326, ,721 Total liabilities and equity 454, ,403 The accompanying notes set out on pages 5 to 43 form an integral part of these financial statements. 1

6 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013 Notes Interest income 17 9,359 13,012 Interest expense 17 (1,238) (2,214) Net interest income 8,121 10,798 Impairment (loss)/gain on loans, net 7, 8, 19 (44) 20 Net interest income after loan impairment losses 8,077 10,818 Fee and commission income Fee and commission expense 18 (6) (5) Net fee and commission income Foreign exchange gain/(loss), net 340 (72) Other operating income 7 15 Operating income 8,692 10,952 Operating expenses Personnel expenses 19 (3,531) (3,491) Operating lease expenses 19 (173) (180) Depreciation and amortization 10, 11, 19 (100) (112) Other expenses 19 (448) (379) Net profit for the period 4,440 6,790 Other comprehensive income (557) 2 Total comprehensive income 3,883 6,792 The accompanying notes set out on pages 5 to 43 form an integral part of these financial statements. 2

7 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013 Reserve for available-for-sale investment Other Retained Share Capital securities reserves earnings Total 1 January ,000-10,199 3, ,929 Appropriation of profit - - 3,730 (3,730) - Fair value gains on available-for-sale financial assets Net profit for the period ,790 6, December , ,929 6, ,721 1 January , ,929 6, ,721 Increase in paid-in share capital 1, ,950 Appropriation of profit - - 6,790 (6,790) - Fair value gains on available-for-sale financial assets - (557) - - (557) Net profit for the period ,440 4, December ,950 (555) 20,719 4, ,554 The accompanying notes set out on pages 5 to 43 form an integral part of these financial statements. 3

8 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 Cash flows from operating activities: 4 Notes Net profit for the period 4,440 6,790 Adjustments for: Depreciation and amortization 10, 11, Net impairment loss on loans and advances 7, 8, (20) Accrued interest and expenses (2,592) (1,429) Measurement of derivative financial instruments at fair value 6 (1,826) 1,470 Provision for retirement benefit obligations Other non-cash items (1,093) (548) Cash flows (used in)/from operating activities before Changes in operating assets and liabilities (643) 6,638 Changes in operating assets and liabilities: Change in loans and advances to banks 19,653 (29,852) Change in loans and advances to customers 1,831 (22,959) Change in other assets (60) 35 Change in retirement benefit obligations 7 (140) Change in deposits from banks 715 (3,289) Change in other liabilities 158 (92) Net cash from/(used in) operating activities 21,661 (49,659) Cash flows (used in) investing activities: Purchase of investment securities (19,784) (1,726) Purchase of property and equipment 11 (10,063) (47) Purchase of intangible assets 10 (25) (2) Net cash (used in) investing activities (29,872) (1,775) Cash flows from financing activities: Increase in paid-in share capital 1,950 - Net cash from financing activities 1,950 - Net decrease in cash and cash equivalents (6,261) (51,434) Effects of exchange-rate changes on cash and cash equivalents 1, Cash and cash equivalents at the beginning of the period 58, ,476 Cash and cash equivalents at the end of the period 5 53,422 58,590 The accompanying notes set out on pages 5 to 43 form an integral part of these financial statements.

9 NOTE 1 - GENERAL INFORMATION The Economic Cooperation Organization Trade and Development Bank ( the Bank ) is a multilateral development finance institution established under the Articles of Agreement ( the Agreement ) with the mission; to promote and facilitate private and public sector investment, cooperation, development and job creation in member states through joint programs, to foster the growth of intra-regional trade, to contribute to the economic and social development for the welfare of the people in member states and promote good governance and environment consciousness in all efforts and projects. The status, privileges and immunities of the Bank and persons connected therewith in the Republic of Turkey are defined in the Headquarters Agreement between the ECO Trade and Development Bank and the Government of the Republic of Turkey (the Headquarters Agreement ) signed on 27 December The Headquarters Agreement was ratified by the Grand National Assembly and the President of the Republic of Turkey by Law No and was published in Official Gazette dated 3 July 2007 with No The headquarters address of the Bank is Bomonti Business center, Cumhuriyet Mah. Silahşör Caddesi, Yeniyol Sk. No: 18 Kat: 14-16, Bomonti Şişli - Istanbul Turkey. The Management Committee of the Bank decided to submit the financial information as of and for the year ended 31 December 2013 to the Board of Directors on 6 May As of 31 December 2013, the number of employees of the Bank is 40 (31 December 2012: 40). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of this financial information are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (a) Basis of preparation These financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards ( IFRS ). International Financial Reporting Standards ( IFRS ) comprise accounting standards issued by the International Accounting Standards Board ( IASB ) and its predecessor body and interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) and its predecessor body. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3. 5

10 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) New standards and amendments IAS 1 (amendment), Presentation of financial statements, regarding other comprehensive income is effective for annual periods beginning on or after 1 July The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially re-classifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. IAS 19 (amendment), Employee benefits, is effective for annual periods beginning on or after 1 January These amendments eliminate the corridor approach and calculate finance costs on a net funding basis. The standard requires past service cost to be recognized immediately in profit or loss. There is a new term re-measurement and remeasurement will be recognized in OCI and no longer be recognized in profit or loss. The effect of related amendment will be reflected to annual financial statements due to immateriality. IFRS 10, Consolidated financial statements, is effective for annual periods beginning on or after 1 January This standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. IFRS 11, Joint arrangements, is effective for annual periods beginning on or after 1 January This standard provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. IFRS 12, Disclosures of interests in other entities, is effective for annual periods beginning on or after 1 January This standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance-sheet vehicles. IFRS 10, 11 and 12 on transition guidance (amendment), is effective for annual periods beginning on or after 1 January The amendment also provide additional transition relief in IFRSs 10, 11 and 12, limiting the requirement to provide adjusted comparative information to only the preceding comparative period. For disclosure related to unconsolidated structured entities, the amendments will remove the requirement to present comparative information for the periods before IFRS 12 is applied. IFRS 13, Fair value measurement, is effective for annual periods beginning on or after 1 January The standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. IAS 27 (revised), Separate financial statements, is effective for annual periods beginning on or after 1 January The standard includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. 6

11 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IAS 28 (revised), Associates and joint ventures, is effective for annual periods beginning on or after 1 January The standard includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11. IFRS 7 (amendment), Financial instruments: Disclosures, on offsetting financial assets and financial liabilities, is effective for annual periods beginning on or after 1 January The amendment reflects the joint IASB and FASB requirements to enhance current offsetting disclosures. These new disclosures are intended to facilitate comparison between those entities that prepare IFRS financial statements and those that prepare US GAAP financial statements. IFRS 1 (amendment), First time adoption, on government loans, is effective for annual periods beginning on or after 1 January The amendment addresses how a first-time adopter would account for a government loan with a below-market rate of interest when transitioning to IFRS. Annual Improvements to IFRSs 2011 is effective for annual periods beginning on or after 1 January Amendments affect five standards: IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34. (c) Forthcoming requirements IAS 32 (amendment), Financial instruments: Presentation, on offsetting financial assets and financial liabilities, is effective for annual periods beginning on or after 1 January The amendment updates the application guidance in IAS 32, Financial instruments: Presentation, to clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. IFRS 9, Financial instruments: classification and measurement, is effective for annual periods beginning on or after 1 January The standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IAS 36 (amendments), Impairment on assets, is effective for annual periods beginning on or after 1 January These amendments address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. IAS 39 (amendments), Financial instruments: Recognition and measurement, is effective for annual periods beginning on or after 1 January These amendments address on novation of derivatives and hedge accounting and will allow hedge accounting to continue in a situation where a derivative is novated to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. 7

12 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IFRS 10, (amendment) Consolidated Financial Statements, IFRS 12 and IAS 27 for investment entities is effective for annual periods beginning on or after 1 January These amendments mean that many funds and similar entities will be exempt from consolidating most of their subsidiaries. Instead, they will measure them at fair value through profit or loss. The amendments give an exception to entities that meet an investment entity definition and which display particular characteristics. Changes have also been made IFRS 12 to introduce disclosures that an investment entity needs to make. Improvements to IFRS were issued in May They contain numerous amendments to IFRS that the IASB considers non-urgent but necessary. Improvements to IFRS comprise amendments that result in accounting changes for presentation recognition or measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards. The application of these new interpretations will not have a material impact on the Bank's financial statements in the period of initial application. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these financial statements, the significant judgments made by management in applying the Bank s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the financial statements for the year ended 31 December (d) Foreign currency translation Functional and presentation currency In accordance with Article 4 of the Agreement the unit of account of the Bank is ECO Unit ( EU ) that is equivalent to one Special Drawing Right ( SDR ) of the International Monetary Fund ( IMF ). In accordance with the Article 11 of the Agreement, the Bank s functional currency is the SDR and all transactions are recorded in SDR. The Bank s presentation currency is ECO Unit ( EU ). Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions as provided by the IMF. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. 8

13 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Exchange rates used by the Bank at the balance sheet dates were as follows: 1 EU (SDR) = United States Dollar Euro Japanese Yen Pound Sterling Turkish Lira (e) Loans and advances Loans and advances are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances are carried at amortized cost. When impaired financial assets are renegotiated and the renegotiated terms and conditions differ substantially from the previous terms, the new asset is initially recognized at its fair value (Notes 7 and 8). (f) Financial instruments and impairment Recognition The Bank initially recognizes financial assets and financial liabilities on the date that they are originated. A financial asset or financial liability is initially measured at fair value plus (for an item not subsequently measured at fair value through profit or loss) transaction costs that are directly attributable to its acquisition or issue. Derecognition The Bank derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when 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 transferred. Any interest in transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability. The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. 9

14 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Subsequent measurement Subsequent to initial recognition, financial assets designated at fair value through profit or loss are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques include using recent arms length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis and option pricing models. All non-trading financial liabilities, loans and receivables and held-to-maturity investment securities are measured at amortized cost less impairment losses. The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. 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 amortized cost) with similar risk characteristics. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognized through the unwinding of the discount. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. 10

15 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (g) Derivative financial instruments Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. The fair values of derivative financial instruments that are quoted in active markets are determined from quoted market prices in active markets including recent market transactions. The fair values of financial derivatives that are not quoted in active markets are determined by using valuation techniques, including discounted cash flow models. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed. Fair values of derivatives are carried as assets when positive and as liabilities when negative. The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of the consideration given or received). Derivative financial instruments are classified as held for trading (Note 6). (h) Available-for-sale investment securities Investment securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates or exchange rates, are classified as available-for-sale. Available-for-sale investment securities are initially recognised at fair value, which is the cash consideration including any transaction costs. Subsequently, the interest calculated using effective interest method is recognized in the income statement and the gains and losses being the difference between the amortized cost and the fair value of the Available-for-sale investment securities are recognised under the equity, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognised. If an available-for-sale investment security is determined to be impaired, the cumulative gain or loss previously recognised under the equity is recognised in the income statement. (i) Property and equipment Property and equipment excluding construction in progress are carried at cost less accumulated depreciation and permanent impairment if any. Depreciation is calculated using the straight-line method to write down the cost of such assets to their residual values over their estimated useful life as follows: Useful lives Machinery and equipment Motor vehicles 5 years Furniture and fixtures Buildings (Shell and core) Buildings (Interior fit-out) 4-5 years 5-10 years 50 years 15 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 11

16 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less cost to sell and value in use. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account for the determination of net profit. Expenses for the repair of property and equipment are charged against income. They are, however, capitalized if they result in an enlargement or substantial improvement of the respective assets. Leasehold improvements comprise primarily the capitalized office floor refurbishment costs (Note 11). (j) Intangible assets Intangible assets consist of computer software program and licenses. Intangible assets are measured at cost, less accumulated amortization and impairment losses. Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets not exceeding period of five years (Note 10). (k) Leasing transactions Assets acquired under finance lease agreements are capitalized at the inception of the lease at the fair value of the leased asset, which is the amount of cash consideration given for the leased asset. Lease payments are treated as comprising capital and interest elements; the capital element is treated as reducing the capitalized obligation under the lease and the interest element is charged to income. Depreciation on the leased asset is also charged to income on a straight-line basis over the useful life of the asset. Other leases are operating leases and are recognized in the income statement in the period they incur. (l) Impairment of assets At each reporting date, the Bank evaluates whether there is any impairment indication on the asset. When an indication of impairment exists, the Bank estimates the recoverable values of such assets. Impairment exists if the carrying value of an asset or a cash generating unit is greater than its recoverable amount which is the higher of value in use or fair value less costs to sell. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. An impairment loss is recognized immediately in the income statement. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or group of assets. An impairment loss recognized in prior periods for an asset is reversed if the subsequent increase in the asset s recoverable amount is caused by a specific event since the last impairment loss was recognized. Such a reversal amount cannot be higher than the previously recognized impairment and is recognized as income in the financial statements. 12

17 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (m) Financial liabilities Financial liabilities including deposits from banks are recognized initially at cost which represents their fair values. Subsequently, financial liabilities are stated at amortized cost, including transaction costs, and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the financial liability using the effective interest method (Note 13). (n) Taxation According to Article 12 of Headquarters Agreement dated 27 December 2006, within the scope of its official activities the Bank, its property, movable and immovable, assets income, of whatever nature such as interests, capital gains, currency gains, profits as well as its operations and transactions, purchase of goods and services shall be exempt from all present and future, direct and indirect taxation and duties, including but not limited to Value Added Tax ( VAT ), income tax, withholding tax, stamp duties, be it of a local or governmental nature. (o) Employee benefits i. Pension plan The Bank operates a pension plan implemented beginning from 1 October 2008, which includes first pillar as hybrid plan that is comprised of a defined benefit plan and defined contribution plan and second pillar as defined contribution plan. The expatriate employees are automatically enrolled in the first pillar whereas participation in the second pillar is at their will. The local employees can also opt for the Bank s pension plan voluntarily in lieu of Turkish State Social Security Plan. The requirements for the defined benefit part of the first pillar are attaining normal retirement age (which is 60 in accordance with the Pension Plan Policy), participating in the second pillar and transferring at least the amount equal to 90% of the first pillar account balance excluding the investment returns from the second pillar account to the first pillar account. If these requirements are met then the (participant) employee shall be entitled to the following benefits: Immediate pension equal to the amount of 1% of the annual average net basic salary of the employee during his/her eligible service period multiplied by number of years in service of the Bank; One twelfth of the immediate pension according to the previous paragraph that shall be paid to the employee every month. The benefit provided will be as a lump sum but with respect to the rates that are linked to the length of the eligible service period for an employee not fulfilling the requirements described above. In case of death before normal retirement age, the benefit will be provided to employee or his/her legal beneficiary as a lump sum up equal to the balance of employee s account. Similarly in case of death of an employee already drawing pension, the full amount of the standing balance will be paid as a lump sum to employee s legal beneficiary. 13

18 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The pension plan is funded by contributions from employees and by the Bank depending on the type of the plan and with respect to the provisions of the Bank s Pension Plan Policy. Contribution rates to the pension plan are as follows: Employer Employee Pension contributions % % First pillar 12 - Second pillar up to 7 (*) up to 7 (*) The Bank contributes to the second pillar if and only if employee contributes but at the same matching rate up to 7%. For the defined benefit part of the hybrid plan, the pension liability is calculated by using the projected unit credit method by an independent actuary annually. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees. The pension liability is measured at the present value of the estimated future cash outflows using interest rates of government securities that have terms to maturity approximately the terms of the related liability. All actuarial gains and losses are recognized in income over the average remaining service lives of the employees (Note 14). ii. Defined contribution plans The Bank also pays contributions to Turkish State Social Security Plan on a mandatory basis for the local employees who did not opt for the Bank s pension plan and pays contributions voluntarily to insurance plans (medical and life insurance) by third party organizations. Obligations for contributions to defined contribution plans are recognized as personnel expense in the income statement when they are due. The Bank has no further payment obligations once the contributions have been paid. iii. Reserve for employment termination benefits Provision for employment termination benefits represents the present value of the estimated total provision of the future probable obligation of entities arising from the retirement of the employees calculated in accordance with the Turkish Labor Law. In accordance with existing social legislation and Turkish Labor Law in Turkey, entities are required to make lump-sum termination indemnities to each employee whose employment is terminated due to retirement or for reasons other than resignation or misconduct and who has completed at least one year of service. Provision is made for the present value of the defined benefit obligation calculated using the projected unit credit method. However, because of being a multilateral development bank which is operative in different jurisdictions, the necessity of immunity from judicial proceedings has been recognized for the Bank by the Government of Turkey under the provision of the Article 4 of the Headquarters Agreement. Therefore these financial statements do not include any provision for employment termination benefit according to Turkish Labor Law. 14

19 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) iv. Annual leave pay liability The Bank provides annual leave pay provision for the employees under its employee Benefit System Policy. Full-time professional staff members are entitled to an annual leave of fifteen workdays per year with service of less than and including ten years and twenty workdays per year with service after ten years and more. New professional staff members will be eligible for annual leave after six months of service (Note 15). (p) Provisions, commitments and contingencies Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. The discount rate reflects current market assessments of the time value of money and the risks specific to the liability. The discount rate shall be a pre-tax rate and shall not reflect risks for which future cash flow estimates have been adjusted. Possible assets or obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Bank are not included in these financial statements and are treated as contingent assets or liabilities (Note 20). (q) Interest income and expense Interest income and expense are recognized in the income statement for all instruments measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts (Note 17). Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 15

20 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (r) Fee and commission income and expense Fees and commissions are generally recognized in the income statement on an accrual basis over the life of the transaction to which they refer or on a cash basis at the time the service is received / the transaction is performed, whichever is more appropriate. Other fees and commission income including commitment fees and front-end fees are recognized as the related services are performed. When a loan commitment is not expected to result in the drawdown of a loan, loan commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received (Note 18). (s) Share capital and dividends In accordance with Article 27 of the Agreement, the Board of Governors shall determine annually what part of the net income of the Bank from ordinary capital operations shall be allocated to reserves, provided that no part of the net income of the Bank shall be distributed to members by way of profit until the General Reserves of the Bank shall have attained the level of 25% of the subscribed capital (Note 16). (t) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents include cash and balances with banks repayable on demand and money market placements 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 (Note 5). (u) Offsetting Financial assets and liabilities are offset and the net amount is presented in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle liability simultaneously. (v) Segment reporting A reportable segment is a business segment or a geographical segment identified based on the foregoing definitions for which segment information is required to be disclosed. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. The Bank has chosen business segments as the Bank s primary segment reporting format. The Bank manages its business through two business units: Banking and Treasury (Note 21). 16

21 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (w) Earnings per share Since the Bank s shares are not traded in a public market and the Bank s financial statements are not filed or not in the process of filing with a securities commission or other regulatory organization for the purpose of issuing shares in a public market, the Bank is not required to disclose basic earnings per share (EPS) information in accordance with IAS 33 Earnings Per Share. (x) Comparatives Comparative figures are reclassified, where necessary, to conform to change, in presentation of the 31 December 2012 financial statements. NOTE 3 - CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on Management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. These disclosures supplement the commentary significant accounting policies (Note 2) and financial risk management (Note 4). Judgments that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances, The Bank reviews its loan portfolio to assess impairment on a continuous basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of loans before the decrease can be identified with an individual loan in that group. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Fair value of assets and liabilities, A number of the Bank s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Management has estimated that the fair value of certain financial instruments is not materially different than their carrying values due to their short term nature. - The fair value of loans and advances is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date. - The fair value of deposits from banks is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date. - The fair value of derivative financial instruments is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date. 17

22 NOTE 4 - FINANCIAL RISK MANAGEMENT The Bank is committed to actively identify and manage all risks inherent in its activities in order to support its objective and safeguard its capital base. The Bank pays particular attention to managing credit risks in the course of its core activities, market risks in its treasury as along with compliance and operational risks. The Bank s risk management policies are established for the identification and assessment of the risks, which the Bank may be exposed to and also to set appropriate risk limit controls for monitoring the same. The financial policies of the Bank approved by the Bank s Board of Directors establish the guiding principles for sound financial management and provide the framework within which the Bank pursues its mandate. The Board of Directors has established Asset and Liability Management Committee (ALCO) which is responsible for setting strategic direction in ALM risk management and establishes specific numerical limits, targets, and guidelines within which tactical and operational ALM decision-making must take place. Credit risk Credit risk is the risk of a financial loss to the Bank in case counterparty fails to meet its contractual obligations as they fall due and arises principally from the Bank s lending and treasury activities. In view of the Bank s philosophy of prudent lending, the function of credit risk management has become a critical fulcrum of the Bank s long term vision and success. Credit analysis is conducted using various information sources and applying qualitative and quantitative methodologies. The Bank reviews lending operations and manages the main areas of credit risk which are inherent to the lending activities of the Bank in order to ensure that decisions are made in line with the Bank s strategy and that loan applications are prudently reviewed. Lending decisions are made to customers by following guidelines laid down in various policies and through coordination with other business units to ensure that the loans are made in line with the Bank s overall risk appetite and strategy. All credit applications are evaluated by the Credit Committee which in case of approval elevates the same to the Board of Directors for final approval. In addition to internal compliance, the Bank s management also provides oversight and direction to the activities of risk management to ensure that the Bank s risk profile is in line with its strategy and the operating environment, in a manner which ensures protection to the shareholder. The Bank s maximum credit risk is the carrying amounts of each financial asset shown on the balance sheet. 18

23 NOTE 4 - FINANCIAL RISK MANAGEMENT (Continued) The Bank s exposure to credit risk as at 31 December 2013 and 2012 are as follows: Loans and advances to banks 332, ,254 Loans and advances to customers 88,670 89,932 Investment securities: Available-for-sale 21,793 1,729 Derivative financial instruments 1, Total 444, ,012 Financial assets that are past due but not impaired amount to EU 1,514 thousand (31 December 2012: None). Fixed assets are hypothecated as collateral against the past due financial asset. (i) Industry sectors: The following table breaks down the Bank s credit risk exposure by the industry sector and geographical location of the counterparty. Undrawn Undrawn Outstanding commitments Outstanding commitments Financial institutions 349, ,080 - Turkey (*) 258, ,891 - Iran (*) 39,153-75,563 - Pakistan 10,785-10,878 - Other (*) 41,321-5,748 - Sovereign, Municipal and Environmental infrastructure 51,899 29,414 31,871 27,354 Turkey 22,737-22,785 - Pakistan 12,129-6,509 - Iran 17,033 29,414 2,577 27,354 Manufacturing 30,854-50,267 - Iran 18,833-36,709 - Pakistan 12,021-13,558 - Turkey Power and energy 11,550-7,794 4,384 Pakistan 11,550-7,794 4,384 Turkey Iran Total 444,248 29, ,012 31,738 (*) The Money market placements with the banks in Turkey, Iran and other countries amount to EU 162,380 thousand, EU 29,717 thousand and EU 41,319 thousand respectively (31 December 2012: EU 224,288 thousand, EU 57,049 thousand and EU 5,745 thousand respectively). 19

24 NOTE 4 - FINANCIAL RISK MANAGEMENT (Continued) (ii) Geographical sectors: The following table breaks down geographical concentrations of the Bank s credit risk exposure. Undrawn Undrawn Outstanding commitments Outstanding commitments Turkey (*) 281, ,676 - Iran (*) 75,019 29, ,849 27,354 Pakistan 46,485-38,739 4,384 Other (*) 41,321-5,748 - Total 444,248 29, ,012 31,738 (*) The Money market placements with the banks in Turkey, Iran and other countries amount to EU 162,380 thousand, EU 29,717 thousand and EU 41,319 thousand respectively (31 December 2012: EU 224,288 thousand, EU 57,049 thousand and EU 5,745 thousand respectively). (iii) Segment analysis of credit risk exposures: The following table breaks down the segment distribution of credit risk exposures. Financial institutions-bank placements 234, ,360 Financial institutions-sme Support Program 85,158 53,299 Project finance 69,837 53,223 Investment securities: Available for sale 21,793 1,729 Corporate loans 18,833 36,709 Financial institutions-short Term Trade Finance 12,778 15,595 Derivative financial instruments 1, Total 444, ,012 Liquidity risk Liquidity risk is the risk that the Bank is unable to fund assets or to fulfill its financial obligations at a reasonable price as they become due. The management of the liquidity risk is concentrated on the timing of the cash in-flows and out-flows as well as in the adequacy of the available cash and liquidity securities. The Bank s commitment in maintaining strong liquidity position is established in policies that are approved by the Board of Directors. According to the ALCO approved procedures at all times, the Bank must have at its disposal a liquidity pool large enough to finance new assets or refinance existing assets. The Bank s liquidity is maintained at a minimum of 12% of the total equity minus total property and equipment and intangible assets plus long term borrowing with remaining maturity greater than six month. The Bank s liquid assets are maintained in short term placements. 20

25 NOTE 4 - FINANCIAL RISK MANAGEMENT (Continued) The table below analyses assets and liabilities of the Bank s into relevant maturity groupings based on the remaining period at balance sheet date to contractual maturity date: 31 December 2013 Up to 1 to 3 3 to 12 Over No 1 month Months Months 1 year maturity Total Assets Loans and advances to banks 66, ,029 35,731 69, ,720 Loans and advances to customers 2,246-27,076 59,348-88,670 Investment securities ,606-21,793 Derivative financial instruments ,065 Intangible assets Property and equipment ,101 10,101 Other assets Total assets 68, ,224 63, ,736 10, ,687 Liabilities Deposits from banks 22,592 92,936 9, ,566 Derivative financial instruments ,238 Retirement benefit obligations ,358 1,358 Other liabilities Total liabilities 23,518 93,405 9, , ,133 Net liquidity gap 45,410 68,819 54, ,197 8, , December 2012 Up to 1 to 3 3 to 12 Over No 1 month Months Months 1 year maturity Total Assets Loans and advances to banks 74, ,637 41,953 29, ,254 Loans and advances to customers ,907 49,668-89,932 Investment securities ,679-1,729 Derivative financial instruments Intangible assets Property and equipment Other assets Total assets 74, ,765 81,936 80, ,403 Liabilities Deposits from banks 24,352 99, ,706 Derivative financial instruments 961 1, ,096 Retirement benefit obligations ,067 1,067 Other liabilities Total liabilities 25, , , ,682 Net liquidity gap 49, ,223 81,527 80,492 (832) 320,721 21