CREDO BANKA D.D., SPLIT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 TOGETHER WITH INDEPENDENT AUDITOR S REPORT

Transcription

1 CREDO BANKA D.D., SPLIT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 TOGETHER WITH INDEPENDENT AUDITOR S REPORT

2 Contents Page Statement of the Management's Responsibility 1 Independent Auditor's Report 2-3 Statement of comprehensive income 4 Statement of financial position 5 Statement of Changes in Shareholders' Equity 6 Cash Flow Statement 7-8 Notes to the financial statements 9-72 Apendix I Apendix II Credo banka d.d., Split

3 Statement of the Management's Responsibility Pursuant to the Croatian Accounting Law in force, the Board is responsible for ensuring that financial statements are prepared for each financial year in accordance with statutory accounting requirements for banks in Croatia which give a true and fair view of the financial position and results of the Bank for that period. The Board has a reasonable expectation that the Bank has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Board continues to adopt the going concern basis in preparing the financial statements. In preparing those financial statements, the responsibilities of the Board include ensuring that: suitable accounting policies are selected and then applied consistently; judgements and estimates are reasonable and prudent; applicable accounting standards are followed, and the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business. The Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Bank and must also ensure that the financial statements comply with the Croatian Accounting Law in force. The Board is also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Management Board is responsible for the submission to the Supervisory Board of its annual report on the Bank together with the annual financial statements, following which the Supervisory Board is required to approve the annual financial statements for submission to the General Assembly of Shareholders for adoption. The financial statements set out on pages 4 to 72 were authorised by the Management Board on 31 March for issue to the Supervisory Board and are signed below to signify this. Šime Luketin President of the Management Board Mato Mišić Member of the Management Board Credo banka d.d. Zrinjsko Frankopanska Split Republic of Croatia Credo banka d.d., Split 1

4 Kalibović i partneri d.o.o. Maţuranićevo šetalište 69, Split, HR OIB: Ţiro račun: RBA Tel: +385 (0) , Fax: +385 (0) info@kalibovicipartneri.hr Url: INDEPENDENT AUDITOR`S REPORT To the Shareholders of Credo Banka d.d., Split: We have audited the accompanying financial statements of Credo banka d.d., Split (the "Bank"), which comprise the statement of financial position as at 31 December 2010, and the statement of comprehensive income, statement of changes in equity and cash flows statement for the year then ended, and a summary of significant accounting policies and other explanatory notes (as set out on pages 4 to 72). Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the the statutory accounting requirements for banks in the Republic of Croatia. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Bank s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 2

5 Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2010, and of its financial performance and cash flows for the year then ended in accordance with the statutory accounting requirements for banks in the Republic of Croatia. Other Legal and Regulatory Requirements In accordance with the By-law on the structure and content of the annual financial statements (National Gazette no 62/08) (hereinafter the By-Law), the Bank's management has prepared forms which are presented on pages 73 to 90, and which contain a balance sheet as at 31 December 2010, profit and loss account, statement of changes in equity and cash flow statement for the year then ended together with notes on reconciliation of the forms to the primary financial statements of the Bank. This financial information is the responsibility of the Bank's management and is, pursuant to statutory accounting requirements for banks in Croatia, not a required part of the financial statements, but is required by the Bylaw. This financial information presented in the forms has been properly derived from the primary financial statements, which were prepared in accordance with statutory accounting requirements for banks in Croatia as presented on pages 4 to 72, or are based on the underlying accounting records of the Bank. Kalibović i partneri d.o.o. Sonja Kalibović Maţuranićevo šetalište Split, Croatia Certified Auditor Split, 31 March

6 Statement of comprehensive income Notes Interest income 3 112, ,583 Interest expense 3 (68,789) (56,752) Net interest income 43,435 43,831 Fee and commission income 4 13,077 14,844 Fee and commission expense 4 (2,486) (2,679) Net fee and commission income 10,591 12,165 Net profits on financial operations 5 7,431 8,155 Other operating income 6 12,805 2,272 Other operating expenses 7 (44,264) (47,276) Provisions and impairment allowance 10 (25,362) (16,584) PROFIT BEFORE TAXATION 4,636 2,563 Income tax expense 11 (1,034) (653) NET PROFIT FOR THE YEAR 3,602 1,910 Other comprehensive income for the year, net of tax Net gains/(losses) on financial assets available for sale 6,860 (40) Other comprehensive income/(loss) for the year, net of tax 6,860 (40) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 10,462 1,870 EARNINGS PER SHARE (expressed in HRK per share) 12 12,00 6,37 These financial statements were authorised for issue on 31 March 2011 and signed on behalf of the Management Board by: Šime Luketin President of the Management Board Mato Mišić Member of the Management Board Credo banka d.d.,split 4

7 Statement of financial position as at 31 December 2010 Notes ASSETS Cash and balances with Croatian National Bank , ,120 Due from other banks ,573 58,333 Loans and receivables 15 1,223,299 1,085,149 Held-to-maturity investments 16 69,379 35,102 Available-for-sale financial assets 17 25,826 10,408 Financial assets at fair value through profit or loss 4 4 Tangible and intangible assets 18 6,278 21,932 Other assets 19 23,353 14,276 Total assets 1,740,647 1,445,324 LIABILITIES Amounts due to other banks 15,590 15,111 Amounts due to customers 20 1,321,706 1,061,918 Other borrowed funds , ,275 Issued hybrid instruments 22 61,756 24,744 Other liabilities 23 8,418 6,838 Provision for contingent liabilities 24 2,524 2,741 Total liabilities 1,597,689 1,312,627 SHAREHOLDERS' EQUITY Share capital , ,032 Treasury shares Retained earnings 27 5,512 1,910 Reserves 12,867 13,068 Fair value reserve 4,547 (2,313) Total shareholders' equity 142, ,697 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,740,647 1,445,324 CONTINGENCIES AND COMMITMENTS , ,922 These financial statements were authorised for issue on 31 March 2011 and signed on behalf of the Management Board by: Šime Luketin President of the Management Board Mato Mišić Member of the Management Board Credo banka d.d.,split 5

8 Statement of Changes in Shareholders' Equity Share capital Treasury shares Fair value reserve Reserves Retained earnings Total At 1 January Net profit for the year Other comprehensive income for the year, net of income tax Total comprehensive income for the year Dividends paid in respect of 2008 At 31 December ,032 - (2,273) 13,068 3, , ,910 1, (40) - - (40) - - (40) - 1,910 1, (3,401) (3,401) 120,032 - (2,313) 13,068 1, ,697 Net profit for the year Other comprehensive income for the year, net of income tax Total comprehensive income for the year Adjustments under Decision of the Tax Administration At 31 December ,910 1, , , ,860-3,602 10, (201) - (201) 120,032-4,547 12,867 5, ,958 These financial statements were authorised for issue on 31 March 2011 and signed on behalf of the Management Board by: Šime Luketin President of the Management Board Mato Mišić Member of the Management Board Credo banka d.d., Split 6

9 Statement of cash flows CASH FLOWS FROM OPERATING ACTIVITIES Notes Profit before taxation 4,636 2,563 Increase in provisions and impairment allowance 10 25,362 16,584 Decrease/(increase) in interest receivable (22,371) (2,444) Increase in interest payable17 7,234 2,167 Depreciation and amortisation 7,18 3,162 3,199 Net book value of disposed property and equipment - 33 Gains on sale of tangible fixed assets business building (10,822) - (Gain) on sale of foreclosed assets 6 - (114) Increase in assets at fair value through profit or loss (204) (126) Effects of exchange rate changes on cash and cash equivalents Operating result before changes in operating assets and liabilities 7,097 22,172 Changes in operating assets and liabilities Net (decrease) in amounts due to other banks 495 (1,080) Net increase in amounts due to customers ,333 70,853 Net (increase)/decrease in other assets (3,486) (1,653) Net (decrease)/increase in other liabilities (12) (2,479) Net increase in obligatory reserve with Croatian National Bank 13 (26,835) (3,317) Decrease / (increase) in deposits with financial institutions (4,823) 3,996 Increase in financial assets available for sale (7,095) (2,935) Net increase in loans and receivables (146,695) (146,755) Income taxes paid (148) (1,142) Net cash used in operating activities 70,831 (57,382) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (2,552) (2,029) Sale of property and equipment 25, Investment in subsidiary (20) (20) Purchase of held-to-maturity debt securities (34,642) 13,940 Sale of foreclosed assets (454) 824 Dividends on investments Net cash generated from / (used in) investing activities (11,589) 12,932 These financial statements were authorised for issue on 31 March 2011 and signed on behalf of the Management Board by: Šime Luketin President of the Management Board Mato Mišić Member of the Management Board Credo banka d.d., Split 7

10 Statement of cash flows (continued) Notes CASH FLOWS FROM FINANCING ACTIVITIES Net increase in other borrowed funds 21 (12,970) 51,357 Net increase in hybrid instruments 22 36,606 (5) Dividends paid - (3,401) Other (payments) from financing activities (121) - Net cash from financing activities 23,515 47,951 Effects of exchange rate changes on cash and cash equivalents (100) (309) Net increase in cash and cash equivalents 82,657 3,192 Cash and cash equivalents at beginning of year 180, ,277 Cash and cash equivalents at end of year , ,469 These financial statements were authorised for issue on 31 March 2011 and signed on behalf of the Management Board by: Šime Luketin President of the Management Board Mato Mišić Member of the Management Board Credo banka d.d., Split 8

11 Notes to the financial statements 1. GENERAL INFORMATION Credo banka d.d., Split ('the Bank') is incorporated in the Republic of Croatia and provides banking services to individual and corporate customers. It is registered at the Commercial Court in Split, with the subscribed share capital in the amount of HRK 120,032 thousand. The Bank's head office is in Split, Zrinjsko Frankopanska 58. The Bank's main areas of operation include all types of deposit and lending operations for corporate and retail customers, domestic and foreign payment operations, issuing of guarantees, backed bills and other types of guarantees, securities trading and other banking activities. Supervisory Board Boris Barać Mirko Vuković Draţen Bilić President Member Member Management Board Šime Luketin Mato Mišić President Member The shareholders of the Bank with a shareholding in excess of 3 % are as follows: % % Boris Barać Mirko Vuković Kvarner Wienna insurance group d.d Simag d.o.o Alkom d.o.o Marko Vuković Kapitalni fond d.d , Other small shareholders Operating income was substantially generated from the provision of banking services in Croatia. The Bank considers that its products and services arise from one segment of business, that is the provision of banking and related services. Credo banka d.d., Split 9

12 2. SIGNIFICANT ACCOUNTING POLICIES a) Statement of compliance The financial statements have been prepared in accordance with statutory accounting requirements for banks in Croatia. The Bank s operations are subject to the Credit Institutions Act and Banking Law (sections in force as at 31 December 2010), in accordance with which the Bank s financial reporting is regulated by the Croatian National Bank ( the CNB ) which is the central monitoring institution of the banking system in Croatia. These financial statements have been prepared in accordance with these banking regulations. The accounting regulations of the CNB are based on International Financial Reporting Standards ( IFRS ). The principal differences between the accounting regulations of the CNB and the recognition and measurement requirements of Croatian accounting regulations are as follows: - The CNB requires banks to recognise impairment losses, through the income statement, on financial assets not identified as impaired (including sovereign risk assets) excluding equity instruments classified as available for sale and assets carried at fair value through the income statement except for the fair value of embedded derivatives at prescribed rates. The Bank has made portfolio based provisions of HRK 16,940 thousand (2009: HRK 15,001 thousand) in compliance with these regulations and has recognised an expense of HRK 1,939 thousand in relation to these provisions within the charge for impairment losses for the year (2009: income of HRK 802 thousand). Although, in accordance with Croatian accounting regulations, such provisions should more properly be presented as an appropriation within equity, the Bank continues to recognise such provisions as a substitute for existing but unidentified impairment losses calculated in accordance with the requirements of Croatian accounting regulations. The Bank is in the process of compiling the observable historical data in respect of the unidentified losses existing in its various credit risk portfolios at the balance sheet date, determining the appropriate emergence period over which these losses come to light, and identifying, for each portfolio, the relevant current economic conditions with which the historical data should be adjusted, as a basis for estimating the extent of unidentified losses existing at the balance sheet date on the basis required by Croatian accounting regulations. - There is a delay in publishing and the effective application date of IFRS in the Republic of Croatia as described in note 2b. As the Bank is obliged to apply IFRS as published and effective in the Republic of Croatia, some further differences between IFRS and accounting regulations applicable to banks in Croatia may arise. Their expected effect (if material to the Bank) is described in note 2b. - The principal accounting policies applied in the preparation of these financial statements are summarised below. Where specific accounting policies are aligned with accounting principles set out in IFRS, reference may be made to certain IFRS in describing the accounting policies of the Bank; unless otherwise stated, these references are to IFRS applicable at 31 December Credo banka d.d., Split 10

13 2. SIGNIFICANT ACCOUNTING POLICIES (continued) b) Basis of preparation The financial statements are presented in the official currency of the Republic of Croatia, which is Croatian kuna (HRK), rounded up to the nearest thousand, unless stated otherwise. The financial statements for the year ended 31 December have been prepared under the historical cost convention, except for financial assets and financial liabilities carried at fair value in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The financial statements of the Bank have been prepared under the going-concern assumption. In the preparation of the financial statements, the directors make judgements, estimates and assumptions affecting the application of accounting policies and reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and their reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and various other factors that are considered to be prudent under the given circumstances and on the information available at the date of preparation of the financial statements, which represent the basis for making judgements about the value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. Estimates and the underlying assumptions are continuously reviewed. Changes in accounting estimates are recognised in the period in which the estimate has been revised if it affects only that period, or in the period of the change and future periods if it affects both the current and future periods. Judgements made by management in the application of applicable IFRS that have significant effects on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 3. The accounting policies have been consistently applied and are consistent with those used in the previous year. Adoption of new and revised International Financial Reporting Standards The accounting policies adopted are consistent with those of the previous financial year, except as follows: The Bank has adopted the following new and amended IFRS and IFRIC interpretations during the year. Credo banka d.d., Split 11

14 2. SIGNIFICANT ACCOUNTING POLICIES (continued) When the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the Bank, its impact is described below. IFRS 2 Share-based Payments IAS 1 Presentation of Financial Statements IAS 17 Leases IAS 34 Interim Financial Reporting IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IFRIC 9 Reassessment of Embedded Derivatives IFRIC 16 Hedge of a Net Investment in a Foreign Operation Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Bank s financial statements are listed below: IFRS 9 Financial Instruments On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets that must be applied from 1 January 2013, with early adoption permitted. On 28 October 2010 the IASB issued amendments to IFRS 9 to address the requirements for classifying and measuring financial liabilities. Most of the requirements were carried forward unchanged from IAS 39. However, some changes were made to the fair value option for financial liabilities to address the problem of own credit risk. This completed the first phase of the Board s project to replace IAS 39. In the subsequent phases, the IASB will address impairment methodology and hedge accounting. The completion of this project is expected in Bank is currently assessing the impact of adopting IFRS 9, however, since the impact of adoption depends on the assets held by the Bank at the date of adoption. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments On 26 November 2009, the IASB issued IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments which clarifies the requirements of International Financial Reporting Standards (IFRSs) when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept the entity s shares or other equity instruments to settle the financial liability fully or partially. The Interpretation is effective for annual periods beginning on or after 1 July 2010 with earlier application permitted. The Bank does not expect IFRIC 19 to have an impact on the financial position or performance of the Bank. Credo banka d.d., Split 12

15 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Standards issued but not yet effective (continued) Amendments to IAS 24 Related Party Disclosures (effective for financial years beginning on or after 1 January 2011) The amendments simplify the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. They also provide a partial exemption from the disclosure requirements for government-related entities. The implementation of these amendments will have no impact on the financial position or performance of the Bank. Amendments to IAS 32 Financial instruments: Presentation Classification of Rights issue (effective for financial years beginning on or after 1 February 2011) The amendments amend definition of a financial liability in order to classify rights issue (and certain options or warrants) as equity instruments in cases where such rights are given pro-rata to all of the existing owners of the same class of an entity s non-derivative equity instruments or to acquire a fixed number of the entity s own equity instruments for a fixed amount in any currency. This amendment will have no impact on the Bank after initial application. IAS 12 Income Taxes Amended IAS 12 includes a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale and a requirement that deferred tax on a non-depreciable assets, measured using the revaluation model in IAS 16, should always be measured on a sale basis. The amended standard is applicable for annual periods beginning on or after 1 January 2012 with earlier application permitted. The Bank does not expect that amended IAS 12 will have an impact on the financial statements of the Bank as the Bank currently does not have any investment property measured using the fair value model or non-depreciable asset which is measured using the revaluation model. IFRS 7 Financial Instruments: Disclosures In October 2010, the IASB issued Disclosures Transfers of Financial Assets (Amendments to IFRS 7). Entities are required to apply the amendments for annual periods beginning on or after 1 July The Bank expects IFRS 7 to have an impact on the disclosures in the financial statements. The Bank plans to adopt this amendment on its effective date. Credo banka d.d., Split 13

16 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Standards issued but not yet effective (continued) Improvements to IFRSs (issued in May 2010) The IASB issued improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective from annual periods on or after either 1 July 2010 or 1 January The amendments listed below, are considered to have a reasonable possible impact on the Bank: IFRS 3 Business combinations IFRS 7 Financial Instruments: Disclosures IAS 1 Presentation of Financial Statements IFRIC13 Customer Loyalty Programmes The Bank, however, expects no impact from the adoption of the amendments on its financial position or performance. c) Functional and presentation currency The Bank s financial statements are presented in Croatian kuna ( HRK ), which is the functional currency. Amounts are rounded to the nearest million (unless otherwise stated). The effective exchange rate as at 31 December 2010 was HRK 7, to EUR 1 (2009: HRK ) and HRK 5, to USD 1 (2009: HRK ). d) Changes in presentation or classification of items in the financial statements Comparative information has been classified consistently with current financial year amounts and other disclosures as no reclassifications were deemed necessary. Credo banka d.d., Split 14

17 2. SIGNIFICANT ACCOUNTING POLICIES (continued) e) Interest income and expense Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount. Interest income and expense includes amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing financial instruments and its amount on maturity, using the effective interest rate method. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts, including all fees paid or received constituting a part of the effective interest rate, transaction costs and other premium or discount, through the expected life of the financial asset, or, where appropriate, a shorter period. Income on debt instruments other than financial assets at fair value through profit or loss is recognised on an effective interest basis. Loan origination fees are deferred, together with the directly related costs, and recognised in the income statement as an adjustment to the effective yield on the loan over its useful life within the line "Interest income". f) Fee and commission income Fees and commissions consist mainly of fees for the services provided by the Bank and comprise mainly fees on domestic and foreign payments, fees for issuing guarantees and letters of credit, fees and commissions on exchange operations and other services provided by the Bank. Fee and commission income is recognised upon completion of services. g) Gains less losses from financial assets and liabilities at fair value through profit or loss Gains less losses from financial assets and liabilities at fair value through profit or loss include accrued interest and unrealised and realised fair value gains on debt securities and derivatives. Foreign exchange differences on financial assets and liabilities at fair value through profit or loss are presented within gains less losses from dealing in foreign currencies in the Income statement. Credo banka d.d., Split 15

18 2. SIGNIFICANT ACCOUNTING POLICIES (continued) h) Foreign currency translation Transactions denominated in foreign currencies are translated into HRK at the prevailing exchange rates on the date of the transaction. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Gains and losses arising on exchange are included in net profit or loss for the period. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Gains and losses on translation are included in the income statement for the period. i) Retirement benefit costs The Bank has no defined retirement benefit plans other than those within the state pension system of the Republic of Croatia. The Bank as employer has the obligation to calculate and pay a certain %age out of the current gross employee salaries as a pension insurance contribution. Pension insurance costs are charged to the income statement in the period in which the employees earn their salaries. The Bank has no obligation in respect of post-retirement benefits to its employees. j) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax, if any. The tax expense is based on taxable income for the year. Taxable income differs from net income as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Credo banka d.d., Split 16

19 2. SIGNIFICANT ACCOUNTING POLICIES (continued) j) Taxation The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement. The Bank is subject to various indirect taxes which are included in administrative expenses Tax returns are subject to tax audits by the Tax Authorities. Because the implementation of tax laws and regulations to different transactions is subject to various interpretations, the amounts disclosed in these financial statements may change on a later date, depending on the final findings of the Tax Authorities. k) Cash and cash equivalents For the purposes of cash flow statement, cash and cash equivalents comprise equivalents with maturities of up to 90 days, which include balances with the Croatian National Bank and on current accounts with other banks, including treasury bills. Cash and cash equivalents excludes the obligatory minimum reserves with the CNB as these funds are not available for the Bank s day-to-day operations. The obligatory reserve with the CNB is a required reserve to be held by all commercial banks licensed in Croatia. l) Financial assets and liabilities Financial assets held by the Bank are categorized into portfolios in accordance with the Bank s intent on the acquisition and pursuant to the Bank's investment strategy. Financial assets and liabilities are classified as Held to maturity, Available for sale', 'At fair value through profit or loss, or as Loans and receivables. The principal difference among the portfolios relates to the measurement of financial assets and the recognition of their fair values in the financial statements. All financial assets and liabilities are recognized and derecognized on a settlement date basis where the purchase or sale of financial asset or liability is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned. When a financial asset or financial liability is recognized initially, the Bank measures it at its fair value plus, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Credo banka d.d., Split 17

20 2. SIGNIFICANT ACCOUNTING POLICIES (continued) l) Financial assets and liabilities (continued) Held-to-maturity investments Investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity. This portfolio comprises bills of exchange and debt securities. Held-to-maturity investments are carried at amortized cost using the effective interest rate method, less any allowance for impairment. The Bank assesses on a regular basis whether there is any objective evidence that an investment held to maturity may be impaired. A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount which is equal to the present value of the expected future cash flows discounted at the financial instrument s original effective interest rate. The amount of the impairment loss for assets carried at amortized cost is calculated as the difference between the asset s carrying amount and the present value of the expected future cash flows discounted at the financial instrument s original effective interest rate. When an impairment of assets is identified, the Bank recognizes allowances through the profit and loss statement line Impairment allowance for losses on securities. Impairment losses are reversed in subsequent periods when an increase in the investment s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognized. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables or (b) held-to-maturity investments. This portfolio comprises equity and debt securities. Subsequent to initial recognition, available-for-sale financial assets are re-measured at fair value based on quoted prices or amounts derived from cash flow models. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of future cash flows and the fair value of unquoted equity instruments is estimated using applicable price/earnings or price / cash flow ratios refined to reflect specific circumstances of the issuer. For available-for-sale assets, unrealized gains and losses arising from changes in fair value are recognised directly in equity until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the profit or loss for the period. Credo banka d.d., Split 18

21 2.SIGNIFICANT ACCOUNTING POLICIES (continued) l) Financial assets and liabilities (continued) Impairment losses recognized in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognized in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. Interest earned whilst holding available-for-sale securities is accrued on a daily basis using the effective interest rate method and reported as Interest income in the income statement. Foreign exchange differences related to available-for-sale equity instruments held in foreign currency are reported together with fair value gains and losses in equity until the financial asset is sold. Foreign exchange differences related to available-for-sale debt instruments held in foreign currency are reported in income statements. Dividends on securities available for sale are recorded as declared and included as a receivable in the balance sheet line Other assets and in Net profit/(loss) on financial operations in the profit and loss statement. Upon payment of the dividend, the receivable is offset against the collected cash. Assets at fair value through profit or loss This portfolio of financial instruments acquired with the intent to sell them for the purpose of profit taking from short-term changes in prices. Investments are measured initially at fair value. Purchases of financial assets are recognised in the balance sheet at the settlement date, and any changes in the value of investments between the trade date and the settlement date are included in the net profit or loss for the period. Gains and losses on subsequent remeasurement at fair value are recognised in the income statement when they arise. Remeasurement at fair value is performed on a monthly basis. Sold assets are derecognised at the date of settlement by the counterparty. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest method, less any allowance for impairment. Loan origination fees are deferred (together with related direct costs) and recognized as an adjustment to the effective yield of the loan and as such adjust the interest income. Credo banka d.d., Split 19

22 2.SIGNIFICANT ACCOUNTING POLICIES (continued) l) Financial assets and liabilities (continued) If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. Objective evidence of impairment for financial assets assessed collectively for impairment are adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments) or national or local economic conditions that correlate with defaults on the assets in the group. When a loan is uncollectible, it is written off against the related allowance for impairment; subsequent recoveries are credited to the Provisions and impairment allowance line in the income statement. The Bank charges penalty interest to borrowers when a portion of the loan falls overdue. Penalty interest is accounted for on a cash received basis in the caption Interest income. Derivative financial instruments are initially recorded at cost and subsequently remeasured at their fair value. Fair values are principally obtained by reference to quoted market prices using discounted cash flow models and option pricing models as appropriate. Changes in the fair values of derivative financial instruments that do not qualify for hedge accounting are recognized in the profit and loss for the year in which they arise. All derivative instruments are reported in assets when their fair value is positive or in liabilities when their fair value is negative. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement. Most of the Bank's embedded derivatives arise from currency clauses embedded in loan agreements, which the Bank as lender uses as a hedge against devaluation of the local currency. l) Sale and repurchase agreements Securities sold under sale and repurchase agreements ( repos ) are presented in the financial statements as trading, held-to-maturity or other financial assets originated by the Bank, and the corresponding liability to the counterparty is included in 'Amounts due to other banks', 'Due to customers' or 'Other borrowed funds', as appropriate. Securities purchased under agreements to purchase and resell ( reverse repos ) are recorded as loans to other banks or customers, as appropriate. The difference between the purchase and repurchase price is treated as interest and recognised over the term of the repo deal using the effective yield method. Credo banka d.d., Split 20

23 2.SIGNIFICANT ACCOUNTING POLICIES (continued) m) Property and equipment Property and equipment are carried initially at cost less accumulated depreciation and accumulated impairment losses. Cost includes the purchase price and directly associated cost of bringing the asset to a working condition for its intended use. Maintenance and repairs, replacements and improvements of minor importance are expensed as incurred. Items of individual unit cost below HRK 2,000 are expensed at the time they are put into use. Significant improvements and replacement of assets are capitalised. Gains or losses on the retirement or disposal of fixed assets are included in the statement of income in the period they occur. Properties in the course of construction are carried at cost, less any recognised impairment loss. Depreciation of these assets, commences when the assets are ready for their intended use. Depreciation is calculated on a straight line basis based on the estimated useful lives of the applicable assets which are as follows: Buildings 40 years 40 years Computers and equipment 4 years 4 years Furniture 4-10 years 4-10 years Motor vehicles 5 years 4 years Other 4-10 years 4-10 years At each balance sheet date, the Bank reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. If the recoverable amount of an asset cannot be determined, the Bank estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the carrying amount of an item of property, equipment and other tangible assets exceeds its recoverable amount, it is reduced immediately to its recoverable amount. Credo banka d.d., Split 21

24 2.SIGNIFICANT ACCOUNTING POLICIES (continued) o) Intangible assets Intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation is provided on a straight-line basis to write down the cost of assets to their residual values over their estimated useful life. The estimated useful lives of intangible assets are as follows: Software 4 years 4 years Other intangible assets 5 years 5 years Costs incurred in order to restore or maintain the future economic benefits that the Bank can expect from the originally assessed standard of performance of existing software systems are recognised as an expense when the restoration or maintenance work is carried out. Costs incurred in order to enhance or extend the benefits of computer software programmes beyond their original specifications and lives are recognised as a capital improvement and added to the original cost of the software. r) Off-balance sheet contingencies and commitments In the ordinary course of business, the Bank enters into credit related commitments which are recorded in off-balance-sheet accounts and primarily include guarantees, letters of credit and undrawn loan commitments. Such financial commitments are recorded in the Bank s balance sheet if and when they become payable. The provision for possible commitments and contingent liabilities losses is maintained at a level Bank s management believes is adequate to absorb probable future losses. Management Board determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other relevant factors. s) Provisions Provisions are recognized when the Bank has a present obligation as a result of a past event, and it is probable that the Bank will be required to settle that obligation. The Management Board determines the adequacy of the provision based on the best estimate of outflows that will be required to settle the obligation. Provisions are discounted to present value where the effect is material. Credo banka d.d., Split 22

25 2.SIGNIFICANT ACCOUNTING POLICIES (continued) t) Share capital and treasury shares Dividends on ordinary shares are recognized in equity in the period in which they are declared. When the Bank purchases, or becomes entitled to purchase its share capital, the consideration paid, including all transaction costs less any taxes, is presented as a deduction from the total equity. Gains and losses on the sale of treasury shares are credited and charged, respectively, to treasury shares within equity. u) Fiduciary activities The Bank manages funds on behalf of legal entities and citizens, for which it charges service fees. As these funds do not represent the Bank s assets, they have not been included in the balance sheet (see Note 29). v) Regulatory requirements The Bank is subject to the regulatory requirements of the Croatian National Bank. These regulations include limits and other restrictions pertaining to minimum capital adequacy requirements, classification of loans and off-balance sheet commitments and forming allowances to cover credit risk, liquidity, interest rate and foreign currency position. At the year-end, the Bank was substantially in compliance with all regulatory requirements. z) Significant accounting estimates and judgements The Bank makes estimates and assumptions about uncertain events, including estimates and assumptions about the future. Such accounting assumptions and estimates are regularly evaluated, and are based on historical experience and other factors such as the expected flow of future events that can be rationally assumed in existing circumstances, but nevertheless necessarily represent sources of estimation uncertainty. The estimation of impairment losses in the Bank s credit risk portfolio represents the major source of estimation uncertainty. This and other key sources of estimation uncertainty, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The significant judgements made in determining the most appropriate methodology for estimating the fair value of financial instruments carried at fair value are also described below. Credo banka d.d., Split 23

26 2.SIGNIFICANT ACCOUNTING POLICIES (continued) z) Significant accounting estimates and judgements (continued) The Bank monitors the creditworthiness of its customers on an ongoing basis. In accordance with the CNB regulations, the need for impairment of the Bank s on- and off-balance-sheet credit risk exposure is assessed at least quarterly. Impairment losses are made mainly against the carrying value of loans and advances to corporate and retail customers (summarised in Note 10), and as provisions for liabilities and charges arising from offbalance-sheet risk exposure to customers, mainly in the form of guarantees and documentary letters of credit (summarised in Notes 24 and 25). Impairment losses are also considered for credit risk exposures to banks, and for other assets not carried at fair value, where the primary risk of impairment is not credit risk. The Bank first assesses whether objective evidence of impairment exists individually for assets that are individually significant (mainly corporate exposures) and collectively for assets that are not individually significant (mainly retail exposures). However, assets assessed individually as unimpaired are then included in groups of assets with similar credit risk characteristics. These portfolios are then assessed collectively for impairment. The Bank estimates impairment losses in cases where it judges that the observable data indicates the likelihood of a measurable decrease in the estimated future cash flows of the asset or portfolio of assets. Such evidence includes delinquency in payments or other indications of financial difficulty of borrowers, and adverse changes in the economic conditions in which borrowers operate or in the value or enforceability of security, where these changes can be correlated with defaults. The Bank takes into consideration the combined effect of several events when assessing impairment and uses its experienced judgement in cases where the observable data required to estimate impairment is limited. In estimating impairment losses on items individually or collectively assessed as impaired, the Bank also has regard to the ranges of impairment loss prescribed by the CNB based on the age of overdue amounts. Credo banka d.d., Split 24