KULSKA BANKA a.d. NOVI SAD IFRS FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006

Transcription

1 KULSKA BANKA a.d. NOVI SAD IFRS FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006

2 Page(s) Independent Auditor s Report 1 Income Statement 2 Balance Sheet 3 Statement of Changes in Equity 4 Cash Flow Statement 5 Notes to the Financial Statements 7-39

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4 INCOME STATEMENT (all amounts expressed in thousands of RSD) Note Interest income 5 1,909,385 1,595,078 Interest expense 5 (479,913) (269,756) Net interest income 1,429,472 1,325,322 Fee and commission income 6 485, ,431 Fee and commission expense 6 (65,251) (46,818) Net fee and commission income 420, ,613 Dividend income 6,101 3,059 Foreign exchange gains, net 7 57, ,223 Gains less losses from investment securities ,843 6,922 Other operating income 8 158, ,796 Operating income, net 2,261,269 2,074,935 Provision for impairment of loans and other assets, net 9 24,625 1,017,446 Operating expenses 10 (1,781,345) (899,077) Losses from associates - (9,690) Profit before taxation 504,549 2,183,614 Income taxes 11 (38,731) (132,306) Net profit for the period 465,818 2,051,308 2

5 BALANCE SHEET 3

6 STATEMENT OF CHANGES IN EQITY (all amounts expressed in thousands of RSD) Balance as of Ordinary shares Preference shares Treasury shares Statutory reserves Revaluation surplus Retained earnings 01-Jan-05 3,035,846 1,268, , , ,632 5,127,811 Acquisition of treasury shares - - (152,097) (152,097) Dividends paid (153,377) (153,377) Fair value adjustments of securities available for sale , ,417 Reversal of impairment of available for sale equity shares 29,619 29,619 Transfer to statutory reserves ,491 - (46,491) - Profit for the year ,051,308 2,051,308 Balance as of Dec-05 3,035,846 1,268,976 (152,097) 162, ,912 2,330,072 7,011,681 Total Disposal of treasury shares , ,097 Acquisition of treasury shares - - (244,029) (244,029) Dividends paid (449,278) (449,278) Transfer of treasury shares dividends ,003-15,003 Treasury shares dividends ,656 - (15,656) - Impairment of available for sale investments (29,619) (29,619) Disposal of Available for sale securities (108,417) - (108,417) Profit for the year , ,818 Balance as of Dec-05 3,035,846 1,268,976 (244,029) 193, ,876 2,330,956 6,813,256 4

7 CASH FLOW STATEMENT (all amounts expressed in thousands of RSD) Note Profit before taxation 504,572 2,183,614 Adjustments for reconciling income before tax charges to net cash provided by operating activities: (Gains) / losses from translation of foreign (57,060) (174,223) Bad and doubtful debt expense 20,081 (1,006,082) Depreciation and amortization charge 86,244 69,651 Disposals of property and equipment 26,221 4,103 Losses from associates - 9,690 Gains from investment securities 189,843 6,922 Changes in the fair value of embedded derivatives - (143,187) Profit before changes in operating assets and liabilities 769, ,488 (Increase) / decrease in operating assets Amounts due from other banks (744,195) 113,759 Trading securities (2,861) 8,604 Loans and advances to customers (2,670,405) (1,243,101) Other assets 130,831 (218,750) Increase / (decrease) in operating liabilities Due to other banks 623,435 (310,672) Due to customers 7,843, ,922 Other deposits 725 1,291 Other borrowed funds, excluding preferential shares 3,685, ,434 Other liabilities 139,204 85,267 Net cash provided from operating activities 9,775,267 71,242 Investing activities Disposal / (purchase) of non-trading securities 223,786 (234,511) Investment in subsidiary (6,423) (6,892) Investment in associates - 299,712 Purchase of property and equipment (226,827) (170,003) Net cash used in investing activities (9,464) (111,694) Financing activities Dividends paid (449,278) (153,377) Net cash used in financial activities (449,278) (153,377) 5

8 CASH FLOW STATEMENT (all amounts expressed in thousands of RSD) Note Net (decrease) / increase in cash and cash equivalents 9,316,525 (193,829) Cash and cash equivalents at beginning of period 2,303,151 2,496,980 Cash and cash equivalents at the end of period 28 11,619,676 2,303,151 6

9 1. CORPORATE INFORMATION (hereinafter referred to as: The Bank ) was founded in 1995 and registered in the Court Register by Decision No. Fi-488/95. The National Bank of Yugoslavia issued a license to the Bank for performing payment and credit operations abroad in During 2006 the principal activities of the Bank were loan activities in the local market, international payment transactions, foreign exchange business, and issue of guarantees for customers. The Bank serves mainly large companies in the Province of Vojvodina and other companies and organizations operating in the Republic of Serbia. The Bank has 8 main branch offices, 14 sub-branches and 25 business units in other cities of Serbia. The Bank employed 486 employees as of 31 December 2005 (2005: 409 employees). The financial statements of the Bank for the year ended December 31, 2006 were authorized for issue in accordance with a resolution of the Board of Directors dated 27 February CAPITAL ADEQUACY At 31 December 2006 and 2005, the Bank was in compliance with the Capital Adequacy Rules, prescribed by the National Bank of Serbia. 3. BASIS OF PREPARATION These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the IASB, and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect. The Bank maintains its records and prepares its financial statements in Republic of Serbian Dinars (RSD), which is the Bank's functional and reporting currency. The financial statements of the Bank are stated in thousands of RSD. The financial statements of the Bank have been prepared under the historical cost convention, except for investment properties which are stated at fair value. The Bank has applied accounting policies explained in Note 4 in the preparation of financial statements. 7

10 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 4.1. Income and expenses recognition Interest income and expenses and other operating income and expenses are recognized on an accrual basis. Interest income and expenses are recognized for all interest bearing financial instruments. The Bank suspends the interest calculation on all loans that are presented at court or in case of financial difficulty of a borrower. Fees receivable and payable are deferred over the duration of the transaction on which they have incurred. Fees and commissions consist mainly of fees for international payments, guarantees given and other Bank services. Loan origination fees are deferred and amortized to interest earned on loans and advances over the life of the loan using the effective interest rate method Foreign currency translation Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets, liabilities and the share capital denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the income statement Cash and cash equivalents Cash and cash equivalents comprise balances with maturities of less than 90 days from the date of acquisition including: cash and balances with National Bank of Serbia, treasury bills and other eligible bills and amounts due from other banks. For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, overnight placements with National Bank of Seria and Due from other banks with maturities of less than 90 days (Note 28) Regular way purchases and sales of financial assets All regular way purchases and sales of financial assets are recognized on the settlement date, i.e. the date the asset is delivered to the counterparty. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. 8

11 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 4.5. Loans and impairment All loans and advances are recognized when cash is advanced to borrowers. Loans are stated at the principal amount outstanding, net of any amounts written off and specific provisions for loan impairment. Impairment is established if there is objective evidence that the Bank will be unable to collect all amounts due on a loan or other advance according to the original contractual term. Impairment is measured as a difference between the carrying amount and the estimated recoverable amount, being the present value of expected future cash flows. Credit losses are evaluated at a individual level. Individual credit exposures are evaluated based upon the borrower s character, overall financial condition, resources and repayment records; the prospects for support from any creditworthy guarantors and where applicable the realizable value of any collateral. A write off is made when all or part of a claim is deemed uncollectible. Write offs are charged against previously established provisions for credit losses or directly to bad debt expense in the income statement and reduce the principal amount of a claim. Recoveries in part or in full of amounts previously written off are credited to the income statement. 9

12 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 4.6. Non-trading securities Non-trading securities are classified as held to maturity and available for sale. All investments are initially recognized at cost, being the fair value of the consideration given including acquisition costs. Premiums and discounts on non-trading investments are amortized using the effective interest rate method and recognized in interest income. Held-to-maturity Investments that are intended to be held-to-maturity, such as treasury bills, debt securities, discounted bills and foreign currency bonds arising on foreign currency public savings, are subsequently measured at amortized cost less any provision for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity. The amount of the impairment loss for investments held to maturity is calculated as the difference between the investments carrying amount and the present value of expected future cash flows discounted at the investment s original effective interest rate. Available-for-sale 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, exchange rates or equity prices are classified as available-for-sale. After initial measurement, available-for-sale investments are measured at fair value. Unrealised gains and losses from charges in fair value are recognised directly in equity in the Revaluation reserve. If fair value cannot be measured reliably available-for-sale investments are presented in the balance sheet at cost. Interest earned whilst holding investment securities is recognized in interest income. Dividends are recognized when shareholders right to receive payment is established Trading securities All investments are initially recognized at cost, being the fair value of the consideration given. After initial recognition, investments which are classified as held for trading are measured at fair value. Gains or losses on investments held for trading are recognized in income. 10

13 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 4.8. Investments in subsidiaries The investments in subsidiaries are measured at cost less any impairment in value. Bank prepares consolidated financial statements Investment in associates The Bank s investments in its associates are measured at cost less any impairment in value. Associates are entities in which the Bank has significant influence and which are neither subsidiaries nor joint ventures of the Bank. Impairment loss is estimated based on Bank's share of the present value of the estimated future cash flows expected to be generated by the investee as a whole, including the cash flows from the operations of the investee and the proceeds on the ultimate disposal of the investment Property, equipment and intangible assets Buildings are measured at fair value less accumulated depreciation and any impairment in value. Valuations are carried out periodically by independent qualified valuers on the basis at current market values. Management of the Bank annually considers if there are indications of significant changes in value of property. Construction land beneath the buildings of the Bank is owned by the state. The fees for usage of the construction land is payable on the monthly basis to the state. Property and equipment are initially recorded at the original purchase cost and until year 2003 they were subsequently restated from the date of the purchase of each item to the balance sheet date, using the general price index. The depreciation and amortization charge for the period is calculated on the basis of the restated amounts of property and equipment. Opening accumulated depreciation and amortization were also restated. Intangible assets comprise of computer software. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of all assets as follows: Computer software Buildings Computers and IT equipment Furniture and other equipment 5 years 77 years 5 years 4 to 15 years Assets under construction are not depreciated. Depreciation on these assets will begin when the related assets are placed in service. Repairs and maintenance costs are charged to the income statement when incurred. 11

14 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Assets held for resale Foreclosed property acquired in debt satisfaction and assets obtained from joint ventures is defined as Property held for resale and disclosed in Other assets. Such property is carried at their fair value Finance lease - Bank as a lessee Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term Ordinary shares Ordinary shares are initially recorded at the original nominal value and subsequently restated using the general price index from the date of issuance to the balance sheet date for all the years for which the Serbian economy met the definition of a hyperinflationary economy under IAS 29. Dividends on ordinary shares are recognized as a liability when they are formally declared Preference shares Preference shares which are not redeemable but convertible at the option of the Bank, are classified as equity. Preference shares are initially recorded at the original nominal value and till year 2003 were subsequently restated using the general price index from the date of the issuance to the balance sheet date Administrated Business Operations in the Name and on Behalf of Third Parties Assets and income arising from administrated business operations, where the Bank acts in a fiduciary capacity such as nominee, trustee or agent, are excluded from the financial statements. The Bank does not charge fee for these business operations carried out in the name and on behalf of third parties (Note 31). 12

15 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Current income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Deferred tax Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where a deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilized, except: where a deferred income tax asset relating to a deductible temporary difference arises from the initial recognition of and asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income 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 deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. 13

16 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes (continued) Deferred tax (continued) Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority Pensions and other post-employment benefits Short-term employee benefits The Bank makes contributions to the Government s health, retirement benefit and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. The cost of social security payments is charged to the statement of income in the same period as the related salary cost. There is no additional liability for these plans. Post employment and other long-term employee benefits In accordance with the Labor Law, there is mandatory one-off retirement compensation equal to 3 gross monthly salaries, based on the country average salary earned in the month prior to retirement. The retirement compensation is payable by the last employer of retiree. The Bank has internally performed valuation to determine the present value of this liability resulting with recognition of the provision for this liability has been made in the accompanying financial statements. Any gains and losses arising from the changes in the assessed amounts are taken to income statement Derivatives The only derivatives used by the Bank are foreign currency options and interest rate options used to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are stated at fair value. These derivatives that do not qualify for special hedge accounting, therefore any gains or losses arising from changes in fair value are taken directly to net profit or loss for the period. 14

17 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Standards, interpretations and amendments to published standards that are not yet effective Effect on new standards and interpretations: The IASB such as the Interpretations Committee have issued a range of new accounting standards and interpretations. The new I.F.R.S. and the I.F.R.I.C. concern accounting periods beginning after 1st January The management s estimation in relation with the effect of the new standards and interpretations is as follows: IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements Capital Disclosures (effective for financial years beginning on or after 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity s capital and how it manages capital. The Bank assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital. IFRS 8, Operating Segments (effective for financial years beginning on or after 1 January 2009). IFRS 8 replaces IAS 14 Segment Reporting and adopts a management approach to segment reporting. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. This information may be different from that reported in the balance sheet and income statement and entities will need to provide explanations and reconciliations of the differences. The Bank is a non-listed entity therefore IFRS 8 is not mandatory. IFRIC 7, Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (effective for financial years beginning on or after 1 March 2006). IFRIC 7 requires entities to apply IAS 29 Financial Reporting in Hyper-inflationary Economies in the reporting period in which an entity first identifies the existence of hyperinflation in the economy of its functional currency as if the economy had always been hyperinflationary. IFRIC 7 is not relevant to the Bank s operations. IFRIC 8, Scope of IFRS 2 (effective for financial years beginning on or after 1 May 2006). IFRIC 8 clarifies that IFRS 2 Share-based payment will apply to any arrangement when equity instruments are granted or liabilities (based on the value of an entity s equity instrument) are incurred by an entity, when the identifiable consideration appears to be less that the fair value of the instruments given. IFRIC 8 is not relevant to the Bank s operations. IFRIC 9, Reassessment of Embedded Derivatives (effective for financial years beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether a contract contains an embedded derivative at the date an entity first becomes a party to the contract and prohibits reassessment unless there is a change to the contract that significantly modifies the cash flows. IFRIC 9 is not relevant to the Bank s operations. 15

18 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Standards, interpretations and amendments to published standards that are not yet effective (Continued) IFRIC 10, Interim Financial Reporting and Impairment (effective for financial years beginning on or after 1 November 2006). This Interpretation may impact the financial statements should any impairment losses be recognised in the interim financial statements in relation to available for sale investments as these may not be reversed in later interim periods or when preparing the annual financial statements. IFRIC 11, IFRS 2-Group and Treasury Share Transactions (effective for financial years beginning on or after 1 March 2007). This Interpretation requires arrangements whereby an employee is granted rights to an entity s equity instruments to be accounted for as an equity-settled scheme by an entity even if the entity chooses or is required to buy those equity instruments from another party, or the shareholders of the entity provide the equity instruments needed. The Interpretation also extends to the way in which subsidiaries, in their separate financial statements, account for schemes when their employees receive rights to equity instruments of the parent. IFRIC 11 is not relevant to the Bank s operations. IFRIC 12, Service Concession Arrangements (effective for financial years beginning on or after 1 January 2008). The interpretation outlines an approach to account for contractual arrangements arising from entities providing public services. It provides for the operator should not account for the infrastructure as property, plant and equipment, but recognize a financial asset and / or an intangible asset. IFRIC 12 is not relevant to the Bank s operations. 16

19 5. NET INTEREST INCOME Interest income Cash and short-term funds 140, ,560 Trading securities 59,327 58,498 Loans and advances 1,709,520 1,410,020 1,909,385 1,595,078 Interest expense Banks 75,417 98,995 Customers 404, , , ,756 Net interest income 1,429,472 1,325, NET FEE AND COMMISSION INCOME Fee and commission income Money transfer operations 240, ,488 Fees on off-balance sheet items 130,862 50,537 Other commission income 114,155 63, , ,431 Fee and commission expense Money transfer operations 29,623 37,937 Other fees and commission expense 35,628 8,881 65,251 46,818 Net fee and commission income 420, , FOREIGN EXCHANGE GAINS, NET Foreign exchange gains from: - trading with foreign currencies 78,140 59,793 - foreign exchange operations 16,512 5,377 - translation of foreign currency assets and liabilities, net (37,592) 109,053 Foreign exchange gains, net 57, ,223 17

20 8. OTHER OPERATING INCOME Refund of consultant and other expenses 123, ,187 Gains on sale of assets held for sale - 37,761 Rents 5,101 2,854 Other operating income 29,776 44,051 Total other operating income 158, , PROVISION FOR IMPAIRMENT OF LOANS AND OTHER ASSETS Provision (charges) / reversal for bad and doubtful loans (Note 14) (30,473) 477,046 Impairment reversals for other assets (Note 19) 132, ,444 Impairment (charges) for non-trading investments (Note 15c) (19,604) - Impairment charges for investments in associates (Note 17) - 1,176 Impairment reversals / (charges) for amounts due from banks (Note 13) 40,533 (49,659) Provision for off-balance sheet items (Note 29) (98,140) 329,289 Other Total provision for impairment of loans and other assets 20,081 1,006,082 18

21 10. OPERATING EXPENSES Bonuses paid to employees 464,933 36,843 Staff cost 379, ,519 Professional services 198,082 48,188 Losses from changes in value of loans in dinars linked to foreign currency 130,982 - Depreciation and amortization (Note 18) 86,244 69,651 Safeguard services 63,313 38,000 Charitable contributions 67,715 50,101 Mail and telecommunication 58,746 38,953 Rent 46,057 32,910 Advertising 43,386 34,213 Materials expenses 40,239 29,092 Donations 29,414 16,763 Tax expenses 19,054 33,852 Securities mark to market losses 15,898 35,015 Court fees 11,914 8,864 Value added tax - 16,755 Provision charges for one-off retirement compensations (Note 23) 4,347 11,364 Indexed RSD deposits losses - 51,180 Losses on revaluation of trading securities Other expenses 121,318 66,813 Total operating expenses 1,781, , INCOME TAX The components of the provision for income tax and 2005 are as follows: Current tax 173,848 - Deferred tax (Note 25) (135,117) 132,306 Total income tax expense 38, ,306 The schedule below shows the reconciliation between the accounting profit and the actual tax expense for the year: Profit from operating activities before income tax 504,549 2,183,614 Tax at statutory income tax rate of 10% 50, ,361 Tax on expenditure not allowable for income tax purposes 46,778 16,772 Tax on income not allowable for income tax purposes (58,502) (102,827) At effective interest tax rate of 8% 38, ,306 Effective tax rate 8% 6% 19

22 12. CASH AND BALANCES WITH CENTRAL BANK Cash in hand 1,544, ,268 Balances with National Bank of Serbia with less than 90 days maturity: - obligatory reserve 2,794, ,291 - overnight deposits with National Bank of Serbia - 160,000 Included in cash and cash equivalents (Note 28) 4,338,774 1,673,559 Other placements with National Bank of Serbia 5,531,164 35,420 Total cash and balances with central bank 9,869,938 1,708,979 Cash includes cash held on giro account, obligatory reserve in RSD, foreign currency cash held in the Bank s vault and petty cash. These amounts are available for use in the Bank s day-to-day operations. The obligatory reserves were set-aside in line with the National Bank of Serbia s Decision on Banks Obligatory Reserves Held with the National Bank of Serbia (Official Gazette of RS, nos. 116/2006 and 3/2007), which prescribes that banks calculate the obligatory reserve in RSD in amount equal to 10% (2005: 18%) of the average daily balance of prescribed deposits in RSD during one month. Apart from this, banks have the obligation to include in the required reserve in RSD 45% (2005: 38%) of the average daily balance of deposits in RSD in the previous month that are indexed with foreign currency clause. In the accounting period, the Bank is obligated to maintain average daily balance of the appropriated obligatory reserve in RSD on its gyro-account. Calculated obligatory reserve in dinars for December 2006 amounted to 744,656 thousand RSD (2005: 461,621 thousand RSD). On 31 December 2006, the Bank had balance on its assets above the amount of the calculated required reserve in RSD on its gyro-account. Obligatory reserve in RSD bears interest rate of 2.5% p.a. Other placements with National Bank of Serbia relate to liquidity suprlus deposit placed with the National Bank of Serbia on the dayly basis with annual interest rate of 2.97%. 20

23 13. DUE FROM OTHER BANKS Foreign currency account 68, ,970 Short term deposits in foreign currency 1,711, ,681 Included in cash and cash equivalents (Note 28) 1,780, ,651 Loans and advances to other banks with over than 90 days maturity 308, ,508 Long term deposits with banks in bankruptcy 208, ,600 Due from other banks, gross 2,297,421 1,593,759 Less: Impairment (211,284) (251,817) Due from other banks, net 2,086,137 1,341,942 The movements in the provision against amounts due from banks during the year were as follows: Balance as at 1 January 251, ,158 Impairment (reversals) / charges (Note 9) (40,533) 49,659 Balance as at 31 December 211, ,817 The placements with banks bear average effective interest rate of 13.87% p.a. 14. LOANS AND ADVANCES TO CUSTOMERS Loans to corporate customers 9,683,250 7,231,808 Loans to other entities 41, Receivables for paid provided guarantees 200, ,998 Loans to individuals 1,342, ,085 Gross loans and advances 11,268,274 8,003,241 Less: Impairment (1,186,044) (1,155,571) Loans and advances to customers, net 10,082,230 6,847,670 Loans and advances to customers bear average variable effective interest rate of 22.76% p.a. The movements in provisions for bad and doubtful loans are as follows: Balance as at 1 January 1,155,571 1,639,493 Impairment charges / (reversals) (Note 9) 30,473 (477,046) Foreign exchange losses - (5,826) Write-off of amounts previously provided - (1,050) Balance as at 31 December 1,186,044 1,155,571 21

24 14. LOANS AND ADVANCES TO CUSTOMERS (Continued) The maturity of the loan portfolio is analyzed as follows: Loans and advances in arrears 2,117,340 1,579,930 Up to one year 6,140,178 5,455,492 Over one year 3,010, ,819 Gross loans and advances 11,268,274 8,003,241 The loans in arrears are analyzed as follows: Up to two months 678,562 1,058,548 Between two and six months 202, ,597 Between six months and one year 243, ,590 Over one year 992, ,195 Total loans in arrears 2,117,340 1,579,930 The loan portfolio is concentrated in the following sectors: Industrial 3,625,471 2,971,068 Agricultural 1,486, ,468 Trading 3,312,247 2,396,715 Construction 1,056, ,461 Tourism 461, ,191 Transport 60, ,505 Citizens 64,722 58,130 Other 1,265, ,703 Gross loans and advances 11,268,274 8,003, NON-TRADING SECURITIES Available for sale 455, ,865 Held to maturity 237, , , ,796 Less: Impairment (298,506) (249,283) Total non-trading securities 394, ,513 22

25 15. NON-TRADING SECURITIES (Continued) a) Non-trading investments comprise of the following securities: (all amounts expressed in thousands of RSD) Held to maturity Available for sale Total Held to maturity Available for sale Total Quoted investments Equity shares ,331 - Quoted investments, net Unquoted investments Equity shares - 455, , , ,534 Debt securities 1,640-1,640 1,740-1,740 Discounted bills 235, , , , , , ,465 Less: Impairment (18,505) (280,001) (298,506) - (249,283) (249,283) Unquoted investments, net 218, , , , , ,182 Non trading securities, gross 237, , , , , ,796 Less: impairment (18,505) (280,001) (298,506) - (249,283) (249,283) Non trading securities, net 218, , , , , ,513 The Bank has sold its investments in shares of AIK Banka a.d. Nis and Centrobanka a.d. Beograd that were classified as available for sale in amount of RSD 169,331 thousand. Investments in shares of aforementioned banks were sold for RSD 358,092 thousand resulting with the net gain of RSD 188,761 thousand (Note 26) disclosed as gains less losses from investment securities. b) The movements in the available for sale investments during the year were as follows: (all amounts expressed in thousands of RSD) Gross Balance as at 1 January 624,865 Change in fair value - Disposal of equity shares (169,331) Additional investments 364 Balance as at 31 December 455,898 c) The movements in the provision for non-trading securities were as follows: Balance as at 1 January 249, ,271 Impairment (reversals) / charges to revaluation reserves 29,619 (29,619) Impairment charges / (reversals) (Note 9) 19,604 - Disposal of equity shares - (24,974) Other - 10,605 Balance as at 31 December 298, ,283 23

26 16. INVESTMENTS IN SUBSIDIARIES The Bank has interest in the following entities: (all amounts expressed in thousands of RSD) 2006 % of share 2005 % of share KBK Commerce d.o.o. Novi Sad 51, % 51, % KB Leasing d.o.o. Novi Sad 10, % 10, % Mlekara Han d.o.o. Vladičin Han 153, % 150, % KB NS Investment d.o.o. Novi Sad 152, % - - Total investments in subsidiaries 367, , INVESTMENTS IN ASSOCIATES The Bank holds 20% to 50% of the voting shares or exercises significant influence over following enterprises: % of share RG Ečka d.o.o. Ečka % KBK Broker d.o.o. Beograd 15,050 15, % Komgrad a.d., Subotica 50,604 50, % Total investments in associates 65,654 65,654 Movements in investments in associates are summarized in the following table: Balance at 1 January 65, ,880 (Disposal) / New investment - (299,712) Share of result - (9,690) Impairment (Note 9) - 1,176 Balance at 31 December 65,654 65,654 24

27 18. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (all amounts expressed in thousands of RSD) Buildings Equipment Equipment under finance lease In course of construction Intangible assets Total Balance as of 31-Dec , ,043 11, ,879 47,964 1,534,763 Additions 5,857 85,908 2, ,852 2, ,827 Transfers (from) / to intangible assets (17,190) 17,190 - Transfers (from) / to intangible assets (110) - Transfers 69,201 49,128 - (118,329) - - Disposals - (14,784) - (17,391) - (32,175) Balance as of 31-Dec-06 1,063, ,295 14, ,821 67,261 1,729,415 Accumulated depreciation and amortization Balance as of 31-Dec-05 17, ,373 2,677-24, ,595 Adjustments Charge for the year (Note 9) 17,801 51,947 2,061 8,132 6,303 86,244 Disposals - (5,954) - - (5,954) Balance as of 31-Dec-06 35, ,367 4,738 8,132 30, ,885 Net book value: - As of 31 December ,027, ,928 9, ,869 36,296 1,435,530 - As of 31 December , ,671 8, ,879 23,302 1,321,169 Assets in course of construction stated in the amount of 111,821 thousand of RSD relate to investments made in business premises construction located in Novi Sad. 25

28 19. OTHER ASSETS Receivables from BIP a.d., Belgrade - 239,145 Accrued interest and fees 307, ,951 Receivables for purchase of foreign currency - Receivables for value added tax 14,080 16,805 Changes in the fair value of embedded derivatives - 22,035 Assets received from out-of-court settlements held for sale 79,472 77,057 Receivables from sales of assets held for sale 53,864 54,226 Receivables from sales of goods received in settlement of loans 2,943 3,003 Receivables for income tax paid 110 9,042 Other assets 51,329 21,532 Other assets, gross 509, ,796 Less: Impairment (156,336) (288,645) Other assets, net 353, ,151 Based on the agreement with BIP a.d. Belgrade, on 10 March 2006 the Bank has collected its receivable amounting RSD 239,145 thousand through acquisition of own-treasury shares in total amount of RSD 244,030 thousands (note 26). Movements in provision for other assets were as follows: Balance as at 1 January 288, ,411 Impairment (reversals) / charges (Note 9) (132,309) (259,444) Foreign exchange losses - 1,669 Other - 57,009 Balance as at 31 December 156, , DUE TO OTHER BANKS Demand deposits from other banks 850,224 15,334 Short-term borrowings from other banks 142, ,507 Long-term borrowings from other banks 3,160 1,710 Other liabilities 6,694 3,145 Total due to other banks 1,002, ,696 26

29 20. DUE TO OTHER BANKS (Continued) The maturities and interest rates for short-term borrowings as at 31 December 2006 are presented in the table below: Bank Maturity date Interest Rate in thousands of RSD Kosovsko - Metohijska Bank a.d ,20 p.m. 12,000 Kreditno - eksportna Bank a.d. Belgade ,00 p.m. 130,053 Total short term borrowings from other banks 142, DUE TO CUSTOMERS Corporate customers - Current / settlement accounts 4,626,386 1,351,891 - Term deposits 3,172,697 1,331,834 Other entities - Current / demand accounts 1,418,721 73,527 - Term deposits 1,404, ,991 Retail customers - Current / demand accounts 796, ,862 - Term deposits 471,849 14,398 Total due to customers 11,891,133 4,047,503 Due to customers bear average variable effective interest rate of 4.1% p.a. 22. OTHER BORROWED FUNDS Foreign investors 4,381, ,956 Republic Development Fund 11,230 14,585 Total other borrowed funds 4,392, ,541 27

30 22. OTHER BORROWED FUNDS (Continued) Other borrowed funds from foreign investors as at 31 December 2006 relate to the following investors: (all amounts expressed in thousands of EUR / RSD) Credit lines for financing small and medium enterprises (SME) Interest rate Initial maturity EUR 000 RSD 000 European Fund for Seoutheast Europe EFSE (KfW) European Fund for Seoutheast Europe EFSE (KfW) European Fund for Seoutheast Europe EFSE (KfW) European Fund for Seoutheast Europe EFSE (KfW) European Fund for Seoutheast Europe EFSE (KfW) EURIBOR + 2%p.a ,925 EURIBOR + 2%p.a ,925 EURIBOR + 2%p.a ,583 EURIBOR + 2%p.a ,250 98,750 EURIBOR + 2,5%p.a ,475 2, ,658 Commerzbank AG EURIBOR + 1,15%p.a ,050 82,950 ING bank EURIBOR + 1,3%p.a ,214 OTP Bank Ltd EURIBOR + 1,8%p.a ,000 2,370,000 OTP Bank Ltd EURIBOR + 1,8%p.a ,000 1,580,000 Total Credit lines for SME 53,415 4,216,822 Commodity loans Landesbank Berlin AG (Bank Lesellschaft) EURIBOR + 1,75%p.a ,291 Other long term loans European Fund for Southeast Europe EFSE(KfW) EURIBOR + 3%p.a , ,200 Total borrowed funds from foreign investors 55,459 4,381,313 All borrowed facilities are denominated in EUR and will be repaid in EUR. 28

31 23. OTHER LIABILITIES Current Tax liabilities 89,781 - Deferred interest payables 83,536 7,811 Deferred other incomes 64,481 42,652 Liabilities for dividends 30, ,705 Other taxes payable 25,655 1,852 Interest payables 23,890 12,560 Trade payables 22,912 16,603 Provision for one-off retirement compensations 15,771 11,364 Liabilities for received unallocated liabilities 7,550 11,434 Advance payments 6,465 5,171 Long term financial leasing payables 3,625 5,769 Other liabilities 4,200 5,140 Total other liabilities 378, , PROVISION FOR COMMITMENTS AND CONTINGENCIES Provision for commitments and contingencies as of 31 December 2006 in the amount of RSD 153,469 thousand (2005: RSD 55,239 thousand) relates to provision of off-balance sheet items (Note 29). The movements in provision for off-balance sheet items are as follows: Balance as at 1 January 55, ,618 Charge to income statement (Note 9) 98,140 (329,289) Balance as at 31 December 153,469 55, DEFERRED TAX LIABILITIES Movement in deferred tax liabilities during the year was as follows: Balance at 1 January 157,730 25,424 Effects of different depreciation rates used in the statutory accounts (717) 275 Effects of temporary differences (134,400) 132,031 Balance at 31 December 22, ,730 29

32 25. DEFERRED TAX LIABILITIES (Continued) Deferred tax income/(expense) during the year, were influenced by the following temporary differences: Difference of the net book value of intangible assets, property and equipment and their taxable basis (717) 275 Recovery - decrease in provision for potential losses (134,400) 132,031 Deferred income tax expense (Note 11) (135,117) 132, SHAREHOLDERS EQUITY Share Capital The share capital of the Bank comprise of the shares initially paid in the amount of RSD 875,770 thousand and subsequent inflation adjustments in the amount of RSD 3,429,052 thousand, made in accordance with IAS 29 in the periods during which the Serbian economy was considered hyperinflationary. Reconciliation between issued capital and outstanding balance as at 31 December is presented in the table below: Issued share capital 875, ,770 Inflation adjustment 3,429,052 3,429,052 4,304,822 4,304,822 Less: Treasury shares (244,029) (152,097) Balance as at 31 December 4,060,793 4,152,725 The share capital comprise of 56,259 ordinary and 31,318 non-redeemable preference shares, both fully paid and with the nominal value of CSD 10 thousand per share. Preference shares can be converted into ordinary shares at any time at the Bank s discretion, subject to the approval of the Board. Dividends on preference shares are set at 3% of the issue price per annum and rank above ordinary dividends. During the year 2006 the bank has transferred its treasury shares repurchased in 2005 totalling to RSD 152,097 thousand by investing them at cost as a founding capital in»kb-ns Investment«d.o.o. Novi Sad on 19 January During the year 2006, the Bank has acquired treasury shares from the shareholder BIP a.d. Belgrade (Note 19). 30

33 26. SHAREHOLDERS EQUITY (Continued) Revaluation reserves arose in previous years in respect of fair value adjustments of investments in shares available for sale (quoted instruments). Revaluation reserves related with investments in equity shares of AIK banka a.d. and Centrobanka a.d. are derecognized on disposal of shares (Note 15) in amount of RSD 138,036 thousand (comprised of RSD 108,417 thousand and RSD 29,619 thousand). The preference shares rank ahead of the ordinary shares in the event of liquidation. Statutory reserves The Bank can use the statutory reserves for covering operating losses including the write off of receivables for which there is no realistic prospect of recovery. Inflation adjustment In accordance with provisions of IAS 29, share capital and all other components of equity were restated till the year 2003 by applying the general price index. The losses arising from restatement of equity were recognised as monetary loss. The Bank s shareholders with share in capital above 1% are presented in the table below: (all amounts expressed in thousands of RSD) Share capital % of share OTP banka 3,581, % Astra banka a.d. 226, % Kulska banka a.d. 244, % Invej d.o.o. 110, % Subtotal 4,162, % Others 142, % Total share capital 4,304, % Less: Treasury shares (244,029) Balance as at 31 December 4,060,793 31

34 27. RECONCILIATION OF SERBIAN STATUTORY FINANCIAL STATEMENTS TO THE IFRS FINANCIAL STATEMENTS The following is the reconciliation of the retained earnings in the statutory financial statements to the amount reported in these financial statements prepared in accordance with International Financial Reporting Standards. Retained earnings presented in the statutory accounts 602,569 1,154,276 Prior year IFRS adjustments not reflected in the Bank's books (62,495) 65,750 Reversal of credit risk reserve created in accordance with decision of the National Bank of Serbia 1,656,482 1,251,767 Investments in associates - (9,690) Deferred income tax expense on the current year temporary differences 134,400 (132,031) Retained earnings in the IFRS financial statements 2,330,956 2,330, CASH AND CASH EQUIVALENTS For the purposes of the cash flow statement, cash and cash equivalents comprise of the following balances with less than 90 days maturity: Placements with National Bank of Serbia 5,500,000 - Cash and balances with National bank of Serbia (Note 12) 4,338,774 1,670,500 Due from other banks (Note 13) 1,780, ,651 Total cash and cash equivalents 11,619,676 2,303, CONTINGENCIES AND COMMITMENTS In the normal course of business, the Bank is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include financial guarantees and acceptances. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss because any other party to a financial instrument fails to perform in accordance with the terms of the contract. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. The guarantees are conditional commitments issued by the Bank to guarantee the performance of the customer to a third party. The credit risk involved in issuing guarantees is essentially the same as that involved in extending facilities to other customers. 32

35 29. CONTINGENCIES AND COMMITMENTS (Continued) The performance bonds are guarantees by the Bank of behalf of its customers that a contract with a third party will be fulfilled. Credit risk is limited and depends on the quality of performed services in accordance with the agreement. As at 31 December 2005 and 2004, contingencies and commitments comprise of following: Guarantees 2,769,780 2,469,106 Performance bonds 1,875,891 2,369,649 Acceptance 600, ,088 Undrawn credit facilities and overdrafts 587, ,133 Other - 65,995 Contingencies and commitments, gross 5,833,812 6,339,971 Less: Provision (Note 25) (153,469) (55,329) Contingencies and commitments, net 5,680,343 6,284,642 The movements in provision for off-balance sheet items are as follows: Balance as at 1 January 55, ,618 Charge to income statement (Note 9) 98,140 (329,289) Balance as at 31 December 153,469 55, FUNDS MANAGED ON BEHALF OF THIRD PARTIES The funds managed on behalf of third parties in the amount of RSD 400,829 thousand as of 31 December 2006 relate to funds received from third parties for financing defined customers. The Bank bears no risk in respect of repayment of these loans and all these amounts are excluded form the financial statements. The Bank charges fee for carrying out these business operations in the name and on behalf of third parties. 31. RELATED PARTY DISCLOSURES The Bank enters into transactions with major shareholders, directors, senior management and their related concerns in the ordinary course of business at commercial interest and commission rates. Portion of loans related parties were granted at the average monthly interest rate of 0.90% while the loans to other customers were issued at market rate ranking form 1.50% to 2% monthly. 33