INVESTMENT BROKERAGE JOINT STOCK COMPANY RENESOURCE CAPITAL (UNIFIED REGISTRATION NUMBER ) ANNUAL REPORT

Transcription

1 INVESTMENT BROKERAGE JOINT STOCK COMPANY RENESOURCE CAPITAL (UNIFIED REGISTRATION NUMBER ) ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2013 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION TOGETHER WITH INDEPENDENT AUDITORS REPORT Riga, 2014

2 CONTENTS Independent auditors report 3 General information 4 Report of the Council and the Board of AS IBS Renesource Capital 5 Statement of responsibility of the management 10 Statement of comprehensive income 11 Statement of financial position 12 Cash flow statement 13 Statement of changes in shareholders equity 14 Notes to the financial statements 15 2

3 INDEPENDENT AUDITORS REPORT 3

4 General information Name of the company Legal status of the company Unified registration number, place and date of registration Registered office Renesource Capital Joint stock company, investment brokerage company , Riga, 23 October 1998 (registration with the Enterprise Register) Riga, 15 July 2004 (registration with the Commercial Register) Jāņa Daliņa iela 15, Riga, Latvia, LV-1013 Duntes iela 15a, Riga, Latvia, LV-1005 (from 20 March 2013) Shareholder SIA Siminvest (100%) Board Members Chairman of the Board: Priede Mārtiņš Board Member: Teličens Vadims (resigned on 6 Febryary 2014) Council Members Chairman of the Council: Kabaškins Igors Deputy Chairman of the Council: Aleksējevs Jaroslavs Council Member: Samarecs Filips Financial year 1 January - 31 December 2013 Auditors Iveta Vimba Latvian Certified Auditor Certificate No. 153 SIA Ernst & Young Baltic Muitas iela 1A, Riga Latvia, LV-1010 Licence No. 17 4

5 Report of the Council and the Board of AS IBS Renesource Capital AS IBS Renesource Capital (hereinafter - the Company) is a universal investment brokerage company, which offers its services to individuals and enterprises. The company offers its customers a wide range of investment services, ranging from classical brokerage and depositary operations, electronic commerce, currency exchange, asset management, financial consulting, market research and corporate finance to complex - individualized risk management deals with the use of derivatives. Public services allow any of the Company s customers with a variety of investment volumes to make use of the investment advantages for both augmentation of funds and accumulation. The company provides access to capital markets and liquidity from the leading banks with terms of trade which traditionally are available only to institutional customers. One of the Company's strategic objectives is to offer the customers a simple and at the same time accountable and safe process of investing money in financial instruments regardless of the amount of the investment and terms. The customer service standard developed by the Company envisages high touch relations, fair and equal approach to any customer regardless of customer size, status or field of activity. Global economy Also in the year 2013 the global economic growth continued to decline. Nevertheless, the last year in the financial markets has been a year of challenges and achievements. Traditionally, financial markets were affected by a series of global events and their consequences - an unusually strong typhoon in the Philippines, terrorist attacks and acts of terrorism in the U.S. and Kenya, military conflicts and clashes in Syria and Egypt, tension and political rhetoric in Ukraine, as well as the near collapse of the financial system of Cyprus was the year when the prevailing positivity and volatility in the stock markets and currency markets was the merit of the U.S. Federal Reserve system, which injected 1 trillion U.S. dollars for the U.S. economic development through government and mortgage bond purchase program in But the highlight of the corporate segment of the market was the social networking giant's "Twitter" shares on the stock exchange market, which without doubt can be called the hottest initial public offering (IPO) of Despite the slowdown of the global economic growth, in 2013 global stock markets experienced an analogue of the annual growth trend of The absolute leader was the Japanese stock market with Nikkei 225 index rising by 46.2%. No less significant were all of the U.S. stock market indices, which saw double-digit gains - NASDAQ Composite +34.2%, S&P %, S&P Total Return +29.1%, Dow Jones Industrials (blue-chip) +23.6% and Russell %. Stock indices of other leading economies also experienced a rise, for example, the British FTSE index rose by 12%, the German DAX by 22.8%, the Danish OMX by 22.9%. Last year the developing countries' stock indices were not as good as in the previous years, as a result, the BRIC index fell by 11.4%, while the Russian stock market grew by only 2%. To some extent the explanation to this situation can be found in commodity and raw material markets, which were dominated by bear market trends. For instance, aluminum and copper prices at London Metal Exchange fell by 14.6% and 10.4% respectively, while gold prices at CME Group exchanges experienced an incredible drop of 27.3%. Volatility of the financial markets was also the basis for the industry s overall performance in 2013, when the scores of many market participants - banks and financial companies significantly improved as a result of increased activity of customer transactions. Also the year 2013 saw further tightening of regulatory requirements applicable to the investment brokerage and banking sector, which were related to a better provision of orders and improvement of quotations / price mechanism (price / quotation offset, transaction execution denials). At the beginning of 2014 European Market Infrastructure Regulation or EMIR Regulation comes into force establishing new requirements for promoting transparency of derivatives market, which obliges market participants to report about OTC derivatives trade repositories. It is expected that in 2014 the industry will face an increased activation of consolidation and M & A transactions, which is promoted by increase of regulatory requirements. We expect that in the industry the year 2014 will be marked by technological developments in the field of social trading and the race to zero competition through elevated speed and low latency of trading possibilities. 5

6 Report of the Council and the Board of AS IBS Renesource Capital (cont d) Local Economy Well-considered national reform process in combination with appropriate monetary and fiscal policy have facilitated a successful post-crisis recovery of the Latvian economy and helped it to become one of the fastest growing market economies in the EU. When all of Maastricht criteria were met, the EU Council gave the green light for Latvia to join the Economic and Monetary Union, as a result of which EU finance ministers officially invited Latvia to join the eurozone on 1 January, Joining the eurozone saw a period of development and stability for both customers and the Company. As of 1 January, 2014, the only legal means of payment in the Republic of Latvia is Euro. Also in 2013 the Latvian economy continued to demonstrate a consistent upward trend. The growth of Latvian gross domestic product (GDP) is forecasted to grow 3.6% compared with the year 2012, which means that also in the year 2013 Latvia was one of the most dynamically and fast growing economies in the EU. The international rating agencies have also positively evaluated the improvement of the Latvian economy and financial situation, as well as the accession to the eurozone. Thus in January 2014, the international rating agency "Fitch Ratings" upgraded the Latvian credit rating to BBB+ with a Stable Outlook. The banking and finance sector At the end of 2013, there were 4 investment brokerages, 17 banks and 10 branches of foreign banks in Latvia. In 2013 the Latvian banking sector continued to show rapid development and operated with a profit of 246 million euros, at the same time maintaining high capitalization rate (average capital adequacy ratio as of was 18.9%). Interest income from loan portfolio continued to dominate the bank income structure. According to many foreign experts, the supervision of the banking and finance sector in Latvia is one of the strictest in the European Union. The supervisory authorities are vested in the Financial and Capital Market Commission, which was established to protect the interests of investors, depositors and the insured, and promote the development and stability of financial and capital markets. The Company today 2013 was a year of significant changes, the year when the Company marked its fifteenth anniversary. Last year was a year of growth and successful projects. Our customer trust, which has lasted all these years, is well-justified. The company has strengthened its reputation as one of the oldest, private, independent of banks and financial holdings, investment brokerages in the Baltics. The accumulated 15 years of experience ensure the quality of sustainable financial products and investment services. During the past year the implementation of successful business strategy ensured growth in Company s main branches of activity, and it is also proved by the loyalty of the Company s customers and partners. The Company s performance indicators prove the quality and advantages of investment services. The Company s profit in 2013 was 17.5 thousand EUR. Despite the increasing competition, the Company s indicators experienced a rise in all areas of activity, starting with the customer service for individuals and enterprises - which doubled in number, the turnover of foreign exchange transactions increased 3.5 times, the turnover of commission from capital market transactions / mediation services with financial instruments rose by 57%, while the total capital of customer investment (asset size) in transactions with financial instruments increased by 59%. In 2013 the Company's equity and reserve fund increased by 9% and the Company's capital adequacy ratio as at 31 December 2013 was 21:22%, which is almost 2.65 times higher than the Financial and Capital Market Commission's minimum requirement - 8%. The customers funds and financial instruments (assets) are held separately from the Company s and other customers' assets by internationally recognized partners (banks and depositories) with high investment rating. The Company does not invest its funds in transactions with financial instruments and the customers assets in custody, and financial instruments in repurchase agreements. In relation to the entry into force of the EMIR regulation in February, 2014, the Company signed an agreement with the London Stock Exchange on the acquisition of a legal entity identifier and became a member of the Depository Trust & Clearing Corporation (DTCC). 6

7 Report of the Council and the Board of AS IBS Renesource Capital (cont d) In 2013 the Company paid special attention to improving internal management and control system in risk management field by improving the functioning of financial department, budgeting and cost control area, as well as automating the essential control functions of compliance with regulations. Every company's most valuable asset is its team of employees. The Company employs a team of professionals, who have an excellent knowledge of the specifics of investment services and are able to combine them with each client's individual needs. The Company's staff is characterized by high-responsibility, self-control, initiative and excellent work results, which significantly strengthens the positions of the Company s internal financial control, risk management, and compliance positions, thus ensuring the Company's compliance with the best international practice. Our key to success consists of education and professionalism, wellconsidered remuneration and motivation policy, as well as strong mutual relations. In 2013 the Company paid great attention to staff training by organizing special thematic internal trainings and attending special courses and seminars in the respective fields. With the purpose of preventing the use of Company for financing money laundering, increased attention has been and will be dedicated to continuous monitoring of strict adherence to existing laws and other legal requirements, as well as to compliance with internationally accepted standards and recommendations. Compliance and Internal Audit Department regularly conducts staff training and inspections, which enable to control how the binding corporate rules and the requirements of Company s internal normative documentation are observed. In 2013 the Company continued the modernization of the system that tracks the transactions with financial instruments. It also raises the capacity for the maintenance of proper accounting records, precision control, and comparison of financial instrument portfolios. The new system allows the Company to work more operatively with high frequency trading data about customers financial transactions. In April, 2013 the Company became a member of the NASDAQ OMX company JSC "Latvian Central Depository". Investment banking and corporate finance are strategically important future activities of the Company. In 2013 the Company began to offer its customers a full range of corporate services - mergers and acquisitions, financial advice, debt and equity financing, as well as consulting on strategic development issues. At the end of 2013 the Company s team of corporate finance specialists, making use of their international experience and knowledge of the market, organized the first issuance of Eurobonds. The company sees positive growth prospects in debt and equity financing over the next 3 years, and plans to increase its market share and strengthen its position in the corporate finance segment in the year Risk management consulting and strategy development is another Company s field of activity with a rapidly increasing development. During the reporting year the Company provided high-quality financial advice in relation to risk management strategies for clients in transportation and energy sector, which significantly increased the turnover of foreign exchange market transactions and over-the-counter derivatives. In order to provide a qualified service for the above mentioned issues and a flexible approach to the corporate services, the Company's staff team was supplemented by experts, who provide thorough analysis of the market and provide exhaustive financial advice for a maximally effective, fast and economical solution, by taking into account each company s field of activity and specificity. The Company also actively focused on developing analytical reviews of capital market and publishing them in the social networks, thus promoting the recognition of the Company's services and interest in them. Operating strategy and goals There has been a logical and reasoned turning point in the Company's operating strategy in order to improve all of the above mentioned fields of activity. In 2014 the Company plans to increase the number of Board members to four. This organizational transformation will greatly enhance the ability to manage the Company, ensuring greater efficiency, as the appointed Company's board members will be professional heads of the departments, whose daily responsibilities already include general management of the Company. 7

8 Report of the Council and the Board of AS IBS Renesource Capital (cont d) The Company's achievements have been gained not only by successfully implementing the Company s development strategy, but also by drawing influence from the common economic growth of Latvia and the Baltic region, which has enabled the Company to attain a consistent and stable expansion of its business operations. We are confident that the Latvian and Baltic markets offer the best business development and growth opportunities. Given our experience and the strong position in the investment services market, the Latvian and Baltic markets will provide us with a stable and predictable commission and fee income stream. The Company's strategic operating region is Latvia and the Baltic States, yet while strengthening its position in the local financial market sector, the Company is also an active participant in the international financial and capital markets. In order to inform the potential customers about the Company's services and benefits, the Company collaborates with regional representatives - agents representing the Company's interests in the respective regions and markets. The Company will continue to focus its operations on increasing the commission and fee income stream by improving the efficiency as a result of investments in information technology, and decreasing the proportion of administrative expense as a result of growth in the scope of operations. The Company has always maintained an accurate balance between conservatism and new progressive technologies and development possibilities. The continuous development of information technology has significantly changed the habits and behaviour of investors. Following these changing trends, the Company pays close attention to the expansion of information system functionality and security features. The company provides access to modern electronic trading platforms developed by internationally recognized information systems developers. With the increase of the Company's customers and the amount of transactions with financial instruments, the Company pays great attention to regular improvement of technological equipment, and it has invested considerable resources in new trading platform and accounting system technologies, which will allow the Company to provide investment services to an even wider range of clients with lower operational expenses and risks. Prospects of future development By continuing to increase the technological functionality, in 2014 the Company plans to complete its work on the restructuring of the Company's web site and to introduce a new service - remote maintenance of financial instruments and accounts on the internet, which will allow the customers to obtain information about the balance of the account, open positions, financial instrument portfolios, as well as to make money transfers and perform a wider range of financial transactions. In 2014 the Company also plans to launch a remote opening of customer accounts in online mode, and to expand money transfer options by ensuring the possibility of account supplementation with payment cards. In 2014 the Company s Compliance / On-boarding department plans to supplement and improve a complex of measures with technological innovations for the monitoring and analysis of the "know your customer" principle and transactions with financial instruments, to prevent the possibility of money laundering by organizing the operations of departments and the Company so as to integrate the prevention of money laundering in all the Company s fields of activity. Also in the year 2014 the Company will continue to develop and integrate new, innovative financial products and services, as well as improve the existing basic services in order to maintain its leading position in the Baltic states and expand the international operations. For example, in 2013 the Company supplemented the range of traded currencies with such currency pairs as USDCNH, USDILS and added Hong Kong s Hang Seng and Australia's ASX exchange indexes to the CFD toolbox. The Company's objective, while developing the scope of investment services, is to offer its customers ever new investment opportunities, financial instruments, geographic market coverage, and to offer their services to an ever wider range of clients. In 2014 the Company will continue to strengthen its positions in brokerage and e-commerce segment, achieving success in all the Company's fields of activity and increasing its market share in the Baltics. 8

9 Report of the Council and the Board of AS IBS Renesource Capital (cont d) Our priority will still be high value-added services, and the provision of reaching each client's individual investment objectives. Our operational stability is based on listening to our clients and understanding their needs and business, customer service experience and management ability to make use of market opportunities while effectively managing risks. The Company's customers trust our team's professionalism and experience. In order to maintain the obtained position, we will continue to work actively and strategically providently according to any of our customer's needs and expectations. Our clients, quality of work and services have always been in the centre of our attention. We are confident that the results of the year 2014 will demonstrate an even better performance and a more rapid growth. We would like to express our deep gratitude to our customers, business partners and shareholders for their loyalty and support to the Company as well as our team for their remarkable contribution to the achievement of our goals. For AS IBS Renesource Capital: Mārtiņš Priede Chairman of the Board Igors Kabaškins Chairman of the Council Riga, 25 March 2014 The annual report was approved by the general shareholders meeting on 27 March

10 Statement of responsibility of the management The management of AS IBS Renesource Capital (hereinafter - the Company) is responsible for the preparation of the Company s financial statements. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and give a true and fair view of the financial position of the Company as at 31 December 2013 and the results of its operations and cash flows for the year then ended. The management confirms that the Company s financial statements for the year ended 31 December 2013 presented in the 2013 annual report are prepared in accordance with the source documents, applying appropriate accounting policies. Prudent and reasonable judgments and estimates have been made by the management in the preparation of the financial statements. The Company s management confirms that these financial statements have been prepared in accordance with International Financial Reporting Standards on a going concern basis and fully complying with the Regulations of the Financial and Capital Market Commission on the Preparation of Annual Reports and Consolidated Annual Reports of Banks, Investment Brokerage Companies and Investment Management Companies. The Company s management is also responsible for the maintenance of proper accounting records, taking reasonable efforts to safeguard the Company s assets and the prevention and detection of fraud and other irregularities in the Company. They are also responsible for operating the Company in compliance with the Law on the Financial Instrument Market, regulations of the Financial and Capital Market Commission and other legislation of the Republic of Latvia applicable to investment brokerage companies. Mārtiņš Priede Chairman of the Board Igors Kabaškins Chairman of the Council Riga, 25 March

11 Statement of comprehensive income Notes Interest income Interest expense 5 (7 752) (7 568) Net interest income (166) 318 Commission and fee income Commission and fee expense 7 (23 455) (17 397) Net commission and fee income Foreign exchange gain/ loss (+/-) 8 (15 045) (2 620) Staff costs 9 ( ) ( ) Administrative expense 10 ( ) (53 334) Depreciation 15, 16 (13 677) (10 645) Total expense ( ) ( ) Other income Other expense (1 600) (2 748) Impairment allowance (708) Profit/ loss before corporate income tax ( ) Corporate income tax Net profit/ loss for the year ( ) The accompanying notes form an integral part of these financial statements. Mārtiņš Priede Chairman of the Board Igors Kabaškins Chairman of the Council Riga, 25 March

12 Statement of financial position Notes Assets Demand deposits with credit institutions Intangible assets Equipment Prepayments and accrued income Other assets Total assets Liabilities Accrued liabilities Other liabilities Subordinated liabilities Total liabilities Shareholders' equity Paid-in share capital Accumulated deficit ( ) ( ) Profit/ (loss) for the period ( ) Total shareholders' equity Total liabilities and shareholders' equity The accompanying notes form an integral part of these financial statements. Mārtiņš Priede Chairman of the Board Igors Kabaškins Chairman of the Council Riga, 25 March

13 Cash flow statement (Indirect method) Cash flows to/ from operating activities Net income/ (loss) ( ) Adjustments for: Depreciation Increase in receivables (44 431) (63 321) (Decrease)/ increase in payables (29 130) Vacation pay reserve Interest income (10) - Loss from fluctuations of currency exchange rates Impairment allowance (360) 708 Net cash flows to/ from operating activities (33 880) ( ) Cash flows to/ from investing activities Purchase of equipment (14 147) (7 384) Purchase of assets (4 642) (598) Net cash flows to/ from investing activities (18 789) (7 982) Cash flows to/ from financing activities Proceeds from issue of share capital Interest received 10 - Net cash flows to/ from financing activities Net change in cash and cash equivalents (52 659) Cash and cash equivalents at the beginning of the year Foreign exchange loss (13 836) (2 620) Cash and cash equivalents at the end of the year The accompanying notes form an integral part of these financial statements. 13

14 Statement of changes in shareholders equity Share capital Accumulated deficit Loss/ profit for the year Total Balance as at 31 December ( ) ( ) (43 389) Transfer of prior year result - ( ) Loss for the reporting year - - ( ) ( ) Increase in share capital Balance as at 31 December ( ) ( ) Transfer of prior year result - ( ) Profit for the reporting year Balance as at 31 December ( ) The accompanying notes form an integral part of these financial statements. 14

15 Notes to the financial statements 1. Corporate information The investment brokerage joint stock company was established on 23 October The Company was registered with the Republic of Latvia Commercial Register on 15 July SIA Siminvest became the sole shareholder of the Company in June The core business activity of the Company comprises brokerage services. 2. Summary of significant accounting policies Adoption of new and/or changed IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations During the year the Company has adopted the following IFRS amendments: Amendment to IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income (OCI). This amendment changes the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Company s financial position or performance. Amendments to IAS 19 Employee Benefits. These amendments range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. These amendments did not impact the financial statements of the Company, because the Company does not have defined benefit obligations. Amendment to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities. The amendment introduces common disclosure requirements. These disclosures would provide users with information that is useful in evaluating the effect or potential effect of netting arrangements on an entity s financial position. The amendment to IFRS 7 is to be retrospectively applied. This amendment did not impact the financial statements of the Company, because the Company does not have netting arrangements. IFRS 13 Fair Value Measurement. The main reason of issuance of IFRS 13 is to reduce complexity and improve consistency in application when measuring fair value. It does not change when an entity is required to use fair value but, rather, provides guidance on how to measure fair value under IFRS when fair value is required or permitted by IFRS. The implementation of this standard did not have a material impact on the amounts recognised in the Company s financial statements. IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine. This interpretation applies to stripping costs incurred in surface mining activity during the production phase of the mine ('production stripping costs'). This interpretation had no impact on the Company s financial statements, as the Company is not involved in mining activity. Standards issued but not yet effective The Company has not applied the following IFRS and IFRIC interpretations that have been issued as of the date of authorisation of these financial statements for issue, but which are not yet effective: Amendments to IAS 19 Employee Benefits (effective for financial years beginning on or after 1 July 2014, once endorsed by the EU) The amendments address accounting for the employee contributions to a defined benefit plan. Since the Company s employees do not make such contributions, the implementation of this amendment will not have any impact on the financial statements of the Company. Amendment to IAS 27 Separate Financial Statements (effective for financial years beginning on or after 1 January 2014) As a result of the new standards IFRS 10, IFRS 11 and IFRS 12 this standard was amended to contain accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 Separate Financial Statements requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. The implementation of this amendment will not have any impact on the financial statements of the Company. 15

16 2. Summary of significant accounting policies (cont d) Amendment to IAS 28 Investments in Associates and Joint Ventures (effective for financial years beginning on or after 1 January 2014) As a result of the new standards IFRS 10, IFRS 11 and IFRS 12 this standard was renamed and addresses the application of the equity method to investments in joint ventures in addition to associates. The implementation of this amendment will not have any impact on the financial statements of the Company. Amendment to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective for financial years beginning on or after 1 January 2014) This amendment clarifies the meaning of currently has a legally enforceable right to set-off and also clarifies the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The Company has not yet evaluated the impact of the implementation of this amendment. Amendment to IAS 36 Impairment of Assets (effective for financial years beginning on or after 1 January 2014) This amendment adds a few additional disclosure requirements about the fair value measurement when the recoverable amount is based on fair value less costs of disposal and removes an unintended consequence of IFRS 13 to IAS 36 disclosures. The amendment will not have any impact on the financial position or performance of the Company; however it may result in additional disclosures. Amendment to IAS 39 Financial Instruments: Recognition and Measurement (effective for financial years beginning on or after 1 January 2014) The amendment provides relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The amendment will not have any impact on the financial position or performance of the Company, since it does not apply hedge accounting. IFRS 9 Financial Instruments (effective for financial years beginning on or after 1 January 2015) IFRS 9 will eventually replace IAS 39. The IASB has issued the first three parts of the standard, establishing a new classification and measurement framework for financial assets, requirements on the accounting for financial liabilities and hedge accounting. The Company has not yet evaluated the impact of the implementation of this standard. IFRS 10 Consolidated Financial Statements (effective for financial years beginning on or after 1 January 2014) IFRS 10 establishes a single control model that applies to all entities, including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled and, therefore, are required to be consolidated by a parent. Examples of areas of significant judgment include evaluating de facto control, potential voting rights or whether a decision maker is acting as a principal or agent. IFRS 10 replaces the part of IAS 27 Consolidated and Separate Financial Statements related to consolidated financial statements and replaces SIC 12 Consolidation Special Purpose Entities. The Company has not yet evaluated the impact of the implementation of this standard. IFRS 11 Joint Arrangements (effective for financial years beginning on or after 1 January 2014) IFRS 11 eliminates proportionate consolidation of jointly controlled entities. Under IFRS 11, jointly controlled entities, if classified as joint ventures (a newly defined term), must be accounted for using the equity method. Additionally, jointly controlled assets and operations are joint operations under IFRS 11, and the accounting for those arrangements will generally be consistent with today s accounting. That is, the entity will continue to recognize its relative share of assets, liabilities, revenues and expenses. The Company has not yet evaluated the impact of the implementation of this standard. IFRS 12 Disclosures of Interests in Other Entities (effective for financial years beginning on or after 1 January 2014) IFRS 12 combines the disclosure requirements for an entity s interests in subsidiaries, joint arrangements, investments in associates and structured entities into one comprehensive disclosure standard. A number of new disclosures also will be required such as disclosing the judgments made to determine control over another entity. The Company has not yet evaluated the impact of the implementation of this standard. 16

17 2. Summary of significant accounting policies (cont d) IFRS 14 Regulatory Deferral Accounts (effective for financial years beginning on or after 1 January 2016, once endorsed by the EU) It is an interim standard that provides first-time adopters of IFRS with relief from derecognising rate-regulated assets and liabilities until a comprehensive project on accounting for such assets and liabilities is completed by the IASB. The implementation of this standard will not have any impact on the financial statements of the Company. Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment Entities (effective for financial years beginning on or after 1 January 2014) The amendments apply to entities that qualify as investment entities. The amendments provide an exception to the consolidation requirements of IFRS 10 by requiring investment entities to measure their subsidiaries at fair value through profit or loss, rather than consolidate them. The implementation of this amendment will not have any impact on the financial statements of the Company, as the parent of the Company is not an investment entity. Improvements to IFRSs Effective for financial years beginning on or after 1 January 2013: In May 2012 the IASB issued omnibus of necessary, but non-urgent amendments to its five standards: IFRS 1 First-time Adoption of IFRS; IAS 1 Presentation of Financial Statements; IAS 16 Property, Plant and Equipment; IAS 32 Financial instruments: Presentation; IAS 34 Interim Financial Reporting. Effective for financial years beginning on or after 1 July 2014, once endorsed by the EU: In December 2013 the IASB issued omnibus of necessary, but non-urgent amendments to the following standards: IFRS 1 First-time Adoption of IFRS; IFRS 2 Share-based Payment; IFRS 3 Business Combinations; IFRS 8 Operating Segments; IFRS 13 Fair Value Measurement; IAS 16 Property, Plant and Equipment; IAS 24 Related Party Disclosures; IAS 38 Intangible Assets; IAS 40 Investment Property. The adoption of these amendments may result in changes to accounting policies or disclosures but will not have any impact on the financial position or performance of the Company. IFRIC Interpretation 21 Levies (effective for financial years beginning on or after 1 January 2014, once endorsed by the EU) This interpretation addresses the accounting for levies imposed by governments. Liability to pay a levy is recognised in the financial statements when the activity that triggers the payment of the levy occurs. The Company has not yet evaluated the impact of the implementation of this interpretation. The Company plans to adopt the above mentioned standards and interpretations on their effectiveness date provided they are endorsed by the EU. 17

18 2. Summary of significant accounting policies (cont d) Reporting currency The financial statements are reported in Latvian lats. Income and expense recognition Interest income and expense items are recognised on an accrual basis using the effective interest rate. Commission and fee income and expense are charged to the income statement as earned/ incurred. Foreign currency translation Transactions denominated in foreign currencies are recorded in Latvian lats at the actual rates of exchange established by the Bank of Latvia at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Latvian lats at the official rate of exchange established by the Bank of Latvia at the end of the year. Any gain or loss resulting from a change in rates of exchange subsequent to the date of the transaction is included in the income statement as profit or loss from revaluation of foreign currency positions. Year-end currency exchange rates for the last two years were as follows: 31/12/ /12/2012 USD EUR RUB CAD GBP (LVL) Demand deposits with credit institutions This caption includes all balances arising from transactions with credit institutions that may be satisfied without a preceding demand or that are subject to the term of demand of 24 hours or one business day. Loans and receivables All loans and receivables are recognised when cash is paid to the borrower and derecognised when cash is repaid. Loans and receivables are carried net of specific allowances established for doubtful and bad receivables. Specific allowances are established when, in the management s opinion, the recovery of the respective receivable is doubtful. Intangible assets Intangible assets are stated at cost and amortised over their estimated useful lives on a straight-line basis. Software and licences are amortised at the rate of 35% and 20% respectively per annum. Property, plant and equipment Property, plant and equipment are recorded at historical cost less accumulated depreciation and any impairment in value. If the recoverable amount of an asset is lower than its carrying value due to circumstances not considered to be temporary, the respective asset is written down to its recoverable amount. Depreciation is calculated using the straight-line method based on the estimated useful life of the asset. The annual depreciation rates range from 20% to 35%. Maintenance and repair costs are charged to the income statement as incurred. Leased assets Leased assets are stated at cost specified in the lease agreement less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. The annual depreciation rate is 20% and 35%. 18

19 2. Summary of significant accounting policies (cont d) Prepayments and accrued income This caption represents income which relates to the reporting year and the previous years but which has not yet become receivable at the reporting date as well as expense which has been incurred by the year end but is attributable to the subsequent periods. Other assets Other assets comprise all the Company s receivables arising from transactions with counterparties, security deposits, cash in transit, and overpaid taxes. Deferred income and accrued expense This caption represents expense which relates to the reporting year and the previous years but which has not yet become due at the reporting date. Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Fair values of financial assets and liabilities Fair value represents the amount at which an asset could be exchanged, or a liability settled, on an arm s length basis. Where, in the opinion of the management, the fair values of financial assets and liabilities differ materially from their book values, such fair values are separately disclosed in the notes to the financial statements. The management believes that the carrying amounts of all financial instruments approximate to their fair value. The fair value of all financial instruments (except for cash, which is subject to Level 1) is determined according to Level 3. Cash and cash equivalents Cash comprises cash at bank and cash held by counterparties. Taxation According to Latvian tax laws, corporate income tax for the year ended 31 December 2013 is applied at the rate of 15% on taxable income generated by the Company for the taxation period. Use of estimates in preparation of the financial statements The preparation of financial statements in conformity with International Financial Reporting Standards as published by the International Accounting Standards Board requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and disclosure of contingencies. The significant areas of estimation used in the preparation of the financial statements relate to depreciation, vacation pay reserve, and the going concern assumption. Employee entitlements to regular vacations are recognised when they accrue to employees. A provision is made for the estimated liability of employee vacation pay based on unused vacation days by employees up to the reporting date. Future events occur which cause the assumptions used in arriving at the estimates to change. The effect of any changes in estimates will be recorded in the financial statements, when determinable. 19

20 3. Financial risk management and capital adequacy The Company has designed an internal control system to identify and manage significant risk exposures. Limits and restrictions are fixed in the respective policies. Credit risk is the risk that the Company will incur a loss because its counterparties fail or refuse to discharge their contractual obligations. Credit risk management is carried out based on the procedure for defining the minimum capital requirement for credit risk providing guidelines as to the identification, measurement and control of credit risk. The standardised approach is used to calculate the minimum capital requirement for credit risk, which is determined as 8% of the risk weighted balance. To define the risk exposure for counterparties and the risk weighted value of all risk exposures, the Company has selected and consistently applies the ratings assigned by an ECAI Fitch Ratings. The Company s risk exposures comprise balances due from institutions and companies except those having short-term ratings, as well as other balances due. Currency risk is the risk that the Company will incur a loss due to the revaluation of assets and liabilities and memorandum items denominated in foreign currencies as a result of fluctuations of currency exchange rates. The capital requirement for currency risk is calculated as 8% of the Company s total net currency position, according to the procedure for defining the minimum capital requirement for currency risk. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The operational risk management policy lists kinds of operational risk inherent in the Company s business, lays down the procedure for measuring, managing and controlling risk, as well as specifies the tools and techniques to mitigate operational risk. The Company applies the basic indicator approach to calculate the minimum capital requirement for operational risk. According to this approach, the capital requirement is defined as 15% of the arithmetic average over the last three years of the positive sum of net interest and net non-interest income. Capital adequacy is the ratio of equity to risk weighted assets and memorandum items. Capital adequacy is managed on the basis of the capital adequacy management policy approved by the Board, prescribing the minimum capital adequacy ratio of 8% of risk weighted assets and memorandum items as well as the minimum equity of LVL As at 31 December 2013, the Company s equity amounted to LVL The capital adequacy ratio was 21.22% (see also Note 27). The Company has the risk management policy approved on the basis of which risks are managed and hedged. The main financial risks arising from the Company s financial instruments are currency risk, liquidity risk, and capital adequacy. Currency risk The Company s financial assets and liabilities, which are exposed to currency risk, comprise cash and cash equivalents. As at 31 December 2013, the Company had trade receivables and trade payables denominated in foreign currencies. The Company is mainly exposed to currency risk of the US dollar (see also Note 24). Credit risk The Company is exposed to credit risk through accrued income, and cash and cash equivalents. In accordance with the Company s investment policy, the funds are placed in term deposits based on the credit institution s credit rating and the interest rate offered. The Company manages its credit risk by monitoring receivable balances to ensure that the Company s exposure to past due or bad debts is minimised. Interest rate risk The Company is not exposed to any material interest rate risk. The Company derives interest income from cash in current accounts and demand deposits with variable interest rates. 20

21 4. Interest income Interest income on financial instrument account balances Interest income on current account balances 10 - TOTAL: Interest expense Interest on financial instrument account balances Interest on the subordinated loan TOTAL: Commission and fee income Derivative financial instruments Foreign exchange transactions Brokerage fees Income from payments Securities holding TOTAL: Commission and fee expense Brokerage fees of customers Bank charges for customer transfers Bank charges TOTAL: Foreign exchange loss Currency exchange loss (13 836) (1 947) Loss from foreign currency sale (1 209) (673) TOTAL: (15 045) (2 620) 9. Staff costs Wages and salaries Statutory social insurance contributions TOTAL: Information about remuneration of the Council and Board Members: Wages and salaries Statutory social insurance contributions TOTAL:

22 9. Staff costs (cont d) The Board and Council Members do not receive remuneration for their functions in the Board and the Council. This item includes information about the remuneration paid to the Board and Council Members for their work based on the employment agreements. Number of employees: Average number of employees during the reporting year Administrative expense Information and training expense Legal fees Communications and mail expense Annual audit fee Agency fees Fee paid to the FCMC and the LCD Advertising and marketing Lease of premises and security Business trips Lease interest payments Operating expense Representation expense Unemployment risk duty Other administrative expense TOTAL: Impairment allowance Income from release of impairment allowances Impairment expense - (708) TOTAL: 360 (708) 22

23 12. Corporate income tax The Company has earned a profit for the reporting year. The deferred tax asset should have been recognised in these financial statements (including LVL arising from the accumulated deficit) but it is normally recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences which give rise to the deferred tax asset can be utilised. Deferred corporate income tax: Deferred corporate income tax liability Statement of financial Income statement position Accelerated depreciation for tax purposes Gross deferred tax liability Deferred corporate income tax asset Tax loss carried forward (86 388) (73 121) - - Vacation pay reserve (36) (238) - - Gross deferred tax asset (86 424) (73 359) - - Net deferred tax liability/ asset (85 208) (72 915) - - The Company s management believes that the above liabilities will be offset against the respective tax assets during the next years when the deferred tax liabilities realise. Tax loss carried forward may be utilised as follows: Tax loss Expiry term Tax loss for 2007 (20 373) 2015 Tax loss for (66 015) unlimited TOTAL: (86 388) Actual corporate income tax charge for the reporting year, if compared with theoretical calculations: Profit/ (loss) before tax Tax at the applicable tax rate of 15% Permanent differences: Non-operating expense 87 Other Deferred corporate income tax asset (used) in the reporting year which had not been recognised in the previous years (4 156) Valuation allowance for unrecognised deferred tax asset (82 232) Actual corporate income tax for the reporting year: