Public Joint Stock Company Raiffeisen Bank Aval. Consolidated IFRS Financial Statements

Transcription

1 Public Joint Stock Company Raiffeisen Bank Aval Consolidated IFRS Financial Statements For the year ended 31 December 2014 Together with Independent Auditors Report

2 2014 Consolidated IFRS Financial Statements CONTENTS INDEPENDENT AUDITORS REPORT CONSOLIDATED IFRS FINANCIAL STATEMENTS Consolidated IFRS Statement of Financial Position... 1 Consolidated IFRS Income Statement... 2 Consolidated IFRS Statement of Comprehensive Income... 3 Consolidated IFRS Statement of Changes in Equity... 4 Consolidated IFRS Statement of Cash Flows... 5 NOTES TO THE CONSOLIDATED IFRS FINANCIAL STATEMENTS 1. Principal activities Operating environment of the Bank Basis of preparation Summary of accounting policies Significant accounting judgements and estimates Segment information Cash and cash equivalents Mandatory reserves in the National Bank of Ukraine Trading securities Amounts due from credit institutions Loans to customers Assets held for sale Investment securities Investment property Property and equipment Intangible assets Taxation Other impairment and provisions Other assets and other liabilities Amounts due to credit institutions Amounts due to customers Debt securities issued Subordinated debt Equity Commitments and contingencies Net fee and commission income Other income Personnel and other administrative and operating expenses Risk management Fair values of financial instruments Maturity analysis of assets and liabilities Related party transactions Capital adequacy Subsequent events Other information in accordance with the requirements of the Ukrainian legislation

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6 2014 Consolidated IFRS Financial Statements CONSOLIDATED IFRS INCOME STATEMENT for the year ended 31 December 2014 (in thousands of Ukrainian hryvnia) Notes Interest income Loans to customers 5,356,625 4,758,210 Amounts due from credit institutions 79,569 68,282 Securities 489, ,690 5,925,437 5,482,182 Interest expense Amounts due to customers (1,051,520) (1,377,594) Amounts due to credit institutions (362,542) (412,097) Subordinated debt (321,933) (194,366) Amounts due to the National Bank of Ukraine (19,961) (4,425) (1,755,956) (1,988,482) Net interest income 4,169,481 3,493,700 Allowance for loan impairment 7, 11 (8,320,283) (1,295,664) Net interest (expense)/income after allowance for loan impairment (4,150,802) 2,198,036 Fee and commission income 1,951,400 1,704,136 Fee and commission expense (486,822) (344,010) Fees and commissions, net 26 1,464,578 1,360,126 Net gains/(losses) from foreign currencies: - dealing 598, ,798 - exchange differences (2,229,382) (17,358) Net gains/(losses) from securities: Trading securities 88,643 8,437 Investment securities designated at fair value through profit or loss: - dealing 853,095 30,680 - revaluation 1,296, ,105 Investment securities available-for-sale (126) 217,668 Other income ,192 96,700 Non-interest income 820, ,030 Personnel expenses 28 (1,390,988) (1,513,315) Depreciation and amortisation 15,16 (365,405) (449,129) Other administrative and operating expenses 28 (1,493,693) (1,016,281) Charge of allowances for impairment of other assets and provisions 18 (47,717) (3,195) Impairment of subsidiaries - (8,555) Impairment loss from assets held for sale - (15,512) Non-interest expense (3,297,803) (3,005,987) (Loss)/profit before income tax expenses (5,163,824) 1,271,205 Income tax benefit/(expenses) ,002 (253,925) (Loss)/profit for the year (4,245,822) 1,017,280 Attributable to: - shareholders of the Bank (4,188,850) 1,014,879 - non-controlling interest (56,972) 2,401 (4,245,822) 1,017,280 (Loss)/profit attributable to shareholders of ordinary shares (4,189,550) 1,014,179 Profit attributable to shareholders of preference shares (4,188,850) 1,014,879 Earnings per share Weighted average number of ordinary shares (in thousands) 29,977,749 29,977,656 Weighted average number of preference shares (in thousands) 50,000 49,994 Basic and diluted earnings per ordinary share (in hryvnias) (0.1398) Basic and diluted earnings per preference share (in hryvnias) The accompanying notes on pages 6 to 62 are an integral part of these consolidated IFRS financial statements 2

7 2014 Consolidated IFRS Financial Statements CONSOLIDATED IFRS STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2014 (in thousands of Ukrainian hryvnia) Notes (Loss)/profit for the year (4,245,822) 1,017,280 Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Change in fair value on investment securities available-for-sale transferred to profit or loss 24 - (103,671) Income tax relating to gains on investment securities available-forsale 17, 24-16,587 Total items that are or may be reclassified subsequently to profit or loss - (87,084) Items that will not be reclassified to profit or loss: Recalculation of income tax relating to revaluation of buildings due to the changes of statutory tax rates 17, Total items that will not be reclassified to profit or loss Other comprehensive income/(loss) for the year, net of tax 743 (87,084) Total comprehensive (loss)/income for the year (4,245,079) 930,196 Attributable to: - shareholders of the Bank (4,188,107) 927,795 - non-controlling interest (56,972) 2,401 (4,245,079) 930,196 The accompanying notes on pages 6 to 62 are an integral part of these consolidated IFRS financial statements 3

8 2014 Consolidated IFRS Financial Statements CONSOLIDATED IFRS STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2014 (in thousands of Ukrainian hryvnia) Attributable to shareholders of the Bank Retained Notes Share capital Additional paid-in capital Revaluation reserves Reserve and other funds earnings/ (Accumulated deficit) Total Noncontrolling interest Total equity 31 December ,083,449 3,032,776 1,076, , ,716 8,103,724 (34,217) 8,069,507 Total comprehensive income for the year - - (87,084) - 1,014, ,795 2, ,196 Depreciation of revaluation reserve (23,533) - 23, Transfer of revaluation upon disposal of property (894) Allocation of retained earnings to reserve and other funds ,763 (2,763) Transfer of inflation adjustment 24 (80,875) , Dividends declared to shareholders of the Bank (700) (700) - (700) Sale of treasury shares December ,002,775 3,033, , ,388 1,749,434 9,031,619 (31,816) 8,999,803 Total comprehensive income for the year (4,188,850) (4,188,107) (56,972) (4,245,079) Depreciation of revaluation reserve (22,691) - 22, Transfer of revaluation upon disposal of property (44,979) - 44, Transfer of tax effect from the changes of statutory tax rates (3,274) - 3, Allocation of retained earnings to reserve and other funds ,351 (37,351) Dividends declared to shareholders of the Bank (900,032) (900,032) - (900,032) 31 December ,002,775 3,033, , ,739 (3,305,855) 3,943,480 (88,788) 3,854,692 The accompanying notes on pages 6 to 62 are an integral part of these consolidated IFRS financial statements 4

9 2014 Consolidated IFRS Financial Statements CONSOLIDATED IFRS STATEMENT OF CASH FLOWS for the year ended 31 December 2014 (in thousands of Ukrainian hryvnia) Notes Cash flows from operating activities Interest received 4,568,586 5,259,085 Interest paid (1,796,414) (2,016,214) Commissions received 1,954,384 1,755,361 Commissions paid (486,822) (344,010) Gains from trading securities 6,656 5,454 Gains from investment securities designated at fair value through profit or loss 853,095 30,680 Gains from dealing in foreign currencies 598, ,798 Other operating income received 229,017 95,746 Personnel expenses (1,468,136) (1,453,229) Other operating and administrative expenses paid (1,194,612) (967,522) Income tax paid (312,809) (208,471) Cash flow from operating activities before changes in operating assets and liabilities 2,951,387 2,298,678 Net (increase)/decrease in operating assets: Mandatory reserves in the National Bank of Ukraine 576,312 (53,249) Trading securities 121,630 (3,098) Investment securities designated at fair value through profit or loss 1,772,673 1,227,572 Amounts due from credit institutions 32,160 (24,024) Loans to customers 3,639,522 (2,460,118) Other assets (209,024) (194,363) Net increase/(decrease) in operating liabilities: Amounts due to credit institutions, short-term (618,575) (9,343) Amounts due to customers (2,244,949) (1,185,404) Debt securities issued (68,000) 31,950 Other liabilities (44,143) (52,888) Net cash flows from/(used in) operating activities 5,908,993 (424,287) Cash flows from investing activities Proceeds from investment securities available-for-sale ,988 Proceeds from redemption of investment securities held-to-maturity 318, ,411 Purchase of investment property (142,833) (7,875) Proceeds from investment property 35,360 5,191 Proceeds from assets held for sale - 35,134 Purchase of property and equipment (125,373) (209,018) Proceeds from sale of property and equipment 75,189 2,079 Purchase of intangible assets (96,531) (109,818) Dividends received Net cash flows from investing activities 64, ,045 Cash flows from financing activities Sale of treasury shares Repayment of borrowings from credit institutions, long-term (5,613,157) (3,977,637) Dividends paid (898,504) (685) Net cash flows used in financing activities (6,511,661) (3,977,522) Effect of exchange rate changes on cash and cash equivalents 1,482,964 24,242 Net change in cash and cash equivalents 944,653 (4,039,522) Cash and cash equivalents, 1 January 7 5,734,275 9,773,797 Cash and cash equivalents, 31 December 7 6,678,928 5,734,275 The accompanying notes on pages 6 to 62 are an integral part of these consolidated IFRS financial statements 5

10 1. Principal activities Joint Stock Commercial Bank Aval (hereinafter Raiffeisen Bank Aval ) was registered on 27 March 1992 by the National Bank of Ukraine (hereinafter the NBU ), as an open joint stock company under the laws of Ukraine. In April 1994, the Bank was re-registered as Joint Stock Post-Pension Bank Aval. In 2006, the Bank was re-registered as Open Joint Stock Company Raiffeisen Bank Aval and in 2009 re-registered in the form of a public joint stock company in line with changes of the Ukrainian legislation. The Bank operates under a general banking license #10 dated 5 October 2011 (as issued by the NBU) and in accordance with Ukrainian legislation, including Law of Ukraine On banks and banking and other legislative acts issued by the NBU. Raiffeisen Bank Aval accepts deposits from individuals, legal entities and budgetary institutions, issues loans, renders payment services in Ukraine and transfers payments abroad, performs currencies exchange transactions, settlements and other banking services to its clients. With effect from 1999, the Bank has been a participant of the Guaranteeing Fund of Individuals Deposits. The fund operates under the Law of Ukraine On the Guaranteeing Fund of Individuals Deposits. The fund covers the Bank s liabilities to its individual depositors for an amount up to 200 thousand of Ukrainian hryvnia for each individual in the event of business failure and revocation of the banking licence by the NBU. The Bank s main office is in Kyiv. Bank has 24 branches and 669 operating outlets throughout Ukraine ( branches and 796 outlets). Raiffeisen Bank Aval s registered legal address is 9 Leskova St., Kyiv, Ukraine. The parent bank and controlling shareholder of Raiffeisen Bank Aval is Raiffeisen Bank International AG, Austria. Raiffeisen-Landesbanken-Holding GmbH (Austria) controls the direct owner parent company Raiffeisen Bank International AG (hereinafter RBI ), being the ultimate shareholder of the Bank. As at 31 December 2014 and 2013, the Bank s shareholding structure based on the amount of outstanding shares was as follows: Shareholders 2014, % 2013, % Raiffeisen Bank International AG Other legal entities Individuals Total As at 31 December 2014, key management personnel of the Bank owned 24,100 shares of the Bank (0.00%) ( ,100 shares, 0.00%). 2. Operating environment of the Bank Ukraine s political and economic situation has deteriorated significantly since the Government s decision not to sign the Association Agreement and the Deep and Comprehensive Free Trade Agreement with the European Union in late November Political and social unrest combined with rising regional tensions has deepened the ongoing economic crisis and has resulted in a widening of the state budget deficit and a depletion of the National Bank of Ukraine s foreign currency reserves and, as a result, a further downgrading of the Ukrainian sovereign debt credit ratings. In March 2014, various events in Crimea led to the annexation of the Republic of Crimea by the Russian Federation, which is not recognised by Ukraine and the international community. This event resulted in a significant deterioration of the relationships between Ukraine and the Russian Federation. Following the instability in Crimea, regional tensions have spread to the Eastern regions of Ukraine, primarily Donetsk and Lugansk regions. In May 2014, protests in the part of Donetsk and Lugansk regions escalated into military clashes and armed conflict between armed supporters of the self-declared republics of the Donetsk and Lugansk regions and the Ukrainian forces. As at the date these consolidated financial statements were authorized for issue, the instability and unrest continue, and part of the Donetsk and Lugansk regions remains under control of the self-proclaimed and unrecognised republics. As a result, Ukrainian authorities are not currently able to fully enforce Ukrainian laws on this territory. Starting from March 2014, the Ukrainian banks were unable to conduct its operations in Crimea. Assets and liabilities associated with operations in Crimea were represented by loans granted to customers, property, leasehold improvements, equipment and customer accounts. The Bank sold the material part of loans to customers in the Crimea as well as all its branches in this region (refer to Note 28). Starting from July the Ukrainian Banks were unable to conduct its operations in the part of Donetsk and Lugansk regions. Assets and liabilities associated with operations on these territories are represented by loans granted to customers, property, leasehold improvements, equipment and customer accounts. Refer to Note 11 and Note 15 for further details relating to assets of the Bank associated with operations on these territories. 6

11 The final resolution and the effects of the political and economic crisis are difficult to predict. Whilst management believes it is taking appropriate measures to support the sustainability of the Bank s business in the current circumstances, a continuation of the current unstable business environment could negatively affect the Bank s results and financial position in a manner not currently determinable. These consolidated financial statements reflect management s current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 3. Basis of preparation General information These consolidated IFRS financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter - IFRS ), requirements of the National Bank of Ukraine on financial reporting by Ukrainian banks. The consolidated IFRS financial statements were prepared on a historical cost basis except for trading securities, investment securities designated at fair value through profit or loss, investment securities available-for-sale measured at fair value, derivatives, investment property and property measured at revalued amounts. The consolidated IFRS financial statements comprise the financial statements of the Bank and its subsidiaries for the years ended 31 December 2014 and 2013 (together referred to as the Bank ). A list of consolidated subsidiaries is disclosed in the Note 4. Inflation accounting The Ukrainian economy was considered hyperinflationary until 31 December As such, the Bank has applied IAS 29 Financial accounting in hyperinflationary economies. The effect of applying IAS 29 is that non-monetary items, including components of equity, were restated to the measuring units current at 31 December 2000 by applying the relevant inflation indices to the historical cost, and that these restated values were used as a basis for accounting in subsequent accounting periods. 4. Summary of accounting policies The main principles of accounting policy are presented below and were used in preparation of consolidated financial statements. These accounting policies where applied consistently in all periods. Financial instruments A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial asset is any asset that is: - cash; - an equity instrument of another entity; - a contractual right to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the Bank; or - a contract that will or may be settled in the Bank's own equity instruments and is a non-derivative for which the Bank is or may be obliged to receive a variable number of the entity's own equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Bank's own equity instruments. Financial liability is any liability that is: - a contractual obligation to deliver cash or another financial asset to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Bank; or - a contract that will or may be settled in the Bank's own equity instruments and is: a non-derivative for which the entity is or may be obliged to deliver a variable number of the Bank's own equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Bank's own equity instruments. Financial assets Initial recognition Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. 7

12 When financial assets are recognised initially, they are measured at fair value, and, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Date of recognition All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Financial assets at fair value through profit or loss Financial assets classified as held for trading and those designated at fair value through profit or loss at inception are included in the category financial assets at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for selling in the near term. Financial assets are designated by the Bank at fair value through profit or loss if they are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy. Gains or losses on financial assets at fair value through profit or loss are recognised in the consolidated income statement. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-tomaturity when the Bank has the positive intention and ability to hold them to maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments are subsequently measured at amortised cost. Gains and losses are recognised in the consolidated income statement when the investments are impaired, as well as through the amortisation process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the consolidated income statement. However, interest calculated using the effective interest method is recognised in the consolidated income statement. Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, the Bank measures assets and long positions at the bid price and liabilities and short positions at the ask price. 8

13 The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: - Level 1: inputs that are quoted market prices (unadjusted) in active markets. - Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. - Level 3: Inputs that are unobservable. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant adjustments or assumptions are required to reflect differences between the instruments. Offsetting Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Amounts due from credit institutions and loans to customers For amounts due from credit institutions and loans to customers carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced using an allowance account and the amount of the loss is recognised in the consolidated income statement. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the consolidated income statement. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated based on historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect 9

14 the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Held-to-maturity financial investments For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are credited to the consolidated income statement. Available-for-sale financial investments For available-for-sale financial investments, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement is reclassified from other comprehensive income to the consolidated income statement. Impairment losses on equity investments are not reversed through the consolidated income statement; increases in their fair value after impairment are recognised in other comprehensive income. In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in the consolidated income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. Renegotiated loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. The accounting treatment of such restructuring is as follows: - If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised. - If the loan restructuring is not caused by the financial difficulties of the borrower the Bank uses the same approach as for financial liabilities described below. - If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after restructuring, the Bank recognizes the difference between the present value of the new cash flows discounted using the original effective interest rate and the carrying amount before restructuring in the provision charges for the period. In case loan is not impaired after restructuring the Bank uses the same approach as for financial liabilities described below. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original or current effective interest rate. Derecognition of financial assets and liabilities Financial assets A financial asset or a group of similar financial assets (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where: - the rights to receive cash flows from the asset have expired; 10

15 - the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; and - the Bank either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cashsettled option or similar provision) on an asset measured at fair value, the extent of the Bank s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated income statement. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, current accounts with the NBU and other credit institutions and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual encumbrances. Precious metals Gold and other precious metals are recorded at NBU bid prices, which approximate fair values and are quoted at a discount to London Bullion Market rates. Changes in the NBU bid prices are recorded as exchange differences from precious metals in other income. Repurchase and reverse repurchase agreements and securities lending Sale and repurchase agreements ( repos ) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the consolidated statement of financial position and, in the event that the transferee has the right by contract or custom to sell or repledge them, they are reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within amounts due to credit institutions or customers. Securities purchased under agreements to resell ( reverse repo ) are recorded as amounts due from credit institutions or loans to customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method. Securities lent to counterparties are retained in the consolidated statement of financial position. Securities borrowed are not recorded in the consolidated statement of financial position, unless these are sold to third parties, in which case the purchase and sale are recorded within gains less losses from trading securities in the consolidated income statement. The obligation to return them is recorded at fair value as a trading liability. Derivative financial instruments In the normal course of business, the Bank enters into various derivative financial instruments including forwards, swaps and options in the foreign exchange market. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in profit or loss and are included in gains less loss from foreign currencies. Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the consolidated income statement. 11

16 Swaps are contractual agreements between two parties to exchange movements in interest and foreign currency rates and equity indices, and (in the case of credit default swaps) to make payments with respect to defined credit events based on specified notional amounts. Promissory notes Promissory notes purchased are included in available-for-sale investment securities, or in amounts due from credit institutions or in loans to customers, depending on their substance and are accounted for in accordance with the accounting policies for these categories of assets. Borrowings Financial instruments issued or their components are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to the National Bank of Ukraine, credit institutions; amounts due to customers, debt securities issued and subordinated debt. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated income statement when the borrowings are derecognised as well as through the amortisation process. If the Bank purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognised in the consolidated income statement. Leases i. Finance Bank as lessee The Bank recognises finance leases as assets and liabilities in the consolidated statement of financial position at the date of commencement of the lease term at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable to determine; otherwise, the Bank s incremental borrowing rate is used. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The costs identified as directly attributable to activities performed by the lessee for a finance lease, are included as part of the amount recognised as an asset under the lease. ii. Finance - Bank as lessor The Bank recognises lease receivables at a value equal to the net investment in the lease, starting from the date of commencement of the lease term. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables. iii. Operating - Bank as lessee Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognised as expenses on a straight-line basis over the lease term and included into other operating expenses. iv. Operating - Bank as lessor The Bank presents assets subject to operating leases in the consolidated statement of financial position according to the nature of the asset. Lease income from operating leases is recognised in the consolidated income statement on a straight-line basis over the lease term as other income. The aggregate cost of incentives provided to lessees is recognised as a reduction of rental income over the lease term on a straight-line basis. Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Bank. The Bank measures goodwill at the acquisition date as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree if the business combination is achieved in stages) and the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. 12

17 Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. The Bank elects on transaction-by-transaction basis whether to measure non-controlling interests at fair value, or at their proportionate share of the recognised amount of the identifiable net assets of the acquiree, at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Bank incurs in connection with a business combination are expensed as incurred. Subsidiaries Subsidiaries are investees controlled by the Bank. The Bank controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Bank consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Acquisitions and disposals of non-controlling interests The Bank accounts for the acquisitions and disposals of non-controlling interests as transactions with equity holders in their capacity as equity holders. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent. Associates Associates are those entities in which the Bank has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Bank s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Bank s share of losses exceeds the Bank s interest (including long-term loans) in the associate, that interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Bank has incurred obligations in respect of the associate. Transactions eliminated on consolidation Intra-Bank balances and transactions, and any unrealised gains arising from intra-bank transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Bank s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment. Goodwill Goodwill on acquisitions of subsidiaries is included in intangible assets. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Goodwill is allocated to cash-generating units for impairment testing purposes and is stated at cost less impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Non-controlling interests Non-controlling interests are the equity in a subsidiary not attributable, directly or indirectly, to the Bank. Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity attributable to equity holders of the Bank. Non-controlling interests in profit or loss and total comprehensive income are separately disclosed in the consolidated income statement and consolidated statement of comprehensive income. The consolidated financial statements include the following subsidiaries: Ownership / Voting, % Date of Subsidiary Country incorporation Industry LLC "Raiffeisen Leasing Aval" Ukraine 29 June 2006 Finance leasing Property LLC REC GAMMA Ukraine 26 March 2013 management 13

18 As at 31 December 2014, JSC Vinegar-yeast Plant is an associate of the Bank with share capital 33.84% ( JSC Vinegar-yeast Plant 33.84%). Investments in associates are recognized as investment securities availablefor-sale and are totally impaired (Note 18). In October 2013 investment in subsidiary LLC "Raiffeisen Aval Asset Management" was impaired. This caused the change in the consolidation group as at the end of the financial year In November 2014 the company was liquidated. Investment property Investment property is held by the Bank for the purpose of earning rental income or for capital appreciation and is not occupied by the Bank. Investment property is initially measured at cost together within transaction costs. Subsequent to initial recognition, investment property is carried at value that reflects the current market value and is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction. Valuation of investment property is performed at each balance sheet date and the difference between carrying amount and fair value is recognized in the consolidated income statement as Revaluation of Investment property. Rental income is recognised in the consolidated income statement in other operating income. Expenses are capitalized only when it is probable that the Bank will receive the associated economic benefits, and that their value can be reliably estimated. All other expenses (repairs and maintenance) are recognized as expenses in the certain period. Property and equipment Equipment is carried at cost or restated cost (for assets acquired prior to 31 December 2000), excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. Buildings are measured at fair value less depreciation and impairment charged subsequent to the date of the revaluation. The carrying values of equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Following initial recognition at cost, buildings are carried at their revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Any revaluation surplus is credited to the revaluation reserve for property, which included in other comprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the consolidated income statement, in which case the increase is recognised in the consolidated income statement. A revaluation deficit is recognised in the consolidated income statement, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the revaluation reserve for property and equipment. An annual transfer from the revaluation reserve for property to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the assets original cost. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Depreciation of an asset begins when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives: Years Buildings 6-50 Furniture, fixtures and other assets 2-25 Equipment and computers 2-15 Motor vehicles 6 The asset s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end. Costs related to repairs and renewals are charged when incurred and included in other operating and administrative expenses unless they qualify for capitalisation. Intangible assets Intangible assets include acquired computer software and licences. Intangible assets acquired separately are measured on initial recognition at cost or restated cost (for assets acquired prior to 31 December 2000). Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets 14