Consolidated and Separate Financial Statements of the Nordea Bank Polska S.A. Group The third quarter of 2006

Transcription

1 Consolidated and Separate Financial Statements of the Nordea Bank Polska S.A. Group The third quarter of 2006

2 SELECTED FINANCIAL FIGURES keur 3 quarter(s) 3 quarter(s) 3 quarter(s) 3 quarter(s) incrementally 2006 Period from 01/01/2006 incrementally 2005 Period from 01/01/2005 incrementally 2006 Period from 01/01/2006 incrementally 2005 Period from 01/01/2005 to 30/09/2006 to 30/09/2005 to 30/09/2006 to 30/09/2005 Data concerning the condensed consolidated financial statements 1. Interest income Fee and commission income Total operating income Gross profit (loss) Net profit (loss) Cash flow in operating activities Cash flow in investing activities Cash flow in financing activities Cash flow in the year Total assets Liabilities to banks Liabilities to customers Total equity Share capital Number of shares Book value per share (PLN/EUR) Capital adequacy ratio Earnings per ordinary share (PLN/EUR) Data concerning the condensed financial statements 1. Interest income Fee and commission income Total operating income Gross profit (loss) Net profit (loss) Cash flow in operating activities Cash flow in investing activities Cash flow in financing activities Cash flow in the year Total assets Liabilities to banks Liabilities to customers Total equity Share capital Number of shares Book value per share (PLN/EUR) Capital adequacy ratio Earnings per ordinary share (PLN/EUR)

3 Consolidated Profit and Loss Account 01/07/ /01/ /07/ /01/2005 note 30/09/ /09/ /09/ /09/2005 Operating income Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Gains/losses on items at fair value through profit or loss Change in investments in associates accounted for under the equity method Dividends received Other operating income Total operating income Operating expenses Administrative expenses staff costs other administrative expenses Depreciation Total operating expenses Impairment of loans and advances Sale of fixed assets and intangible assets Gross profit Income tax Net profit

4 Consolidated Balance Sheet ASSETS Note 30/09/ /06/ /12/ /09/ /06/2005 Cash in hand and balances with central bank Treasury bills and other debt securities eligible for rediscounting with the central bank Receivables from banks Receivables from customers Debt securities Shares Derivative financial instruments Investments in associates Intangible assets Property, plant and equipment Deferred tax assets Prepayments Other assets TOTAL ASSETS

5 LIABILITIES Note 30/09/ /06/ /12/ /09/ /06/2005 LIABILITIES AND RESERVES Liabilities to banks Liabilities to customers Liabilities due to debt securities in issue Derivative financial instruments Other liabilities Accruals Deferred tax reserve Provisions TOTAL LIABILITIES Share capital Supplementary capital Reserve capital Retained earnings Net profit (loss) for the year Total equity TOTAL LIABILITIES AND EQUITY

6 Statement of Movements in Consolidated Equity Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 1 January Distribution of the profit for Coverage of retained losses Net profit (loss) for the year Measurement of financial assets Balance as of the end of 30 September Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 1 January Distribution of the profit for Coverage of retained losses Net profit (loss) for the year Measurement of financial assets Balance as of the end of 30 June Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of the profit for Net profit (loss) for the year Measurement of financial assets Balance as of the end of 31 December

7 Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of the profit for Net profit (loss) for the year Measurement of financial assets Balance as of the end of 30 September Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of the profit for Net profit (loss) for the year Measurement of financial assets Balance as of the end of 30 June

8 Consolidated Cash Flow Statement 01/07/ /01/ /07/ /01/ /09/ /09/ /09/ /09/2005 Operating activities Net profit Adjustment for reconciliation of the net profit with the net cash from operating activities Interest paid and received Income tax Effect of exchange differences for operating activities Operating activities Changes in operating assets Change in loans to financial institutions Change in advances (lending activity) Change in derivative financial instruments Change in other assets except for financial instruments Change in operating liabilities Change in deposits by credit institutions Change in deposits and borrowings from other institutions Change in other liabilities Cash flow in operating activities Investing activities Sale of subordinates Purchase of fixed assets Sale of fixed assets Purchase of intangible assets Sale of intangible assets Change in other financial assets Cash flow in investing activities Financing activities Other Cash flow in financing activities Cash flow in the year Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Balance sheet change in cash Interest paid Interest received

9 Profit and Loss Account 01/07/ /01/ /07/ /01/ /09/ /09/ /09/ /09/2005 Operating income Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Gains/losses on financial instruments at fair value through profit or loss Change in investments in associates accounted for under the equity method Dividends received Other operating income Total operating income OPERATING EXPENSES Administrative expenses staff costs other operating expenses Depreciation and revaluation of assets Total operating expenses Impairment of loans and advances Sale of fixed assets and intangible assets Gross profit Income tax on the gross profit this year Net profit

10 Balance Sheet ASSETS 30/09/ /06/ /12/ /09/ /06/2005 Cash in hand and balances with Central Bank Treasury Bills and other debt securities eligible for rediscounting with Central Bank Receivables from banks Receivables from customers Debt securities Shares Derivative financial instruments Shares and interests in subsidiaries Intangible assets Property, plant and equipment Deferred tax assets Prepayments Other assets TOTAL ASSETS

11 LIABILITIES 30/09/ /06/ /12/ /09/ /06/2005 LIABILITIES AND RESERVES Liabilities to banks Liabilities to customers Liabilities due to debt securities in issue Derivative financial instruments Other liabilities Accruals Deferred tax reserve Provisions TOTAL LIABILITIES Share capital Supplementary capital Reserve capital Retained earnings Net profit/(loss) for the year Total equity TOTAL LIABILITIES AND EQUITY

12 Statement of Movements in Equity Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year Equity Balance as of 1 January Distribution of the profit for Coverage of retained losses Net profit (loss) for the year Balance as of the end of 30 September Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 1 January Distribution of the profit for Coverage of retained losses Net profit (loss) for the year Balance as of the end of 30 June Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of the profit for Net profit (loss) for the year Balance as of the end of 31 December

13 Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of the profit for Net profit (loss) for the year Balance as of the end of 30 June Share Supplementary Reserve Retained earnings Total and the profit/ capital capital capital loss for the year equity Balance as of 31 December 2004 according to the previously applied accounting principles Changes resulting from the adoption of the IFRS as of 1 January Balance as of 1January 2005 in accordance with the IFRS Distribution of the profit for Net profit (loss) for the year Balance as of the end of 30 September

14 Cash Flow Statement 01/07/ /01/ /07/ /01/ /09/ /09/ /09/ /09/2005 Operating activities Net profit Adjustment for reconciliation of the net profit with the net cash from operating activities Interest paid and received Income tax Effect of exchange differences for operating activities Operating activities Changes in operating assets Change in the value of Treasury bills and other government securities Change in loans to financial institutions Change in advances (lending activity) Change in derivative financial instruments Change in other assets except for financial instruments Change in operating liabilities Change in deposits by credit institutions Change in deposits and borrowings from other institutions Change in other liabilities Cash flow in operating activities Investing activities Purchase of fixed assets Sale of fixed assets Purchase of intangible assets Sale of intangible assets Change in other financial assets Cash flow in investing activities Financing activities Other Cash flow in financing activities Cash flow in the year Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Balance sheet change in cash Interest paid Interest received

15 Information on the Nordea Bank Polska S.A. Group The Group of Nordea Bank Polska S.A. ("Group ) comprises: Nordea Bank Polska S.A., Bank the parent company, Inwestycje Kapitałowe S.A.- a subsidiary The parent company of the Group is Nordea Bank Polska S.A., a joint stock company registered in Poland. Background information on the Group companies: 1) Nordea Bank Polska S.A. the parent company Nordea Bank Polska Spółka Akcyjna, hereinafter referred to as the Bank, whose registered office is in Gdynia at No. 2, Kielecka St., registered by the District Court in Gdańsk, 16 th Business Division of the National Court Register on November 21, 1991 (register No.: KRS ); sector according to the classification applied by the Warsaw Stock Exchange: BANKS. The core business of Nordea Bank Polska S.A., based in Gdynia, according to the Polish Business Classification, is other banking activity (PKD A). The Bank provides universal banking services to all entities, both business and non-business, as well as natural persons. The Bank's shares are listed at the Warsaw Stock Exchange. 2) Inwestycje Kapitałowe S.A. the subsidiary Nordea Bank Polska S.A. holds 100% of the shares in Inwestycje Kapitałowe Spółka Akcyjna. Inwestycje Kapitałowe Spółka Akcyjna based in Gdańsk operates under its articles of association made in the form of a notarised deed dated 14 October The Company was entered into the Commercial Register under a decision issued by the District Court XII Commercial Register Division in Gdańsk on 4 November 1994 in section B under number RHB The entry in the National Court Register was made on 27 September 2001 under number KRS The core business of the subsidiary is defined as other financial intermediation described in section 6523 of the European Business Classification, secondary operations are defined as advisory services in the area of operations relating to the conducting of business and management, classified in the EBC in section

16 1. Description of the factors and events influencing the profit earned in the third quarter of 2006: The net profit recorded by the Nordea Bank Polska S.A. Group for the third quarter of 2006 amounted to 12,1 mpln. This is 244% more than the result posted in the corresponding period of 2005 (3.5 mpln). The considerable improvement in the financial standing was a consequence of a significant growth in the business volumes achieved by the Group (from the end of September 2005 to 2006 the balance sheet total went up by 19%), as well as positive changes in the structure of the assets and liabilities, which made it possible to compensate to a large extent the negative consequences of the shrinking market rates (between September 2005 and September 2006, the average interest rate on loans decreased by about. 0.7 percentage points, while the rate on customer deposits fell by around 0.6 percentage points). Other important positive factors included: increased repayments of loans under restructuring; a larger contribution from commission income; an effective cost-curbing policy. The specification below shows the changes that occurred in the main items of the consolidated profit and loss account of the Nordea Bank Polska S.A. Group in the third quarter of 2006 compared with the corresponding quarter of Selected items of the P&L account (PLN thousand) Q Q Change Total operating income ,8% Total operating expenses ,2% Operating profit ,0% Gross profit ,7% Income tax ,2% Net profit ,4% Operating income The operating income earned by the Nordea Bank Polska S.A. Group in the third quarter of 2006 amounted to 59,9 mpln. It was almost 22% more than the result posted in the same quarter of The most important income items were as follows: - The net interest income reached 31,389, 3.1% up on the same item in the third quarter of As regards interest income, this is a result of two factors acting in opposite directions: the growth in the credit volume in all the main customer segments (businesses - o 583 mpln, private individuals (mortgage loans) by 446 mpln, public sector entities by 193 mpln), as well as a drop in the average (for the quarter) nominal interest rate on loans by 0.92 percentage points in Q compared with Q As regards interest expenses, one could see the doubling of the balance of current accounts and a 3% growth in the term deposits, which contributed to a significant reduction of interest expenses; 16

17 - The net fee and commission income amounted to 12,006, exceeding the previous year s result by 68%. This was mainly brought about by the commission income from the surging credit volume (an increase of 1.95 mpln), international payment transactions (an increase of PLN 1.5 mpln) and income relating to the handling of unit-linked funds (2.3 mpln).; - Gains on items at fair value were in the third quarter of 2006 higher by 5.3 mpln, which represented 159% of the amount posted in the corresponding period of the previous year. This was on the one hand caused by a positive development in the FX income and transactions over derivative instruments (a 13.4 mpln rise) and on the other hand by a much smaller F/X profit (a decrease by about 7.4 mpln) compared with Q r. Operating expenses The operating expenses reached in the third quarter of 2006 the level of 45.5 mpln, bettering the result posted at the end of the corresponding period of last year by 3.2%. The specific cost items were as follows: - staff costs: turned out to be 8% higher, following an almost 6% increase in the head count caused by the opening of new bank outlets as well as structural changes resulting from the centralisation of the back office functions (between September 2005 and September 2006, the level of employment in the branches decreased by 7.5%, whereas the head count in the Head office increased by 27.6%); - other administrative expenses turned out to be 5.7% higher than a year ago (higher cost of rent of office space, bigger expenditures on IT and marketing); - the cost of depreciation of fixed assets decreased by 21%, reaching 5.7 mpln due to a decrease in the volume of fixed assets (disposal of or resignation from the lease of premises considered redundant after the merger between Nordea Bank Polska S.A. and LG Petro Bank S.A. in 2003). Allowances for the impairment of loans and advances In the third quarter of 2006, charges to provisions and the balance of impairment of loans and advances decreased by 2,529 (the corresponding period of last year saw an increase by 91 ). It must be highlighted that the volume of irregular loans fell sharply (by 167 mpln). This is also reflected in the ratio of the irregular receivables to the total receivables, which reached 6.3% (compared with 12.8% at the end of September 2005). Consolidate Balance Sheet The changes occurring in the most important items of the balance sheet are presented in the table below: 17

18 Selected items (mpln) 30/09/ /09/2005 Zmiana % Balance sheet total 6 316, ,1 +18,8% Gross receivables from customers 5 002, ,9 +31,7% Receivables from banks 539,1 916,6-41,2% Liabilities to customers *) 4 412, ,1 +31,8% Liabilities to banks 1 265, ,3-9,6% Equity 553,0 510,2 +8,4% *) Including liabilities due to debt securities in issue Compared with the corresponding period of last year, the balance sheet total of the Nordea Bank Polska S.A. Group (which is an aggregated measure of the volume of business) grew by 18.8%, reaching 6,316.9 mpln on 30/09/2006. This means a 2% drop on the figure recorded at the end of the second quarter (a similar seasonal drop had been observed between the second and the third quarter of 2005). The volume of business done with the customers developed dynamically (both the credit volume and the deposit volume showed a dynamics of about 32%) and so did the value of the securities portfolio (the value of debt securities increased by about 15%), whereas the volume of business done with banks decreased. Credit portfolio The almost equal contributors to the growth in the credit volume were PLN-denominated loans (a 594 mpln increase, that is by 23% in relative terms) and foreign currency-denominated loans (which grew by the equivalent of 568 mpln, that is by 53% in relative terms). Loans to private individuals showed high dynamics (55%), largely due to a 63% increase in the volume of mortgages. At the same time, receivables from business went up by 29%, and the receivables from the public sector by 19%. These are bigger growth rates than the figures for the whole commercial banking sector, which can be worked out for the same period on the basis of the report entitled The Receivables and Liabilities of Monetary Financial Institutions, regularly published by the National Bank of Poland. Thus, it can be seen that the trends caused by the operation of macroeconomic factors continue: a growing consumer demand and the propensity of private individuals to undertake long-term liabilities connected with the financing of their housing needs, following from a rise in employment and salaries, as well as considerable financial surplus realised by businesses, which allows them to boost production by activating their reserves or through investments financed with their own money. The amount of receivables from banks decreased by 41%, which is a consequence of a drop in the balance of term deposits and of nostro accounts. Summing up the changes in the structure of the assets of the Nordea Bank Polska S.A. Group, we can say that they have caused major shifts: the proportion of receivables from customers grew from 68.8% 18

19 to 78.0%, while the proportion of receivables from banks fell (from 17.2% to 8,5%) and so did the proportion of debt securities (from 9.0% to 8.7%). The share of interest-income-generating assets (except for the balance of the current account with NBP constituting the mandatory reserve) maintained a similar level (95%). Deposit base In the third quarter of 20006, the level of liabilities to customers was 32% higher than at the end of the third quarter of This was mainly a consequence of the dynamics of corporate deposits (77% up) and to a lesser extent of household deposits (which had only grown by 2%). Public sector deposits recorded a 38% fall in the period under analysis. One should note a positive change (for the profit and loss account) in the proportion of current and term deposits to total deposits: the balance of current accounts was almost twice as high at the end of September 2006 as it had been at the end of September 2005 (having grown by 93%); the balance of term deposit increased by a mere 3% over the same period. A similar trend (though not as strong) is followed by the whole banking sector: current deposits increased by 26% in the period in question, while term deposits by 1%. Another essentially positive factor is the faster growth in F/X deposits than in PLN deposits (60% vs. 27%), which is good from the point of view of interest expenses as well as the cost of closing the Bank s F/X position. Liabilities to banks fell in the period under consideration by 9.6%, owing to a smaller demand for finance from the Nordea Group, used for balancing the F/X position opened by foreign-currencydenominated loans. These changes caused the proportion of deposits to the balance sheet total to grow from 63% at the end of Q to 70% at the end of Q , while the proportion of liabilities to banks slightly decreased (from 26% to 20%). All in all, the proportion of liabilities generating interest expenses increased in the period of analysis by 0.6 percentage points (from 89.3% in September 2005 to 89.9% in September 2006), whereas the total proportion of liabilities grew from 90.4% to 91.2%. 2. Significant Accounting Policies (a) Statement of compliance The condensed interim financial statements of the Bank have been drawn up in accordance with the requirements of the International Financial Reporting Standards (IFRS) as approved by the European Union, and with respect to issues not provided therein - in accordance with the requirements of the Accounting Law of September 29, 1994 (Official Journal of 2002 No. 76 item 694, as amended) and enforcement regulations issued on the basis of that law, as well as according to the requirements applying to the issuers of securities admitted to trading or in regard of which an application has been filed for admission to trading in an official stock market.. 19

20 The interim consolidated financial statements of the parent company have been drawn up in accordance with the requirements of the International Financial Reporting Standards (IFRS). (b) An earlier application of the standards that are not yet mandatory IFRS 7 Financial Instruments Disclosures, which has been approved by the European Union, is not yet mandatory but will take effect as of 1 January The Bank did not apply IFRS 7 earlier, because in the opinion of the Management Board, the disclosures under IFRS 7, will not differ in any material respect from the disclosures under IAS 32 and IAS 30. Other standards or amendments to the existing standards and interpretations issued by the International Financial Reporting Standards Interpretation Committee, both the approved ones and the ones pending approval by the European Commission are either not applicable to the Bank s consolidated financial statements or would not have any material influence on these condensed interim financial statements. (c) The basis of preparation of the consolidated financial statements These financial statements incorporate the concept of fair value of financial assets and financial liabilities measured at fair value through profit or loss, including derivative instruments, as well as financial assets classified as available-for-sale, except for such assets whose fair value cannot be reliably measured. Other financial assets and financial liabilities are carried at amortised cost (loans and advances, financial liabilities other than those measured at fair value through profit or loss) or at cost less any impairment losses. The consolidated financial statements are presented in the Polish zlotys and rounded to the nearest thousand. The Polish zloty is a functional currency and the currency of the Group's presentations. The consolidated financial statements were prepared on the historical cost basis, except for the following assets and liabilities, which are accounted for at fair value: derivative financial instruments, financial assets and financial liabilities at fair value through profit and loss. The preparation of the consolidated financial statements in compliance with the IFRS requires the management to make judgements, estimates and assumptions influencing its accounting policies and the presentation of the assets and liabilities, as well as the income and expenses. The estimates and assumptions are based on available historical data and a number of other factors that are deemed to be reasonable under the circumstances, the results of which constitute the basis for estimating the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and the underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period when the estimate is revised, provided that such an estimation affects only that period or in the period of the revision and in future periods if the revision affects both current and future periods. 20

21 The accounting policies presented below have been applied to all the reporting periods presented in the consolidated financial statements. The accounting policies have been applied consistently by each of the Group entities. (d) Comparability with the results of previous periods In order to ensure comparability of the consolidated Profit and Loss account, the following changes in the presentation of financial data were made in comparison with the third quarter 2005: - a change in the treatment of gains/losses on the sale of fixed assets in the amount of 7 in the line Sale of fixed assets and intangible assets, previously presented in the line Other operating income, Administrative expenses and Other operating expenses.. (e) The principles of consolidation Subsidiary Subsidiaries are units that are controlled by Nordea Bank Polska S.A. Such control exists if the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain economic benefits from its activities. The financial statements of subsidiaries are included in the consolidated statements from the date that control commences until the date that control ceases. The Bank has one (wholly-owned: 100% of shares) subsidiary, Inwestycje Kapitałowe SA, which is presented in the balance sheet in the line Shares and interests in subsidiaries. As of 30 September 2006, the carrying amount of the shares was Associate Associates are entities under significant influence of the Group, but whose financial and operating polices are not controlled by the The consolidated financial statements comprise the Group's share in the gains and losses of the associates on an equity accounted basis from the date that significant influence commences until the date the significant influence ceases. Transactions eliminated on consolidation Intra-group balances and unrealised gains and losses or income and expenses resulting from intragroup transactions are excluded from the consolidated financial statements. Unrealised gains arising from transactions with associates or joint ventures are eliminated proportionally to the Group's interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains unless there is evidence for impairment. (f) Transactions in foreign currencies shown in the functional currency measurement Transactions in foreign currencies are translated at the foreign exchange rates applicable at the transaction date. Monetary assets and liabilities denominated in foreign currencies and stated at historical costs are translated at the exchange rates effective at that date. Exchange differences 21

22 arising from translation are recognised in profit or loss. Non-monetary assets and liabilities denominated in foreign currencies and stated at historical costs are translated at the exchange rates prevailing at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies and stated at fair value are translated into the currency of the financial statements at the foreign exchange rates applicable at the date when their fair value was measured. (g) Hedge accounting and derivative financial instruments The Group does not apply hedge accounting. Derivative financial instruments are initially recognised at fair value. Subsequently, they are measured at fair value without any allowance for transaction costs to be borne to sell them. The best evidence of the fair value of a financial instrument at the initial recognition is the transaction price (i.e. the fair value of the consideration paid or received) unless the fair value of the instrument is evidenced by comparison with other observable current market transactions over the same instruments (i.e. without any modifications) or based on a valuation technique only including data from observable markets. Some derivative instruments embedded in other financial instruments are separated from the basic agreement and treated as derivative instruments provided that the economic properties and risks of such embedded derivative instruments are not strictly related to the economic features and risks of the basic agreement, and the basic agreement is not measured at fair value through profit or loss. Embedded derivative instruments are measured at fair value, and changes in the fair value are taken to profit or loss. The Group uses financial derivative instruments to hedge its exposure to foreign exchange and interest rate risks resulting from its operating, financing and investing activities. (h) Financial assets and financial liabilities Classification The Group has classifies financial instruments into the following categories: financial assets or financial liabilities at fair value through profit or loss, and loans and receivables. (a) Financial assets or financial liabilities at fair value through profit or loss These are financial assets and liabilities meeting one of the following criteria. (1) They are classified as held-for-trading. Financial assets or financial liabilities are classified as heldfor-trading if they are acquired or incurred mainly for the purpose of being sold or repurchased in near future; they are a part of the portfolio of certain financial instruments managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Derivative instruments are also categorised as held-for-trading unless a derivative is a designated and effective hedging instrument.. (2) Upon initial recognition they were designated by the Group as measured at fair value through profit or loss. 22

23 (b) Loans and receivables Loans and receivables are financial assets other than derivative instruments, whose terms of payment are defined or definable, which are not quoted in an active market. Loans and receivables arise when the Group provides finance to customers for other purpose than short-term profit taking. Loans and receivables comprise loans and advances to other banks and customers, including purchased receivables and investment in debt securities provided that they are not quoted in an active market. NBP bonds were also classified in the loans and receivables category. (c) Financial liabilities A financial liability is a contractual obligation of the Bank to deliver cash or another financial asset to another entity. Financial liabilities are measured according to the amortised cost method using the effective interest rate. They comprise deposits received from other banks and from customers, as well as debt securities issued. The Group does not classify financial assets into the categories: held-to-maturity and available-forsale. Recognition and de-recognition in the balance sheet A regular way purchase or sale transaction involving financial assets is accounted for in the balance sheet as of the transaction date. This method is applied consistently for all purchase and sale transactions over financial assets. Loans are recognised when cash is advanced to borrowers. A financial asset is derecognised from the balance sheet when the contractual rights to cash flows from the financial asset expire or when the Group transfers a major part of the risk and benefits connected with the possession of the financial asset. Measurement Upon initial recognition, a financial asset or a financial liability is measured at fair value increased, in the case of financial assets or liabilities not classified at fair value through profit or loss, by transaction costs directly attributable to the acquisition or issue of the financial asset or financial liability. Subsequently, the Bank measures financial assets, including derivative instruments being assets, at fair value without any deduction for transaction costs to be borne on sale or other disposal, except for: except for: - loans and receivables (receivables from banks and customers, NBP bonds), which are measured at amortised cost using the effective interest rate method - investments in associates, which are measured according to the share held by the Bank in the net assets, allowing for any impairment losses. After the initial recognition, financial liabilities are measured at amortised cost using the effective interest rate method except for financial liabilities measured at fair value through profit or loss (derivative financial instruments).. 23

24 Gains and losses on subsequent measurement Gains and losses from a change in the fair value of a financial asset or financial liability eligible for being recognised at their fair value through profit or loss, not being a part of a hedging relationship, shall be charged to income or cost. The fair value of investments in an active market is based on current bid prices. If there is no active market for a given instrument or securities are not listed, the Bank establishes the fair value based on valuation techniques, which include recent arm s length transactions, the analysis of discounted cash flows, option pricing models and other valuation techniques commonly applied by marketplace participants. Offsetting financial instruments A financial asset and a financial liability are offset and the net amount is presented in the balance sheet when and only when there is a legally enforceable legal right to set off the recognised amounts and when the settlement is to be carried out on a net basis or the asset is realised and the liability settled simultaneously. (i) Impairment of financial assets Financial assets measured at amortised cost As at the balance-sheet date, the Group assesses whether there is any objective evidence for the impairment of any financial asset (or a group of financial assets). The recognition of assets as impaired assets is not limited to ma situation when the loss may be recognized as irreversible. The objective evidence of impairment of a financial asset or a group of assets may be constituted by a single event or a combined effect of several events. The Group includes the following events as examples of objective circumstances suggesting the occurrence of impairment i: - a significant financial difficulty of the issuer or obligor; - breach of contract, e.g. default or delinquency in interest or principal payments; - a concession made by the Group to the borrower, for economic or legal reasons relating to the Borrower s financial difficulty, which the Group would not otherwise consider; - probable bankruptcy of the borrower or other financial reorganisation of the borrower caused by its difficult situation; - the disappearance of an active market for a given financial asset because of financial difficulties, or - information indicating that the drop of estimated future cash flow from the group of financial assets may be measured from the moment of their initial recognition although the drop related to a single financial asset may not be defined yet, including: - adverse changes to the payment status of the debtors (e.g. increasing number of defaulted payments); or - adverse changes in the domestic or local market that are correlated (may contribute to) with the impairment of assets coming within such a group (e.g. increase in the unemployment rate, adverse economic or legal changes in a given sector of economy). 24

25 The above list presents examples and does not exhaust all possible situations that may be considered as sufficient evidence of impairment. The Group tests all its credit exposures for impairment. Exposures for which evidence of impairment has been found are subject to impairment testing done individually or on the basis of a whole portfolio, depending on the amount of a single exposure. Exposures deemed to be individually significant are subject to individual impairment testing. Exposures deemed to be individually insignificant are subject to portfolio impairment testing based on historical data concerning cash flow from assets having a similar risk profile. Exposures are divided into individually significant and individually insignificant according to the criterion of amount. This process enables the Group to make an adequate classification of its customers to all relevant risk categories, as well as to define whether any loss has been incurred (whether a given exposure has become impaired). Exposures in the case of which no evidence of impairment has been found are subject to tests for incurred but not yet identified losses ( IBNR ). The purpose of portfolio IBNR tests is to estimate the losses that have already been incurred (and influenced future cash flows that were to be settled in accordance with the agreement), but are still unidentifiable under individual impairment tests. To make portfolio tests, credit exposures are grouped in such a manner as to maintain an approximate specification of credit risk of individual sub-portfolios. The basic factors taken into account are: customer type, product type, sector, delinquency in payment. The portfolio testing at the Group does not cover customer exposures whose objective impairment reasons have been recognised. The results of historical data analyses constituting the basis for provisioning are further revised to take account of the impact of current factors which did not exist in the past, and to eliminate the impact of the factors that existed in the past and do not exist now. If there is any objective evidence of credit exposure impairment, the amount of impairment loss is calculated as the difference between the carrying amount of the asset in question and the present value of estimated future cash flows. The time value of money is included in the calculation of estimated cash flows both in the case of expected additional payments, as well as expected results of debt recovery activity (enforcement against collateral held). When estimating the value of collateral held, the Goup takes into consideration the possible price to be obtained from forced sale. This price is additionally reduced by the expected costs of enforcement, sale, storage, etc. In the case of exposures towards business entities, to rate risks and carry out impairment tests, the Group applies an internal rating system, which is to reflect the probability of default. (j) Property, plant and equipment Items of property, plant and equipment and intangible assets are initially measured at cost or deemed cost. 25

26 After the initial recognition of items of property, plant and equipment as well as intangible assets as assets, the Group carries them at cost less accumulated depreciation and any cumulative impairment losses. Goodwill All business combinations are accounted for at acquisition costs. Goodwill is the value resulting from the acquisition of subsidiaries, associates and joint ventures. In the case of acquisitions that took place after January 1, 2003, goodwill represents the difference between the cost of acquisition and the fair value of identifiable assets acquired. Goodwill is allocated to cash generating units and it is not subject to depreciation. Goodwill is tested for impairment every year. Subsequent expenses The Group recognises in the carrying amount of property, plant and equipment and intangible assets the cost of replacing a part of such items at the moment such cost is incurred if the Group is likely to obtain future economic benefits related to the assets, and the cost to buy or manufacture may be reliably measured. Other costs are charged to the profit and loss account when incurred. Amortisation Amortization is charged to the profit and loss account on a straight-line over the economic useful life of a given tangible or intangible asset. Land is not subject to depreciation. The estimated economic useful lives are as follows: buildings and structures machinery and equipment fittings means of transport computer software licences years 3-22 years 5-10 years 5 years 5 years 2-5 years The residual value is subject to annual estimation. (k) Other receivables Trade and other receivables are carried at cost less any impairment losses. (l) Cash and Cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise items maturing within three months of their acquisition date, including: cash in hand and balances with the central bank of unlimited disposal, Treasury bills and other eligible bills (including loans and advances to other banks, receivables from other banks and short-term securities of the State Treasury). 26