CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2014
CONSOLIDATED INCOME STATEMENT For the year ended Notes Interest and similar income 8,198,628 4,826,609 Interest and similar expense (2,821,045) (1,146,822) NET INTEREST INCOME 3 5,377,583 3,679,787 Fee and commission income 18,151,482 15,850,147 Fee and commission expense (3,800,406) (2,802,605) NET FEE AND COMMISSION INCOME 4 14,351,076 13,047,542 Net gain from financial assets at fair value through profit or loss 5 441,910 1,030,016 Other income 3,579 30,292 TOTAL OPERATING INCOME 20,174,148 17,787,637 Write-back of impairment on balances due from a bank 11-1,532,505 Provision for credit losses, net 6 (469,047) (11,359) NET OPERATING INCOME 19,705,101 19,308,783 Personnel expenses 7 (9,543,493) (9,402,069) Depreciation of property and equipment 17 (1,769,124) (1,519,999) Amortization of intangible assets 18 (37,097) (36,584) Other operating expenses 8 (6,963,421) (7,270,933) TOTAL OPERATING EXPENSES (18,313,135) (18,229,585) PROFIT BEFORE TAX 1,391,966 1,079,198 Income tax expense 9 (4,333) (20,164) PROFIT FOR THE YEAR 1,387,633 1,059,034 Attributable to: Equity holders of the parent 1,388,440 1,060,599 Non-controlling interests (807) (1,565) PROFIT FOR THE YEAR 1,387,633 1,059,034 The attached notes from 1 to 32 form an integral part of these consolidated financial statements. 2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended PROFIT FOR THE YEAR 1,387,633 1,059,034 Other comprehensive income: Revaluation of property (note 25) - 14,328,847 Exchange differences on translation of foreign operations (14,218) (64,713) Net (loss) gain from financial instruments at fair value through other comprehensive income (43,278) 20,776 Other comprehensive (loss) income for the year (57,496) 14,284,910 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,330,137 15,343,944 Attributable to: Equity holders of the parent 1,327,218 15,331,441 Non-controlling interests 2,919 12,503 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,330,137 15,343,944 The attached notes from 1 to 32 form an integral part of these consolidated financial statements. 3
The attached notes from 1 to 32 form an integral part of these consolidated financial statements. 4
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended Share capital common shares Share premium common shares Equity holders of the parent Distributable Non-distributable reserves reserve Retained earnings (accumulated Changes in fair value of financial assets at fair value through other comprehensive Foreign currency translation Legal reserve Reserve for general banking risks Total General reserve losses) income Revaluation reserve of property reserve Result of the year profit Total Noncontrolling interests Total equity Balance at 1 January 2013 17,000,000 19,443,212 1,583,408 1,147,935 2,731,343 1,465,396 (1,261,012) (63,713) - (110,605) 3,036,985 42,241,606 47,114 42,288,720 Profit for the year 2013 - - - - - - - - - - 1,060,599 1,060,599 (1,565) 1,059,034 Other comprehensive income - - - - - - - 20,776 14,328,847 (78,781) - 14,270,842 14,068 14,284,910 Total comprehensive income - - - - - - - 20,776 14,328,847 (78,781) 1,060,599 15,331,441 12,503 15,343,944 Transfer to reserves and retained earnings (note 24) - - 44,804-44,804 (745,399) 3,737,580 - - - (3,036,985) - - - Balance at 31 December 2013 17,000,000 19,443,212 1,628,212 1,147,935 2,776,147 719,997 2,476,568 (42,937) 14,328,847 (189,386) 1,060,599 57,573,047 59,617 57,632,664 Profit for the year 2014 - - - - - - - - - - 1,388,440 1,388,363 (807) 1,387,545 Other comprehensive loss - - - - - - - (43,278) - (18,032) - (61,222) 3,726 (57,496) Total comprehensive income - - - - - - - (43,278) - (18,032) 1,388,440 1,327,141 2,919 1,330,049 Transfer to reserves and retained earnings (note 24) - - 29,433 264,902 294,335-766,264 - - - (1,060,599) - - - Balance at 17,000,000 19,443,212 1,657,645 1,412,837 3,070,482 719,997 3,242,832 (86,215) 14,328,847 (207,418) 1,388,440 58,900,188 62,536 58,962,713 The attached notes from 1 to 32 form an integral part of these consolidated financial statements. 5
CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended Notes OPERATING ACTIVITIES Profit before tax 1,391,966 1,079,198 Adjustments for: Depreciation 17 1,769,124 1,519,999 Amortization 18 37,097 36,584 Provision for credit losses, net 6 469,047 11,359 (Write-back of provision) provision for risks and charges (10,883) 10,953 Loss on disposal of property and equipment 2,888 2,492 Provision for employees end of service benefits 7 255,449 373,777 3,914,688 3,034,362 Operating loss before working capital changes: Balances with the Central Bank (8,592,750) (3,768,750) Financial assets at fair value through profit or loss 11,310,714 (5,890,407) Loans and advances to customers and related parties (29,121,771) (2,673,551) Other assets (673,288) 127,339 Financial liability under murabaha transaction (377) 4,543,063 Customers deposits at amortized cost 46,505,053 (631,508) Other liabilities 181,824 (792,231) Employees end of service benefits paid - (3,347) 23,524,093 (6,055,030) Taxes paid (20,164) (80,676) Net cash from (used in) operating activities 23,503,929 (6,135,706) INVESTING ACTIVITIES Purchase of property and equipment 17 (417,305) (328,335) Purchase of intangible assets 18 (19,746) - Proceeds from disposal of property and equipment 6,329 704 Net cash from (used in) investing activities (430,722) (327,631) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,073,207 (6,463,337) Effects of foreign exchange (186,193) (64,712) Cash and cash equivalents at 1 January 12,645,429 19,173,478 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 27 35,532,443 12,645,429 During the year ended, non-cash transactions comprised the transfer of LL (000) 790,388 from investments in subsidiaries and affiliates accounts to loans and advances accounts (note 15). During the year ended 31 December 2013, the non-cash transaction comprised the revaluation of property in the amount of LL (000) 14,328,847 which was charged to the revaluation reserve under equity (note 25). The attached notes from 1 to 32 form an integral part of these consolidated financial statements. 6
1 CORPORATE INFORMATION FFA Private Bank SAL (the Bank) is a Lebanese shareholding company registered at the commercial registry of Beirut on 7 June 1996 under no. 70256. The Bank started its operations as a financial institution (Financial Funds Advisors SAL) registered at the Bank of Lebanon under no. 18 in the list of financial institutions. On 20 March 2007, the status of the entity changed from a financial institution to a Private Bank under the name FFA Private Bank SAL according to the terms of legislative law no 50 dated 15 July 1983. The Bank was registered at the commercial registry of Beirut under the same number on 2 June 2007 and under the number 129 in the list of Banks at the Central Bank of Lebanon. The Bank, together with is subsidiaries (the Group), Financial Funds Advisors (FFA) SARL, FFA Dubai Limited, FFA Investments (Holding) SAL, FFA Real Estate SAL, FFA Real Estate Limited, FFA Capital Limited and FFA Syria SARL are involved in mainly banking, real estate and financial services activities. The Bank is regulated by the Laws in Lebanon mainly the Code of Commerce, the Money and Credit Act and the circulars issued by the Central Bank of Lebanon and the Banking Control Commission. The Bank s main activity is to provide financial services such as corporate and project finance as well as asset management and brokerage. The Bank s head office is located at One FFA Gate-Marfaa 128, Foch Street, Beirut, Central District, Lebanon. 2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements are prepared on a historical cost basis, except for financial assets designated at fair value through profit or loss, financial assets designated at fair value through other comprehensive income, and a certain class of property which are all measured at fair value. The consolidated financial statements have been presented in thousands of Lebanese Liras (LL (000)) which is the functional and presentation currency of the Group unless otherwise mentioned. Other currencies are presented in their relating units. Statement of compliance The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the regulations of the Central Bank of Lebanon and the Banking Control Commission (BCC). Presentation of financial statements The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the consolidated statement of financial position date: (current), and more than 12 months after the consolidated statement of financial position date: (non-current) is presented in the risk management notes. Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense will not be offset in the consolidated income statement unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group. The consolidated financial statements include the financial statements of FFA Private Bank SAL and the subsidiaries listed in the following table: % effective equity interest Date of Country of 31 December 31 December Name establishment incorporation Activities % % FFA SARL 1994 Lebanon Financial Consulting and Brokerage 99.97 99.97 FFA Dubai Limited 2006 UAE Financial Institution 100.00 100.00 FFA Investments (Holding) SAL 2007 Lebanon Investment 99.99 99.99 FFA Real Estate SAL 2008 Lebanon Real Estate Consulting 100.00 100.00 FFA Capital Limited 2009 Cayman Islands Financial Consulting 100.00 100.00 FFA Syria SARL 2009 Syria Financial Consulting 88.00 88.00 FFA Real Estate Limited 2014 Cayman Islands Real Estate 100.00 100.00 7
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Basis of consolidation (continued) Control is achieved when the Group is exposed, 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. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Non-controlling interest represent the portion of profit or loss and net assets of subsidiaries not owned directly or indirectly by the Bank. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the noncontrolling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interests Derecognizes the cumulative translation differences recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the parent s share of components previously recognized in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities 2.2 Significant accounting judgments, estimates and assumptions In the process of applying the Group s accounting policies, management has exercised judgment and estimates in determining the amounts recognized in the consolidated financial statements. The most significant use of judgment and estimates are as follows: Going concern The Group s management has made an assessment of the Group s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. 8
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Significant accounting judgments, estimates and assumptions (continued) Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. Impairment losses on loans and advances The Group reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the consolidated income statement. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilization, loan to collateral ratios etc.), concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual groups). Revaluation of property and equipment The Bank measures buildings at revalued amounts with changes in fair value being recognized in other comprehensive income (OCI). The Bank engaged an independent valuation specialist to assess fair value of buildings. Buildings were valued by reference to market-based evidence, using comparable prices adjusted for specific market factors such as nature, location and condition of the property. 2.3 Changes in accounting policies and disclosures Revaluation of buildings The Bank re-assessed its accounting for buildings with respect to measurement after initial recognition. The Bank has previously measured all buildings using the cost model as set out in IAS 16.30, whereby after initial recognition of the asset classified as property and equipment, the asset was carried at cost less accumulated depreciation. On 3 December 2013, the Bank elected to change the method of accounting for buildings classified in property and equipment. Since the Bank believes that revaluation model more effectively demonstrates the financial position of buildings. After initial recognition, the Bank uses the revaluation model, whereby buildings will be measured at fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The Bank applied the exemptions in IAS 8, which exempts this change in accounting policy from retrospective application and extensive disclosure requirements. New and amended standards and interpretations The accounting policies adopted in the preparation of the financial statements are consistent with those followed in the preparation of the Group s annual financial statements for the year ended 31 December 2013 except for the adoption of new standards and interpretations effective as of 1 January 2014, noted below: Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements and must be applied retrospectively, subject to certain transition relief. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. 9
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Changes in accounting policies and disclosures (continued) New and amended standards and interpretations (continued) Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting and is applied retrospectively. Novation of Derivatives and Continuation of Hedge Accounting Amendments to IAS 39 These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria and retrospective application is required. IFRIC 21 Levies IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective application is required for IFRIC 21. Annual Improvements 2010-2012 Cycle In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 is effective immediately and, thus, for periods beginning at 1 January 2014, and it clarifies in the Basis for Conclusion that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. Annual Improvements 2011-2013 Cycle In the 2011-2013 annual improvements cycle, the IASB issued four amendments to four standards, which included an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment to IFRS 1 is effective immediately and, thus, for period beginning at 1 January 2014, and clarifies in the Basis for Conclusions that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but permits early application, provided either standard is applied consistently throughout the periods presented in the entity s first IFRS financial statements. The above changes are not expected to have a significant effect on the Group s financial statements. 2.4 Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s financial statements were disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective. - IFRS 14 Regulatory Deferred Accounts - Amendments to IAS 19 Defined Benefit Plans : Employee Contributions - Annual improvements 2010 2012 and 2011-2013 Cycle (effective from 1 July 2014) - IFRS 15 Revenue from contracts with Customers - Amendments to IFRS 11 Joint Arrangements : Accounting for Acquisitions of Interests - Amendments to IAS 16 and IAS 38 : Clarification of Acceptable methods of Depreciation and Amortization - Amendments to IAS 16 and IAS 41 Agriculture : Bearer Plants - Amendments to IAS 27 : Equity Method in Separate Financial Statements 10
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (1) Foreign currency translation The consolidated financial statements are presented in Lebanese Liras (LL). Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. (i) Transactions and balances Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the date of the statement of financial position. All differences are taken to net gain on financial assets at fair value through profit or loss in the consolidated income statement. Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss respectively). Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. (ii) Group companies On consolidation, the assets and liabilities of subsidiaries are translated into the Bank s presentation currency at the rate of exchange as at the reporting date, and their income statements are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the consolidated income statement. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. (2) Financial instruments classification and measurement (i) Date of recognition All financial assets and liabilities are initially recognized on the trade date, i.e., the date that the Group becomes a party to the contractual provisions of the instrument. This includes regular way trades : purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (ii) Classification and measurement of financial instruments a. Financial assets The classification of financial assets depends on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, particular transaction costs. Assets are subsequently measured at amortized cost or fair value. 11
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (2) Financial instruments classification and measurement (continued) (ii) Classification and measurement of financial instruments (continued) a. Financial assets (continued) An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases. An entity is required to disclose such financial assets separately from those mandatorily measured at fair value. Debt instruments at amortized cost Debt instruments are subsequently measured at amortized cost less any impairment loss (except for debt instruments that are designated at fair value through profit or loss upon initial recognition) if they meet the following two conditions: The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and The contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These financial assets are initially recognized at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributed to the acquisition are also included in the cost of investment. After initial measurement, these financial assets are measured at amortized cost using the effective interest rate (EIR) method, less allowance for impairment. Amortized cost is calculated by taking into account any discount of premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortization is included in Interest and similar income in the consolidated income statement. The losses arising from impairment are recognized in the consolidated income statement. Although the objective of an entity's business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity's business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur. However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows. If the objective of the entity's business model for managing those financial assets changes, the entity is required to reclassify financial assets. Gains and losses arising from the derecognition of financial assets measured at amortized cost are reflected under net gain (loss) from sale of financial assets at amortized cost in the consolidated income statement. Financial assets at fair value through profit or loss Included in this category are those debt instruments that do not meet the conditions in at amortized cost above, debt instruments designated at fair value through profit or loss upon initial recognition and equity instruments at fair value through profit or loss. 12
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (2) Financial instruments classification and measurement (continued) (ii) Classification and measurement of financial instruments (continued) a. Financial assets (continued) Debt instruments and other financial assets at fair value through profit or loss Included in this category are those debt instruments that do not meet the conditions in Debt instruments at amortized cost above, and debt instruments designated at fair value through profit or loss upon initial recognition. These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in fair value and interest income are recorded under net gain (loss) from financial assets at fair value through profit or loss in the consolidated income statement showing separately, those related to financial assets designated at fair value upon initial recognition from those mandatorily measured at fair value. Gains and losses arising from the derecognition of debt instruments and other financial assets at fair value through profit or loss are also reflected under net gain (loss) from financial instruments at fair value through profit or loss in the consoldiated income statement showing separately, those related to financial assets designated at fair value upon initial recognition from those mandatorily measured at fair value. Equity instruments at fair value through profit or loss Investments in equity instruments are classified at fair value through profit or loss, unless the Group designates at initial recognition an investment that is not held for trading as at fair value through other comprehensive income. These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in fair value and dividend income are recorded under net gain (loss) from financial assets at fair value through profit or loss in the consolidated income statement. Gains and losses arising from the derecognition of equity instruments at fair value through profit or loss are also reflected under net gain (loss) from financial instruments at fair value through profit or loss in the consolidated income statement. Dividends on these investments are recognized when the entity s right to receive payment of dividend is established in accordance with IAS 18: «Revenue», unless the dividends clearly represent a recovery of part of the cost of the investment. Equity instruments at fair value through other comprehensive income Investments in equity instruments designated at initial recognition as not held for trading are classified at fair value through other comprehensive income. These financial assets are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value, with gains and losses arising from changes in fair value recognized in other comprehensive income and accumulated under equity. The cumulative gain or loss will not be reclassified to the consolidated income statement on disposal of the investments. Dividends on these investments are recognized under net gain on financial assets in the consolidated income statement when the entity s right to receive payment of dividend is established in accordance with IAS 18: Revenue, unless the dividends clearly represent a recovery of part of the cost of the investment. Due from banks and financial institutions, loans and advances to customers and related parties at amortized cost After initial measurement, amounts Due from banks and financial institutions and Loans and advances to customers and related parties are subsequently measured at amortized cost using the EIR, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in Interest and similar income in the consolidated income statement. The losses arising from impairment are recognized in the consolidated income statement in Credit loss expense. 13
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (2) Financial instruments classification and measurement (continued) (ii) Classification and measurement of financial instruments (continued) b. Financial liabilities An entity classifies all financial liabilities as subsequently measured at amortized cost using the effective interest method, except for: - financial liabilities at fair value through profit or loss (including derivatives); - financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. - financial guarantee contracts and commitments to provide a loan at a below-market interest rate which after initial recognition are subsequently measured at the higher of the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18 Revenue. An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when: - doing so results in more relevant information, because it either eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases; or - a group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel. As at, there are no financial liabilities designated at fair value through profit or loss by the Group. Financial liabilities consist mainly of due to banks and financial institutions and Customers deposits. Due to banks and financial institutions and customers deposits After initial measurement, due to banks and financial institutions and customers deposits are measured at amortized cost less amounts repaid using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest method. (iii) Reclassification of financial assets An entity reclassifies financial assets if the objective of the entity's business model for managing those financial assets changes. Such changes are expected to be very infrequent. Such changes must be determined by the entity's senior management as a result of external or internal changes and must be significant to the entity's operations and demonstrable to external parties. If an entity reclassifies financial assets it shall apply the reclassification prospectively from the reclassification date, which is the first day of the first reporting period following the change in business model that results in an entity reclassifying financial assets. The entity shall not restate any previously recognised gains, losses or interest. If the entity reclassifies a financial asset so that it is measured at fair value, its fair value is determined at the reclassification date. Any gain or loss arising from a difference between the previous carrying amount and fair value is recognised in profit or loss. If the entity reclassifies a financial asset so that it is measured at amortized cost, its fair value at the reclassification date becomes its new carrying amount. 14
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (3) Derecognition of financial assets and financial liabilities (i) Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: The rights to receive cash flows from the asset have expired; or The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either: (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations the Group has retained. 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 Group could be required to repay. (ii) Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. 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 recognized in the consolidated income statement. (4) Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date are not derecognized from the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognized in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability reflecting the transaction s economic substances as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the EIR. When the counterparty has the right to sell or repledge the securities, the Group reclassifies those securities in its consolidated statement of financial position to Financial assets at fair value through profit or loss pledged as collateral. Conversely, securities purchased under agreements to resell at a specified future date are not recognized in the consolidated statement of financial position. The consideration paid, including accrued interest is recorded in the consolidated statement of financial position within Cash collateral on securities borrowed and reverse purchase agreements, reflecting the transaction s economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in Net interest income and is accrued over the life of the agreement using the EIR. (5) Murabaha transaction An agreement whereby the Bank sells a commodity or asset, which the Bank has purchased and acquired based on a promise received from the customer to buy the item purchased according to specific terms and conditions. The selling price comprises the cost of the commodity and an agreed profit margin. Murabaha expense is recognised on an effective rate basis over the period of the contract based on the principal amounts outstanding. 15
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (6) Determination of fair value The Group measures financial instruments, at fair value at each balance sheet date. Also, fair values of financial instruments measured at amortized cost are disclosed in the notes. 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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. At each reporting date, the management analyses the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per the Group s accounting policies. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. (7) Impairment of financial assets The Group assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a 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. 16
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (7) Impairment of financial assets (continued) 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 restructuring 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. If such evidence exists, any impairment loss is recognised in the consolidated income statement. Financial assets carried at amortised cost For financial assets carried at amortised cost (such as amounts due from Banks, loans and advances to customers), the Group 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 Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment 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 (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. 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 Group. 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 Net credit losses in 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 Group 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 on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions 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 and 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. 17
2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Summary of significant accounting policies (continued) (8) Renegotiated loans Where possible, the Bank seeks to restructure loans. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. (9) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in the consolidated statement of financial position. (10) Leasing The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific assets or assets and the arrangement conveys a right to use the assets. Lease which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognized as an expense in the consolidated income statement on a straight line basis over the lease term. Contingent rental payable are recognized as an expense in the period in which they are incurred. (11) Recognition of income and expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. (i) Interest and similar income and expense For all financial instruments measured at amortised cost, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the rate of interest used to discount future cash flows for the purpose of measuring the impairment loss. Interest income on debt securities classified at fair value through profit or loss is recognized under net gain from financial assets at fair value through profit or loss in the income statement. (ii) Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. 18