Financial Statements For the third quarter of 2012
Contents Statement of Comprehensive Income... 3 Statement of Financial Position... 4 Statement of Changes in Equity... 5 Statement of Cash Flows... 7 Compliance with the mandatory ratios set by the Central Bank of the RA... 8 Notes to the Financial Statements... 9
Intermediate statement of comprehensive income 01/07/2012-01/01/2012-01/07/2011-30/09/2011 01/01/2011-30/09/2011 Notes Interest and similar income 4 3,040,001 8,651,408 2,169,113 5,965,183 Interest and similar expense 4 (1,288,602) (3,624,541) (832,898) (2,274,366) Net interest and similar income 1,751,399 5,026,867 1,336,215 3,690,817 Fee and commission income 5 217,942 593,966 182,406 475,432 Fee and commission expense 6 (30,112) (84,479) (23,697) (75,739) Net fee and commission income 187,830 509,487 158,709 399,693 Net profit/(loss) from trading activities 7 165,413 391,861 120,407 320,454 Other operating income 8 130,638 340,403 263,075 553,667 Operating income 2,235,280 6,268,618 1,878,406 4,964,631 Net assignments to the asset possible loss reserve 9 (344,298) (527,628) (213,637) (303,320) General administrative expenses 10 (784,098) (2,340,916) (651,649) (1,962,304) Other operating expenses 11 (71,232) (238,745) (255,790) (510,642) Profit/(loss) before taxation 1,035,652 3,161,329 757,330 2,188,365 Income tax expense (compensation) 12 (175,463) (618,443) (281,622) (541,052) Profit/(loss) after taxation 860,189 2,542,886 475,708 1,647,313 Other comprehensive income Revaluation of assets available-for-sale (28,726) (36,451) 946 21,327 Other comprehensive income, net of tax (28,726) (36,451) 946 21,327 Comprehensive income 831,463 2,506,435 476,654 1,668,640 The intermediate statement of comprehensive income is to be read in conjunction with the notes to, and forming part of, the financial statements. 3
Intermediate statement of financial position Notes (not audited) 31/12/2011 (audited) ASSETS Cash and due from the Central Bank of Armenia 13 8,138,171 9,936,931 Banking standardized bullions of precious metals 66,575 18,324 Placements with banks and other financial institutions 14 6,514,124 6,644,188 Loans to customers 15 71,455,501 61,947,297 Available-for-sale assets - Held by the Bank 16 5,586,070 3,068,040 - Pledged under sale and repurchase agreements 16-954,202 Held-to-maturity investments - Held by the Bank - 854 Property, equipment and intangible assets 17 4,239,578 4,146,060 Other assets 18 1,045,725 513,764 Total assets 97,045,744 87,229,660 LIABILITIES Deposits and balances from banks and other financial institutions 19 52,093,359 43,045,358 Current accounts and deposits from customers 20 25,921,939 27,810,871 Amounts payable 21 12,413 13,384 Deferred tax liability 22 261,907 272,073 Grant received 121,290 100,308 Other liabilities 23 1,389,741 988,661 Total liabilities 79,800,649 72,230,655 Equity Share capital 24 6,926,450 6,926,450 Share premium 967,945 967,945 Reserves Main reserve 1,300,000 1,300,000 Revaluation reserve 25 2,139,921 2,193,873 Retained earnings 5,910,779 3,610,737 Total equity 17,245,095 14,999,005 Total liabilities and equity 97,045,744 87,229,660 The financial statements as set out on pages 3 to 47 were approved on 6 October 2012. A. Baloyan L. Movsisyan Chief Executive Officer Chief Accountant The intermediate statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 4
Intermediate statement of changes in equity Revaluation Share capital Share premium Main reserve Revaluation surplus for land and building reserve for available-forsale assets Retained earnings Total The same intermediate period of the previous financial year (cumulative from the beginning of the year) Balance at the beginning of the previous financial year as of 01 January 2011 (audited) 3,463,225 967,945 670,000 2,150,577 14,265 5,511,075 12,777,087 Net gain /loss of the period - - - - - 1,647,313 1,647,313 Other comprehensive income - - - - 21,327-21,327 Dividends - - - - - (433,897) (433,897) Internal movements, including - - - (17,500) - 17,500 - Depreciation of revaluation surplus for land and building - - - (17,500) - 17,500 - Balance at the end of the same intermediate period of the previous financial year as of 30 September 2011 (not audited) 3,463,225 967,945 670,000 2,133,077 35,592 6,741,991 14,011,830 Share capital Share premium Main reserve Revaluation surplus for land and building Revaluation reserve for available-forsale assets Retained earnings Total The same intermediate period of the current year (cumulative from the beginning of the year) 1. Balance at the beginning of the current year as of 01 January 2012 (audited) 6,926,450 967,945 1,300,000 2,127,245 66,628 3,610,737 14,999,005 Net gain /loss of the period - - - - - 2,542,886 2,542,886 Other comprehensive income - - - - (36,451) - (36,451) Dividends - - - - - (260,345) (260,345) Internal movements, including - - - (17,501) - 17,501 - Depreciation of revaluation surplus for land and building - - - (17,501) - 17,501 - Balance at the end of the intermediate reporting period as of 30 September 2012 (not audited) 6,926,450 967,945 1,300,000 2,109,744 30,177 5,910,779 17,245,095 The Intermediate statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements.
Intermediate statement of cash flows Previous period Reporting period 1. Cash flow from operating activities x x Net cash flow before the change of operating assets and liabilities 2,830,501 4,108,587 Interests received 5,184,038 8,172,677 Interests paid (1,794,735) (3,001,296) Commissions received 934,250 595,962 Commissions paid (97,154) (84,479) Gains/(losses) from available-for-sale assets (12) 288 Gains/(losses) from foreign exchange 341,484 402,677 Recovery of written-off assets 206,190 488,447 Salary and other payables to employees (1,229,462) (1,414,290) Other income received and expenses paid from operating activities (507,908) (562,952) Cash flow from the changes of operating assets and liabilities (7,301,401) (12,566,095) Decrease/(increase) in operating assets (9,231,992) (8,978,586) including decrease/(increase) of loans and advances (8,852,030) (8,107,155) decrease/(increase) in securities held for trading and for sale (1,508,492) (1,424,797) decrease/(increase) in other operating assets 1,128,530 553,366 Increase/(decrease) in opreating liabilities 1,930,591 (3,587,509) including increase/(decrease) in liabilities to customers 2,171,394 (3,596,667) increase/(decrease) in other operating liabilities (240,803) 9,158 Net cash flow from operating activities before profit tax (4,470,900) (8,457,508) Profit tax paid (612,968) (548,421) Net cash flow from operating activities (5,083,868) (9,005,929) 2. Cash flow from investing activities x x Decrease (increase) in capital investments in property and equipment and intangible assets (406,291) (367,917) Purchase of property and equipment and intangible assets (407,635) (368,902) Disposal of property and equipment and intangible assets 1,344 985 Net cash flow from investing activities (406,291) (367,917) 3. Cash flow from financing activities x x Dividends paid (433,897) (260,345) Increase (decrease) of funds borrowed from the Central Bank of the RA 519,213 928,160 Increase (decrease) of other funds borrowed 6,171,509 6,268,185 Debt securities issued by the Bank - - Net cash flow from financing activities 6,256,825 6,936,000 Influence of the change of the foreign currency exchange rate on cash and cash equivalents 144,296 382,081 Net increase/(decrease) in cash and cash equivalents 910,962 (2,055,765) Cash and cash equivalents at the beginning of the period 13-2 8,818,195 14,650,500 Cash and cash equivalents at the end of the period 13-2 9,729,157 12,594,735 The intermediate statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements. 6
Compliance with the mandatory ratios set by the Central Bank of the RA 01/07/2012- NORMS Actual value Compulsory value set by the Central Bank of Armenia Any non compliance during reporting quarter Minimal required paid-in capital (AMD 000 ) 7,894,395 50,000 Compliant Minimal required total (own) capital (AMD 000 ) 15,853,096 5,000,000 Compliant N1 minimal ratio of total capital to risk-weighted assets 14.34% 12.0% Compliant N2(1) minimal ratio of high-liquid assets to total assets 18.10% 15.0% Compliant N2(2) minimal ratio of high-liquid assets to demand liabilities 180.98% 60.0% Compliant N3(1) Maximum risk of one borrower 15.88% 20.0% Compliant N3(2) Maximum risk on major borrowers 148.93% 500.0% Compliant N4(1) Maximum risk of one borrower related to the Bank 0.84% 5.0% Compliant N4(2) Maximum risk of all borrowers related to the Bank 3.25% 20.0% Compliant Minimal obligatory reserves at the Central Bank of RA Maximum ratio of total foreign currency position to total capital (without derivatives)* Maximum ratio of each foreign currency position to total capital Compliant in drams X 8.0% Compliant in foreign currencies X 12.0% Compliant 1.39% 10.0% Compliant USD 0.92% 7.0% Compliant EURO 0.04% 7.0% Compliant RUB 0.38% 7.0% Compliant Other currencies X X Compliant *) with derivatives - respectively 1.42%, 0.96%, 0.04% and 0.38%. The intermediate financial statements for the third quarter were prepared on the basis of the general analogical forms set by the Central Bank of the RA. 7
1 Background Principal activities Inecobank cjsc Inecobank cjsc (the Bank) was established in the Republic of Armenia as a closed joint stock company in 1996. The principal activities of the Bank are deposit taking, lending and operations with securities, gold bullion and foreign exchange. The activities of the Bank are regulated by the Central Bank of Armenia ( the CBA ). The Bank conducts business throughout the Republic of Armenia from its head office and fourteen branches. The majority of the Bank s assets and liabilities are located in the Republic of Armenia. The average number of persons employed by the Bank during the third quarter of 2012 was 520 (2011: 497). Legal address of the Bank is 17 Toumanyan Street, Yerevan, 375001, RA. Legal addresses of the branches are: Koryun Branch 105/1 Teryan Street, Yerevan, RA 18 Abovyan Branch 18 Abovyan Street, Yerevan, RA Arabkir Branch 49-1 Komitas Street, Yerevan, RA Nor Norq Branch 21-37/1 Nor Norq 4, Yerevan, RA Malatia Branch 39/3 Raffu Street, Yerevan, RA Shengavit Branch 22/3 Bagratunyatc Street, Yerevan, RA Gyumri Branch 6 Alek Manukyan Street, Gyumri, RA Vanadzor Branch 41a Tigran Mets Street, Vanadzor, RA Lori Branch 79/1 Tigran Mets Street, Vanadzor, RA Armavir Branch 17 Hanrapetutyun Street, Armavir, RA Hrazdan Branch 46/100 Ogostos 23 Street, Hrazdan, RA Abovyan Branch 7/3 Sahmanadrutyan Square, Abovyan,RA Ashtarak Branch 2 Nerses Ashtaraketci Square,Ashtarak,RA Charentcavan 3/2 Shinutyun Qochar Street,Charentcavan,RA Representation Shareholders The Bank s shareholders are: Mr. Avetis Baloyan (37.1%), Mr. Karen Safaryan (33.2%), DEG Deutsche Investitions-und Entwicklungsgesellschaft mbh (13.5%), International Financial Corporation (10%) and others (6.2%). Related party transactions are detailed in note 30. Armenian business environment Armenia is experiencing political and economic change that has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in Armenia involve risks that typically do not exist in other markets. In addition, the contraction in the capital and credit markets has further increased the level of economic uncertainty in the environment. The financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 8
2 Basis of preparation Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ). Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale assets are stated at fair value, and land and buildings are revalued periodically. Functional and presentation currency The functional currency of the Bank is the Armenian Dram (AMD) as, being the national currency of the Republic of Armenia, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The AMD is also the Bank s presentation currency for the purposes of these financial statements. Financial information presented in AMD is rounded to the nearest thousand. Use of estimates and judgments Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from those estimates. 3 Significant accounting policies The following significant accounting policies are consistently applied in the preparation of the financial statements. Changes in accounting policies are described at the end of this note. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-forsale equity instruments, which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The official rate of exchange prevailing at 30 September 2012 was AMD 406.25 = USD 1 (31 December 2011: AMD 385.77 = USD 1). 9
Cash and cash equivalents The Bank includes cash and nostro accounts with commercial banks and the CBA in cash and cash equivalents. Financial instruments Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking derivative financial instruments (except for derivative financial instruments that are designated and effective hedging instruments) or, upon initial recognition, designated as at fair value through profit or loss. The Bank may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed and evaluated on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or, the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale or, may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: the Bank upon initial recognition designates as at fair value through profit or loss the Bank designates as available-for-sale or, meet the definition of loans and receivables. Available-for-sale assets are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. 10
Management determines the appropriate classification of financial instruments at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the entity has an intention and ability to hold it for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Recognition Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: loans and receivables which are measured at amortized cost using the effective interest method held-to-maturity investments that are measured at amortized cost using the effective interest method investments in equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. Where a quoted market price is not available, fair value is determined using valuation techniques with a maximum use of market inputs. Such valuation techniques include reference to recent arm s length market transactions, current market prices of substantially similar instruments, discounted cash flow and option pricing models and other techniques commonly used by market participants to price the instrument. 11
Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Bank would receive or pay to terminate the contract at the reporting date taking into account current market conditions and the current creditworthiness of the counterparties and own credit risk. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss a gain or loss on an available-for-sale asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in relation to an available-for-sale asset is recognized as earned in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process. Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished. The Bank also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. Repurchase and reverse repurchase agreements Sale and repurchase agreements ( repos ) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the balance sheet and, in case the transferee has the right by contract or custom to sell or repledge them, reclassified as securities pledged under sale and repurchase agreements and faced as the separate balance sheet item. Securities purchased under agreements to resell ( reverse repo ) are not recognized on the balance sheet, and the extended amounts are faced as the separate balance sheet item. The difference between sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method. 12
Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for land and buildings which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Leased assets Leases under which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Revaluation Land and buildings are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the land and buildings being revalued. A revaluation increase on an item of land and building is recognised as other comprehensive income directly in equity except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on an item of land or buildings is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised directly in equity. Revaluation surplus is transferred to retained earnings at the amount equal to the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Leasehold improvements are depreciated over the shortest of the asset useful life and lease term. Land is not depreciated. The estimated useful lives are as follows: - buildings 50 years - computer equipment 3 years - vehicles 5 years - furniture and other office supplies 7 years - ATM and POS 7 years - Strongboxes 20 years - Servers 5 years 13
- communication devices, computing technology 6 years - other fixed assets 5 years Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows: - computer software 10 years Impairment Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables 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 on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. 14
In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgement to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectable and when all necessary steps to collect the loan are completed. Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognized in profit or loss and can not be reversed. Available-for-sale assets Impairment losses on available-for-sale assets are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. For an investment in an equity security available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale debt security is recognised in other comprehensive income. 15
Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Provisions A provision is recognized in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities. 16
Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Share premium Any amount paid in excess of par value of shares issued is recognised as share premium. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Income and expense recognition Interest income and expense are recognised in profit or loss using the effective interest method. Accrued discounts and premiums on financial instruments at fair value through profit or loss are recognised in gains less losses from financial instruments at fair value through profit or loss. 17
Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortized to interest income over the estimated life of the financial instrument using the effective interest method. Other fees, commissions and other income and expense items are recognised in profit or loss when the corresponding service is provided. Dividend income is recognised in profit or loss on the date that the dividend is declared. Standards, amendments and interpretations not yet applied by the Bank At the date of authorization of these financial statements, certain new standards, amendments and interpretations to the existing Standards have been published but are not yet effective. The Bank has not early adopted any of these pronouncements. Management anticipates that all of the pronouncements will be adopted in the Bank s accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Bank s financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Bank s financial statements. IFRS 7 (Amendment) Transfer of Financial Assets The amendment aims to help users of financial statements evaluate the risk exposure relating to more complex transfers of financial assets and the effect of those risks on an entity s financial position. The additional disclosures required are designed to provide information that enables users: To understand the relationship between transferred financial asset that are not derecognized in their entirely and the associated liabilities To evaluate the nature of and risks associated with any continuing involvement of the reporting entity in financial assets that are derecognized in their entirely. This amendment is effective for annual periods beginning on or after July 1, 2011. IAS 32 (Amendment) Offsetting Financial Assets and Financial Liabilities The amendments to IAS 32 add application guidance to address inconsistencies in applying IAS 32 s criteria for offsetting financial assets and financial liabilities in the following two areas: The meaning of currently has a legally enforceable right of set-off : the amendments clarify that a right of set-off is required to be legally enforceable in the normal course of business, the event of default and the event of insolvency or bankruptcy of the entity and all of the counterparties, and that the right must also exist for all counterparties. Since there was diversity in practice related to the interpretation of simultaneous settlement in IAS 32, the IASB has therefore clarified the principle behind net settlement and included an example of a gross settlement system with characteristics that would satisfy the IAS 32 criterion for net settlement. The amendments are effective for annual reporting periods beginning on or after 1 January 2014 and are required to be applied retrospectively. 18
IFRS 7 (Amendment) Offsetting Financial Assets and Financial Liabilities The amendment adds qualitative and quantitative disclosures to IFRS 7 relating to gross and net amounts of recognized financial instruments that are (a) set off in the statement of financial position and (b) subject to enforceable master netting arrangements and similar agreements, even if not set off in the statement of financial position. The amendments are effective for annual reporting periods beginning on or after 1 January 2013, and are required to be applied retrospectively. IFRS 9 Financial Instruments The IASB aims to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. IFRS 9 is being issued in phases. To date, the chapters dealing with recognition, classification, measurement and derecognition of financial assets and liabilities have been issued. Further chapters dealing with impairment methodology and hedge accounting are still being developed. The IASB has issued an amendment to IFRS 9 which deferred the mandatory effective date of IFRS from 1 January 2013 to 1 January 2015. This means that all the phases of the project to replace IAS 39 will now have the same mandatory effective date. The amendments also provide relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9. This relief was originally only available to companies that chose to apply IFRS 9 prior to 2012. Additional transition disclosures will now be required to help understand the initial application of the Standard. Management have yet to assess the impact of this new standard on the Bank s financial statements. IFRS 13 Fair Value Measurement IFRS 13 does not affect which items are required to be fair-valued, but clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It is applicable for annual periods beginning on or after 1 January 2013. The Bank s management have yet to assess the impact of this new standard on the financial statements. IAS 1 Presentation of Financial Statements The IAS 1 Amendments require an entity to group items presented in other comprehensive income into those that, in accordance with other IFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. The Bank s management expects this will change the current presentation of items in other comprehensive income; however, it will not affect the measurement or recognition of such items. 4 Net interest and similar income Interest and similar income 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Loans to customers 2,792,157 7,985,824 1,983,761 5,487,183 Available-for-sale assets 171,005 450,158 100,590 235,218 Placements with banks 60,589 147,438 30,487 86,665 Amounts receivable under reverse repurchase agreements 16,250 67,976 26,134 90,408 Held-to-maturity investments - 12 74 168 Other - - 28,067 65,541 3,040,001 8,651,408 2,169,113 5,965,183 19
Interest and similar expense 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Other borrowed funds 786,624 2,131,271 492,548 1,315,490 Current accounts and deposits from customers 368,081 1,071,392 303,864 833,648 Deposits and balances from banks 94,079 343,792 32,615 108,482 Amounts payable under repurchase agreements 39,818 78,086 3,871 16,710 Other - - - 36 1,288,602 3,624,541 832,898 2,274,366 Net interest and similar income 1,751,399 5,026,867 1,336,215 3,690,817 5 Fee and commission income 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Intermediary 17,485 56,881 6,933 72,013 Consumer lending fees from retailers 83,639 148,427 49,110 75,078 Settlement 32,738 144,366 56,275 146,074 Plastic cards 71,515 200,430 44,428 110,166 Guarantees and letters of credit issuance 12,565 43,862 25,660 72,101 217,942 593,966 182,406 475,432 6 Fee and commission expense 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Settlement foreign exchange spot transactions 5,225 16,387 3,489 18,788 Settlement-other transactions 7,363 20,495 6,619 18,427 Plastic cards 14,745 38,332 6,571 19,548 Guarantees and letters of credit issuance 2,766 8,609 2,456 6,926 Other 13 656 4,562 12,050 30,112 84,479 23,697 75,739 20
7 Net profit/(loss) from trading activities From foreign exchange activities 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Gain on spot transactions 174,072 402,115 133,190 341,484 (Loss)/gain from revaluation of financial assets and liabilities (8,808) (10,542) (12,783) (21,018) 165,264 391,573 120,407 320,466 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 From available-for-sale investments Net realized (loss)/gain from the sale of available-for-sale assets 149 288 - (12) 149 288 - (12) Net profit/(loss) from trading activities 165,413 391,861 120,407 320,454 8 Other operating income 01/07/12-01/01/2012-30/09/12 01/07/11-30/09/11 01/01/11-30/09/11 Penalties received 89,718 212,515 40,815 116,182 Gain on operations with gold bullion 28,455 105,463 217,159 410,189 Other 11,818 21,778 5,101 27,296 130,638 340,403 263,075 553,667 9 Net assignments to the asset possible loss reserve 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Loans to customers 344,298 527,628 213,637 303,320 21
10 General administrative expenses 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Personnel expenses Employee compensation 416,431 1,301,575 360,571 1,112,483 Payroll related taxes 45,197 126,844 39,057 108,282 461,628 1,428,419 399,628 1,220,765 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Other general administrative expenses Depreciation and amortization 83,948 249,135 69,658 189,660 Advertising and marketing 51,340 132,633 33,493 94,125 Communications and information services 17,535 47,863 17,606 54,160 Security 28,899 85,274 25,437 77,186 Office supplies 27,714 76,506 16,450 44,860 Professional services 5,326 15,478 6,080 27,742 Occupancy 56,091 158,041 43,804 127,781 Repairs and maintenance 20,292 77,991 23,219 61,762 Travel expenses 6,713 11,753 2,704 9,426 Training expenses 4,778 7,032 1,698 4,792 Other 19,834 50,791 11,872 50,045 322,470 912,497 252,021 741,539 Total general administrative expenses 784,098 2,340,916 651,649 1,962,304 11 Other operating expenses 01/07/12-30/09/12 01/01/2012-01/07/11-01/01/11-30/09/11 30/09/11 Penalties paid - - 4,149 4,363 Loss on operations with gold bullion 27,809 104,760 213,182 406,587 Loss on disposal of repossessed assets - 135 729 729 Payments to Deposit Guarantee Fund 10,480 28,502 11,466 24,345 Other taxes 1,267 6,210 1,889 6,731 Membership fees 2,050 6,282 2,806 7,062 Other 29,626 92,856 21,569 60,825 71,232 238,745 255,790 510,642 22
12 Profit tax expense (compensation) 01/07/12-30/09/12 01/01/2012-01/07/11-30/09/11 01/01/11-30/09/11 Income tax expense 175,463 618,443 281,622 541,052 175,463 618,443 281,622 541,052 The applicable tax rate for current and deferred tax is 20%. 13 Cash and due from the Central Bank of Armenia 13-1 Cash and due from the Central Bank of Armenia 31/12/2011 Cash 2,065,245 1,937,715 Other cash disposals 257,444 415,386 Nostro accounts in the CBA 5,649,886 7,043,996 Deposited funds in the CBA 165,596 539,834 8,138,171 9,936,931 The nostro accounts represent balances with the Central Bank of Armenia related to settlement activity. Nostro accounts include non-interest bearing mandatory minimum reserve deposits calculated in accordance with regulations issued by the CBA at 8% to 12% from the attracted funds. Withdrawability of these deposits is not restricted however within 28 days (or 35 days) the Bank may be exposed to penalties if the minimum average balance is not periodically maintained. The deposited funds in the CBA represent a non-withdrawable deposit in the CBA for membership in ArCa. 13-2 Cash and cash equivalents which include in cash flow statement 31/12/2011 30/09/2011 Cash 2,065,245 1,937,715 1,350,157 Other cash disposals 257,444 415,386 277,797 Nostro accounts at CBA 5,649,886 7,043,996 4,028,118 Nostro accounts with correspondent banks 4,622,160 5,253,403 4,073,085 Cash and cash equivalents 12,594,735 14,650,500 9,729,157 23
14 Placements with banks and other financial institutions 31/12/2011 Placements with banks Nostro accounts Rated Aa3 4,301,263 5,141,678 Rated Baa1 to Baa3 30,026 41,913 Rated Ba1 to Ba3 21,436 25,404 Rated B1 to B3 46,021 44,408 Not rated 223,414 - Total nostro accounts 4,622,160 5,253,403 Loans and deposits Loans to resident banks 812,689 2,781 Total loans and deposits 812,689 2,781 Other placements with banks Short term claims on settlements with banks 106,532 39,434 Other - 92,585 Total other placements with banks 106,532 132,019 5,541,381 5,388,203 The Bank used credit ratings published by Moody s in disclosing credit quality of its placements with banks. As of 31 December 2011 included in other placements with banks is AMD 92,585 thousand that represents a blocked deposit in Commerzbank AG. Placements with other financial institutions Nostro accounts 31/12/2011 Loans to resident other financial institutions 265,187 306,253 Amounts receivable under reverse repurchase agreements from financial institutions 707,556 949,732 972,743 1,255,985 Total of placements with banks and other financial institutions 6,514,124 6,644,188 24