Financial reports and Independent Auditors Report Eurostandard Banka AD, Skopje This is an English translation of the original Report issued in Macedonian, in case of any discrepancies between the English and Macedonian version the Macedonian text shall prevail.
Contents Page Independent Auditors Report 1 Income statement 4 Statement of comprehensive income 5 Balance sheet 6 Statement of changes in equity and reserves 8 Statement of Cash Flows 12 Notes to the financial statements 14
4 Income statement in Denar thousand Notes 2014 2013 Interest income 422,770 366,440 Interest expense (273,897) (259,032) Net Interest income / (expense) 6 148,873 107,408 Fee and commission income 111,235 60,841 Fee and commission expense (41,629) (15,847) Net fee and commission income/(expense) 7 69,606 44,994 Net trading income 8 395 (327) Net income from other financial instruments carried at fair value 9 - - Foreign exchange gains/(losses), net 10 7,309 6,993 Other operating income 11 34,635 7,311 Participation in income of associates 24 - - Allowance for impairment of financial assets, net 12 (21,727) (50,098) Impairment losses of non-financial assets, net 13 (68,638) (3,140) Personnel expenses 14 (86,742) (66,323) Depreciation and amortization 15 (16,048) (11,545) Other operating expenses 16 (138,396) (116,398) Participation in losses of associates 24 - - Profit / (loss) before taxation (70,733) (81,125) Income tax 17-788 Profit / (loss) for the year from continuing operations (70,733) (81,913) Profit / (loss) from group of assets and liabilities held for sale - - (70,733) (81,913) Profit / (loss) for the financial year, attributable to:* Shareholders - - minority interest - - Earnings by share 41 Basic earnings per share (in Denar) (3.930) (4.551) Diluted earnings per share (in Denar) *For consolidated financial statements only Accompanying Notes are an integral part of to the financial statements
5 Statement of comprehensive income in Denar thousand Notes 2014 2013 Profit/(loss) for the financial year (70,733) (81,913) Other profits/(losses) not recognized in profit or loss (prior to taxation) Revalorization reserve for assets available-for-sale - Unrealized net-changes in fair value of assets available for sale - - - Realized profits/(losses) of assets available for sale, reclassified in profit and loss, net - - Revaluation reserves for foreclosed assets - Revaluation reserve as at the date of foreclosure - - - Decrease of the revaluation reserve, reclassified in profit and loss - - Reserve for protection against risk of cash flows - - - Unrealized net-changes in fair value of instruments for protection against risk of cash flows - - - Realized profits/losses from instruments for protection against risk of cash flows, - - Reserve for instruments for the protection against risk of net investments in foreign operations - - Reserve for Foreign exchange differences from investments in foreign operations - - Share in other profit/(loss) of associates not recognized in profit or loss 24 - - Other profit/(loss) not recognized in profit or loss - - Income tax from other profits/(losses) not recognized in profit or loss 17 - - Other profit/(loss) from the period not recognized in profit or loss - - Comprehensive profit/ (loss) for the financial year (70,733) (81,913) Comprehensive income/(loss) for the financial year, attributed to: * Shareholders - - Minority interest - - *For consolidated financial statements only Accompanying Notes are an integral part of to the financial statements
6 Balance sheet in Denar thousand Notes 2014 2013 Assets Cash and cash equivalents 18 2,585,010 1,210,504 Trading assets 19 8,222 3,078 Financial assets at fair value through profit and loss at initial recognition 20 - - Derivative assets held for risk management 21 - - Loans and receivable from banks 22.1 123,036 116,734 Loans and receivables from customers 22.2 4,210,540 3,398,387 Investments in securities 23 104,398 641,078 Investments in associates (in accounting not registered by the method of core capital) 24 - - Income tax receivables (current) 30.1 15,978 118 Other receivables 25 29,749 189,808 Pledged assets 26 - - Foreclosed assets 27 200,389 343,189 Intangible assets 28 17,653 7,181 Property and equipment 29 639,724 9,475 Deferred tax assets 30.2 - - Non - current assets held for sale and group for disposal 31-251,606 Total assets 7,934,699 6,171,158 Liabilities Trading liabilities 32 - - Financial assets at fair value through profit and loss at its/ their initial recognition 33 - - Derivative liabilities held for risk management 21 - - Due to banks 34.1 165,891 132,108 Due to customers 34.2 7,038,318 4,920,950 Issued debt securities 35 - - Borrowings 36 137,724 304,109 Subordinated liabilities 37 266,224 266,268 Special reserve and provisions 38 1,146 661 Income tax liabilities (current) 30.1-12 Deferred tax liabilities 30.2 - - Other liabilities 39 39,652 9,234 Liabilities related to disposal group of assets 31 - - Total liabilities 7,648,955 5,633,342 Accompanying Notes are an integral part of to the financial statements
8 Statement of changes in equity and reserves in Denar thousand Subscribed capital Equity Revaluation reserves Other reserves Retained earnings Share premiu Treasury m shares Other equity instrume nts Reval. reserve of assets available for sale Reval. reserve for foreclosed assets Risk reserve (Accum. loss) Total equity and reserves attributable to the shareho. of the Bank At 01 January 2013 1,100,668 - - - - - - - - 25,507 - - - - (506,446) 619,729-619,729 Corrections to the opening balance - - - - - - - - - - - - - - - - - - At 01 January 2013, corrected 1,100,668 - - - - - - - - 25,507 - - - - (506,446) 619,729-619,729 Comprehensive profit/ (loss) for the financial year Profit/(loss) for the financial year - - - - - - - - - - - - - - (81,913) (81,913) - (81,913) Other profit/(loss) not recognized in profit or loss - - - - - - - - - - - - - - - - - - Changes in fair value of assets available for sale - - - - - - - - - - - - - - - - - - Changes in fair value of risk protection of cash flows - - - - - - - - - - - - - - - - - - Changes in fair value of risk protection of net investments in foreign operations - - - - - - - - - - - - - - - - - - Forex reserve. Other revaluati on reserves Statutory reserveе Capital com. of hyb. fin. Instrum Other reserves Attribut. to sharehol. Limited for distrib. to sharehol. Minorit y interest * Total equity and reserves Accompanying Notes are an integral part of to the financial statements
9 Statement of changes in equity (continued) Subscribed capital Equity Revaluation reserves Other reserves Retained earnings Share premium Treasu ry shares Other equity instrume nts Reval. reserve of assets available for sale Reval. reserve for foreclosed assets Risk reserve Forex reserve Other revaluati on reserves Statutory reserve Capital com. of hyb. fin. Instrum Other Attribut. to reserves sharehol. in Denar thousand Foreign exchange differences from investments in foreign operations - - - - - - - - - - - - - - - - - - Deferred tax (assets) / liabilities recognized in equity - - - - - - - - - - - - - - - - - - Other profit/(loss) not recognized in profit or loss - - - - - - - - - - - - - - - - - - Total unrealized profit/(loss) recognized in equity and reserves - - - - - - - - - - - - - - - - - - Comprehensive profit/ (loss) for the financial year - - - - - - - - - - - - - - (81,913) (81,913) - (81,913) Transactions with shareholders, recognized in equity and reserves: Shares issued during the period - - - - - - - - - - - - - - - - - - Distribution to statutory reserve - - - - - - - - - - - - - - - - - - Distribution to other reserves - - - - - - - - - - - - - - - - - - Dividends - - - - - - - - - - - - - - - - - - Purchase of treasury shares - - - - - - - - - - - - - - - - - - Sold treasury shares - - - - - - - - - - - - - - - - - - Covering loses from previous years - - - - - - - - - - - - - - - - - - Other changes in equity and reserves (specify in more detail) - - - - - - - - - - - - - - - - - - Transactions with shareholders, recognized in equity and reserves - - - - - - - - - - - - - - - - - - On 31 December 2013 / 1 January 2014 1,100,668 - - - - - - - - 25,507 - - - - (588,359) 537,816-537,816 Limited for distrib. to shareh ol. (Accum. loss) Total equity and reserves attributa ble to the shareho. of the Bank Mino rity inter est * Total equity and reserves Accompanying Notes are an integral part of to the financial statements
10 Statement of changes in equity and reserves (continued) Subscribed capital Equity Revaluation reserves Other reserves Retained earnings Share premiu Treasury m shares Other equity instrume nts Reval. reserve of assets available for sale Reval. reserve for foreclosed assets Risk reserve in Denar thousand Comprehensive profit/ (loss) for the financial year Profit/(loss) for the financial year - - - - - - - - - - - - - - (70,733) (70,733) - (70,733) Other profit/(loss) not recognized in profit or loss - - - - - - - - - - - - - - - - - - Changes in fair value of assets available for sale - - - - - - - - - - - - - - - - - - Changes in fair value of protection against risk of cash flows - - - - - - - - - - - - - - - - - - Changes in fair value of protection against risk of net investments in foreign operations - - - - - - - - - - - - - - - - - - Foreign exchange differences from investments in foreign operations - - - - - - - - - - - - - - - - - - Deferred tax (assets) / liabilities recognized in equity - - - - - - - - - - - - - - - - - - Other profit/(loss) not recognized in profit or loss - - - - - - - - - - - - - - - - - - Total unrealized profit/(loss) recognized in equity and reserves - - - - - - - - - - - - - - - - - - Comprehensive profit/ (loss) for the financial year - - - - - - - - - - - - - - (70,733) (70,733) - (70,733) Forex reserve. Other revaluati on reserves Statutory reserve Capital com. of hyb. fin. Instrum Other reserve s Attribut. to sharehol. Limited for distrib. to sharehol. (Accum. loss) Total equity and reserves attributab le to the shareho. of the Bank Minori ty intere st * Total equity and reserves Accompanying Notes are an integral part of to the financial statements
11 Statement of changes in equity and reserves (continued) Equity Revaluation reserves Other reserves Retained earnings Subscribed capital Share premium Treasu ry shares Other equity instrume nts Reval. reserve of assets available for sale Reval. reserve for foreclosed assets Risk reserve Forex reserve. Other revaluati on Statutory reserves reserve Capital com. of hyb. fin. Instrum Other reserve s Attribut. to sharehol. Limited for distrib. to shareh ol. (Accum. loss) Total equity and reserves attributab le to the shareho. of the Bank in Denar thousand Transactions with shareholders, recognized in equity and reserves: Shares issued during the period - - - - - - - - - - - - - - - - - - Distribution to statutory reserve - - - - - - - - - - - - - - - - - - Distribution to other reserves - - - - - - - - - - - - - - - - - - Dividends - - - - - - - - - - - - - - - - - - Purchase of treasury shares - - - - - - - - - - - - - - - - - - Sold treasury shares - - - - - - - - - - - - - - - - - - Covering loses from previous years - - - - - - - - - - - - - - - - - - Effect from acquisition of Postenska Banka - - - - - - - - - - - - - - (181,339) (181,339) - (181, 339) Transactions with shareholders, recognized in equity and reserves - - - - - - - - - - - - - - (181,339) (181,339) - (181, 339) 285,7 At 1,100,668 - - - - - - - - 25,507 - - - - (840,431) 285,744-44 Minori ty intere st * Total equit y and reser ves *For consolidated financial statements only Accompanying Notes are an integral part of to the financial statements
12 Statement of Cash Flows in Denar thousand Notes Year that ended at 31 December 2014 2013 Cash flows from primary business activity Profit/(loss) before taxation (70,733) (81,125) Adjustment for: Minority interest, included in consolidated income statement * - - Amortization and depreciation of: Intangible assets 4,573 4,652 Property and equipment 11,475 6,893 Capital gain from: Sale of intangible assets - - Sale of property and equipment (615) - Sale of foreclosed assets (23,773) - Capital loss from: Sale of intangible assets - - Sale of property and equipment - - Sale of foreclosed assets - 1,050 Interest income (422,770) (366,440) Interest expense 273,897 259,032 Net trading income (129) 807 Allowance for impairment of financial assets, net additional impairment losses 161,942 217,227 release of impairment losses (140,215) (167,129) Impairment losses of non-financial assets, net additional impairment losses 68,638 3,140 release of impairment losses Special reserve (22) (586) additional provisions 2,500 4,103 release of provisions (2,478) (4,689) Dividends (1,396) (1,402) Participation in profit / (loss) of associates - - Other corrections - effect from acquisition of Postenska Banka (181,339) - Received interest 415,478 359,600 Paid interest (255,093) (253,806) Profit / (Loss) from operations before changes in operating assets (160,038) (18,087) (Increase) / decrease of operating assets: Trading assets (5,015) - Derivative assets held for risk management - - Loans and receivable from banks (6,272) 28,318 Loans and receivables from customers (827,594) (240,476) Pledged assets - - Foreclosed assets 97,935 858 Obligatory deposit in foreign currency (18,055) (17,684) Accompanying Notes are an integral part of to the financial statements
13 in Denar thousand Statement of cash flows (continued) Notes Year that ended at 31 December 2014 2013 Obligatory deposit held with NBRM according to special regulations - - Other receivables 165,614 (166,023) Deferred tax assets - Non - current assets held for sale and group for disposal 251,606 - Increase / (decrease) in operating liabilities: Trading liabilities - - Derivative liabilities held for risk management - - Due to banks 33,790 125,705 Due to customers 2,097,960 605,376 Other liabilities 30,881 (26,789) Liabilities related to disposal group of assets - - Net cash flow from operating activities before taxation 1,660,812 291,198 (Paid) / received income tax (15,872) (12) Net cash flow from operating activities 1,644,940 291,186 Cash flow from investment activity (Investments in securities) - (326,166) Inflows from sale of investment in securities 533,231 - (Outflows from investment in subsidiaries and associates) - - Inflows from disposal of investment in subsidiaries and associates - - (Purchase of intangible assets) (15,045) (2,336) Inflows from sale of intangible assets - (Purchase of property and equipment) (641,109) (2,035) Inflows from sale of property and equipment - - (Outflows from non current assets held for sale) - - Inflows from non current assets held for sale - - (Other outflows from investing activity) - - Other inflows from investing activity 266 1,402 Net cash flow from investing activity (122,657) (329,135) Cash flow from financing activity (Repayment of debt securities issued) - - Inflows from debt securities issued - - (Repayment of borrowings) (165,787) (1,654,341) Increase of borrowings - 1,684,552 (Repayment of issued subordinated debts) (45) - Inflows from issued subordinated debts 150,017 Inflows from issued shares / equity instruments during the period - - (Purchase of treasury shares) - - Sold treasury shares - - (Dividends paid) - - (Other outflows from financing) - - Other inflows from financing - - Net cash flow from financing activity (165,832) 180,228 Effect from allowance for impairment of cash and cash equivalents - - Effect from foreign exchange differences of cash and cash equivalents - - Net increase / (decrease) of cash and cash equivalents 1,356,451 142,279 Cash and cash equivalents as at 1 January 1,121,742 979,463 Cash and cash equivalents at 31 December 18 2,478,193 1,121,742 *For consolidated financial statements only Accompanying Notes are an integral part of to the financial statements
14 Notes to the financial statements 1 Introduction 1.1 General Eurostandard Banka AD, Skopje ( the Bank ) is a Shareholding Company incorporated in the Republic of Macedonia. The Bank s registered head office is: Nikola Kljusev 2, Skopje, Republic of Macedonia The Bank is licensed by the National Bank of the Republic of Macedonia for conducting payment transfers, and deposit services on the territory of the Republic of Macedonia and abroad and credit services on the territory of the Republic of Macedonia. These financial statements have been approved by the Bank s Supervisory Board on 21 April 2014. The Bank s shares are not listed on the Macedonian Stock Exchange AD. As at and 2013, the Bank s total number of employees is 165 and 109, respectively. Acquisition of Postenska Banka AD Skopje As at 31 December 2013, the Bank owns 66.66% of the shares of Postenska Banka AD, Skopje, with voting right acquired by realization of pledge. This investment was recorded as non-current assets held for sale. On 4 January 2014, the Ministry of Finance announced the sale of ordinary shares of Postenska Banka AD Skopje, owned by the Government. The number of shares offered for sale amounted to 12.830 or 33.333% of total shares issued by Postenska Banka AD Skopje. The initial selling price of one share is set at Denar 20,950. The shares were sold at a public auction, applying the "all-ornothing" rule. On 24 January 2014, the Bank participated in the auction and became the owner of 100% of the voting shares of the Postenska Banka AD Skopje. To this end, at the previously submitted application, the Bank received an approval for the purchase of shares pursuant to decision no. 2075 of 13 January 2014 issued by the Governor of the NBRM.
15 General information (continued) Acquisition of Postenska Banka AD, Skopje (continued) On 28 March 2014, the Supervisory Board and Postenska Banka AD Skopje concluded an agreement for the acquisition of Postenska Banka AD Skopje by Eurostandard Banka AD, Skopje. Based on the Decision for registration of a change registered under file number 30120140024538 of 30 June 2014, Postenska Banka AD Skopje was deleted from the Trade Registry and a status change was registered as follows: acquisition of Postenska Banka AD Skopje as a Bank acquired by Eurostandard Banka AD Skopje - an acquiring Bank, by transferring all assets and liabilities. In the absence of specific guidance in the Methodology regarding the recording and valuation of accounting items and preparation of financial statements (Methodology) and the International Financial Reporting Standards (IFRS) that underlies the methodology, which would specifically refer to the above transaction, the Bank's Management had in mind the requirements of the Methodology and IAS 8 related to the accounting policies, changes in accounting estimates and corrections of errors. The method of recording at book value was also applied as a result: - Assets and liabilities of the acquired entity were recorded at their carrying value and there was no need of additional adjustments; - The income statement reflects the operations of the two entities since the date of acquisition, i.e. since 1 July 2014. Balance sheet of Postenska Banka AD Skopje as at 30 June 2014: 30 June 2014 Cash and cash equivalents 609,757 Loans and receivables from customers 401,079 Investments in securities 9,731 Income tax receivables (current) 15,380 Other receivables 13,052 Foreclosed assets 16,945 Intangible assets 5,817 Property and equipment 264,200 Total assets 1,335,961 Liabilities Due to customers 950,295 Special reserve and provisions 464 Other liabilities 44,552 Total liabilities 995,311 Subscribed capital 439,959 Revaluation reserves 3,612 Other reserves 3,565 Retained earnings / (Accumulated losses) (106,486) Total equity and reserves 340,650 Total liabilities and equity and reserves 1,335,961 Contingent liabilities 112,904 Contingent assets -
16 General information (continued) 1.2 Basis for preparation of the financial statements Statement of compliance These financial statements are prepared in accordance with the Law on Trade Companies (Official Gazette of the RM No. 28/2004) 138/2014), Banking Law (Official Gazette of the RM No. 67/2007, 90/2009, 67/2010 and 26/2013), bylaws prescribed by the National Bank of the Republic of Macedonia (hereinafter NBRM and the Decision on the Methodology of recording and evaluating accounting items and the preparation of financial statements (Official Gazette of RM No. 169/2010, 162/2012, 50/2013, 110/13) and the Decision on the types and content of financial statements of banks (Official Gazette of RM No. 169/2010, 152/2011 and 54/2012, 166/2013). The financial statements are separate financial statements. The financial statements have been prepared as at and for the years ended and 2013. Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. Basis of measurement The financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through profit or loss measured at fair value; available-for-sale financial assets are measured at fair value; Functional and presentation currency The financial statements are presented in Macedonian Denars ("MKD" or "Denar"), which are functional and presentation currency of the Bank. Unless otherwise stated, the financial amounts are expressed in Denar thousands. Use of estimates and judgments The preparation of financial statements requires the Management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the assessment is revised and in future periods if such revision affects the future period. Information relating to the judgment made by Management and critical estimates in applying accounting standards that have a significant influence on the financial statements are disclosed in Note 1.4 Use of estimates and judgments.
17 1.3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (а) Foreign currency transactions Transactions denominated in foreign currencies have been translated into Denar at rates valid at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to denars at the exchange rate at the date of the balance sheet. Non-monetary items that are carried at historical cost denominated in a foreign currency, should are calculated using the exchange rate on the transaction date. Non-monetary assets and liabilities that are measured at fair value denominated in foreign currencies at the reporting date are retranslated to denars at the exchange rate at the date of determination of fair value. Translation differences arising from translation of foreign currency amounts are included in the income statement when they arise. The foreign currencies the Bank holds are predominantly Euros (EUR), US dollars (USD) and Swiss francs (CHF). The official exchange rate at which foreign assets and liabilities are retranslated valid at and 2013 were as follows: 2014 2013 MKD MKD 1 EUR 61.4814 Denar 61.5113 1 USD 50.5604 Denar 44.6284 1 USD 51.1152 Denar 50.1764 (b) Interest Interest income and expense is recognized in the income statement under the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of an asset or liability and is not revised subsequently. The calculation of effective interest rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense presented in the profit or loss include: interest on financial assets and liabilities at amortized cost using the effective interest method; interest on available-for-sale investment securities by using the effective interest method.
18 Significant accounting policies (c) Fees and commission Income and expenses from fees and commissions that are an integral part of the effective interest rate on financial assets and liabilities are included in the calculation of effective interest rate. Other fees and commissions, including financial services provided by the Bank in respect of exchange operations, payment operations in the country and abroad, guarantees, letters of credit and other services are recognized when the related services are performed. Other fees and commissions related to financial services received by the Bank and are expensed as the related service is provided. (d) Dividend income Dividend income is recognized when the right to receive payment is established. Dividends are presented as a part of net-revenues from trading or other revenues from operating activities, depending on the appropriate classification of the instrument. (e) Lease payments made Payments under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. (f) Taxes The Bank s obligation for current tax is calculated in accordance with the statutory tax regulations and by applying the prescribed tax rates which are in force or are significant in terms of their implementation on the date of the Balance sheet. The current tax expense at a rate of 10% is calculated on the profit for the period determined as the difference between total revenue and total expenditure increased by non-deductible expenses for tax purposes corrected for tax credit and understated revenues. The tax base is reduced by the amount of income from dividends realized through participation in the capital of another taxpayer - resident of the Republic of Macedonia, provided that they are taxed at the taxpayer who pays dividend. Taxpayers who carry out payments on accumulated gains realized in the period from 2009 to 2013 for dividends and other distributions of profits are obliged to calculate and pay income tax. The tax expense for the previous period presented is calculated at 10% of non-deductible expenses for tax purposes corrected for tax credit and understated revenues, as well as distributed profits for dividends of legal entities - non-residents and individuals. Undistributed earnings are not subject to taxation. Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized for all deductible temporary differences and to the extent that it is probable that there will be sufficient future tax profits against which it can be used as deductible temporary differences item.
19 Significant accounting policies Taxes (continued) Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized and based on tax rates (and tax laws) that apply on the date of the balance sheet. As at and 2013, the Bank has not recognized any deferred tax asset or liability, as there are no temporary differences existing at that date. (g) Financial assets and liabilities (i) Recognition Regular purchases and sales of financial assets and liabilities are recognized on the trade date at which the Bank is obliged to purchase or sell the asset. All other financial assets and liabilities are initially recognized on the trade date at which the Bank becomes party to the contractual provisions of the instrument. A financial asset or liability is initially measured at fair value plus (for items not measured at fair value through profit or loss) transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability. (ii) Classification See accounting policies 1 (h), (i), (j), (p). (iii) Derecognition The Bank derecognizes a financial asset when the contractual rights of contract cash flows from the asset expire or it transfers the rights to receive the contractual cash flows from the asset in a transaction in which all risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability. The Bank derecognizes a financial liability when its contractual obligations are discharged or canceled or expired. (iv) Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and intends to settle transactions on a net basis or to realize payments simultaneously. Income and expenses are offset only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions, such as the activities of the Bank's trading. (v) Amortized cost value measurement Amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus accumulated amortization using the effective interest method rate of any difference between the initial amount recognized and the maturity amount, minus any impairment losses.
20 Significant accounting policies Financial assets and liabilities (continued) (vi) Fair value measurement Measurement at fair value assumes that the asset or liability is exchanged between market participants in a common transaction, according to current market conditions at the measurement date. The fair value is determined in different ways, depending on whether the asset or liability traded in an active market or not traded. Active market: Fair value An active market is a market where transactions are carried out with the asset or liability with sufficient frequency and volume to provide pricing information for the asset or liability. Appropriate quoted market price for the asset or liability is one that is within the spread between the purchase and the selling price, which best represents fair value in the circumstances. Usually it uses the current: purchase price for the asset which is stored or obligation to be issued, i.e. ask/bid rate for an asset that will be acquired or liability which is kept: average market price or other price in accordance with the usually accepted market practice. Absence of an active market: Valuation techniques If there is no active market for a financial asset or liability, in order to determine the fair value of the asset or liability, the Bank applies valuation techniques for which there is the most available data, giving preference to data that can be validated in the marketplace. Widely used valuation techniques include: market approach (using quoted prices or other relevant information from market transactions with the same or similar assets or liabilities), cost approach (known as current replacement cost, represents the amount that would be required to replace the existing asset) and income approach (discounted value of current market expectations for future amounts (cash flows or income and expenses) of the asset or liability). In application of these valuation techniques the Bank: - uses information on prices achieved at recent (in the last 6 months), regular, commercial transactions for the same financial instrument between familiar, voluntary parties (if available); - If there is no information on the prices achieved at recent transactions for the same financial instrument, then to determine the fair value one should apply the current market value of another instrument that is substantially the same (the same currency and the same or similar maturity); - If no information can be obtained about the fair value of the financial instrument from the markets, the fair value of the financial instrument is determined using data that cannot be confirmed in the markets. The bank may change or make changes in techniques for valuing financial instruments, if such a change is due to the development of new markets, the availability of new information, changing market conditions or improving the technique for evaluating and if it provides more appropriate fair value of the financial instrument. Analysis of discounted cash flows is an important and often applied technique to determine the fair value of many assets and liabilities. One of the most important factors in the application of this technique is the determination of an appropriate discount rate.
21 Significant accounting policies Financial assets and liabilities (continued) Fair value measurement (continued) The discount rate should include uncertainties and risks of the assessment of cash flows relating to an asset or liability, and variability of these risks and uncertainties. The appropriate discount rate can be determined on the following way: - a rate based on the current market yield of the instrument or of an instrument with similar features; - referring to a rate that is free from risk, adjusted for the appropriate risk that arises from the asset. While determining the discount rate, the two factors should be taken in consideration separately. The risk-free interest rate is normally based on government bonds with comparable characteristics (currency and maturity) of assets or liabilities for which discount rate will be applied. The risk premium of an asset is equal to the amount that market participants would claim as a compensation for the uncertainty of future cash flows from the asset. If the fair value of equity instruments that have no price traded in an active market and derivatives that are linked to them and that must be settled by delivery of unquoted equity instruments cannot be reliably measured, these instruments should be measured at cost. (vii) Impairment Bank on a monthly basis assesses whether there is objective evidence of impairment of financial assets not carried at fair value through profit and loss or a group of financial assets. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and it has an impact on future cash flows that can be reliably estimated. The Bank considers evidence of impairment for loans and receivables and securities on an individual basis. A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. If there is any proof of this, the Bank is required to estimate the recoverable amount of that asset or group of assets and recognize impairment (impairment losses). Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer of securities went bankrupt, the disappearance of an active market for a security, or other observable data for a group of assets such as adverse changes in the payment status of the borrower or issuer of securities in the group, or economic conditions that correlate with defaults on group. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying value of financial assets and the present value of expected cash flows, discounted at the original effective interest rate of assets. Impairment losses are recognized in the income statement and reflected in the account for impairment of loans and advances. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the income statement.
22 Significant accounting policies Financial assets and liabilities (continued) Impairment (continued) Impairment losses on investments available-for-sale, as the difference between cost and fair value are recognized in the income statement. Changes in impairment provisions attributable to time value are reflected as a component of interest income. 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 recognized in the income statement, the impairment loss is reversed through the income statement. However, any subsequent recovery in the fair value of an impaired available-for-sale equity securities are not reversed through the income statement, but are recognized as other comprehensive income. (h) Cash and cash equivalents Cash and cash equivalents include cash on hand, demand deposits with banks, cash deposited with the National Bank of the Republic of Macedonia, and highly liquid financial assets with original maturities of three or less than three months, subject to minor risk of changes in their fair value, and are used by the Bank to manage its short-term obligations. Cash and cash equivalents are carried at amortized cost in the balance sheet. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money or services directly to a debtor with no intention of trading the receivable. Loans and receivables are initially recognized at fair value plus incremental direct transaction costs, and subsequently measured at amortized cost using the effective interest method. (j) Investments Investments are initially measured at fair value plus, in the case of investments not carried at fair value through profit or loss, incremental direct transaction costs and are subsequently accounted for depending on their classification as either held-to-maturity or available-for-sale. (k) Investments held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturities that the Bank has the positive intent and ability to hold to maturity, and which are not designated at fair value through profit or loss or as available-for-sale. Held-to-maturity investments are measured at amortized cost using the effective interest method. If the Bank purchased debt securities, which classifies as held to maturity, with a discount or premium, the amount of discount or premium received will be recorded on accounts of discount or premium in the appropriate group of accounts for investments in debt securities held to maturity. Other commissions and fees which are an integral part of the effective interest rate, as well as transaction costs that are directly associated with the transaction are recorded in the accounts for accumulated depreciation under the appropriate group accounts for investments in debt securities held to maturity.
23 Significant accounting policies Investments (continued) Investments held to maturity (continued) Any sale or reclassification of a significant amount of held-to-maturity investments far away from their maturity would result in reclassification of all held-to-maturity investments as available-forsale, and would prevent the Bank from classifying investment securities as held-to- maturity for the current and next two years. (ii) Investments available-for-sale Available-for-sale investments are non-derivative investments that are designated as available for sale or are not classified as another category of financial assets. Financial assets that do not have quoted market price and whose fair value cannot be reliably measured, are carried at cost less impairment losses. All other investments available-for-sale are carried at fair value. Interest income is recognized in the income statement using the effective interest method. Dividend income is recognized when the Bank becomes entitled to the dividend. Gains or losses from foreign exchange differences on debt securities available-for-sale are recognized in the income statement. Other changes in fair value are recognized directly in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains or losses on other comprehensive income are recognized in the income statement. (l) Foreclosed assets Foreclosed assets are recognized after legislative procedure for foreclosing, or after acquiring a legal basis for registration of ownership. Foreclosed assets are recognized at the lower of the cost and the estimated value less the expected costs for sale. At the moment of recognition of the foreclosed asset, the receivable is derecognized from the Balance sheet. From 1 January 2012, the impairment loss for existing foreclosures is at least equal to the higher amount of: the difference between the appraised value less costs for sale and the initial carrying value, less the total amount of impairment loss and 20% of the initial carrying value reduced by the total amount of impairment loss. According to the new Decision on the accounting and regulatory treatment of foreclosed assets based from 28 March 2013 (Official Gazette No. 50/13), the Bank shall on the foreclosure date, present in the balance sheet an impairment of at least 20% of the initial carrying value of the foreclosed asset. If the amount of the closed impairment is greater than 20% of the initial carrying value of the foreclosed asset, the Bank is obliged to recognize this difference as revaluation reserve at the date of foreclosing the asset. Revaluation reserve is part of the supplementary capital of the Bank and may be excluded from the supplementary capital if it meets the conditions set in the Decision on the methodology for determining capital adequacy.
24 Significant accounting policies Foreclosed assets (continued) At least once in a period of twelve months, the Bank is obliged to determine the estimated value of the foreclosed asset and in the income statement to recognize impairment loss equal to at least the higher amount of: negative difference between the estimated value and the net value of the foreclosed asset and 20% of the net value of the foreclosed asset. Between two estimates of the market value of the foreclosed asset, the Bank will recognize additional amount of impairment loss in the income statement equal to the negative difference between the net value and the amount of the announced reduced sales price of the foreclosed asset. If the Bank fails to sell the asset taken until 1 January 2010 no later than 1 January 2017, on 1 January 2017 it shall bring down their net worth to zero. For assets foreclosed between 1 January 2010 until the entry into force of this Decision, the Bank is obligated to make the first recognition of the impairment loss no later than 1 January 2014, and if it fails to sell them until 1 January 2018, it shall bring down their net worth to zero on that date. If the Bank fails to sell the foreclosed asset within 5 years, at the end of the fifth year it shall bring down the value of the existing foreclosed asset to zero. Assets are derecognized upon sale of the asset or when the asset is permanently withdrawn from use. Surplus realized upon sale of the asset is recognized in the income statement at the date of sale. (m) Property and equipment (i) Recognition and measurement Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is recognized as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. (ii) Subsequent costs The cost of replacing part of the property and equipment is added to the carrying amount of the asset when it is probable that it will have future economic benefits for the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of maintenance of property and equipment are recognized in the income statement as an expense as incurred
25 Significant accounting policies Property and equipment (continued) (iii) Depreciation and amortization Depreciation is recognized in the income statement on a straight-line basis over the estimated useful lives of each item of property and equipment. Depreciation is not calculated on land and property and equipment in preparation. Useful lives of property and equipment, for the current and comparative periods are as follows: Buildings Transport vehicles Furniture and office equipment Other equipment 100 years 4 years 5 years 4, 5 and 10 years. The method of depreciation, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (n) Intangible assets (i) Recognition and measurement Intangible assets acquired by the Bank are recognized at cost less accumulated depreciation and accumulated impairment losses, if any. (ii) Subsequent costs Subsequent expenditure on intangible assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognized in the income statement as an expense as incurred. (iii) Depreciation and amortization Depreciation is recognized in the income statement on a straight-line basis over their estimated useful life of 4 and 5 years. (o) Leased assets- lessee Leases that transfer substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Upon commencement of the lease, finance leases are recognized at the lower amount between the fair value and the present value of the minimum lease payments. Consequently, the asset is accounted for in accordance with the Bank's accounting policy applicable to that asset. Other leases are operating leases and are not recognized in the balance sheet of the Bank. (p) Impairment of non-financial assets The carrying amounts of non-financial assets of the Bank are reviewed at each date of preparation of the balance sheet in order to determine whether there is objective evidence of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognized if the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. Cash-generating unit is the smallest group of assets which can be identified as one that generates cash inflows from continuing use that are largely independent from the cash inflows from other assets or groups of assets. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated to the assets of the unit (group of units) on a pro rata basis.
26 Significant accounting policies Impairment losses of non-financial assets (continued) The recoverable amount of an asset or cash-generating unit is the higher amount of its fair value less costs to sell of an asset and its value in use. In assessing the use value, 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. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there is a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, had it not been recognized impairment loss. The release of impairment losses are not recognized as assets acquired through foreclosure procedure. (q) Deposits, borrowed funds, subordinated and other liabilities Financial liabilities are classified in accordance with the substance of the contractual arrangements. Financial liabilities at amortized cost consist of deposits, borrowings, subordinated and other liabilities. Deposits, borrowings, subordinated and other liabilities are initially measured at fair value, adjusted for transaction costs and subsequently measured at amortized cost using the effective interest method. (r) Provisions A provision is recognized when as a result of a past event there is a present legal or constructive obligation that can be estimated reliably and it is probable that there will be an outflow to settle the liability. Provisions are determined by discounting the expected future cash flows using a discount rate before tax that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognized when the expected benefits of the agreement for the Bank are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the lower of the present value of the expected cost of terminating the contract and the present value of the expected net cost for continuing with the contract. Before a provision is established, the Bank recognizes an impairment loss on the assets associated with the contract.