IFRS CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006
CONTENTS Page Report of Independent Auditors 1 Consolidated Income Statement 2 Consolidated Balance Sheet at 31 December 2006 3 Consolidated Statement of Changes in Equity 4 Consolidated Cash Flow Statement 5 Notes to the Consolidated Financial Statements 6-42
CONSOLIDATED INCOME STATEMENT Year ended 31 December (all amounts expressed in thousands of RSD) Notes 2006 2005 Interest income 5 1,894,313 1,642,610 Interest expense 5 (481,232) (277,792) Net interest income 1,413,081 1,364,818 Fee and commission income 6 481,702 370,688 Fee and commission expense 6 (65,251) (46,818) Net fee and commission income 416,451 323,870 Dividend income 6,101 3,059 Foreign exchange gains, net 7 58,341 172,986 Gains less losses from investment securities 16 189,525 6,922 Other operating income 8 300,184 295,035 Operating income, net 2,383,683 2,166,690 Provision for impairment of loans and other assets, net 9 25,440 1,038,961 Operating expenses 10 (1,936,890) (999,133) Losses from associates 11 41,309 (9,690) Profit before taxation 514,968 2,174,099 Income taxes 12 (228,257) (133,107) Net profit for the period 285,285 2,040,992 2
CONSOLIDATED BALANCE SHEET 3
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (all amounts are expressed in thousands of RSD) Ordinary shares Acquired Treasury shares Preference shares Statutory reserves Revaluation reserves Retained earnings Minority interest Total Balance as of 1 January 2005 2,856,694-1,268,976 131,430 227,876 546,454 2,169 5,033,599 Cancellation of subsidiaries treasury shares - - - - - - (2,169) (2,169) Acquired treasury shares of the Bank - (152,097) - - - - - (152,097) Revaluation of fixed assets (Note 20) - - - - 108,417 - - 108,417 Profit for the year - - - - - 2,040,992-2,040,992 Dividends paid - - - - - (147,814) - (147,814) Distribution of profit to reserves - - - 31,763 - (31,763) - - Reversal of impairment of available-for-sale securities - - - - 29,619 - - 29,619 Balance as of 31 December 2005 2,856,694 (152,097) 1,268,976 163,193 365,912 2,407,869-6,910,547 Issuance of shares - - - - - - - - Disposal of treasury shares at cost - 152,097 - - - - - 152,097 Cancellation of subsidiaries treasury shares - - - - - - - - Acquired treasury shares of the Bank - (244,029) - - - - - (244,029) Dividend transfer for treasury shares (year 2006) - - - 15,656 - (15,656) - - Dividend transfer for treasury shares (previous years) - - - 14,782 - - - 14,782 Revaluation of fixed assets - - - - - - - - Impairment of available for sale - - - - (29,619) - - (29,619) Disposal of available for sale securities - - - - (108,417) - - (108,417) Dividends paid - - - - - (334,880) - (334,880) Disposal of treasury shares previously held by subsidiaries 179,152 1,930,644 - - - 2,109,796 Distribution of profit to reserves - - - - - - - - Profit for the year - - - - - 285,285-285,285 Balance as of 31 December 2006 3,035,846 (244,029) 1,268,976 2,124,275 227,876 2,342,618-8,755,562 4
CONSOLIDATED CASH FLOW STATEMENT (all amounts are expressed in thousand of RSD) Notes 2006 2005 Profit before taxation 514,968 2,174,099 Adjustments for reconciling income before tax charges to net cash provided by operating activities: (Gains)/Losses from translation of foreign exchange assets and liabilities (58,341) (163,310) Bad and doubtful debt expense 25,440 (1,027,597) Depreciation and amortization charge 91,647 73,486 Disposals of property and equipment 26,071 6,866 (Gains)/Losses from associates (41,309) 9,690 Gains from investment securities 189,525 (6,922) Changes in the fair value of embedded derivatives - (143,187) Profit before changes in operating assets and liabilities 748,001 923,125 (Increase) Decrease in operating assets Amounts due from other banks (744,195) (544,453) Trading securities (2,861) 19,293 Loans and advances to customers (2,926,921) (924,453) Stocks - (6,806) Other assets 135,114 63,133 Increase (Decrease) in operating liabilities Due to other banks 606,535 (331,215) Due to customers 7,855,699 458,551 Other deposits 725 1,291 Other borrowed funds 3,688,276 307,593 Other liabilities 336,033 (5,383) Net cash (used)/provided from operating activities 9,,737,715 (39,324) Investing activities (Purchase)/ Disposal of non-trading securities 168,967 (148,201) Acquisition of subsidiary net of cash acquired 1 - Disposal/(new investment) in associates - 308,226 Purchase of property and equipment (213,996) (207,887) Net cash used in investing activities (45,028) (47,862) Financial activities Dividends paid (334,880) (116,272) Net cash provided from financial activities (334,880) (116,272) Net (decrease)/increase in cash and cash equivalents 9,316,498 (203,458) Cash and cash equivalents at beginning of period 2,303,204 2,496,986 Net foreign exchange differences from translation of cash and cash equivalents - 9,676 Cash and cash equivalents at the end of period 30 11,619,702 2,303,204 5
1. CORPORATE INFORMATION Kulska banka group ( the Group ) comprises of Kulska banka a.d. Novi Sad ( The Bank ), trading company KBK Commerce d.o.o. Novi Sad, leasing company KB Leasing d.o.o. Novi Sad, factoring and consulting company KB NS Investments d.o.o. Novi Sad and milk factory Mlekara Han d.o.o. Vladičin Han. The primary activities of the group are banking services. During 2006 the principal activities of the group were loan activities in the local market, international payment transactions, foreign exchange business, issue of guarantees for customers as well as leasing activities. The Group serves mainly large companies in the Province Vojvodina and other companies and organizations operating in the Republic of Serbia. The Group had employed 486 employees as of 31 December 2006 (2005: 409). 2. CAPITAL ADEQUACY At 31 December 2006 and 2005 the Bank was in compliance with the Capital Adequacy Rules, prescribed by the National Bank of Serbia. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of the financial statements are set out below: (a) Basis of Preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the IASB, and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect. The Group maintains its records and prepares its financial statements in Dinars (RSD), which is the Group's functional and reporting currency. The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of trading securities, buildings and derivative financial instruments. The IFRS financial statements differ from those financial statements issued for statutory purposes in Serbia in respect that they reflect certain adjustments, not recorded in the Group s books, which are appropriate for presentation of the financial position, results of operations and cash flows in accordance with IFRS. A reconciliation of retained earnings presented in the Group s 2006 statutory financial statements to the retained earnings reported in the IFRS financial statements is presented in Note 29. 6
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 4.1. Income and expenses recognition Interest income and expenses and other operating income and expenses are recognized on an accrual basis. Interest income and expenses are recognized for all interest bearing financial instruments. The Bank suspends the interest calculation on all loans that are presented at court or in case of financial difficulty of a borrower. Fees receivable and payable are deferred over the duration of the transaction on which they have incurred. Fees and commissions consist mainly of fees for international payments, guarantees given and other Bank services. Loan origination fees are deferred and amortized to interest earned on loans and advances over the life of the loan using the effective interest rate method. 4.2. Foreign currency translation Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets, liabilities and the share capital denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the income statement. 4.3. Cash and cash equivalents Cash and cash equivalents comprise balances with maturities of less than 90 days from the date of acquisition including: cash and balances with National Bank of Serbia, treasury bills and other eligible bills and amounts due from other banks. For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, overnight placements with National Bank of Seria and Due from other banks with maturities of less than 90 days (Note 28). 4.4. Regular way purchases and sales of financial assets All regular way purchases and sales of financial assets are recognized on the settlement date, i.e. the date the asset is delivered to the counterparty. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. 7
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.5. Loans and impairment All loans and advances are recognized when cash is advanced to borrowers. Loans are stated at the principal amount outstanding, net of any amounts written off and specific provisions for loan impairment. Impairment is established if there is objective evidence that the Bank will be unable to collect all amounts due on a loan or other advance according to the original contractual term. Impairment is measured as a difference between the carrying amount and the estimated recoverable amount, being the present value of expected future cash flows. Credit losses are evaluated at a individual level. Individual credit exposures are evaluated based upon the borrower s character, overall financial condition, resources and repayment records; the prospects for support from any creditworthy guarantors and where applicable the realizable value of any collateral. A write off is made when all or part of a claim is deemed uncollectible. Write offs are charged against previously established provisions for credit losses or directly to bad debt expense in the income statement and reduce the principal amount of a claim. Recoveries in part or in full of amounts previously written off are credited to the income statement. 4.6. Non-trading securities Non-trading securities are classified as held to maturity and available for sale. All investments are initially recognized at cost, being the fair value of the consideration given including acquisition costs. Premiums and discounts on non-trading investments are amortized using the effective interest rate method and recognized in interest income. Held-to-maturity Investments that are intended to be held-to-maturity, such as treasury bills, debt securities, discounted bills and foreign currency bonds arising on foreign currency public savings, are subsequently measured at amortized cost less any provision for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity. The amount of the impairment loss for investments held to maturity is calculated as the difference between the investments carrying amount and the present value of expected future cash flows discounted at the investment s original effective interest rate. 8
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.6. Non-trading securities (continued) Available-for-sale Investment securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices are classified as available-for-sale. After initial measurement, available-for-sale investments are measured at fair value. Unrealised gains and losses from charges in fair value are recognised directly in equity in the Revaluation reserve. If fair value cannot be measured reliably availablefor-sale investments are presented in the balance sheet at cost. Interest earned whilst holding investment securities is recognized in interest income. Dividends are recognized when shareholders right to receive payment is established. 4.7. Trading securities All investments are initially recognized at cost, being the fair value of the consideration given. After initial recognition, investments which are classified as held for trading are measured at fair value. Gains or losses on investments held for trading are recognized in income. 4.8. Investment in associates The Bank s investments in its associates are consolidated under equity method. 4.9. Property, equipment and intangible assets Buildings are measured at fair value less accumulated depreciation and any impairment in value. Valuations are carried out periodically by independent qualified valuers on the basis at current market values. Management of the Bank annually considers if there are indications of significant changes in value of property. Construction land beneath the buildings of the Bank is owned by the state. The fees for usage of the construction land is payable on the monthly basis to the state. Property and equipment are initially recorded at the original purchase cost and until year 2003 they were subsequently restated from the date of the purchase of each item to the balance sheet date, using the general price index. The depreciation and amortization charge for the period is calculated on the basis of the restated amounts of property and equipment. Opening accumulated depreciation and amortization were also restated. Intangible assets comprise of computer software. 9
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.9. Property, equipment and intangible assets (continued) Depreciation and amortization are provided on the straight-line method over the estimated useful lives of all assets as follows: Computer software Buildings Computers and IT equipment Furniture and other equipment 5 years 77 years 5 years 4 to 15 years Assets under construction are not depreciated. Depreciation on these assets will begin when the related assets are placed in service. Repairs and maintenance costs are charged to the income statement when incurred. 4.10. Assets held for resale Foreclosed property acquired in debt satisfaction and assets obtained from joint ventures is defined as Property held for resale and disclosed in Other assets. Such property is carried at their fair value. 4.11. Finance lease - Bank as a lessee Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. 4.12. Ordinary shares Ordinary shares are initially recorded at the original nominal value and subsequently restated using the general price index from the date of issuance to the balance sheet date for all the years for which the Serbian economy met the definition of a hyperinflationary economy under IAS 29. Dividends on ordinary shares are recognized as a liability when they are formally declared. 10
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.13. Preference shares Preference shares which are not redeemable but convertible at the option of the Bank, are classified as equity. Preference shares are initially recorded at the original nominal value and till year 2003 were subsequently restated using the general price index from the date of the issuance to the balance sheet date. 4.14. Administrated Business Operations in the Name and on Behalf of Third Parties Assets and income arising from administrated business operations, where the Bank acts in a fiduciary capacity such as nominee, trustee or agent, are excluded from the financial statements. The Bank does not charge fee for these business operations carried out in the name and on behalf of third parties (Note 31). 4.15. Income Taxes Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Current income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Deferred tax Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where a deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. 11
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.15. Income Taxes (continued) Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilized, except: where a deferred income tax asset relating to a deductible temporary difference arises from the initial recognition of and asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 4.16. Pensions and other post-employment benefits Short-term employee benefits The Bank makes contributions to the Government s health, retirement benefit and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. The cost of social security payments is charged to the statement of income in the same period as the related salary cost. There is no additional liability for these plans. 12
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.16. Pensions and other post-employment benefits (continued) Post employment and other long-term employee benefits In accordance with the Labor Law, there is mandatory one-off retirement compensation equal to 3 gross monthly salaries, based on the country average salary earned in the month prior to retirement. The retirement compensation is payable by the last employer of retiree. The Bank has internally performed valuation to determine the present value of this liability resulting with recognition of the provision for this liability has been made in the accompanying financial statements. Any gains and losses arising from the changes in the assessed amounts are taken to income statement. 4.17. Derivatives The only derivatives used by the Bank are foreign currency options and interest rate options used to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are stated at fair value. These derivatives that do not qualify for special hedge accounting, therefore any gains or losses arising from changes in fair value are taken directly to net profit or loss for the period. 4.18. Standards, interpretations and amendments to published standards that are not yet effective Effect on new standards and interpretations: The IASB such as the Interpretations Committee have issued a range of new accounting standards and interpretations. The new I.F.R.S. and the I.F.R.I.C. concern accounting periods beginning after 1st January 2006. The management s estimation in relation with the effect of the new standards and interpretations is as follows: IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements Capital Disclosures (effective for financial years beginning on or after 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity s capital and how it manages capital. The Bank assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital. 13
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.18. Standards, interpretations and amendments to published standards that are not yet effective (continued) IFRS 8, Operating Segments (effective for financial years beginning on or after 1 January 2009). IFRS 8 replaces IAS 14 Segment Reporting and adopts a management approach to segment reporting. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. This information may be different from that reported in the balance sheet and income statement and entities will need to provide explanations and reconciliations of the differences. The Bank is a nonlisted entity therefore IFRS 8 is not mandatory. IFRIC 7, Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (effective for financial years beginning on or after 1 March 2006). IFRIC 7 requires entities to apply IAS 29 Financial Reporting in Hyper-inflationary Economies in the reporting period in which an entity first identifies the existence of hyperinflation in the economy of its functional currency as if the economy had always been hyperinflationary. IFRIC 7 is not relevant to the Bank s operations. IFRIC 8, Scope of IFRS 2 (effective for financial years beginning on or after 1 May 2006). IFRIC 8 clarifies that IFRS 2 Share-based payment will apply to any arrangement when equity instruments are granted or liabilities (based on the value of an entity s equity instrument) are incurred by an entity, when the identifiable consideration appears to be less that the fair value of the instruments given. IFRIC 8 is not relevant to the Bank s operations. IFRIC 9, Reassessment of Embedded Derivatives (effective for financial years beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether a contract contains an embedded derivative at the date an entity first becomes a party to the contract and prohibits reassessment unless there is a change to the contract that significantly modifies the cash flows. IFRIC 9 is not relevant to the Bank s operations. IFRIC 10, Interim Financial Reporting and Impairment (effective for financial years beginning on or after 1 November 2006). This Interpretation may impact the financial statements should any impairment losses be recognised in the interim financial statements in relation to available for sale investments as these may not be reversed in later interim periods or when preparing the annual financial statements. IFRIC 11, IFRS 2-Group and Treasury Share Transactions (effective for financial years beginning on or after 1 March 2007). This Interpretation requires arrangements whereby an employee is granted rights to an entity s equity instruments to be accounted for as an equity-settled scheme by an entity even if the entity chooses or is required to buy those equity instruments from another party, or the shareholders of the entity provide the equity instruments needed. The Interpretation also extends to the way in which subsidiaries, in their separate financial statements, account for schemes when their employees receive rights to equity instruments of the parent. IFRIC 11 is not relevant to the Bank s operations. 14
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4.18. Standards, interpretations and amendments to published standards that are not yet effective (continued) IFRIC 12, Service Concession Arrangements (effective for financial years beginning on or after 1 January 2008). The interpretation outlines an approach to account for contractual arrangements arising from entities providing public services. It provides for the operator should not account for the infrastructure as property, plant and equipment, but recognize a financial asset and / or an intangible asset. IFRIC 12 is not relevant to the Bank s operations. 4.19. Consolidated Financial Statements The consolidated financial statements include the accounts of Kulska Bank a.d. Novi Sad and the following subsidiaries: KBK Commerce d.o.o. Novi Sad wholly owned by the Bank Mlekara Han d.o.o. Vladicin Han wholly owned by the Bank KB Leasing d.o.o. Novi Sad wholly owned by the Bank KB NS Investments d.o.o. Novi Sad wholly owned by the Bank Goodwill The goodwill resulted from the acquisition of the remaining 50% of shares of KB Leasing in 2005. The goodwill is initially measured at its cost, being the excess of the cost of the business combination over the Bank s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. The goodwill is to be tested impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. Basis of consolidation The consolidated financial statements comprise the financial statements of Kulska banka Group and its subsidiaries as at 31 December each year. The financial statements of subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. 15
5. NET INTEREST INCOME (all amounts expressed in thousands of RSD) 2006 2005 Interest income Loans and advances 1,661,682 1,410,020 Cash and short-term funds 140,538 126,560 Trading securities 59,327 58,498 Finance lease 17,277 25,564 Other interest income 15,489 21,968 1,894,313 1,642,610 Interest expense Customers 405,815 178,797 Banks 75,417 98,995 481,232 277,792 Net interest income 1,413,081 1,364,818 6. NET FEE AND COMMISSION INCOME (all amounts expressed in thousands of RSD) 2006 2005 Fee and commission income Payment operations 236,685 256,821 Fees on guarantees 130,862 50,498 Other commission income 114,155 63,369 481,702 370,688 Fee and commission expense Payment operations 29,623 37,937 Other fees and commission expense 35,628 8,881 65,251 46,818 Net fee and commission income 416,451 323,870 7. FOREIGN EXCHANGE GAINS (NET) (all amounts expressed in thousands of RSD) 2006 2005 Income from trading with foreign currencies 78,140 14,075 Gains from foreign exchange operations 17,793 51,096 Foreign exchange gains from translation of loans with the foreign currency clause - 168,902 Translation of foreign currency assets and liabilities (37,592) (61,087) Net foreign exchange gains 58,341 172,986 16
8. OTHER OPERATING INCOME (all amounts expressed in thousands of RSD) 2006 2005 Refund of consultant and other expenses 123,334 143,187 Income from sale of foreclosed assets - 46,215 Income from sale of goods given on finance lease to other clients 48,994 37,761 Sales of finished products and goods (subsidiary companies) 75,799 8,024 Gains on disposal of securities - 12,943 Rents 5,101 2,854 Other operating income 46,956 44,051 Total other operating income 300,184 295,035 9. PROVISION FOR IMPAIRMENT OF LOANS AND OTHER ASSETS (all amounts expressed in thousands of RSD) 2006 2005 Provision (charges) / reversal for bad and doubtful loans (Note 15) (29,658) 535,978 Impairment reversals for other assets (Note 20) 132,309 259,444 Impairment charges for investments in associates - 1,176 Impairment reversals / (charges) for amounts due from banks (Note 14) 40,533 (49,659) Impairment (charges) for non-trading investments (Note 16) (19,604) - Provision for off-balance sheet items (Note 26) (98,140) 329,289 Provision for bed and doubtful trade receivables - (37,267) Total provision for impairment 25,440 1,038,961 17
10. OPERATING EXPENSES (all amounts expressed in thousands of RSD) 2006 2005 Bonuses paid to employees 464,933 36,843 Staff cost 409,636 298,349 Depreciation and amortization (Note 19) 91,647 73,486 Contributions 68,274 47,266 Rental expenses 46,057 34,145 Advertising 43,386 24,594 Mail and telecommunication expenses 58,746 19,312 Donations 29,414 17,067 Professional services 193,218 25,405 Safeguard services 63,313 16,077 Tax expenses 19,516 6,315 Value added tax - 21,445 Electricity and heating - 16,755 Write off of other receivables - 304 Maintenance of fixed assets 576 22,306 External presentation - 17,866 Stationary - 13,634 Business cards expenses - 16,778 Commission for usage of land - 6,092 Court fees 11,914 8,864 Costs of goods sold 49,596 - Cleaning services - 6,640 Traveling expenses 6,522 7,878 Lawyer's fees - 49,658 Cost of materials 93,047 81,861 Expenses form changes in the fair value of assets 130,982 - Insurance of fixed assets 8,499 5,774 Securities mark to market losses 15,898 - Other expenses 131,716 124,419 Total operating expenses 1,936,890 999,133 11. LOSS FROM ASSOCIATES Losses from associates represent Bank s share in results of its associates. Bank s share in results of the associates as of 31 December 2006 and 2005 is presented in the table below: (all amounts expressed in thousands of RSD) 2006 2005 KBK Broker a.d. 9,646 761 Komgrad a.d., Subotica 31,663 (10,451) Net loss from associates 41,309 (9,690) 18
12. INCOME TAX The components of the provision for income tax and 2005 are as follows: (all amounts expressed in thousands of RSD) 2006 2005 Current tax 363,388 - Deferred tax (Note 27) 135,131 133,107 Total tax expense (228,257) 133,107 The schedule below shows the reconciliation between the accounting profit and the actual tax expense for the year: (all amounts are expressed in thousands of RSD) 2006 2005 Profit per IFRS financial statements before income tax 514,968 2,174,099 Tax expense at applicable rate of 10% 51,496 217,410 Tax on expenditures not allowable for income tax purposes 251,418 19,536 Tax on income not allowable for income tax purposes (74,657) (103,839) Total tax expense 228,257 133,107 Effective tax rate 49% 6% 19
13. CASH AND BALANCES WITH NATIONAL BANK OF SERBIA (all amounts are expressed in thousands of RSD) 2006 2005 Cash in hand 1,544,355 748,291 Balances with National Bank of Serbia with less than 90 days maturity: - Obligatory liquidity reserve 2,794,445 765,291 - Overnight deposits with National Bank of Serbia - 160,000 Included in cash and cash equivalents (Note 30) 4,338,800 1,673,582 Other placements with National banks of Serbia 5,531,164 35,420 Total cash and balances with National bank of Serbia 9,869,964 1,709,002 Cash includes cash held on gyro account, obligatory reserve in RSD, foreign currency cash held in the Bank s vault and petty cash. These amounts are available for use in the Bank s day-to-day operations. The obligatory reserves were set-aside in line with the National Bank of Serbia s Decision on Banks Obligatory Reserves Held with the National Bank of Serbia (Official Herald of the Republic of Serbia, No. 116/2006 and 3/2007), which prescribes that banks calculate the obligatory reserve in RSD in amount equal to 10% (2005: 18%) of the average daily balance of prescribed deposits in RSD during one month. Apart from this, banks have the obligation to include in the required reserve in RSD 45% (2005: 38%) of the average daily balance of deposits in RSD in the previous month that are indexed with foreign currency clause. In the accounting period, the Bank is obligated to maintain average daily balance of the appropriated obligatory reserve in RSD on its gyro-account. Calculated obligatory reserve in RSD for December 2006 amounted to RSD 744,656 thousand (2005: RSD 461,621 thousand). On 31 December 2006, the Bank had balance on its assets above the amount of the calculated required reserve in RSD on its gyro-account. Obligatory reserve in RSD bears interest rate of 2.5% p.a. Other placements with National Bank of Serbia relate to liquidity suprlus deposit placed with the National Bank of Serbia on the dayly basis with annual interest rate of 2.97%. 20
14. DUE FROM OTHER BANKS (all amounts are expressed in thousands of RSD) 2006 2005 Foreign currency account 68,955 101,970 Short term deposits in foreign currency 1,711,947 530,681 Included in cash and cash equivalents (Note 28) 1,780,902 632,651 Loans and advances to other banks with over than 90 days maturity 308,403 710,508 Long term deposits 208,116 250,600 Due from other banks, gross 2,297,421 1,593,759 Less: Provision (211,284) (251,817) Due from other banks, net 2,086,137 1,341,942 Major portion of Due to other banks balance represents short term deposits in foreign currency. They comprise of over night (up to 7 days) placements in other domestic banks. Average interest rate in 2006 on placements nominated in RSD amounted 12.33%. Euro linked placements bear 3.86% p.a., USD linked 5.88% p.a. and placements nominated in CHF bear average annually interest rate of 1.55%. The movement in the provision against amounts due from banks during the year were as follows: (all amounts are expressed in thousands of RSD) 2006 2005 Balance as at 1 January 251,817 202,158 Charge to income statement (Note 9) (40,533) 49,659 Balance as at 31 December 211,284 251,817 15. LOANS AND ADVANCES TO CUSTOMERS (all amounts are expressed in thousands of RSD) 2006 2005 Loans to corporate customers 9,608,601 7,007,526 Loans to individuals 1,342,990 641,085 Receivables for paid provided guarantees 200,964 129,998 Loans to other entities 41,070 350 Gross loans and advances 11,193,625 7,778,959 Less: provisions for impairment (1,185,233) (1,166,789) Loans and advances to customers, net 10,008,392 6,612,170 Loans and advances to customers bear average variable effective interest rate of 19.83% p.a. 21
15. LOANS AND ADVANCES TO CUSTOMERS (continued) The movements in provisions for bad and doubtful loans are as follows: (all amounts are expressed in thousand of RSD) 2006 2005 Balance as at 1 January 1,166,789 1,639,493 (Credit)/Charge to income statement (Note 9) 29,658 (535,978) Foreign exchange (gains)/losses (5,202) 5,086 Write off of amounts previously provided (6,012) (1,050) Balance as at 31 December 1,185,233 1,166,789 The maturity of the loan portfolio is analysed as follows: (all amounts are expressed in thousands of RSD) 2006 2005 Loans and advances in arrears 2,117,340 1,579,930 Up to one year 6,131,834 5,241,210 Over one year 2,944,451 967,819 Gross loans and advances 11,193,625 7,788,959 The loans in arrears are analysed as follows: (all amounts are expressed in thousands of RSD) 2006 2005 Up to two months 678,562 1,058,548 Between two and six months 202,216 189,597 Between six months and one year 243,859 110,590 Over one year 992,703 221,195 Total loans in arrears 2,117,340 1,579,930 22
15. LOANS AND ADVANCES TO CUSTOMERS (continued) The loan portfolio is concentrated in the following sectors: (all amounts are expressed in thousands of RSD) 2006 2005 Industrial 3,550,822 2,893,927 Trading 3,312,247 810,327 Agricultural 1,486,580 2,396,715 Construction 1,056,931 470,191 Transport 60,343 244,461 Tourism 461,395 155,505 Citizens 64,722 641,085 Other 1,200,585 176,748 Gross loans and advances 11,193,625 7,788,959 Less: provisions for impairment (1,185,233) (1,166,789) Loans and advances, net 10,008,392 5,271,227 16. NON-TRADING SECURITIES (all amounts are expressed in thousands of RSD) 2006 2005 Available for sale 455,898 624,865 Held to maturity 237,335 242,931 Less: Provision for impairment (298,506) (249,283) Total non trading securities 394,727 618,513 23
NOTES TO THE CONSOLIDATED 16. NON-TRADING SECURITIES (continued) a) Non trading investments comprise following securities: 2006 2005 (all amounts expressed in thousands of RSD) Held to maturity Available for sale Total Held to maturity Available for sale Total Quoted investments Equity shares - - - - 169,331 169,331 Quoted investments, net - - - - 169,331 169,331 Unquoted investments Equity shares - 455,898 455,898-455,534 455,534 Debt securities 1,640-1,640 1,740-1,740 Discounted bills 235,695-235,695 241,191-241,191 Less: Impairment (18,505) (280,001) (298,506) - (249,283) (249,283) Unquoted investments, net 218,830 175,897 394,727 242,931 206,251 449,182 Non trading securities, gross 237,335 455,898 693,233 242,931 624,865 867,796 Less: Impairment (18,505) (280,001) (298,506) - (249,283) (249,283) Non trading securities, net 218,830 175,897 394,727 242,931 375,582 618,513 The Bank has sold its investments in shares of AIK Banka a.d. Nis and Centrobanka a.d. Belgrade that were classified as available for sale in amount of RSD 169,331 thousand. Investments in shares of aforementioned banks were sold for RSD 358,092 thousand resulting with the net gain of RSD 188,761 thousand disclosed as gains less losses from investment securities. b) The movements in the available for sale instruments during the year were as follows: (all amounts expressed in thousands of RSD) Gross Balance as at 1 January 624,865 Disposal of equity shares (169,331) Additional investments 364 Balance as at 31 December 455,898 24
16. NON-TRADING SECURITIES (continued) c) The movements in the provision against non-trading securities during the year were as follows: (all amounts expressed in thousands of RSD) 2006 2005 Balance as at 1 January 249,283 293,271 Impairment (reversals) / charges to revaluation reserves 29,619 (29,619) Impairment charges / (reversals) (Note 9) 19,604 - Disposal of equity shares - (24,974) Other - 10,605 Balance as at 31 December 298,506 249,283 17. INVESTMENTS IN ASSOCIATES The Bank holds 20% to 50% of the voting shares or exercises significant influence over following enterprises: (all amounts expressed in thousands of RSD) 2006 2005 % of share Ečka a.d. Lukino Selo - - 33.26% KBK Broker 24,696 15,050 8.67% Komgrad a.d., Subotica 82,267 50,604 49.96% 106,963 65,654 Less: provision for impairment - - 106,963 65,654 Movements in investments in associates are summarised in the following table: (all amounts expressed in thousands of RSD) 2006 2005 Balance at 1 January 65,654 373,880 (Disposal) / New investment - (299,712) Share of result (Note 11) 41,309 (9,690) Provision for impairment (Note 9) - 1,176 Balance at 31 December 106,963 65,654 25
18. INVESTMENT PROPERTY Investment property as of 31 December 2006 totaling RSD 31,159 thousand comprise of three office premises located in Novi Sad and one apartment in Belgrade amounting to RSD 17,065 thousand and RSD 14,094 thousand, respectively. Since the above mentioned investment properties were acquired in the last quarter of 2006 for renting purposes, the management believes that carrying amounts of items of investment property correspond with their fair values. 19. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (all amounts are expressed in thousands of RSD) Buildings Equipment Equipment under finance lease In course of Construction Intangible assets Total Cost Balance as of 1 January 2005 988,251 306,664-190,816 34,425 1,520,156 Additions 9,007 31,754 11,626 144,814 16,795 213,996 Transfers 96,329 103,742 (203,243) (3,172) (6,344) Disposals - (7,804) - (5,850) (84) (13,738) Balance as of 31 December 2005 1,093,587 434,356 11,626 126,537 47,964 1,714,070 Additions 6,089 88,585 2,993 156,196 2,217 256,080 Transfers (from)/to intangible assets - - - (17,190) 17,190 - Transfers (from)/to intangible assets 110 - - - (110) - Transfers (from)/to equipment and buildings 69,201 49,128 - (118,329) - - Disposals - (14,784) - (17,391) - (32,175) Balance as of 31 December 2006 1,168,987 557,285 14,619 129,823 67,261 1,937,975 Accumulated depreciation and amortization Balance as of 1 January 2005-129,259 875-20,682 150,816 Adjustments to opening balance Charge for the year 18,518 49,186 1,802 3,980 73,486 Disposals (6,868) (6,868) Balance as of 31 December 2005 18,518 171,577 2,677-24,662 217,434 Adjustments to opening balance - Charge for the year 19,153 55,998 2,061 8,132 6,303 91,647 Disposals - (6,104) - - - (6,104) Balance as of 31 December 2006 37,671 221,471 4,738 8,132 30,965 302,977 Net book value: - As of 31 December 2006 1,131,316 335,814 9,881 121,691 36,296 1,634,998 - As of 31 December 2005 1,075,069 262,779 8,949 126,537 23,302 1,496,636 Assets in course of construction relate to investments made for the purpose of reconstruction of branches. As at 31 December 2006 reconstruction was not finished. 26
20. OTHER ASSETS (all amounts are expressed in thousands of RSD) 2006 2005 Receivables from BIP a.d., Belgrade - 239,145 Accrued interest and fees 396,171 327,259 Advances given to suppliers (subsidiary s suppliers) 57,734 46,078 Trade receivables (subsidiary s customers) 28,130 94,276 Receivables for purchase of foreign currency - Receivables for value added tax 14,080 19,056 Assets received from out-of-court settlements held for sale 79,472 Changes in the fair value of embedded derivatives (Note 17) - 22,035 Foreclosed assets - 77,057 Receivables from sales of assets held for sale 53,864 54,226 Inventories and assets held for sale - 95,503 Prepayments for purchase of fixed assets - - Receivables for income tax paid 110 9,042 Receivables from sales of goods received in settlement of loans 2,943 3,003 Other assets 108,568 21,815 Other assets, gross 741,072 1,008,495 Less: Impairment Other assets (156,336) (288,645) Trade receivables (subsidiary s customers) (56,113) (56,113) Total provision (212,449) (344,758) Other assets, net 528,623 663,737 Based on the agreement with BIP a.d. Belgrade, on 10 March 2006 the Bank has collected its receivable amounting RSD 239,145 thousand through acquisition of own-treasury shares in total amount of RSD 244,030 thousands (Note 27). (all amounts are expressed in thousands of RSD) 2006 2005 Balance as at 1 January 344,758 508,257 Impairment (reversals) / charges (Note 9) (132,309) (259,444) Provision for trade receivables (subsidiary company)- - 37,267 Foreign exchange gains, net - 1,669 Other - 57,009 Balance as at 31 December 212,449 344,758 27
21. NET INVESTMENTS IN FINANCE LEASE (all amounts are expressed in thousands of RSD) 2006 2005 Gross receivables from finance leases Not later than 1 year 42,782 38,989 Later than 1 year and not later than 5 years 89,974 105,428 Later than 5 years - - 132,756 144,417 Less: Gross earnings (finance charges) allocated to future periods (22,982) (31,206) 109,774 113,211 Less: Allowance for impairment losses (149) - Net investment in finance leases 109,625 113,211 The leasing portfolio comprises mainly of vehicles (new and second hand) and agricultural machinery. The contracts are of average duration of approximately 2 to 5 years and are not renewable. The gross amount of receivables includes the interest and finance charges accrued for the future periods that are deducted as Gross earnings allocated to future periods. 22. DUE TO OTHER BANKS (all amounts are expressed in thousands of RSD) 2006 2005 Demand deposits from other banks 850,224 15,334 Short-term borrowings from other banks 142,053 358,507 Short-term borrowings of subsidiary company from other banks - 16,900 Long-term borrowings from other banks 3,160 1,710 Other liabilities 6,694 3,145 Total due to other banks 1,002,131 395,596 The maturities and interest rates for short-term borrowings as at 31 December 2006 are presented in the table below: Bank Maturity date Interest Rate in thousands of RSD Kosovsko-metohijska Banka a.d. Zvecan 04.01.2007. 1,20 p.m. 12,000 Kreditno-eksportna Banka a.d. Belgade 03.04.2007. 1,00 p.m. 130,053 Total short-term borrowings from other banks 142,053 28
23. DUE TO CUSTOMERS (all amounts are expressed in thousands of RSD) 2006 2005 Corporate customers - Current / settlement accounts 2,490,711 1,349,756 - Term deposits 3,172,697 1,328,912 Other entities - Current / demand accounts 1,418,721 73,527 - Term deposits 1,404,582 738,991 Retail customers - Current / demand accounts 796,898 536,882 - Term deposits 471,849 14,398 9,755,458 4,042,466 24. OTHER BORROWED FUNDS (all amounts are expressed in thousands of RSD) 2006 2005 Foreign investors 4,381,313 692,956 Borrowing for financing leasing operations 113,721 110,447 Republic Development Fund 11,230 14,585 Total borrowed funds 4,506,264 817,988 29
24. OTHER BORROWED FUNDS (continued) Other borrowed funds from foreign investors as at 31 December 2006 relate to the following investors: (all amounts expressed in thousands of EUR / RSD) Credit lines for financing small and medium enterprises (SME) Interest rate Initial maturity EUR 000 RSD 000 European Fund for Seoutheast Europe EFSE (KfW) EURIBOR + 2% p.a. 30.06.2007. 75 5,925 European Fund for Seoutheast Europe EFSE (KfW) EURIBOR + 2% p.a. 30.06.2007. 75 5,925 European Fund for Seoutheast Europe EFSE (KfW) EURIBOR + 2% p.a. 30.12.2007. 83 6,583 European Fund for Seoutheast Europe EFSE (KfW) EURIBOR + 2% p.a. 30.06.2009. 1,250 98,750 European Fund for Seoutheast Europe EFSE (KfW) EURIBOR + 2,5% p.a. 30.12.2010. 525 41,475 2,008 158,658 Commerzbank AG EURIBOR+1,15%p.a. 31.03.2009. 1,050 82,950 ING bank EURIBOR+1,3%p.a. 15.01.2007. 357 28,214 OTP Bank Ltd EURIBOR+1,8%p.a. 07.07.2011. 30,000 2,370,000 OTP Bank Ltd EURIBOR+1,8%p.a. 07.11.2011. 20,000 1,580,000 Total Credit lines for SME 53,415 4,216,822 Commodity loans Landesbank Berlin AG (Bank Lesellschaft) EURIBOR + 1,75% p.a. 24.06.2009. 244 19,291 Other long term loans European Fund for Southeast Europe EFSE(KfW) EURIBOR + 3% p.a. 30.12.2015. 1,800 142,200 Total borrowed funds from foreign investors 55,459 4,381,313 All borrowed facilities are denominated in EUR and are to be repaid in EUR. 30
25. OTHER LIABILITIES (all amounts expressed in thousands of RSD) 2006 2005 Current Tax liabilities 278,692 - Deferred interest payables 83,536 7,811 Deferred other incomes 64,481 22,652 Suppliers for fixed assets, office materials and goods - 21,466 Liabilities for dividends 30,138 97,376 Other taxes payable 25,655 1,852 Interest payables 23,890 12,560 Trade payables 31,671 11,603 Provision for one-off retirement compensations 15,771 11,364 Liabilities for received unallocated liabilities 7,550 11,434 Advance payments 6,465 10,940 Other liabilities 8,394 31,152 Total other liabilities 576,243 240,210 26. PROVISION FOR COMMITMENTS AND CONTINGENCIES Provision for commitments and contingencies as of 31 December 2006 in the amount of RSD 153,469 thousand (2005: RSD 55,239 thousand) relates to provision of off-balance sheet items (Note 29). The movements in provision for off-balance sheet items are as follows: (all amounts expressed in thousands of RSD) 2006 2005 Balance as at 1 January 55,329 384,618 Charge to income statement (Note 9) 98,140 (329,289) Balance as at 31 December 153,469 55,329 27. DEFERRED TAX LIABILITIES Movement in deferred tax liabilities during the year was as follows: (all amounts expressed in thousands of RSD) 2006 2005 Balance at 1 January 157,730 25,424 Effects of different depreciation rates used in the statutory accounts (716) 275 Effects of temporary differences (134,400) 132,031 Balance at 31 December 22,614 157,730 31