CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2009
CONTENTS PAGES Consolidated statement of comprehensive income 1 Consolidated statement of the financial position 2 Consolidated statement of changes in fund balance 3 Consolidated statement of cash flows 4 5 50
- Deldtte Kosova 8h.p.k. St. Bsdri Pejani, no.3 10030 FIisMinL! 3 Kosova Tel: +381 38 245 58213 Fax: +381 38 245 584 To the management of KEP Trust INDEPENDENT AUDITORS' REPORT We have audited the aceampanying consolidated financial statements of ICEP Trust (the "Group"), which comprise the consolidated statement of financial position as at December 3 1, 2009, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. The financial statements of the Group as of and for the year ended December 3 1, 2008, were audited by another auditor whose report dated March 3 1, 2009, expressed an unqualified opinion on those financial statements. Management's Respom%91iry for the Fi'nciul Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in acoordance with the International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation mid fair presentation of financial statements that are free from material misstatement, whether due to fraud or emr; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Our responsibility is to express an opinion on these financial statements based on our audit. We GUW our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance wh&er the fmancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amomts and disclotsum in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to hud or m r. In making those risk assessments, the auditor considers internal control relevant to the entity's prepamtion and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's inlnternal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the averall presentation of the financial statements. We believe that the audl't evidence we have obtained is sufficient and appropriate to provide a h is for ow audit opinion. DelaM nrws to one or more of DelW Taroho Tohtnabu. a Swiss Vareln, and Ns nehumk of member llnns, ead~ ofwhwhld, Is a bgrly separate and ~ d manuty. l Please see -bra &Wid ddesulpllon d the legal struchm of DaloiUa Touche Tohmetsu and b member A m.
Deloitte. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31,2009, and of its financial performance and its cash flows for the I year then ended in accordance with International Financial Reporting Standards. 1 Emphasis of matter Without qualifying our opinion, we draw attention to note 24 to the accompanying consolidated financial! statements. NGO Registration and Liaison Department cancelled the public benefit status of the KEP on r July 15, 2009. KEP appealed against its decision to appeal commission, which on January 25, 2010 has I revoked the decision of NGO Registration and Liaison Department and has asked them to review it. The I ultimate outcome of the matter cannot presently be determined. I I Prisht'i Kosovo April 22,20 10
Consolidated Statement of Comprehensive Income For the year ended 31 December In EUR Note 2009 2008 Interest income 8,550,631 6,746,386 Interest expense (2,485,783) (2,016,596) Net interest income 17 6,064,848 4,729,790 Fee and commission income 773,402 822,640 Fee and commission expense (42,317) (19,880) Net fee and commission income 19 731,085 802,760 - Income from services 18 9,442 40,768 Other operating income 70,918 36,475 Operating income 6,876,293 5,609,793 - Impairment losses on loans and advances to customers 11 (588,493) (253,676) Personnel expenses 20 (3,062,775) (2,514,964) Operating lease expenses 21 (472,153) (467,558) Depreciation and amortisation 8, 9 (366,604) (281,726) Other expenses 22 (1,314,346) (1,197,708) Operating expenses (5,804,371) (4,715,632) Operating profit for the year before grant income 1,071,922 894,161 Grant income 23 17,087 2,879,366 Foreign exchange (loss) / profit (22) 49 Net surplus for the year before income tax 1,088,987 3,773,576 Income tax expense 24 - - Surplus for the year 1,088,987 3,773,576 Other comprehensive income - - Total comprehensive income from the year 1,088,987 3,773,576 The notes on pages 5 to 50 are an integral part of these consolidated financial statements. 1
ComIidsted Startemfit of Flnandal Position As & 31 December In EUR Note ASSETS Cash and cash equivalents Loans and advances to customers Other receivables and prepayments Property and equipment Intangible assets Total assets LImITrES Borrowings Deferred income Liabilities to employees Accruals and other short term liabilities Total Iiabilities Equity Retained surplus Total equity Total liabilities and equity The notes on pages 5 to 50 are an integral part of these consolidated financial statements. ial statements set out on pages 1 to 50 were autharised for issue by the 2010 and signed on their behalf by: Muriithi Kagai Executive Director
Consolidated statement of changes in fund balance For the year ended 31 December Retained In EUR Surplus Balance at 1 January 2007 9,393,891 Surplus for the year 984,217 Total recognised income and expense 984,217 Balance at 31 December 2007 10,378,108 Balance at 1 January 2008 10,378,108 Surplus for the year 3,773,576 Total recognised income and expense 3,773,576 Balance at 31 December 2008 14,151,684 Balance at 1 January 2009 14,151,684 Surplus for the year 1,088,987 Total recognised income and expense 1,088,987 Balance at 31 December 2009 15,240,671 The notes on pages 5 to 50 are an integral part of these consolidated financial statements. 3
Consolidated statement of cash flows For the year ended 31 December In EUR Note 2009 2008 Cash flows from operating activities Net surplus for the year 1,088,987 3,773,576 Adjustments for: Depreciation 8 348,585 254,078 Amortisation 9 18,019 27,648 Foreign exchange loss 22 (49) Net impairment loss / (reversal) on loans and advances to customers 11 588,493 232,078 Net impairment loss on curricula 11-21,598 Provision for bed debts 22 28,736 - Loss from disposal of PPE 8,9 1,989 Capitalisation of MFA loan 23 - (2,740,056) Grant income 16,23 (17,088) (129,925) Net interest income 17 (6,064,848) (4,709,909) (4,007,105) (3,270,961) Change in loans and advances to customers (1,817,653) (12,737,801) Change in other assets 75,159 (76,818) Change in liabilities to employees 5,422 (70,729) Change in other liabilities 142,429 (596,464) (5,601,748) (16,752,773) Interest received 8,388,579 6,656,858 Interest paid (2,481,058) (1,570,234) Net cash from/(used in) operating activities 305,773 (11,666,149) Cash flows from investing activities Acquisition of property and equipment 8 (474,122) (742,944) Acquisition of intangible assets 9 (250,976) (22,804) Net cash used in investing activities (725,098) (765,748) Cash flows from financing activities Proceeds from borrowings 8,987,407 15,856,644 Repayment of borrowings (5,159,219) (2,590,000) Proceeds from grants - (9,428) Net cash from financing activities 3,828,188 13,257,216 Net increase in cash and cash equivalents 3,408,863 825,319 Cash and cash equivalents at 1 January 1,637,700 812,381 Cash and cash equivalents at 31 December 10 5,046,563 1,637,700 The notes on pages 5 to 50 are an integral part of these consolidated financial statements. 4
1. General information Organisation s operations The Micro Finance Institution KEP Trust ( KEP or the Organisation ), previously Kosovo Enterprise Program ( KEP ) was founded by the humanitarian organisation International Catholic Migration Commission Switzerland ( ICMC ) in August 1999, obtaining authority to operate as a Micro Finance Institution from the Central Bank of the Republic of Kosovo ( CBK ), previously Central Banking Authority of Kosovo ( CBAK ), on 19 May 2000 when new regulations for financial institutions came into effect in Kosovo. KEP was registered as a separate local Non-Governmental Organisation on 4 March 2002 and is registered with the CBK as a non-bank micro financial institution as defined in section 2 of Regulation 1999/21. KEP s principal activity is to provide financial services to the people of Kosovo. During 2005 KEP established the International Center for Community and Enterprise Development ICCED headquartered in Dublin Ireland ( ICCED ). This is a company which provides training and other consulting services to microcredit institutions mainly in Kosovo. ICCED is fully owned by KEP and is registered in Ireland as ICCED Dublin, a limited liability company. ICCED Dublin has three subsidiaries: Kosovo, Belgrade and Montenegro which operate under the status of limited liability companies. During 2009 KEP established the KEP Holding Company L.L.C. ( KEP Holding ). KEP Holding is fully owned by KEP and is registered in state Delaware, USA as a limited liability company. KEP Holding has one subsidiary, Hexagon Security Company L.L.C ( Hexagon ) in Kosovo which operate under the status of limited liability companies. The subsidiary in Kosovo was established on 13 November, 2009. The consolidated financial statements of the Organisation as at and for the year ended 31 December 2009 comprise the Organisation and ICCED Dublin, ICCED Kosovo, ICCED Belgrade, ICCED Montenegro and KEP Holding fully owned subsidiaries (together referred to as the Group ). Board of directors KEP is governed by the following persons: Charles Davy Chairman of the Board from November 2003 to September 2009 Ken Patterson Chairman of the Board from September 2009 Albert Musliu Member of the Board Michael Conlon Member of the Board Evelyn Hempenstall Member of the Board Leo MacGillivray Vice Chairman of the Board Muriithi Kagai Secretary of the Board 5
1. General information (continued) Management By the end of 2009 the Management of KEP comprises the following persons: Muriithi Kagai Elvis Ziu Arten Zikaj Silvana Berdufi Menduh Lluka Fatmire Dumoshi Alket Gradeci Hashim Sejdiu Ismet Pireva Ekrem Dreshaj Arta Haxha Alert Godeni Lulzim Buqa Ilir Guhelli Lulzim Shala Group Executive Director Group General Manager Deputy Chief Executive Officer Head of Group Internal Audit Head of Lending Human Resource Manager Head of MIS and Reporting Head of External Services Head of Administration Head of Security Head of Marketing Branch Manager Branch Manager Branch Manager Branch Manager The Management of ICCED Dublin is represented by Michael Conlon. The management of KEP Holding US is represented by Ken Patterson The Management of ICCED Limited Kosovo comprises the following persons: Muriithi Kagai Driton Berisha Group Executive Director ICCED Manager Number of authorised offices and registered addresses The activities of KEP are distributed over 5 regions covering 13 branch offices throughout Kosovo, as follows: a) Southern Region located in Prizren; branch offices: Prizren, Suhareka, Malisheve and Rahovec; sub-branch offices: Xerxe, Dragash, Gjonaj, Kijeva and Recane; b) Western Region located in Peja; branch offices: Peje, Gjakova, Istog and Klina; subbranch offices: Deqan. c) Central Region located in Prishtina; branch offices: Prishtina and Drenas; sub-branch offices: Gracanica, Lipjani, Besiana, Kastrioti and Komorani. d) Eastern Region located in Ferizaj; branch offices: Gjilan and Ferizaj; sub-branch offices: Kaqanik, Shtime, Kamenica, Viti and Shterpce. e) Northern Region located in Mitrovica; branch offices: Mitrovica; sub-branch offices: Skenderaj, Vushtri, Zubin Potok, and Mitrovica North. The head office is located in Prishtina, Bajram Kelmendi, no 16, Kosova. 6
2. Basis of preparation (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis. (c) Functional and presentation currency These consolidated financial statements are presented in euro ( EUR ), which is the Group s functional currency. (d) Use of estimates and judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, 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 recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognised in the consolidated financial statements are described in note 5. 7
3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. (a) (i) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency transactions (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. The Group deals predominantly in EUR, while the foreign currency the Group deals with is Dinar. The exchange rates used for translation at 31 December 2009 and 2008 were as follows: 2009 2008 Dinar Dinar 1 EUR 93 81 8
3. Significant accounting policies (continued) (c) Interest Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the 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 calculation of the effective interest rate includes all fees and points 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 income statement include: interest on financial assets and liabilities at amortised cost on an effective interest rate basis. (d) Fees and commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income is recognised as the related services are performed. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. (e) Income from services Income from services rendered is recognised in the income statement in proportion of the stage of completion of the transaction at the end of the reporting period date. The stage of completion is assessed by reference to surveys of work performed. (f) Grant income A grant is recognised in the balance sheet initially as deferred income when there is reasonable assurance that it will be received and that the Group will comply with the conditions associated with the grant. Loan grants used for loan purposes under specific conditions are recognised as revenue on a straight-line basis over the period until the conditions are fulfilled. Grants that compensate the Group for expenses incurred are recognised as revenue in the income statement on a systematic basis in the same periods in which the expenses are recognised. 9
3. Significant accounting policies (continued) (f) Grant income (continued) Grants that compensate the Group for the cost of an asset are recognised in the income statement as revenue on a systematic basis over the useful life of the asset. (g) Lease payments made Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. (h) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of each reporting period, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. 10
3. Significant accounting policies (continued) (i) Financial assets and liabilities (i) Recognition The Group initially recognises loans and advances and borrowings on the date that they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. (ii) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets, if any, which is created or retained by the Group, is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (iii) Offsetting Financial assets and liabilities are set off and the net amount is presented in the balance sheet when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group s trading activity. (iv) Amortised cost measurement The amortised 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 the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. (v) Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices for financial instruments traded in active markets. For all other financial instruments fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models. 11
3. Significant accounting policies (continued) (i) Financial assets and liabilities (continued) (vi) Identification and measurement of impairment At the end of each reporting period the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably. The Group considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. (j) Cash and cash equivalents Cash and cash equivalents include cash balance on hand, demand deposits with banks and shortterm highly liquid investments with maturities of three months or less when purchased and are subject to an insignificant risk of changes in value. Cash and cash equivalents are carried at amortised cost in the balance sheet. 12
3. Significant accounting policies (continued) (k) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. (l) (i) Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. 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 capitalised 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 an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of the property and equipment are recognised in profit or loss as incurred. (iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets and leasehold improvements are depreciated over the shorter of the lease term and their useful lives. The estimated useful lives for the current and comparative periods are as follows: Office equipment, including computers and IT equipment Motor vehicles Furniture and fittings 5 years 5 years 5 years Depreciation methods, useful lives and residual values are reassessed at the reporting date. 13
3. Significant accounting policies (continued) (m) Intangible assets Research and development (i) Recognition and measurement Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in profit or loss when incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Borrowing costs related to the development of qualifying assets are recognised in profit or loss as incurred. Other development expenditure is recognised in profit or loss as incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (ii) Subsequent costs Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. (iii) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets classified, other than goodwill, from the date that they are available for use. The classification of curricula based on their estimated useful life is as follow: indefinite life for those curricula where no foreseeable limit to the period over which the asset is expected to generate net cash inflows could be determined, and finite life for those curricula where a limited period of benefit could be determined. The estimated useful lives for the internally generated curricula and capitalised development costs are from 5 to 10 years. 14
3. Significant accounting policies (continued) (m) Intangible assets (continued) Software (i) Recognition and measurement Items of intangible assets are measured at cost less accumulated amortisation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. (ii) Subsequent costs Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iii) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of the intangible asset. The estimated useful life of the intangible assets is 4 years for software (2008: 4 years). (n) Leased assets Leased assets represents assets leased under operating leases and are not recognised in the Group s balance sheet. (o) Impairment of non financial assets The carrying amounts of the Group s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 15
3. Significant accounting policies (continued) (o) Impairment of non financial assets (continued) An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised 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 has been 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 or amortisation, if no impairment loss had been recognised. (p) Borrowings Borrowings comprise loans obtained from various organisations. The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. Borrowings are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective interest method. (q) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. (r) (i) Employee benefits Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. 16
3. Significant accounting policies (continued) (r) (i) Employee benefits (continued) Defined contribution plans (continued) The Group contributes to its employees' post retirement plans as prescribed by the national legislation. Contributions, based on salaries, are made to the national organisations responsible for the payment of pensions. Additionally the Group recognises a fixed contribution payable into a separate pension fund which is maintained by Group. There is no additional liability in respect of these plans. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (s) Segment reporting A segment is a distinguishable component of the Group that is engaged in providing services within a particular economic environment which is subject to risks and returns that are different from those of other segments. The Group s primary format for segment reporting is based on business segments. The business segments are determined based on the Group s management and internal reporting structure. 17
3. Significant accounting policies (continued) (t) Adoption of new and revised international financial reporting standards i) Standards and Interpretations effective in the current period The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period: IFRS 8 Operating Segments (effective for annual periods beginning on or after 1 January 2009), Amendments to IFRS 7 Financial Instruments: Disclosures - Improving disclosures about financial instruments (effective for annual periods beginning on or after 1 January 2009), Amendments to IFRS 1 First-time Adoption of IFRS and IAS 27 Consolidated and Separate Financial Statements Cost of investment in a subsidiary, jointly-controlled entity or associate (effective for annual periods beginning on or after 1 January 2009), Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on 22 May 2008 (IAS 1, IFRS 5, IAS 8, IAS 10, IAS 16, IAS 19, IAS 20, IAS 23, IAS 27, IAS 28, IAS 29, IAS 31, IAS 34, IAS 36, IAS 38, IAS 39, IAS 40, IAS 41) primarily with a view to removing inconsistencies and clarifying wording (most amendments are to be applied for annual periods beginning on or after 1 January 2009), Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable financial instruments and obligations arising on liquidation (effective for annual periods beginning on or after 1 January 2009), IAS 1 (revised) Presentation of Financial Statements A revised presentation (effective for annual periods beginning on or after 1 January 2009), IAS 23 (revised) Borrowing Costs (effective for annual periods beginning on or after 1 January 2009), Amendments to IFRS 2 Share-based Payment Vesting conditions and cancellations (effective for annual periods beginning on or after 1 January 2009), Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement - Embedded Derivatives (effective for annual periods ending on or after 30 June 2009), IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008), IFRIC 15 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009), IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008), The adoption of these amendments to the existing standards and interpretations has not led to any significant changes in the Group s accounting policies. 18
3. Significant accounting policies (continued) (t) Adoption of new and revised international financial reporting standards ii) Standards and interpretations in issue not yet effective At the date of authorisation of these financial statements the following standards, revisions and interpretations were in issue but not yet effective: IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013), IFRS 3 (revised) Business Combinations (effective for annual periods beginning on or after 1 July 2009), IFRS 1 (revised) First-time Adoption of IFRS (effective for annual periods beginning on or after 1 July 2009), Amendments to IFRS 1 First-time Adoption of IFRS - Additional Exemptions for Firsttime Adopters (effective for annual periods beginning on or after 1 January 2010), Amendments to IFRS 2 Share-based Payment - Group cash-settled share-based payment transactions (effective for annual periods beginning on or after 1 January 2010), Amendments to IAS 24 Related Party Disclosures Simplifying the disclosure requirements for government-related entities and clarifying the definition of a related party (effective for annual periods beginning on or after 1 January 2011), Amendments to IAS 27 Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009), Amendments to IAS 32 Financial Instruments: Presentation Accounting for rights issues (effective for annual periods beginning on or after 1 February 2010) Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Eligible hedged items (effective for annual periods beginning on or after 1 July 2009), Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on 16 April 2009 (IFRS 2, IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 18, IAS 36, IAS 38, IAS 39, IFRIC 9, IFRIC 16) primarily with a view to removing inconsistencies and clarifying wording, (most amendments are to be applied for annual periods beginning on or after 1 January 2010), Amendments to IFRIC 14 IAS 19 The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction - Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011), IFRIC 17 Distributions of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009), IFRIC 18 Transfers of Assets from Customers (effective for transfer of assets from customers received on or after 1 July 2009), IFRIC 19 Extinguishing Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). The Group has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. The Group anticipates that the adoption of these standards, revisions and interpretations will have no material impact on the financial statements of the Bank in the period of initial application. 19
4. Financial risk management (a) Introduction and overview The Group has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risks This note presents information about the Group s exposure to each of the above risks, the Group s objectives, policies and processes for measuring and managing risk, and the Group s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Group s risk management framework. The Board and the management have established different committees which are responsible for developing and monitoring the overall Group s risk management policies. All Board committees have both executive and non-executive members and report regularly to the Board of Directors on their activities. The Internal Audit Department undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Board of Directors. (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s loans and advances to customers and other banks. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The Group s primary exposure to credit risk arises through its loans and advances. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the balance sheet. The Group has no significant exposure to any individual customer or counterparty. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The Group s policy is to require suitable collateral to be provided by the customers prior to the disbursement of approved loans. Collateral for loans is usually obtained in the form of mortgages, inventory or other property. 20
4. Financial risk management (continued) (b) Credit risk (continued) Management of credit risk The Board of Directors has delegated responsibility for the management of credit risk to the management. Regular audits of business units and Group Credit processes are undertaken by the Internal Audit Department. Exposure to credit risk Note Loans and advances to customers 2009 2008 Carrying amount 11 41,307,565 39,916,352 Individually Impaired 3,018,760 - Collectively impaired 39,110,000 40,481,012 Gross amount 11 42,128,760 40,481,012 Allowance for impairment (821,195) (564,660) Carrying amount 11 41,307,565 39,916,352 Neither past due nor impaired - - Total carrying amount 11 41,307,565 36,916,352 Impaired loans Impaired loans are loans for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan agreement(s). Allowances for impairment The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. This allowance refers to a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. 21
4. Financial risk management (continued) (b) Credit risk (continued) Write-off policy The Group writes off a loan balance (and any related allowances for impairment losses) when it is estimated that the loans are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. The Group holds collateral against loans and advances to customers in the form of mortgages, vehicles/equipment and goods. Estimates of fair value are based on the value of collateral assessed at the time of borrowing. The collateral exposure is at least 100% of the loan amount disbursed. An estimate of the fair value of collateral held against financial assets is shown below: Loans and advances to customers 2009 2008 Vehicles 92,931,631 82,851,494 Properties (buildings and land) 11,175,462 12,018,174 Goods 1,050,491 494,093 Other - 3,568,113 Total 105,157,584 98,931,874 22
4. Financial risk management (continued) (b) Credit risk (continued) The Group monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk at the reporting date is shown below: Note Loans and advances to customers 2009 2008 Carrying amount 11 41,307,565 39,916,352 Concentration by loan product Individual loans 16,831,471 15,211,703 Consumer loans 5,532,348 4,965,366 Group loans 94,760 173,317 Agricultural loans 8,527,480 6,170,251 Village banking 89,582 309,937 Livestock loans 784,663 528,844 Housing 3,810,193 5,748,412 Start up loans 20,908 39,569 Express women loan 804,395 99,376 Loan for women (LFW) 4,505,010 6,430,166 41,000,810 39,676,941 Staff loans 306,755 239,411 Total 11 41,307,565 39,916,352 Concentration by location Deçan 548,648 - Dragash 254,464 - Drenas 3,264,775 2,752,852 Ferizaj 2,307,107 3,661,031 Gjakova 1,684,404 2,047,053 Gjilan 1,382,009 1,691,520 Gracanica 980,691 - Istog 1,950,209 1,723,250 Kamenica 572,262 - Kaqanik 1,219,407 - Klina 1,988,845 1,908,465 Malisheva 2,453,724 2,682,512 Mitrovica 2,158,853 3,780,019 Peja 3,925,219 5,235,435 Prishtina 3,884,808 4,374,037 Prizren 3,497,488 4,957,839 Rahovec 801,442 2,470,154 Reçan 557,157 - Shtimje 860,055 - Skenderaj 833,072 - Suhareka 2,618,805 2,632,185 Vushtrri 635,606 - Xerxe 1,331,697 - Zubin Potok 1,596,818 - Total 11 41,307,565 39,916,352 23
4. Financial risk management (continued) Concentration by location for loans and advances is measured based on the location of the Group entity holding the asset, which has a high correlation with the location of the borrower. During the years 2009 and 2008 the balance of staff loans has been distributed to each location. (c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. The Group s liquidity position is monitored by the Finance Department on a weekly basis and directly from the management systematically, through managing cash availability for loan disbursement and ensuring adequate funds are available for each account based on expected inflows and outflows to meet the Group s obligations. Exposure to liquidity risk The main funding bases of the Group are borrowings. The Group strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Group continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Group strategy. In addition the Group holds a portfolio of liquid assets as part of its liquidity risk management strategy. Residual contractual maturities of financial liabilities 31 December 2009 Non-derivative liabilities Note Carrying amount Gross nominal outflow On demand Up to 6 months 6 months to 1 year Over one year Borrowings 13 32,243,781 (32,243,781) - 4,682,585 5,431,526 22,129,670 Liabilities to employees 14 98,296 (98,296) - 98,296 Accruals and other short term liabilities 15 634,518 (634,518) 634,518 - - 32,976,595 (32,976,595) - 5,317,103 5,431,526 22,227,966 31 December 2008 Non-derivative liabilities Borrowings 13 28,415,594 (28,415,594) - 4,341,244 2,614,683 21,459,667 Liabilities to employees 14 92,874 (92,874) - - - 92,874 Accruals and other short term liabilities 15 487,342 (487,342) - 487,342 - - 28,995,810 (28,995,810) - 4,828,586 2,614,683 21,552,541 24