Financial Statements and Independent Auditors Report
and independent auditors report Table of contents Page Statement of management s responsibilities for the preparation and approval of the financial statements for the year ended 31 December 2015 1 Independent auditors Report 2-3 Statement of financial Position 4 Statement of comprehensive income 5 Statement of changes in equity 6 Statement of cash flows 7 Notes to the financial Statements 1. Legal Status and Nature of Operations 8 2. Standards, Interpretations and Amendments 9 3. Summary of Significant Accounting Policies 12 4. Cash and Cash Equivalents and Balances with the Central Bank of the Republic of Azerbaijan 21 5. Due from other banks 22 6. Loans and Advances to Customers 22 7. Investment Securities Available for Sale 29 8. Premises, Equipment and Intangible Assets 30 9. Other Assets 32 10. Due to Other Banks 32 11. Customer Accounts 32 12. Term Borrowings 33 13. Other Financial Liabilities 34 14. Other Liabilities 34 15. Share Capital 34 16. Interest Income and Expense 35 17. Fee and Commission Income and Expense 35 18. Administrative and Other Operating Expenses 36 19. Income Taxes 36 20. Earnings per Share 37 21. Segment Analysis 38 22. Financial Risk Management 44 23. Management of Capital 51 24. Contingencies, Commitments and Operating Risk 52 25. Fair Value of Financial Instruments 54 26. Presentation of Financial Instruments by Measurement Category 57 27. Related Party Transactions 58 28. Events after the end of the reporting period 59
Statement of management s responsibilities for the preparation and approval of the financial statements The following statement is made with a view of distinguishing respective responsibilities of the management and those of the independent auditors in relation to the financial statements of Amrahbank Open Joint Stock Company (the Bank ). The management is responsible for the preparation of the financial statements that present fairly the financial position of the Bank as at 31 December 2015, the results of its operations, cash flows and changes in equity for the year then ended, in accordance with International Financial Reporting Standards ( IFRS ). In preparing the financial statements, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Providing additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Bank's financial position and financial performance; Making an assessment of the Bank's ability to continue as a going concern. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Bank; Maintaining proper accounting records with reasonable accuracy at any time to ensure that these records enable them to prepare the financial statement of the Bank in compliance with IFRS; Maintaining statutory accounting records in compliance with legislation and accounting standards of the Republic of Azerbaijan; Taking such steps are reasonably available to them to safeguard the assets of the Bank; and Detecting and preventing fraud, errors and other irregularities. The financial statements of the Bank for the year ended 31 December 2015 were authorized for issue on 10 March 2016 by the management of the Bank: On behalf of the Management Board: Mr. Emil Hasanov Mr. Najaf Jafarli Chairman of the Management Board Finance Director Date: 10 March 2016 Date: 10 March 2016 1
Independent Auditors Report To the Shareholders of Amrahbank Open Joint Stock Company Report on the financial statements We have audited the accompanying financial statements of Amrahbank Open Joint Stock Company (the Bank ) which comprise the statement of financial position as at 31 December 2015, and statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted 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 whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation 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 internal 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 overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion Grant Thornton Azerbaijan Damirchi Tower 22 nd floor 37 Khojali Avenue Baku, Azerbaijan T +994 124047537 +994 12 4047538 F. +994 12 4047543 E info@az.gt.com www.grantthornton.az In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2015, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. 2 Grant Thornton Azerbaijan, a member form of Grant Thornton International Ltd. Grant Thornton International and its member firms are not a worldwide partnership. Services are delivered independently by the member firms.
Independent Auditors Report To the Shareholders of Amrahbank Open Joint Stock Company (continued) Other Matter The financial statements of the Bank for the year ended 31 December 2014 were audited by another auditor who expressed an unmodified opinion on those statements on 24 July 2015. Grant Thornton Baku, Republic of Azerbaijan Date: 10 March 2016 3
Statement of financial position As at 31 December 2015 2015 2014 Note ASSETS Cash and cash equivalents 4 28,849 50,391 Mandatory cash balances with CBAR 4 809 1,732 Due from other banks 5 58,368 - Loans and advances to customers 6 167,733 120,894 Investment securities available for sale 7 200 200 Current income tax asset 1,038 - Deferred income tax asset 19 1,532 758 Computer software and licenses 8 529 377 Premises and equipment 8 20,098 14,581 Other assets 9 22,192 14,132 TOTAL ASSETS 301,348 203,065 LIABILITIES AND EQUITY LIABILITIES: Due to other banks 10 25,009 20,470 Customer accounts 11 177,003 115,529 Term borrowings 12 53,553 15,959 Other financial liabilities 13 800 568 Current income tax liability - 468 Other liabilities 14 965 535 TOTAL LIABILITIES 257,330 153,529 EQUITY Share capital 20 39,844 39,844 Share premium 5,140 5,140 (Accumulated deficit)/retained earnings (966) 4,552 TOTAL EQUITY 44,018 49,536 TOTAL LIABILITIES AND EQUITY 301,348 203,065 On behalf of the Management Board: Mr. Emil Hasanov Mr. Najaf Jafarli Chairman of the Management Board Finance Director Date: 10 March 2016 Date: 10 March 2016 The accompanying notes 1 to 28 form an integral part of these financial statements. 4
Statement of comprehensive income As at 31 December 2015 Note 2015 2014 Interest income 16 27,047 25,074 Interest expense 16 (11,857) (8,180) Net interest income 15,190 16,894 Provision for loan impairment 6 (2,589) (5,580) Net interest income after provision for loan impairment 12,601 11,314 Fee and commission income 17 1,803 2,951 Fee and commission expense 17 (484) (538) Gains less losses from trading in foreign currencies 3,191 2,569 Foreign exchange translation (losses less gains) (6,266) (136) Other operating income 9 38 Administrative and other operating expenses 18 (17,146) (14,624) (Loss)/profit before tax (6,292) 1,574 Income tax credit/(expense) 19 774 (285) Net (loss)/profit for the year (5,518) 1,289 TOTAL COMPREHENSIVE (LOSS)/INCOME (5,518) 1,289 Earnings per share for (loss)/profit attributable to the owners of the Bank, basic and diluted (expressed in AZN per share) 20 (13.9) 3.2 On behalf of the Management Board: Mr. Emil Hasanov Mr. Najaf Jafarli Chairman of the Management Board Finance Director Date: 10 March 2016 Date: 10 March 2016 The accompanying notes 1 to 28 form an integral part of these financial statements. 5
Statement of changes in equity As at 31 December 2015 Note Share capital Share premium Retained earnings/ (accumulated deficit) Total equity At 1 January 2014 27,618 5,140 3,263 36,021 Profit for the year - - 1,289 1,289 Total comprehensive income for 2014 - - 1,289 1,289 Share issue 15 12,226 - - 12,226 Balance at 31 December 2014 39,844 5,140 4,552 49,536 Loss for the year - - (5,518) (5,518) Total comprehensive loss for 2015 - - (5,518) (5,518) Balance at 31 December 2015 39,844 5,140 (966) 44,018 On behalf of the Management Board: Mr. Emil Hasanov Mr. Najaf Jafarli Chairman of the Management Board Finance Director Date: 10 March 2016 Date: 10 March 2016 The accompanying notes 1 to 28 form an integral part of these financial statements. 6
Statement of cash flows Note 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Interest received 19,552 23,335 Interest paid (9,690) (7,523) Fees and commissions received 17 1,803 2,951 Fees and commissions paid 17 (484) (538) Income received from trading in foreign currencies 3,191 2,569 Other operating income received 9 38 Staff costs paid (10,600) (8,899) Administrative and other operating expenses paid (5,196) (4,558) Income tax paid (1,504) (1,533) Cash flows (used in)/from operating activities before changes in operating assets and liabilities (2,919) 5,842 Net decrease in mandatory cash balances with the CBAR 923 332 Net (increase)/decrease in due from other banks (58,368) 146 Net (increase) in loans and advances to customers (41,933) (25,005) Net (increase)/decrease in other financial assets - (359) Net (increase) in other assets (7,970) (6,388) Net increase in due to other banks 4,196 12,099 Net increase in customer accounts 59,344 23,408 Net increase in other financial liabilities 232 341 Net increase in other liabilities 417 129 Net cash (outflow)/inflow from operating activities (46,078) 10,545 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of premises and equipment (6,804) (5,573) Acquisition of intangible assets (307) (293) Net cash used in investing activities (7,111) (5,866) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from term borrowings 37,913 6,001 Repayment of term borrowings - (2,759) Issue of ordinary shares - 12,226 Net cash flow from financing activities 37,913 15,468 Effect of exchange rate changes on cash and cash equivalents (6,266) (136) Net (decrease)/increase in cash and cash equivalents (21,542) 20,011 Cash and cash equivalents at the beginning of the year 4 50,391 30,380 Cash and cash equivalents at the end of the year (excluding mandatory reserve deposits with CBAR) 4 28,849 50,391 The accompanying notes 1 to 28 form an integral part of these financial statements. 7
Notes to the financial statements 1. Legal Status and Nature of Operations The Bank was incorporated and is domiciled in the Republic of Azerbaijan. The Bank was established on 1 December 1993, in accordance with Azerbaijani regulations and registered by the Central Bank of the Republic of Azerbaijan on 28 December 1993. On 14 July 2004, it changed its legal status and name from a Limited Liability Commercial Bank Amrahbank to Open Joint Stock Company Amrahbank. The Bank is regulated by the Central Bank of the Republic of Azerbaijan and conducts its business under the general banking license number 171. As at 31 December 2015 the Bank had 24 branches and 1 affiliate in the Republic of Azerbaijan (31 December 2014-25 branches and 2 affiliates). The registered office of the Bank is located at 45A, Huseyngulu Sarabski street, Baku, AZ 1022, Azerbaijan. The Bank had 708 employees at 31 December 2015 (31 December 2014: 711 employees) As of 31 December 2015 and 2014 the immediate owners of the Bank were the following: 31 December 2015 31 December 2014 Shareholder: Ownership interest, % Ownership interest, % Mr. Ildirimzade Yunis Ali 53.17 53.17 IIB Caspian Investment Company 45.84 45.84 Ms. Ildirimzade Elza Abbas 0.33 0.33 Mr. Ildirimzade Amrah Yunis 0.33 0.33 Mr. Ildirimzade Khalid Yunis 0.33 0.33 Total 100 100 As at 31 December 2015 and 2014 the ultimate controlling party of the Bank was Mr. Ildirimzade Yunis, who owns 53.17% of the Bank`s shares. Principal activity The Bank s principal business activity is commercial and retail banking operations within the Republic of Azerbaijan. The Bank participates in the state deposit insurance scheme, which was introduced by the Azerbaijani Law, Deposits of individuals insurance in Azerbaijan Republic dated 29 December 2006. The State Deposit Insurance Fund guarantees full repayment of deposits of individuals in the amount up to AZN 30,000. Statement of compliance with International Financial Reporting Standards These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"). Presentation currency These financial statements are presented in thousands of Azerbaijani Manats ("AZN"). 8
2. Standards, Interpretations and Amendments (a) Standards, interpretations and amendments to existing standards that are effective in 2015 Following relevant new standards, revisions and amendments to existing standards were issued by the IASB, which are effective for the accounting period beginning on or after 1 January 2015 and have been adopted by the Bank: Standard number Title Effective date IAS 19 Employee Benefits Amendments 1 July 2014 Annual Improvements 2010 2012 IAS 16 Property, Plant and Equipment Amendments 1 July 2014 IAS 24 Related Party Disclosures Amendments 1 July 2014 Annual Improvements 2011 2013 IFRS 1 First-time Adoption of IFRS Amendments 1 July 2014 IFRS 13 Fair Value Measurement Amendments 1 July 2014 IAS 38 Intangible Assets Amendments 1 July 2014 IAS 40 Investment Property Amendments 1 July 2014 (b) Standards, interpretations and amendments to existing standards that are not yet effective and have not been adopted early by the Bank At the date of authorisation of these financial statements, the following new standards, interpretations and amendments to existing standards have been published but are not yet effective, and have not been adopted early by the Bank. Standard number Title Effective date IAS 16 and IAS 38 Property, Plant and Equipment and Intangible Assets Amendments 1 January 2016 IAS 16 and IAS 41 Property, Plant and Equipment and Investment Property Amendments 1 January 2016 IFRS 15 Revenue from Contracts with Customers New 1 January 2018 IFRS 9 Financial Instruments Amendments 1 January 2018 IFRS 16 Leases 1 January 2019 IAS 19 Employee Benefits Amendments 1 January 2016 IFRS 7 Financial Instruments: Disclosures Amendments 1 January 2016 Management anticipates that all of the relevant pronouncements will be adopted in the Bank's accounting policies for the first period beginning after the effective date of the pronouncement. Information on the relevant new standards, amendments and interpretations that are not yet effective has been provided below. The Bank's management has yet to assess the impact of these new and revised standards on the Bank's financial statements, unless specifically stated. 9
2. Standards, Interpretations and Amendments (continued) (b) Standards, interpretations and amendments to existing standards that are not yet effective and have not been adopted early by the Bank (continued) IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets Amendments (effective for accounting period beginning on or after 1 January 2016) The amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets : clarify that a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate for property, plant and equipment; introduce a rebuttable presumption that an amortisation method that is based on the revenue generated by an activity that includes the use of an intangible asset is inappropriate, which can only be overcome in limited circumstances where the intangible asset is expressed as a measure of revenue, or when it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated; and add guidance that expected future reductions in the selling price of an item that was produced using an asset could indicate the expectation of technological or commercial obsolescence of the asset, which, in turn, might reflect a reduction of the future economic benefits embodied in the asset. IAS 16 Property, Plant and Equipment and IAS 41 Agriculture Amendments (effective for accounting period beginning on or after 1 January 2016) The amendments to IAS 16 Property, Plant and Equipment and IAS 41 Agriculture define a bearer plant and require biological assets that meet the definition of a bearer plant to be accounted for as property, plant and equipment in accordance with IAS 16, instead of IAS 41. In terms of the amendments, bearer plants can be measured using either the cost model or the revaluation model set out in IAS 16. On the initial application of the amendments, entities are permitted to use the fair value of items of bearer plant as their deemed cost as at the beginning of the earliest period presented. Any difference between the previous carrying amount and fair value should be recognised in opening retained earnings at the beginning of the earliest period presented resulting in retrospective application. The produce growing on bearer plants continues to be accounted for in accordance with IAS 41. For government grants related to bearer plants, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance will apply. IFRS 15 Revenue from Contracts with Customers - New (effective for accounting period beginning on or after 1 January 2018) IFRS 15 establishes a single comprehensive five-step model for entities to use in accounting for revenue arising from contracts with customers. It will supersede the following revenue Standards and Interpretations upon its effective date: IAS 18 Revenue; IAS 11 Construction Contracts; IFRIC 13 Customer Loyalty Programmes; IFRIC 15 Agreements for the Construction of Real Estate; IFRIC 18 Transfers of Assets from Customers; and SIC 31 Revenue-Barter Transactions Involving Advertising Services. The five steps in the model are as follows: Identify the contract with the customer; Identify the performance obligations in the contract; Determine the transaction price; 10
Allocate the transaction price to the performance obligations in the contracts; and Recognise revenue when (or as) the entity satisfies a performance obligation. 2. Standards, Interpretations and Amendments (continued) (b) Standards, interpretations and amendments to existing standards that are not yet effective and have not been adopted early by the Bank (continued) IFRS 15 Revenue from Contracts with Customers - New (effective for accounting period beginning on or after 1 January 2018) (continued) Guidance is also provided on topics such as the point in which revenue is recognised, accounting for variable consideration, costs of fulfilling and obtaining a contract and various related matters. New disclosures about revenue are also introduced. IFRS 9 Financial Instruments Amendments (effective for accounting period beginning on or after 1 January 2018) In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. Classification and measurement Financial assets are classified by reference to the business model within which they are held and their contractual cash flow characteristics. The 2014 version of IFRS 9 introduces a 'fair value through other comprehensive income' category for certain debt instruments. Financial liabilities are classified in a similar manner to under IAS 39; however there are differences in the requirements applying to the measurement of an entity's own credit risk. Impairment The 2014 version of IFRS 9 introduces an 'expected credit loss' model for the measurement of the impairment of financial assets, so it is no longer necessary for a credit event to have occurred before a credit loss is recognised. Hedge accounting Introduces a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. Derecognition The requirements for derecognition of financial assets and liabilities are carried forward from IAS 39. IFRS 9 is effective for accounting period beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. Management has yet to assess the impact of this revised standard on the Bank s financial statements. IFRS 16 Leases - New (effective for accounting period beginning on or after 1 January 2019) IFRS 16 Leases specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. 11
2. Standards, Interpretations and Amendments (continued) (b) Standards, interpretations and amendments to existing standards that are not yet effective and have not been adopted early by the Bank (continued) IAS 19 Employee Benefits Amendments (effective for accounting period beginning on or after 1 January 2016) The amendment clarifies that the high quality corporate bonds used in estimating the discount rate for postemployment benefits should be denominated in the same currency as the benefits to be paid. IFRS 7 Financial Instruments: Disclosures Amendments (effective for accounting period beginning on or after 1 January 2016) The amendment adds additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of determining the disclosures required. It also clarifies the applicability of the amendments to IFRS 7 on offsetting disclosures to condensed interim financial statements. 3. Summary of Significant Accounting Policies (a) Basis of preparation These financial statements have been prepared using the measurement bases specified by IFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies below. The preparation of the financial statements in conformity with IFRS 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 recognized in the period in which the estimate is revised and in any future periods affected. The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding financial assets or financial liabilities within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in Note 22. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. (b) Financial instruments - key measurement terms Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is the price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the number of instruments held by the entity. This is the case even if a market s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. 12
Valuation techniques such as discounted cash flow models or models based on recent arm s length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. 3. Summary of Significant Accounting Policies (continued) (b) Financial instruments - key measurement terms (continued) Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Refer to Note 25. Transaction costs Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost Is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to the maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of the related items in the statement of financial position. The effective interest method Is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. (c) Classification of financial assets Financial assets have the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss have two sub-categories: (i) assets designated as such upon initial recognition, and (ii) those classified as held for trading. Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Bank intends to sell in the near term. Financial assets other than loans and receivables are permitted to be reclassified out of the fair value through profit or loss category only in rare circumstances arising from a single event that is unusual and highly unlikely to reoccur in the near term. Financial assets that would meet the definition of loans and receivables may be 13
reclassified if the Bank has the intention and ability to hold these financial assets for the foreseeable future or until maturity. 3. Summary of Significant Accounting Policies (continued) (d) Classification of financial liabilities Financial liabilities have the following measurement categories: (a) held for trading which also includes financial derivatives and (b) other financial liabilities. Liabilities held for trading are carried at fair value with changes in value recognised in profit or loss for the year (as finance income or finance costs) in the period in which they arise. Other financial liabilities are carried at amortised cost. (e) Initial recognition of financial instruments Financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date on which the Bank commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. (f) Derecognition of financial assets The Bank derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement whilst (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all the risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. (g) Cash and cash equivalents Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include mandatory reserve deposits with the CBAR and all interbank placements with original maturities of less than three months. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. (h) Mandatory cash balances with the CBAR Mandatory cash balances with the CBAR are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Bank s day to day operations, and hence are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows. (i) Due from other banks In the normal course of business, the Bank maintains advances or deposits for various periods of time with other banks. Due from banks are initially recognized at a fair value. Due from banks with a fixed maturity term are subsequently measured at amortized cost using the effective interest method and are carried net of any allowance for impairment losses. Those that do not have fixed maturities are carried at amortized cost based on expected maturities. Amounts due from financial institutions are carried net of any allowance for impairment losses. (j) Loans and advances to customers Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. 14
3. Summary of Significant Accounting Policies (continued) (k) Investment securities available for sale Available-for-sale investments financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition availablefor-sale investments financial assets are measured at cost with gains or losses being recognized in other comprehensive income until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to profit and loss accounts. Available-for-sale-investments are carried at cost less impairment, if any. (l) Impairment of financial assets carried at amortised cost Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Bank determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics, and collectively assesses them for impairment. The primary factors that the Bank considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; the borrower experiences a significant financial difficulty as evidenced by the borrower s financial information that the Bank obtains; the borrower considers bankruptcy or a financial reorganisation; there is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or the value of collateral significantly decreases as a result of deteriorating market conditions. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment, are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods, and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. The renegotiated asset is then derecognized and a new asset is recognized at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows. Impairment losses are always recognised through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 15
3. Summary of Significant Accounting Policies (continued) (l) Impairment of financial assets carried at amortised cost (continued) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. (m) Credit related commitments The Bank issues financial guarantees and commitments to provide loans. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties, and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. (n) Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and provision for impairment, where required. Costs of minor repairs and day-to-day maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised, and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses). Depreciation Depreciation on items of premises and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives: Useful lives in years Office and computer equipment 4 Furniture, fixtures and other 4 Vehicles 4 Leasehold improvements 3 The residual value of an asset is the estimated amount that the Bank would currently obtain from the disposal of the asset less the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 16
3. Summary of Significant Accounting Policies (continued) (o) Intangible assets The Bank s intangible assets have definite useful life and primarily include capitalised computer software. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 10 years. (p) Due to other banks Amounts due to other banks are recorded when money or other assets are advanced to the Bank by counterparty banks. The non-derivative liability is carried at amortised cost. If the Bank purchases its own debt, the liability is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from retirement of debt. (q) Customer accounts Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. (r) Term borrowings Term borrowings include loans from resident financial institution with fixed maturity and fixed interest rate. Term borrowings are carried at amortised cost. (s) Income taxes Income taxes have been provided for in the financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge/credit comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if the financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. (t) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity. 17
3. Summary of Significant Accounting Policies (continued) (u) Income and expense recognition Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability or group of financial assets or financial liabilities and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Income is recognized on an effective interest basis for debt instruments. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. (v) Recognition of fee and commission income and expense Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in profit or loss over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are provided. All other commissions are recognized when services are provided. (w) Foreign currency translation In preparing the financial statements of the Bank, transactions in currencies other than the entity's functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. The exchange rates used by the Bank in the preparation of the financial statements as at year-end are as follows: 31 December 2015 31 December 2014 AZN/1 US Dollar 1.5594 0.7844 AZN/1 Euro 1.7046 0.9522 AZN/1 GBP 2.3133 1.2173 AZN/1 RUB 0.0216 0.0133 (x) Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy. 18