Financial Statements for the year ended 31 December and Independent Auditors Report
Contents Independent Auditors Report... 3 Financial Statements Statement of profit or loss and other comprehensive income... 7 Statement of financial position... 8 Statement of cash flows... 9 Statement of changes in equity...10 Notes to the financial statements 1 Background...11 2 Basis of preparation...12 3 Significant accounting policies...13 4 Net interest income...23 5 Fee and commission income...24 6 Fee and commission expense...24 7 Net gain on financial instruments at fair value through profit of loss...24 8 Net gain on available-for-sale financial assets...24 9 Impairment losses...24 10 Personnel expenses...25 11 Other general administrative expenses...25 12 Income tax benefit...25 13 Cash and cash equivalents...27 14 Financial instruments at fair value through profit or loss...27 15 Available-for-sale financial assets...28 16 Loans to banks...28 17 Loans to customers...29 18 Transfers of financial assets...34 19 Non-current assets held for sale...35 20 Investment property...35 21 Property, equipment and intangible assets...36 22 Other assets...37 23 Deposits and balances from banks...38 24 Current accounts and deposits from customers...38 25 Promissory notes issued...38 26 Subordinated borrowings...38 27 Other liabilities...39 28 Share capital and reserves...39 29 Risk management...40 30 Corporate governance and internal control...52 31 Capital management...56 32 Credit related commitments...57 33 Operating leases...57 34 Contingencies...57 35 Related party transactions...58 36 Financial assets and liabilities: fair values and accounting classifications...61 2
JSC KPMG 10 Presnenskaya Naberezhnaya Moscow, Russia 123112 Telephone +7 (495) 937 4477 Fax +7 (495) 937 4400/99 Internet www.kpmg.ru Independent Auditors Report To the Shareholders and the Board of Directors of Joint Stock Company İŞBANK Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Joint Stock Company İŞBANK (the Bank ), which comprise the statement of financial position as at 31 December, the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the independence requirements that are relevant to our audit of the financial statements in the Russian Federation and with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the requirements in the Russian Federation and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, 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. In preparing the financial statements, management is responsible for assessing the Bank s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank s financial reporting process. Audited entity: Joint Stock Company IŞBANK. Registration No. in the Unified State Register of Legal Entities 1027739066354. Moscow, Russia. Independent auditor: JSC KPMG, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. Registration No. in the Unified State Register of Legal Entities 1027700125628. Member of the Self-regulated organization of auditors Russian Union of auditors (Association). The Principal Registration Number of the Entry in the Register of Auditors and Audit Organizations: No. 11603053203. 3
Independent Auditors Report Page 2 Auditors Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Bank s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Bank to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 4
Independent Auditors Report Page 3 Report of findings from procedures performed in accordance with the requirements of Federal Law dated 2 December 1990 No. 395-1 On Banks and Banking Activity Management is responsible for the Bank s compliance with mandatory ratios and for maintaining internal control and organizing risk management systems in accordance with requirements established by the Bank of Russia. In accordance with Article 42 of Federal Law dated 2 December 1990 No 395-1 On Banks and Banking Activity (the Federal Law ), we have performed procedures to examine: the Bank s compliance with mandatory ratios as at 1 January 2017 as established by the Bank of Russia; and compliance of elements of the Bank s internal control and organization of its risk management systems with requirements established by the Bank of Russia. These procedures were selected based on our judgment and were limited to analyses, inspections of documents, comparisons of the Bank s internal policies, procedures and methodologies to applicable requirements established by the Bank of Russia, as well as recalculations, comparisons and reconciliations of numerical data and other information. Our findings from the procedures performed are reported below. Based on our procedures with respect to the Bank s compliance with mandatory ratios as established by the Bank of Russia, we found that the Bank s mandatory ratios as at 1 January 2017 were within the limits established by the Bank of Russia. We have not performed any procedures on the accounting records maintained by the Bank other than those which we considered necessary to enable us to express an opinion as to whether the Bank s financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Based on our procedures with respect to compliance of elements of the Bank s internal control and organization of its risk management systems with requirements established by the Bank of Russia, we found that: - as at 31 December, the Bank s Internal Audit Department was subordinated to, and reported to, the Board of Directors, and the Risk Management Division was not subordinated to, and did not report to, divisions accepting relevant risks in accordance with regulations and recommendations issued by the Bank of Russia; - the Bank s internal documentation, effective on 31 December, establishing the procedures and methodologies for identifying and managing the Bank s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and for stress-testing was approved by the authorized management bodies of the Bank in accordance with regulations and recommendations issued by the Bank of Russia; - as at 31 December, the Bank maintained a system for reporting on the Bank s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Bank s capital; 5
Independent Auditors Report Page 4 - the frequency and consistency of reports prepared by the Bank s Risk Management Division and Internal Audit Department during, which cover the Bank s credit, operational, market, interest rate, legal, liquidity and reputational risk management, was in compliance with the Bank s internal documentation. The reports included observations made by the Bank s Risk Management Division and Internal Audit Department as to their assessment of the effectiveness of the Bank s procedures and methodologies, and recommendations for improvement; - as at 31 December, the Board of Directors and Executive Management of the Bank had responsibility for monitoring the Bank s compliance with risk limits and capital adequacy ratios as established by the Bank s internal documentation. With the objective of monitoring effectiveness of the Bank s risk management procedures and their consistent application during the Board of Directors and Executive Management of the Bank periodically discussed reports prepared by the Risk Management Division and Internal Audit Department, and considered proposed corrective actions. Our procedures with respect to elements of the Bank s internal control and organization of its risk management systems were performed solely for the purpose of examining whether these elements, as prescribed in the Federal Law and described above, are in compliance with the requirements established by the Bank of Russia. The engagement partner on the audit resulting in this independent auditors report is: Shevarenkov E.V. JSC KPMG Moscow, Russia 28 April 2017 6
Statement of profit or loss and other comprehensive income Joint Stock Company İŞBANK Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December Notes Interest income 4 934 522 1 243 027 Interest expense 4 (344 528) (500 070) Net interest income 589 994 742 957 Fee and commission income 5 41 418 50 130 Fee and commission expense 6 (12 604) (16 104) Net fee and commission income 28 814 34 026 Net gain on financial instruments at fair value through profit or loss 7 137 787 624 581 Net foreign exchange loss (167 492) (681 854) Net gain on available-for-sale financial assets 8 32 197 2 203 Net gain from dealing in foreign currency 30 090 63 834 Other operating income 101 644 51 640 Operating income 753 034 837 387 Impairment losses 9 (13 113) (733 287) Personnel expenses 10 (497 739) (570 130) Other general administrative expenses 11 (297 539) (357 931) Loss before income tax (55 357) (823 961) Income tax benefit 12 56 830 90 714 Profit (loss) for the year 1 473 (733 247) Other comprehensive income, net of income tax Items that are or may be reclassified subsequently to profit or loss: Revaluation reserve for available-for-sale financial assets: - Net change in fair value, net of deferred tax 162 004 369 700 - Net change in fair value transferred to profit or loss, net of income tax (25 758) (1 762) Items that will not be reclassified to profit or loss: Revaluation of buildings, net of deferred tax 1 088 (85 364) Other comprehensive income for the year, net of income tax 137 334 282 574 Total comprehensive income (loss) for the year 138 807 (450 673) The financial statements were approved by management on 28 April 2017 and were signed on its behalf by: The statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of, the financial statements. 7
Statement of financial position Joint Stock Company İŞBANK Statement of Financial Position as at 31 December Notes ASSETS Cash and cash equivalents 13 1 335 395 2 688 350 Financial instruments at fair value through profit or loss 14 1 050 - Available-for-sale financial assets - Held by the Bank 15 2 817 733 2 696 309 - Pledged under repo agreements 15 472 009 - Loans to banks 16 2 276 002 1 678 049 Loans to customers 17 5 532 568 5 378 016 Non-current assets held for sale 19 54 498 300 632 Investment property 20 226 459 - Property, equipment and intangible assets 21 774 862 826 275 Deferred tax assets 12 164 250 231 087 Other assets 22 27 828 148 468 Total assets 13 682 654 13 947 186 LIABILITIES Financial instruments at fair value through profit or loss 14 4 253 330 Deposits and balances from banks 23 4 495 414 5 376 108 Current accounts and deposits from customers 24 3 288 806 2 781 727 Promissory notes issued 25 32 742 71 892 Subordinated borrowings 26 1 841 360 2 212 180 Other liabilities 27 28 665 37 156 Total liabilities 9 691 240 10 479 393 EQUITY Share capital 28 4 979 071 4 979 071 Share premium 3 496 3 496 Additional paid-in capital 28 384 814 - Revaluation surplus for buildings 2 248 7 434 Revaluation reserve for available-for-sale financial assets (23 558) (159 804) Accumulated losses (1 354 657) (1 362 404) Total equity 3 991 414 3 467 793 Total liabilities and equity 13 682 654 13 947 186 The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 8
Statement of cash flows Joint Stock Company İŞBANK Statement of Cash Flows for the year ended 31December Notes CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 947 602 1 291 230 Interest payments (380 940) (531 979) Fee and commission receipts 41 418 50 130 Fee and commission payments (12 604) (16 104) Net receipts from financial instruments at fair value through profit or loss 142 233 627 970 Net receipts from foreign exchange 28 528 63 834 Other income receipts 7 423 53 843 Other general administrative expenses payments (680 106) (806 105) (Increase) decrease in operating assets Financial instruments at fair value through profit or loss (723) - Loans to banks (624 413) (1 538 262) Loans to customers (654 170) 1 460 689 Non-current assets held for sale 116 546 - Other assets 14 490 (90 841) Increase (decrease) in operating liabilities Deposits and balances from banks (171 643) (3 573 652) Current accounts and deposits from customers 558 736 523 755 Promissory notes issued (36 013) 13 453 Other liabilities (364) 5 834 Net cash used in operating activities before income tax paid (704 000) (2 466 205) Income tax paid (5 509) (5 252) Net cash flows used in operating activities (709 509) (2 471 457) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale financial assets (4 553 648) (285 163) Sale and repayment of available-for-sale financial assets 3 706 529 526 139 Purchases of property, equipment and intangible assets (18 630) (177 194) Sales of property and equipment 45 211 153 Net cash flows (used in) provided from investing activities (820 538) 63 935 CASH FLOWS FROM FINANCING ACTIVITIES Shares issued - 3 040 000 Contribution from the shareholder 481 018 - Net cash flows provided from financing activities 481 018 3 040 000 Net (decrease) increase in cash and cash equivalents (1 049 029) 632 478 Effect of changes in exchange rates on cash and cash equivalents (303 926) 212 030 Cash and cash equivalents as at the beginning of the year 2 688 350 1 843 842 Cash and cash equivalents as at the end of the year 13 1 335 395 2 688 350 The statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements. 9
Statement of changes in equity Joint Stock Company İŞBANK Statement of Changes in Equity for the year ended 31December Share capital Share premium Additional paid-in capital Revaluation surplus for buildings Revaluation reserve for availablefor-sale financial assets Accumulated losses Total Balance as at 1 January 1 939 071 3 496-92 798 (527 742) (629 157) 878 466 Total comprehensive loss Loss for the year - - - - - (733 247) (733 247) Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of available-forsale financial assets, net of deferred tax - - - - 369 700-369 700 Net change in fair value of available-forsale financial assets transferred to profit or loss, net of income tax - - - - (1 762) - (1 762) Items that will not be reclassified to profit or loss: Revaluation of buildings, net of income tax - - - (85 364) - - (85 364) Total other comprehensive income - - - (85 364) 367 938-282 574 Total comprehensive loss for the year - - - (85 364) 367 938 (733 247) (450 673) Transactions with owners, recorded directly in equity Shares issued 3 040 000 - - - - - 3 040 000 Balance as at 31 December 4 979 071 3 496-7 434 (159 804) (1 362 404) 3 467 793 Total comprehensive income Profit for the year - - - - - 1 473 1 473 Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of available-forsale financial assets, net of deferred tax - - - - 162 004-162 004 Net change in fair value of available-forsale financial assets transferred to profit or loss, net of income tax - - - - (25 758) - (25 758) Items that will not be reclassified to profit or loss: Revaluation of buildings, net of deferred tax - - 1 088 - - 1 088 Total other comprehensive income - - - 1 088 136 246-137 334 Total comprehensive income for the year - - - 1 088 136 246 1 473 138 807 Transfer of revaluation surplus on disposal of building, net of deferred tax - - - (6 274) - 6 274 - Transactions with owners, recorded directly in equity Contribution from the shareholder, net of current tax (note 12, 28) - - 384 814 - - - 384 814 Balance as at 31 December 4 979 071 3 496 384 814 2 248 (23 558) (1 354 657) 3 991 414 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 10
1 Background (a) (b) Organization and operations Joint Stock Company İŞBANK (the Bank), was founded on 15 December 1998 as a closed joint stock company under the laws of the Russian Federation through the restructuring of Commercial Bank Sofia (limited liability partnership) founded on 6 October 1993. In 2011 the Bank changed its name from JSCB Sofia (CJSC) to CJSC İŞBANK. In in accordance with requirements of Russian legislation the Bank changed its name to Joint Stock Company İŞBANK. Since 15 September 2005 the Bank has been a member of the Obligatory Deposit Insurance System regulated by the state corporation Deposit Insurance Agency. The Bank is also a member of the Association of Russian Banks, International Payment Systems - Europay International, Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.), Moscow Interbank Currency Exchange, an Associate member of VISA International Service Association, an Affiliate member of MasterCard Worldwide, member of international payment system Western Union, member of self-regulatory organization Russian National Association of Securities Market Participants (NAUFOR). The priority lines of the Bank s business are commercial banking services in the Russian Federation. The principal activities are deposit taking and customer account maintenance, lending, issuing guarantees, cash and settlement operations and transactions with securities and foreign exchange. The Bank has 5 offices in Moscow, Saint-Petersburg, Novosibirsk and Kazan. The Bank s legal and actual address is: 13D, Nametkina street, Moscow, 117420, Russian Federation. Since 27 April 2011, and as at 31 December and the sole shareholder of the Bank is TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ (TİBAŞ). The key shareholders of TİBAŞ are İşbank Member s Supplementary Pension Fund controlling 40.15% of TİBAŞ shares and the Republican People s Party controlling 28.09% of TİBAŞ shares. The remainder 31.76% shares of TİBAŞ are free float. Russian business environment The Bank s operations are primarily located in Russian Federation. Consequently, the Bank is exposed to the economic and financial markets of Russian Federation, which display characteristics of an emerging market. Legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine. 11
2 Basis of preparation Joint Stock Company İŞBANK (a) (b) (c) (d) Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale financial assets and investment property are stated at fair value, and buildings are stated at revalued amounts. Functional and presentation currency The functional currency of the Bank is the Russian Rouble (RUB) as, being the national currency of the Russian Federation, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The RUB is also the presentation currency for the purposes of these financial statements. Financial information presented in RUB is rounded to the nearest thousand. Use of estimates and judgments The preparation of 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 could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the following notes: loan impairment estimates note 17 fair value of buildings estimates note 20 and 21. 12
3 Significant accounting policies Joint Stock Company İŞBANK The accounting policies set out below are applied consistently to all periods presented in these financial statements. (a) (b) (c) (i) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Bank 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 amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments unless the difference is due to impairment in which case foreign currency differences that have been recognized in other comprehensive income are reclassified to profit or loss; a financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; or qualifying cash flow hedges to the extent that the hedge is effective, which are recognized in other comprehensive income. Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances (nostro accounts) held with the CBR and other banks. The mandatory reserve with the CBR is not considered to be a cash equivalent due to restrictions on its withdrawability. Cash and cash equivalents are carried at amortized cost in the statement of financial position. Financial instruments Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: - acquired or incurred principally for the purpose of selling or repurchasing in the near term - part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking - derivative financial instruments (except for derivative that is a financial guarantee contract or a designated and effective hedging instruments) or, - upon initial recognition, designated as at fair value through profit or loss. The Bank may designate financial assets and liabilities at fair value through profit or loss where either: - the assets or liabilities are managed, evaluated and reported internally on a fair value basis - the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or, - the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. 13
Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the fair value through profit or loss or availablefor-sale category if the Bank has an intention and ability to hold them for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank: - intends to sell immediately or in the near term - upon initial recognition designated as at fair value through profit or loss - upon initial recognition designated as available-for-sale or, - may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: - the Bank upon initial recognition designates as at fair value through profit or loss - the Bank designates as available-for-sale or, - meet the definition of loans and receivables. Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. (ii) (iii) Recognition Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: - loans and receivables which are measured at amortized cost using the effective interest rate method - held-to-maturity investments that are measured at amortized cost using the effective interest rate method - investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. 14
(iv) (v) (vi) Amortized cost The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Fair value measurement principles 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 in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Bank uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, the Bank measures assets and long positions at the bid price and liabilities and short positions at the ask price. The Bank recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: - a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss - a gain or loss on an available-for-sale financial asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognized, at which time the cumulative gain or loss previously recognized in equity is recognized in profit or loss. Interest in relation to an available-for-sale financial asset is recognized in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process. 15
(vii) (viii) (ix) Derecognition The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability in the statement of financial position. The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. The Bank enters into transactions whereby it transfers assets recognized on its statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognized. In transactions where the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognizes the asset if control over the asset is lost. In transfers where control over the asset is retained, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. If the Bank purchases its own debt, it 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 early retirement of debt. The Bank writes off assets deemed to be uncollectible. Repurchase and reverse repurchase agreements Securities sold under sale and repurchase (repo) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo agreements within deposits and balances from banks or current accounts and deposits from customers, as appropriate. The difference between the sale and repurchase prices represents interest expense and is recognized in profit or loss over the term of the repo agreement using the effective interest rate method. Securities purchased under agreements to resell (reverse repo) are recorded as amounts receivable under reverse repo transactions within loans to banks or loans to customers, as appropriate. The difference between the purchase and resale prices represents interest income and is recognized in profit or loss over the term of the reverse repo agreement using the effective interest rate method. If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. Offsetting Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when, and only when, the Bank currently has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. The rights is considered legally enforceable right if that right is not contingent on a future event and is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the Bank and/or all counterparties. 16
(d) (i) (ii) (iii) (iv) (e) (f) Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for buildings, which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Leased assets Leases under which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Revaluation Buildings are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the buildings being revalued. A revaluation increase on a building is recognized as other comprehensive income except to the extent that it reverses a previous revaluation decrease recognized in profit or loss, in which case it is recognized in profit or loss. A revaluation decrease on a building is recognized in profit or loss except to the extent that it reverses a previous revaluation increase recognized as other comprehensive income directly in equity, in which case it is recognized in other comprehensive income. Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Land is not depreciated. The estimated useful lives are as follows: - buildings 50 years - equipment 5 to 10 years - fixtures and fittings 5 to 10 years - motor vehicles 5 to 10 years. Intangible assets Acquired intangible assets are stated at cost less accumulated amortization and impairment losses. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. Amortization is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives range from 1 to 10 years. Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in normal course of business, or for the use in production or supply of goods or services or for administrative purposes. Investment property is measured at fair value with any change recognized in profit or loss. When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. 17
(g) (h) (i) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Bank s accounting policies. Thereafter generally, the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Impairment The Bank assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the Bank determines the amount of any impairment loss. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a financial asset or group of financial assets that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security available-for-sale a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis. The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan or receivable in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgment to estimate the amount of any impairment loss. 18
All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. (ii) (iii) (iv) Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale financial assets that are not carried at fair value because their fair value cannot be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognized in profit or loss and cannot be reversed. Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognized by transferring the cumulative loss that is recognized in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non-financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. 19