SOCIETE GENERALE BANKA MONTENEGRO A.D., PODGORICA FINANCIAL STATEMENTS FOR THE YEAR ENDED
SOCIETE GENERALE MONTENEGRO BANKA A.D, PODGORICA CONTENTS Page Independent Auditor s Report 1-2 Income Statement for the year ended 2017 3 Statement of Other Comprehensive Income for the year ended 2017 4 Balance Sheet as of 2017 5 Statement of Changes in Equity for the year ended 2017 6 Cash Flow statement for the year ended 2017 7 Notes to Financial Statements 8 75
INDEPENDENT AUDITORS REPORT TO THE OWNERS OF SOCIETE GENERALE BANKE MONTENEGRO A.D., PODGORICA Report on Financial Statements We have audited the accompanying financial statements of Societe Generale banke Montenegro A.D., Podgorica (hereinafter: the Bank), which comprise the balance sheet as at 31 December 2017, and the income statement, statement of other 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 notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Law on Accounting and the regulations of the Central bank of Montenegro governing financial reporting of banks, 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. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Standards on Auditing applicable in Montenegro. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 auditor s 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 In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2017, and of its financial performance and its cash flows for the year then ended in accordance with the Law on Accounting and the regulations of the Central bank of Montenegro governing financial reporting of banks.
Report on other legal and regulatory requirements We have reviewed the annual management report of the Bank. Management is responsible for the preparation of the annual management report in accordance with the legal requirements of Montenegro. Our responsibility is to assess whether the annual management report is consistent with the annual financial statements for the same financial year. Our work regarding the annual management report has been restricted to assessing whether the accounting information presented in the annual management report is consistent with the annual financial statements and did not include reviewing other information contained in the annual management report originating from nonaudited financial or other records. In our opinion, the accounting information presented in the annual management report is consistent, in all material respects, with the financial statements of the Bank for the year ended 31 December 2017. Podgorica, 12 March 2018 Stephen Fish, Partner for Ernst & Young Montenegro d.o.o., Podgorica Danijela Jović Authorized Auditor
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA INCOME STATEMENT In the period from January 1 to 2017 (In thousands EUR) Note 2017 2016 Interest income 3.1, 5a 22,851 24,054 Interest expense 3.1, 5b (2,870) (3,539) NET INTEREST INCOME 19,981 20,515 Impairment losses 3.7, 6a (2,709) (3,477) Provisions 3.7, 6b (631) (1,096) Fee and commission income 3.1, 7a 8,380 8,196 Fee and commission expense 3.1, 7b (3,785) (4,043) NET FEE AND COMMISSION INCOME 4,595 4,153 Net gains from investment securities (4) 57 Net gains from foreign exchange differences 242 242 Personnel expenses 8 (8,077) (7,221) General and administrative expenses 9 (3,981) (3,722) Depreciation 10 (1,103) (1,076) Other expenses 11 (126) (127) Other income 11 113 118 OPERATING PROFIT 8,300 8,366 Income tax 3.4, 12a (909) (575) NET PROFIT 7,391 7,791 The accompanying notes form an integral part of these financial statements. Podgorica, March 12, 2018 Approved by and signed on behalf of Societe Generale Banka Montenegro AD, Podgorica: Miroslav Hiršl Chief Executive Officer Ratka Glumac Head of Accounting Unit 3
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA STATEMENT OF OTHER COMPREHENSIVE INCOME In the period from January 1 to 2017 (In thousands EUR) Note 2017 2016 Net profit 7,391 7,791 Other comprehensive income Unrealized Gains on available for sale financial assets, before tax 1,222 748 Actuarial gains/(losses) on long-term employee benefits 12 (69) Income tax effect on other comprehensive income items (102) (62) Total other comprehensive income for the year 1,032 617 TOTAL OTHER COMPREHENSIVE INCOME 8,423 8,408 The accompanying notes are an integral part of these financial statements. Podgorica, March 12, 2018 Approved by and signed on behalf of Societe Generale Banka Montenegro AD, Podgorica: Miroslav Hiršl Chief Executive Officer Ratka Glumac Head of Accounting Unit 4
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA BALANCE SHEET As at 2017 (In thousands EUR) 2017 2016 Notes ASSETS Cash and deposit accounts held with central banks 3.5, 13 66,541 76,232 Loans and receivables from banks 3.5, 14 23,087 13,716 Loans and receivables from customers 3.6.1, 15 340,942 302,963 Asset held for sale 16 1,113 1,264 Investment securities - available for sale 3.6.4, 17a 33,773 35,353 - held to maturity 3.6.3, 17b 4,490 7,576 Property, plant and equipment 3.8, 3.9, 18 10,533 10,578 Intangible assets 19 376 410 Deferred tax assets 12c 146 69 Other financial receivables 860 451 Other operating receivables 20 1,515 1,606 TOTAL ASSETS 483,375 450,218 LIABILITIES Deposits from customers 21 355,572 347,738 Borrowings from banks 22 15,000 - Borrowings from other customers 22 44,996 39,455 Reserves 23 3,812 3,158 Current tax liabilities 12a 890 743 Deferred tax liabilities 12d 351 118 Other liabilities 24 2,413 3,193 TOTAL LIABILITIES 423,034 394,405 EQUITY Share capital 25 24,731 24,731 Retained earnings 20,349 17,128 Profit for the year 7,391 7,791 Other reserves 7,870 6,163 TOTAL EQUITY 60,341 55,813 TOTAL LIABILITIES AND EQUITY 483,375 450,218 OFF-BALANCE-SHEET ITEMS 27 868,674 832,013 Podgorica, March 12, 2018 The accompanying notes are an integral part of these financial statements. Approved by and signed on behalf of Societe Generale Banka Montenegro AD, Podgorica: Miroslav Hiršl Chief Executive Officer Ratka Glumac Head of Accounting Unit 5
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA STATEMENT OF CHANGES IN EQUITY In the period from January 1 to 2017 (In thousands EUR) Share capital Retained earnings Profit for the year Other reserves Total Balance, as of January 1, 2016 24,731 13,688 6,310 4,807 49,536 Effects of fair value adjustment of securities available for sale - - - 680 680 Free shares to employees - - - (28) (28) Actuarial losses, net - - - (63) (63) Transfer to regulatory reserves - (767) - (767) Distribution of profit through dividends - - (2,103) - (2,103) Transfer of profit from previous year - 4,207 (4,207) - - Profit for the year - - 7,791-7,791 Balance, as of 2016 24,731 17,128 7,791 6,163 55,813 Balance, as of January 1, 2017 24,731 17,128 7,791 6,163 55,813 Effects of fair value adjustment of securities available for sale - - - 1,021 1,021 Actuarial gains, net - - - 11 11 Transfer to regulatory reserves - (675) - 675 - Distribution of profit through dividends - - (3,895) - (3,895) Transfer of profit from previous year - 3,896 (3,896) - - Profit for the year - - 7,391-7,391 Balance, as of 2017 24,731 20,349 7,391 7,870 60,341 Podgorica, March 12, 2018 The accompanying notes are an integral part of these financial statements. Approved by and signed on behalf of Societe Generale Banka Montenegro AD, Podgorica: Miroslav Hiršl Ratka Glumac Chief Executive Officer Head of Accounting Unit 6
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA CASH FLOW STATEMENT In the period from January 1 to 2017 (In thousands EUR) 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES Inflows from interest and similar income 22,535 23,797 Outflows from interest and similar income (3,014) (4,052) Inflows from fees and commissions 8,402 8,184 Outflows from fees and commissions (3,754) (4,019) Cash paid to employees and suppliers (12,182) (10,899) Increase in loans and other assets (40,692) (6,739) Inflows from deposits 6,955 12,636 Taxes paid (708) (604) Other inflows/outflows 413 (29) Net cash inflow from operating activities (22,045) 18,275 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of business premises and equipment (866) (545) Purchase of intangible assets (183) (350) Purchase/sale and maturity of T-bills and T-bonds 5,862 3,313 Proceeds from sale of fixed asset 16 32 Net cash inflow/(outflow) from investing activities 4,828 2,450 CASH FLOWS FROM FINANCING ACTIVITIES Net cash (outflow)/inflow from borrowings 20,530 (5,376) Distribution of profit through dividends (3,876) (2,097) Net cash (outflow)/inflow from financing activities 16,654 (7,473) Effects of foreign exchange gains and losses, net 242 242 Net increase in cash and cash equivalents (562) 13,252 Cash and cash equivalents, beginning of year 89,948 76,454 Cash and cash equivalents, end of year (Note 13 and 14) 89,628 89,948 Podgorica, March 12, 2018 The accompanying notes are an integral part of these financial statements. Approved by and signed on behalf of Societe Generale Banka Montenegro AD, Podgorica: Miroslav Hiršl Chief Executive Officer Ratka Glumac Head of Accounting Unit 7
1. FOUNDATION AND BUSINESS ACTIVITY SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA Podgorička Banka AD, Podgorica was established by separating from Montenegrobanka D.D., Podgorica in the course of 1992. On November 21, 2001, the Central Bank of Montenegro issued an approval enabling the bank to continue its operations pursuant to Decision 27. Following the aforementioned privatization process that took place in 2005, the majority interest in the bank is held by Societe Generale, Paris, France. On September 26, 2006, the bank was inscribed in the Central Register of the Commercial Court in Podgorica under the registration number 4-0000880/019, operating the activities as Podgorička Banka Societe Generale Group AD, Podgorica. Under registration number 4-0000880/41 on May 7, 2012, the bank was inscribed in Central Register of the Commercial Court in Podgorica as Societe Generale banka Montenegro AD (hereinafter: the Bank). The bank is licensed to perform credit, depositary and guarantee operations, as well as foreign payments transactions, depo transaction, to provide safekeeping services, issuance, processing and recording of payment instruments (including credit cards, travellers and banks cheques). In addition to the core business, the Bank from 2014 performs insurance representation business, in accordance with the approval from Agency for Insurance Supervision and Central Bank of Montenegro. The bank is headquartered in Bulevar Revolucije 17, Podgorica. As of 2017, the bank was comprised of a Central Office located in Podgorica and 20 branch offices located throughout Montenegro. As of 2017, the bank has 298 employees ( 2016: 298 employees). 8
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 2. BASIS FOR PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS 2.1. Basis for preparation and presentation of the financial statements The Bank is obligated to maintain its accounting records and prepare its statutory financial statements in accordance with the Accounting and Auditing Law of Montenegro (Official Gazette of Montenegro, No. 052/16) entailing the application of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), as well as the Law on Banks (Official Gazette of Montenegro, No.17/08, 44/10, 40/11) and decisions of the Central bank of Montenegro governing the financial reporting of banks. The financial statements are prepared in accordance with the Decision on the Contents, Deadlines and Manner of Preparation and Submission of the financial Statements of Banks (Official Gazette of Montenegro, no. 15/12 and 18/13). In preparation of these financial statements the Bank applied policies in conformity with the regulations of the Central Bank of Montenegro, which however, in the part regarding recording receivables eligible for derecognition from the Bank's balance sheet and in the format for presentation of the financial statements, depart from the requirements of IFRS and IAS effective as of December 31, 2017. In the preparation of the accompanying financial statements, the Bank has adhered to the accounting policies described in Note 3, which are in conformity with the accounting, banking and tax regulations prevailing in Montenegro. The financial statements have been prepared on the going concern assumption. The official currency in Montenegro and the Bank s functional and presentation currency is Euro (EUR). 2.2. Use of estimates The presentation of financial statements requires the bank s management to make best estimates and reasonable assumptions that affect the assets and liabilities amounts, as well as the disclosure of contingent liabilities and assets as of the date of the preparation of the financial statements, and the income and expenses arising during the reporting period. These estimations and assumptions are based on information available as of the date of preparation of the financial statements. However, actual outcome may vary from the estimated values. Below listed are estimates and assumptions which carry a risk of causing materially significant adjustments to the carrying value of assets and liabilities within the next financial year. Impairment of financial assets In accordance with its internal policy, the Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired 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 loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. These evidence of impairment may include indications that unfavourable change had occurred in a borrower status regarding the payments of obligations to the Bank, or in national/local economic conditions that correlate with default on obligations. Regarding the assessment of losses due to impairment of loans, the Bank reviews its loan portfolio on a quarterly basis in order to assess the impairment. 9
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 2. BASIS FOR PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.2. Use of estimates (continued) Provision for retirement benefits The costs of employee benefits payable upon termination of employment, or retirement in accordance with the legal requirements, are determined based on independent actuary s report. Actuarial assessment includes assessment of the discount rate, future movements in salaries, mortality rates and employee turnover. Due to long-term nature of these plans, significant uncertainties may influence the outcome of the assessment. Additional information is disclosed in Note 23 to the financial statements. Provision for Litigations The Bank is involved in a number of legal disputes arising from daily operations that relate to commercial and contractual issues as well as issues related to labour relations, which are handled or considered in the ordinary course of business. The Bank routinely assesses the likelihood of any adverse outcomes to these matters as well as ranges of probable and reasonable estimated losses. Reasonable estimates involve judgments made by management after considering information including notifications, settlements, estimates performed by the legal department, available facts, identification of other potentially responsible parties and their ability to contribute, and prior experience. A provision is recognized when it is probable that there is an obligation whose amount can be reliably estimated by careful analysis (Note 29). The required provision may change in the future due to new developments and as additional information. Contingent liabilities, as well as items that do not meet the criteria for a provision are disclosed, unless the possibility of an outflow of resources representing economic benefits is remote. Tax Liabilities Montenegro tax legislation is often interpreted differently and is subject to frequent changes. The interpretation of tax legislation by tax authorities regarding the Bank transactions and operations may differ from interpretation of the Bank's management. As a result, transactions may be opposed by tax authorities and the Bank may be assigned additional taxes, penalties and interest. The period of obsolescence of tax liability is five years. This practically means that tax authorities could determine payment of outstanding liabilities within five years from the origination of the liability. 10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Interest and fees income and expense SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA For all financial instruments valued at amortized cost, interest-bearing financial instruments available for sale and financial instruments at fair value through income statement, income or expense are recognized at an effective interest rate that exactly discount future cash payments or income through expected lifetime of financial instruments or, when it is appropriate, in shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the bank estimates cash flows considering all contractual terms of the financial instrument (i.e. prepayment options) but does not consider future credit losses. The calculations include all fees and commissions paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Interest income and interest expense, including penalty interest and operating income and expenses related to interest-bearing assets and liabilities are accounted for on an accrual basis. Fees for banking services and fee and commission expenses are recorded when due, i.e., when realized. Income and expenses arising from loan and guarantee origination are accounted for on an accrual basis using effective interest method. 3.2. Foreign Exchange Translation Transactions denominated in foreign currencies are translated in Euros using official average exchange rates determined on the Interbank Market effective on date of each transaction. Assets and liabilities denominated in foreign currencies are translated in Euros by applying the official average exchange rates, as determined on the Interbank Market, effective on the balance sheet date. Net foreign exchange gains or losses arising from transactions in foreign currencies and from translation of balance sheet items denominated in foreign currencies are credited or charged to the income statement, as positive or negative foreign exchange differences. Commitments and contingent liabilities denominated in foreign currencies are translated in Euros by applying the official average exchange rates, as determined on the Interbank Market, effective on the balance sheet date. 3.3. Leasing The leases entered into by the Bank are operating leases. The payments made under operating leases are charged to operating expenses in the income statement on a straight-line basis over the period of the lease agreement duration. 11
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.4. Taxes and Contributions Income Taxes Current income taxes Income taxes are calculated and paid in conformity with Article 28 of the Corporate Income Tax Law (Official Gazette of Montenegro, No., 80/04 and 40/08, 86/09, 14/12, 61/13 and 55/16). The income tax rate is a proportionate rate of 9% applied to the tax base. A taxpaying entity s taxable income is determined based on the income stated in its statutory statements of comprehensive income following certain adjustments to its income and expenses performed in accordance with the Montenegrin Corporate Income Tax Law (Articles 8 and 9 for income adjustment and Articles 10 to 20 for expense adjustment) and the Decision on the New Chart of accounts for Bank Central Bank of Montenegro (Official Gazette of Montenegro No. 55/12). Capital losses may be set off against capital gains earned in the same year. In case there are outstanding capital losses even after the set-off of capital losses against capital gains earned in the same year, these outstanding losses are carried forward in the following 5 years. Montenegrin tax regulations do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carry back period. However, any current year losses reported in the annual corporate income tax returns may be carried forward and used to reduce or eliminate taxes to be paid in future accounting periods, but only for a period of a maximum of five following years. Deferred income taxes Deferred income tax is determined using the balance sheet liability method, for the temporary differences arising between the tax bases of assets and liabilities, and their book values. The currently-enacted tax rates at the balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for the deductible temporary differences, and the tax effects of income tax losses and credits available for carry forward, to the extent that it is probable that future taxable profit will be available against which deferred tax assets may be utilized. Deferred tax assets and liabilities are calculated at the tax rate that will be effective in the year of tax benefits, i.e. in reconciliation of deferred tax liabilities and on the basis of the official tax rates and regulations implemented on the balance sheet date. Deferred income tax that relates to the items that are recorded directly in favour or in charge of the capital are also recorded in charge, i.e. in favour of the capital. Taxes, contributions and other duties not related to operating results Taxes, contributions and other duties that are not related to the bank s operating result, include property taxes and other various taxes and contributions paid pursuant to republic and municipal regulations. 3.5. Cash and Cash Equivalents Cash and cash equivalents comprise cash (EUR and foreign currencies) and balances with the Central Bank of Montenegro and other banks. 12
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.6. Financial instruments A financial instrument means any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. The Bank recognizes a financial asset in the balance sheet only on becoming a contracting party to the financial instrument. The purchase or sale of a financial asset that requires the asset to be transferred, within a deadline prescribed by regulations or market mainstreams, is recognized on the trade date, that is at the date when the Bank commits to buy or sell the asset. The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. Financial instruments are initially recognized at fair value adjusted for related purchase expenses or issuing costs, except for securities and other investments for trading. The Bank classifies its financial assets into the following categories: loans and receivables, financial assets at fair value through profit or loss, available-for-sale financial assets, and held-to-maturity financial assets. 3.6.1. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and placements to banks and customers provided by the Bank are recognized in balance sheet when cash is advanced to borrowers. All loans and placements are initially measured at fair value. On the Balance sheet date loans are measured at amortized value of the contractual interest rate, net accumulated depreciation and direct impairment. 3.6.2. Financial assets at fair value through profit and loss This category includes financial assets held for sale, and ones carried at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for sale or repurchase in the short term, for generating profit from short-term price changes. Derivatives are measured at fair value unless they are designated as hedging instruments. The category of a financial asset is not subject to amendments on further measurements. The acquisition or sale of financial assets at fair value through profit or loss is recognized at fair value at the date of transaction, i.e. at the date the Bank has committed to purchase or sell the asset. Subsequent measurement of these assets is performed at fair value without any deduction of transaction costs that may arise from the sale or disposal of the asset. Gains and losses arising from changes in the fair value of financial assets at fair value are included as profit or loss through P&L, in the period when they occurred. 3.6.3. Held-to-maturity securities Held to maturity securities are financial assets with fixed or determinable payments and fixed maturities, which the bank has the intention and ability to hold to maturity. After initial measurement, held to maturity financial investments are subsequently measured at amortised cost using the EIR, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition. The losses arising from impairment of such investments are determined as difference between the carrying amount and present value of expected cash flows discounted using original interest rate of investments. 13
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.6. Financial instruments (continued) 3.6.4. Securities available-for-sale Securities which are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified as "securities available for sale". After initial recognition securities available for sale are measured at fair value. Equity investments that are not quoted in an active market and whose value cannot be reliably measured are stated at cost. The fair value of the securities to be listed is based on current bid prices. Unrealized gains and losses on securities available for sale are recognized in the revaluation reserve, until the security is sold, collected or otherwise realized, or until the security is impaired. When securities available-for-sale are disposed of or when they are impaired, the accumulated fair value adjustments recognized in equity are recorded in the Income statement. For potential risks that investments in shares and other securities available for sale will not be charged, the Bank performs impairment. Dividends from available-for-sale financial assets are included in dividend income upon gaining the right to such income. Regarding financial instruments available for sale, the Bank assesses on an individual basis whether there is objective evidence of impairment based on the same criteria applicable to financial assets measured at amortized cost. Also, the booked value of impairment represents cumulative loss evaluated as the difference between the amortized cost and the current fair value, deducted for eventual loses due to impairment previously recognized in the income statement. Regarding equity instruments available for sale, objective evidence is considered as "significant" or "prolonged" decline in the fair value of an equity instrument, below its cost. If objective evidence of impairment exists, cumulative loss, measured as the difference between the asset's purchase value and current fair value less loses due to impairment previously recognized in Income statement, is transferred from equity to Income Statement, while the increase in fair value after impairment is booked directly through equity. 3.6.5. Derecognition of financial assets and financial liabilities Financial assets A financial asset (or part of a financial asset or group of financial assets) is derecognized if: The contractual rights to receive cash flows from the asset expired; The Bank has transferred its rights to receive cash flows from the asset or has assumed to pay cash received from the asset in full without material delay to pay a third party of an assignment contract; The Bank carried out the transfer of all risks and rewards of the asset, or has not transferred nor retained substantially all risks and rewards of the asset, but has transferred control over it. When the bank has transferred its rights to receive cash flows from an asset or has entered into a pass through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the bank could be required to repay. 14
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.6. Financial instruments (continued) 3.6.5. Derecognition of financial assets and financial liabilities (continued) Also, in accordance with the regulations of the Central Bank of Montenegro receivables from the bank's balance sheet are transferred to the internal records if the bank during the process of the collection of receivables estimates that the value of receivables measured at amortized cost will not be recovered and that the criteria for derecognition of financial assets is fulfilled, which includes the following cases: 1) for unsecured receivables: - When the borrower bankruptcy proceedings lasts longer than one year, or - When the borrower is late with the payment more than two years; 2) for secured receivables, when a borrower is late with the payment more than four years, or if the bank during this period did not receive any payment from the realization of collateral. Financial liabilities A financial liability is derecognized when the obligation and commitments made, if the obligation is revoked or the expiry of the liability. Where an existing financial liability is replaced by another from the same creditor, but under significantly changed conditions or the terms of existing commitments substantially modified, such changes or conditions is treated as a derecognition of the original liability and the recognition of new responsibilities, and the difference between the original and new values of the obligations recognized in the income statement. 3.7. Allowances for Impairment and Provisions for Potential Losses In accordance with the Decision issued by the Central Bank of Montenegro regarding minimal standards for credit risks management in banks (Official Gazette of Montenegro, no. 22/12, 55/12 and 57/13) the following were established: elements of credit risk management, minimum criteria and manner of classifying assets and off-balance sheet items which render the bank is exposed to credit risk and the manner of determining the minimum provisions for potential losses arising from credit risk exposure. The bank's risk-weighted assets, within the meaning of this Decision, are comprised of loans, interest, fees and commissions, lease receivables, deposits with banks, advances and all other items included in the balance sheet exposing the bank to default risk, as well as guarantees issued, other sureties, effectuated letters of credit and approved, but undrawn loan facilities, as well as all other off-balance sheet items being the bank's contingent liabilities. In accordance with the Decision on Minimum standards for credit risk management in banks (Official Gazette of Montenegro, no.22/12, 55/12 and 57/13) the bank shall perform at least once in quarter impairment assessment (for balance sheet items) and/or assessment of probable loss (for off-balance sheet items) for balance sheet assets and off-balance sheet items based on which it is exposed to credit risk and classify them into appropriate classification categories. According to IAS 39 the bank is also required to establish a methodology for assessing impairment of balance sheet assets and probable losses related to off-balance sheet items. For the purpose of calculation of credit risk provisions, the Bank applies Methodology for assessment of asset impairment and probable loss for off-balance items which is compliant with the methodology of Societe Generale Group. 15
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7. Allowances for Impairment and Provisions for Potential Losses (continued) The Methodology defines: 1) criteria for identification of receivables for which assessment of assets impairment and probable loss per off-balance items is performed on individual basis; 2) process for assessment of amount of assets impairment and probable loss per off-balance items, and obligations and responsibilities in this process; 3) the Bank s methods and techniques for assessment on individual and collective basis; 4) criteria for selection of receivables in groups with similar characteristics for assessment needs on collective basis. Bank on a quarterly basis estimates whether there is an objective reason for the devaluation of exposure or group of exposures. If the bank assess that an event which has a negative effect on expected cash flows has occurred, exposure will be reclassified from healthy in defaulted loans/exposures. The objective evidence of assets impairment i.e. probable loss per off-balance items is data on one or more events that have negative influence on debtor s ability to regularly settle its obligations towards the Bank. At calculation of assets impairment and probable loss per off-balance items, the Bank may also take into account cash flows based on collateral and costs for its realization. The bank is obliged to perform individual assessment of assets impairment and probable loss per offbalance items for individually significant receivables. Individually significant receivables are total gross exposures of the Bank to a party or group of related parties exceeding EUR 50 thousand. There is an objective evidence of impairment if: - Debtor s financial standing indicates that there are significant problems in his business; - There is data on unsettled obligations, on frequent delays in repayment of principle and/or interest, or about unsettlement of other obligations over 90 days without chances for recent recovery (for public company, regional or local self-governments days of delay may be up to 180 days); or - It is evident that at debtor will be initiated bankruptcy process, reorganization process or some similar process. If objective evidence of impairment loss exists, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement. 16
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7. Allowances for Impairment and Provisions for Potential Losses (continued) The Bank on the day of impairment calculation for all loans for which there are uncollected interest receivables older than 90 days are classified under the category of receivables for which each subsequent calculation of the interest will be booked in internal records and do not affect receivables and interest income positions. These receivables are recognised in income only if collected from client. For the purposes of a collective evaluation of impairment, loans 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 in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. IFRS 9: Financial Instruments (IASB Effective Date: 1 January 2018) In July 2014 the International Accounting Standards Bord (IASB) has announced IFRS 9 Financial Instruments which will replace IAS 39 - Financial instruments: Recognition and Measurement. IFRS 9 will apply for annual periods on or after 1 January 2018 with early adoption allowed. The final version of the new standard IFRS 9 Financial instruments is based on a new approach regarding classification and measurement of financial instruments and it is different from IAS 39 and all previous versions of IFRS 9 model. The standard introduces new requirements relating to classification and measurement of financial instruments, impairment of financial instruments and changes the approach to hedge accounting. Classification and measurement The Concept of IFRS 9 is based on a new approach for classification and measurement of all financial assets, except equity instruments and derivatives, which reflects the business model based on which assets are managed and the characteristics of contractual cash flows. The standard introduces changes into existing IAS 39 categories of financial assets (financial assets at fair value through profit or loss, financial assets available for sale, financial assets held to maturity): debt instruments measured at amortized cost; debt instruments measured at fair value through other comprehensive income (FVOCI) with gains or losses recycled into the profit or loss statement on derecognition; equity instruments measured at fair value through other comprehensive income (FVOCI) with no recycling of gains or losses into the profit or loss statement on derecognition financial assets measured at fair value through profit or loss (FVPL). Under IFRS 9, embedded derivatives are no longer separated from a host financial asset. Instead, financial assets are classified based on the business model and their contractual terms. 17
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA Business model The Bank determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Bank's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as: How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel. The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed. How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected). The expected frequency, value and timing of sales are also important aspects of the Bank s assessment The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case scenarios into account. If cash flows after initial recognition are realized in a way that is different from the Bank's original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. In general, business model assessment can be summarized in the following manner: - loans and deposits held at banks or other depository institutions are included in the business model hold to colect due to the fact that the primary intention of the Bank is to collect the contractual cash flows - debt securities are divided into two business models: o first group of debt secuirities relatee to business model hold to collect and sale in which the goal is to collect the contractual cashflow and also to sale the assets, wherby these assets represent a liquidity reserve of the Bank o second group of debt securities relates to business model hold to collect For debt securities managed in accordance with the business model hold to collect, sales relating to the increase in credit risk of the security, risk of concentration of exposure, sales near the maturity date and sales in order to meet the liquidity needs in the stress scenario are allowed. Other sales, which are not a result of the increase in credit risk may be consistent with the model if those sales are exceptions in the business model and: - are not material in value, individualy or as a whole even if they are frequent - are not frequent even when the value is material As a second step in the process of classification, the Bank assesses the contractual conditions of financing in order to determine if the cash flows represent solely the payment of principal and interest (SPPI test). For the purpose of this test the principal is defined as the value of the financial assets at initial recognition and can be changed during the lifetime of the asset (i.e. if there re repayments of principal or amortization of discount/premium). The most important characteristics of the interest in the lending agreement are usually the time value of money, credit risk and interest margin. In order to perform the SPPI test, the Bank assesses and considers relevant conditions such as the currency in which the financial assets is denominated and the period for which the interest is determined. In contrast, contractual terms that introduce a de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding do not represent a breach of the SPPI test. 18
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7. Allowances for Impairment and Provisions for Potential Losses (continued) IFRS 9: Financial Instruments (IASB Effective Date: 1 January 2018) As of 31 December 2017, the major part of the loans in the Banks portfolio meet the requirements of the SPPI test which along with the business model hold to collect results in a classification of the loans portfolio into a segment of financial assets measured at amortized cost as was the case in the previous years. Changes in the assessment of impairment The application of the IFRS 9 standard introduces a new model of impairment and replaces the IAS 39 morel of incurred losses with a new forward looking model of expected credit losses (ECL). New standard requires that the Bank recognizes ECL provisions for all loans and debt financial instruments which are not classified as FVPL along with loan commitments and financial guarantees. The ECL impairment based is measured based on 12-month expected credit losses, except if there was no significant increase in the credit risk after initial recognition. If the financial asset is defined as purchased or originated credit impaired (POCI), the impairment is determined as an estimation of ECL over the lifetime of the financial asset. Based on the assessment of the credit risk, all instruments are classified into: Stage1: No significant changes in the credit risk after the date of initial recognition ( performing clients, ECL is calculated for the period of next 12 months) Stage2: Significant change in the credit risk after the date of initial recognition ( under-performing clients, ECL is calculated over the lifetime of the asset) Stage3: Impaired assets ( non-performing clients, ECL calculated over the lifetime of the asset) The Bank uses all reasonable information available at the date of assessment without significant costs or effort as staging criteria. Minimal criteria for classification into Stage 2 are days of delay higher than 30 but less than 90. Interest income from financial assets classified into Stage 1 and Stage 2 are calculated on the gross exposure (amortized cost before impairment), while interest income on financial assets classified in Stage 3 are calculated on net exposure (amortized cost less impairment). Bank in accordance with its accounting policies recognizes interest income on financial assets classified in Stage 3 on a cash basis. The Bank has finalized the process of development and implementation of software solutions for the calculations of ECL in line with the requirements of IFRS 9. The effects of the transition to IFRS 9 as of 1 January 2018 are summarized in the table below: EUR 000' 31 December 1 January 2017 2018 Difference Corporate Loans 18.215 18.382 167 Retail Loans 4.338 3.849 (489) Credi Cards 184 223 39 Securities - 507 507 Other 110 173 63 Total 22.847 23.134 287 The transition to IFRS 9 as of 1 January 2018 will lead to additional impairment of EUR 287 thousand mainly due to impairment of debt securities. 19
SOCIETE GENERALE BANKA MONTENEGRO A.D, PODGORICA 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7. Allowances for Impairment and Provisions for Potential Losses (continued) 3.7.1. Allowances in accordance with the Decision on Minimum standards for credit risk management in banks In accordance with the Decision on Minimum standards for credit risk management in banks ( Official Gazette of Montenegro, no. 22/12, 55/12 and 57/13), loans and other risk bearing assets are classified into the following categories: A category ( Good ) including assets assessed as collectible in full pursuant to the agreement; B category ( Special Mention ) with B subcategory B1 and B2, including items for which there is low probability of loss, but which, still the same, require special attention, as the potential risk, if not adequately monitored, could diminish their collectability; C category ( Substandard assets ) with C1 and C2 subcategories for which there is high probability of loss, due to the clearly identified collectability issues; D category ( Doubtful assets ) including items the collection of which is, given the creditworthiness of loan beneficiaries, value and marketability of collaterals, highly unlikely; E category ( Loss ) including the items which are uncollectible in full, or will be collectible in an insignificant amount. On monthly bases, based on the performed classification the bank is required to calculate the allowances for losses related to the balance sheet and off-balance sheet items, applying percentages in the following table: Risk % Days category Provisions of delay A - <30 B1 2 31-60 B2 7 61-90 C1 20 91-150 C2 40 151-270 D 70 271-365 E 100 >365 The bank shall determine the difference between the amount of loan loss provisions calculated in accordance with the above given table and the sum of the amount of allowances for impairment losses and provisioning for off-balance sheet items calculated in accordance with the provisions of Decision regulating the manner of valuation of asset items by applying IAS. The positive difference between the amount of calculated loan loss provisions and the sum of the amount of allowances for impairment and impairment losses and provisioning for off-balance sheet items represents necessary reserves for estimated losses. At the time of adoption of the annual financial statements the bank is required to transfer amount of necessary reserves for estimated losses from the profit in the current year or retained earnings from previous years to the account of reserves for estimated losses on regulatory requirements. 20