SEF International Universal Credit Organization LLC. Financial Statements for the Year Ended 31 December 2009

Transcription

1 SEF International Universal Credit Organization LLC Financial Statements for the Year Ended 31 December

2 Contents Independent Auditors Report... 3 Statement of comprehensive income... 5 Statement of financial position... 6 Statement of cash flows... 7 Statement of changes in equity... 8 Notes to the financial statements Background Basis of preparation Significant accounting policies Net interest income Net foreign exchange loss Other operating income Impairment losses/(reversals) General administrative expenses Income tax expense Placements with banks Loans to customers Property, equipment and intangible assets Loans and borrowings Other liabilities Share capital Risk management Capital management Commitments Operating leases Contingencies Related party transactions Cash and cash equivalents Fair value of financial instruments Average effective interest rates Maturity analysis Currency analysis... 39

3 ABCD KPMG Armenia cjsc 8 th floor, Erebuni Plaza Busness Center, 26/1 Vazgen Sargsyan Street Yerevan 0010, Armenia Telephone (10) Fax (10) Internet Independent Auditors Report To the management SEF International Universal Credit Organization LLC Report on the Financial Statements We have audited the accompanying financial statements of SEF International Universal Credit Organization LLC (the Organization), which comprise the statement of financial position as at 31 December, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of 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 principles 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 opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Organization as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. KPMG Armenia cjsc, a company incorporated under the Laws of the Republic of Armenia and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity

4 Independent auditors report Page 2 Other Matter The financial statements of the Organization as at and for the year ended 31 December were audited by other auditors whose report dated 22 May expressed an unmodified opinion on those statements.

5 Statement of comprehensive income for the year ended 31 December Notes Interest income 4 560, ,925 Interest expense 4 (277,652) (166,527) Net interest income 283, ,398 Fee and commission income 59,321 52,865 Fee and commission expense (8,450) (6,601) Net fee and commission income 50,871 46,264 Net loss on financial instruments at fair value through profit or loss (1,535) (29,393) Net foreign exchange loss 5 (107,342) (6,510) Other operating income 6 145,882 23,951 Operating income 371, ,710 Impairment losses 7 (84,505) (38,647) General administrative expenses 8 (343,039) (283,254) (Loss)/profit before taxes (56,336) 5,809 Income tax expense 9 (13,041) (1,685) (Loss)/profit (69,377) 4,124 Other comprehensive income Revaluation of property and equipment, net of tax 1,306 - Total comprehensive income (68,071) 4,124 The financial statements as set out on pages 5 to 39 were approved by management on 29 June The statement of comprehensive income is to be read in conjunction with the notes to, and forming part of, the financial statements. 5

6 Statement of financial position as at 31 December The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 6

7 Statement of financial position as at 31 December ASSETS Notes Cash 3,992 2,320 Placements with banks 10 1,181, ,081 Loans to customers 11 2,046,855 2,396,469 Current tax asset - 5,422 Property, equipment and intangible assets 12 82,702 88,470 Deferred tax asset 9 10,056 5,740 Other assets 7,363 10,396 Total assets 3,332,242 3,402,898 LIABILITIES Loans and borrowings 13 2,454,413 2,697,588 Other liabilities 14 78,769 78,741 Total liabilities 2,533,182 2,776,329 EQUITY Share capital , ,160 Revaluation surplus for property and equipment 1, Additional paid-in capital 2,541 14,787 Retained earnings 30,240 99,579 Total equity 799, ,569 Total liabilities and equity 3,332,242 3,402,898 The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 6

8 Statement of cash flows for the year ended 31 December Notes CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 542, ,491 Interest payments (283,042) (150,863) Fee and commission receipts 59,321 52,865 Fee and commission payments (8,450) (6,601) Net payments from financial instruments at fair value through profit or loss (8,341) (44,660) Net foreign exchange payments (2,357) (1,420) Other receipts 130,071 9,022 General administrative expense payments (310,411) (243,849) (Increase) decrease in operating assets Placements with banks (110,224) (609,916) Loans to customers 421,566 (887,658) Other assets (711) (1,500) Increase (decrease) in operating liabilities Other liabilities 7,658 (7,326) Net cash provided from (used in) operating activities before income tax paid 437,429 (1,438,415) Income tax paid (4,676) (6,062) Cash flows from/(used in) operations 432,753 (1,444,477) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (19,470) (6,183) Proceeds on disposal of property and equipment 4, Cash flows used in investing activities (15,050) (6,068) CASH FLOWS FROM FINANCING ACTIVITIES Receipts of loans and borrowings 644,637 2,082,061 Repayments of loans and borrowings (1,161,271) (554,661) Proceeds from issuance of share capital - 6,084 Cash flows (used in)/from financing activities (516,634) 1,533,484 Net (decrease) increase in cash and cash equivalents (98,931) 82,939 Effect of changes in exchange rates on cash and cash equivalents 43,314 (4,465) Cash and cash equivalents as at the beginning of the year 158,869 80,395 Cash and cash equivalents as at the end of the year , ,869 The statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements. 7

9 Statement of changes in equity for the year ended 31 December Share capital Revaluation surplus for property and equipment Additional paid-in capital Retained earnings Balance as at 1 January 490, , , ,428 Total comprehensive income Profit ,124 4,124 Other comprehensive income Realization of property and equipment revaluation reserve - (380) Total other comprehensive income - (380) Total comprehensive income - (380) - 4,504 4,124 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Shares issued 6, ,084 Reclassification of retained earnings to share capital (note 15) 16, (16,076) - Dividends distributed to shareholder (14,067) (14,067) Total transactions with owners, recorded directly in equity 22, (30,143) (7,983) Balance as at 31 December 512, ,787 99, ,569 Total Balance as at 1 January 512, ,787 99, ,569 Total comprehensive income Loss (69,377) (69,377) Other comprehensive income Realization of property and equipment revaluation reserve - (38) Revaluation of property and equipment, net of tax - 1, ,306 Total other comprehensive income - 1, ,306 Total comprehensive income - 1,268 - (69,339) (68,071) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Shares issued 240, ,562 Transfer of additional paid-in capital to share capital (note 15) 12,246 - (12,246) - - Total transactions with owners, recorded directly in equity 252,808 - (12,246) - 240,562 Balance as at 31 December 764,968 1,311 2,541 30, ,060 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 8

10 1 Background Principal aсtivities SEF International Universal Credit Organization LLC (the Organization) was established in the Republic of Armenia as a limited liability company in 2003 as a legal succesor of SEF International LLC which had been involved in microfinance lending in Armenia since The principal activities of the Organization are the provision of microfinance, individual business loans and consumption loans. The activities of the Organization are regulated by the Central Bank of Armenia (CBA). The Organization has a credit organization license. The Organization has 4 branches and 3 representative offices from which it conducts business throughout the Republic of Armenia. The registered address of the head office is 19/19 Yervand Kochar Street, Yerevan, Armenia. The average number of people employed during the year was 65 (: 50). Shareholder The Organization is wholly-owned by Vision Fund International. Related party transactions are detailed in note 21. Armenian business environment Armenia is experiencing political and economic change that has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in Armenia involve risks that typically do not exist in other markets. In addition, the contraction in the capital and credit markets has further increased the level of economic uncertainty in the environment. The financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and the financial position of the Organization. The future business environment may differ from management s assessment. 2 Basis of preparation 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 are stated at fair value, and computer equipment is stated at revalued amounts. Functional and presentation currency The national currency of the Republic of Armenia is the Armenian Dram ( AMD ), which is the Organization s functional currency and the currency in which these financial statements are presented. All financial information presented in AMD has been rounded to the nearest thousand. 9

11 Use of estimates and judgments Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from those estimates. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in note 11 Loans to customers in relation to loan impairment estimates and notes 10 and 13 relating to gross presentation of loans to and deposits from the same banks with similar terms. 3 Significant accounting policies The following significant accounting policies are consistently applied in the preparation of the financial statements. Changes in accounting policies are described at the end of this note. Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Organization at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Foreign currency differences arising on retranslation are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Cash and cash equivalents The Organization includes cash and current accounts with banks in cash and cash equivalents. 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 financial instruments that are designated and effective hedging instruments) or, upon initial recognition, designated as at fair value through profit or loss. The Organization may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed and evaluated 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. 10

12 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. 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 Organization: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale or, may not recover substantially all of its initial investment, other than because of credit deterioration. Management determines the appropriate classification of financial instruments 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 asset that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the entity has an intention and ability to hold it for the foreseeble 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. Recognition Financial assets and liabilities are recognized in the statement of financial position when the Organization 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 method held-to-maturity investments that are measured at amortized cost using the effective interest method investments in equity instruments that do not have a quoted market price in an active market and whose fair value can not 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. Amortized cost is calculated using the effective interest rate method. 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. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability. 11

13 Financial assets or liabilities originated at interest rates different from market rates are re-measured at origination to their fair value, being future interest payments and principal repayments discounted at market interest rates for similar instruments. The difference between the fair value and the nominal value at origination is credited or charged to profit or loss as gains or losses on origination of financial instruments at rates different from market rates. Subsequently, the carrying amount of such assets or liabilities is adjusted for amortization of the gains/losses on origination and the related income/expense is recorded in interest income/expense within profit or loss using the effective interest method. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. Where a quoted market price is not available, fair value is determined using valuation techniques with a maximum use of market inputs. Such valuation techniques include reference to recent arm s length market transactions, current market prices of substantially similar instruments, discounted cash flow and option pricing models and other techniques commonly used by market participants to price the instrument. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Organization would receive or pay to terminate the contract at the reporting date taking into account current market conditions and the current creditworthiness of the counterparties and own credit risk. 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 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 recognised in equity is recognized in profit or loss. Interest in relation to an available-for-sale asset is recognized as earned 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. Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Organization transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished. The Organization also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. 12

14 Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for computer equipment which is stated at revalued amounts as described below. Revaluation Computer equipment is subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the computer equipment being revalued. A revaluation increase on an item of computer equipment is recognised as other comprehensive income directly in equity except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on an item of computer equipment is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised directly in equity. 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. Leasehold improvements are depreciated over the shorter of the asset useful life and the lease term. The estimated useful lives are as follows: - buildings 20 years - computer equipment 1-5 years - motor vehicles 7 years - leasehold improvements 5 years - other 3-5 years Intangible assets Intangible assets that are acquired by the Organization are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful life of the computer software is 10 years. 13

15 Impairment Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans and other receivables (loans and receivables). The Organization reviews its loans and receivables to assess impairment on a regular basis. A loan or receivable 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 loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan 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 loan or advance on terms that the Organization 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. The Organization 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 Organization determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan 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 recognised 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 Organization uses its experience and judgement to estimate the amount of any impairment loss. 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 recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Organization 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. 14

16 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 recognised 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 amortisation, if no impairment loss had been recognised. Provisions A provision is recognised in the statement of financial position when the Organization has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Credit related commitments In the normal course of business, the Organization enters into credit related commitments, comprising undrawn loan commitments. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Dividends The ability of the Organization to declare and pay dividends is subject to the rules and regulations of the Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. 15

17 Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Income and expense recognition Interest income and expense are recognised in profit or loss using the effective interest method. Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortized to interest income over the estimated life of the financial instrument using the effective interest method. Other fees, commissions and other income and expense items are recognised in profit or loss when the corresponding service is provided. Donations Donations received by the World Vision International network from third parties, the original intention of which was to support the Organization, and passed on to the Organization are recognized in profit and loss on receipt. Comparative information Comparative information is reclassified to conform to changes in presentation in the current year. The reclassification represents regrouping or combination of several items in the statement of comprehensive income, the statement of financial position and in the notes to the financial statements made to achieve better presentation. The statement of financial position as at the beginning of the earliest comparative period is not presented on the basis that the effect of the reclassifications is not judged to be material. 16

18 Changes in accounting policies Starting from 1 January the Organization adopted the revised version of IAS 1 Presentation of Financial Statements (effective for annual periods beginning on or after 1 January ). As a result the income statement is replaced by a statement of comprehensive income that also includes all non-owner changes in equity, such as the revaluation of property and equipment. The balance sheet is renamed to the statement of financial position and the cash flow statement is renamed to the statement of cash flows. According to the revised IAS 1, a statement of financial position at the beginning of the earliest comparative period is presented whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December, and are not applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the Organization s operations. The Organization plans to adopt these pronouncements when they become effective. The Organization has not yet analysed the likely impact of these pronouncements on its financial statements. Revised IAS 24 Related Party Disclosures () (effective for annual periods beginning on or after 1 January 2011) introduces an exemption from the basic disclosure requirements in relation to related party disclosures and outstanding balances, including commitments, for governmentrelated entities. Additionally, the standard has been revised to simplify some of the presentation guidance that was previously non-reciprocal. The revised standard is to be applied retrospectively. IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January The new standard is to be issued in several phases and is intended to replace IAS 39 Financial Instruments: Recognition and Measurement once the project is completed by the end of The first phase of IFRS 9 was issued in November and relates to the recognition and measurement of financial assets. The Organization recognizes that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on the Organization s financial statements. The impact of these changes will be analyzed during the course of the project as further phases of the standard are issued. Various Improvements to IFRSs which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January

19 4 Net interest income Interest income Loans to customers 504, ,239 Placements with banks 56,362 11, , ,925 Interest expense Loans and borrowings 277, ,527 5 Net foreign exchange loss Net loss from revaluation of financial assets and liabilities 104,985 5,090 Loss on spot transactions 2,357 1, ,342 6,510 6 Other operating income Donations 122,898 14,929 Fines and penalties received 16,322 7,699 Gain/(loss) on disposal of property and equipment 4,124 5 Other 2,538 1, ,882 23,951 Donations represent funds received by the World Vision International network from third parties and passed on to the Organization for developmet of microfinance in rural areas where availability of credit resources to the population is limited. 7 Impairment losses/(reversals) Loans to customers 84,538 38,676 Other assets (33) (29) 84,505 38,647 18

20 8 General administrative expenses Employee compensation 196, ,687 Depreciation and amortization 26,575 27,770 Occupancy 20,798 19,221 Payroll related taxes 19,226 15,980 Repairs and maintenance 16,467 16,153 Professional services 14,907 14,909 Communication expenses 10,784 9,962 Travel expenses 8,903 3,432 Security 3,516 3,128 Advertising and marketing 2,108 1,911 Insurance 1,077 1,073 Other 21,813 20, , ,254 9 Income tax expense Current tax expense Current year 17,684 - Deferred tax (benefit)/expense 17,684 - Origination and reversal of temporary differences (4,643) 1,685 Total income tax expense 13,041 1,685 The applicable tax rate for current tax is 20% (: 20%). The Organization applied a 20% deferred tax rate (: 20%). Reconciliation of effective tax rate: % % (Loss)/profit before income tax (56,336) 5,809 Income tax at the applicable tax rate (11,267) 20% 1,162 20% Non-deductible costs 24,308 (43%) 523 9% 13,041 (23%) 1,685 29% 19

21 Deferred tax asset and liability Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax assets as of 31 December and. These deferred tax assets have been recognised in these financial statements. The future tax benefits will only be realised if profits will be available against which the unused tax losses can be utilised and there are no changes to the law and regulations that adversely affect the Organization s ability to claim the deductions in future periods. These deductible temporary differences do not expire under current tax legislation. Movements in temporary differences during the years ended 31 December and are presented as follows: Balance 1 January Recognised in profit or loss Recognised in other comprehensive income Balance 31 December Placements with banks (1,718) (578) - (2,296) Loans to customers - 5,000-5,000 Property, plant and equipment (11) 10 (327) (328) Other assets (68) 5 - (63) Other liabilities 7, ,743 Tax loss carry-forward 178 (178) - - 5,740 4,643 (327) 10,056 Balance 1 January Recognised in profit or loss Recognised in other comprehensive income Balance 31 December Placements with banks (365) (1,353) - (1,718) Property and equipment (106) 95 - (11) Other assets (68) - - (68) Other liabilities 7,964 (605) - 7,359 Tax loss carry-forward ,425 (1,685) - 5,740 Income tax recognised in other comprehensive income The tax effects relating to components of other comprehensive income comprise: Amount before tax Tax Amount Amount Tax expense net-of-tax before tax expense Amount net-of-tax Revaluation surplus for property and equipment 1,633 (327) 1,

22 10 Placements with banks Current accounts Largest 10 Armenian banks 99, ,515 Other Armenian banks Total current accounts 99, ,549 Term deposits Largest 10 Armenian banks 967, ,635 Other Armenian banks 114,720 17,897 Total loans and deposits 1,082, ,532 Total placements with banks 1,181, ,081 Concentration of placements with banks Both as at 31 December and the Organization has two banks whose balances exceeded 10% of total placements with banks. The gross value of these balances as of 31 December and are AMD 967,279 thousand and AMD 812,111 thousand, respectively. As at 31 December deposits of AMD 472,363 thousand (: AMD 702,412 thousand) are pledged under loans from banks disclosed in note Loans to customers Loans to legal entities Business loans to small companies and sole entrepreneurs 912, ,643 Total loans to legal entities 912, ,643 Loans to individuals Agricultural loans 649,414 1,026,573 Consumer loans 460, ,129 Renovation loans 101,694 52,062 Total loans to individuals 1,211,820 1,714,764 Gross loans to customers 2,124,433 2,438,407 Impairment allowance (77,578) (41,938) Net loans to customers 2,046,855 2,396,469 21

23 Movements in the loan impairment allowance for the year ended 31 December are as follows: Balance at the beginning of the year 41,938 26,420 Net charge 84,538 38,676 Write-offs (48,898) (23,158) Balance at the end of the year 77,578 41,938 Credit quality of the loans to legal entities portfolio The following table provides information on the credit quality of the loans to legal entities portfolio as at 31 December : Gross loans Impairment Net loans Impairment to gross loans % Business loans to small companies and soles enterpreneurs Loans without individual signs of impairment - Not overdue 882,205 7, , % - overdue days 9, , % - overdue days 16,781 10,908 5, % - overdue more than 180 days 3,753 3, % Total business loans to small companies and sole entrepreneurs 912,613 22, , % The following table provides information on the credit quality of the loans to legal entities portfolio as at 31 December : Gross loans Impairment Net loans Impairment to gross loans % Business loans to small companies and sole enterpreneurs Loans without individual signs of impairment - Not overdue 698,703 4, , % - overdue less than 30 days 14, , % - overdue days 10,671 6,938 3, % Total business loans to small companies and sole entrepreneurs 723,643 12, , % Loan impairment results from one or more events that occurred after the initial recognition of the loan and that have an impact on the estimated future cash flows associated with the loan, and which can be reliably estimated. Loans without individual signs of impairment do not have objective evidence of impairment that can be directly attributed to them. 22

24 The objective indicators of loan impairment include the following: overdue payments under the loan agreement significant difficulties in the financial conditions of the borrower deterioration in business environment, negative changes in the borrower s markets The Organization estimated loan impairment for loans to legal entities based on an analysis of the future cash flows for impaired loans and based on its past loss experience for portfolios of loans for which no indications of impairment has been identified. As of 31 December the Organization does not have individually significant loans with signs of impairment. In determining the impairment allowance for loans to legal entities, management made the following key assumptions: loss migration rates are constant and can be estimated based on the historic loss migration pattern for the past 12 months loans to legal entities overdue for more than 180 days are allocated 100% probability of loss. Changes in these estimates could effect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by one percent, the loan impairment provision on loans to legal entities as of 31 December would be AMD 8,899 thousand lower/higher (31 December : AMD 7,111 thousand). During the year ended 31 December the Organization renegotiated loans to legal entitites that would otherwise be past due or impaired of AMD 13,466 thousand (31 December : nil). Such restructuring activity is aimed at managing customer relationships and maximising collection opportunities. Analysis of collateral The following table provides the analysis of loans to legal entitites portfolio, net of impairment, by types of collateral as at 31 December and : % of loan portfolio % of loan portfolio Real estate 884,403 99% 708,486 99% Motor vehicles 5,504 1% 2,615 1% 889, % 711, % The amounts shown in the table above represent the carrying value of the loans, and do not necessarily represent the fair value of the collateral. Impaired or overdue loans with a gross value of AMD 30,408 thousand are secured by collateral with a fair value of AMD 61,209 thousand. During the year ended 31 December the Organization did not obtain any assets by taking control of collateral accepted as security for loans to legal entities (31 December : nil). 23

25 Analysis of movements in the impairment allowance Movements in the loan impairment allowance by classes of loans to legal entities for the year ended 31 December and are as follows: Loan impairment allowance as at 1 January 12,542 9,960 Loans written off as uncollectible (5,892) (8,201) Loan impairment losses 16,056 10,783 Loan impairment allowance as at 31 December 22,706 12,542 Credit quality of loans to individuals The following table provides information on the credit quality of loans to individuals collectively assessed for impairment as at 31 December : Gross loans Impairment Net loans Impairment to gross loans, % Agricultural loans - Not past due 563,218 4, , % - Overdue less than 30 days 12,210 1,221 10, % - Overdue days 31,753 6,351 25, % - Overdue days 16,406 6,301 10, % - Overdue more than 180 days 25,827 25, % Total agricultural loans 649,414 44, , % Consumer loans - Not past due 456,909 3, , % - Overdue more than 180 days 3,803 3, % Total consumer loans 460,712 7, , % Renovation loans - Not past due 99,986 1,500 98, % - Overdue more than 180 days 1,708 1, % Total renovation loans 101,694 3,208 98, % Total loans to individuals 1,211,820 54,872 1,156, % 24

26 The following table provides information on the credit quality of loans to individuals collectively assessed for impairment as at 31 December : Gross loans Impairment Net loans Impairment to gross loans % Agricultural loans - Not past due 980,962 5, , % - Overdue less than 30 days 6, , % - Overdue days 11,270 2,254 9, % - Overdue days 18,918 6,375 12, % - Overdue more than 180 days 9,383 9, % Total agricultural loans 1,026,573 24,502 1,002, % Consumer loans - Not past due 632,979 3, , % - Overdue days 3, , % - Overdue more than 180 days % Total consumer loans 636,129 4, , % Renovation loans - Not past due 52, , % Total renovation loans 52, , % Total loans to individuals 1,714,764 29,396 1,685, % The Organization estimates loan impairment based on its past historical loss experience on these types of loans. In determining the impairment allowance for loans to individuals, management made the following key assumptions: loss migration rates are constant and can be estimated based on the historic loss migration pattern for the past 12 months, loans to individuals overdue for more than 180 days are allocated 100% probability of loss. Changes in these estimates could effect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by plus minus three percent, the loan impairment on loans to individuals as of 31 December would be AMD 34,708 thousand lower/higher (31 December : AMD 50,561 thousand). Analysis of collateral The following table provides the analysis of loans to individuals portfolio, net of impairment, by types of collateral as at 31 December and : % of loan portfolio % of loan portfolio Real estate 472,507 41% 340,506 20% Gold collateral 432,177 37% 635,899 38% Livestock 201,946 18% 644,744 38% Motor vehicles 50,318 4% 64,219 4% 1,156, % 1,685, % The amounts shown in the table above represent the carrying value of the loans, and do not necessarily represent the fair value of the collateral. 25

27 Agricultural loans are secured by real estate, motor vehicles and livestock. Consumer loans are secured by gold collateral. Renovation loans are secured by the underlying housing real estate. Analysis of movements in the impairment allowance Movements in the loan impairment allowance by classes of loans to individuals for the year ended 31 December are as follows: Agricultural Consumer Renovation loans loans loans Total Loan impairment allowance as at 1 January 24,502 4, ,396 Loans written off as uncollectible (35,412) (7,594) - (43,006) Loan impairment losses 55,116 10,679 2,687 68,482 Loan impairment allowance as at 31 December 44,206 7,458 3,208 54,872 Movements in the loan impairment allowance by classes of retail loans for the year ended 31 December are as follows: Agricultural Consumer Renovation loans loans loans Total Loan impairment allowance as at 1 January 12,207 4,253-16,460 Loans written off as uncollectible (10,998) (3,959) - (14,957) Loan impairment losses 23,293 4, ,893 Loan impairment allowance as at 31 December 24,502 4, ,396 Industry and geographical analysis of the loan portfolio Loans to customers were issued primarily to customers located within the Republic of Armenia who operate in the following economic sectors: Trade 694, ,513 Agriculture 649,414 1,026,573 Consumer loans 460, ,129 Renovation loans 101,694 52,062 Food industry 99,816 21,731 Manufacturing 47,867 7,349 Light industry 33,631 29,810 Other 37,101 55,240 2,124,433 2,438,407 Impairment allowance (77,578) (41,938) 2,046,855 2,396,469 Significant credit exposures Both as at 31 December and the Organization has no borrowers or groups of connected borrowers, whose loan balances exceed 10% of loans to customers. 26