National Mortgage Company Refinancing Credit Organisation CJSC. Financial Statements for the year ended 31 December 2014

Transcription

1 National Mortgage Company Refinancing Credit Organisation CJSC Financial Statements for the year ended 31 December

2 Contents Independent Auditors Report... 3 Statement of profit or loss and other comprehensive income... 4 Statement of financial position... 5 Statement of cash flows... 6 Statement of changes in equity... 7 Notes to the financial statements... 8

3 KPMG Armenia cjsc Telephone (1 0) th floor, Erebuni Plaza Business Center, Fax (10) /1 Vazgen Sargsyan Street Internet vvww.kpmgam Yereva n 0010, Armenia Independent Auditors' Report To the Board National Mortgage Company Refinancing Credit Organisation CJSC We have audited the accompanying financial statements of National Mortgage Company. Refinancing Credit Organisation CJSC (the Organisation), which comprise the statement of financial position as at 31 December, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory infonnation. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management detennines 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 International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perfonn the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves perfonning 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 conttol 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 ofthe 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 present fairly, in all material respects, the financial position of the Organisation as at 31 December, and its financial perfonnance and its cash flows for in accordance with International Financial Reporting Standards. Other Matter The fmancial statements of the Organisation as at and for the year ended 31 December were audited by other auditors whose report dated 22 April expressed an unmodified opinion on those statements. TDI/ ~an ;j/'--:;;. Tigra asparyan lr~aspar _, ' En gement Partner /~P/IC '/-/r)/?(",oic<- 5/SC :" KPM G Annenia CJSC 10 March-2015 KPMG Armenia cj sc, a co mpany in COfporated under the Laws of the Republic of Armenia, a membe r firm of the KPM G network 01 independent member firms ahdiatsd with KPMG Inte rnational Cooperative C' KPMG International"), a Swiss en tity

4 Statement ojprofit or Loss and Other Comprehensive IncomeJor the year ended 31 December Notes AMD'OOO AMD'OOO Interest income 4 2,817,166 2,262,078 Interest expense 4 (1,780,618) (1,381,909) Net interest income 1,036, ,169 Net foreign exchange income 6,547 Personnel expenses (115,918) (95,420) Other general administrative expenses 5 (69,167) (60,758) Profit before income tax 858, ,991 Income tax expense 6 (171,510) (145,859) Profit and total comprehensive income for the year 686, ,132 The financial statements as set out on pages 4 to 33 were approved by management on 10 March 2015 and were signed on its behalf by: The statement ofprofit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming pali of, the financial statements. 4

5 Statement of Financial Position as at 31 December ASSETS Notes Cash and cash equivalents 7 912,812 1,419,942 Placements with banks 8 6,484,111 4,547,378 Loans to banks and financial institutions 9 27,322,382 23,868,379 Property, equipment and intangible assets 10 33,238 36,010 Other assets 43,855 44,107 Total assets 34,796,398 29,915,816 LIABILITIES Amounts due to CBA 11 13,931,683 13,315,733 Amounts due to Government of Armenia 12 2,897,476 3,541,341 Amounts due to international financial institutions 13 1,430,303 - Debt securities issued 14 4,040,952 2,259,703 Current tax liability 58,214 60,120 Deferred tax liabilities 6 66,812 55,606 Other liabilities 10,296 9,156 Total liabilities 22,435,736 19,241,659 EQUITY Share capital 15 10,202,505 9,202,500 General reserve 75,282 48,443 Retained earnings 2,082,875 1,423,214 Total equity 12,360,662 10,674,157 Total liabilities and equity 34,796,398 29,915,816 The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 5

6 Statement of Cash Flows for the year ended 31 December Notes Restated CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 2,757,930 2,211,030 Interest payments (1,723,825) (1,341,947) Personnel and other general administrative expenses (payments (175,863) (148,546) (Increase) decrease in operating assets Placements with banks (1,739,109) (430,000) Loans to banks and financial institutions (3,402,785) (4,589,720) Other assets 252 (31,645) Increase (decrease) in operating liabilities Other liabilities 1,008 2,877 Net cash used in operating activities before income tax paid (4,282,392) (4,327,951) Income tax paid (162,210) (120,996) Cash flows used in operations (4,444,602) (4,448,947) CASH FLOWS FROM INVESTING ACTIVITIES Repayment of held-to-maturity investments - 147,305 Purchases of property and equipment and intangible assets (6,449) (6,002) Cash flows (used in) from investing activities (6,449) 141,303 CASH FLOWS FROM FINANCING ACTIVITIES Receipt of funds from CBA 2,101,664 5,241,259 Repayment of funds from CBA (1,486,457) (743,043) Repayment of funds from Government of Armenia (641,895) (642,515) Receipt of funds from international financial institutions 1,238,312 - Proceeds from issuance of debt securities 3,935,380 3,162,898 Repayment of debt securities (2,207,900) (2,380,000) Proceeds from issuance of share capital 1,000,005 - Cash flows from financing activities 3,939,109 4,638,599 Net (decrease) increase in cash and cash equivalents (511,942) 330,955 Effect of changes in exchange rates on cash and cash equivalents 4,812 - Cash and cash equivalents as at the beginning of the year 1,419,942 1,088,987 Cash and cash equivalents as at the end of the year 7 912,812 1,419,942 The statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements. 6

7 Statement of Changes in Equity for the year ended 31 December Share capital General reserve Retained earnings Total equity Balance as at 1 January 9,202,500 28, ,189 10,096,025 Total comprehensive income Profit and total comprehensive income for the year , ,132 Transactions with owners, recorded directly in equity Transfer to general reserve - 20,107 (20,107) - Balance as at 31 December 9,202,500 48,443 1,423,214 10,674,157 Balance as at 1 January 9,202,500 48,443 1,423,214 10,674,157 Total comprehensive income Profit and total comprehensive income for the year , ,500 Transactions with owners, recorded directly in equity Shares issued 1,000, ,000,005 Transfer to general reserve - 26,839 (26,839) - Balance as at 31 December 10,202,505 75,282 2,082,875 12,360,662 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 7

8 1 Background (a) Organisation and operations National Mortgage Company Refinancing Credit Organisation CJSC (the Organisation) was established in the Republic of Armenia as a closed joint stock company and was granted its activity license on 1 June Its principal activity is refinancing the mortgage loans provided to the individuals by banks and credit organisations. The Organisation obtains financing from the Central Bank of the Republic of Armenia (the CBA), the Government of Armenia, International Financial Institutions and by issuing Bonds (these borrowings are generally secured by loans to banks and financial institutions). The loans to banks and financial institutions are collateralized by the mortgage sub loans extended by the banks and financial institutions to the end customers.. The Organisation s activities are regulated by the CBA. The Organisation s registered office is 22-7/1 Hanrapetutyan Street, Yerevan, Republic of Armenia. The Organisation s sole shareholder is the Central Bank of the Republic of Armenia. Related party transactions are described in detail in note 21. (b) Armenian business environment The Organisation s operations are located in Armenia. Consequently, the Organisation is exposed to the economic and financial markets of Armenia which display emerging-market characteristics. Legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in Armenia. The financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and financial position of the Organisation. The future business environment may differ from management s assessment. 2 Basis of preparation (a) Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). (b) Basis of measurement The financial statements are prepared on the historical cost basis. (c) Functional and presentation currency The functional currency of the Organisation is the Armenian Dram (AMD) as, being the national currency of the Republic of Armenia, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The AMD is also the presentation currency for the purposes of these financial statements. Financial information presented in AMD is rounded to the nearest thousand. 8

9 (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. (e) Changes in accounting policies and presentation Offsetting financial assets and financial liabilities The Organisation has adopted the amendments to IAS 32 Financial Instruments: Presentation, with a date of initial application of 1 January. Amendments to IAS 32 Financial Instruments: Disclosure and Presentation - Offsetting Financial Assets and Financial Liabilities do not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The Amendments specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The Organisation does not expect that these amendments will have an impact on its financial statements as the Organisation does not present financial assets and financial liabilities on net basis in the statement of financial position. Change in the reporting of the operating cash flows In the Organisation changed the reporting of the cash flows from operating activities in the statements of cash flows from the indirect to the direct method. Management believes that reporting cash flows using the direct method provides more relevant information. 3 Significant accounting policies The accounting policies set out below are applied consistently to all periods presented in these financial statements, except as explained in note 2(e), which addresses changes in accounting policies. (a) Foreign currency Transactions in foreign currencies are translated to the functional currency of the Organisation 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. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value is determined. 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. Foreign currency differences arising on translation are recognised in profit or loss. 9

10 (b) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances (nostro accounts) held with the CBA and other banks. Cash and cash equivalents are carried at amortised cost in the statement of financial position. (c) (i) 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 a derivative that is a financial guarantee contract or a designated and effective hedging instruments) or, upon initial recognition, designated as at fair value through profit or loss. The Organisation may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or, the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the fair value through profit or loss or availablefor-sale category if the Organisation has an intention and ability to hold them for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Organisation: 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. 10

11 Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Organisation has the positive intention and ability to hold to maturity, other than those that: the Organisation upon initial recognition designates as at fair value through profit or loss the Organisation designates as available-for-sale or, meet the definition of loans and receivables. Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. (ii) Recognition Financial assets and liabilities are recognised in the statement of financial position when the Organisation becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. (iii) 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 their 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 cannot be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. (iv) Amortised cost The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. (v) Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Organisation has access at that date. The fair value of a liability reflects its non-performance risk. 11

12 When available, the Organisation measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Organisation uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Organisation determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, the Organisation measures assets and long positions at the bid price and liabilities and short positions at the ask price. The Organisation recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. (vi) 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 recognised as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in profit or loss a gain or loss on an available-for-sale financial asset is recognised 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 derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Interest in relation to an available-for-sale financial asset is recognised in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognised in profit or loss when the financial asset or liability is derecognised or impaired, and through the amortisation process. (vii) Derecognition The Organisation derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Organisation neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Organisation is recognised as a separate asset or liability in the statement of financial position. The Organisation derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. 12

13 The Organisation enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. In transactions where the Organisation neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the Organisation continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. If the Organisation purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. The Organisation writes off assets deemed to be uncollectible. (viii) 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. (d) (i) Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. (ii) 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. The estimated useful lives are as follows: - equipment 1-5 years - fixtures and fittings 5 years - motor vehicles 5 years - other 1-5 years (e) Intangible assets Acquired intangible assets are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are 10 years. 13

14 (f) Impairment The Organisation assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the Organisation determines the amount of any impairment loss. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of financial asset or group of financial assets that the Organisation 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 related 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. (i) Financial assets carried at amortised cost Financial assets carried at amortised cost consist principally of loans and receivables. The Organisation reviews its loans and receivables to assess impairment on a regular basis. The Organisation 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 Organisation determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan or receivable in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be 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 related to similar borrowers. In such cases, the Organisation uses its experience and judgment to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognised 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. 14

15 When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Organisation writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. (ii) 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 goodwill is estimated at each reporting date. 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 recognised 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. An impairment loss in respect of goodwill is not reversed. (g) Provisions A provision is recognised in the statement of financial position when the Organisation 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. (h) Credit related commitments In the normal course of business, the Organisation enters into credit related commitments, comprising undrawn loan commitments. Loan commitments are not recognised, except in the following cases: loan commitments that the Organisation designates as financial liabilities at fair value through profit or loss; if the Organisation has a past practice of selling the assets resulting from its loan commitments shortly after origination, then the loan commitments in the same class are treated as derivative instruments; loan commitments that can be settled net in cash or by delivering or issuing another financial instrument; commitments to provide a loan at a below-market interest rate. 15

16 (i) (i) Share capital Ordinary shares 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. (ii) Dividends The ability of the Organisation to declare and pay dividends is subject to the rules and regulations of Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. (j) 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. 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 assets and liabilities are recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are not recognised for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow the manner in which the Organisation expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are 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 taxable profit will be available against which the deductible temporary differences can be utilized. (k) 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 amortised 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. 16

17 Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. (l) Segment reporting An operating segment is a component of the Organisation that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses related to transactions with other components of the Organisation); whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Management considers that the Organisation comprises of one operating segment. (m) 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 financial position and performance. The Organisation plans to adopt these pronouncements when they become effective. IFRS 9 Financial Instruments has been issued in phases and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding the classification and measurement of financial liabilities was published in October The third phase of IFRS 9 was issued in November and relates to general hedge accounting. The standard was finalized and published in July. The final phase relates to a new expected credit loss model for calculating impairment. The Organisation recognises that the new standard introduces many changes to accounting for financial instruments and is likely to have a significant impact on the financial statements. The Organisation has not yet analysed the impact of these changes. The Organisation does not intend to adopt this standard early. The standard will be effective for annual periods beginning on or after 1 January 2018 and will be applied retrospectively with some exemptions. Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect after 1 January. The Organisation has not yet analysed the likely impact of the improvements on its financial position or performance. 17

18 4 Net interest income Interest income Loans to banks and financial institutions 2,229,337 1,816,689 Placements with banks 586, ,694 Other 1,486 2,695 2,817,166 2,262,078 Interest expense Amounts due to CBA 1,161, ,995 Amounts due to Government of Armenia 233, ,649 Amounts due to international financial institutions 48,978 - Debt securities issued 336, ,265 1,780,618 1,381,909 1,036, ,169 Interest income from three banks and financial institutions, which individually amount to more than 10% of total interest income, represented approximately AMD 1,190,055 thousand (: three banks and financial institutions represented approximately AMD 1,058,720 thousand) of the Organisation s total interest income. 5 Other general administrative expenses Operating lease expense 12,747 9,702 Depreciation and amortisation 9,222 7,634 Other 47,198 43,422 69,167 60,758 6 Income tax expense Current year tax expense 160, ,120 Movement in deferred tax assets and liabilities due to origination and reversal of temporary differences 11,206 9,739 Total income tax expense 171, ,859 In, the applicable tax rate for current and deferred tax is 20% (: 20%). 18

19 Reconciliation of effective tax rate for the year ended 31 December: % % Profit before tax 858, ,991 Income tax at the applicable tax rate 171, , Non-deductible costs (non-taxable income) (92) - 1,061 - Deferred tax assets and liabilities 171, , Movements in temporary differences during the years ended 31 December and are presented as follows: Balance 1 January Recognised in profit or loss Balance 31 December Placements with banks (9,916) (3,538) (13,454) Loans to banks and financial institutions (47,536) (7,574) (55,110) Property, equipment and intangible assets - (189) (189) Other liabilities 1, ,941 (55,606) (11,206) (66,812) Balance 1 January Recognised in profit or loss Balance 31 December Placements with banks (8,319) (1,597) (9,916) Loans to banks and financial institutions (38,923) (8,613) (47,536) Held-to-maturity investments (20) 20 - Other liabilities 1, ,846 Debt securities issued 130 (130) - (45,867) (9,739) (55,606) 7 Cash and cash equivalents Current accounts with the CBA 626,231 1,380,528 Current accounts with banks Largest 10 Armenian banks 36,429 37,654 Other Armenian banks 250,152 1,760 Total current accounts with banks 286,581 39,414 Total cash and cash equivalents 912,812 1,419,942 No cash and cash equivalents are impaired or past due. 19

20 8 Placements with banks Term deposits with banks Largest 10 Armenian banks 2,204,127 3,242,838 Other Armenian banks 4,279,984 1,304,540 Total term deposits with banks 6,484,111 4,547,378 No placements with banks are impaired or past due. As at 31 December the Organisation has one bank (: two banks), whose balances exceed 10% of equity. The gross value of these balances as at 31 December is AMD 1,455,781 thousand (: AMD 2,308,556 thousand). Term deposits with a carrying amount of AMD 1,455,781 thousand are pledged to secure bonds issued as at 31 December. 9 Loans to banks and financial institutions Largest 10 Armenian banks 16,541,996 14,209,526 Other Armenian banks 6,440,165 5,858,701 Armenian credit organisations 4,340,221 3,800,152 Total loans to banks and financial institutions 27,322,382 23,868,379 No loans to banks and financial institutions are impaired or past due. Loans to banks and financial institutions with a carrying amount of AMD 19,109,748 thousand are pledged to secure the borrowings from the CBA and the Government of Armenia and bonds issued as at 31 December (: AMD 18,206,236 thousand). (a) Sub loan pledge Loans to banks and financial institutions are secured by the qualifying mortgage sub loans extended to end customers by the banks and financial institutions. The nominal amount of such loans was AMD 26,485,628 thousand as at 31 December (: AMD 23,194,129 thousand). The Organisation has the right to obtain the ownership of these loans in case of default by the banks and financial institutions. (b) Concentration of loans to banks As at 31 December the Organisation has eight banks and financial institutions (: nine banks and financial institutions), whose balances exceed 10% of equity. The gross value of these balances as at 31 December is AMD 21,068,793 thousand (: AMD 19,467,155 thousand). 20

21 10 Property, equipment and intangible assets Cost Equipment Fixtures and fittings Motor vehicles Other Computer software Balance at 1 January 13,632 1,273 10,336 1,154 29,209 55,604 Additions 5, ,523 Disposals (73) (73) Balance at 31 December 19,555 1,762 10,336 1,192 29,209 62,054 Total Depreciation and amortisation Balance at 1 January 7, , ,432 19,594 Depreciation and amortisation for the year 3, ,066-3,287 9,222 Balance at 31 December 11,207 1,213 5, ,719 28,816 Carrying amount At 31 December 8, , ,490 33,238 Cost Equipment Fixtures and fittings Motor vehicles Other Computer software Balance at 1 January 11,572 1,197 10,336 1,097 25,400 49,602 Additions 2, ,809 6,002 At 31 December 13,632 1,273 10,336 1,154 29,209 55,604 Total Depreciation and amortisation Balance at 1 January 5, , ,779 11,960 Depreciation and amortisation for the year 2, , ,653 7,634 Balance at 31 December 7, , ,432 19,594 Carrying amounts At 31 December 5, , ,777 36,010 21

22 11 Amounts due to CBA Borrowings from CBA 13,931,683 13,315,733 The borrowings from the CBA include amounts lent under an agreement with the CBA and the Organisation. According to the agreement the CBA provides borrowings to the Organisation for refinancing qualifying mortgage loans disbursed by banks and credit organisations to its customers. Borrowings are granted for period of up to 10 years and principle is repaid in semi-annual equal instalments. Loan pledge As at 31 December, loans to banks and financial institutions with a gross value of AMD 12,880,674 thousand (: AMD 13,362,281 thousand) serve as collateral for borrowings from CBA (see note 9). The CBA has a right to obtain the ownership of these loans in case of default by the Organisation. 12 Amounts due to Government of Armenia Borrowings from Government of Armenia 2,897,476 3,541,341 The borrowings from the Government of Armenia include amounts lent under an agreement with the CBA (acting as the agent of the Government of Armenia) and the Organisation. According to the agreement the CBA provides borrowings to the Organisation for refinancing qualifying mortgage loans disbursed by banks and credit organisations to its customers. Borrowings are granted for period of up to 10 years and principle is repaid in semi-annual equal instalments. Loan pledge As at 31 December, loans to banks and financial institutions with a gross value of AMD 2,306,675 thousand (: AMD 2,962,403 thousand) serve as collateral for borrowings from the Government of Armenia (see note 9). The CBA has a right to obtain the ownership of these loans in case of default by the Organisation. 13 Amounts due to international financial institutions Borrowings from the French Development Agency 1,430,303-22

23 14 Debt securities issued Bonds issued 4,040,952 2,259,703 The bonds with nominal amount of AMD 3,200,000 thousand are listed in Nasdaq OMX Armenia. Pledge of assets As at 31 December, loans to banks and financial institutions and placements with banks with a carrying amount of AMD 3,922,399 thousand and AMD 1,455,781 thousand respectively (: AMD 1,881,552 thousand loans to banks and financial institutions) serve as collateral for debt securities issued (see notes 8 and 9). 15 Share capital and reserves (a) Issued capital The authorised, issued and outstanding share capital comprises 997,800 ordinary shares (: 900,000). All shares have a nominal value of AMD 10,225. During 97,800 ordinary shares were issued at their nominal value. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Organisation. (b) Dividends Dividends payable are restricted to the maximum retained earnings of the Organisation, which are determined according to legislation of the Republic of Armenia. 16 Risk management (a) Risk management policies and procedures Management of risk is fundamental to the business of the Organisation and forms an essential element of the Organisation s operations. The major risks faced by the Organisation are those related to market risk, credit risk and liquidity risk. The risk management policies aim to identify, analyse and manage the risks faced by the Organisation, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice. The Management has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures. 23

24 The Management is responsible for monitoring and implementing risk mitigation measures, and ensuring that the Organisation operates within established risk parameters. The Management is responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. Management reports directly to the Board of Directors. Both external and internal risk factors are identified and managed throughout the Organisation. Particular attention is given to identifying the full range of risk factors and determining the level of assurance over current risk mitigation procedures. (b) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risks. Market risk arises from open positions in interest rate and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices and foreign currency rates. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Organisation manages its market risk by setting open position limits in relation to financial instruments, interest rate maturity and currency positions. These are monitored on a regular basis and reviewed and approved by the Management. (i) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Organisation is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes, but may also reduce or create losses in the event that unexpected movements occur. 24

25 Interest rate gap analysis Interest rate risk is managed principally through monitoring interest rate gaps. A summary of the interest gap position for major financial instruments is as follows: 31 December Less than 3 months 3-6 months 6-12 months 1-5 years More than 5 years Noninterest bearing Carrying amount ASSETS Cash and cash equivalents 249, , ,812 Placements with banks 5,001,996 26,342-1,455, ,484,111 Loans to banks and financial institutions 654, ,742 1,029,642 15,800,371 9,385,647-27,322,382 5,906, ,084 1,029,642 17,256,144 9,385, ,468 34,719,305 LIABILITIES Amounts due to CBA - 763, ,143 8,962,886 3,462,111-13,931,683 Amounts due to Government of Armenia - 329, ,944 2,246, ,897,476 Amounts due to international financial institutions - 5, , ,940-1,430,303 Debt securities issued 799,412 45,078-3,196, ,040, ,412 1,143,940 1,064,087 14,880,924 4,412,051-22,300,414 5,106,908 (665,856) (34,445) 2,375,220 4,973, ,468 12,418, December ASSETS Cash and cash equivalents 7, ,412,369 1,419,942 Placements with banks 4,547, ,547,378 Loans to banks and financial institutions 555, , ,422 11,549,613 10,497,217-23,868,378 5,109, , ,422 11,549,613 10,497,217 1,412,369 29,835,698 LIABILITIES Amounts due to CBA - 762, ,143 7,369,127 4,440,492-13,315,733 Amounts due to Government of Armenia - 331, ,944 2,567, ,944-3,541,341 Debt securities issued 850, , , ,259, ,861 1,576,287 1,991,516 9,936,677 4,761,436-19,116,777 4,259,111 (1,179,182) (1,122,094) 1,612,936 5,735,781 1,412,369 10,718,921 25