BANK OF KHANTY-MANSIYSK OPEN JOINT STOCK COMPANY (OJSC BANK OF KHANTY- MANSIYSK) GROUP

Transcription

1 BANK OF KHANTY-MANSIYSK OPEN JOINT STOCK COMPANY (OJSC BANK OF KHANTY- MANSIYSK) GROUP Consolidated Financial Statements For the year ended

2 TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS 1 INDEPENDENT AUDITOR'S REPORT 2 CONSOLIDATED FINANCIAL STATEMENTS : CONSOLIDATED INCOME STATEMENT 4 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 6 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 7 CONSOLIDATED STATEMENT OF CASH FLOWS 8 : 1. Organisation Basis of presentation Significant accounting policies Net interest income Trading income on foreign currency, precious metal and securities operations Net commission income Other income Operating expenses Income tax Cash and balances with the Central Bank of the Russian Federation Minimum reserve deposit with the Central Bank of the Russian Federation Precious metals Financial assets at fair value through profit or loss Derivative financial instruments Loans and advances to banks and other financial institutions Loans to customers Investments available-for-sale Property, plant and equipment and intangible assets Investment property Other assets Financial liabilities at fair value through profit or loss Due to banks and the Central Bank of the Russian Federation Customer accounts Promissory notes issued Bonds Other liabilities Subordinated debt and eurobonds Share capital, share premium Acquisitions and disposals of subsidiaries Non-controlling interests Commitments and contingencies Related party transactions Segment reporting Fair value Capital management Risk management policies Subsequent events 96

3 STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position of Bank of Khanty-Mansiysk Open Joint Stock Company (the Bank ) and its subsidiaries (the Group ) as at and the consolidated results of its operations, comprehensive income, cash flows and changes in shareholders equity for the years then ended, in compliance with International Financial Reporting Standards ( IFRS ). In preparing the consolidated financial statements, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Providing additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group s consolidated financial position and financial performance; Stating whether IFRS has been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and Making an assessment of the Group's ability to continue as a going concern. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; Maintaining statutory accounting records in compliance with legislation and accounting standards of the Russian Federation (the RF ); Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. On behalf of the Management Board: President, Chairman of the Management Board D.A. Mizgulin Chief Accountant V.I. Marinina 3 April April

4 INDEPENDENT AUDITOR'S REPORT To the Shareholders and the Board of Directors of Bank of Khanty-Mansiysk Open Joint Stock Company. We have audited the accompanying consolidated financial statements of BANK OF KHANTY- MANSIYSK OPEN JOINT STOCK COMPANY (the Bank ) and its subsidiaries (the Group ) which comprise the consolidated statement of financial position as at, and the consolidated statements of income, comprehensive income, changes in equity and cash flow for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for the internal control system which the management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the fair presentation of these consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management of the audited entity, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of these consolidated financial statements. 2

5 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. 3 April 2014 Moscow, Russian Federation Svetlana Ploutalova, Partner (Qualification certificate No on 19 March ) ZAO DELOITTE & TOUCHE CIS Audited entity: OJSC BANK OF KHANTY-MANSIYSK State Registration Certificate No Issued by the Central Bank of the Russian Federation on Certificate of entry in the Unified State Register of Legal Entities: , issued on by the Department of the Russian Ministry of Taxes and Levies for the Khanty-Manskiysk Autonomous District. Location: 38 Mira st., Khanty-Mansiysk, Khanty-Mansiysk Autonomous District Yugra, Russian Federation Independent Auditor: ZAO DELOITTE & TOUCHE CIS State Registration Certificate No issued by Moscow Registration Chamber on 30 October Certificate of registration in the Unified State Register of Legal Entities No issued by Interregional Inspectorate of the Russian Ministry of Taxation No.39 for Moscow on 13 November Certificate of membership in self-regulated organization "Non- Commercial Partnership Audit Chamber of Russia No dated 20 May 2009; main registration number

6 CONSOLIDATED INCOME STATEMENT Continuing operations Notes Year ended Year ended Interest income 4,16,32 30,425,299 21,415,734 Interest expense 4,32 (18,032,237) (11,902,292) (Loss)/recovery of loss on loans issued at below market rates 4,32 (374) 132,152 NET INTEREST INCOME 12,392,688 9,645,594 Provision for impairment losses on interest bearing assets 15,16,32 (2,337,937) (1,477,172) NET INTEREST INCOME AFTER PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 10,054,751 8,168,422 Trading income on foreign currency, precious metal and securities operations: 5,32 122,399 1,696,583 Foreign exchange operations 519, ,218 Securities operations (345,466) 840,359 Precious metal operations (68,241) 34,087 Other derivatives 16,959 (10,081) Net commission income 3,251,358 2,962,948 Fee and commission income 6,32 4,122,776 3,429,656 Fee and commission expense 6,32 (871,418) (466,708) Provision for impairment losses on financial guarantees and other transactions 20,26,32 (25,861) (30,670) (Loss)/gain on revaluation of investment property 19 (200,884) 29,150 Net gain on investments available-for-sale - 616,861 Other income 7,32 413, ,272 NET NON-INTEREST INCOME 3,560,357 5,536,144 OPERATING INCOME 13,615,108 13,704,566 OPERATING EXPENSES 8,32 (7,721,110) (6,668,193) Reversal of impairment loss on property, plant and equipment 18 19,400 29,573 PROFIT BEFORE TAX 5,913,398 7,065,946 Income tax expense 9 (1,301,731) (1,440,099) INCOME FROM CONTINUING OPERATIONS 4,611,667 5,625,847 Discontinued operations Loss from discontinued operations net of tax 29, 32 - (253,410) NET PROFIT 4,611,667 5,372,437 Attributable to: Owners of the Bank 4,499,191 5,362,617 Non-controlling interests 112,476 9,820 On behalf of the Management Board: President, Chairman of the Management Board D.A. Mizgulin Chief Accountant V.I. Marinina 3 April April 2014 The notes on pages form an integral part of these consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Notes Year ended Year ended NET PROFIT 4,611,667 5,372,437 OTHER COMPREHENSIVE INCOME Items that will not be reclassified subsequently to profit or loss: Revaluation of property, plant and equipment , ,000 Deferred tax relating to revaluation of property, plant and equipment 9 (28,701) (24,139) Items that will be reclassified subsequently to profit or loss: Investments available-for-sale: Net gain for the period 17 31, ,633 Less: Reclassification adjustments relating to amounts recognized in the income statement - (426,492) Deferred income tax effect 9 (6,279) 50,979 TOTAL OTHER COMPREHENSIVE INCOME/(LOSS) NET OF TAX 148,362 (91,019) TOTAL COMPREHENSIVE INCOME 4,760,029 5,281,418 Attributable to: Owners of the Bank 4,647,553 5,271,648 Non-controlling interests ,476 9,770 On behalf of the Management Board: President, Chairman of the Management Board D.A. Mizgulin Chief Accountant V.I. Marinina 3 April April 2014 The notes on pages form an integral part of these consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER Notes ASSETS: Cash and balances with the Central Bank of the Russian Federation 10 17,337,369 14,805,626 Minimum reserve deposits with the Central Bank of the Russian Federation 11 1,998,171 2,300,890 Precious metals 12 10,100 11,844 Loans and advances to banks and other financial institutions 15,32 82,664,122 67,763,429 Financial assets at fair value through profit or loss 13,14,32 37,390,296 37,648,947 Loans to customers 16,32 210,092, ,847,241 Investments available-for-sale , ,941 Property, plant and equipment and intangible assets 18 4,893,925 4,811,628 Deferred income tax asset 9 103,738 30,851 Investment property 19 1,583,889 1,297,680 Other assets 20,32 4,065,170 3,405,801 TOTAL ASSETS 360,614, ,367,878 LIABILITIES AND EQUITY LIABILITIES: Financial liabilities at fair value through profit or loss 14,21,32 2,024,706 1,235,108 Due to banks and the Central Bank of the Russian Federation 22,32 64,200, ,541,013 Customer accounts 23,32 233,668, ,158,348 Promissory notes issued 24 8,613,400 12,559,760 Bonds 25,32 4,804,151 3,014,393 Deferred income tax liability 9 700, ,708 Other liabilities 26,32 1,657,588 1,748,381 Subordinated debt and Eurobonds 27 9,597,389 5,042,958 TOTAL LIABILITIES 325,266, ,780,669 EQUITY: Equity attributable to owners of the Bank Share capital 28 11,282,369 11,282,369 Share premium 28 4,550,504 4,550,504 Revaluation of investments available-for-sale 68,130 43,012 Property, plant and equipment revaluation reserve 1,115,982 1,071,328 Retained earnings 18,217,777 13,639,996 Total equity attributable to owners of the Bank 35,234,762 30,587,209 Non-controlling interests ,486 - TOTAL EQUITY 35,347,248 30,587,209 TOTAL LIABILITIES AND EQUITY 360,614, ,367,878 On behalf of the Management Board: President, Chairman of the Management Board D.A. Mizgulin Chief Accountant V.I. Marinina 3 April April 2014 The notes on pages form an integral part of these consolidated financial statements. 6

9 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Notes Share capital Share premium Revaluation of investments available-forsale revaluation reserve Property, plant and equipment revaluation reserve Retained earnings Total equity attributable to owners of the Bank Non controlling interests TOTAL EQUITY Balance as at ,282,369 4,550, , ,439 8,238,388 25,315,561 74,713 25,390,274 Net profit for the period ,362,617 5,362,617 9,820 5,372,437 Total other comprehensive income for the period net of deferred tax - - (204,849) 91,313 22,567 (90,969) (50) (91,019) Total comprehensive income - - (204,849) 91,313 5,385,184 5,271,648 9,770 5,281,418 Disposal of share in subsidiary 29, (16,424) 16,424 - (84,483) (84,483) Balance as at 11,282,369 4,550,504 43,012 1,071,328 13,639,996 30,587,209-30,587,209 Net profit for the period ,499,191 4,499, ,476 4,611,667 Total other comprehensive income for the period net of deferred tax ,118 44,654 78, , ,362 Total comprehensive income ,118 44,654 4,577,781 4,647, ,476 4,760,029 Issue of shares by subsidiaries, acquired by noncontrolling interests Balance as at 11,282,369 4,550,504 68,130 1,115,982 18,217,777 35,234, ,486 35,347,248 On behalf of the Management Board: President, Chairman of the Management Board D.A. Mizgulin Chief Accountant V.I. Marinina 3 April April 2014 The notes on pages form an integral part of these consolidated financial statements. 7

10 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended Year ended Notes CASH FLOWS FROM OPERATING ACTIVITIES Interest received 29,747,609 20,825,588 Interest paid (17,970,820) (10,813,149) Net receipts on financial instruments at fair value through profit or loss 1,271,254 1,040,176 Net (payments)/receipts on precious metals transactions (68,339) 2,718 Net (payments)/receipts on foreign exchange operations (45,446) 575,017 Fee and commission income 4,123,193 3,396,708 Fee and commission expense (872,809) (463,312) Other income received 262, ,192 Operating expenses paid (7,264,213) (5,765,308) Income tax paid (942,674) (1,401,314) 8,240,608 7,563,316 Decrease/(increase) in the minimum reserve deposit at Central Bank of the Russian Federation ,719 (437,227) Increase of guarantee deposits on plastic cards (38,232) (569) (Purchase)/sale of precious metals (2,248) 12,149 Repayment/(issue) of loans and funds to banks and other financial institutions 3 45,905,532 (38,574,508) Net (increase)/decrease of financial assets and liabilities at fair value through profit or loss (408,158) 5,831,599 Net increase in loans to customers (45,125,862) (49,290,881) (Payments)/raising of funds from banks and the Central Bank of the Russian Federation (38,680,687) 43,828,041 Net increase of customer accounts 92,473,135 22,844,405 Net (decrease)/increase in promissory notes issued (4,074,545) 5,952,384 Issue of bonds 25 1,762,593 - Net increase in other assets (1,187,796) (907,985) Net decrease in other liabilities 84,939 69,632 Net cash inflow/(outflow) from operating activities 3 59,251,998 (3,109,644) Net cash outflow from operating activities - discontinued operations 3 - (2,306,606) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment and intangible assets 18 (415,382) (357,234) Proceeds on sale of property, plant and equipment and intangible assets 4,142 8,189 Acquisition of investment property 19 (655,413) (162,242) Proceeds from disposal of investment properties , ,538 Income from lease of investment property 3,19 24,522 26,770 Dividends received 3,7 1, Sale of investments available-for-sale - 8,702,457 Purchase of investments available-for-sale - (134,822) Disposal of interests in subsidiaries 29-97,860 Net cash (outflow)/inflow from, investing activities (582,332) 8,368,223 Net cash outflow from investing activities - discontinued operations - (65,846) The notes on pages form an integral part of these consolidated financial statements. 8

11 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) Year ended Year ended Notes CASH FLOWS FROM FINANCING ACTIVITIES Subordinated debt received ,963 - Issue of subordinated Eurobonds 27 6,335,800 - Redemption of subordinated Eurobonds 27 (3,167,900) - Issue of shares by subsidiaries, acquired by non-controlling interests Net cash inflow from financing activities 4,145,873 - Net cash outflow from financing activities - discontinued operations 27 - (40,000) Effect of foreign exchange changes on cash and cash equivalents 787,524 (264,587) NET INCREASE IN CASH AND CASH EQUIVALENTS 3 63,603,063 2,581,540 CASH AND CASH EQUIVALENTS beginning of the period 3, 10 23,548,227 20,966,687 CASH AND CASH EQUIVALENTS end of the period 3, 10 87,151,290 23,548,227 During the years ended and, the Group obtained non-cash settlement for uncollectible loans to customers. These non-cash settlements were excluded from the consolidated statement of cash flows and presented separately below: Year ended Year ended NON-CASH TRANSACTIONS: Loans to customers settled by means of collateral repossession: (27,317) (70,333) Property received as a collateral 27,317 70,333 On behalf of the Management Board: President, Chairman of the Management Board D.A. Mizgulin Chief Accountant V.I. Marinina 3 April April 2014 The notes on pages form an integral part of these consolidated financial statements. 9

12 1. ORGANIZATION The BANK OF KHANTY-MANSIYSK GROUP comprises the Bank of Khanty-Mansiysk Open Joint Stock Company, (the Bank ) and its subsidiaries (the Group ). The Bank of Khanty-Mansiysk Open Joint Stock Company (OJSC Bank of Khanty-Mansiysk) is an open joint-stock company, which was incorporated in the Russian Federation in The registered office of the Bank is located at: 38, Mira St., Khanty-Mansiysk, Khanty-Mansiysk Autonomous District-Yugra, Russian Federation. The Bank is regulated by the Central Bank of the Russian Federation (the CBR ) and conducts its business under general license number The Bank s primary business consists of commercial banking, trading with securities, foreign currencies and originating loans and financial guarantees. The Bank holds the following licenses: General banking license issued by the CBR; Precious metals operations license issued by the CBR; Professional securities market participant license for broker operations issued by the Federal Service For Financial Markets ( FSFM ); Professional securities market participant license for securities management issued by the FSFM; Professional securities market participant license for custodian operations issued by the FSFM; Professional securities market participant license for dealer operations issued by the FSFM; and License of commodity exchange intermediary for performing futures and options transactions in the stock exchange market issued by the FSFM. The Bank has a branch network to deliver services to its customers. As at and, the Group had a head office in Khanty-Mansiysk, and 7 and 10 branches across the Russian Federation, respectively. As at and, the Group had a representative office abroad. As at and, the Group had 140 and 138 additional offices and operating cash desks, respectively. The Bank is the parent company of a banking group which consists of the following enterprises which have been included in the consolidated financial statements of the Group: Description Country of operation Ownership/ control interest of the Bank as at Ownership/ control interest of the Bank as at Type of activity OJSC BANK OF KHANTY- MANSIYSK RF Parent company Parent company Banking activity LLC Yugra-Leasing RF 100% / 100% 100% / 100% Finance leases LLC GPF RF 100% / 100% 100% / 100% Construction CUIT Real estate KhMB Capital RF 100% /100% 100% /100% Investment fund management CJSC Mortgage Agent KhMB-1 RF 0% / 100% - Issue of mortgage-backed bonds BKM Finance Limited Ireland 0% / 100% 0% / 100% Assistance to the Bank in securities issuance As at and, the Group also had holdings (50%) in CJSC PK HESCARD that does not conduct active operations. LLC Yugra-Leasing is a finance lease company rendering leasing services to the Bank s customers. LLC GPF is a provider of financing for construction projects of the Bank s customers. 10

13 CUIT Real estate KhMB-Capital is a closed unit trust comprising real estate, transferred in trust to managing company OJSC RONIN Trust. CJSC Mortgage Agent KhMB-1 is a special purpose entity founded for the securitization of mortgage loans through their sale. The Group does not have an ownership interest in the capital of the company, but exercises the control through the determination of its operations. BKM Finance Limited is a special purpose entity incorporated for the purposes of assisting in the issuance of the Group s securities. The Group does not have an ownership interest in the capital of the company, but exercises the control through the determination of its operations. The Group's management assessed the nature of interest and the level of impact of subsidiaries on the consolidated financial statements of the Group and took a decision not to disclose the statements of consolidated subsidiaries due to their immateriality. The acquisitions and disposals of subsidiaries during the years ended and are disclosed in Note 29. The Bank is a member/participant of: Association of Regional Banks ( Russia Association); Association of Russian Banks; Tyumen Regional Association of Credit Institutions; Association of Banks of the North-West; National Currency Association; Russian National Association of S.W.I.F.T.; National Stock Exchange Association; Moscow Interbank Currency Exchange; Siberian Interbank Currency Exchange; National Settlement Depositary (as a depositor); Chamber of Industry and Commerce of the Khanty-Mansiysk Autonomous District-Yugra; Chamber of Industry and Commerce of the Tyumen Region; St.-Petersburg Chamber of Industry and Commerce; Chamber of Industry and Commerce of the Leningrad Region; Chamber of Industry and Commerce of Nizhnevartovsk; Chamber of Industry and Commerce of Kurgan; Russian Trading System Stock Exchange; VISA International payment system (principal member); MasterCard International Incorporated payment system (principal member); UNION CARD Russian payment system; Obligatory Deposit Insurance System (register number 322); Brussels International Banking Club International Association; The Union of Builders of Yugra Non-Commercial Organization; The West-Siberian Association of Builders Non-Commercial Organization; Moscow International Foreign Currency Association; Association of Russian members of Europay International. The number of employees of the Group as at and was 4,625 and 4,409 respectively. 11

14 As at and the Management Board consisted of 6 persons. As at and the Board of Directors included 7 and 9 directors, respectively, including 1 member of the Bank's Management Board. As at and the following shareholders owned the shares of the Bank: Shareholders(Shareholders of the first level): Share in capital, % Share in capital, % Limited Liability Company Ferrosplav Invest 48.08* 44.20** Limited Liability Company KN-Estate 19.99* 19.99** Limited Liability Company Vostok-Capital 19.98* 19.98** Open Joint-Stock Company NOMOS-BANK 7.79* 6.29** Limited Liability Company Promgazcomplekt 3.53* 3.53** Open Joint-Stock Company NOMOS-REGIOBANK ** Other Total Ultimate shareholders of the Bank Share in capital, % Share in capital, % Open Joint-Stock Company NOMOS-BANK Nikolay Ivanovich Dobrinov Other Total * The statements have been provided by the nominal holder as at 30 December. ** The statements have been provided by the nominal holder as at 22 October. 2. BASIS OF PREPARATION These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ). The consolidated financial statements have been prepared on a historical cost basis, except for financial assets and liabilities designated at fair value through profit or loss, available for sale investments and derivative financial instruments, which have all been measured at fair value, precious metals, loans and deposits held in precious metals and land plots, buildings and investment property stated at revalued amounts. The consolidated financial statements have been prepared on the assumption that the Group is a going concern and will continue in operation for the foreseeable future. Management and shareholders have the intention to further develop the business of the Group in the Russian Federation both in the corporate and retail banking segments. The management believes that the going concern assumption is appropriate for the Group due to its sufficient capital adequacy ratio, and that historical experience, the short-term obligations will be refinanced in the normal course of business. 12

15 These consolidated financial statements are presented in thousands of Russian Roubles ( RUB thousand ), unless otherwise indicated. The Bank and its consolidated entities incorporated in the Russian Federation maintain their accounting records in accordance with Russian Accounting Standards ( RAS ), and foreign consolidated entities of the Bank maintain their accounting records in accordance with the laws and regulations of the countries in which they operate. These consolidated financial statements, except for BKM Finance Limited whose accounting records are prepared in accordance with IFRS, have been prepared from the Russian statutory accounting records and have been adjusted to conform to IFRS. Functional currency The functional currency of a majority of the entities within the Group is Russian Roubles ( RUB ). Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The presentational currency of the consolidated financial statements of the Group is Russian Roubles ( RUB ). All values are rounded to the nearest thousand Roubles, except when otherwise indicated. 3. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and entities (including special purpose entities) controlled by the Bank (its subsidiaries). Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Subsidiaries are those enterprises controlled by the Bank. Control exists when the Bank has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Special purpose entities ( SPEs ) are entities that are created to accomplish a narrow and welldefined objective such as the securitization of particular assets, or the execution of a specific borrowing or lending transaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE s risks and rewards, the Group concludes that it controls the SPE. Non-controlling interests non-controlling interests the portion of profit or loss and net assets of subsidiaries not owned, directly or indirectly, by the Bank. Non-controlling interests are presented separately in the consolidated income statement, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from parent shareholders equity. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in 13

16 exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value at the acquisition date. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any noncontrolling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests' proportionate share of the recognized amounts of the acquiree s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS. The equity attributable to owners of the parent is shown separately in the consolidated statement of financial position and net income attributable to non-controlling interests is presented in the consolidated income statement and consolidated statement of comprehensive income. When a business combination is achieved in stages, the Group s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Group obtains control) and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete at the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date. Changes in the Group's ownership interests in existing subsidiaries Changes in the Group s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the Group s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the owners of the parent. When the Group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. Amounts previously recognized in other comprehensive income in relation to the subsidiary are reclassified to profit or loss or transferred directly to retained earnings in the same manner as would be required if the relevant assets or liabilities were disposed of. The results of the entities acquired or transferred during an accounting period are recognized in the consolidated income statement from the date of acquisition or until the date of disposal, respectively. 14

17 Recognition and measurement of financial instruments The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual provisions of the financial instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Rights to purchase financial instruments that will be subsequently measured at fair value between trade date and settlement date are accounted for in the same way as for acquired instruments. Financial assets and liabilities are initially recognized at fair value. Financial assets or financial liabilities not designated at or classified as fair value through profit or loss are initially recognized at fair value. Transaction costs are directly attributable to the acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent re-measurement of these financial instruments are disclosed in the respective accounting policies set out below. Derecognition A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or when the Group 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. Also, when a financial asset is deemed to be uncollectible, the Group writes them off. The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. If the Group purchases its own debt, it is removed from the consolidated 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. Cash and balances with the Central Bank of the Russian Federation Cash represents cash on hand. Unrestricted balances on correspondent and term deposit accounts with the CBR are recognized as balances with the CBR and are measured at amortized cost. In the consolidated statement of cash flows the cash and cash equivalents, include cash on hand, unrestricted balances on correspondent and term deposit accounts with the Central Bank of the Russian Federation, loans issued to banks with an initial maturity of up to 90 days, loans issued to banks under reverse repurchase agreements with an initial maturity of up to 90 days and correspondent accounts with banks and other financial institutions that are not restricted, except for margin deposits for operations with plastic cards, which may be converted to cash within a short period of time (less than 90 days). Precious metals Assets and liabilities denominated in precious metals are translated at the current rate computed based on the second fixing of the London Metal Exchange (LME) rates, using the RUB/USD exchange rate effective at the date. Changes in the bid prices are recorded in net gain/(loss) on operations with precious metals. Loans and advances to banks and other financial institutions include funds placed on nostro accounts with banks and other financial institutions. Also, in the normal course of business, the Group originates loans and deposits to other banks and other credit institutions for various time periods. Loans and deposits to credit institutions thus non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables and that are measured at amortized cost using the effective interest method. Financial assets and liabilities at fair value through profit or loss represent financial instruments: Acquired for the purpose of selling/purchasing them in the near future; Are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent and actual pattern of short-term profit taking; 15

18 Are derivative financial instruments (except for derivative financial instruments that are designated and effective as a hedging instruments); or Are financial assets and liabilities that upon initial recognition are designated by the Group at fair value through profit or loss. The Group designates financial assets and liabilities at fair value through profit or loss where either: Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL in consolidated income statement. Financial assets and liabilities at fair value through profit or loss are initially recorded and subsequently measured at fair value. The Group uses quoted market prices to determine the fair value for financial assets and liabilities at fair value through profit or loss or appropriate pricing models if quoted market prices are not available. The valuation models include the use of information about current market prices of similar instruments, discounted cash flow analysis and use of other valuation models where appropriate. If there is a valuation technique commonly used by market participants to compute fair value for the financial instrument and that technique has been demonstrated to provide reliable estimates of the fair value obtained in actual market transactions, the Group uses that technique. Changes in fair value of financial assets and liabilities at fair value through profit or loss are recognized in profit or loss in the period that they occurred. Derivative financial instruments The Group enters into derivative financial instruments to manage currency, interest rate and liquidity risks and for trading purposes. Derivatives entered into by the Group include forward transactions in foreign exchange, precious metals and securities, interest rate and currency interest swaps. Derivative financial instruments entered by the Group are not designated as hedges and do not qualify for hedge accounting. Loans to customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans are initially recognized at fair value plus related transaction costs that directly relate to acquisition or creation of such financial assets. Where the fair value of the consideration given does not equal the fair value of the loan, for example where the loans to customers are issued at lower than market rates, the difference between the fair value of the consideration given and the fair value of the loan is included in profit or loss or in the consolidated statement of changes in equity. Subsequently, loans are carried at amortized cost using the effective interest rate method. Loans to customers are accounted for net of any provision for impairment losses. Write-off of loans to customers The Bank's Management Board and/or Board of Directors considers and makes a decision on writing off loans in the consolidated statement of financial position against the provision for loan impairment. The Group writes off a loan balance (and any related provision for loan impairment) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. Repurchase and reverse repurchase agreements The Group enters into sale and repurchase agreements with securities ( repo ) and purchase and resale agreements with securities ( reverse repo ) in the normal course of its business. Repos and reverse repos are utilized by the Group as an element of its treasury management and trading business. 16

19 A repo is an agreement to transfer securities to another party in exchange for cash or other consideration with an obligation to repurchase the securities at a future date for an amount equal to the cash or other consideration exchanged plus interest. These agreements are accounted for as financing transactions. Securities transferred under repo agreements are not derecognized from the Group s consolidated statement of financial position. The funds received are recognized as collateralized deposits received. Reverse repo agreements are recognized in the consolidated financial statements as amounts placed on deposit, which is collateralized by securities. Assets purchased under reverse repo agreements are not recognized in the consolidated statement of financial position. Gain/loss on the sale of the above instruments is recognized as interest income or expense in the consolidated income statement based on the difference between the repurchase price accreted to date using the effective interest method and the sale price when such instruments are sold to third parties. When the reverse repo/repo is fulfilled on its original terms, the effective yield or interest between the sale and repurchase price negotiated under the original contract is recognized using the effective interest method. When securities purchased under reverse repo agreements are sold to third parties the obligation to return securities is recorded as a financial liability at fair value through profit or loss and measured at fair value. Investments classified as available-for-sale are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity financial assets or financial assets at fair value through profit or loss. Financial assets available-for-sale represent debt and equity investments that are intended to be held for an indefinite period of time. Financial assets classified as available for sale are initially recorded at fair value. Subsequently the financial assets are measured at fair value, with revaluation recognized in other comprehensive income until the financial asset is derecognized, at which time the cumulative gain or loss previously recognized in other comprehensive income is recognized in profit or loss, except for impairment losses, foreign exchange gains and losses on debt financial instruments and interest income accrued using the effective interest method, which are recognized in consolidated profit or loss. The Group uses quoted market prices to determine fair value of financial assets available-for-sale or appropriate valuation models if quoted market prices are not available. The valuation models include the use of information about current market prices of similar instruments, discounted cash flow analysis and use of other valuation models where appropriate. If there is a valuation technique commonly used by market participants to compute fair value of the instrument and that technique has been demonstrated to provide reliable estimates of fair values obtained in actual market transactions, the Group uses that technique. Unquoted shares are stated at acquisition cost less impairment losses, unless fair value can be reliably measured. Impairment Financial assets carried at amortized cost consist principally of loans and receivables. The Group 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 (have) 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 by the Group on terms that the Group 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. 17

20 The Group 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 Group 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 recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of 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 Group uses its experience and judgment 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 recognized. Impairment Financial assets classified as available-for-sale. When there is objective evidence that financial assets available-for-sale are impaired, the cumulative loss previously recognized in the consolidated statement of comprehensive income is removed from the statement of comprehensive income and recognized in the consolidated income statement. For an investment available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the nature of the available-for-sale financial asset concerned: For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognized in the consolidated income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognized in the consolidated statement of comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognized in the income statement, the impairment loss is reversed through the income statement to the extent of the increase in fair value; For an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognized in the consolidated statement of comprehensive income. Impairment losses recognized on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available-for-sale equity security are recognized in the consolidated income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security. Impairment Financial assets carried at cost include unquoted equity instruments included in availablefor-sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognized in profit or loss in the consolidated income statement and can not be reversed. 18