PRIVREDNA BANKA SARAJEVO D.D. SARAJEVO

Transcription

1 PRIVREDNA BANKA SARAJEVO D.D. SARAJEVO Financial statements for the year ended prepared in accordance with International Financial Reporting Standards as modified by the regulatory requirements of the Banking Agency of Federation of Bosnia and Herzegovina and Independent auditors report

2 Contents Page Responsibility for the financial statements 1 Independent auditors' report 2 Income statement 3 Statement of comprehensive income 4 Balance sheet 5 Cash flow statement 6 Statement of changes in equity 7 Notes to the financial statements 8-44

3 Responsibility for the financial statements The Management Board is responsible for ensuring that financial statements are prepared for each financial period in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB), as modified by the regulatory requirements prescribed by the Banking Agency of the Federation of Bosnia and Herzegovina, which give a true and fair view of the state of affairs and results of Privredna banka Sarajevo d.d. Sarajevo (the Bank) for that period. After making enquiries, the Management Board has a reasonable expectation that the Bank has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Management Board continues to adopt the going concern basis in preparing the financial statements. In preparing those financial statements, the responsibilities of the Management Board include ensuring that: suitable accounting policies are selected and then applied consistently; judgments and estimates are reasonable and prudent; applicable accounting standards are followed, subject to any material departures disclosed and explained in the financial statements; and the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business. The Management Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Bank and must also ensure that the financial statements comply with the Federation of Bosnia and Herzegovina Accounting and Audit Law. The Management Board is also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Signed on behalf of the Management Board Azra Čolić Director Alipašina Sarajevo Bosnia and Herzegovina 27 May

4 Independent Auditors Report To the Shareholders of Privredna banka Sarajevo d.d. Sarajevo We have audited the accompanying financial statements Privredna banka Sarajevo d.d. Sarajevo ( the Bank ), set out on pages 3 to 44 which comprise of the balance sheet as at, and the income statement, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as modified by the regulatory requirements prescribed by the Banking Agency of the Federation of Bosnia and Herzegovina. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s 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 perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of 31 December, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as modified by the regulatory requirements prescribed by the Banking Agency of the Federation of Bosnia and Herzegovina. Deloitte d.o.o. Sead Bahtanović, director and authorized auditor Sarajevo, Bosnia and Herzegovina 27 May 2010

5 Income statement for the year ended Notes (Restated) Interest and similar income 7 5,004 3,532 Interest expense and similar charges 8 (1,746) (995) Net interest income 3,258 2,537 Fee and commission income 9 4,409 3,878 Fee and commission expense (276) (208) Net fee and commission income 4,133 3,670 Fair value gains Net foreign exchange gains Other operating income Income from operating activities 8,807 6,825 Personnel expenses 11 (4,404) (3,502) Depreciation expenses 24 (558) (506) Other administrative expenses 12 (3,010) (3,116) Operating expenses (7,972) (7,124) PROFIT BEFORE IMPAIRMENT LOSSES, PROVISIONS AND INCOME TAX 835 (299) Impairment losses and provisions 13 (2,320) (2,911) Recoveries 14 3,980 9,113 1,660 6,202 PROFIT BEFORE INCOME TAX 2,495 5,903 Income tax expense 15 (360) (50) NET PROFIT 2,135 5,853 Basic earnings per share The accompanying notes form an integral part of these financial statements. Privredna banka Sarajevo d.d. Sarajevo 3

6 Statement of comprehensive income for the year ended Notes (Restated) Net profit 2,135 5,853 Other comprehensive income: Fair value loss on AFS investments 21 (81) - Property revaluation gain 24 2,846-2,765 - TOTAL COMPREHENSIVE INCOME 4,900 5,853 The accompanying notes form an integral part of these financial statements. Privredna banka Sarajevo d.d. Sarajevo 4

7 Balance sheet as at ASSETS Notes (Restated) 1 January Cash and balances with banks 17 22,864 20,592 13,100 Obligatory reserve with the Central Bank 18 11,187 8,775 8,851 Placements with other banks, net 19 23,209 12,528 27,722 Loans and advances to customers, net 20 70,225 32,162 19,994 Financial assets available for sale Financial assets at FVTPL 22 1, Other assets, net 23 1,295 5,743 1,085 Tangible and intangible assets 24 21,620 17,772 19,228 Investment property 25 5,332 4,378 4,361 Deferred tax assets TOTAL ASSETS 157, ,329 94,443 LIABILITIES Due to customers ,761 65,315 59,622 Due to other banks and financial institutions 27 10,874 4,894 4,137 Provisions ,666 Other liabilities 29 2,710 2,115 1,763 Total liabilities 120,120 72,902 67,188 EQUITY Share capital 30 28,296 25,296 25,296 Share premium Property revaluation reserves 13,370 10,788 14,659 Investments revaluation reserves (81) - - Accumulated losses (4,256) (6,657) (12,700) Total equity 37,335 29,427 27,255 TOTAL LIABILITIES AND EQUITY 157, ,329 94,443 The accompanying notes form an integral part of these financial statements. Signed on behalf of Privredna banka Sarajevo d.d. Sarajevo on 27 May 2010: Azra Čolić Director Zijad Lugonić CFO Privredna banka Sarajevo d.d. Sarajevo 5

8 Cash flow statement for the year ended Operating activities (Restated) Profit before taxation 2,495 5,903 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Impairment losses and provisions 2,320 2,911 Fair value gain on investment property (954) - Settlement of receivables with the Federal Ministry of Finance (1,360) (8,473) Financial assets available for sale obtained free of charge (70) - (Gain)/loss on disposal of fixed assets (11) - Liabilities written-off (3) (9) Changes in assets and liabilities: (Increase) / decrease in obligatory reserve with the Central Bank (net) (2,412) 76 (Increase) / decrease in placements with other banks, before provision (net) (10,676) 15,193 Increase in loans, before provision (net) (39,954) (13,479) Decrease in other assets, before provision (net) 4, Increase in amounts due to customers (net) 40,446 5,693 Increase / (decrease) in other liabilities (net) 257 (1,553) NET CASH (USED IN) / FROM OPERATING ACTIVITIES (5,153) 7,027 Investing activities Purchase of tangible assets (1,572) (277) Increase of investment property - (17) Proceeds from disposal of tangible assets 11 2 NET CASH USED IN INVESTING ACTIVITIES (1,561) (292) Financing activities Share issue 3,006 - Increase in due to other banks and financial institutions (net) 5, NET CASH FROM FINANCING ACTIVITIES 8, NET INCREASE IN CASH AND CASH EQUIVALENTS 2,272 7,492 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 20,592 13,100 CASH AND CASH EQUIVALENTS AT THE END OF YEAR 22,864 20,592 The accompanying notes form an integral part of these financial statements. Privredna banka Sarajevo d.d. Sarajevo 6

9 Statement of changes in equity for the year ended Share capital Share premium Property revaluation reserves Investments revaluation reserves Accumulated losses Total Balance as of ,296-14,659 - (12,700) 27,255 Balance as of 1 January 25,296-14,659 - (12,700) 27,255 Correction of PY errors (Note 3.2): - Removal of properties (Note 24) - - (3,701) - - (3,701) - Removal of investments (Note 21) (77) (77) - Removal of old saving liabilities (Note 29) Transfer (from) / to - - (170) Net profit for the year ,853 5,853 Other comprehensive income Total comprehensive income ,853 5,853 Balance as of (Restated) 25,296-10,788 - (6,657) 29,427 3 rd share issue 3, ,006 Transfer (from) / to - - (266) Other adjustments Net profit for the year ,135 2,135 Other comprehensive income - - 2,846 (81) - 2,765 Total comprehensive income - - 2,846 (81) 2,135 4,900 Balance as of 28, ,370 (81) (4,256) 37,335 The accompanying notes form an integral part of these financial statements. Privredna banka Sarajevo d.d. Sarajevo 7

10 for the year ended 1. GENERAL Privredna banka Sarajevo d.d. Sarajevo ( the Bank ) was founded in 1989 as a result of the division of former Privredna banka Sarajevo - Joint Bank (PBS Group) into 9 independent banks. According to the agreement from 2001, the state-owned capital of the Bank was transferred to Sarajevo Privatization Venture ( SPV ), Cayman Islands - the company established by the Ministry of Finance of the Federation of Bosnia and Hercegovina, International Finance Corporation, Washington, USA and B.P. Invest Consult GmbH, Vienna, Austria. According to that agreement, SPV became owner of the total state-owned capital that represented 89% of total equity of the Bank. Due to non-compliance with the law requirement in regards to the minimum level of capital, on 4 November 2004 by the decision No /04, the Banking Agency of the Federation of Bosnia and Herzegovina ( FBA ) established the provisional administration within the Bank and suspended all competencies of managing and executive bodies of the Bank, as well as its owners and representatives. All competencies have been transferred to the provisional administrator introduced by FBA. Role of provisional administrator has been exercised by: - Mr. Mustafa Imširović (from 4 November 2004 to 15 July 2006) and - Mr. Maruf Burnazović (from 15 July 2006 to 12 September ). On 15 August 2007, the partners' group X-25, acquired the majority share from SPV for KM 2,250,000. Furthermore, the partners' group X-25 paid-in additionally KM 15,000,000. By this additionally paid-in capital, the law requirement in regards to the minimum level of capital has been fulfilled and, as a consequence, the provisional administration has been cancelled on 12 September. The additional paid-in capital was registered with the Municipal court as of 1 April. Principal activities of the Bank include following services: 1. receiving and placing of deposits; 2. disbursement of loans; 3. buying and selling foreign currencies; 4. cash transactions in inter-bank market; 5. foreign currency exchange and other banking-related activities; 6. cash payment and transfer, both national and abroad. Directors and Management Board Supervisory Board Nusret Čaušević Mujo Duraković Sead Gradaščević Milić Simić Mirsad Letić President Member Member Member Member Decision on introduction of members of Supervisory Board has been adopted by General Assembly on 27 December Besides the fact that Supervisory Board became operational on 9 March, their mandate became effective from the moment of cancellation of provisional administration, i.e. from 12 September. Management Board Azra Čolić Director (from 12 September ) Azemina Golo Executive Director (from 12 September ) Mensudina Mesihović Executive Director (from 12 September ) Nedim Lulo Executive Director (from 30 October ) Privredna banka Sarajevo d.d. Sarajevo 8

11 for the year ended 2. ADOPTION OF NEW AND REVISED STANDARDS 2.1 Standards and Interpretations effective in the current period The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period: IFRS 8 Operating Segments (effective for annual periods beginning on or after 1 January ), Amendments to IFRS 4 Insurance Contracts and IFRS 7 Financial Instruments: Disclosures - Improving disclosures about financial instruments (effective for annual periods beginning on or after 1 January ), Amendments to IFRS 1 First-time Adoption of IFRS and IAS 27 Consolidated and Separate Financial Statements Cost of investment in a subsidiary, jointly-controlled entity or associate (effective for annual periods beginning on or after 1 January ), Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on 22 May (IAS 1, IFRS 5, IAS 8, IAS 10, IAS 16, IAS 19, IAS 20, IAS 23, IAS 27, IAS 28, IAS 29, IAS 31, IAS 34, IAS 36, IAS 38, IAS 39, IAS 40, IAS 41) primarily with a view to removing inconsistencies and clarifying wording (most amendments are to be applied for annual periods beginning on or after 1 January ), Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable financial instruments and obligations arising on liquidation (effective for annual periods beginning on or after 1 January ), IAS 1 (revised) Presentation of Financial Statements A revised presentation (effective for annual periods beginning on or after 1 January ), IAS 23 (revised) Borrowing Costs (effective for annual periods beginning on or after 1 January ), Amendments to IFRS 2 Share-based Payment Vesting conditions and cancellations (effective for annual periods beginning on or after 1 January ), Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement - Embedded Derivatives (effective for annual periods ending on or after 30 June ), IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July ), IFRIC 15 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January ), IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October ). The adoption of these amendments to the existing standards and interpretations has not led to any changes in the Bank s accounting policies. Privredna banka Sarajevo d.d. Sarajevo 9

12 for the year ended 2. ADOPTION OF NEW AND REVISED STANDARDS (CONTINUED) 2.2 Standards and Interpretations in issue not yet adopted At the date of authorisation of these financial statements the following standards, revisions and interpretations were in issue but not yet effective: IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013); IFRS 3 (revised) Business Combinations (effective for annual periods beginning on or after 1 July ); IFRS 1 (revised) First-time Adoption of IFRS (effective for annual periods beginning on or after 1 July ); Amendments to IFRS 1 First-time Adoption of IFRS - Additional Exemptions for First-time Adopters (effective for annual periods beginning on or after 1 January 2010); Amendments to IFRS 1 First-time Adoption of IFRS - Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (effective for annual periods beginning on or after 1 July 2010), Amendments to IFRS 2 Share-based Payment - Group cash-settled share-based payment transactions (effective for annual periods beginning on or after 1 January 2010); Amendments to IAS 24 Related Party Disclosures - Simplifying the disclosure requirements for governmentrelated entities and clarifying the definition of a related party (effective for annual periods beginning on or after 1 January 2011); Amendments to IAS 27 Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July ); Amendments to IAS 32 Financial Instruments: Presentation Accounting for rights issues (effective for annual periods beginning on or after 1 February 2010); Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Eligible hedged items (effective for annual periods beginning on or after 1 July ); Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on 16 April (IFRS 2, IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 18, IAS 36, IAS 38, IAS 39, IFRIC 9, IFRIC 16) primarily with a view to removing inconsistencies and clarifying wording, (most amendments are to be applied for annual periods beginning on or after 1 January 2010); Amendments to various standards and interpretations Improvements to IFRSs (2010) resulting from the annual improvement project of IFRS published on 6 May 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily with a view to removing inconsistencies and clarifying wording (most amendments are to be applied for annual periods beginning on or after 1 January 2011), Amendments to IFRIC 14 IAS 19 The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction - Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011); IFRIC 17 Distributions of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July ); IFRIC 18 Transfers of Assets from Customers (effective for transfer of assets from customers received on or after 1 July ); IFRIC 19 Extinguishing Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). The Bank has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. The Bank anticipates that the adoption of these standards, revisions and interpretations will have no material impact on the financial statements of the Bank in the period of initial application. Privredna banka Sarajevo d.d. Sarajevo 10

13 for the year ended 3. CORRECTION OF ERRORS 3.1 Restatement of the financial statements for the year ended Based on the instruction from the Federal Banking Agency No /09 dated 12 January 2010, the Bank has made correction of errors from and restated the financial statements for the year ended. Restatements have included the following: - decrease of provisions for liabilities toward employees, provisions for liabilities toward Supervisory Board members and provision charges by the amount of KM 1,200 thousand, KM 47 thousand and KM 1,247 thousand, respectively; and - increase of due to customers and other liabilities by the amount of KM 9 thousand and KM 257 thousand, respectively, and decrease of other income by KM 266 thousand. 3.2 Correction of errors from the year ended 2007 Based on the decision of the Banking agency of the Federation of Bosnia and Herzegovina instructing the Bank to correct the matters qualified in Independent Auditors Report for the year ended 2007, the Bank derecognized the assets and liabilities from its balance sheet on 30 August. The correction was made through the statement of changes in equity for the year ended. This was not in accordance with the International Accounting Standard 8: Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) that states that the effects of transactions and other events are recognized when they occur and that for the subsequently identified errors, the entity shall adjust the comparative balances for prior period or periods presented when the error has occurred; or adjust the opening balances of the assets, liabilities and equity for the earliest period presented. Accordingly, the balances of the property and equipment, other liabilities, revaluation reserves and accumulated losses as of 1 January were overstated by the amounts of KM 3,778 thousand, KM 97 thousand, KM 3,701 thousand and KM 20 thousand, respectively. 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES Basis of presentation As required by local legislation, the Bank prepares financial statements in accordance with International Financial Reporting Standards ( IFRS ) as published by the International Accounting Standards Board and as modified by the regulatory requirements prescribed by the Banking Agency of the Federation of Bosnia and Herzegovina ( FBA ) with respect to the calculation of provision for impairment of financial instruments. The financial statements have been prepared on the historical cost basis except for the revaluation of certain noncurrent assets and financial instruments. The principal accounting policies are set out below. The financial statements are presented in thousands of Convertible mark (KM 000) which is the functional currency of the Bank. The financial statements are prepared on an accrual basis of accounting, under the going concern assumption. Certain amounts in the previous year financial statements have been reclassified to conform to the current year presentation. Privredna banka Sarajevo d.d. Sarajevo 11

14 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Basis of presentation (continued) The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. These estimates are based on the information available as at the reporting period date and actual results could differ from those estimates. The Bank maintains its books of accounts and prepares financial statements for regulatory purposes in accordance with the regulations of the Federal Banking Agency ( FBA ) and Law on Banks of the Federation of Bosnia and Herzegovina. The Bank considers that it operates in a single business segment, and a single geographical segment, that is the provision of banking services in Bosnia and Herzegovina. Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit and loss, are recognized within interest and similar income and interest expense and similar charge in the income statement using the effective interest rate method. Fee and commission income and expense Fees and commissions consist mainly of fees earned on domestic and foreign payment transactions, and fees for loans and other credit instruments issued by the Bank. Fees for payment transactions are recognized in the period when services are rendered. Loan origination fees, after approval and drawdown of loans, are deferred (together with related direct costs) and recognized over the loans duration. Employee benefits On behalf of its employees, the Bank is paying pension and health insurance on and from salaries, which are calculated on the gross salary paid, as well as taxes, which are calculated on the net salary paid. The Bank is paying the above contributions into the pension and health funds, as per the set legal rates during the course of the year on the gross salary paid. In addition, meal allowances, transport allowances and vacation bonuses are paid in accordance with the local legislation. These expenses are recorded in the income statement in the period in which the salary expense is incurred. Retirement severance payments The Bank makes provision for retirement severance payments of minimum three salaries of the employee in question paid in the preceding month or three average salaries of the Federation of Bosnia and Herzegovina for the preceding month, depending on what is more favorable to the employee. Privredna banka Sarajevo d.d. Sarajevo 12

15 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax expense is based on taxable income for the year. Taxable income differs from net income as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting period date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting period date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt within equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Bank has the ability and intention to settle on a net basis. The Bank is subject to various indirect taxes which are included in administrative expenses. Cash and cash equivalents For the purpose of reporting cash flows, cash and cash equivalents are defined as cash, balances with the Central Bank of Bosnia and Herzegovina ( CBBH ), current accounts with other banks and cash at hand. Cash and cash equivalents excludes the compulsory minimum reserve with the Central Bank as these funds are not available for the Bank s day to day operations. The compulsory minimum reserve with the CBBH is a required reserve to be held by all commercial banks licensed in Bosnia and Herzegovina. Financial assets Financial assets are recognized and derecognized on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the instrument within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. Financial assets are classified into the following specified categories: financial assets as at fair value through profit or loss (FVTPL), available-for-sale (AFS), held-to-maturity investments, and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. For current operations, the Bank uses three categories of financial assets, for which basis of accounting is disclosed below. Privredna banka Sarajevo d.d. Sarajevo 13

16 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Financial assets (continued) Method of effective interest rate The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognized on an effective interest basis for financial instruments: held-to-maturity investments, availablefor-sale and loans and receivables. Loans and receivables Loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. AFS financial assets Listed shares and listed redeemable notes held by the Bank that are traded in an active market are classified as being AFS and are stated at fair value. Fair value is determined in the manner described in the Note 33, point j). Gains and losses arising from changes in fair value are recognized directly in equity in the investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest rate method and foreign exchange gains and losses on monetary assets, which are recognized directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in the investments revaluation reserve is included in profit or loss for the period. Dividends on AFS equity instruments are recognized in profit or loss when the Bank s right to receive payments is established. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the reporting period date. The change in fair value attributable to translation differences that result from a change in amortized cost of the asset is recognized in profit or loss, and other changes are recognized in equity. Financial assets at FVTPL Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling in the near future; or it is a part of an identified portfolio of financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking. Privredna banka Sarajevo d.d. Sarajevo 14

17 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Financial assets (continued) Financial assets at FVTPL (Continued) A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or 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 Bank'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. Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset. Fair value is determined in the manner described in Note 33, point j). Impairment of financial assets Impairment of loans FBA rules require banks to make provision for impairment losses on loan portfolio, including 2% of general provision, by using a matrix system based on number of days of overdue, as follows: Overdue days From To Category % of provision 0 30 A 2% B 5% - 15% C 16% - 40% D 41% - 60% 271 and more E 100% Impairment of financial assets other than loans Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each reporting period date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For all other financial assets objective evidence of impairment could include: significant financial difficulty of the counterparty; or default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. Privredna banka Sarajevo d.d. Sarajevo 15

18 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Financial assets (continued) Impairment of financial assets (continued) Impairment of financial assets other than loans (continued) With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognized. In respect of AFS equity securities, any increase in fair value subsequent to an impairment loss is recognized directly in equity. Derecognition of financial assets Bank derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank continues to recognize the financial asset. Financial liabilities and equity instruments issued by the Bank Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Bank are recorded at the proceeds received, net of direct issue costs. Financial guarantee contract liabilities Financial guarantee contract liabilities are measured initially at their fair values and are subsequently measured at the higher of: the amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; or the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies set out at above. Financial liabilities Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. The Bank creates one category of financial liabilities, for which basis of accounting is disclosed below. Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. Privredna banka Sarajevo d.d. Sarajevo 16

19 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Financial liabilities and equity instruments issued by the Bank (continued) Financial liabilities (continued) Other financial liabilities (continued) The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Derecognition of financial liabilities The Bank derecognizes financial liabilities when, and only when, the Bank s obligations are discharged, cancelled or they expire. Property and equipment Property is stated in the balance sheet at its revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of the reporting period. Any revaluation increase arising on the revaluation of such property is recognised in other comprehensive income, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such property is recognised in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued property is recognised in profit or loss. Equipment is stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes the purchase price and directly associated cost of bringing the asset to a working condition for its intended use. Maintenance and repairs, replacements and improvements of minor importance are expensed as incurred. Significant improvements and replacement of assets are capitalized. Gains or losses on the retirement or disposal of property and equipment are included in the income statement for the period in which they occur. Properties in the course of construction are carried at cost, less impairment loss, if any. Depreciation commences when the assets are ready for their intended use. Depreciation is calculated on a straight-line basis over the estimated useful life of the applicable assets. Estimated depreciation rates were as follows: Buildings 1.3% Computers and other equipment 7% - 20% Software 20% Revaluation reserves Revaluation reserves included in equity in respect of revalued items of property and equipment may be transferred directly to retained earnings when the assets are derecognized. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the revaluation reserves may be transferred as the assets are used by the Bank. In such a case, the amount of the reserve transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. Transfers from revaluation reserves to retained earnings are not made through profit or loss. Privredna banka Sarajevo d.d. Sarajevo 17

20 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Property and equipment (continued) Impairment At each reporting period date, the Bank reviews the carrying amounts of its property and equipment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Recoverable amount is the greater of net selling price 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. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately, unless the relevant asset is land or buildings other than investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Intangible assets Intangible assets are measured initially at purchase cost and are amortized on a straight-line basis over their estimated useful lives. Investment property Investment property, which is property held to earn rentals and/or for capital appreciation, is measured initially at its cost, including transaction costs. Subsequent to initial recognition, investment property is measured at fair value. Gains and losses arising from changes in the fair value of investment property are included in profit or loss in the period in which they arise. Foreign currency translation Transactions in foreign currencies are initially recorded at the official exchange rates prescribed by the Central Bank of Bosnia and Herzegovina on the dates of the transactions. Monetary assets and liabilities are translated at the rates prevailing on the reporting period date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Profits and losses arising on conversion are included in the income statement for the period. The Bank values its assets and liabilities by middle rate of Central Bank of Bosnia and Herzegovina valid at the date of balance sheet, which approximate market rates. The principal rates of exchange set forth by the Central Bank and used in the preparation of the Bank s balance sheet at the reporting dates were as follows: EUR 1 = KM USD 1 = KM EUR 1 = KM USD 1 = KM Privredna banka Sarajevo d.d. Sarajevo 18

21 for the year ended 4. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Provisions Provisions are recognized when the Bank has a present obligation as a result of a past event, and it is probable that the Bank will be required to settle that obligation. Management of the Bank estimates the provisions based at the best estimate of expenditure to settle the Bank s obligation. Provisions are discounted to present value where the effect is material. 5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Bank s accounting policies, which are described in Note 4, the Management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Useful lives of property and equipment As described at Note 4 above, the Bank reviews the estimated useful lives of property and equipment at the end of each annual reporting period. Impairment losses on loans and advances As described at Note 4 above, the Bank assessed indicators for impairment by applying the established loss percentages to aged loans, grouped by the number of days overdue in accordance with the FBA regulations. Fair value of derivatives and other financial instruments As described in Note 33, point j), the Management uses its judgment in selecting an appropriate valuation technique for financial instruments not quoted in an active market. Valuation techniques commonly used by market practitioners are applied. Financial instruments, other than loans, are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market prices or rates. The estimation of fair value of unlisted shares includes some assumptions not supported by observable market prices or rates. Privredna banka Sarajevo d.d. Sarajevo 19

22 for the year ended 6. GLOBAL MARKET CRISIS The Bank has been impacted by the recent financial crisis and deteriorating economic conditions. Due to the current global crisis in the market and its effects on the local market in Bosnia and Herzegovina, the Bank will still probably operate in difficult and uncertain economic environment in 2010, and possibly beyond. The impact of this crisis on the Bank s business operations is currently not possible to fully predict and therefore there is an element of general uncertainty. So far, the ongoing financial crisis has had a limited impact on the financial position and performance of the Bank, mainly due to the internal risk management policies and regulatory restrictions. The Bank monitors closely the credit, liquidity, interest rate and foreign exchange risks on a regular basis. The deteriorating economic situation in the country will probably impact the position of certain industries and the abilities of some clients to meet their loan obligations. This may consequently influence the amount of the Bank s provisions for impairment losses in 2010 and other areas that require estimates to be made by management, including the valuation of collateral and of securities. The financial statements contain significant estimates with respect to impairment charges, collateral valuation and the fair value of securities. Actual results may differ from these estimates. The key priorities of the Bank in 2010 will be attention to the management of the financial portfolio adjusting to the changing economic environment and maintaining the Bank s position on the market. 7. INTEREST AND SIMILAR INCOME Companies 3, Individuals 1,607 1,403 Banks 213 1,186 5,004 3, INTEREST EXPENSE AND SIMILAR CHARGES Companies 1, Individuals Banks , FEE AND COMMISSION INCOME Fees from payment transactions within the country 3,568 2,989 Fees from conversion transactions Fees from guarantees issued Fees from on-lending activities Other fee and commission income ,409 3,878 Privredna banka Sarajevo d.d. Sarajevo 20

23 for the year ended 10. OTHER OPERATING INCOME (Restated) Rent income Dividend received 71 7 Gain on disposal of property and equipment 11 - Liabilities written-off 3 9 Other income PERSONNEL EXPENSES Net salaries 2,056 1,612 Taxes and contributions 1,538 1,143 Other ,404 3,502 The number of employees of the Bank as of and was 195 and 177, respectively. 12. OTHER ADMINISTRATIVE EXPENSES Professional services 1, Advertising and marketing Rent Fuel and energy Cost of material Telecommunication costs Maintenance Litigations Fees to Supervisory Board Members Travel costs Membership fees Insurance Other costs ,010 3,116 Privredna banka Sarajevo d.d. Sarajevo 21