Joint Stock Commercial Bank "Yapi Kredi Bank Moscow" (Closed Joint-Stock Company) Financial statements

Transcription

1 Joint Stock Commercial Bank "Yapi Kredi Bank Moscow" (Closed Joint-Stock Company) Financial statements Year ended Together with independent auditors report

2 Financial statements Contents Independent auditors' report Financial statements Statement of financial position... 1 Statement of comprehensive income... 2 Statement of changes in equity... 3 Statement of cash flows... 4 Notes to financial statements 1. Principal activities Basis of preparation Summary of accounting policies Significant accounting judgments and estimates Adoption of new or revised standards and interpretations New accounting pronouncements Cash and cash equivalents Due from other banks Loans and advances to customers Investment securities available for sale Property and equipment and intangible assets Other assets Due to other banks Amounts due to customers Promissory notes issued Other liabilities Share capital Interest income and expense Fee and commission income and expense Administrative and other operating expenses Income tax Financial risk management Capital management Commitments and contingencies Derivative financial instruments Fair value of financial instruments Related party transactions... 33

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5 Financial statements Statement of comprehensive income (thousands of Russian Rubles) Notes 2010 Interest income , ,032 Interest expense 18 (60,276) (73,104) Net interest income 295, ,928 Allowance for impairment of loans 9 (40,746) (358,300) Net interest income after allowance for impairment of loans 255,113 14,628 Fees and commissions income 19 98, ,136 Fees and commission expense 19 (4,386) (5,296) Gains less losses arising from derivative financial instruments (1,775) 39,259 Gains less losses arising from dealing in foreign currencies 62,843 44,580 Losses net of gains from translation of foreign currency 17,422 (23,145) Gains less losses on disposal of investment securities available-for-sale (335) 13,852 Provisions for credit-related commitments 16 (6,209) Other operating income 4,981 1,588 Administrative and other operating expenses 20 (201,087) (193,577) Profit before income tax expense 225,222 18,025 Income tax expenses 21 (46,682) (3,502) Profit for the year 178,540 14,523 Other comprehensive income: Investments available-for-sale Unrealized (losses)/gains on investment securities available-for-sale (4,564) 54,040 Realized gains/(losses) on investment securities available-for-sale reclassified to the income statement 335 (13,852) Income tax relating to components of other comprehensive income (8,038) Other comprehensive income for the year (3,383) 32,150 Total comprehensive income for the year 175,157 46,673 The accompanying notes on pages 5 to 33 are an integral part of these financial statements. 2

6 Financial statements Statement of changes in equity (thousands of Russian Rubles) Share capital Share premium Fair value re-measurement reserve for investment securities available-for-sale Retained earnings Total equity 1 January ,201 67,475 (33,308) 741,393 1,685,761 Profit for the year 14,523 14,523 Other comprehensive income 32,150 32,150 Total comprehensive income 32,150 14,523 46, ,201 67,475 (1,158) 755,916 1,732,434 Profit for the year 178, ,540 Other comprehensive income (3,383) (3,383) Total comprehensive income (3,383) 178, , ,201 67,475 (4,541) 934,456 1,907,591 The accompanying notes on pages 5 to 33 are an integral part of these financial statements. 3

7 Financial statements Statement of cash flows (thousands of Russian Rubles) Notes 2010 Cash flows from operating activities Interest received 369, ,308 Interest paid (57,721) (84,786) Fees and commissions received 98, ,137 Fees and commissions paid (4,386) (5,053) Gains from foreign currency and derivative financial instruments 61,068 83,839 Other operating income received 4,981 1,587 Total administrative and other operating expenses (182,127) (187,964) Cash flows from operating activities before changes in operating assets and liabilities 289, ,068 Net decrease/(increase) in obligatory reserves with the Central Bank of the Russian Federation 3,064 (36,725) Net increase in amounts due from other banks (162,460) (15,462) Net increase in loans and advances to customers (88,725) (69,016) Net decrease in other assets 2,720 3,937 Net increase/(decrease) in amounts due to other banks 683,570 (835,406) Net decrease in amounts due to customers (535,613) (19,021) Net increase/(decrease) in promissory notes issued (273,596) 381,471 Net increase in other liabilities 2,214 2,070 Net cash used in operating activities before income tax (79,268) (208,084) Income tax paid (6,880) (40,553) Net cash flows used in operating activities (86,148) (248,637) Cash flows from investing activities Purchase of investment securities (137,418) Proceeds from sale and redemption of investment securities 147, ,475 Purchase of intangible assets 11 (10,058) Purchase of property, equipment 11 (794) (5,897) Proceeds from sale of property and equipment 397 Net cash from investing activities 9, ,917 Effect of exchange rate changes on cash and cash equivalents 15,009 (3,589) Net decrease in cash and cash equivalents (61,616) (76,309) Cash and cash equivalents, beginning 7 1,525,891 1,602,200 Cash and cash equivalent, ending 7 1,464,275 1,525,891 The accompanying notes on pages 5 to 33 are an integral part of these financial statements. 4

8 1. Principal activities Joint Stock Commercial Bank "Yapi Kredi Bank Moscow" (Closed Joint Stock Company) (the "Bank") was formed on 21 May 1993 as a closed joint stock company under the laws of the Russian Federation. The Bank operates under a general banking license issued by the Central Bank of Russia ("CBR") on 1 November The Bank accepts deposits from the public and extends credit, transfers payments in Russia and abroad, exchanges currencies and provides other banking services to its commercial and retail customers. Its main office is in Moscow. The Bank s registered legal address is 1 bld, 2 Goncharnaya naberezhnaya, Moscow, , Russian Federation. Starting from 2005, the Bank is a member of the deposit insurance system. The system operates under the Federal laws and regulations and is governed by the State Corporation "Agency for Deposits Insurance". In and 2010, insurance covers the Bank s liabilities to individual depositors in the amount up to RUB 700 thousand for each individual in case of business failure or revocation of the CBR banking license. As of and 2010, the following shareholders owned the outstanding shares. Shareholder, % 2010, % YAPI VE KREDI BANKSI A.S YAPI KREDI FINANSAL KIRALAMA Total The Bank is ultimately controlled by Koç Holding A.S. (50.0%) and UniCredit Bank Austria AG (50.0%). 2. Basis of preparation General These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The Bank is required to maintain its records and prepare its financial statements for regulatory purposes in Russian Rubles in accordance with the Russian accounting and banking legislation and related instructions ("RAL"). These financial statements are based on the Bank s RAL books and records, as adjusted and reclassified in order to comply with IFRS. The financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. For example, available-for-sale securities and derivative financial instruments have been measured at fair value. These financial statements are presented in thousands of Russian Rubles ( RUB ), unless otherwise indicated. Inflation accounting The Russian economy was considered hyperinflationary until As such, the Group applied IAS 29 Financial Reporting in Hyperinflationary Economies. The effect of applying IAS 29 is that non-monetary items, including components of equity, were restated to the measuring units current at 2002 by applying the relevant inflation indices to the historical cost, and that these restated values were used as a basis for accounting in subsequent periods. 3. Summary of accounting policies Basis of presentation. These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") under the historical cost convention, as modified by the revaluation of available-for-sale financial assets. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated (Note 5). Financial instruments key measurement terms. Depending on their classification financial instruments are carried at fair value or amortized cost as described below. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current ask price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Bank may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm s length basis. 5

9 3. Summary of accounting policies (continued) Valuation techniques such as discounted cash flows models or models based on recent arms length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortized cost is the amount at which the financial instrument was recognized at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortization of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortized discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items of the statement of financial position. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest re-pricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortized over the whole expected life of the instrument. The present value calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate. Initial recognition of financial instruments. Derivative financial instruments are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. Gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at the settlement date, which is the date when the asset is delivered to the Bank or by the Bank. All other purchases are recognized when the company enters into an agreement related to such financial instrument. Derecognition of financial assets. The Bank derecognizes financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. Offsetting. Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. 'Day 1' profit. Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a 'Day 1' profit) in the income statement. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the statement of operations when the inputs become observable, or when the instrument is derecognized. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to insignificant changes in value. Cash and cash equivalents comprise all interbank deposits with an original maturity of three months or less. The amounts that have any restrictions on use for the period over three months at the moment of their provision are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortized cost. Obligatory reserves with the CBR. Obligatory reserves with the CBR are carried at amortized cost and represent noninterest bearing obligatory reserve deposits which are not available to finance the Bank's day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the cash flow statement. 6

10 3. Summary of accounting policies (continued) Trading securities are recorded at fair value. Interest earned on trading securities calculated using the effective interest method is presented in the income statement as interest income. All other elements of the changes in the fair value and gains or losses on derecognition are recorded in profit or loss as gains less losses from trading securities in the period in which they arise. Amounts due from other banks. Amounts due from other banks are recorded when the Bank advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivables due on fixed or determinable dates. Amounts due from other banks are carried at amortized cost. Loans and advances to customers. Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivables. Loans and advances to customers are carried at amortized cost. Renegotiated loans. Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. The accounting treatment of such restructuring is as follows: If the currency of the loan has been changed, the old loan is derecognized and the new loan is recognized in the statement of financial position; If the loan restructuring is not caused by the financial difficulties of the borrower, the Bank recalculates the effective interest rate. If the loan restructuring is due to the financial difficulties of the borrower and the loan is deemed impaired after this restructuring, the Bank recognizes the difference between the present value of the future cash flows discounted using the original effective interest rate and the carrying amount before the restructuring as an expense for impairment in the reporting period. If the loan is not impaired after the restructuring, the Bank recalculates the effective interest rate. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original or current effective interest rate. Impairment of financial assets carried at amortized cost. Impairment losses are recognized in the statement of comprehensive income when incurred as a result of one or more events ("loss events") that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. The primary factors that the Bank considers whether a financial asset is impaired are its overdue status and realizability of related collateral, if any. The following principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: breach of contract terms, such as a default or delinquency in interest or principal payments other than a delay caused by the settlement systems; the borrower experiences a significant financial difficulty as evidenced by borrower s financial information that the Bank obtains; the borrower considers bankruptcy or a financial reorganization; significant claims from tax and other government bodies; there is adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; the value of collateral significantly decreases as a result of deteriorating market conditions; or substantial drop of turnover. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. 7

11 3. Summary of accounting policies (continued) If the terms of a financial asset held at amortized cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognized through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 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 (such as an improvement in the debtor s credit rating), the previously recognized impairment loss shall be reversed by adjusting an allowance account through the statement of comprehensive income. Uncollectible financial assets are written off against the impairment allowance, after all the necessary procedures for their full or partial recovery have been completed and the ultimate loss amount has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in the statement of comprehensive income for the year. Based on the professional judgment of the Management Board and/or Board of Directors the final conclusion for classification of asset as uncollectible is taken and then, write-off of the loss processed. Credit related commitments. The Bank assumes credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable commitments to make payments in the event of the client's default to any third party and are exposed to the same credit risk as loans. Financial guarantees and credit related commitments are initially recorded at fair value which is normally substantiated by the amount of fees and commissions received. Such amount is amortized on a straight-line basis throughout the effective term of the liability, except credit related commitments, when it is likely that the Bank will enter into a specific loan agreement and will not plan to sell the loan shortly after it has been extended. Such fee and commission income pertaining to credit related commitments are recorded in deferred income and are included in the loan carrying amount at initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the unamortized balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of the reporting period. Investment securities available-for-sale. This category includes investment securities which are intended to be held for an indefinite period of time and which can be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Bank classifies investments as available-for-sale at the time of purchase. Investment securities available-for-sale are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognized in the statement of comprehensive income. All other elements of changes in the fair value including foreign currency translation are recognized in other comprehensive income until the investment is derecognized or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit and loss for the year. Impairment losses are recognized in the statement of comprehensive income when incurred as a result of one or more events ("loss events") that occurred after the initial recognition of investment securities available for sale. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognized in the income statement is reclassified from other comprehensive income to profit and loss for the year. Impairment losses on equity instruments are not reversed and any subsequent gains are recognized in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as 'available-for-sale' increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the profit or loss, the impairment loss is reversed through the statement of comprehensive income for the year. Property and equipment. Property and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 2002 for assets acquired prior to 1 January 2003 less accumulated depreciation and provision for impairment, where required. Equipment acquired after 1 January 2003 is stated at cost less accumulated depreciation and impairment loses, if any. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of property and equipment items are capitalized and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of property and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognized in statement of comprehensive income for the year. An impairment loss recognized for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. 8

12 3. Summary of accounting policies (continued) Gains and losses on disposals determined by comparing proceeds with carrying amount are recognized in statement of comprehensive income for the year (within other operating income or expenses). Depreciation. Depreciation on other items of property and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives: Useful life, years Buildings 40 Motor vehicles and equipment 7 Computer equipment 5 The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Bank expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting period. Intangible assets. Intangible assets of the Bank have definite useful life and mainly include capitalized computer software. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. Development costs that are directly associated with identifiable and unique software controlled by the Bank are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is expected. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalized computer software is amortized on a straight-line basis over expected useful lives of 5 years. Operating leases. Where the Bank is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Bank, the total lease payments are charged to the statement of comprehensive income for the year (rental expense) on a straight-line basis over the period of the lease. Due to other banks. Amounts due to other banks are recorded when cash or other assets are advanced to the Bank by counterparty banks. Such amounts are carried at amortized cost. Amounts due to customers. Amounts due to customers are non-derivative liabilities to individuals, state or corporate customers and are carried at amortized cost. Debt securities issued. Debt securities issued include promissory notes issued by the Bank. Debt securities are stated at amortized cost. Derecognition of financial liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement. Derivative financial instruments. Derivative financial instruments including forex contracts are recognized at fair value. All derivative financial instruments are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivative instruments are included in profit and loss for the year (gains less losses on derivative financial instruments). The Bank does not apply hedge accounting. Income taxes. Income taxes have been provided for in the financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge/credit comprises current tax and deferred tax and is recognized in the statement of comprehensive income for the year except if it is recognized in other comprehensive income or directly in equity because it relates to transactions that are also recognized, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorized prior to filing relevant tax returns. Taxes, other than on income, are recorded within administrative and other operating expenses. 9

13 3. Summary of accounting policies (continued) Deferred income taxes are provided using the balance sheet liability method for tax loss carry forward and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax assets and liabilities are measured at tax rates enacted or substantively enacted at the end of the reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilized. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilized. Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events. There is also the possibility of an outflow of economic benefits in settlement and the liability amount can be reliably measured. Other payables. Trade payables are recognized when the counterparty has fulfilled its obligations and are carried at amortized value. Share capital. Ordinary shares are classified as equity. Any excess of the fair value of consideration received over the par value of shares issued is recorded in equity as share premium. Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accruals basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees and commissions pertaining to the effective interest rate include commissions paid or received from origination or acquisition of a financial asset or issue of a financial liability (e.g., commission for creditworthiness assessment, measurement or recognition of guarantees or collateral, settlement of instruments terms and conditions, and processing transaction documents). Commissions received by the Bank for a commitment to extend a loan at market rates are an integral part of an effective interest rate, when it is likely that the Bank will enter into a specific loan agreement and will not plan to sell the loan shortly after it has been extended. The Bank does not classify a commitment to extend a loan as financial liability recognized at fair value in the statement of comprehensive income. When loans and other debt instruments become doubtful of collection, they are written down to present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Foreign currency translation. The Bank s functional and presentation currency is the national currency of the Russian Federation, Russian Rouble ("RUB"). Foreign exchange gains and losses resulting from the settlement of transactions are recognized in statement of comprehensive income for the year (as foreign exchange translation gains less losses). Translation at year-end rate does not apply to non-monetary items that are measured at historical cost. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss. At, the principal rate of exchange used for translating foreign currency balances was Rubles to 1 USD (2010: Rubles to 1 USD). Staff costs and related contributions. Wages, salaries, contributions to the Russian state pension and social insurance funds, paid annual leaves and sick leaves, bonuses and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Bank. The Bank has no legal or constructive obligation to make pension or similar benefit payments beyond the unified social tax. 10

14 4. Significant accounting judgments and estimates The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and assumptions are continuously assessed and are based on management's experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Most significant judgments which affect the amounts recorded in the financial statements, and estimates which may result in significant adjustment of the carrying value of assets and liabilities in the next financial year are presented below: Impairment losses on loans and advances. The Bank regularly reviews its loan portfolio to assess impairment. In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Deferred tax asset recognition. A deferred tax asset is that amount of income tax which may be offset against future income taxes and is recorded in the statement of financial position. A deferred tax asset is recorded only to the extent that the realization of the related tax benefit is probable. Future taxable income and tax benefits, which are likely to arise in future, are determined based on a mid-term business plan prepared by management relying on a moderately optimistic scenario for the Russian economy development, including a range of measures by the Russian Government aimed at ensuring macroeconomic balance, stability of the national currency, gradual reduction of inflation rate, investment and customer demand recovery. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations. Initial recognition of related party transactions. In the normal course of business the Bank enters into transactions with related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgment is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgment is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note Adoption of new or revised standards and interpretations Certain new IFRS and IFRIC interpretations became effective for the Bank from 1 January. The principal effects of these changes are as follows: IAS 24 Related Party Disclosures (revised). The revised IAS 24, issued in November 2009 and effective for annual periods beginning on or after 1 January, simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. Previously, an entity controlled or significantly influenced by a government was required to disclose information about all transactions with other entities controlled or significantly influenced by the same government. The revised standard requires disclosure about these transactions only if they are individually or collectively significant. Revised IAS 24 did not have any impact on the information disclosed in the financial statements. Amendments to IAS 32 Financial Instruments: Presentation Classification of Rights Issues. The amendment was issued by the IASB in October 2009 and is effective for annual periods beginning on or after 1 February The amendment alters the definition of a financial liability to classify rights issues as equity instruments. This is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity s non-derivative equity instruments, in order to acquire a fixed number of the entity s own equity instruments for a fixed amount in any currency. This amendment did not have any impact on the Bank's financial statements. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. IFRIC Interpretation 19 was issued in November 2009 and is effective for annual periods beginning on or after 1 July The Interpretation clarifies the accounting when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor to extinguish all or part of the financial liability. IFRIC 19 did not have any material effect on the Bank's financial statements. Improvements to IFRSs. In May 2010, the IASB issued the third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. Most of the amendments are effective for reporting periods beginning on or after 1 January. There are separate transitional provisions for each standard. 11

15 5. Adoption of new or revised standards and interpretations (continued) Amendments included in May 2010 "Improvements to IFRS" had an impact on the accounting policies, financial position or performance of the Bank, as described below. IFRS 7 Financial Instruments: Disclosures: introduces the amendments to quantitative and credit risk disclosures. The additional requirements had minor impact as information is readily available. Amendments to IFRS 1, IAS 3, IAS 1, IAS 27 and IFRIC 13 had no impact on the accounting policies, financial position or performance of the Bank. Except as described above, the new standards and interpretations had no significant effect on the Bank s financial statements. 6. New accounting pronouncements Standards and interpretations issued but not yet effective IFRS 9 Financial Instruments (first phase) In November 2009 and 2010, the IASB issued the first phase of IFRS 9 Financial Instruments. This Standard will eventually replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 becomes effective for annual periods beginning on or after 1 January The first phase of IFRS 9 introduces new requirements on classification and measurement of financial instruments. In particular, for subsequent measurement all financial assets are to be classified at amortized cost or at fair value through profit or loss with the irrevocable option for equity instruments not held for trading to be measured at fair value through other comprehensive income. There is a new requirement for financial liabilities recognized through profit or loss using a fair value option that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income. The Bank now evaluates the impact of the adoption of new standard and considers the initial application date. IFRS 10 Consolidated Financial Statements IFRS 10 Consolidated Financial Statements establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. In addition IFRS 10 introduces specific application guidance for agency relationships. The standard also contains accounting requirements and consolidation procedures, which are carried over unchanged from IAS 27. IFRS 10 replaces the consolidation requirements in SIC-12 Consolidation Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after 1 January Earlier application is permitted. The Bank now evaluates the possible impact of IFRS 10 on its financial position and performance. IFRS 11 Joint Arrangements IFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method. IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities Non-monetary Contributions by Venturers and becomes effective for annual periods beginning on or after 1 January Earlier application is permitted. The Bank now evaluates the possible impact of IFRS 11 on its financial position and performance. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 contains all disclosure requirements that were previously included in IAS 27 related to consolidated financial statements, as well as all disclosure requirements that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required for such entities. This standard becomes effective for annual periods beginning on or after 1 January Earlier application is permitted. Adoption of the standard will have no effect on financial position or performance, or disclosures of the Bank. IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard becomes effective for annual periods beginning on or after 1 January Earlier application is permitted. The adoption of IFRS 13 may have effect on the measurement of the Bank s assets and liabilities accounted for at fair value. The Bank now evaluates the possible impact of IFRS 13 on its financial position and performance. IAS 27 Separate Financial Statements (revised in ) As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The amendment becomes effective for annual periods beginning on or after 1 January

16 6. New accounting pronouncements (continued) IAS 28 Investments in Associates and Joint Ventures (revised in ) As a consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures. The revised standard describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after 1 January Amendments to IFRS 7 Financial Instruments: Disclosures In October 2010, the IASB issued the amendments to IFRS 7 effective for annual periods beginning on or after 1 July. The amendment introduces additional disclosure requirements for transferred financial assets that are not derecognized to enable the user of the Group s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the users to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognized assets. The amendment affects disclosure only and has no impact on the Bank s financial position or performance. Amendments to IAS 12 Income Taxes Deferred Taxes: Recovery of Underlying Assets In December 2010, the IASB issued amendments to IAS 12 effective for annual periods beginning on or after 1 January The amendment clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. Furthermore, it introduces the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16 should always be measured on a sale basis. The Bank now evaluates the possible impact of this amendment. Amendment to IAS 19 Employee Benefits The amendment to IAS 19 becomes effective for annual reporting periods beginning on or after 1 January The amendment introduces significant changes to the method of accounting for employee benefits, including the removal of the option for deferred recognition of changes in pension plan assets and liabilities (known as the "corridor approach"). In addition, these amendments will limit the changes in the net pension asset (liability) recognized in profit or loss to net interest income (expense) and service costs. The amendment will have no impact on the Bank's financial position or performance. Amendment to IAS 1 Presentation of Financial Statements Presentation of Other Comprehensive Income The amendment to IAS 1 becomes effective for annual periods beginning on or after 1 July The amendment changes the grouping of items presented in other comprehensive income. Items that could be reclassified to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and will have no impact on the Bank's financial position or performance. 7. Cash and cash equivalents 2010 Cash on hand 55,076 39,555 Cash balances with the CBR (other than obligatory reserves) 87, ,026 Correspondent accounts with banks and other financial institutions - Russian Federation 97,330 97,650 - other countries 70,362 37,560 Deposits with other banks with an original maturity of less than three months 1,154, ,100 Total cash and cash equivalents 1,464,275 1,525,891 The Bank evaluates the quality of cash and cash equivalents on the basis of ratings assigned by Standard & Poor s, Moody s or Fitch rating agencies. 13

17 7. Cash and cash equivalents (continued) As at, the credit quality of cash and cash equivalents was as follows: Cash balances with the CBR Correspondent accounts Placements with other banks Current and not impaired - the Central Bank of Russia 87,348 87,348 - A+ to A- rated 59,261 59,261 - BBB+ to BBB- rated 11, , ,451 - BB+ to BB- rated 7, , ,996 - another rating 89,143 89,143 Total cash and cash equivalents, excluding cash on hand 87, ,692 1,154,159 1,409,199 As at 2010, the credit quality of cash and cash equivalents was as follows: Cash balances with the CBR Correspondent accounts Placements with other banks Current and not impaired - the Central Bank of Russia 454, ,026 - AA+ to AA- rated 14,211 14,211 - A+ to A- rated 9, , ,938 - BBB+ to BBB- rated 111, , ,133 - BB+ to BB- rated 150, ,028 Total cash and cash equivalents, excluding cash on hand 454, , ,100 1,486,336 As at, cash and cash equivalents comprised deposits with other banks with an original maturity of less than three months in the amount of RUB 482,944 thousand, granted to three banks (large borrowers), (33.0% of total cash and cash equivalents) (2010: RUB 575,657 thousand or 38.7% of total cash and cash equivalents). As at and 2010, fair values of cash and cash equivalents approximate their carrying values. In, the Bank did not conduct non-cash transactions. Total Total 8. Due from other banks Amounts due from other banks are not collateralized and have maturities of more than three months. The Bank analyses amounts due from other banks by credit quality in a similar way as cash and cash equivalents (refer to Note 7) Current and not impaired - BBB+ to BBB- rated 177,922 - not rated 15,462 Total due from other banks - current and not impaired 177,922 15,462 As at, the estimated fair value of due from other banks was RUB 177,949 thousand (2010: RUB 15,462 thousand). Refer to Note Loans and advances to customers 2010 Corporate loans 4,156,782 3,762,638 Loans to individuals 60, ,217 Total loans and advances to customers before impairment 4,216,796 3,980,855 Less: Allowance for loan impairment (790,509) (751,449) Total loans and advances to customers 3,426,287 3,229,406 14

18 9. Loans and advances to customers (continued) In, movements in the allowance for loan impairment were as follows: Corporate loans Loans to individuals Total Allowance for loan impairment as at 1 January 703,754 47, ,449 Charge for impairment during the year 40, ,746 Amounts written off during the year as uncollectible (1,686) (1,686) Allowance for loan impairment as at 742,770 47, ,509 Individual impairment 710,521 47, ,137 Collective impairment 32, , ,770 47, ,509 Gross amount of individually impaired loans before deducting any individually assessed impairment allowance 932,061 47, ,677 In 2010, movements in the allowance for loan impairment were as follows: Corporate loans Loans to individuals Total Allowance for loan impairment as at 1 January ,622 27, ,221 Charge for impairment during the year 326,284 32, ,300 Amounts written off during the year as uncollectible (335,152) (11,920) (347,072) Allowance for loan impairment as at ,754 47, ,449 Individual impairment 648,363 46, ,465 Collective impairment 55,391 1,593 56, ,754 47, ,449 Gross amount of individually impaired loans before deducting any individually assessed impairment allowance 706,982 58, ,904 Economic sector risk concentrations within the customer loan portfolio are as follows: 2010 Amount % Amount % Manufacturing 1,890, ,415, Real estate and construction 1,031, ,307, Tourism and transport 469, , Trade 443, , Financial services 210, Food industry 62, , Individuals 60, , Other 49, , Total loans and advances to customers before impairment 4,216, ,980, As at, the Bank's 9 borrowers (2010: 8 borrowers) each had a loan amount above RUB 160,000 thousand and accounted for the total aggregate loan amount of RUB 2,790,809 thousand, or 66% of loan portfolio before impairment (2010: RUB 1,944,216 thousand or 49%). Information about collateral as at is as follows: Corporate loans Loans to individuals Unsecured loans 707,417 3, ,812 Unsecured loans to related parties 300, ,000 Loans collaterized by: - cash deposits 75,000 75,000 - residential real estate 121,475 5, ,377 - real estate 748, ,344 - other realizable assets 391,487 9, ,710 - surety 1,813,059 41,494 1,854,553 Total loans and advances to customers before impairment 4,156,782 60,014 4,216,796 Total 15

19 9. Loans and advances to customers (continued) Information about collateral as at 2010 is as follows: Corporate loans Loans to individuals Unsecured loans 442, ,688 Unsecured loans to related parties 300, ,000 Loans collaterized by: - cash deposits 335, , ,634 - residential real estate 50,260 6,236 56,496 - real estate 1,011,495 15,671 1,027,166 - other realizable assets 669,906 15, ,394 - surety 953,547 42, ,477 Total loans and advances to customers before impairment 3,762, ,217 3,980,855 If there are several types of collateral, with the aggregate collateral value exceeding the amount of the respective loan, the amount of outstanding loans was presented in the following way: it was allocated to different types of collateral in descending order of collateral liquidity. In this classification: cash deposits represent the best collateral and other assets are less adequate collateral. Other realizable assets are collateral, which, according to the Bank s management, may be sold in order to reduce losses in case of a loan default. Analysis by credit quality of loans outstanding as at is as follows: Corporate loans Loans to individuals Current and not impaired - Loans to large borrowers with a credit history over two years 2,384,465 2,384,465 - Loans to large new borrowers 620, ,000 - Loans to medium-size borrowers 181, ,175 - Loans to small borrowers 39,081 12,398 51,479 Total current and not impaired 3,224,721 12,398 3,237,119 Individually impaired loans (gross) - no overdue 252, ,151 - less than 30 days overdue 2,220 2, to 90 days overdue 15,166 15, to 180 days overdue 121,380 9, , to 360 days overdue 113,405 12, ,473 - over 360 days overdue 427,739 26, ,134 Total individually impaired loans before impairment 932,061 47, ,677 Total loans and advances to customers before impairment 4,156,782 60,014 4,216,796 Less allowance for impairment (742,770) (47,739) (790,509) Total loans and advances to customers 3,414,012 12,275 3,426,287 Unsecured loans are represented by loans to large borrowers with good credit history. Total Total 16

20 9. Loans and advances to customers (continued) Analysis by credit quality of loans outstanding as at 2010 is as follows: Corporate loans Loans to individuals Current and not impaired - Loans to large borrowers with a credit history over two years 2,483, ,534 2,621,186 - Loans to large new borrowers 213, ,338 - Loans to medium-size borrowers 211, ,746 - Loans to small borrowers 146,920 21, ,681 Total current and not impaired 3,055, ,295 3,214,951 Individually impaired loans (gross) - less than 30 days overdue 124,092 13, , to 90 days overdue 878 2,580 3, to 180 days overdue 3,125 4,414 7, to 360 days overdue 127,116 13, ,741 - over 360 days overdue 451,771 24, ,426 Total individually impaired loans before impairment 706,982 58, ,904 Total loans and advances to customers before impairment 3,762, ,217 3,980,855 Less allowance for impairment (703,754) (47,695) (751,449) Total loans and advances to customers 3,058, ,522 3,229,406 All borrowers with a credit amount of more than 3% of the Bank s equity are classified as large borrowers, with a loan amount between 1% and 3% of the equity as medium-size borrowers, with a credit amount less than 1% of the equity as small borrowers. The fair value of collateral in respect of individually impaired loans as at was as follows: Corporate loans Loans to individuals Fair value of collateral for individually impaired loans - real estate 348,766 5, ,668 - other realizable assets 101,255 9, ,478 - surety 57,819 31,919 89,738 Total 507,840 47, ,884 The fair value of collateral in respect of individually impaired loans as at 2010 was as follows: Corporate loans Loans to individuals Fair value of collateral for individually impaired loans - real estate 358,462 16, ,255 - other realizable assets 28,898 6,656 35,554 - surety 18,095 27,551 45,646 Total 405,455 51, ,455 The fair value of collateral is determined based on reports by independent appraisers which are updated at each reporting date on the basis of professional judgment of Bank's specialists using comparable sales method or any other comparative method based on observable market data. As at, the estimated fair value of loans and advances to customers was RUB 3,396,382 thousand (2010: RUB 3,226,650 thousand). Refer to Note 26. Interest income accrued on loans, individually determined to be impaired, for the year ended, comprised RUB 2,665 thousand (2010: RUB 220 thousand). Total Total Total 17