Poshtenska Banka AD Skopje. Financial Statements for the year ended 31 December 2007

Transcription

1 for the year ended 31 December 2007

2 Contents Auditors' report Balance sheet 2 Income statement 3 Statement of changes in equity 4 Statement of cash flows 5 Notes to the financial statement 6

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6 Income statement For the year ended 31 December In thousands of denars Note Interest income 7 53,420 60,986 Interest expense 7 (23,699) (24,645) Net interest income 29,721 36,341 Fee and commission income 8 239, ,870 Fee and commission expense 8 (39,972) (35,942) Net fee and commission income 199,679 67,928 Net foreign exchange gain Other operating income 9 22,196 16,104 22,321 16,104 Operating income 251, ,373 Net impairment loss on financial assets 14,15,18 (145,931) 5,617 Personnel expenses 10 (41,311) (47,244) Depreciation and amortisation 16,17 (14,165) (12,158) Other expenses 11 (73,179) (65,948) (Loss)/profit before income taxes (22,865) 640 Income tax expense 12 (1,492) (471) (Loss)/profit for the period (24,357) 169 The notes on pages 6 52 are an integral part of these financial statements. 3

7 Statement of changes in equity For the year ended 31 December In thousands of denars Share capital Statutory reserves Retained earnings Total Balance at 1 January ,959 51,888 8, ,231 Net profit for the period Total recognised income and expense Balance at 31 December ,959 51,888 8, ,400 Balance at 1 January ,959 51,888 8, ,400 Loss for the period - - (24,357) (24,357) Total recognised income and expense - - (24,357) (24,357) Appropriation to statutory reserve (169) - Balance at 31 December ,959 52,057 (15,973) 476,043 The notes on pages 6-52 are an integral part of these financial statements. 4

8 Statement of cash flows For the year ended 31 December In thousands of denars Note Cash flows from operating activities (Loss)/Profit for the period (24,357) 169 Adjustments for: Depreciation and amortisation 16,17 14,165 12,158 Net losses / (releases) due to impairment 14,15,18 145,931 (5,617) Impairment losses/ (releases) on off-balance sheet items 11 2,482 (29) Net interest income (29,721) (36,341) Dividend income (2,562) (278) Income tax (income)/expense 1, ,430 (29,467) Change in loans and advances to customers 14 (299,113) (13,630) Change in other assets (21,785) 45,119 Change in deposits from banks and other financial institutions ,728 Change in deposits from customers 20 (347,109) (100,668) Change in other liabilities and provisions and impairment provision related to off balance sheet items 22 (2,285) (12,918) (562,055) (77,836) Interest received 55,204 61,688 Interest paid (23,699) (20,630) Income tax received / (paid) (1,632) 14,942 Net cash used in operating activities (532,182) (21,836) Cash flows from investing activities Purchase of property and equipment 16 (14,459) (16,991) Purchase of intangible assets 17 (2,617) (143) Proceeds from investment securities ,330 (403,292) Dividends received 2, Net cash used in investing activities 288,816 (420,148) Net increase / (decrease) in cash and cash equivalents (243,366) (441,984) Cash and cash equivalents at 1 January 629,098 1,071,082 Cash and cash equivalents at 31 December , ,098 The notes on pages 6-52 are an integral part of these financial statements. 5

9 1. Reporting entity Poshtenska Banka AD Skopje ( the Bank ) is a joint stock company incorporated and domiciled in the Republic of Macedonia. The address of the Bank s registered office is as follows: St. 27 Mart b.b. (Mal Ring) 1000 Skopje Republic of Macedonia The main activities of the Bank are payment operation services in the country, commercial lending and receiving of deposits. For the purpose of providing payment operation services in the country the Bank has concluded contract with AD Makedonska Posta for utilising its branch network. 2. Basis of preparation (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). During the period the Bank adopted IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Capital Disclosures, which increased the level of disclosure in respect of financial instruments and capital, but had no impact on the reported profits or financial position of the Bank. In accordance with the transitional requirements of the standards, the Bank has provided full comparative information. (b) Basis of measurement The financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through profit or loss are measured at fair value; available-for-sale financial assets are measured at fair value; 6

10 2. Basis of preparation (continued) (c) Functional and presentation currency These financial statements are presented in Macedonian denars ( MKD ), which is the Bank s functional currency. Except as indicated, financial information presented in MKD has been rounded to the nearest thousand. (d) Use of estimates and judgments The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in note Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. Transactions in foreign currencies are translated to the respective functional currencies of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Nonmonetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments. 7

11 3. Significant accounting policies (continued) (a) Foreign currency transactions The foreign currencies the Bank deals with are predominantly Euro (EUR). The exchange rates used for translation at 31 December 2007 and 2006 were as follows: MKD MKD 1 EUR (b) Interest Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense presented in the income statement include: interest on financial assets and liabilities at amortised cost on an effective interest rate basis; interest on available-for-sale investment securities on an effective interest basis; Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income. (c) Fees and commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including financial services provided by the Bank in respect of foreign currency settlements, domestic payment operations, issuance of MKD guarantees and other services, are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. 8

12 3. Significant accounting policies (continued) (c) Fees and commission (continued) Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. (d) Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value changes, interest, dividends and foreign exchange differences. (e) Dividends Dividend income is recognised when the right to receive income is established. Dividends are reflected as a component of net trading income, or dividend income based on the underlying classification of the equity instrument. (f) Rental income Rental income from leased property is recognised in profit or loss on a straight-line basis over the term of the lease. (g) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. 9

13 3. Significant accounting policies (continued) (g) Income tax expense (continued) A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (h) (i) Financial assets and liabilities Recognition The Bank initially recognises loans and advances, deposits and borrowings on the date that they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. (ii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets, if any that is created or retained by the Bank is recognised as a separate asset or liability. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (iii) Offsetting Financial assets and liabilities are set off and the net amount is presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Bank s trading activity. (iv) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. 10

14 3. Significant accounting policies (continued) (h) (v) Financial assets and liabilities (continued) Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices for financial instruments traded in active markets. For all other financial instruments fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models. (vi) Identification and measurement of impairment At each balance sheet date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably. The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In assessing collective impairment the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount. 11

15 3. Significant accounting policies (continued) (h) (vi) Financial assets and liabilities (continued) Identification and measurement of impairment (continued) When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to profit or loss. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income. (vii) Designation at fair value through profit or loss The Bank has designated financial assets and liabilities at fair value through profit or loss when either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis; the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. Financial assets that have been designated at fair value through profit or loss include financial assets held-for-trading. (i) Cash and cash equivalents Cash and cash equivalents include cash balance on hand, demand deposits with banks, cash deposited with the National Bank of the Republic of Macedonia ( NBRM ) and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments, including treasury bills that can be traded on the secondary market. Cash and cash equivalents are carried at amortised cost in the balance sheet. 12

16 3. Significant accounting policies (continued) (j) Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the balance sheet with transaction costs taken directly to profit or loss. All changes in fair value are recognised as part of net trading income in profit or loss. Trading assets and liabilities are not reclassified subsequent to their initial recognition. (k) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method, except when the Bank chooses to carry the loans and advances at fair value through profit or loss as described in accounting policy (h)(vii). (l) Investment securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-tomaturity, fair value through profit or loss, or available-for-sale. (i) Held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which are not designated at fair value through profit or loss or available-for-sale. Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a significant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Bank from classifying investment securities as held-to-maturity for the current and the following two financial years. (ii) Available-for-sale Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Available-for-sale financial instruments include investments in equity securities. 13

17 3. Significant accounting policies (continued) (l) Investment securities (continued) Unquoted equity securities whose fair value cannot be reliably measured are carried at cost, less impairment losses. All other available-for-sale investments are carried at fair value. Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in profit or loss. Other fair value changes are recognised directly in equity until the investment is sold or impaired and the balance in equity is recognised in profit or loss. (m) (i) Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. (ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. (iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. 14

18 3. Significant accounting policies (continued) (m) Property and equipment (continued) Depreciation rates, based on the estimated useful lives for the current and comparative periods, are as follows: Computers 25 Furniture and equipment % (n) (i) Intangible assets Recognition and measurement Software acquired by the Bank is stated at cost less accumulated amortisation and accumulated impairment losses. (ii) Subsequent expenditure Subsequent expenditure on software is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iii) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use. The amortisation rates based on the estimated useful lives for the current and comparative periods are as follows: Software 25 % (o) Impairment of non-financial assets The carrying amounts of the Bank s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses in respect of cashgenerating units are allocated to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. 15

19 3. Significant accounting policies (continued) (o) Impairment of non-financial assets (continued) The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (p) Deposits, debt securities issued and subordinated liabilities Deposits, debt securities issued and subordinated liabilities are the Bank s sources of debt funding. The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. Deposits, debt securities issued and subordinated liabilities are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Bank chooses to carry the liabilities at fair value through profit or loss. (q) Provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. 16

20 3. Significant accounting policies (continued) (r) (i) Employee benefits Defined contribution plans The Bank contributes to its employees' post retirement plans as prescribed by the national legislation. Contributions, based on salaries, are made to the national organisations responsible for the payment of pensions. There is no additional liability in respect of these plans. Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss when they are due. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (s) (i) Share capital and reserves Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity. (ii) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, and is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently the amount received is recognised as an increase on equity, and the resulting surplus or deficit of the transaction is transferred to/from share premium. (iii) Dividends Dividends are recognised as a liability in the period in which they are declared. 17

21 3. Significant accounting policies (continued) (t) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these consolidated financial statements: Revised IFRS 2 Share-based Payment (effective from 1 January 2009). The revised Standard will clarifies the definition of vesting conditions and non-vesting conditions. Based on the revised Standards failure to meet non-vesting conditions will generally result in treatment as a cancellation. Revised IFRS 2 is not relevant to the Bank s operations as the Bank does not have any share-based compensation plans. Revised IFRS 3 Business Combinations (effective for annual periods beginning on or after 1 July 2009). The scope of the revised Standard has been amended and the definition of a business has been expanded. The revised Standard also includes a number of other potentially significant changes including: All items of consideration transferred by the acquirer are recognised and measured at fair value as of the acquisition date, including contingent consideration. Transaction costs are not included in the acquisition accounting. The acquirer can elect to measure any non-controlling interest at fair value at the acquisition date (full goodwill), or at its proportionate interest in the fair value of the identifiable assets and liabilities of the acquiree. Acquisitions of additional non-controlling equity interests after the business combination must be accounted for as equity transactions. Revised IFRS 3 is not relevant to the Bank s operations as the Bank does not have any interests in subsidiaries that will be affected by the revisions to the Standard. IFRS 8 Operating Segments (effective from 1 January 2009). The Standard requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Bank has not yet completed its analysis of the impact of the standard. Revised IAS 1 Presentation of (effective from 1 January 2009). The revised Standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. Items of income and expense and components of other comprehensive income may be presented either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). The Bank is currently evaluating whether to present a single statement of comprehensive income, or two separate statements. 18

22 3. Significant accounting policies (continued) (t) New standards and interpretations not yet adopted (continued) Revised IAS 23 Borrowing Costs (effective from 1 January 2009). The revised Standard will require the capitalization of borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Revised IAS 23 is not relevant to the Bank s operations as the Bank does not have any qualifying assets for which borrowing costs would be capitalised. Revised IAS 27 Consolidated and Separate financial statements (effective for annual periods beginning on or after 1 July 2009). In the revised Standard the term minority interest has been replaced by non-controlling interest, and is defined as "the equity in a subsidiary not attributable, directly or indirectly, to a parent". The revised Standard also amends the accounting for non-controlling interest, the loss of control of a subsidiary, and the allocation of profit or loss and other comprehensive income between the controlling and non-controlling interest. The Bank has not yet completed its analysis of the impact of the revised Standard. IFRIC 11 IFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). The Interpretation requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. It also provides guidance on whether share-based payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity s parent should be accounted for as cash-settled or equity-settled in the entity s financial statements.the Interpretation is not relevant to the Bank s operations IFRIC 12 Service Concession Arrangements (effective from 1 January 2008) The Interpretation provides guidance to private sector entities on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. The Interpretation is not relevant to the Bank s operations. IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). The Interpretation explains how entities that grant loyalty award credits to customers who buy other goods or services should account for their obligations to provide free or discounted goods or services ( awards ) to customers who redeem those award credits. Such entities are required to allocate some of the proceeds of the initial sale to the award credits and recognise these proceeds as revenue only when they have fulfilled their obligations. The Bank does not expect the Interpretation to have any impact on the unconsolidated financial statements. 19

23 3. Significant accounting policies (continued) (t) New standards and interpretations not yet adopted (continued) IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interactions (effective for annual periods beginning on or after 1 January 2008). The interpretation addresses when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available, how a minimum funding requirements (MFR) might affect the availability of reductions in future contributions and when a MFR might give rise to a liability. No additional liability need be recognised by the employer under IFRIC 14 unless the contributions that are payable under the minimum funding requirement cannot be returned to the company. The Bank does not operate in country that has a minimum funding requirement where there are restrictions on the employer company s ability to get refunds or reduce contributions. 20

24 4. Financial risk management (a) Introduction and overview The Bank has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risks. This note presents information about the Bank s exposure to each of the above risks, the Bank s objectives, policies and processes for measuring and managing risk, and the Bank s management of capital. Risk management framework The Supervisory Board has overall responsibility for the establishment and oversight of the Bank s risk management framework. Managing Board of the Bank is responsible for developing and monitoring of Bank s risk management policies in their specified areas and report regularly to the Supervisory Board on their activities. The Bank s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The Bank s Audit Committee is responsible for monitoring compliance with the Bank s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Bank s Audit Committee is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. 21

25 4. Financial risk management (continued) (b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank s loans and advances to customers and other banks and investment securities. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). Management of credit risk The Supervisory Board has delegated responsibility for the management of credit risk to its Credit committee that approve all credit exposures up to 10% of Bank s own funds. All credit exposures over 10% of the Bank s own funds are approved by the Risk Management committee. Separate Bank s Credit departments (Corporate Lending Department, Retail Lending Department), are responsible for oversight of the Bank s credit risk, including: Formulating credit policies, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements. Reviewing and assessing credit risk. Credit departments assess all credit exposures prior to facilities being committed to customers. Renewals and reviews of facilities are subject to the same review process. Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances), and by issuer, credit rating band, market liquidity and country (for investment securities). Developing and maintaining the Bank s credit risk grindings in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining where impairment provisions may be required against specific credit exposures. The current risk grading framework consists of six grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. 22

26 4. Financial risk management (continued) (b) Credit risk (continued) Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports are provided on the credit quality of local portfolios and appropriate corrective action is taken. Credit departments are required to implement credit policies and procedures and are responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios. Regular audits of Credit departments processes are undertaken by Internal Audit. Exposure to credit risk Note Loans and advances to customers Investment securities In thousands of denars Carrying amount 14,15 270, , , ,752 Individually impaired Grade A 257,455 99, Grade B 6,110 14, Grade C 3,164 1, Grade D 15,763 14, Grade E 233,556 90, Gross amount 516, , Allowance for impairment (245,534) (100,799) - (351) Carrying amount 270, , Neither past due nor impaired Grade A , ,752 Carrying amount , ,752 Total carrying amount 270, , , ,752 23

27 4. Financial risk management (continued) (b) Credit risk (continued) Impaired loans and securities Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities agreement(s). These loans are graded A to E in the Bank s internal credit risk grading system. Past due but not impaired loans Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collection of amounts owed to the Bank. Allowances for impairment The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Bank writes off a loan / security balance (and any related allowances for impairment) when the Supervisory Board determines that the loans / securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower / issuer s financial position such that the borrower / issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. Set out below is an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by risk grade. 24

28 4. Financial risk management (continued) (b) Credit risk (continued) Loans and advances to customers In thousands of denars Gross Net 31 December 2007 Individually impaired Grade A 257, ,760 Grade B 6,110 5,499 Grade C 3,164 2,373 Grade D 15,763 7,882 Grade E 233,556 - Total 516, , December 2006 Individually impaired Grade A 99,168 98,043 Grade B 14,433 12,990 Grade C 1,480 1,110 Grade D 14,088 7,044 Grade E 90,817 - Total 219, ,187 The Bank holds collateral1 against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing. Collateral generally is not held over loans and advances to banks and investment securities. 25

29 4. Financial risk management (continued) (b) Credit risk (continued) The Bank monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk at the reporting date is shown below: Note Loans and advances to customers Investments Investment securities In thousands of denars Carrying amount 14,15 270, , , ,752 Concentration by sector Corporate 40,274 19, Government , ,292 Financial institutions ,009 13,460 Retail 230,240 99, , , , ,752 Concentration by location Republic of Macedonia 270, , , , , , , ,652 Concentration by location for loans and advances is measured based on the location of the borrower. Concentration by location for investment securities is measured based on the location of the issuer of the security. (c) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk The Bank s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank s reputation. Department for treasury, MKD liquidity and payment operations receives information from other departments regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Department for treasury, MKD liquidity and payment operations then maintain a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank. 26

30 4. Financial risk management (continued) (c) Liquidity risk (continued) The daily liquidity position and market conditions are regularly monitored. All liquidity policies and procedures are subject to review and approval by Managing Board of the Bank. Daily reports cover the liquidity position of the Bank. Monthly reports on Bank s liquidity are regularly submitted to NBRM. Exposure to liquidity risk The Bank has access to a diverse funding base. Funds are raised using a broad range of instruments including deposits, borrowings and share capital. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Bank strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Bank strategy. In addition the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy. 27

31 4. Financial risk management (continued) (c) Liquidity risk (continued) Residual contractual maturities of financial liabilities In thousands of denars Note Carrying amount Gross nominal inflow / (outflow) Less than 1 month months months to 1 year 1-5 years More than 5 years 31 December 2007 Non-derivative liabilities Deposits from banks and other financial institutions 19 45,051 (45,051) (29,910) (2,000) (13,141) - - (29,303 Deposits from customers ,351 (633,351) (536,468) (26,676) (40,904) ) - Other liabilities 22 13,873 (13,873) (11,646) - (2,227) - - (29, ,275 (692,275) (578,024) (28,676) (56,272) ) - Undrawn overdraft facilities ,223 (243,223) (243,223) (29, ,498 (935,498) (821,247) (28,676) (56,272) ) - 31 December 2006 Non-derivative liabilities Deposits from banks and other financial institutions 19 44,244 (44,244) (42,244) - (2,000) - - (27,585 Deposits from customers ,460 (980,460) (834,936) (81,242) (36,697) ) - Other liabilities 22 16,158 (16,158) (16,158) (27,585 1,040,862 (1,040,862) (893,338) (81,242) (38,697) ) - Undrawn overdraft facilities ,558 (214,558) (214,558) (27,585 1,255,420 (1,255,420) (1,107,896) (81,242) (38,697) ) - The previous table shows the undiscounted cash flows on the Bank s financial liabilities and unrecognised loan commitments on the basis of their earliest possible contractual maturity. The Bank s expected cash flows on these instruments vary significantly from this analysis. For example, demand deposits from customers are expected to maintain a stable or increasing balance. The Gross nominal inflow / (outflow) disclosed in the previous table is the contractual, undiscounted cash flow on the financial liability or commitment. 28

32 4. Financial risk management (continued) (d) Market risks Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor s / issuer s credit standing) will affect the Bank s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Exposure to interest rate risk non-trading portfolios The Bank s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. In the case of floating rate assets and liabilities, the Bank is also exposed to basis risk, which is the difference in reprising characteristics of the various floating rate indices, such as the savings rate, LIBOR and different types of interest. Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the Bank s business strategies. Asset-liability risk management activities are conducted in the context of the Bank s sensitivity to interest rate changes. In general, the Bank is asset sensitive because of the majority of the interest-earning assets and liabilities, the Bank has the right simultaneously to change the interest rates. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rates. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation. A summary of the Bank s interest rate gap position on non-trading portfolios is as follows: 29