Bankhaus Erbe AG (closed joint stock company) International Financial Reporting Standards Financial Statements and Independent Auditor s Report

Transcription

1 Bankhaus Erbe AG (closed joint stock company) International Financial Reporting Standards Financial Statements and Independent Auditor s Report 31 December 2013 Moscow 2014

2 Contents BANK MANAGEMENT RESPONSIBILITY STATEMENT AND FINANCIAL REPORTING APPROVAL... 4 AUDIT REPORT... 5 BANKHAUS ERBE BALANCE SHEET AS OF DECEMBER 31, BANKHAUS ERBE PROFIT AND LOSS STATEMENT STATEMENT OF AGGREGATE INCOME FOR THE YEAR ENDED 31 DECEMBER, BANKHAUS ERBE CASHFLOW STATEMENT BANKHAUS ERBE STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY THE BANK S PRINCIPAL ACTIVITIES ECONOMIC ENVIRONMENT OF THE BANK FINANCIAL REPORTING STANDARDS STANDARDS, ADDITIONS AND INTERPRETATIONS APPROVED IN NEW STANDARDS, ADDITIONS AND INTERPRETATIONS PUBLISHED BUT NOT ACCEPTED ACCOUNTING POLICY PRINCIPLES CASH AND CASH EQUIVALENTS TRADE ORIENTED FINANCIAL ASSETS ASSETS WITH OTHER BANKS LOANS AND RECEIVABLES OTHER ASSETS FIXED ASSETS CLIENT ACCOUNTS FINANCIAL LIABILITIES AT THEIR FAIR VALUE THROUGH PROFIT OR LOSS DEBT SECURITIES ISSUED OTHER BORROWED FUNDS OTHER LIABILITIES ISSUANCE PROFIT ACCUMULATED DEFICIT / (RETAINED EARNINGS) INTEREST INCOME AND EXPENSES COMMISSIONS INCOME AND EXPENSES OTHER OPERATING INCOME AND EXPENSES PROFIT TAXES EARNINGS/(LOSSES) PER SHARE DIVIDENDS PROFIT TO BE DISTRIBUTED AMONG SHAREHOLDERS

3 26. SEGMENT ANALYSIS FINANCIAL RISKS MANAGEMENT Credit risk...52 Maximum credit risk before collateral applied Loans and receivables...55 Funds with other banks...55 Credit risk concentration...56 Market risk...58 Geographical risk...58 Currency risk...59 Liquidity risk...60 Interest rate risk...61 Other types of risks OFF-THE BALANCE AND CONDITIONAL LIABILITIES Court litigations...63 Tax legislation...63 Liabilities on operating lease...63 Liabilities of credit nature FAIR VALUE OF FINANCIAL INSTRUMENTS RELATED PARTIES TRANSACTIONS EVALUATIONS AND PROFESSIONAL JUDGMENTS, ACCEPTED IN THE APPLICATION OF ACCOUNTING POLICY Impairment of loans and receivables...65 Impairment of investments in securities instruments available for sale...66 Financial assets held to maturity...66 Profit tax CAPITAL MANAGEMENT EVENTS AFTER THE REPORTING DATE

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5 Our Ref. 06/01 of April 16, 2014 AUDIT REPORT AUDITING COMPANY INFORMATION: Name of the Auditing Firm: RIAN-AUDIT (Limited liability company) Address: Lublinskaya street, 141, office 506, Moscow, Russia Mailing Address: Lenskaya street, 10/1, Moscow, Russia Phones: Membership in the selfregulatory organization auditor: Information about Moscow Audit Chamber: Management: "RIAN-AUDIT" is a member of the Moscow Audit Chamber. Registration number of record Full name: Nonprofit Partnership «Moscow Audit Chamber» Number of entries in the registry: 03 Date of adoption and number of orders the Ministry of Finance of Russia on entry of information on selforganization in the register of auditors: Head of audit, deputy General Manager LLC «RIAN-AUDIT» Gubankov Andrei Nikolaevich (member of the Institute of Financial Accountants (IFA) Great Britain), obtaining: issued by the Self Regulated Organization non-profit partnership «Audit Chamber of Russia» from ; - diploma IFA, has completed the financial accounting technician level examinations (issued by the IFA in June 2004); - Member of the Audit Chamber of Russia. Registration number of record

6 THE AUDITED COMPANY INFORMATION: Full name of the Bank: Bankhaus Erbe AG (closed joint stock company) Abbreviated name of the Bank: Bankhaus Erbe The date of the registration by the Central Bank of the Russian Federation: August 6, 2001 Registration number: 1717 Legal address: Bld. 1, 26 Zoologicheskaya St., , Moscow State registration Moscow Interdistrict Inspectorate No. 39 of the Ministry of Taxation of Russia, principal state registration number of September 30, During the period under review the Bank conducted its activities in accordance with the following licenses issued by the Central Bank of the Russian Federation: - License No issued on May 17, 2012 (before that License No issued on April 21, 2008) gives the right to conduct the following banking operations in rubles and foreign currency: 1. Establishment of individual on-call and fixed term deposit accounts. 2. Investment of deposited into on-call and fixed term individual cash assets on its behalf and at its expense 3. Opening and conduct of current individual bank accounts 4. Execution of transactions from and to individual bank accounts following the orders of their holders - License No issued on May 17, 2012 (before that date License No issued on April 21, 2008) gives the right to conduct the following banking operations in rubles and foreign currency: 1. Establishment of corporate on-call and fixed term deposit accounts 2. Investment of deposited into on-call and fixed term corporate cash assets on its behalf and at its expense 3. Opening and conduct of current corporate bank accounts and credit individual bank accounts 4. Execution of transactions following the orders and notices of holders of individual and corporate bank accounts including the correspondent banks. 5. Collection of cash, promissory notes, payment and transaction documentation as well as the cash service of individuals and legal entities 6. Purchase and sale of foreign currency both in cash and in bank transfers 7. Issuance of bank guarantees 8. Funds transfer without opened accounts on the order of individuals (except for mail 6

7 payments) - License No issued on May 17, 2012 (before that - License No issued on April 21, 2008) gives the right to conduct the following banking operations: 1. Establishment of precious metal deposits and their sale. 2. Other operations with precious metals in accordance with the legislation of the Russian Federation. Permits and licenses issued by the Center for licensing, certification, and protection of state secrets of the Federal Security Service of Russia: - License C No (registration number H April 2, 2013) for the development, manufacturing and distribution of enciphering (cryptographic)systems, informational and telecommunication systems protected by means of enciphering, services and works in enciphering of information, technical maintenance of enciphering (cryptographic) systems, informational and telecommunication systems protected by means of enciphering (excluding the case if the technical maintenance of enciphering (cryptographic) systems, informational and telecommunication systems protected by means of enciphering is executed for the own purposes of the enterprise. The Bank has no affiliate offices. We have conducted the audit of attached financial (accounting) documentation of Bankhaus Erbe AG for the period that ended December 31, 2013 inclusively. The financial documentation of Bankhaus Erbe AG consists of: - Balance sheet as of December 31, PROFIT AND LOSS STATEMENT statement of aggregate income statement of changes in shareholders equity cash flow statement - Commentaries on the Bank s IFRS accounting policy basics and other relevant issues. The Bank management is responsible for the preparation of this financial documentation. Our responsibility is to conduct an audit of this documentation and express our opinion about it. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements of the Bank present fairly, in all material 7

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9 BANKHAUS ERBE BALANCE SHEET AS OF DECEMBER 31, 2013 (thousand rubles) Position name Note ASSETS Cash and cash equivalents Mandatory cash balances with local central banks Due from other banks Loans and receivables Financial assets at fair value through profit or loss Financial assets for trade Financial assets held to maturity 0 Other assets Postponed taxation assets Fixed assets Total assets: LIABILITIES Client accounts Financial liabilities at fair value through profit or loss Debt securities issued Other borrowed funds Deferred tax liability 0 0 Other liabilities Total liabilities

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11 2013 BANKHAUS ERBE PROFIT AND LOSS STATEMENT (thousand rubles) Position name NOTE Interest income Interest expense Net interest income/(negative interest differential) Provision for loan impairment Net interest income/(negative interest differential) after the creation of loans impairment reserves Income less losses arising from financial assets at fair value through profit or loss Income less losses arising from dealing in foreign currencies Foreign currencies revaluation income less losses Commission income Commission expenditure Net income from assets sales available for sale Other operating income Change in reserve of estimated liabilities 5, 6,

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14 2013 BANKHAUS ERBE CASHFLOW STATEMENT (thousand rubles) Cash flow from operating activities NOTE Interest received Interest paid Income less expenses received on dealing in financial assets at hand at their fair value calculated through profit or loss Income less expenses on dealing in foreign currencies Commissions received Commissions paid Other operating income received Operating expenses paid Profit tax paid Total cash resources from operating activities Cash flow received from (used in) operating activities before changes in operating assets and liabilities Accounts with the Central Bank of the Russian Federation Net (increase) decrease in due from banks Net (increase) decrease in loans and accounts receivable Net (increase) decrease in assets for trading Net (increase) decrease in other assets Net increase (decrease) in due to banks 0 0 Net increase (decrease) in Client funds

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17 NOTES TO FINANCIAL STATEMENTS 1. THE BANK S PRINCIPAL ACTIVITIES Bankhaus Erbe AG (further on referred to as BANKHAUS ERBE or the Bank) was officially rebranded on March 26, 2008 and is a legal successor of the closed joint stock company Commercial bank World Bank of Christ the Saviour Cathedral that was founded in the Russian Federation in The Bank operates on the basis of the extended banking license No issued by the Central Bank of the Russian Federation (The Bank of Russia) and is a member of MICEX currency trading and stock trading sections, the SWIFT payment system and a MasterCard associate member. The Bank specializes in Private Banking for wealthy individuals and institutions. The Bank provides its Clients with wide range of banking services, namely credit operations, settlements, currency exchange operations on Clients order and for the trade, promissory note operations, cash operations, assets management, individual and corporate payment cards, individual safe deposit boxes and other commercial bank operation. In 2013 Bank had following licenses: - License No of May 17, 2013 for transactions with funds in rubles and foreign currency (excluding the right to attract the funds of individuals) (before that License No of April 21, 2008); - License No of May 17, 2013 for attracting the individuals funds for holding in rubles and foreign currency (before that License No of April 21, 2008); - License No of May 17, 2013 for attracting and transactions with precious metals (before that - License No of April 21, 2008); - License C No (registration number H) for the development, manufacturing and distribution of enciphering (cryptographic)systems, informational and telecommunication systems protected by means of enciphering, services and works in enciphering of information, technical maintenance of enciphering (cryptographic) systems, informational and telecommunication systems protected by means of enciphering (excluding the case if the technical maintenance of enciphering (cryptographic) systems, informational and telecommunication systems protected by means of enciphering is executed for the own purposes of the enterprise), issued on April 2, The Bank has no subsidiaries and or rep offices in the Russian Federation and abroad. The absence of the latter is determined by the strategy of the Bank and is connected with Bank s specialization in private banking and absence of retail operations in the Bank. Legal address: Bld. 1, 26 Zoologicheskaya St., , Moscow. 17

18 2. ECONOMIC ENVIRONMENT OF THE BANK The growth rates of the Russian economy significantly deteriorated in 2013 translated into the decrease of the GDP growth rates to 1.3% mainly due to the low investments according to the preliminary estimates by the Ministry of the Economic Development of the Russian Federation. Exterior factors influenced economic trends in Russia in 2013 significantly as well. Capital outflows from emerging markets including Russia were significant in They were caused by the FRS plans to tamper the quantitative easing program. As a result the Russian ruble lost 7.2% of its value to the US dollar and 10.5% of its value to the Euro, strengthening the weakening of the Russian currency influenced by the fundamentals. Shrinking of the current accounts proficit along with the above mentioned negative factors defined a negative trend for the Russian ruble in spite of the relative stability of the oil prices in Inflation made 6.5% in 2013 above the higher threshold set by the Bank of Russia. The growth rate of consumption deteriorated in 2013 (3.9% in 2013 compared to 6.3% in 2012), but nevertheless it was the main driver of the economic growth in Russia. This trend was caused by the decrease in the growth of retail lending, income of the population due to the restrictions imposed by the Bank of Russia. Along with the policies to limit the growth of the risky retail lending the Bank of Russia launched the campaign to re-register private pension funds into joint stock companies and continued its efforts to close down the shadowy banks. As the result of these steps the trust of the population in the banking system deteriorated urging part of the depositors to transfer their funds into foreign currency and precious metals deposits with the state owned banks. Corporate lending growth rates were well behind the retail lending growth in % and 28.7% respectively. It was caused by low investments and a very low share of banks funds in the total investments (about 10%). Industrial growth fluctuated around zero mark. Real interest rates were still pretty high suppressing further investment demand. Foreign loans growth for the corporate sector was another factor to limit the corporate lending. Shrinking of the current accounts proficit along with the capital outflows from Russia led to the weakening of the major factors supporting the Russian ruble so the Bank of Russia had to imply currency interventions which started in May 2013 and led to certain liquidity issues on the Russian money market. Consequently the Bank of Russia sped up refinancing of the Russian banks especially during the periods of the peaked demand. Indebtedness of the banking system for the repo transactions with the Bank of Russia surged to the maximum of 3 trillion rubles. Interbank interest rates were high during the year reaching the maximum limit set by the Bank of Russia at the times of maximum demand. 18

19 3. FINANCIAL REPORTING STANDARDS The Bank s financial statements have been prepared in accordance with the International Financial Reporting Standards ( IFRS ), including all earlier accepted standards and interpretations of the International Accounting Standards Board. The Bank maintains its accounting records in accordance with banking law requirements of the Russian Federation. The financial statements are based on those accounting books and records, as adjusted and reclassified to comply with IFRS. In 2013 Bank s activity was stable enough. As of December 31, 2013 Bank s equity was 621,107 thousand rubles (2012: 602,927 thousand rubles). The Management considers that the Bank will continue its activity and fulfill its liabilities, at least for the next 12 months after reporting period, and in this connection these financial statements was prepared on the base of continuously working enterprise. These financial statements do not include any adjustments that might be needed in case if the Bank happens not to be able to continue its activity on the continuous base. The financial statements are presented in Russian rubles, the national currency of the Russian Federation, and are adjusted on inflation in conformity with IFRS 29 "Financial statement in hyperinflation". Starting from January 1, 2003 there are no conditions in the Russian Federation to apply the IFRS 29. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period of time. Despite that these estimates are based on the management s understanding of the current events and operations, actual results could differ from those estimated. The comparative data were reclassified and adjusted where necessary to bring to conformity with the changes in presenting the reports of current year considering the compliance of the principle of comparability and reliability. This financial statements of the Bank were prepared on the base of accruing method and was translated in the units (Russian rubles), in force as of December 31, 2013, conditionally indicated as RUR, the financial statements include the Bank s accounts only. 3.1 STANDARDS, ADDITIONS AND INTERPRETATIONS APPROVED IN IFRS 10 Consolidated Financial Statements. IFRS 10 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

20 In addition IFRS 10 introduces specific application guidance for agency relationships. IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation Special Purpose Entities. It is effective for annual periods beginning on or after 1 January IFRS 11 Joint Arrangements. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs 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 Ventures and is effective for annual periods beginning on or after 1 January IFRS 12 Disclosure of Interests in Other Entities. IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures 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. IFRS 12 is effective for annual periods beginning on or after 1 January Adoption of the standard will not require new disclosures to be made in the financial statements of the Bank and will have no impact on its financial position or performance. IFRS 13 Fair Value Estimation. 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. IFRS 13 is effective for annual periods beginning on or after 1 January The adoption of the IFRS 13 does not effect the measurement of the Bank s assets and liabilities accounted for at fair value. IAS 27 Separate Financial Statements (as revised in 2011). 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 IAS 28 Investments in Associates and Joint Ventures (as revised in 2011). IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and 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 IAS 19 Employee Benefits. The IASB has published amendments to IAS 19 Employee Benefits, effective for annual periods beginning on or after 1 January 2013, which proposes major changes to the accounting for employee benefits, including the removal of the option for deferred recognition of 20

21 changes in pension plan assets and liabilities (known as the corridor approach ). In addition, these amendments limited the changes in the net pension asset (liability) recognized in profit or loss to net interest income (expense) and service costs. Amendments to IAS 1 Changes to the Presentation of Other Comprehensive Income. The amendments to IAS 1 Presentation of Financial Statements, effective for annual periods beginning on or after 1 July 2012, change the grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon de-recognition or settlement) are presented separately from items that are never to be reclassified. These amendments changed presentation in the statement of comprehensive income but had no effect on the financial position or performance. Offsetting Financial Assets and Financial liabilities Disclosures Offsetting Financial Assets and Financial liabilities Amendments to IFRS 7 Financial instruments: Disclosures (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods, with retrospective application). These disclosures, which are similar to the new US GAAP requirements, provide users with information that is useful in (a) evaluating the effect or potential effect of netting arrangements on an entity s financial position and (b) analyzing and comparing financial statements prepared in accordance with IFRSs and US GAAP. Improvements to IFRS. The amendments are effective for annual periods beginning on or after 1 January IFRS 1 First-time Adoption of International Financial Reporting Standards: This improvement clarifies that an entity that stopped applying IFRS in the past and chooses, or is required, to apply IFRS, has the option to re- apply IFRS 1. If IFRS 1 is not re-applied, an entity must retrospectively restate its financial statements as if it had never stopped applying IFRS. IAS 1 Presentation of Financial Statements: This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period. IAS 16 Property Plant and Equipment: This improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory. IAS 32 Financial Instruments, Presentation: This improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. IAS 34 Interim Financial Reporting: The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are 21

22 aligned with annual disclosures. Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued in June 2012 and effective for annual periods beginning January 1, 2013). The amendments clarify the transition guidance in IFRS 10 Consolidated Financial Statements. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. Other revised standards and interpretations: IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine, considers when and how to account for the benefits arising from the stripping activity in mining industry. The interpretation did not have an impact on the Bank s consolidated financial statements. Amendments to IFRS 1 First-time adoption of International Financial Reporting Standards Government Loans, which were issued in March 2012 and are effective for annual periods beginning January 1, 2013, give first-time adopters of IFRSs relief from full retrospective application of accounting requirements for loans from government at below market rates. The amendment is not relevant to the Bank NEW STANDARDS, ADDITIONS AND INTERPRETATIONS PUBLISHED BUT NOT ACCEPTED Certain new standards and interpretations have been published that are mandatory for the Bank s accounting periods beginning on or after January 1, 2014 or later periods and which the Bank has not early adopted but will adopt when they come effective: IFRS 9 Financial Instruments. IFRS 9, as issued in November 2009 and amended in October 2010, December 2011 and November 2013, reflects two of the three phases of the IASB project on replacement of IAS 39 Financial Instruments: Recognition and Measurement and applies to classification and measurement of financial assets and financial liabilities and hedge accounting. The standard has no mandatory effective date and may be applied voluntarily. The adoption of IFRS 9 will have an effect on the classification and measurement of the Bank s financial assets, but is not expected to have an impact on classification and measurements of the Bank s financial liabilities. The Bank will quantify the effect when the remaining part of the standard containing guidance on impairment of financial assets is issued. Key features of the standard are: 22

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27 analysis systems (such as «Reuters» and «Bloomberg»), market dealers and other sources. If current quotations on the active market are not available for determination of fair value, the following information can be applied: actual price of transaction made by the Bank under standard terms and conditions, provided that there were no material changes in the economic environment from the moment of making a transaction to the reporting period. the last quotation (demand (offer) price according to data of external independent sources provided that there were no material changes in the economic environment from the moment of its determination to the end of the reporting period. In the event of material changes in the economic environment, the said last quotation (price of transaction) is subject to adjustment taking into account changes in quotation (price of transaction) with regard to similar financial instruments. Adjustment of the said last quotation (price of transaction) with regard to debt securities can be effected, subject to account change in debt securities turnover. Going-concern assumption in respect of the organization which does have an intention or need to be liquidated, sufficiently reduce the scope of its activities or make operations under disadvantageous conditions is the basis for determining fair value. Therefore, the fair value is not equivalent to the amount received by the Bank in case of making involuntary transaction, forced liquidation or assets diversion for debts repayment. In order to determine fair value of financial instruments in respect thereof there is no information of market prices (quotations) from external sources such methods of evaluation as discounted cash flow method and analysis of financial information with regard to investment medium are used. In the event when there is a method of evaluation of a financial instrument which is widely applicable by market participants and which has confirmed compliance of estimations with values of prices obtained upon the results of actual market transactions which have been made, such method can be applied for determining the price of an instrument. It is possible to choose applicable method of evaluation in respect of each particular case of fair value determination, at the same time, unless otherwise said the methods of evaluation based on stock exchange market prices and quotations of demand and offer prices shall be applied. The Bank classifies information for determination of fair value of a financial instrument according to significance of initial data used in the course of assessments as follows: current prices (quotations) of the active market with regard to financial instruments that are identical with a financial instrument under evaluation (level 1); 27

28 in the event when the information about current prices (quotations) is not available the price of the last transaction made in the active market, provided that there were no material changes in the economic environment from the moment of transaction to the end of the reporting period; and current prices (quotations) with regard to comparable financial instruments, provided that economic conditions changed after the transaction; and also the data observed in the market (level 2); prices, calculated with evaluation procedures, the initial data for which are not based on data observed in the market (level 3). Amortized cost of a financial asset or a financial liability it is a cost of financial asset or financial liability as of the moment of initial recognition with a deduction of received or paid cash funds (principal amount, interest income (expenses) and other payments determined by the terms and conditions of the contract) adjusted for the amount of accumulated depreciation, difference between initially recognized and actually received (paid) amount with regard to financial instrument as well as for the amount of the recognized depreciation of the financial asset. The depreciation of the said difference shall be made by applying compound interest rate. Accrued interest includes depreciation of deferred expenses on the transaction as of moment of initial recognition and premiums or discounts of the amount of repayment applying compound interest rate. Accrued interest income and accrued interest expenses including accrued coupon yield and amortized discount and premium are not given separately but they are included into book cost of respective assets and liabilities. As far as financial assets and financial liabilities with floating rate are concerned it takes place recalculation of cash flows and compound rate as of the moment of establishing new coupon (interest) rate. Recalculation of compound rate shall be made from current amortized cost and anticipatory payments. At the same time, the current amortized cost of financial instrument is not changed, and the further calculation of amortized cost shall be made applying a new compound rate. The method of compound interest rate method of amortized cost calculation of a financial asset or financial liability and charging of interest income or expenses for payment of interest during respective period of life of a financial asset or liability. Compound interest rate rate of discounting of estimated anticipatory cash payments or proceeds during anticipated period of a financial instrument life or, if applicable, during shorter period, to the amount of net book cost of a financial asset or financial liability. While calculating a compound interest rate, the Bank evaluates cash flows, taking into account all contractual terms and conditions in respect of a financial instrument (for example, possibility of advanced repayment), but excluding anticipatory credit losses. 28

29 Such calculation includes all commissions and charges paid and received by parties under the contract, being an integral part in the course of calculating compound interest rate, transaction costs as well as other premiums and discounts. In case of doubt about repayment of extended loans, their book cost is to be adjusted up to the reimbursable cost with a subsequent recognition of interest income on the basis of that interest rate which was used for discounting of anticipatory cash flows for the purpose to determine a reimbursable cost. It is assumed that cash flows and Bank s anticipated period with regard to similar financial instruments can be evaluated correctly. However, in those rare instances when it is not possible to make evaluation of cash flows or anticipated period of validity of a financial instrument, the Bank uses cash flows envisaged by the contract during the whole contractual period of a financial instrument. The prime cost represents an amount of paid cash funds or cash funds equivalents or fair value of another compensation transferred for acquisition of asset as of the date of acquisition and includes transaction costs. Evaluation according to prime cost shall only be applied in respect of investments in equity instruments which do not have market quotations and the fair value thereof cannot be reliably assessed, and in respect of derivative financial instruments which are connected with equity instruments not having quotations in the open market and which are subject to repayment by such equity instruments. Transaction costs are additional expenses directly connected with acquisition, issuance or retirement of a financial instrument and include remuneration and commissions paid to agents, consultants, brokers, dealers, paid to regulatory bodies and stock exchanges, as well as taxes and dues collected in case of property transfer. Costs for transaction do not include premiums or discounts under debt obligations, financing expenses, internal administrative costs or storage costs. Initial Acknowledgement of Financial Instruments At the initial acknowledgement of a financial asset or financial liability, the Bank assesses it at fair value plus transaction costs directly connected with acquisition or issuance of a financial asset or financial liability, in case when a financial asset or financial liability are not valuated at fair value through profit or loss. The profit or loss at the initial recognition of a financial asset or financial liability is accounted only if there is a difference between transaction value and fair value which can be confirmed by other current transactions with the same instrument in the market or assessment method that uses only data of existing markets as base data. With standard settlement terms the purchase and sale of financial assets is reflected in accounting as of the date of transaction, in other words, as of the date when the Bank undertakes to purchase or sell the asset in question, or at the date of settlement, that is the date of performance of financial asset delivery by the Bank. The selected method is applied by the Bank consistently 29

30 with regard to all acquisitions and sales of financial assets referred to one and the same category of financial assets. For this purpose, financial assets for sale constitute a separate category differing from financial assets valuated at fair value through profit or loss. In case of accounting as of the date of transaction, there will be: recognition of a financial asset to be received, and liability to pay it on the day of transaction; cessation of recognition of the asset to be sold, recognition of any profit or loss arising out of its retirement and recognition of accounts receivable on the part of the buyer, subject to repayment; In case of accounting as of the date of settlement it is envisaged the following: recognition of an asset as of the date of its transfer to the Bank; cessation of recognition of the asset and recognition of any profit or loss arising out of its retirement as of the day of delivery by the Bank. In case of accounting as of the settlement date, the Bank accounts any change in the fair value of the financial asset to be received during the period between the date of transaction and settlement date, just as it accounts change in cost of the acquired asset, i.e. the change in the cost is not acknowledged in respect of assets recognized at prime cost or amortized cost; it is charged to profit or loss with regard to assets classified as financial assets at fair value through profit or loss, and it is recognized in other components of aggregate income of the consolidated statement on aggregate income with regard to assets classified as available for sale. In case of accounting as of the settlement date prior to making settlement the operations are classified as operations with derivative financial instruments. Depreciation of financial assets. For the sake of objective accounting reflection of accepted risks, the Bank creates provisions for investments in financial assets held until maturity, loans and accounts receivable, as well as for investments in equity financial assets available for sale, the fair value thereof cannot be determined accurately. The financial asset is depreciated, and depreciation losses occur if there is objective evidence of depreciation as a result of one or several occurrences having place after the initial asset recognition ( loss occurrence ), and if this occurrence (or occurrences) of loss has such influence upon anticipated cash flows relating to the financial asset, which can be assessed accurately. The main factors permitting the Bank to determine if a financial asset is depreciated (if loss occurrence is present) are the following events: - any payable installment was not paid in due time and delay in payment was not caused by malfunction in payment system; - a borrower or issuer has considerable financial problems that can be evidenced by financial reporting of the borrower or issuer, received by the Bank; - a borrower or issuer considers the possibility of bankruptcy; 30

31 - there are unfavorable changes in paying capacity of a borrower or issuer being a result of changes in the national or regional economy which have impact on a borrower or issuer; - the cost of collateral is significantly reduced as a result of unfavorable market environment; - due to reasons of economic or legal nature a creditor provided borrower with preferential conditions impossible under other circumstances; - assets are granted to a borrower for the purpose of repayment of indebtedness; - lack of active market for the financial asset in question due to financial difficulties of the issuer (but not for the reason that the asset is not active in the market); - there is information about violations of terms and conditions of contracts on similar financial assets on the part of an issuer or borrower. Depreciation losses related to financial assets at amortized cost are acknowledged in the composition of profit or loss as they appear in the result of one or more occurrences ( loss occurrence ), after initial recognition of the financial asset. The Bank does not recognize depreciation losses at the initial recognition of financial assets. If the Bank does not have objective evidence of depreciation for individually assessed financial asset, this asset, irrespectively of its significance, shall be included into the group of financial assets having similar characteristics of credit risk and shall be evaluated in the aggregate with them for the purpose of depreciation. For the purpose of aggregate evaluation of depreciation all financial assets form groups according to similar characteristics of credit risk. These characteristics refer to evaluation of anticipated cash flows for groups of such assets and are evidence of ability of debtors to repay all amounts due and payable in accordance with contractual terms and conditions in respect of assets under assessment. Anticipated cash flows in the group of financial assets, assessed in the aggregate for the purpose of depreciation, are determined on the basis of the contractual cash flows in respect of overall remaining term of asset s validity and on the basis of statistics available to the Bank on volumes of past-due indebtedness arising out of loss occurrences, as well as possibility of recovery of past-due liabilities. Statistical data of the past years is adjusted according to current data reflecting the impact of current conditions, which had not influenced previous periods, as well as to eliminate the effect of past occurrences not existing in current period. Depreciation losses, relating to financial asset, either directly decrease book cost of financial asset or are recognized via creation of provisions for possible losses, arising out of financial asset depreciation to the amount required for 31

32 lowering of the asset book cost to the current value of anticipated cash flows (which does not include anticipatory damages on credit not incurred at present) discounted applying initial compound interest rate upon the present asset. Calculation of discounted cost of anticipated cash flows of the secured financial asset includes cash flows which may arise out of sale of collateral with deduction of expenses connected with its sale irrespective of the degree of probability of such sale. If the loss amount arising out of financial asset depreciation is reduced in the subsequent period and this reduction can be objectively referred to the occurrence that happened after recognition of the financial asset depreciation (such as, for example, improvement of debtor s rating) the depreciation loss which was recognized earlier shall be reinstated in the composition of profit or loss by way of adjustment of the created reserve. After adjustment of loan as a result of depreciation to the recoverable cost the interest yields shall be recognized on the basis of interest rate which was used for discounting of anticipated cash flows for the purpose of determining depreciation loss. Financial assets, paying of thereof is impossible and all required procedures in respect thereof are completed for the purpose of full or partial recovery and the final amount of loss is determined, shall be written off on account of created provision for possible losses arising out of depreciation that is reflected in the financial standing report. If in case of revision of conditions relating to depreciated financial assets revised conditions significantly differ from the previous ones the new asset initially is recognized at fair value. Depreciation losses relating to financial assets available for sale shall be recognized in the composition of profit or loss as they are incurred resulting from one or more occurrences ( loss occurrence ) which happened after initial recognition of financial assets available for sale. Significant or prolonged reduction of fair value of equity security, classified as available for sale to the level lower than its acquisition cost, is a sign of its depreciation. In case of presence of signs of depreciation, the accumulated loss, determined as difference between acquisition cost and current fair value with deduction of a loss arising out of the present asset depreciation, which earlier had been recognized in the composition of profit or loss, shall be reclassified from other components of the aggregate income of the consolidated report of aggregate income into profit or loss by way of re-classification adjustment. Losses arising out of equity instruments depreciation shall not be reinstated though profit or loss; increase in fair value after depreciation shall be recognized in the other components of the aggregate income of the consolidated report of aggregate income. As far as debt instruments, classified as available for sale, are concerned, the assessment of availability of depreciation signs shall be made according to the 32

33 same criteria ( loss occurrences ) as for financial assets accounted at amortized cost. The amount of loss, which is subject to re-classification into the composition of profit or loss, equals to the difference between the asset acquisition price (with deduction of payments for the principal amount and taking into account depreciation of assets valuated applying the method of compound interest rate) and current fair value less losses arising out of depreciation of this asset which had been earlier recognized in the composition of profit or loss. Interest income on depreciated assets shall be charged proceeding from amortized expenses determined taking into account recognition of a loss arising out depreciation using interest rate applied for discounting of anticipated cash flows for the purpose of valuation of depreciation losses. Interest yields shall be reflected in the article Interest income of the profit and loss statement. The fair value of a debt instrument referred to the category available for sale increased in the subsequent reporting period and such increase can be objectively referred to the occurrence that happened after recognition of the depreciation loss in the composition of profit or loss. In this case, the depreciation loss shall be reinstated through profits or losses of the current reporting period. Russian ruble is the reporting currency the monetary unit used for preparing these financial statements, its brief indication is RUR. Cash and cash equivalents - include cash funds in the cash office, free balance with Correspondent accounts with the Central Bank of the Russian Federation (CBRF) and other banks, except the respective loan loss reserve amounts for impairment of these funds, and represent the items that may be converted to cash within one day, including all short-term interbank placements overnight and hot money. The amounts, in respect to which there are any use limitations, shall be excluded from cash and cash equivalent. Mandatory cash balances in the CBRF- are funds deposited in the CBRF and not supposed for the current Bank operations financing. They are not considered as part of cash and cash equivalents for the purposes of the cash flow statement. Financial assets estimated at fair value through profit or loss - financial asset is classified like this if it s acquired with the view to be sold in short-term outlook. Derivatives with positive fair value are also determined as financial assets estimated at fair value through profit or loss in case if they are not the derivatives determined as effective hedging instrument only. Initially and subsequently financial assets estimated at fair value through profit or loss are accounted at fair value that is calculated either on the base of market quotation, either by different estimation methods, using assumptions on possibility to sell these financial assets in future. Depending on circumstances different estimation methods can be applied. Published price quotations of active market are the best to determine fair value of an intrument. When there is no active market, there can be used techniques 33

34 that include the information on last market deals between well-informed and willing to make such deals independent parties, using the current fair value of other instrument that is substantially indentical, the DCF analysis results and the options price determining models. When there is an estimation technique that is widely used by market participants to determine the price of the instrument and that is proved as granting reliable prices estimations, obtained as a result of actual market deals, this technique is used. Realized and unrealized profits and losses on operations with financial assets, estimated at fair value through profit or loss, are presented in the consolidated profit and loss statement for the period, when they appeared within the profits less expenses on operations with financial assets, estimated at fair value through profit or loss. Interest profits on financial assets, estimated at fair value through profit or loss, are reflected in consolidated profit and loss statement as interest income on financial assets, estimated at fair value through profit or loss. Dividends received are reflected in the line Dividend incomes in consolidated profit and loss statement within operating incomes. Purchase and selling of financial assets, estimated at fair value through profit or loss, that shall be delivered in terms set by laws or by the convention for this market (purchase and selling on standard contracts ), are reflected on the date of deal, i.e. on the date when the Bank undertakes to sell or to buy this asset. The Bank classifies financial assets, estimated at fair value through profit or loss to the respective category in the moment of purchasing. Financial assets classified to this category, may not be re-classified. Funds with other banks - are current interbank loans and deposits, except short-term inter-bank placements overnight and hot funds, minus respective loan loss reserves for impairment of these funds. Loans and receivables - include financial assets with fixed or determined payment, not rated on active market, with the exception of: ) those, with respect to which there is an intention to sell immediately or in the near future and which shall be classified as intended for trade and estimated at initial recognition at fair value through profit or loss; b) those, that are determined as available for sale after initial recognition; ) those, on which the possessor is not capable to cover the whole substantial amount of initial investments by reasons, different from creditability decrease, and that should be classified as available for sale. Loans given and receivables are accounted on the primary cost minus loan loss reserve for possible loans losses. The first given loans and receivables are reflected on primary cost that represents fair value of the loan given. Further the loans given and receivables are accounted on amortized cost minus the loan loss reserve for loans impairment. The amortized cost is based on the fair value of 34