FOREX Bank AB Annual Report 2010

Transcription

1 FOREX Bank AB Annual Report 2010 FOREX Bank Annual Report

2 2 FOREX Bank Annual Report 2010

3 Contents Contents 3 Statutory administration report 4 The group s income statement 10 The group s statement of comprehensive income 10 The group s balance sheet 11 The group s statement of changes in equity 12 The group s cash flow statement 13 The parent company s income statement 14 The parent company s statement of comprehensive income 14 The parent company s balance sheet 15 The parent company s statement of changes in equity 17 The parent company s cash flow statement 18 Notes to the financial statements 19 Note 1 Information about the group and parent company 19 Note 2 Accounting principles 19 Note 3 Financial risks 29 Note 4 Net interest income/expense 32 Note 5 Dividends received 33 Note 6 Commission income 34 Note 7 Commission expenses 34 Note 8 Net profit from financial transactions 35 Note 9 Other operating income 36 Note 10 General administrative expenses 37 Note 11 Other operating expenses 45 Note 12 Loan losses, net 45 Note 13 Impairment of financial assets 46 Note 14 Reversal of impairment of financial assets 46 Note 15 Appropriations 46 Note 16 Taxes 47 Note 17 Loans to credit institutions 50 Note 18 Loans to the general public 50 Note 19 Bonds and other interestbearing securities 51 Note 20 Shares and participations in group companies 51 Note 21 Other shares and participations 53 Note 22 Intangible assets 54 Note 23 Property, plant and equipment 56 Note 24 Receivables from group companies 60 Note 25 Other assets 60 Note 26 Prepaid expenses and accrued income 61 Note 27 Liabilities to credit institutions 61 Note 28 Deposits from the general public 61 Note 29 Liabilities to group companies 62 Note 30 Other liabilities 62 Note 31 Accrued expenses and prepaid income 63 Note 32 Provisions 63 Note 33 Untaxed reserves 64 Note 34 Contingent liabilities 64 Note 35 Commitments 65 Note 36 Related parties 65 Note 37 Geographic distribution of income 66 Note 38 Financial assets and liabilities 67 Note 39 Cash flow statement 74 Note 40 Acquisitions 75 Note 41 Important estimates and assessments 75 Note 42 Capital adequacy 75 Note 43 Dividends 78 Signatures of the board of directors 79 Audit report 80 Governance 81 List of branches 82 FOREX Bank Annual Report

4 Statutory administration report The Board of Directors and Managing Director of FOREX Bank AB hereby submit the annual report and consolidated financial statements for the 2010 financial year. Ownership FOREX Bank AB, CIN , is one of the family Friberg s wholly owned joint-stock banks. Organization and business activities FOREX Bank AB runs banking activities consisting of deposits from and loans to the general public, remittance services, supplying means of payment in Swedish and foreign currencies, etc. The bank is the parent company of the group that is comprised of its bank branches in Finland, Denmark and Norway as well as the wholly-owned subsidiaries, X-change in Sweden AB (with subsidiaries) and FOREX Sweden International Ltd in Great Britain. During the year, the following dormant companies belonging to the group were liquidated: X-change Arlanda AB, X-change Malmö AB, X-change Göteborg AB, X-change in Denmark A/S, FOREX Fastighetsförvaltning AB, FOREX Kapitalförvaltning AB, FOREX Internethandel AB, Traveller Scandinavia AB, FOREX OY Valuutanvaihto, FOREX Valutaveksling A/S and FOREX Norge AS. FOREX Sweden International Ltd is in the process of being liquidated and is expected to be fully liquidated during The business is conducted in the Scandinavian countries and at the end of the year there were 113 (114) bank branches. During 2010 a new branch was opened in Denmark, as well as one in Norway. A new branch belonging to the X-change business was also opened. During 2010, a review was conducted of the group s existing network of branches in order to improve the group s utilization of resources. As a result, three branches were closed down in Sweden along with the branch in Great Britain during During the year, the volume of currency exchange continued to decline, which, among other things, is due to the increased use of credit cards. The volume of other products has increased considerably. The volume of both loans to and deposits from the general public increased substantially, which is an indication of the market s continued confidence in the bank. The trend for the number of bill payments has continued in a positive direction. The volume and number of brokered foreign transfers has also increased in all of the bank s markets. The overview of the group s operations that got underway in prior years has resulted in continued ongoing change efforts. During the year, the business was structured as Retail Sweden and Retail Nordic. Retail Sweden is comprised of all of FOREX Sweden s and X-change in Sweden s branches located in Sweden, as well as FOREX Service Center. Retail Nordic is comprised of all branches in Finland, Denmark and Norway. In conjunction with that, X-change in Sweden was also reorganized. Extensive training efforts were also conducted during the year in order to obtain a higher overall level of competency within the group. Recruitment of new employees to managerial and specialist positions also continued in order to meet the need for specialist expertise within the various business areas. Efforts to outsource the banking platform resulted in a contract with EDB Norway. During autumn 2010, EDB initiated the take over, which is being implemented in stages and is estimated to be fully completed during During the year, the credit card, FOREX Visa was transferred to Nordea. This applies to the existing cards that have been issued as well as the issuance of new cards. Cash Center is being set up as the group s own function for management and supply of foreign currency. Operations are expected to get underway during the first half of The size of the penalty fee (SEK 50 million) handed down by the Swedish Financial Supervisory Authority in 2008 has been appealed by FOREX Bank to the Supreme Administrative Court. Leave to appeal has been announced. The Group s results For the financial year, the group reported an operating profit of SEK 340 (148) million and profit after tax of SEK 255 (107) million. Most of the profit is comprised of the net profit from financial transactions, primarily currency exchange and commission income. Operating income was SEK 1,202 (1,023) million, which is an increase of 17 percent compared to the prior year. Net interest income/expense increased by 66 percent to SEK 88 (53) million due to growth in the volume of loans granted in conjunction with an increased interest margin. Net commissions increased by 15 percent to SEK 180 (156) million 4 FOREX Bank Annual Report 2010

5 and net income from financial transactions increased by 14 percent to SEK 925 (809) million. General administrative expenses increased 17 percent to SEK 740 (633) million due to significantly increased expenses for skill development and system development. Depreciation/amortization and impairment increased by 45 percent to SEK 38 (69) million. Last year, this item included an impairment charge to property values of SEK 15 million. Other operating expenses decreased by 18 percent to SEK 79 (96) million. Loan losses were SEK 5 (74) million. Verified loan losses amounted to 0 (2) percent of loans granted. The group s position Total assets were SEK 4,879 (3,764) million. Cash equivalents and short-term loans to credit institutions amounted to SEK 1,006 (2,247) million. The decline was due to the fact that SEK 1,691 (-) million of the bank s excess liquidity was invested in interest-bearing securities at year-end. Loans to the general public increased 57 percent to SEK 1,734 (1,105) million. Deposits from the general public increased from SEK 2,983 million to SEK 3,854 million, which is an increase of 29 percent. The group s equity at year-end was SEK 696 (471) million. The equity ratio was 14 (13) percent and the capital adequacy ratio was 1.67 (1.28). The parent company s results The parent company s operating profit increased to SEK 315 (143) million and profit after tax was SEK 255 (103) million. Most of the profit is comprised of the net profit from financial transactions, primarily currency exchange and commission income. Operating income was SEK 1,078 (928) million, which is an increase of 16 percent compared to the prior year. Net interest income/expense increased by 69 percent to SEK 88 (52) million due to growth in the volume of loans granted in conjunction with an increased interest margin. Net commissions increased by 18 percent to SEK 150 (127) million and net income from financial transactions increased by 20 percent to SEK 823 (683) million. General administrative expenses increased 18 percent to SEK 660 (559) million due to significantly increased expenses for skill development and system development. Depreciation/amortization and impairment decreased by 48 percent to SEK 32 (61) million. Last year, this item included an impairment charge to property values of SEK 15 million. Other operating expenses decreased by 14 percent to SEK 68 (79) million. Loan losses were SEK 5 (74) million. Verified loan losses amounted to 0 (2) percent of loans granted. The parent company s position Total assets were SEK 4,787 (3,680) million. Cash equivalents and short-term loans to credit institutions amounted to SEK 865 (2,141) million. The decline was due to the fact that SEK 1,691 (-) million of the bank s excess liquidity was invested in interest-bearing securities at year-end. Loans to the general public increased 57 percent to SEK 1,734 (1,105) million. Deposits from the general public increased from SEK 2,983 million to SEK 3,854 million, which is an increase of 29 percent. The parent company s equity at year-end was SEK 582 (324) million. The equity ratio was 13 (9) percent and the capital adequacy ratio was 1.93 (1.52). Future development Looking forward, the volume of currency exchange in Sweden is expected to decline even further while the volumes for other bank services continue to increase. In Sweden, there is a downward trend in cash transactions overall in the society. Various initiatives to achieve a cash-free society enable the group to, because of its accessibility, develop the business as a complement to other banks in the area of cash management. For the Danish, Finnish and Norwegian markets, the goal is to significantly increase market share for currency exchange and remittance services during the next few years. Other banking services might be introduced later on, once FOREX Bank s brand achieves a higher level of recognition in these markets. It was decided to set up new branches in all of the markets where the group currently has operations. Due to developments in the banking sector and the decline in cash transactions in society, it is critical to come up with a new branch structure and design that is adapted to the various markets where the group currently has operations. This may lead to a relocation or shutdown of certain branches. The decision to set up Cash Center makes it possible for the group to, in the long term, deliver local and foreign curren- FOREX Bank Annual Report

6 cies to all of its own branches. This also means that it will be possible for FOREX Bank to offer other stakeholders the same services, which will bring about new customer segments in need of professional cash management. The group will continue to invest in training to raise the level of employee expertise. This is necessary in order to make possible increased market penetration for the products offered by the bank, as well as ensuring that staff have the requisite knowledge of the routines and regulations pertaining to operations. It should also be noted that massive efforts are continually being made to increase the knowledge of all employees about money laundering. Significant events subsequent to year-end A decision was made to close down X-change in Sweden s branch in Denmark and focus on developing FOREX Bank s brand in the Danish market. Business risks Each day, the bank is exposed to various types of risks associated with the business, such as credit risks, liquidity risks, market risks (interest rate risks and currency risks) and operational risks. A more detailed description of these risks is provided in Note 3. 6 FOREX Bank Annual Report 2010

7 Five Year Summary The Group Key figures 1) Volume Loans to the general public Change during the year, % 57% 63% 20% 27% 246% Deposits from the general public Change during the year, % 29% -1% 63% 23% 321% Equity Equity ratio 14.3% 12.5% 9.6% 15.8% 17.4% Taxed equity as a % of total assets Capital adequacy ratio 2) Capital base/capital adequacy requirement Net profit Investment margin 2.04% 1.40% 0.72% 0.69% 0.78% Net interest income/expense as a % of average total assets Return on equity 58.2% 35.7% -12.3% 17.9% 1.9% Operating profit as a % of average equity Cost/income ratio before loan losses Total costs excluding loan losses and changes in the value of property taken over in relation to net interest income/expense + operating income Cost/income ratio after loan losses Total costs including loan losses and changes in the value of property taken over in relation to net interest income/expense + operating income Doubtful debts and loan losses Reserve ratio for doubtful debts 100.0% 100.0% 100.0% 100.0% 100.0% Write-down for probable losses as a % of doubtful debts, gross Percentage doubtful debts 4.3% 6.0% 2.2% 1.9% 1.3% Net doubtful debts as a % of total loans granted to the general public and credit inst. (excluding banks) Loan loss ratio 0.4% 10.6% 2.0% 2.0% 3.8% Loan losses as a % of the opening balance for loans granted to the general public and credit institutions. (excluding banks and leasing objects, property taken over and credit guarantees) Other information Average number of employees Number of branches ) As of 16 April 2007, X-change is included as part of the group 2) The years relate to the parent company s capital adequacy ratio FOREX Bank Annual Report

8 Income statements and balance sheets The Group SEK thousands Income statement Net interest income/expense Dividends received Commissions, net Net profit from financial transactions Other income Total income General administrative expenses Other operating expenses 1) Credit losses and impairment of financial assets Total expenses Operating/loss Tax Net profit/loss for the year Balance sheet Cash Loans to credit institutions Loans to the general public Interest-bearing securities Shares and participations Intangible assets Property, plant and equipment Other assets Total assets Liabilities to credit institutions Deposits from the general public Other liabilities Provisions Total liabilities and provisions Equity Total liabilities, provisions and equity ) Including depreciation/amortization and impairment of property, plant and equipment and intangible assets 8 FOREX Bank Annual Report 2010

9 Proposal for appropriation of the parent company s profit The board of directors proposes that accumulated profit profit for the year SEK is appropriated as follows distributed as dividends to shareholders carried forward SEK The proposal to distribute dividends has been made having considered the rules on buffer capital, limitation of risks and transparency as per the Banking and Financing Act, as well as Chapter 17, Section 3 of the Swedish Companies Act (Prudence Rule). The parent company s capital adequacy ratio, after the proposed appropriation of profits is 1.93 (1.52). The capital adequacy ratio for the group and the financial company group, after the proposed appropriation of profits is 1.67 (1.28). Consideration of the financial position of the group and parent company does not lead to any other assessment than that all short-term and long-term obligations are expected to be fulfilled. The board of directors assessment is that the amount of equity, as reported in the annual report, is adequate in relation to the scope of the business and its risks. For further information on the profit and financial position of the parent company and group, please refer to the accompanying income statement, balance sheet and notes to the financial statements. FOREX Bank Annual Report

10 The group s income statement SEK thousands Note Interest income Interest expense Net interest income/expense Dividends received Commission income Commission expenses Net profit from financial transactions Other operating income Total operating income General administrative expenses Depreciation/amortization and impairment of property, plant and equipment and intangible assets 22, Other operating expenses Total expenses before loan losses Net profit before loan losses Loan losses, net Impairment of financial assets Operating profit Tax Net profit for the year The group s statement of comprehensive income SEK thousands Note Net profit for the year Other comprehensive income Available-for-sale financial assets Exchange rate differences Other comprehensive income, net after tax Total comprehensive income FOREX Bank Annual Report 2010

11 The group s balance sheet SEK thousands Note 31 Dec Dec 2009 Assets Cash Loans to credit institutions Loans to the general public Bonds and other interest-bearing securities Other shares and participations Intangible assets 22 - Goodwill Other intangible assets Property, plant and equipment 23 - Equipment Capitalized reconstruction costs Buildings Current tax assets Deferred tax assets Other assets Prepaid expenses and accrued income TOTAL ASSETS Liabilities, provisions and equity Liabilities and provisions Liabilities to credit institutions Deposits from the general public Deferred tax liabilities Other liabilities Accrued expenses and prepaid income Provisions Total liabilities and provisions Equity Share capital Reserves Earned profits including net profit for the year Total equity TOTAL LIABILITIES, PROVISIONS AND EQUITY FOREX Bank Annual Report

12 The group s statement of changes in equity SEK thousands Share capital 1) Reserves 2) Accrued earnings Total equity Opening balance, 1 Jan Net profit (loss) for the year Other comprehensive income Exchange rate differences Total other comprehensive income Closing balance, 31 Dec Net profit for the year Other comprehensive income Available-for-sale financial assets Exchange rate differences Total other comprehensive income Transfer within equity Dividends Closing balance, 31 Dec ) Specification of share capital Number of shares Class A shares Class B shares Total number of shares Quotient value 10 kr All shares have been fully paid 2) Specification of reserves Reserve for fair value Reserve for translation differences Statutory reserve Total reserves Opening balance, 1 Jan Other comprehensive income Exchange rate differences Total other comprehensive income Closing balance, 31 Dec Other comprehensive income Available-for-sale financial assets Exchange rate differences Total other comprehensive income Transfer within equity Closing balance, 31 Dec FOREX Bank Annual Report 2010

13 The group s cash flow statement SEK thousands Note Operating profit (+) Adjustments for items not included in cash flow - Depreciation/amortization and impairment (+) Loan losses (+) Change in provisions (+/-) Capital gains/losses on intangible assets and property, plant and equipment (+/-) Other items not included in cash flow (+/-) Taxes paid (-) Cash flow from operating activities before changes in working capital Cash flow from changes in working capital Increase/decrease in loans to the general public (-/+) Increase/decrease in securities (-/+) Increase/decrease in deposits from the general public (+/-) Increase/decrease in liabilities to credit institutions (+/-) Increase/decrease in other assets and liabilities (+/-) Cash flow from operating activities Investing activities Sale of financial assets (+) Sale of intangible assets (+) - 25 Acquisition of intangible assets (-) Sale of property, plant and equipment (+) Acquisition of property, plant and equipment (-) Cash flow from investing activities Financing activities Dividends paid (-) Cash flow from financing activities Cash flow for the year Cash equivalents at the beginning of the year Exchange rate differences on cash equivalents Cash equivalents at year-end Cash and cash equivalents is comprised of the following items: Cash Loans to credit institutions repayable on demand Bonds and other interest-bearing securities - payable on demand Cash equivalents at year-end FOREX Bank Annual Report

14 The parent company s income statement SEK thousands Note Interest income Interest expense Net interest income/expense Dividends received Commission income Commission expenses Net profit from financial transactions Other operating income Total operating income General administrative expenses Depreciation/amortization and impairment of property, plant and equipment and intangible assets 22, Other operating expenses Total expenses before loan losses Net profit before loan losses Loan losses, net Impairment of financial assets Reversal of impairment of financial assets Operating profit Appropriations Tax Net profit for the year The parent company s statement of comprehensive income SEK thousands Net profit for the year Other comprehensive income Available-for-sale financial assets Exchange rate differences Other comprehensive income, net after tax Total comprehensive income FOREX Bank Annual Report 2010

15 The parent company s balance sheet SEK thousands Note 31 Dec Dec 2009 Assets Cash Loans to credit institutions Loans to the general public Bonds and other interest-bearing securities Shares and participations in group companies Other shares and participations Intangible assets 22 - Goodwill Other intangible assets Property, plant and equipment 23 - Equipment Capitalized reconstruction costs Buildings Receivables from group companies Deferred tax assets Other assets Prepaid expenses and accrued income TOTAL ASSETS Liabilities, provisions and equity Liabilities and provisions Liabilities to credit institutions Deposits from the general public Liabilities to group companies Other creditors Accrued expenses and prepaid income Provisions Total liabilities and provisions Untaxed reserves Equity Restricted equity Share capital Statutory reserve Non-restricted equity Profit brought forward Net profit for the year Total equity TOTAL LIABILITIES, PROVISIONS AND EQUITY FOREX Bank Annual Report

16 Memorandum items Pledged assets - - Contingent liabilities Commitments FOREX Bank Annual Report 2010

17 The parent company s statement of changes in equity SEK thousands Share capital 1) Restricted equity Statutory reserve Accumulated net profit /loss Non-restricted equity Year s net profit/ loss Total equity Opening balance, 1 Jan Appropriation of profits Net profit for the year Other comprehensive income Exchange rate differences Total other comprehensive income Closing balance, 31 dec Appropriation of profits Net profit for the year Other comprehensive income Available-for-sale financial assets Exchange rate differences Total other comprehensive income Group contribution received Dividends Closing balance, 31 dec ) Specification of share capital Number of shares Class A shares Class B shares Total number of shares Quotient value All shares have been fully paid 10 kr FOREX Bank Annual Report

18 The parent company s cash flow statement SEK thousands Note Operating activities Operating profit (+) Adjustments for items not included in cash flow - Depreciation/amortization and impairment (+) Loan losses (+) Change in provisions (+/-) Capital gains/losses shares and participations Capital gains/losses on intangible assets and property, plant and equipment (+/-) Other items not included in cash flow (+/-) Taxes paid (-) Cash flow from operating activities before changes in working capital Cash flow from changes in working capital Increase/decrease in loans to the general public (-/+) Increase/decrease in securities (-/+) Increase/decrease in deposits from the general public (+/-) Increase/decrease in liabilities to credit institutions (+/-) Increase/decrease in other assets and liabilities (+/-) Cash flow from operating activities Investing activities Sale of financial assets (+) Sale of intangible assets (+) - 25 Acquisition of intangible assets (-) Sale of property, plant and equipment (+) Acquisition of property, plant and equipment (-) Cash flow from investing activities Financing activities Dividends paid (-) Cash flow from financing activities Cash flow for the year Cash equivalents at the beginning of the year Exchange rate differences on cash equivalents Cash equivalents at year-end Cash and cash equivalents is comprised of the following items: Cash Loans to credit institutions repayable on demand Bonds and other interest-bearing securities - payable on demand Cash equivalents at year-end FOREX Bank Annual Report 2010

19 Notes to the financial statements Note 1 Information about the group and parent company The annual report as of 31 December 2010 is for the group where FOREX Bank AB, a joint-stock bank, is the parent company, with registered office in Stockholm. The main office s address is Kornhamnstorg 4, Stockholm. A list of all the wholly-owned subsidiaries is provided in note 20. On 24 February 2011, the board of directors approved this annual report for FOREX Bank AB and the annual report will be brought forth for adoption at the bank s annual general meeting on 22 March Note 2 Accounting principles (a) Accordance with norms and legislation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) along with interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) as adopted by the EU. Additions to these standards have also been provided by the Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL), the Swedish Financial Supervisory Authority s regulations and guidelines on annual reports issued by credit institutions and securities companies, FFFS 2008:25, and the Swedish Financial Reporting Board s Supplementary Accounting Rules for Groups, RFR 1, as well as their interpretations, UFR. The parent company applies the same accounting principles as the group, except for situations where ÅRKL limits the ability to apply IFRS to legal entities. Additionally, consideration has been given to the relationship between accounting and taxation. More information is provided in section (x) of the parent company s accounting principles, below. Unless otherwise stated, the accounting principles (discussed below) were consistently applied to each period that is presented in the financial statements. New and revised accounting standards and interpretations that are obligatory for accounting periods as of 1 January 2010 None of the revisions to existing standards issued by IASB, nor new interpretations issued by IFRIC that apply to accounting periods as of 1 January 2010 and which apply to FOREX Bank AB, have had, or are expected to have any significant impact on the group s results or financial position. IFRS 3 Business Combinations (revision). Revision of the standard means that the purchase accounting method may still be applied for business combinations, but with certain significant changes. For example, all payments to acquire a business are reported at fair value on the acquisition date, but any additional contingent payments must be classified as liabilities, which are later revalued via the income statement. For holdings without a controlling interest in the acquired business, a choice is made for each acquisition to either value at fair value or at the proportional share of the acquired business net assets as a holding without controlling interest. All transactions costs related to acquisitions must be expensed. The change does not have any effect on acquisitions that were made prior to 1 January IAS 27 Consolidated and separate financial statements (revision). The change means that the effects of all transactions with a non-controlling interest must be reported as part of equity if they do not result in a change to the controlling interest. Furthermore, such transactions no longer result in goodwill or profit/losses. The change also states that when the parent company loses controlling interest, any remaining share must be revalued at fair value and the profit/loss must be reported in the income statement. IFRIC 9 Reassessment of embedded derivatives and IAS 39 Financial instruments: Recognition and measurement (revision) and IFRIC 16 Hedges of a net investment in foreign operations are not expected to have any effect. New and revised accounting standards and interpretations that are obligatory for accounting periods as of 1 January 2011 or later IAS 24 Related party disclosures (revised). The revised standard clarifies and simplifies the definition of a related party. The revised standard means that both the group and parent company will also be required to provide disclosures on all transactions between subsidiaries and between related parties in the group. Furthermore, the revised standard limits government-owned companies disclosure requirements for transactions with the government and for transactions with other government-owned companies. The group will begin applying the revised standard as of 1 January IAS 32 Financial Instruments: The classification of rights, options and warrants (change), IFRIC 19 Extinguishing financial liabilities with equity instruments and IFRIC 14. The FOREX Bank Annual Report

20 limit on a defined benefit asset, minimum funding requirements and their interaction (change) are not expected to have any effect. (b) Functional currency and reporting currency The parent company s functional currency is the Swedish Krona (SEK), which is also the reporting currency for both the parent company and the group. Accordingly, the financial statements are presented in SEK. Unless otherwise stated, all amounts have been rounded to the nearest thousand. (c) Valuation principles used when preparing the company s financial statements Assets and liabilities are reported at historical cost. Financial assets and liabilities are reported at amortized cost, with the exception of certain financial assets and liabilities that are valued at fair value. Financial assets and liabilities reported at fair value consist of derivative instruments, financial instruments classified as financial assets valued at fair value in the income statement, financial liabilities valued at fair value in the income statement or availablefor-sale financial assets. (d) Assessments and estimates used to prepare the financial statements In order to prepare the financial statements in accordance with IFRS, it is necessary for the bank s management team to make assessments and estimates, as well as assumptions that affect how the accounting principles are applied and the reported amounts for assets, liabilities, income and expenses. The estimates and assumptions are based on historical experiences and several other factors that are deemed to be reasonable under the current circumstances. The outcome of these estimates and assumptions is then used when determining the carrying amounts of assets and liabilities when such amounts are not otherwise clearly provided by other sources. These estimates and assumptions are regularly reviewed. Changes to estimates are reported in the period the change was made if the change only affects that period. Otherwise, it is reported in the current period and future periods, if the change affects the current period as well as future periods. Assessments made by the company management team when applying IFRS, which have a significant impact on the financial statements, and estimates that were made that could result in significant adjustment to the next year s financial statements are described in more detail in Note 41. (e) Changes in accounting principles During the year, no changes have been made to accounting principles that affect the group s or parent company s financial statements. (f) Consolidation principles (i) Subsidiaries Subsidiaries are companies in which the parent company is able to exert a controlling influence. A controlling influence means that ownership directly or indirectly exceeds 50 percent or, that there are other conditions entitling the parent company to formulate a company s financial or operating strategies in order to reap financial benefits. An assessment of controlling influence involves determining whether the shares with potential voting rights can be used or converted without delay. Subsidiaries are reported in accordance with the purchase accounting method. Using this method, the acquisition of a subsidiary is treated as a transaction through which the group indirectly acquires the subsidiary s assets and assumes responsibility for its liabilities and contingent liabilities. Consolidated cost is determined through an acquisition analysis in conjunction with the business acquisition. The analysis is used to determine the identifiable assets that have been acquired, as well as the liabilities and contingent liabilities that have been assumed. The cost of acquisition of the subsidiary s shares and its business is determined by the fair value as of the transfer date for the assets, assumed/newly arisen liabilities and newly issued equity instruments that were given as consideration in exchange for the acquired net assets. Any transaction costs that are directly related to the acquisition are directly reported in the income statement. In business acquisitions where the acquisition cost exceeds the net value of the acquired assets and assumed liabilities/contingent liabilities, the difference is shown as goodwill. If the difference is negative, it is directly reported in the income statement. The financial reports of subsidiaries are included in the consolidated financial statements as of the acquisition date and until such time as the controlling influence no longer exists. (ii) Branches The bank s business activities in other Nordic countries is 20 FOREX Bank Annual Report 2010

21 conducted through bank branches of FOREX Bank AB in Sweden. The business activities of the branches are consolidated as part of the parent company s business and the parent company s financial statements in the same way as foreign subsidiaries are consolidated as part of the group s financial statements. (iii) Transactions to be eliminated on consolidation Intra-group receivables, liabilities, revenues or expenses attributable to intra-group transactions between group companies are fully eliminated when the consolidated financial statements are prepared. This also applies to the same types of transactions between the parent company in Sweden and the foreign branches, as well as such transactions between branches, when preparing the parent company s annual report. (g) Foreign currency Transactions in foreign currency Transactions in foreign currency are translated to the functional currency using the exchange rate that is in effect on the transaction date. Functional currency is the currency used in the primary economic environments where the company or its branches run their operations. Monetary assets and liabilities in foreign currency are translated to the functional currency using the exchange rate in effect on the balance sheet date. Exchange differences that arise upon translation are reported in the income statement. Non-monetary assets and liabilities that are reported at historical cost are translated using the exchange rate in effect on the transaction date. Non-monetary assets and liabilities that are reported at fair value are translated to the functional currency using the prevailing exchange rate at the point in time when valuation to fair value is made. Financial reports concerning foreign operations The assets and liabilities of foreign operations, including goodwill and other group surplus values, are translated into SEK using the exchange rate prevailing on the closing date. The revenue and expenses of foreign operations is translated to SEK using the average exchange rate. Translation differences that arise from currency translations of foreign operations are reported as part of other comprehensive income. Net investments in foreign operations Translation differences that arise in conjunction with the translation of a net investment in foreign operations are reported directly to other comprehensive income. When an investment in foreign operations is divested, the group recognizes the accumulated translation differences after the deduction for any currency hedging. Accumulated translation differences are presented in a separate equity category that comprises translation differences as of 1 January Accumulated translation differences from periods prior to 1 January 2006 are allocated to other equity categories and are not reported separately. For information on the reconciliation of the change in translation differences that is reported as part of equity, please see: The group s statement of changes in equity. (h) Interest income, interest expenses and dividends Interest income on receivables and interest expense on liabilities are calculated and reported using the effective interest method. The effective rate is the interest rate that renders the present value of all future cash receipts and disbursements during the anticipated remaining fixed interest term equal to the carrying amount of the receivable or liability. Interest income and interest expense includes the accrued amounts of any fees that have been received that have been included in the effective interest rate, transaction expenses and any discounts, premiums and any differences between the original value of the receivable/liability and the amount that is settled on the due date. Interest expenses include the direct transaction costs associated with entering into new loan agreements. The interest income and interest expenses that are presented in the income statement consist of: - Interest on financial assets and liabilities valued at amortized cost using the effective interest method, including interest on doubtful debts - Interest on financial assets that are classified as available-for-sale Dividends from shares and participations are recognized when the right to receive payment has been established. (i) Revenue from commissions and fees Revenue from commissions and fees is recognized when (i) the amount of revenue can be measured reliably, (ii) it is probable that the future economic benefits that are attributable to the transaction will flow to the company, (iii) the percentage of completion as of the closing date can be measured reliably and (iv) the fees that have arisen and the fees that remain in order to complete the service assign- FOREX Bank Annual Report

22 ment can be measured reliably. Revenue is valued at the fair value of the amount that has been received or that is expected to be received. Revenue recognition is in accordance with the percentage of completion method, which means that revenue is recognized based on the assignment s or service s percentage of completion on the closing date. The bank receives fees and commissions for services rendered. The following two methods are used when recognizing revenue: (i) Commissions and fees that are calculated using the effective interest rate Commissions and fees that are an integrated portion of the effective interest rate are not recognized as revenue from commissions. This type of revenue is recognized by adjusting the effective interest rate on the profit/loss item, interest income. These types of fees primarily consist of the fees associated with setting up new loans. (ii) Commissions and fees that are earned through rendering a particular service These types of fees and commissions consist of administration fees, charge/credit card fees in instances when the service is performed over a period of time that does not extend past the quarterly closing, payment for remittance services, money transfers and commissions for counting daily receipts, etc. These commissions and fees are typically related to a completed transaction and they are immediately recognized as revenue. (j) Commission expenses These are expenses associated with services that have been received, to the extent that they are not considered as interest. For example, these consist of the expenses associated with clearing and bankgiro, charge/credit cards, payment to loan brokers and fees to UC (credit information agency). Transaction costs that are taken into consideration when calculating the effective interest rate are not reported here. (k) Net profit from financial transactions The item, Net profit from financial transactions, includes the realized and unrealized changes in value that have arisen when conducting financial transactions. Net profit from financial transactions consists of: - Realized and unrealized changes in the fair value of the assets and liabilities that are held for trading purposes - Capital gains/losses from the disposal of financial assets and liabilities that are held for trading purposes - Capital gains/losses from available-for-sale financial assets - Changes in exchange rates (l) Financial instruments Financial instruments that are reported in the balance sheet and classified as financial assets include: cash and bank balances, treasury bills eligible as collateral, loans granted to credit institutions, loans granted to the general public, bonds and other interest-bearing securities, other shares and participations and other assets. Financial liabilities include liabilities to credit institutions, deposits from the general public and other liabilities. (i) Items reported in or removed from the balance sheet A financial asset or liability is reported in the balance sheet as soon as the bank has committed to the terms of the contract. A financial asset is removed from the balance sheet when the rights stated in the contract have been realized, have fallen due, or when the company has lost control over them. The same applies to parts of a financial asset. A financial liability is removed from the balance sheet once the obligation under the contract has been fulfilled or otherwise expired. The same applies to parts of a financial liability. Financial assets and liabilities are offset and reported at net amounts in the balance sheet only when there is a legal right to offset the sum and there is an intention to regulate the items with a net sum or at the same time realize the asset and regulate the debt. The acquisition and sale of financial assets are recorded on the trade date, i.e., when the company commits to acquiring or disposing of the asset. Loan commitments are not reported in the balance sheet. Loan receivables are reported in the balance sheet when the loan amount has been paid out to the borrower. (ii) Classification and valuation Financial instruments are initially reported at the instrument s fair value plus transaction costs except for instruments that belong to the category financial assets reported at fair value through the income statement. Such instruments are reported at fair value, excluding transaction costs. A financial instrument is classified the first time it is reported partly based on the purpose for which the instrument was acquired, and partly based on the options available in IAS FOREX Bank Annual Report 2010

23 Financial assets valued at fair value via the income statement This category consists of two sub-categories: financial assets held for trading purposes and other financial assets that the company has initially chosen to put in this category. Financial instruments in this category are adjusted to fair value on a continual basis, with changes in value reported in the income statement. For financial instruments held for trading purposes, both realized and unrealized changes in value are reported in the income statement item, Net profit (loss) from financial transactions. Items in the balance sheet that are classified as financial assets valued at fair value via the income statement, and which are held for trading purposes, are cash and bank balances, as well as derivatives with a positive value that are part of other assets. At the end of the financial year, there were no other financial assets that the company initially chose to value at fair value via the income statement. Loan receivables and accounts receivable Loan receivables and accounts receivable are financial assets that are not derivatives, and which have fixed or determinable payments and are not quoted in an active market. These assets are valued at cost. Accounts receivable and loan receivables are reported at net realizable value, i.e. after the allowance for doubtful accounts. Items in the balance sheet that are classified as loan receivables and accounts receivable are: loans granted to credit institutions, loans granted to the general public and other assets, except derivatives with a positive value. Held-to-maturity investments Held-to-maturity investments are financial assets consisting of interest-bearing securities with fixed or determinable payments and fixed maturity that the company intends and is able to hold to maturity. Assets in this category are valued at amortized cost. Items in the balance sheet classified at held-to-maturity investments are: treasury bills eligible as collateral, bonds and other interest-bearing securities. Available-for-sale financial assets Available-for-sale assets are financial assets that are not classified in any other category and financial assets that the company has initially chosen to classify in this category. Holdings of shares and participations that are not reported as subsidiaries, associated companies or joint ventures are reported here. Assets in this category are adjusted to fair value on a continual basis. Changes in value are reported directly against equity, except for changes in value that are the result of impairment (see accounting principles) or exchange rate differences for monetary items, which are reported in the income statement. In accordance with the effective interest method, the interest on interest-bearing instruments is reported in the income statement. The same applies to dividends on shares. For these instruments, any transaction costs are included in the cost of acquisition for first-time reporting. Afterwards, they are included in the fair value reserve when regular adjustments to fair value are made. This is done until the time when the instrument falls due or is disposed of. Upon disposal of the asset, the accumulated profit/loss is reported in the income statement (which was previously reported as part of equity). Items in the balance sheet classified as available-for-sale financial assets are other shares and participations. Financial liabilities valued at fair value via the income statement This category consists of two sub-categories: financial liabilities that are held for trading purposes and financial liabilities that are classified in this category when reported for the first time (Fair Value Option). Financial instruments in this category are adjusted to fair value on a continual basis, with changes in value reported in the income statement. The first sub-category includes derivatives with a negative fair value. For financial instruments held for trading purposes, both realized and unrealized changes in value are reported in the income statement item, Net profit (loss) from financial transactions. Items in the balance sheet classified as financial liabilities valued at fair value via the income statement are derivatives with a negative value that are included as part of other liabilities. Other financial liabilities The category, other financial liabilities, includes financial liabilities that have not been classified in any other category, such as borrowings, deposits and other liabilities. Liabilities in this category are valued at amortized cost. Items in the balance sheet that are classified as other financial liabilities are: liabilities to credit institutions, deposits from the general public and other liabilities, except derivatives with a negative value. (m) Loan losses and impairment of financial instruments (i) Test of impairment for financial assets At each reporting occasion, the bank assesses whether there is any objective evidence to suggest that a financial asset or group of assets needs to be written down as the FOREX Bank Annual Report