FS Lviv en 2014 (IFRS) final · 2018. 12. 6. · BANK “LVIV” Financial Statements for the year ended 31 December 2014 (All amounts in Ukrainian Hryvnia thousand unless otherwise

BANK “LVIV” Financial Statements for the year ended 31 December 2014 TRANSLATED FROM UKRAINIAN ORIGINAL

BANK “LVIV” Financial Statements for the year ended 31 December 2014

2

CONTENTS

INDEPENDENT AUDITOR’S REPORT ..................................................................................................................... 3 STATEMENT OF COMPREHENSIVE INCOME ....................................................................................................... 5 STATEMENT OF FINANCIAL POSITION ................................................................................................................ 6 STATEMENT OF CHANGES IN EQUITY ................................................................................................................. 7 STATEMENT OF CASH FLOWS ............................................................................................................................... 8 NOTES TO THE FINANCIAL STATEMENTS ........................................................................................................... 9 1. BANK INFORMATION .................................................................................................................................. 9 2. BANK’S OPERATING ENVIRONMENT ......................................................................................................11 3. PREPARATION OF THE FINANCIAL STATEMENTS ................................................................................11 3.1. BASIS OF PREPARATION ............................................................................................................................11 3.2. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS ...................................12 3.3. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES ....................................................................13 3.4. SIGNIFICANT ACCOUNTING POLICIES ....................................................................................................14 3.5. STANDARDS ISSUED BUT NOT YET EFFECTIVE ....................................................................................24 4. SEGMENT INFORMATION ..........................................................................................................................27 5. INTEREST INCOME ......................................................................................................................................29 6. INTEREST EXPENSE ....................................................................................................................................29 7. FEE AND COMMISSION INCOME ..............................................................................................................29 8. FEE AND COMMISSION EXPENSES ...........................................................................................................29 9. OTHER OPERATING INCOME ....................................................................................................................29 10. IMPAIREMENT OF FINANCIAL ASSETS ...................................................................................................30 11. PERSONNEL EXPENSES ..............................................................................................................................30 12. OTHER OPERATING AND ADMINISTRATIVE EXPENSES ......................................................................30 13. OTHER INCOME/(EXPENSES).....................................................................................................................30 14. INCOME TAX ................................................................................................................................................31 15. EARNINGS PER SHARE ...............................................................................................................................32 16. CASH AND CASH EQUIVALENTS ..............................................................................................................32 17. DUE FROM BANKS ......................................................................................................................................32 18. TRADING SECURITIES ................................................................................................................................32 19. INVESTMENT SECURITIES HELD-TO-MATURITY ..................................................................................33 20. LOANS TO CUSTOMERS .............................................................................................................................33 21. OTHER ASSETS ............................................................................................................................................35 22. PROPERTY AND EQUIPMENT ....................................................................................................................36 23. INTANGIBLE ASSETS ..................................................................................................................................37 24. DUE TO BANKS ............................................................................................................................................38 25. AMOUNTS DUE TO CUSTOMERS ..............................................................................................................38 26. DEBT SECURITIES ISSUED .........................................................................................................................38 27. OTHER BORROWED FUNDS .......................................................................................................................38 28. SUBORDINATED DEBT ...............................................................................................................................38 29. OTHER FINANCIAL LIABILITIES ...............................................................................................................39 30. OTHER LIABILITIES ....................................................................................................................................39 31. ISSUED CAPITAL .........................................................................................................................................39 32. FAIR VALUE OF FINANCIAL INSTRUMENTS ..........................................................................................40 33. MATURITY ANALYSIS OF ASSETS AND LIABILITIES............................................................................42 34. CONTINGENT LIABILITIES, COMMITMENTS AND LEASE ARRANGEMENTS ....................................43 35. RELATED PARTY DISCLOSURES ..............................................................................................................44 36. EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE ....................................................45 37. RISK MANAGEMENT ..................................................................................................................................45 38. CAPITAL .......................................................................................................................................................54

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У/е Ьаче аисіііесі ІЬе ассотрапуіпд їіпапсіаі зіаіетепіз о! гіоіпІ-Зїоск СоттегсіаІ Вапк ТуК/” Р ^ С , «ЬісЬ сотргізе ІЬе зіаіетепі ої ГіпапсіаІ розіїіоп аз аі 31 ОесетЬег 2014, апс! їґіе зіаіетепі ої сотргеЬепзме іпсоте, зіаіетепі оТ сМапдез іп ециііу апсі зіаіетепі ої саеЬ їіочуз Тог ІЬе уеаг ІИеп епсіесі, а псі а зи ттагу ої зідпіїісапі ассоипііпд роїісіез апсі оіііег ехріапаїогу поіез.

Мападетепі’з КезропБІЬІІІіу Тог ІЬе ГіпапсіаІ Зіаіетепіз

Мападетепі із гезропзіЬІе їог ІЬе ргерагаїіоп апсі їаіг ргезепіаііоп ої ІЬезе їіпапсіаі зіаіетепіз іп ассогсіапсе чуііґі ІЬе Іпіегпаїіопаї РіпапсіаІ Керогііпд Зіапсіагсіз- ТЬіз гезропзіЬІІіїу іпсіисіез: сіезідпіпд, ітріетепііпд апсі таіпіаіпіпд іпіегпаї сопігої геїеуапі іо ІЬе ргерагаїіоп апсі Гаіг ргезепіаііоп ої їіпапсіаі зіаіетепіз ІЬаІ аге їгее їгот таїегіаі тіззіа іетеп і, даЬеІЬег сіие Іо їгаисі ог еггог; зеїесііпд апсі арріуіпд арргоргіаіе ассоипііпд роїісіез; апсЗ такіпд ассоипііпд езіітаїез ІЬаІ аге геазопаЬІе іп ІЬе сігситзіапсез.

Аидііоґв КезропвіЬіІііу

Оиг гезропзіЬіІіІу із Іо ехргезз ап оріпіоп оп ІЬезе їіпапсіаі зіаіетепіз Ьазесі оп оиг аисііі. \Л/е сопсіисіесі оиг аисііі іп ассогсіапсе шіІЬ Іпіегпаїіопаї Зіапсіагсіз оп Аисііііпд. ТЬозе зіапсіагсіз гечиіге ІЬаІ же сотріу мгіІЬ еІГіісаІ гедиігетепіз апсі ріап апсі регїогт ІЬе аисііі Іо оЬІаіп геазопаЬІе аззигапсе «ЬеІЬег ІЬе ГіпапсіаІ зіаіетепіз аге їгее їгот таїегіаі тіззіа іетеп і.

Ап аисііі іпуокез регїогтіпд ргосесіигез Іо оЬІаіп аисііі еуісіепсе аЬоиІ ІЬе атоипіз апсі сіізсіозигез іп ІЬе ■ГіпапсіаІ зіаіетепіз. ТЬе ргосесіигез веіесіесі сіерепсі оп Ипе аисіііоґз іисідтепі, іпсіисііпд ІЬе аззеззтепі ої ІЬе гізкз ої таїегіаі тіззіа іетеп і ої ІЬе ГіпапсіаІ зіаіетепіз, м/ЬеІЬег сіие Іо їгаисі ог еггог. Іп такіпд ІЬозе гівк аззеззтепіз, ІЬе аисіііог сопзісіегз іпіегпаї сопігої геїеуапі Іо ІЬе епіііу'з ргерагаїіоп апсі їаіг ргезепіаііоп ої ІЬе ГіпапсіаІ зіаіетепіз іп огсіег Іо сіезідп аисііі ргосесіигез ІЬаІ аге арргоргіаіе іп ІЬе сігситзіапсез, Ьиі поі їог ІЬе ригрозе ої ехргеззіпд ап оріпіоп оп ІЬе еїїесііуепезз ої ІЬе епіііу’з іпіегпаі сопігої. Ап аисііі аізо іпсіисіез еуаіиаііпд ІЬе арргоргіаіепезз ої ассоипііпд роїісіез изесі апсі ІЬе геазопаЬІепезз ої ассоипііпд езіітаїез тасіе Ьу тападетепі, аз и/еіі аз еуаіиаііпд ІЬе оуегаІІ ргезепіаііоп ої ІЬе їіпапсіаі зіаіетепіз.

Ме Ьє ііє у є ІЬаІ ІЬе аисіії еуісіепсе же Ьауе оЬІаіпесі із зиїїісіепі апсі арргоргіаіе Іо ргоуісіе а Ьазіз їог оиг аисііі оріпіоп.

Вакег ТіІІу іб а (гасіетагк ої Йіе ІІК {|гт Вакег ТіІІу ІЖ Сгоир 1-І.Р, иївй Ьу Вакег ТіІІу икгаіпе Ц.Р игсієг Іісепзе. ТТіе Сотрапу Кедізігаїіоп із N0. 30373906.Ап іпсіерепсіепі те тЬ е г ої Вакег ТіІІу іпіетаїіопаї

Оріпіоп

Іп оиг оріпіоп, ІЬе ГіпапсіаІ зіаіетепіз діуе а Ігие ап<1 Гаіг уією оГ ІЬе ГіпапсіаІ розіїіоп ої «Іоіпі-Зіоск СоттегсізІ Вапк “і_уіу” Р ^ С аз оГ 31 ОесетЬег 2014, апсі оГ ііз ГіпапсіаІ регГогтапсе апсі ііз сазЬ Поиге Гог ІЬе уеаг ІЬеп епсіес! іп ассогсіапсе ууіііі ІЬе Іпіегпаїіопаї ГіпапсіаІ Керогііпд Зіапсіаггіз.

Ехріапаіогу рагадгарії

\/Уе сІга\л/ уоиг аііепііоп Іо №1е №2 оГ ІЬе ГіпапсіаІ зіаіетепіз ІЬаІ сІезсгіЬез ІЬе сиггепі сгізіз іп ІІкгаіпе. ТЬе ітрасі оГ ІЬе опдоіпд есопотіс сгізіз апгі ІЬе роїііісаі іпзІаЬіІіІу іп ІІкгаіпе апгі ІЬеіг ГіпаІ зеїііетепі саппої Ье ргесіісіесі и/ІІЬ геазопаЬІе орегаїіопз.

Рагіпег

Куіу, Укгаіпе

9 АргіІ 2015

Кедізігаііоп #15-062.1

Вакег ТіІІу із а Ігайетагк оїйіе ІІК І іг т Вакег ТІІІу ІІК Сгоир І_І_Р, изегі Ьу Вакег ТіІІу ІІкгаіпе Ш 3 ипгіег Іісепзе. ТТіе Сотрапу КедізІгаНоп із N0,30373906.Ап іпсіерепгіепі те тЬ е г о! Вакег ТіІІу Іпіегпаїіопа!

BANK “LVIV” Financial Statements for the year ended 31 December 2014 (All amounts in Ukrainian Hryvnia thousand unless otherwise stated)

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NOTES TO THE FINANCIAL STATEMENTS

1. BANK INFORMATION

Public Joint Stock Company Joint Stock Bank “Lviv” (the Bank) is incorporated and domiciled in Ukraine.

Its registered office is at 1 Serbska St., Lviv, Ukraine.

The reporting date for the reporting period is 31 December 2014.

Functional currency and measuring unit of the reporting is UAH thou.

The Bank was registered on 17 October 1990 by the State Bank of USSR. On 12 August 2008, the Bank was registered by the National Bank of Ukraine (the NBU) under its previous name as Open Joint-Stock Company Joint-Stock Bank “Lviv”. On 23 September 2009, the Bank was registered by the NBU as Public Joint-Stock Company Joint Stock Bank “Lviv”.

The Bank enters the integrated banking system of Ukraine and is an independent entity. The main Bank’s shareholder is a Limited Liability Company "New Progress Holding", which as at 31.12.2014 owns 99,8789% of the share capital of JSC Bank “Lviv” (as at 31.12.2013 - 99,8752%). The ultimate controlling parties of the Bank are citizens of Iceland: Margeir Petursson, Jon Palmanson and Sigurdur Gisli Palmanson.

JSC Bank “Lviv” does not prepare consolidated financial statements, as far as it does not own either associated or affiliated companies.

There are no foreign investors among the shareholders of Joint Stock Bank “Lviv”.

Public Joint Stock Company Joint Stock Bank “Lviv” operates as a universal Bank.

According to the Charter the main purpose of the Bank’s activities is earning profit by providing banking and other financial services in national and foreign currency and conducting other activities that may be allowed for banks according to the current legislation of Ukraine. If there is a license, permission or consent (agreement) of the National Bank of Ukraine, Securities an Stock Market State Commission, State Property Fund of Ukraine, or any other authorities, required for conducting activities foreseen by the Charter, the Bank conducts such activity after obtaining such licenses, permissions or consents (agreements).

The supreme governing body of the Bank is the General Meeting of Shareholders defining the mission, philosophy and strategy of the activities.

Regulatory authority that supervises the activities of the Bank is the Supervisory Board. The Bank Supervisory Board represents the shareholders’ interests in the period between the Members’ General Meetings.

The Board as the executive body of the Bank is responsible for the ongoing management of its activities.

JSC Bank “Lviv” operates according to the banking license No. 54 issued by the National Bank of Ukraine on 26.10.2011.

According to the banking license No. 54 of 26.10.2011 the Bank has a right to provide banking services, determined in the third part of Article 47 of the law of Ukraine “On Banks and Banking” notably:

1) acquisition of funds and bank metal in deposits from the unrestricted circle of l legal entities and individuals; 2) opening and managing current (correspondent) accounts of the clients including accounts in bank metals; 3) placing raised in deposits including current accounts funds and bank metals sui Juris, on One’s own terms and

at One’s own risk.

The Bank has a right to provide its clients (except banks) with financial services including concluding agency contracts with the legal entities. The list of financial services which the Bank has a right to provide its clients (except banks) with by concluding the agency contracts is established by the national bank of Ukraine.

Except providing financial services The Bank has a right to conduct its activity concerning:

1) investments; 2) issue of own securities; 3) issue, dissemination and conducting lotteries; 4) saving valuables or providing individual bank safes in property lease; 5) collection of funds and currency valuables transition; 6) maintaining registers of registered securities owners (except of own securities); 7) providing consulting and informational services concerning banking and other financial services.


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1. BANK INFORMATION (continued)

According to the currency transactions General license of 26.10.2011 No. 54 the Bank has a right to conduct its activity, provide banking and other financial services in foreign currency notably:

1) currency valuables non-trading transactions; 2) cash foreign currency and cheques (buying, selling, exchange, obtaining for collection) transactions , which are

performed in the banks’ cash-offices and foreign currency exchange offices; 3) cash foreign currency (buying, selling, exchange) transactions, which are performed in the foreign currency

exchange offices which operate on the basis of concluded by the banks agency contracts with legal entities-residents;

4) managing clients’ accounts (residents’ and non-residents’) in foreign currency and clients-non-residents in monetary units of Ukraine;

5) managing banks’ correspondent accounts (residents’ and non-residents’) in foreign currency; 6) managing banks’ correspondent accounts (non-residents’) in monetary units of Ukraine; 7) opening correspondent accounts in authorized banks of Ukraine in foreign currency and performing

transactions on them; 8) opening correspondent accounts in banks (non-residents) in foreign currency and performing transactions on

them; 9) acquisition and placing foreign currency on currency market of Ukraine; 10) acquisition and placing foreign currency on international markets; 11) foreign currency trade on currency market of Ukraine [except of transactions with cash foreign currency and

cheques (buying, selling, exchange), which are performed in the banks’ and agencies’ cash-offices and foreign currency exchange offices];

12) foreign currency trade on international markets; 13) acquisition and placing bank metals on currency market of Ukraine; 14) acquisition and placing bank metals on international markets; 15) bank metals trade on currency market of Ukraine; 16) currency transactions on currency market of Ukraine, which belong to financial services according to Article 4

of the law of Ukraine ‘”On financial services and state regulation on Financial Market” and do not mentioned in paragraphs 2-17 of Regulation of assignment of currency transactions general licences for performing currency transactions to banks and foreign banks’ branches approved by the National Bank of Ukraine decision of 15.08.2011 No. 281.

The Bank makes direct investments and performs portfolio transactions according to the securities, investment activity legislation of Ukraine and regulatory and legal acts of National Bank of Ukraine.

During the year 2015 JSC Bank “Lviv” does not plan to expand the list of transactions, the performance of which requires the permission of the National Bank of Ukraine.

The Bank Development Strategy 2013-2017 was approved by the decision of the Board, minutes No. 47/2003 of 29.05.2013 and by the decision of The Bank Supervisory Board, minutes of 30.05.2013.

In accordance with the Strategy, the vision of the Bank – is a reliable financial partner, who is trustworthy and approaching the clients, the mission of the Bank is forming a strong position on banking services market of West Ukraine, ensuring stable profitable performance.

The Bank identifies the following strategic targets:

1) managerial – the high manageability of the business and risk-control; 2) business-technological – effective functioning and development of the business; 3) methodological – the effective methodological support of the managerial and business-processes of the Bank; 4) in the IT sphere – satisfaction of the managerial, business-technological, methodological and informational

needs of the Bank.

JSC Bank “Lviv” is a permanent member of the Individuals Deposits Guarantee Fund since 1999:

No. under the Fund’s register

34

Date of registration in the Fund

02.09.1999

No. of the Fund’s member certificate

31

The date of the certificate

18.10.2012 As of the end of year 2014 the members of the Board do not own the shares of the Bank. The members of the Supervisory Board own 25 850 shares of the Bank (0,001 % of the equity capital), the value of which is 2,6 thousand hryvnias (at the end of year 2013 – 25 850 shares).

The release of these financial statements for the year that ended on 31 December 2014 was approved by the decision of the Management Board on 09 April 2015 and by the decision of the Supervisory Board on 09 April 2015.


10

2. BANK’S OPERATING ENVIRONMENT

Internal and external shocks, escalation of the conflict in eastern Ukraine struck economy, made negative impact on trust and unbalanced financial markets. It is estimated that economic activity in 2014 declined by 6,9 percent and indicators in December suggested about continuing decline in industrial production, retail sales and in construction.

Consumer price inflation accelerated in 2014, which was a reflection of the consequences of transfer devaluation and the growth of administrative prices. At the end of 2014, inflation reached 25 percent, due to the fact that the hryvnia has lost almost half of its value against the US dollar. Since 2015 devaluation of hryvnia exchange rate against the US dollar was 49 percent.

Outflow of deposits from the banking system is continued due to a decrease of people income and the deterioration of market expectations.

The credit activity of banks is reduced due to their limited resource base, increased rigidity of lending standards on all types of loans and reducing the number of reliable borrowers in the face of declining economic activity.

As at March 1, 2015 volume of international reserves of Ukraine is amounted on 5 625 mln USD in equivalent.

On March 4, 2015 the National Bank of Ukraine set a discount rate of 30% per annum.

Ministry of Finance in March 2015 published on its website a Letter of Intent, Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding, which is the basic document approved under the IMF program EFF for Ukraine.

The Bank’s management believes that all necessary measures are taken to maintain economic stability in such circumstances. Further deterioration of the situation may adversely affect the results and financial position of the Bank. At the moment, it is impossible to determine exactly how it will impact.

3. PREPARATION OF THE FINANCIAL STATEMENTS

3.1. BASIS OF PREPARATION

The financial statements have been prepared on a historical cost basis, except for available-for-sale investments, other financial assets and liabilities held for trading, financial assets and liabilities designated at fair value through profit or loss, land, buildings and investment property. The financial statements are presented in Ukrainian hryvnia (UAH) and all values are rounded to the nearest UAH thousands, except when otherwise indicated.

Statement of compliance

The financial statements of the Bank have been prepared in accordance with IFRS as issued by the IASB

Presentation of financial statements

The Bank presents its statement of financial position broadly in order of liquidity.

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank.


11

3. PREPARATION OF THE FINANCIAL STATEMENTS (continued)

3.2. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

In the process of applying the Bank's accounting policies, management has exercised judgment and estimates in determining the amounts recognised in the financial statements. The most significant uses of judgment and estimates are as follows:

Going concern

The Bank's management has made an assessment of the Bank's ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank's ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset-backed securities.

Impairment losses on loans and advances

The Bank reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the income statement. In particular, management judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in banks of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, credit utilization, loan to collateral ratios, etc.), and judgments to the effect of concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual banks).

Impairment of available-for-sale investments

The Bank reviews its debt securities classified as available-for-sale investments at each statement of financial position date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances.

The Bank also records impairment charges on available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is 'significant' or 'prolonged' requires judgment. In making this judgment, the Bank evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost.

Deferred tax assets

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies.


12


3.3. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES

New and amended standards and interpretations

The Bank applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2014.

The nature and the impact of each new standard and amendment are described below:

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements and must be applied retrospectively, subject to certain transition relief. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments have no impact on the Bank, since none of the entities in the Bank qualifies to be an investment entity under IFRS 10.

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

These amendments clarify the meaning of ’currently has a legally enforceable right to set-off’ and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting and is applied retrospectively. These amendments have no impact on the Bank, since none of the entities in the Bank has any offsetting arrangements.

Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39

These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria and retrospective application is required. These amendments have no impact on the Bank as the Bank has not novated its derivatives during the current or prior periods.

IFRIC 21 Levies

IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective application is required for IFRIC 21. This interpretation has no impact on the Bank as it has applied the recognition principles under IAS 37 Provisions, Contingent Liabilities and Contingent Assets consistent with the requirements of IFRIC 21 in prior years.

Annual Improvements 2010-2012 Cycle

In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 is effective immediately and, thus, for periods beginning at 1 January 2014, and it clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 has no impact on the Bank.

Annual Improvements 2011-2013 Cycle

In the 2011-2013 annual improvements cycle, the IASB issued four amendments to four standards, which included an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment to IFRS 1 is effective immediately and, thus, for periods beginning at 1 January 2014, and clarifies in the Basis for Conclusions that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but permits early application, provided either standard is applied consistently throughout the periods presented in the entity’s first IFRS financial statements. This amendment to IFRS 1 has no impact on the Bank, since the Bank is an existing IFRS preparer.


13


3.4. SIGNIFICANT ACCOUNTING POLICIES

Foreign currency translation

(1) Transactions and balances

Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the statement of financial position date. All differences arising on non-trading activities are taken to 'Other operating income' in the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

(2) Financial instruments - initial recognition and subsequent measurement

(i) Date of recognition

All financial assets and liabilities are initially recognised on the trade date, i.e., the date that the Bank becomes a party to the contractual provisions of the instrument. This includes "regular way trades": purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.

(ii) Initial measurement of financial instruments

The classification of financial instruments at initial recognition depends on the purpose and the management's intention for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss.

(iіі) Financial assets and financial liabilities designated at fair value through profit or loss

Financial assets and financial liabilities classified in this category are those that have been designated by management on initial recognition. Management may only designate an instrument at fair value through profit or loss upon initial recognition when the following criteria are met, and designation is determined on an instrument by instrument basis:

• The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis.

• The assets and liabilities are part of a bank of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

• The financial instrument contains one or more embedded derivatives which significantly modify the cash flows that otherwise would be required by the contract.

Financial assets and financial liabilities at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recorded in 'Net gain or loss on financial assets and liabilities designated at fair value through profit or loss'. Interest is earned or incurred is accrued in 'Interest income' or 'Interest expense', respectively, using the effective interest rate (EIR), while dividend income is recorded in 'Other operating income' when the right to the payment has been established.

(іv) 'Day 1' profit or loss

When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognises the difference between the transaction price and fair value (a 'Day 1' profit or loss) in 'Net trading income'. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the income statement inputs become observable, or when the instrument is derecognised.


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(v) Available-for-sale financial investments

Available-for-sale investments include equity and debt securities. Equity investments classified as available-for-sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions.

The Bank has not designated any loans or receivables as available-for-sale.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value.

Unrealized gains and losses are recognised directly in equity (other comprehensive income) in the 'Available-for-sale reserve'. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the income statement in 'Other operating income'. Where the Bank holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the EIR. Dividends earned whilst holding available-for-sale financial investments are recognised in the income statement as 'Other operating income' when the right of the payment has been established. The losses arising from impairment of such investments are recognised in the income statement in 'Impairment losses on financial investments' and removed from the 'Available-for-sale reserve'.

(vi) Held-to-maturity financial investments

Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortized cost using the EIR, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization is included in 'Interest and similar income' in the income statement. The losses arising from impairment of such investments are recognised in the income statement line 'Credit loss expense'.

If the Bank were to sell or reclassify more than an insignificant amount of held-to-maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Bank would be prohibited from classifying any financial asset as held to maturity during the following two years.

(vii) Due from Banks and loans and advances to customers

After initial measurement, amounts 'Due from Banks' and 'Loans and advances to customers' are subsequently measured at amortized cost using the EIR, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in 'Interest and similar income' in the income statement. The losses arising from impairment are recognised in the income statement in 'Credit loss expense'.

The Bank may enter into certain lending commitments where the loan, on drawdown, is expected to be classified as held-for-trading because the intent is to sell the loans in the short term. These commitments to lend are recorded as derivatives and measured at fair value through profit or loss.

Where the loan, on drawdown, is expected to be retained by the Bank, and not sold in the short term, the commitment is recorded only when the commitment is an onerous contract and it is likely to give rise to a loss (for example, due to a counterparty credit event).

(viіі) Debt issued and other borrowed funds

Financial instruments issued by the Bank, that are not designated at fair value through profit or loss, are classified as liabilities under 'Debt issued and other borrowed funds', where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

After initial measurement, debt issued and other borrowings are subsequently measured at amortized cost using the EIR. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR.


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(іx) Reclassification of financial assets

Effective from 1 July 2008, the Bank was permitted to reclassify, in certain circumstances, non-derivative financial assets out of the 'Held-for-trading' category and into the 'Available-for-sale', 'Loans and receivables', or 'Held-to-maturity' categories. From this date it was also permitted to reclassify, in certain circumstances, financial instruments out of the 'Available-for-sale' category and into the 'Loans and receivables' category. Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortized cost.

For a financial asset reclassified out of the 'Available-for-sale' category, any previous gain or loss on that asset that has been recognised in equity is amortized to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired then the amount recorded in equity is recycled to the income statement.

The Bank may reclassify a non-derivative trading asset out of the 'Held-for-trading' category and into the 'Loans and receivables' category if it meets the definition of loans and receivables and the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Reclassification is at the election of management, and is determined on an instrument by instrument basis. The Bank does not reclassify any financial instrument into the fair value through profit or loss category after initial recognition.

(3) Derecognition of financial assets and financial liabilities

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a bank of similar financial assets) is derecognised when:

• The rights to receive cash flows from the asset have expired.

• The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement; and either:

• the Bank has transferred substantially all the risks and rewards of the asset, or

• the Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank's continuing involvement in the asset. In that case, the Bank also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

(ii) Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss.


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(4) Repurchase and reverse repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position as the Bank retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability within 'Cash collateral on securities lent and repurchase agreements', reflecting the transaction's economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the EIR. When the counterparty has the right to sell or repledge the securities, the Bank reclassifies those securities in its statement of financial position to 'Financial assets held-for-trading pledged as collateral' or to 'Financial investments available-for-sale pledged as collateral', as appropriate.

Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within 'Cash collateral on securities borrowed and reverse repurchase agreements', reflecting the transaction's economic substance as a loan by the Bank. The difference between the purchase and resale prices is recorded in 'Net interest income' and is accrued over the life of the agreement using the EIR.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within 'Financial liabilities held-for-trading' and measured at fair value with any gains or losses included in 'Net trading income'.

(5) Determination of fair value

The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models.

Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Bank's best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded ('Day 1' profit or loss) is deferred and recognised only when the inputs become observable or on derecognition of the instrument.

(6) Impairment of financial assets

The Bank assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a bank of financial assets is impaired. A financial asset or a bank of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the bank of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a bank of borrowers is experiencing significant financial difficulty, the probability that they will enter Bankruptcy or other financial reorganization, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.


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(i) Financial assets carried at amortized cost

For financial assets carried at amortized cost (such as amounts due from Banks, loans and advances to customers as well as held-to-maturity investments), the Bank first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a bank of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of 'Interest and similar income'. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the 'Credit loss expense'.

The present value of the estimated future cash flows is discounted at the financial asset's original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. If the Bank has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new EIR determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are banked on the basis of the Bank's internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

Future cash flows on a bank of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.


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(ii) Available-for-sale financial investments

For available-for-sale financial investments, the Bank assesses at each statement of financial position date whether there is objective evidence that an investment is impaired.

In the case of debt instruments classified as available-for-sale, the Bank assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of 'Interest and similar income'. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement.

In the case of equity investments classified as available-for-sale, objective evidence would also include a 'significant' or 'prolonged' decline in the fair value of the investment below its cost. The Bank treats 'significant' generally as 20% and 'prolonged' generally as greater than six months. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement - is removed from equity and recognised in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in the fair value after impairment are recognised in other comprehensive income.

(iii) Renegotiated loans

Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan's original EIR.

(7) Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in statement of financial position.

(8) Leasing

The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Bank as a lessee

Leases which do not transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term. Contingent rental payable are recognised as an expense in the period in which they are incurred.

Bank as a lessor

Leases where the Bank does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.


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(9) Recognition of income and expenses

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

(i) Interest and similar income and expense

For all financial instruments measured at amortized cost, interest bearing financial assets classified as available- for-sale and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as 'Other operating income'. However, for a reclassified financial asset for which the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Once the recorded value of a financial asset or a bank of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

(ii) Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis.

Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

(iii) Dividend income

Dividend income is recognised when the Bank's right to receive the payment is established.

(iv) Net trading income

Results arising from trading activities include all gains and losses from changes in fair value and related interest income or expense and dividends for financial assets and financial liabilities 'held-for-trading'. This includes any ineffectiveness recorded in hedging transactions.

(10) Cash and cash equivalents

Cash and cash equivalents as referred to in the cash flow statement comprises cash on hand, non-restricted current accounts with central Banks and amounts due from Banks on demand or with an original maturity of three months or less.


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(11) Property and equipment

Property and equipment (including equipment under operating leases where the Bank is the lessor) is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Changes in the expected useful life are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates.

Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:

• Buildings and investment property 35 to 100 years

• Motor vehicles 10 years

• Furniture and equipment 4 to 15 years

Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in 'Other operating income' in the income statement in the year the asset is derecognised.

(12) Intangible assets

The Bank's other intangible assets include the value of computer software.

Software comprises software and software use license. Licenses comprise licenses to undertake Banking operations issued by the NBU and trademark licenses issued by the payment systems in which the Bank holds its membership. The Bank’s other intangible assets include the right of access to payment systems in which the Bank holds its membership and right to use of property.

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.

Amortization is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows:

• Computer software 2 – 10 years

• Licenses up to 10 years


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(13) Impairment of non-financial assets

The Bank assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Bank estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Bank estimates the asset's or CGU's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement.

(14) Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements (within 'Other liabilities') at fair value, being the premium received. Subsequent to initial recognition, the Bank's liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortization recognised in the income statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is recorded in the income statement in 'Credit loss expense'. The premium received is recognised in the income statement in 'Net fees and commission income' on a straight line basis over the life of the guarantee.

(15) Provisions

Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement net of any reimbursement.


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(16) Taxes

(i) Current tax

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date.

(ii) Deferred tax

Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognised deferred tax assets are reassessed at each statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.

Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and not in the income statement.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

(17) Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank's shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.

Dividends for the year that are approved after the statement of financial position date are disclosed as an event after the statement of financial position date.

(18) Segment reporting

The Bank's segmental reporting is based on the following operating segments: Retail Banking, Corporate Banking, Treasury.


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3.5. STANDARDS ISSUED BUT NOT YET EFFECTIVE

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The adoption of IFRS 9 will have an effect on the classification and measurement of the Bank’s financial assets, but no impact on the classification and measurement of the Bank’s financial liabilities.

IFRS 14 Regulatory Deferral Accounts

IFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-regulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of IFRS. Entities that adopt IFRS 14 must present the regulatory deferral accounts as separate line items on the statement of financial position and present movements in these account balances as separate line items in the statement of profit or loss and other comprehensive income. The standard requires disclosures on the nature of, and risks associated with, the entity’s rate-regulation and the effects of that rate-regulation on its financial statements. IFRS 14 is effective for annual periods beginning on or after 1 January 2016. Since the Bank is an existing IFRS preparer, this standard would not apply.

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions

IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after 1 July 2014. It is not expected that this amendment would be relevant to the Bank, since none of the entities within the Bank has defined benefit plans with contributions from employees or third parties.

Annual improvements 2010-2012 Cycle

These improvements are effective from 1 July 2014 and are not expected to have a material impact on the Bank. They include:

IFRS 2 Share-based Payment

This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including:

• A performance condition must contain a service condition • A performance target must be met while the counterparty is rendering service • A performance target may relate to the operations or activities of an entity, or to those of another entity in the

same group • A performance condition may be a market or non-market condition • If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service

condition is not satisfied

The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 (or IAS 39, as applicable).

IFRS 8 Operating Segments

The amendments are applied retrospectively and clarifies that:

• An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’


24


• The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets

The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data on either the gross or the net carrying amount. In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset.

IAS 24 Related Party Disclosures

The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services.

Annual improvements 2011-2013 Cycle

These improvements are effective from 1 July 2014 and are not expected to have a material impact on the Bank. They include:

IFRS 3 Business Combinations

The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that:

• Joint arrangements, not just joint ventures, are outside the scope of IFRS 3

• This scope exception applies only to the accounting in the financial statements of the joint arrangement itself

IFRS 13 Fair Value Measurement

The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable).

IAS 40 Investment Property

The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or business combination.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2017 with early adoption permitted. The Bank is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date.

Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests

The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.

The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Bank.


25


Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets.

The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Bank given that the Bank has not used a revenue-based method to depreciate its non-current assets.

Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants

The amendments change the accounting requirements for biological assets that meet the definition of bearer plants. Under the amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of IAS 41. Instead, IAS 16 will apply. After initial recognition, bearer plants will be measured under IAS 16 at accumulated cost (before maturity) and using either the cost model or revaluation model (after maturity). The amendments also require that produce that grows on bearer plants will remain in the scope of IAS 41 measured at fair value less costs to sell. For government grants related to bearer plants, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance will apply. The amendments are retrospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Bank as the Bank does not have any bearer plants.

Amendments to IAS 27: Equity Method in Separate Financial Statements

The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively.

For first-time adopters of IFRS electing to use the equity method in its separate financial statements, they will be required to apply this method from the date of transition to IFRS. The amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments will not have any impact on the Bank, because Bank does not preparing consolidated financial statements.


26

4. SEGMENT INFORMATION

For management purposes, the Bank is organized into three operating segments based on products and services as follows:

1) Retail Banking - Individual customers' deposits and consumer loans, overdrafts, credit card facilities and funds transfer facilities.

2) Corporate Banking - Loans and other credit facilities and deposit and current accounts for corporate and institutional customers.

3) Treasury business - this business segment includes trading in financial instruments, transactions with securities and derivatives, including REPO deals, foreign currency transactions, raising and origination of loans on interBank loan markets, interest rate arbitrage on SWAP transactions. Besides, the treasury function includes the Bank's short-term asset management and the Bank's open positions in foreign currencies.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects is measured differently from operating profit or loss in the financial statements. Income taxes are managed on a bank basis and are not allocated to operating segments.

The following table presents income and profit and certain asset and liability information regarding the Bank’s operating segments for the year ended 31 December is given in the table below:

As at 31 December 2014

Retail Banking

Corporate Banking

Treasury business

Other/ Unallocated

Total

Interest and similar income 14 062

97 380

8 451

-

119 893

Interest and similar expenses (57 055)

(18 648)

(13 715)

-

(89 418) Commission income 13 175

7 177

433

-

20 785

Commission expenses (288)

(699)

(931)

-

(1 918) Allowance for loan impairment 6 279

(6 842)

-

5

(558)

Segment results

(23 827)

78 368

(5 762)

5

48 784 Other non-interest income -

-

(6 769)

1 111

(5 658)

Other non-interest expenses -

-

-

(39 554)

(39 554) Profit before tax (23 827)

78 368 (12 531)

(38 438)

3 572

Income tax expense -

- -

(5 606)

(5 606) Profit for the year (23 827)

78 368 (12 531)

(44 044)

(2 034)

Assets and liabilities Segment assets 80 139

738 352

242 163

-

1 060 654

Unallocated assets -

-

-

94 758

94 758 Total assets

80 139

738 352

242 163

94 758

1 155 412

Segment liabilities 521 283

315 839

175 834

-

1 012 956 Unallocated liabilities -

-

-

6 459

6 459

Total liabilities

521 283

315 839

175 834

6 459

1 019 415


27

Retail Banking

Corporate Banking

Treasury business

Other/ Unallocated

Total

31 December 2013 Interest income

13 818 83 927 5 586 - 103 331 Interest expenses

(52 112) (19 461) (9 662) - (81 235)

Fee and commission income

4 477 10 978 473 - 15 928 Fee and commission expenses

(398) (56) (607) - (1 061)

Allowance for loan impairment

13 917 (13 802) 310 (17) 408 Segment results

(20 298) 61 586 (3 900) (17) 37 371

Other non-interest income

- - 13 061 746 13 807 Other non-interest expenses

- - - (47 945) (47 945)

Profit before tax

(20 298) 61 586 9 161 (47 216) 3 233 Income tax expense

- - - (2 075) (2 075)

Profit for the year

(20 298) 61 586 9 161 (49 291) 1 158

Assets and liabilities

Segment assets

67 270 557 164 134 605 - 759 039 Unallocated assets - - - 85 450 85 450 Total assets 67 270 557 164 134 605 85 450 844 489 Segment liabilities

404 420 200 077 103 771 - 708 268

Unallocated liabilities - - - 5 690 5 690 Total liabilities 404 420 200 077 103 771 5 690 713 958


28

5. INTEREST INCOME

2014

2013

Cash and short term funds

89

152 Due from banks

1 056

2 394

Loans and advances to customers

111 442

97 745 Financial investments

7 306

3 040

119 893

103 331

6. INTEREST EXPENSE

2014

2013

Due to banks

(3 610)

(3 071) Due to customers

(78 799)

(73 040)

Debt issued and other borrowed funds

(7 009)

(5 124)

(89 418)

(81 235)

7. FEE AND COMMISSION INCOME

2014

2013

Settlements and cash operations

16 892

13 332 Currency conversion operations

2 651

1 727

Securities operations

21

- Loan operations, guarantees and letters of credit

92

54

Other

1 129

815

20 785

15 928

From line “Other fee income”: Fee income from trust customer service

251

202 Other fee and commission income from transactions with customers 878

613

8. FEE AND COMMISSION EXPENSES

2014

2013

Settlements and cash operations

(1 591)

(995) Loan operations, guarantees and letters of credit

(87)

-

Currency conversion operations

(34)

(36) Other (206)

(30)

(1 918)

(1 061)

From line “Other fee expenses”: Fee expenses from transactions in the foreign exchange market and precious

metals market (20)

- Fee expenses for off-balance sheet transactions

(160)

(16)

Other

(26)

(14)

9. OTHER OPERATING INCOME

2014

2013

Operating lease income

259

391 Penalties, fines received by the bank

653

208

Other 199

147

1 111

746

From line “Other operating income”: Income from provided consulting services of financial character

3

1 Other operating income

159

109

Positive result from sale of intangible assets, property and equipment

4

- Other income

33

37


29

10. IMPAIREMENT OF FINANCIAL ASSETS

2014

2013

Loans and advances to customers:

(563)

115

Corporate lending

(6 842)

(13 802) Consumer lending

6 279

13 917

Other

5

293

(558)

408

In 2014 the Bank returned previously written off bad debts for the amount of 18 359 thousand UAH (in 2013 - 6 863 thousand UAH)

From line «Other»: (Charge)/Release of allowances for impairment of advances and

prepayments

5

17 Impairment losses on securities available-for-sale

-

302

Allowances for liabilities

-

(26)

11. PERSONNEL EXPENSES

2014

2013

Wages and salaries

(20 098)

(17 241) Social security costs

(6 866)

(5 986)

(26 964)

(23 227)

12. OTHER OPERATING AND ADMINISTRATIVE EXPENSES

2014

2013

Depreciation charge

(2 458)

(2 691) Operating lease rental charge

(4 691)

(4 662)

Administrative expenses

(13 194)

(11 167) Individual's deposit guarantee fund

(3 714)

(2 883)

Advertising and marketing

(667)

(637) Professional services

(287)

(205)

Other taxes apart from income tax

(1 108)

(437) Other

(171)

(3 757)

(26 290)

(26 439)

Expenses, caused first of all by the property impairment, which passed into ownership of the Bank as the Pawnee are represented in line “Other operating and administrative expenses” (2013 – (3 593) thousand UAH).

13. OTHER INCOME/(EXPENSES)

2014

2013

Write-off of a previously recognised asset

13 852

6 092 Other expenses

(152)

(4 371)

13 700

1 721

In the line "Write-off of a previously recognised asset" for 2013 is showing result of the sale of certain objects of real estate, which became the property of the Bank as mortgagee. In the same line for 2014 is showing result of the recognition of the Bank the results of the impairment testing of the fair value of certain objects of real estate which became the property of the Bank as mortgagee.

Expenses caused first of all by the assignment of claims on loans by the Bank to the collector companies are represented in line “Other expenses” (2013 – (4 223) thousand UAH).


30

14. INCOME TAX

The components of income tax expenses for the years ended 31 December are presented below:

2014

2013

Current income tax

-

(426)

Deferred tax expenses

(5 606)

(1 649)

(5 606)

(2 075)

Reconciliation of tax expense and notes multiplied by a tax rate that was effective in Ukraine for the years that ended 31 December is presented below:

2014

2013

Accounting profit before tax

3 572

3 233

At a tax rate set by the laws of Ukraine 18% (2013- 19%)

(643)

(614)

Tax effect of items, which are not taken for taxation purposes or not included to the taxable amount

(4 963)

(1 461)

Income tax expense recognised in the income statement and other comprehensive income statement

(5 606)

(2 075)

Deferred tax included in the statement of financial position can be presented as follows:

2014

2013

Tax effect of deductible temporary differences: Provision for loan impairment

895

398 Fixed and intangible assets

237

247

Other long-term assets held for sale

464

3 128 Settlements with personnel

497

368

Other

2 038

5 596 Deferred tax asset, net

4 131

9 737

Deferred tax liabilities

-

-

Net deferred tax asset/(liability)

4 131

9 737


31

15. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary equity holders of Bank by the weighted average number of ordinary shares outstanding during the year.

The following table shows the income and share data used in the basic earnings per share calculations (diluted earnings/loss is not disclosed due to absence of convertible securities, conversional instruments and ordinary shares issue is not expected without convenient assets increasing)

2014

2013

Net profit attributable to ordinary equity holders of the parent, thousand UAH (2 034)

1 158

Weighted average number of ordinary shares for basic earnings per share, thousand shares 2 458 779

2 396 313

Basic earnings per share, UAH (0,0008) 0,0005

There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of the completion of these financial statements which would require the restatement of earnings per share.

16. CASH AND CASH EQUIVALENTS

2014

2013

Cash on hand

29 330

15 594 Current accounts with the National Bank of Ukraine

25 801

15 890

Deposits with the National Bank of Ukraine

-

1 855 Current accounts in banks

99 710

51 721

154 841

85 060

During 2013-2014 years period the Bank did not break the NBU mandatory reserve standard.

17. DUE FROM BANKS

2014

2013

Loans from banks

-

7 003 Deposits in banks

8 964

7 459

8 964

14 462

At at 31.12.2014 and 31.12.2013 costs placed with other banks is not overdue and not devalued.

18. TRADING SECURITIES

2014

2013

Government bonds

28 629

26 679

28 629

26 679

During 2013-2014 years period the Bank did not perform reclassification of trading securities.

As at 31.12.2014 in connection with the receipt of the refinancing loan according to the Regulations on banks of Ukraine liquidity by NBU, the Bank pledged government bonds in a trading portfolio for the amount of 18 218 thousand hryvnias in UAH equivalent to ensure the discharge of the commitments (as at 31.12.2013 - 25 986 thousand hryvnias).


32

19. INVESTMENT SECURITIES HELD-TO-MATURITY

2014

2013

Government bonds

32 265

1 035 National Bank Securities

16 000

-

48 265

1 035

20. LOANS TO CUSTOMERS

2014

2013

Corporate lending

827 810

610 292

Consumer lending

87 237

75 640

915 047

685 932

Less: Allowance for impairment losses

(96 556)

(61 498)

818 491

624 434

As at 31.12.2013 and 31.12.2014 the Bank did not use securities as loans and clients debts collateral.

Impairment allowance for loans to customers

A reconciliation of the allowance for impairment losses for loans, by class, is as follows:

Corporate lending

Consumer lending Total

At 1 January 2014

(53 128)

(8 370)

(61 498) Charge for the year

(25 931)

(1 422)

(27 353)

Loan recovery 5 575

2 856 8 431 Write-off of bed debts

-

657

657

Net foreign exchange difference

(15 974)

(819)

(16 793) At 31 December 2014

(89 458)

(7 098)

(96 556)

Individual impairment

(87 197)

(6 186)

(93 383) Collective impairment

(2 261)

(912)

(3 173)

Corporate lending


At 1 January 2013

(46 110)

(38 551)

(84 661) Charge for the year (45 515) (491) (46 006) Loan recovery

25 858

13 035

38 893

Write-off of bed debts

12 889

17 661

30 550 Net foreign exchange difference

(250)

(24)

(274)

At 31 December 2013

(53 128)

(8 370)

(61 498) Individual impairment

(47 485)

(5 747)

(53 232)

Collective impairment

(5 643)

(2 623)

(8 266)


33

20. LOANS TO CUSTOMERS (continued)

Loans by economic sector

Economic sector risk concentrations within the customer loan portfolio (before impairment) are as follows:

2014

2013 Trade

233 988

165 521

Manufacturing

230 989

157 180 Real estate

90 704

70 842

Individuals

87 237

75 640 Construction

75 733

72 624

Financial services

64 203

52 809 Transportation

57 763

37 512

Other services

39 350

24 114 Agriculture and food processing

19 776

13 337

Other

15 304

16 353

915 047

685 932

Collateral for loans

Information about collateral (before impairment) is as follows:

At 31 December 2014

Corporate lending


Cash

36 421

2 930

39 351 Household mortgage

9 543

24 719

34 262

Plant

35 071

168

35 239 Non-household mortgage

231 089

21 678

252 767

Vehicles

12 029

2 766

14 795 Land

-

-

-

Other

503 657

32 730

536 387 Unsecured

-

2 246

2 246

827 810

87 237

915 047

At 31 December 2013

Corporate lending


Cash

33 196

2 662

35 858 Household mortgage

9 860

24 824

34 684

Plant

53 158

138

53 296 Non-household mortgage

271 964

21 154

293 118

Vehicles

9 989

3 881

13 870 Land

-

-

-

Other

231 822

21 262

253 084 Unsecured

303

1 719

2 022

610 292

75 640

685 932


34

20. LOANS TO CUSTOMERS (continued)

The financial effect of collateral is presented by disclosing collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed carrying value of the asset (“overcollateralised assets”) and (ii) those assets where collateral and other credit enhancements are less than the carrying value of the asset (“under-collateralised assets”).

The effect of collateral:

Over-collateralised assets

Under-collateralised assets

At 31 December 2014

Carrying value of the

assets Fair value of

collateral



collateral

Corporate lending

617 954

2 305 357

120 398

91 473 Consumer lending

70 005

265 981

10 134

6 798

687 959

2 571 338

130 532

98 271

Over-collateralised assets

Under-collateralised assets

At 31 December 2013



collateral



collateral

Corporate lending

527 940

1 980 364

29 224

14 632 Consumer lending

63 112

240 696

4 158

2 400

591 052

2 221 060

33 382

17 032

The fair value of collateral is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. This amount does not include possible costs of debt recovery through the foreclosure. Net collateral value after court expenses, disposal costs and other costs related to debt recovery through the foreclosure may differ from its fair value.

21. OTHER ASSETS

2014

2013 Other non-current assets available-for-sale

34 117

20 264

Bank metals

1 465

905 Other assets and prepayments

1 221

893

Allowance for other assets

(111)

(109)

36 692

21 953

Fair value of assets (residential real estate and commercial property) bought by foreclosure for the purpose of loans collateral is represented in line “Other non-current assets available-for-sale”.

The question of passing the property of the debtors in the ownership of the Bank with the purpose of repayment of the liabilities is regulated by the corresponding internal normative documents. According to them it is essential to receive property into the ownership of the Bank, the following realization of which will allow reimbursing of the unpaid commitments of the debtors to the Bank at most, unless otherwise provided by the mortgage contract (pledge contract).

If the property assigned for sale is not realized within a year, such property is transferred to the compound of assets held for use in the process of activity.

The continuance of the period needed for the completion of the sale is permitted if the delay is caused by the events or circumstances which do not depend on the Bank, but there are reasons to suppose that the Bank continues performing the sale of the asset.


35

22. PROPERTY AND EQUIPMENT

Cost: Land Buildings Leasehold

improvements Furniture and equip. Computers Motor vehicles

Construction in progress

Investment property Total

As at 31 December 2012 3 349 37 507 3 227 8 657 10 218 1 066 88 1 006 65 118 Addition - 592 1 192 277 239 - 2 665 - 4 965 Disposal - - (626) (109) (342) - (2 729) - (3 806) Transfer - 1 171 (165) - - - - (1 006) - As at 31 December 2013 3 349 39 270 3 628 8 825 10 115 1 066 24 - 66 277 Addition - 475 90 505 991 658 3 547 - 6 266 Disposal - - (106) (196) (561) (417) (3 231) - (4 511) Transfer - - - - - - - - - As at 31 December 2014 3 349 39 745 3 612 9 134 10 545 1 307 340 - 68 032

Depreciation and impairment: As at 31 December 2012 - (1 681) (2 897) (3 029) (7 031) (602) - - (15 240) Charge for the year - (498) (101) (475) (1 061) (107) - - (2 242) Disposal - - 297 - 342 - - - 639 As at 31 December 2013 - (2 179) (2 701) (3 504) (7 750) (709) - - (16 843) Charge for the year - (520) (116) (569) (762) (113) - - (2 080) Disposal - - 57 183 535 294 - - 1 069 As at 31 December 2014 - (2 699) (2 760) (3 890) (7 977) (528) - - (17 854)

Net book value: As at 31 December 2012 3 349 35 826 330 5 628 3 187 464 88 1 006 49 878 As at 31 December 2013 3 349 37 091 927 5 321 2 365 357 24 - 49 434 As at 31 December 2014 3 349 37 046 852 5 244 2 568 779 340 - 50 178


36

The value of the fixed assets in relation to which there are restrictions concerning ownership, usage and disposal foreseen by the legislation of Ukraine

-

The value of the pledged fixed assets and intangible assets

-

The residual value of the fixed assets that are temporarily not used (temporary closing down, reconstruction etc.)

-

The residual value of the fixed assets extracted from operation for sale

-

Original cost of the fully depreciated fixed assets

5 703

The value of intangible assets in relation to which there are restrictions concerning ownership

-

The value of created intangible assets

-

Increase or decrease during the accounting period which arise in the result of revaluation and losses from the impairment acknowledged or reversed directly in equity capital.

-

23. INTANGIBLE ASSETS

Software

Licenses

Total

Cost: As at 31 December 2012

2 187

1 792

3 979 Addition

194

229

423

Disposal

-

-

- Transfer

-

-

-


2 381

2 021

4 402 Addition

370

133

503

Disposal

(81)

(87)

(168) Transfer

-

-

-


2 670

2 067

4 737

Depreciation and impairment: As at 31 December 2012

(1 172)

(653)


(170)

(170)

(340)


(1 342)

(823)


(123)

(106)

(229)


(1 465)

(929)

(2 394)

Net book value: As at 31 December 2012

1 015

1 139

2 154 As at 31 December 2013

1 039

1 198

2 237


1 205

1 138

2 343


37

24. DUE TO BANKS

2014

2013

Current accounts due to other banks

54 554

25 292 Due to NBU

16 566

25 400

71 120

50 692

25. AMOUNTS DUE TO CUSTOMERS

2014

2013

Legal entities: Current accounts

141 634

84 601 Term deposits

116 168

81 397

Individuals: Current accounts

37 006

34 708 Term deposits

484 277

369 712

Government: Current accounts

-

1 077 Term deposits

-

-

779 085

571 495

26. DEBT SECURITIES ISSUED

In 2013-2014 Bank did not issue debt securities.

27. OTHER BORROWED FUNDS

2014

2013

Loans from international and other financial organizations

58 037

33 002

58 037

33 002

In 2013, the Nordic Environment Finance Corporation (NEFCO) and the Bank signed an agreement worth 3 000 thousand EUR on Bank lending programs for energy efficiency goals.

The program is intended for private households and small and medium-sized companies.

28. SUBORDINATED DEBT

Interest rate Currency Issue date Maturity date 2014 2013

8,73%

USD

11.03.2013

29.03.2018

104 714

53 079

104 714

53 079

The subordinated loans are from the related parties in amount 6 592 thousand USD and do not contain any share conversion terms.


38

29. OTHER FINANCIAL LIABILITIES

2014

2013

Accounts payable for operations with currency

3

1 Dividends

6

6

Other financial liabilities

2 129

2 746

2 138

2 753

From line “Other financial liabilities”: Credit amounts for operations with clients

1 909

2 664 Other

220

82

30. OTHER LIABILITIES

2014

2013

Settlements with personnel

2 790

1 963 Accounts payable and other amounts payable

222

158

Accounts payable to Individual's deposits guarantee fund

1 102

745 Accounts payable for tax other than income tax

207

71

4 321

2 937

31. ISSUED CAPITAL

Authorized

2014

2013

No. thousand

No. thousand

Ordinary shares of 0,1 UAH each

2 578 703

2 503 703

2 578 703

2 503 703

Ordinary shares issued and fully paid

No. thousand

UAH'000

At 1 January 2013

2 428 703

242 870 Emission of ordinary shares of 0,1 UAH each

75 000

7 500

At 31 December 2013

2 503 703 250 370 Emission of ordinary shares of 0,1 UAH each

75 000

7 500

At 31 December 2014

2 578 703 257 870


39

32. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

quoted (unadjusted) prices in active markets for identical assets or liabilities;

other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

Financial instruments recorded at fair value

The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation techniques. These incorporate the Bank’s estimate of assumptions that a market participant would make when valuing the instruments.

(i) financial investments – available-for-sale

Available-for-sale financial assets valued using a valuation technique or pricing models primarily consist of unquoted equities and debt securities.

These assets are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates.

(ii) other trading assets

Other trading assets valued using a valuation technique consists of certain debt securities and asset-backed securities. The Bank values the securities using valuation models which use discounted cash flow analysis which incorporates either only observable data or both observable and non-observable data. Observable inputs include assumptions regarding current rates of interest and real estate prices; unobservable inputs include assumptions regarding expected future default rates, prepayment rates and market liquidity discounts.

(i) loans and receivables designated at fair value through profit or loss

For loans and receivables designated at fair value through profit or loss, a discounted cash flow model is used based on various assumptions, including current and expected future credit losses, market rates of interest, prepayment rates and assumptions regarding market liquidity, where relevant

(ii) other liabilities designated at fair value through profit or loss

For unquoted notes issued, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity adjusted for market liquidity and credit spreads.


40

30. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Financial assets and liabilities not carried at fair value

The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements:

(i) assets for which fair value approximates carrying value

For financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, and savings accounts without a specific maturity.

(ii) fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity. For quoted debt issued the fair values are determined based on quoted market prices. For those notes issued where quoted market prices are not available, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity and credit spreads. For other variable rate instruments an adjustment is also made to reflect the change in required credit spread since the instrument was first recognised.

Set out below is a comparison, by class, of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the financial statements. This table does not include the fair values of non-financial assets and non-financial liabilities.

31 December 2014

31 December 2013

Carrying amount

Total fair value

Carrying amount

Total fair value

Financial assets Cash and balances with central

bank

154 841

154 841

91 524

91 524

Due from banks

8 964

8 964

14 462

14 462

Financial investment

76 894

76 894

27 714

27 714

Loans to customers: Corporate lending

738 352

738 352

557 164

557 164

Consumer lending

80 139

80 139

67 270

67 270

Other financial assets

807

807

1 156

1 156

1 059 997

1 059 997

759 290

759 290

Financial liabilities Due to banks

71 120

71 120

50 692

50 692

Due to customers

837 122

837 122

604 497

604 497

Subordinated debt

104 714

104 714

53 079

53 079

Other financial liabilities

2 138

2 138

2 753

2 753

1 015 094

1 015 094

711 021

711 021


41

33. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recovered or settled.


Less than 12 months

Over 12 months Total

Assets Cash and balances with central banks

154 841

-

154 841 Due from banks

202

8 762

8 964

Financial assets held-for-trading

28 629

-

28 629 Financial investments - held-to-maturity

48 265

-

48 265


638 600

179 891

818 491 Other assets

39 523

47

39 570

Property and equipment

-

50 178

50 178 Intangible assets

-

2 343

2 343

Tax assets deferred

-

4 131

4 131

910 060

245 352

1 155 412

Liabilities Due to banks

71 120

-

71 120 Due to customers

765 048

72 074

837 122

Subordinated debt

771

103 943

104 714 Other liabilities

6 375

84

6 459

843 314

176 101

1 019 415

Net position

66 746

69 251

135 997

As at 31 December 2013 Less than 12 months

Over 12 months Total

Assets Cash and cash equivalents

85 060

-

85 060 Mandatory reserves with the NBU 6 464 - 6 464 Due from banks

14 462

-

14 462

Financial assets held-for-trading

26 679

-

26 679 Financial investments - held-to-maturity

1 035

-

1 035


446 046

178 388

624 434 Other assets

24 947

-

24 947

Property and equipment

-

49 434

49 434 Intangible assets

-

2 237

2 237

Tax assets deferred

-

9 737

9 737

604 693

239 796

844 489

Liabilities Due to banks

50 692

-

50 692 Due to customers

551 441

53 056

604 497

Subordinated debt

-

53 079

53 079 Other liabilities

5 690

-

5 690

607 823

106 135

713 958

Net position

(3 130)

133 661

130 531


42

34. CONTINGENT LIABILITIES, COMMITMENTS AND LEASE ARRANGEMENTS

To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend.

Even though these obligations may not be recognized on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank.

Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans.

Legal claims

Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing.

As at 31.12.2014 the Bank was filed 1 property and 5 non-property suits. The Bank is represented with procedural status of a third party in 2 suits (as at 31.12.2013 the Bank was filed 7 non-property suits. The Bank is represented with procedural status of a third party in 4 suits). The Bank does not qualify that these suits may have negative influence on its financial state.

Operating lease commitments – Bank as lessee

The Bank has concluded a number of contracts concerning commercial lease of real estate objects. The average term of operation of these leasing contracts is from three to five years without a possibility of duration. There are no restrictions against the lessee during the conclusion of these contracts.

The following table shows information about the future minimum lease payments under the contracts of operating lease at 31 of December.

2014

2013

Not later than 1 year

3 624

2 863

Later than 1 year but not later than 5 years

2 108

1 651

Later than 5 years

-

-

5 732

4 514


43

35. RELATED PARTY DISCLOSURES

Compensation of key management personnel of the Bank

2014

2013

Salaries and other short-term benefits

2 810

2 565

2 810

2 565

The following table shows the outstanding balance and the corresponding interest during the year.

Inco

me

2014

Exp

ense

s 201

4

Bal

ance

as a

t 31

Dec

embe

r 20

14

Inco

me

2013

Exp

ense

s 201

3

Bal

ance

as a

t 31

Dec

embe

r 20

13

Key management personnel of the Bank:

Loans to customers 15 - 229 - - - Due to customers - 1 721 15 321 - 305 2 824 Other 11 7 - 53 5 -

Shareholders:

Due to customers - 200 20 - 5 68 Subordinated debt - - 0 - - 0 Other 4 - - 117 - -

Entities with significant influence over the Bank:

Loans to customers - - - - - - Due to customers - 1 208 18 815 - 3 389 25 551 Issued debt - - - - - - Subordinated debt - 6 633 104 714 - 4 394 53 079 Operating lease - 592 - - 1 147 - Other 25 - - 746 42 -

55 10 361 139 099 916 9 287 81 522

The above mentioned outstanding balances arose from the ordinary course of business. The interest charged to and by related parties is at normal commercial rates.


44

36. EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE

In 20 February 2015 General Meeting of Shareholders of the Bank decided to increase the share capital through a private placement of additional shares of current nominal value by making additional contributions. The total nominal value of the shares as provided for placement is 15 000 thousand of UAH.

In 20 March 2015 by decision of the Commission for Supervision and regulation of banks at the Office of the National Bank of Ukraine in Lviv region was approved Bank's Supervisory Board decision about additional increase in 2015 share capital of the Bank by the amount of 30 000 thousand of UAH.

Thus, in 2015 the Bank's share capital will increase by 45 000 thousand of UAH.

No other significant events occurred after the balance sheet date.

37. RISK MANAGEMENT

Introduction

Risk is inherent in the Bank’s activities but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. It is also subject to various operating risks.

The independent risk control process does not include business risks such as changes in the environment, technology and industry. The Bank's policy is to monitor those business risks through the Bank’s strategic planning process.

Risk measurement and reporting systems

The Bank assesses credit risk when clients apply to obtain credit, namely:

• undertakes a detailed analysis of the company's activities (duration of operating in the market, availability of open current accounts, cash flow analysis), the client's need for borrowed funds is analysed, analysis of financial statements (main economic indicators are analysed), analysis of provision proposed to the Bank (liquidity);

• liquidity risk based on the analysis of gaps in assets and liabilities on which interest is accrued, taking into account the difference between assets and liabilities by maturities, interest rate risk through the calculation of local and cumulative gaps between interest bearing assets and liabilities. Evaluation of currency risk is made by setting limits on currency transactions.

Monitoring and controlling of risks is primarily based on limits established by the Assets, Liabilities and tariffs Management Committee. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition, the Bank’s policy is to measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Information compiled from all the businesses is examined and processed in order to analyse, control and identify risks on a timely basis. This information is presented and explained to the Board of Directors and the head of each business division. The report includes aggregate credit exposure, credit metric forecasts, hold limit exceptions, liquidity ratios and risk profile changes. Senior management assesses the appropriateness of the allowance for credit losses on a monthly basis.


45

37. RISK MANAGEMENT (continued)

Risk mitigation

The Bank actively uses collateral to reduce its credit risks. The use of collateral as collateral gives the bank the ability to control assets in the event of default by the borrower of his liabilities. Collateral is a potential source of loan repayment. However, the decision of the Bank to provide a credit is accepted only on the basis of sufficient collateral or guarantees. Each decision to grant credit is accompanied by a comprehensive credit analysis, which reduces credit risk and improves the quality of Bank’s loan portfolio.

The Bank uses a number of measures to guarantee repayment of loans. After loan granting the Bank monitors the financial condition of the borrower, the borrower’s compliance with the conditions established by the credit agreement, and the search of new opportunities for further cooperation with the client. Control of the credit provides the identification at early stages of evidence that a borrower run into financial difficulties in repaying the loan. This helps to maximize the impact of corrective actions of the Bank and to reduce possible losses.

Excessive risk concentration

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.

In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

Credit risk

Credit risk is the risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.

The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process aims to allow the Bank to assess the potential loss as a result of the risks to which it is exposed and take corrective action.

Credit-related commitments risks

The Bank makes available to its customers guarantees which may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Such commitments expose the Bank to similar risks to loans and are mitigated by the same control processes and policies.

Risk concentrations: maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The Bank’s concentrations of risk are managed by client/counterparty, by geographical region and by industry sector. The maximum credit exposure to any client or counterparty as of 31 December 2014 was 43 020 thousand of UAH (2013: 33 278 thousand of UAH) before taking account of collateral or other credit enhancements.

The following table shows the maximum exposure to credit risk for the components of the statement of financial position, including derivatives, by geography and by industry before the effect of mitigation through the use of master netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.


46


Geographical analysis:

2014

2013

Ukraine OECD CIS Total Ukraine OECD CIS Total

Assets:

Cash and balances with

central bank 141 476 12 991 374 154 841 78 490 11 074 1 960 91 524 Due from banks 8 964 - - 8 964 14 462 - - 14 462 Financial investments 76 894 - - 76 894 27 714 - - 27 714 Loans to customers 818 491 - - 818 491 624 434 - - 624 434

1 045 825 12 991 374 1 059 190 745 100 11 074 1 960 758 134

Industry analysis:


Fina

ncia

l Se

rvic

es

Gov

ernm

ent

and

cash

on

hand

Con

sum

ers

lend

ing

Who

lesa

le

Con

stru

ctio

n

Man

ufac

turi

ng

Serv

ices

Oth

er

Tot

al

Assets: Cash and balances

with central bank 99 710 55 131 - - - - - - 154 841 Due from banks 8 964 - - - - - - - 8 964 Financial investments - 76 894 - - - - - - 76 894

Loans to customers - - 80 139 198 239 75 591 207 365 252 978 4 179 818 491

108 674 132 025 80 139 198 239 75 591 207 365 252 978 4 179 1 059 190


Fina

ncia

l Se

rvic

es

Gov

ernm

ent

and

cash

on

hand

Con

sum

ers

lend

ing

Who

lesa

le

Con

stru

ctio

n

Man

ufac

turi

ng

Serv

ices

Oth

er

Tot

al

Assets: Cash and balances

with central bank 51 721 39 803 - - - - - - 91 524 Due from banks 14 462 - - - - - - - 14 462 Financial investments - 27 714 - - - - - - 27 714

Loans to customers - - 67 269 145 337 70 377 149 472 188 796 3 183 624 434

66 183 67 517 67 269 145 337 70 377 149 472 188 796 3 183 758 134


47


Collateral

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.

Credit quality by class of financial assets

The credit quality of financial assets is managed by the Bank using internal credit ratings. The table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based on the Bank’s internal credit rating system. The amounts presented are gross of impairment allowances.

As at 31 December 2014 Neither past due nor impaired

Past

due

but

not

im

pair

ed

Impa

ired

Tot

al

Stan

dard

gra

de

Sub-

stan

dard

gr

ade

Assets:

Cash and balances with central banks 154 841

-

-

-

154 841

Due from banks 8 964

-

-

-

8 964 Financial investments 76 894

-

-

-

76 894

Loans to customers 115 542

461 857

39 303

298 345

915 047 Corporate lending 115 542

432 250

28 288

251 730

827 810

Consumer lending -

29 607

11 015

46 615

87 237 Other assets 653

-

21

162

836

356 894

461 857

39 324

298 507

1 156 582

Less: Allowance for impairment losses -

-

-

(96 585)

(96 585)

356 894

461 857

39 324

201 922

1 059 997

As at 31 December 2013 Neither past due nor impaired

Past

due

but

not

im

pair

ed

Impa

ired

Tot

al

Stan

dard

gra

de

Sub-

stan

dard

gr

ade

Assets:

Cash and balances with central banks 91 524

-

-

-

91 524

Due from banks 14 462

-

-

-

14 462 Financial investments 27 714

-

-

-

27 714

Loans to customers 98 496

314 335

23 303

249 798

685 932 Corporate lending 98 496

285 126

21 794

204 876

610 292

Consumer lending -

29 209

1 509

44 922

75 640 Other assets 982

-

29

188

1 199

233 178

314 335

23 332

249 986

820 831

Less: Allowance for impairment losses -

-

-

(61 541)

(61 541)

233 178

314 335

23 332

188 445

759 290


48


Impairment assessment

For accounting purposes, the Bank uses an incurred loss model for the recognition of losses on impaired financial assets. This means that losses can only be recognised when objective evidence of a specific loss event has been observed. This approach differs from the expected loss model used for regulatory capital purposes in accordance with Basel II.

The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances.

Individually assessed allowances

The Bank determines the allowances appropriate for each individually significant loan or advance on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected payout should bankruptcy ensue, the availability of other financial support, the realisable value of collateral and the timing of the expected cash flows.

Impairment allowances are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Collectively assessed allowances

Allowances are assessed collectively for losses on loans and advances and for held-to-maturity debt investments that are not individually significant and for individually significant loans and advances that have been assessed individually and found not to be impaired

Allowances are assessed collectively for losses on loans and advances that are not individually significant (including credit cards, residential mortgages and unsecured consumer lending) and for individually significant loans and advances where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.

The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration of the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Management of Credit risk and monitoring department (CRD) is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by CRD management to ensure alignment with the Bank's overall policy. Financial guarantees and letters of credit are assessed and provisions are made in a similar manner as for loans.

Commitments and guarantees

To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. Even though these obligations may not be recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank.

The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Bank could have to pay if the guarantee is called on. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognised as a liability in the statement of financial position.

The table below shows the Bank’s maximum credit risk exposure for commitments and guarantees:

2014

2013

Financial guarantees

2 947

1 035

2 947

1 035


49


Liquidity risk and funding management

Liquidity risk is defined as the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due under both normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. The Bank has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.

The Bank maintains a portfolio of highly marketable and diverse assets that assumed to be easily liquidated in the event of an unforeseen interruption of cash flow. In addition, the Bank maintains a statutory deposit with the National Bank of Ukraine. In accordance with the Bank’s policy. the liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. The most important of these is to maintain limits on the ratio of net liquid assets to customer liabilities, set to reflect market conditions.

Required by the NBU 2014 (%) 2013 (%)

H4 «Instant Liquidity Ratio» (cash and balances on correspondent accounts/liabilities repayable on demand)

>=20% 61 47

H5 «Current Liquidity Ratio» (assets receivable or realizable within 31 days/liabilities repayable within 31 days)

>=40% 61 47

H6 «Short-term Liquidity Ratio» (certain assets with original maturity up to 1 year/liabilities with original maturity up to 1 year including off-balance sheet commitments)

>=60% 101 94

Analysis of financial liabilities by remaining contractual maturities

The table below summarizes the maturity profile of the Bank’s financial assets and liabilities as at 31 December.


On

dem

and

Les

s tha

n 1

mon

th

1 to

3 m

onth

s

3 m

onth

s to

1 ye

ar

1 to

5 y

ears

Ove

r 5

year

s

Past

due

Tot

al

Assets: Cash and balances with

central banks 154 841 - - - - - - 154 841 Due from banks - 142 - 60 8 762 - - 8 964 Financial investments 75 581 1 313 - - - - - 76 894 Loans to customers 14 615 50 240 50 844 522 900 152 207 13 432 14 253 818 491 Other assets 673 - - 87 - - 47 807

245 710 51 695 50 844 523 047 160 969 13 432 14 300 1 059 997


50



On

dem

and

Les

s tha

n 1

mon

th

1 to

3 m

onth

s

3 m

onth

s to

1 ye

ar

1 to

5 y

ears

Ove

r 5

year

s

Past

due

Tot

al

Liabilities: Due to banks 54 554 16 566 - - - - - 71 120 Due to customers 177 752 179 750 190 174 217 372 72 060 14 - 837 122 Issued debt - 771 - - 103 943 - - 104 714 Subordinated debt 1 189 863 - 2 - - 84 2 138

233 495 197 950 190 174 217 374 176 003 14 84 1 015 094

Net position 12 215 (146 255) (139 330) 305 673 (15 034) 13 418 14 216 44 903 Accumulated gap 12 215 (134 040) (273 370) 32 303 17 269 30 687 44 903


On

dem

and

Les

s tha

n 1

mon

th

1 to

3 m

onth

s

3 m

onth

s to

1 ye

ar

1 to

5 y

ears

Ove

r 5

year

s

Past

due

Tot

al

Assets: Cash and balances with

central banks 91 524 - - - - - - 91 524 Due from banks 7 459 7 003 - - - - - 14 462 Financial investments 26 937 777 - - - - - 27 714 Loans to customers 7 10 987 48 916 386 136 146 659 13 547 18 182 624 434 Other assets 1 156 - - - - - - 1 156

127 083 18 767 48 916 386 136 146 659 13 547 18 182 759 290 Liabilities: Due to banks 25 292 10 500 14 900 - - - - 50 692 Due to customers 120 280 85 408 123 021 222 731 53 044 13 - 604 497 Issued debt - 391 - - 52 688 - - 53 079 Subordinated debt 2 753 - - - - - - 2 753

148 325 96 299 137 921 222 731 105 732 13 - 711 021

Net position (21 242) (77 532) (89 005) 163 405 40 927 13 534 18 182 48 269 Accumulated gap (21 242) (98 774) (187 779) (24 374) 16 553 30 087 48 269


51


The table below show the contractual expiry by maturity of the Bank’s contingent liabilities and commitments as at 31 December. In the case of financial guarantee contracts the maximum amount of the guarantee applies to the earliest period in which this guarantee may be brought to fulfillment by the Bank.


On

dem

and

L

ess t

han

1 m

onth

1

to 3

m

onth

s

3

mon

ths

to 1

yea

r

1

to 5

ye

ars

O

ver

5 ye

ars

T

otal


-

-

2 706

241

-

-

2 947

-

-

2 706

241

-

-

2 947


On

dem

and

L

ess t

han

1 m

onth

1

to 3

m

onth

s

3

mon

ths

to 1

yea

r

1

to 5

ye

ars

O

ver

5 ye

ars

Tot

al


-

495

170

-

370

-

1 035

-

495

170

-

370

-

1 035

Market risk

Market risk - the risk that the fair value of future cash flows of financial instruments will fluctuate because of changes in market parameters such as interest rates, exchange rates and equity prices. The Bank separates its market risk to risk in the trading portfolio and the risk for non-trading portfolio and manages these risks independently.

Currency risk

Currency risk - the risk that the fair value of a financial instrument will fluctuate due to changes in exchange rates. The Assets, Liabilities and tariffs Management Committee sets limits on positions by currency. According to the Bank's policy positions are monitored every day and hedging strategies are used to provide assurance that the positions are within the set limits.

2014

2013 Change in currency rate in %

Effect on profit before

tax

Effect on equity

Change in currency rate in %

Effect on profit before

tax

Effect on equity

+ 5/(5) (818)/818 (818)/818

+ 5/(5) (433)/433 (433)/433 + 5/(5) (907)/907 (907)/907

+ 5/(5) 20/(20) 20/(20)

Interest rate risk

The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Assets, Liabilities and tariffs Management Committee monitors on a constantly basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken.

The table below summarizes the Bank’s exposure to interest rate risks.

As at 31 December 2014 less than 1 month less than 3 months

Total financial assets 133 029 199 321 Total financial liabilities 214 537 404 691 Net interest sensitivity gap (81 508) (205 370)


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As at 31 December 2013 less than 1 month less than 3 months

Total financial assets 70 944 147 708 Total financial liabilities 119 258 281 535 Net interest sensitivity gap (48 314) (133 827)

The maximum size of the impact from the interest rate risk as at 31 December 2014 is (3 762) thousand UAH in case of extraordinary stressful event - changes in interest rates by 100% from the current (as at 31 December 2013 - (2 146) thousand UAH).

The Bank monitors interest rates for its financial instruments. The table below summarizes interest rates based on reports reviewed by key management personnel:


UAH (%)

USD (%)

EUR (%)

Other (%)

Assets:

Cash and balances with central banks

0,00 0,00 0,00 0,00 Due from banks

2,07 0,33 1,68 -

Loans to customers

Corporate lending

16,51 8,89 10,67 - Consumer lending

19,04 12,51 13,34 -

Debt securities available for sale

- - - - Liabilities:

Due to banks

19,15 0,50 1,56 -

Due to customers:

Current accounts of legal entities

3,75 0,00 0,00 0,00 Current accounts of individuals

2,72 0,31 3,15 0,00

Term deposits of legal entities

16,89 6,19 3,27 - Term deposits of individuals

19,09 7,81 6,52 1,12

Debt securities issued

- - - - Subordinated debt

- 8,73 - -


UAH (%)

USD (%)

EUR (%)

Other (%)

Assets:

Cash and balances with central banks

0,00 0,00 0,00 0,00 Due from banks

9,05 0,32 1,38 -

Loans to customers

Corporate lending

16,64 9,41 10,45 - Consumer lending

17,70 12,35 13,01 -

Debt securities available for sale

- - - - Liabilities:

Due to banks

8,17 0,85 1,30 -

Due to customers:

Current accounts of legal entities

3,93 0,00 0,00 0,00 Current accounts of individuals

3,35 0,55 3,81 -

Term deposits of legal entities

16,90 6,04 5,00 - Term deposits of individuals

17,80 6,29 4,76 1,18

Debt securities issued

- - - - Subordinated debt

- 8,73 - -

The sign “-“ in the table above means that the Bank does not have the respective assets or liabilities in the corresponding currency.


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Operational risk

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit.

38. CAPITAL

The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value.

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes yet have been made in the objectives, policies and processes from the previous years, however, it is under constant scrutiny of the Board.

2014

2013

Tier 1 capital Issued capital 257 870 250 370 Share premium 230 230 Retained loss (153 342) (151 308)

Total Tier 1 capital 104 758 99 292 Tier 2 capital

Profit (loss) for the year (2 034) 1 158 Revaluation 31 239 31 239 Subordinated debt lower the available limit 52 379 49 646

Total Tier 2 capital 81 584 82 043 Total capital 186 342 181 335

Risk weighted assets 881 866 671 876

Capital ratios

Total capital ratio 21% 27%

Tier 1 capital ratio 12% 15%

The Bank carries out active management of capital adequacy level for protection against the risks inherent in its activities. The Bank’s capital adequacy is controlled using the standards established by the NBU.

For the year 2014, the Bank fulfilled completely all external capital requirements.

Documents

FS Lviv en 2014 (IFRS) final · 2018. 12. 6. · BANK “LVIV” Financial Statements for the year ended 31 December 2014 (All amounts in Ukrainian Hryvnia thousand unless otherwise