Legal proceedings. From time to time and in the normal course of business, claims against
the Bank are received. Based on its own estimates and internal and external professional advice,
the Bank’s management is of the opinion that no material losses will be incurred and
accordingly no provision has been made in these financial statements.
Tax legislation. The tax consequence of transactions for Belarus taxation purposes is
frequently determined by the form in which transactions are documented and the underlying
accounting treatment prescribed by Belarus Accounting Rules. Accordingly, the Bank structures
certain transactions so as to take advantage of such form driven determinations to reduce the
overall effective tax rate of the Bank. The statement of income as presented in these financial
statements includes reclassifications to reflect the underlying economic substance of those
transactions. The effect of these reclassifications does not have an effect on the Bank’s profit
before taxation or the tax charge recorded in these financial statements.
23. Contingencies, commitments and derivative financial instruments (continued)
The Bank’s management is confident that this ongoing restructuring of taxable income and
deductible expenses is unlikely to result in additional tax liabilities. Accordingly, no provision
for a potential tax liability, with regard to these transactions, has been recognised in the
financial statements.
If a particular treatment was to be challenged by the tax authorities, the Bank may be assessed
additional taxes, penalties and interest, which can be significant.
Credit related commitments. The primary purpose of these instruments is to ensure that
funds are available to a customer as required. Guarantees, which represent irrevocable
assurances that the Bank will make payments in the event that a customer cannot meet its
obligations to third parties, carry the same credit risk as loans. Documentary letters of credit,
which are written undertakings by the Bank on behalf of a customer authorising a third party to
draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are
collateralised by the underlying shipments of goods to which they relate or cash deposits and
therefore carry less risk than a direct borrowing.
Commitments to make loans at a specific rate of interest during a fixed period of time are
accounted for as derivative instruments unless these commitments do not extend beyond the
period expected to be needed to perform appropriate underwriting. Outstanding credit related
commitments are as follows:
Note 2004 2003
Undrawn credit lines 5 598 -
Import letters of credit 2 014 843
Guarantees issued 2 299 2 633
Less: provision for impairment of credit related commitments 15 (135) (167)
Total credit related commitments 9 776 3 309
Commitments to extend credit represent unused portions of authorisations to extend credit in
the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to
extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused
commitments. However, the likely amount of loss is less than the total unused commitments
since most commitments to extend credit are contingent upon customers maintaining specific
credit standards. The Bank monitors the term to maturity of credit-related commitments
because longer-term commitments generally have a greater degree of credit risk than shorter-
term commitments.
The total outstanding contractual amount of undrawn credit lines, letters of credit, and
guarantees does not necessarily represent future cash requirements, as these financial
instruments may expire or terminate without being funded.
23. Contingencies, commitments and derivative financial instruments (continued)
The analysis and movement of provision for impairment of credit related commitments are
given below:
2004 2003 Provision for impairment of credit related commitments as at 1 January 2004 167 319
Recovery of provision for impairment of credit related commitments during the year (54) (192)
Effect of inflation 22 40
Provision for impairment of credit related commitments as at 31 December
2004 135 167
Current derivative financial instruments. Foreign exchange and other derivative financial
instruments are generally traded in an over-the-counter market with professional market
counterparties on standardised contractual terms and conditions.
Contractual amounts of certain financial instruments provide a basis for comparison with
instruments recognised in the balance sheet but do not necessarily indicate the amounts of
future cash flows involved or the current fair value of the instruments and, therefore, do not
indicate the Bank’s exposure to credit or price risks. The derivative instruments become
favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates
or foreign exchange rates relative to their terms. The aggregate contractual or principal amount
of derivative financial instruments on hand, the extent to which instruments are favourable and,
thus the aggregate fair values of derivative financial assets and liabilities can fluctuate
significantly from time to time.
The principal or agreed amounts and fair values of derivative instruments held are set out in the
following table. This table reflects gross position before the netting of any counterparty
position by type of instrument and covers the contracts with a maturity date subsequent to
31 December 2004. These contracts were entered into in December 2004 and are short term in
nature.
Contracts with foreign
counterparties Contracts with Belarus counterparties
Principal or
agreed amount
Negative
fair value fair valuePositive Principal or agreed amount
Negative
fair value fair value Positive
Deliverable forwards
Foreign currency
— sale of foreign currency 1 383 - - 1 003 (3) -
Spot
Foreign currency
— sale of foreign currency 272 - - - - -
Swap
Foreign currency
— sale of foreign currency 12 982 - - -