5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
5.6. Repurchase and Reverse Repurchase Agreements
From time to time, the Bank enters into contracts to sell and buy back financial instruments at a specific future date (“repo”) or to buy and sell back financial instruments at a specific future date (“reverse repo”).
In repo transactions the securities provided by the Bank remain to be recognized and reported in the statement of financial position as the Bank retains substantially all the risks and rewards of ownership together with all coupons and other income payments received during the period of repo transaction. The corresponding cash received is recognised in the statement of financial position and a corresponding obligation to return it (including accrued interest) is recorded as a liability.
Securities purchased as a reverse repo transaction are not recognised in the statement of financial position. The consideration paid (including accrued interest) is recorded in the statement of financial position as “Loans and receivables to banks” or “Loans and receivables to customers”.
Reverse repo securities are not recognised in the statement of financial position. The Bank is allowed to provide securities received in reverse repo transactions as collateral or sell them, even in the absence of default by their owner.
The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.
5.7. Fair Value Measurement
Fair value is the price the Bank would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date.
In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
The calculation of the present value of the estimated future cash flows of a collateralised 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 purposes of a collective evaluation of impairment (see note 41.3.1.), financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according the contractual terms of the the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. The methodology (note 41) and assumptions (note 16) used for estimating future cash flows are reviewed regularly to reduce difference between loss estimates and actual loss experience.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the profit or loss.
When a loan is deemed uncollectible, it is derecognized and the provision for impairment is utilized. Subsequent recoveries are recognized as a credit in the profit or loss.
Available-for-sale financial assets
Available-for-sale financial assets are assessed at each balance sheet date for objective evidence of impairment.
Where such evidence exists an impairment loss is recognized.
In addition to the factors set out above, a prolonged (i.e. 12 consecutive months) decline in the fair value of an investment in an available for sale equity instrument below its cost is considered in determining whether an impairment loss has been incurred.
If an impairment loss has been incurred, the cumulative loss that has been recognized in other comprehensive income is removed from equity and recognized in the profit or loss.
If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases, and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the profit or loss.
Deferred Tax
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probably that the related tax benefit will be realized.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
Significant temporary and timing differences arise mainly from different accounting and tax value adjustments to receivables, provisions and from the revaluation of financial assets.
5.16. Segment Reporting
Our operating businesses are organized based on the nature of markets and customers.
Operating segments are reported in accordance with the internal reports prepared on a regular basis and presented to the members of the senior management team.
The Bank has identified the following segments.
• Commercial clients – includes individually and portfolio managed commercial loans contracts. Clients are mainly entrepreneurs and business corporations.
• Retail clients – segment covers most of the Bank’s consumer products (consumer loans, mortgages etc.).
Products in the Bank’s consumer portfolio have similar characteristic. They consist mainly of term loans offered through a network of individual branches, call centers and external partners. The products are primarily targeted at consumers and households.
• Other – it includes mainly investment banking and equity investments and other areas that are not included in the above segments.
Information about the reported segments is described in note 40.
Bonuses Tied to the Capital – Share-based payments
Share options and restricted units over the shares of General Electric Company, the ultimate parent entity are granted to certain employees and executives of the Bank. The fair value of options and units granted is recognised as “Personnel expenses” with a corresponding increase in “Share based payment reserve” within equity.
The fair value is measured at grant date using the Black-Scholes option pricing model, and is recognised as an expense over the period the employees become unconditionally entitled to the options/units. The amount recognised as an expense is adjusted to reflect the actual number of options/units expected to vest.
The credit to ‘share based payment reserve’ over the vesting period on expensing an award represents the effective capital contribution from General Electric Company.
To the extent the Bank will be, or has been, required to fund a share-based payment arrangement, this reserve is reduced.
5.14. Cash and cash balances with the central bank
Cash and balances with the central bank include current accounts and time deposits with the Czech National Bank (CNB), cash in ATMs and in branches. Cash and balances are reported in the statement of financial positon in “Cash and balances with the central bank”. The Banks mandatory minimum reserve held by the CNB is also included within
“Cash and balances with the central bank”.
5.15. Income Tax and Deferred Tax
Income tax expense comprises current and deferred tax. It is recognized in the profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income.
Current Tax
Current tax represents the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when the Bank intends to settle on a net basis and the legal right to offset exists.
5.12. Impairment of Non-Financial Assets
At the end of each reporting date the Bank reviews the carrying amounts of its non-financial assets to determine whether there is any indication of impairment. If any such indication exists then the assets recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s fair value less costs of disposal and its value in use. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount.
Impairment losses are recognized in the profit or loss. An impairment loss may be reversed to the extent it does not exceed the carrying amount that would have been determined if no impairment loss had been recognized.
5.13. Employee Benefits
Employee benefits include short term bonus payments, bonus for loyalty and bonuses tied to equity and stock option plan.
Short Term Bonuses Payment
Manager and Retention Bonuses: used as a motivation for the Bank´s management. Measurement is based on meeting performance indicators. The payments are payable in the next quarter after the end of the period. Bonus payments are accrued over time and represent the best estimate of the amount that will be paid.
Sales incentives: represent performance benefit to retail employees at branches and commercial bankers. The size of the sales incentives depends on fulfilment performance targets, which is evaluated quarterly and the payment is partially made in the subsequent quarter and in the first quarter after the end of the year. The Bank recognizes a liability as of the reporting date representing the sum of the sales incentives in the fourth quarter and the amounts deferred from the previous reporting periods.
Bonuses for Loyalty
Long service award is a corporate program that rewards employees for loyalty. Employees are eligible for an award each five years of employment with the Bank. A liability is recognized for the benefit reflecting the probability of each eligible employee attaining each anniversary. The Bank records a provision for a loyalty based on an actuarial model that is in line with IAS 19 and it is recognised in the statement of financial position in the line item “Provisions”.
Property and equipment is depreciated on a straight-line basis over their estimated useful lives as follows:
Cars 4-5 years
Technical Improvements related
to branches and HQ building 5-15 years
Furniture 4-10 years
Equipment 5 years
Computers and servers 3-6 years
Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease terms or their remaining useful lives.
Assets' residual values and useful lives are monitored and adjusted if appropriate at each financial statement date.
Property and equipment are subject to annual impairment reviews (see note 5.12.). If the carrying amount of the asset exceeds its estimated recoverable amount, the asset is adjusted accordingly. Its estimated recoverable amount is the higher of fair value including costs to sell and its value in use.
Gains and losses on disposals are determined by deducting the carrying value from the consideration received. Any gain/loss on sale is recognized in the profit or loss.
5.11. Intangible Assets Software
Software acquired by the Bank is measured at cost less accumulated amortization and any accumulated impairment losses.
Expenditure on internally developed software is recognized as an asset when the Bank is able to demonstrate its intention and ability to complete the development and use the software to generate future economic benefits and the costs to complete the development can be reliably measured.
Internally developed software is stated at capitalized cost less accumulated amortization and impairment.
Software is amortized over its useful life usually not exceeding 5 years.
Subsequent expenditure on software assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.
Reconciliation of the Statement of Financial Position as at 1 January 2013
CZ GAAP as at Notes to FS caption Notes IFRS Effect IFRS as at 1 Jan 2013 reclasses CZ GAAP to transition of transition 1 Jan 2013
IFRS reclasses to IFRS
ASSETS
Cash and balances with the central bank 15,602 P 1,072 0 16,674
Financial assets at fair value through profit or loss 0 L 4 0 4
Financial assets - available for sale 8,902 0 0 8,902
Loans and receivables to banks 3,838 0 0 3,838
Loans and receivables to customers 96,328 0 A (1,157) 95,171
Intangible assets 932 0 0 932
Property and equipment 761 0 B, C, D 102 863
Investments in subsidiaries and associates 6,823 0 0 6,823
Deferred tax assets 0 M 1,293 E 225 1,518
Other assets 2,855 L, M, P, U (2,374) F, K 11 492
Total assets 136,041 (5) (819) 135,217
LIABILITIES
Deposits from banks 378 0 0 378
Deposits from customers 98,614 0 0 98,614
Financial liabilities – at fair value
through profit or loss 0 L 1 0 1
Provisions 272 M (24) D, G, H, I 82 330
Current tax liability 0 M 24 0 24
Other liabilities 2,938 L, U (6) C, K 49 2,981
Total liabilities 102,202 (5) 131 102,328
EQUITY
Share capital 510 0 0 510
Share premium 4,726 0 J (24) 4,702
Legal and statutory reserve 102 0 0 102
Share based payments reserve 0 0 I 4 4
Available for sale reserve 200 0 0 200
Retained earnings 28,301 (930) 27,371
Total equity 33,839 0 (950) 32,889
Total equity and liabilities 136,041 (5) (819) 135,217
IFRS Exceptions and Applied Exemption Options
As set out in IFRS 1, paragraph 18, the Bank has opted to use the following exemptions contained in Appendices C-E for share-based payment transactions:
The Bank decided to use the exemption specified in Appendice D3 for share based payments. Based on the exemption the Bank is not required to apply IFRS 2 to liabilities arising from share-based payment transactions that were settled before the date of transition to IFRSs.
Based on IFRS 1, any hindsight since the transition date is not allowed to be used to create or revise estimates in the financial statements and was treated as non-adjusting event. Therefore, the estimates previously made by the Bank under CZ GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies.
5.17. Financial Guarantees and Loan Commitments
Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions.
Liabilities under financial guarantee contracts which are are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure required to settle the obligations.
The provided guarantees are shown in note 37.
6. EXPLANATION OF TRANSITION TO IFRS
The accounting policies set out in note 5 have been applied in preparing the financial statements for the year ended 31 December 2015, the comparative information presented in these financial statements for the year ended 31 December 2013 and 2014 and in the preparation of an opening IFRS statement of financial position at 1 January 2013 (the Bank’s date of transition).
In preparing its opening IFRS statement of financial position, the Bank has adjusted amounts reported previously in financial statements prepared in accordance with Czech accounting legislation for banks (CZ GAAP).
An explanation of how the transition from previous CZ GAAP to IFRSs has affected the Bank’s financial position and financial performance is set out in the following tables and the notes that accompany the tables. The Bank was not required to prepare a statement of cash flows under CZ GAAP. Therefore, no explanation of impact of the transition to IFRSs on cash flows is included.
Total Comprehensive Income Reconciliation for the year ended 31 December 2013
IFRS for the year CZ GAAP Notes to FS caption Notes IFRS Effect ended
for 2013 reclasses CZ GAAP to transition of transition 31 Dec
IFRS reclasses to IFRS 2013
Interest and similar income 9,468 0 A 332 9,800
Interest expense and similar charges (559) 0 0 (559)
Net interest income 8,909 0 332 9,241
Fee and commission income 3,353 N, Q 380 A (360) 3,373
Fee and commission expense (388) N 27 (361)
Net fee and commission income 2,965 407 360 3,012
Dividend income 9 0 0 9
Net income from financial operations 413 0 0 413
Other operating income 543 O, Q (349) 0 194
Total operating income 12,839 58 (28) 12,869
Personnel expenses (2,083) S, T (159) A, H, I 88 (2,154)
Other administrative expenses (2,055) S 150 A, C, F 59 (1,846)
Depreciation and amortisation (493) B, C, D (32) (525)
Other operating expenses (768) O, T (49) G 1 (816)
Operating expenses (5,399) (58) 116 (5,341)
Net impairment of loans and receivables (2,864) 0 A 525 (2,339)
Impairment of financial assets available for sale (7) 0 0 (7)
Profit for the year before tax 4,569 0 614 5,182
Taxes on income (959) 0 E (117) (1,076)
Profit for the year after tax 3,610 0 497 4,106
Items that may be reclassified to profit or loss - Change in fair value of AFS investments recognised
in OCI 0 (82) (82)
- Change in fair value of AFS investments recognised
in P&L 0 (164) (164)
- Deferred tax 0 47 47
Total other comprehensive income 0 (199) 0 (199)
Total comprehensive income for the year 0 (199) 497 3,907
Reconciliation of the Statement of Financial Position as at 31 December 2013
CZ GAAP as at Notes to FS caption Notes IFRS Effect IFRS as at 31 Dec 2013 reclasses CZ GAAP to transition of transition 31 Dec
IFRS reclasses to IFRS 2013
ASSETS
Cash and balances with the central bank 8,064 P 1,308 0 9,372
Financial assets at fair value through profit or loss 0 L 6 0 6
Financial assets - available for sale 22,835 0 0 22,835
Loans and receivables to banks 1,104 0 0 1,104
Loans and receivables to customers 92,243 0 A (519) 91,724
Intangible assets 887 0 0 887
Property and equipment 603 0 B, C, D 79 682
Investments in subsidiaries and associates 6,823 0 0 6,823
Current tax assets 0 M 4 0 4
Deferred tax assets 0 M 1,399 E 108 1,507
Other assets 3,183 L, M, P (2,717) F, K 19 485
Total assets 135,742 0 (313) 135,429
LIABILITIES
Deposits from banks 123 0 0 123
Deposits from customers 95,927 0 0 95,927
Financial liabilities – at fair value through profit or loss 0 L 5 0 5
Provisions 259 0 D, G, H, I 79 338
Current tax liability 0 0 0 0
Other liabilities 2,183 L (5) C, K 62 2,240
Total liabilities 98,492 0 141 98,633
EQUITY
Share capital 510 0 0 510
Share premium 4,726 0 J (24) 4,702
Legal and statutory reserve 102 0 0 102
Share based payments reserve 0 0 I 2 2
Available for sale reserve 1 0 0 1
Retained earnings 31,911 0 (432) 31,479
Total equity 37,250 0 (454) 36,796
Total equity and liabilities 135,742 0 (313) 135,429
Total Comprehensive Income Reconciliation for the year ended 31 December 2014
IFRS for the year CZ GAAP Notes to FS caption Notes IFRS Effect ended
for 2014 reclasses CZ GAAP to transition of transition 31 Dec
IFRS reclasses to IFRS 2014
Interest and similar income 8,768 0 A 293 9,061
Interest expense and similar charges (288) 0 0 (288)
Net interest income 8,480 0 293 8,773
Fee and commission income 2,846 N, Q 293 A (251) 2,888
Fee and commission expense (429) N 102 0 (327)
Net fee and commission income 2,417 395 (251) 2,561
Dividend income 9 0 0 9
Net income from financial operations 395 0 0 395
Other operating income 507 O, Q (330) 0 177
Total operating income 11,808 65 42 11,915
Personnel expenses (1,827) S, T (151) A, H, I 100 (1,878)
Other administrative expenses (2,080) S 142 A, C, F 58 (1,880)
Depreciation and amortisation (442) 0 B, C, D (33) (475)
Other operating expenses (941) O, T (53) G (17) (1,011)
Operating expenses (5,290) (62) 108 (5,244)
Net impairment of loans and receivables (1,412) 0 A (212) (1,624)
Impairment of investments
in subsidiaries and associates 0 0 0 0
Profit for the year before tax 5,106 0 (59) 5,047
Taxes on income (1,060) 0 E 12 (1,048)
Profit for the year after tax 4,046 0 (47) 3,999
Items that may be reclassified to profit or loss – Change in fair value of AFS
investments recognised in OCI 0 519 519
– Change in fair value of AFS
investments recognised in P&L 0 (77) (77)
– Deferred tax 0 (84) (84)
Total other comprehensive income 0 358 0 358
Total comprehensive income for the year 0 358 (47) 4,357
Reconciliation of the Statement of Financial Position as at 31 December 2014
CZ GAAP as at Notes to FS caption Notes IFRS Effect IFRS as at 31 Dec 2014 reclasses CZ GAAP to transition of transition 31 Dec
IFRS reclasses to IFRS 2014
ASSETS
Cash and balances with the central bank 9,882 P 1,864 0 11,746
Financial assets at fair value through profit or loss 0 L 12 0 12
Financial assets - available for sale 20,401 0 0 20,401
Loans and receivables to banks 520 0 0 520
Loans and receivables to customers 99,050 0 A (553) 98,497
Intangible assets 644 0 0 644
Property and equipment 574 0 B, C, D 45 619
Investments in subsidaries and associates 9,771 0 0 9,771
Investments in subsidaries and associates 9,771 0 0 9,771