GAZPROMBANK GROUP Consolidated Financial Statements
Non-State Pension Fund “Gazfond” * 49.65% 49.65%
OAO “Gazprom” 35.54% 35.54%
State Corporation “Bank for Development and Foreign Economic
Affairs” (Vnesheconombank) 10.19% 10.19%
Treasury stock ** 4.40% 4.22%
Individuals 0.22% 0.40%
100.00% 100.00%
* - including 43.57% managed by ZAO “Leader” (an asset management company) on behalf of Non-State Pension Fund “Gazfond” ** - shares held by OOO “New Financial Technologies” (NFT), a subsidiary of the Bank; of them 0.35% managed by ZAO “Leader” on behalf of NFT.
Board of Directors
Alexey B. Miller Chairman of the Board of Directors Chairman of ОАО “Gazprom” Management Board
Andrey I. Akimov Deputy Chairman of the Board of Directors Chairman of Gazprombank Management Board Mikhail L. Sereda Deputy Chairman of the Board of Directors Deputy Chairman of OAO “Gazprom”
Management Board
Yury N. Shamalov Deputy Chairman of the Board of Directors President of Non-State Pension Fund “Gazfond” Kirill A. Dmitriev Member of the Board of Directors Chief Executive Officer of Russian Direct
Investment Fund
Iliya V. Eliseev Member of the Board of Directors Deputy Chairman of Gazprombank Management Board
Anatoliy A. Gavrilenko Member of the Board of Directors Chief Executive Officer of ZAO “Leader” Sergey S. Ivanov Member of the Board of Directors Chairman of ОАО “Sogaz” Management Board Yuliya S. Karpova Member of the Board of Directors Deputy Chairman of Vnesheconombank
Management Board
Andrey V. Kruglov Member of the Board of Directors Deputy Chairman of OAO “Gazprom” Management Board
Kirill G. Selesnev Member of the Board of Directors Member of OAO “Gazprom” Management Board
Elena A. Vasilieva Member of the Board of Directors Deputy Chairman of OAO “Gazprom”
Management Board, Chief Accountant of OAO “Gazprom”
Natalia A. Chervonenko
Deputy Chairman of the Board Corporate lending, Trade finance Iliya V. Eliseev Deputy Chairman of the Board Compliance, Media assets
Viktor A. Komanov Deputy Chairman of the Board Merchant banking, M&A advisory, Direct investments in resource-based industries
Nikolay G. Korenev Deputy Chairman of the Board Corporate governance Svetlana E. Maluseva Deputy Chairman of the Board Chief Accountant
Aleksey A. Matveev Deputy Chairman of the Board Direct investments, Project and structured finance, Capital markets, Trading activities, Brokerage, Asset management Alexander Y. Muranov Deputy Chairman of the Board Corporate clients relations, Corporate lending policy,
Precious metals, Real estate development business Famil K. Sadygov Deputy Chairman of the Board Strategy, Liquidity management, Heavy machinery assets Alexander I. Sobol Deputy Chairman of the Board Chief Financial Officer
Oleg M. Vaksman Deputy Chairman of the Board Chief Risk Officer Dmitriy V. Zauers Deputy Chairman of the Board Chief of Administration Yan V. Center First Vice-President Regional network Andrey A. Pimenov First Vice-President Procurement
Igor V. Rusanov First Vice-President Assets & liabilities management, Wholesale funding and investor relations, Financial institutions
Valeriy A. Seregin First Vice-President Retail business, Custody services Ekaterina V. Trofimova First Vice-President Chief Analytical Officer, Public relations Vladimir N. Vinokurov First Vice-President Corporate security
Alexander M. Stepanov First Vice-President Strategic industrial assets The composition of the Management Board is presented as of 21 April 2015. Auditors
TABLE OF CONTENTS
AUDITORS’REPORT 5
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER СOMPREHENSIVE INCOME 8
CONSOLIDATED STATEMENT OF FINANCIAL POSITION 9
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 10
CONSOLIDATED STATEMENT OF CASH FLOWS 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
NOTE 1–PRINCIPAL ACTIVITIES AND ORGANIZATION ... 14
NOTE 2–BASIS OF PRESENTATION ... 15
NOTE 3–PRINCIPAL ACCOUNTING POLICIES ... 16
NOTE 4–SEGMENT REPORTING ... 32
NOTE 5–NET INTEREST INCOME ... 37
NOTE 6–PROVISIONS AND IMPAIRMENT LOSSES ... 38
NOTE 7–FEES AND COMMISSIONS INCOME AND EXPENSE ... 39
NOTE 8–NON-INTEREST LOSS FROM FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS, NET . 39 NOTE 9–NON-BANKING OPERATING PROFITS ... 40
NOTE 10–BANKING SALARIES, EMPLOYMENT BENEFITS AND ADMINISTRATIVE EXPENSES ... 41
NOTE 11–PROFIT TAX ... 42
NOTE 12–CASH AND CASH EQUIVALENTS, OBLIGATORY RESERVE WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION AND DUE FROM CREDIT INSTITUTIONS ... 45
NOTE 13–FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS ... 46
NOTE 14–DERIVATIVE FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING ... 48
NOTE 15–LOANS TO CUSTOMERS ... 49
NOTE 16–INVESTMENTS AVAILABLE-FOR-SALE AND INVESTMENTS IN ASSOCIATES ... 54
NOTE 17–RECEIVABLES AND PREPAYMENTS ... 62
NOTE 18–INVESTMENTS HELD-TO-MATURITY ... 62
NOTE 19–PLANT, PROPERTY AND EQUIPMENT ... 63
NOTE 20–INTANGIBLES ... 64
NOTE 21–GOODWILL ... 64
NOTE 22–AMOUNTS OWED TO CREDIT INSTITUTIONS ... 66
NOTE 23–AMOUNTS OWED TO CUSTOMERS ... 67
NOTE 24–BONDS ISSUED ... 68
NOTE 25–SUBORDINATED DEBTS ... 69
NOTE 26–OTHER LIABILITIES ... 69
NOTE 27–SHAREHOLDERS EQUITY ... 70
NOTE 28–PERPETUAL DEBT ISSUED ... 71
NOTE 29–FINANCIAL COMMITMENTS AND CONTINGENCIES ... 71
NOTE 30–CORPORATE GOVERNANCE AND INTERNAL CONTROLS ... 73
NOTE 31–RISK MANAGEMENT ... 76
NOTE 32–PRINCIPAL SUBSIDIARIES OF THE GROUP ... 96
NOTE 33–RELATED PARTIES ... 98
NOTE 34–CAPITAL ADEQUACY... 103
NOTE 35–FAIR VALUE OF FINANCIAL INSTRUMENTS ... 106
NOTE 36–ANALYSIS BY MEASUREMENT CATEGORY... 110
NOTE 37–ACQUISITIONS OF INTERESTS IN SUBSIDIARIES ... 111
Auditors’ Report
To the Shareholdes and Board of Directors of Gazprombank (Joint-stock Company)
We have audited the accompanying consolidated financial statements of Gazprombank (Joint-stock Company) (the “Bank”) (and its subsidiaries (the “Group”)), which comprise the consolidated statement of financial position as at 31 December 2014, and the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for 2014, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Сonsolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the fair presentation of these consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of these consolidated financial statements.
Audited entity: Gazprombank (Joint-stock Company).
Registered by the State Bank of the USSR on 31 July 1990, Registration No. 354.
Registered by the Central Bank of the Russian Federation on 23 January 1992, Registration No. 354.
Entered in the Unified State Register of Legal Entities on 28 August 2002 by Moscow Division of the Ministry of taxes and duties of the Russian Federation, Registration No. 1027700167110, Certificate series 77 No. 004890355.
Address of the audited entity: 16, Nametkina street, bldging 1, Moscow, 117420.
Independent auditor: JSC “KPMG”, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Registered by the Moscow Registration Chamber on 25 May 1992, Registration No. 011.585.
Entered in the Unified State Register of Legal Entities on 13 August 2002 by the Moscow Inter-Regional Tax Inspectorate No.39 of the Ministry for Taxes and Duties of the Russian Federation, Registration No. 1027700125628, Certificate series 77 No. 005721432.
Member of the Non-commercial Partnership “Chamber of Auditors of Russia”. The Principal Registration Number of the Entry in the State Register of Auditors and Audit Organisations: No.10301000804.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014, and its financial performance and its cash flows for 2014 in accordance with International Financial Reporting Standards.
Report of findings from procedures performed in accordance with the requirements of Article 42 of the Federal Law dated 2 December 1990 No 395-1 On Banks and Banking Activity
Management is responsible for the Group’s compliance with mandatory ratios and for maintaining internal control and organising risk management systems in accordance with requirements established by the Bank of Russia.
In accordance with Article 42 of the Federal Law dated 2 December 1990 No 395-1 On Banks and Banking Activity (the “Federal Law”), we have performed procedures to examine:
• the Group’s compliance with mandatory ratios as at 1 January 2015 as established by the Bank of Russia; and
• compliance of elements of the Group’s internal control and organization of its risk management systems with requirements established by the Bank of Russia.
These procedures were selected based on our judgment and were limited to enquiries, analyses, inspections of documents, comparisons of the Bank’s internal policies, procedures and methodologies to applicable requirements established by the Bank of Russia, as well as recalculations, comparisons and reconciliations of numerical data and other information.
Our findings from the procedures performed are reported below.
• Based on our procedures with respect to the Group’s compliance with mandatory ratios as established by the Bank of Russia, we found that the Group’s mandatory ratios as at 1 January 2015 were within the limits established by the Bank of Russia.
We have not performed any procedures on the accounting records maintained by the Group other than those which we considered necessary to enable us to express an opinion as to whether the Group’s consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014, and its financial performance and its cash flows for 2014 in accordance with International Financial Reporting Standards.
• Based on our procedures with respect to compliance of the Group’s internal control and organization of its risk management systems with requirements established by the Bank of Russia, we found that:
- as at 31 December 2014, the Bank’s Internal Audit Department was subordinated to, and reported to, the Board of Directors, and the risk management function was not subordinated to, and did not report to, divisions accepting relevant risks in accordance with regulations and recommendations issued by the Bank of Russia;
- the Bank’s internal documentation, effective on 31 December 2014, establishing the procedures and methodologies for identifying and managing the Group’s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and for stress-testing was approved by the authorized management bodies of the Bank in accordance with regulations and recommendations issued by the Bank of Russia;
-- as at 31 December 2014, the Bank maintained a system for reporting on the Group’s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Group’s capital;
- the frequency and consistency of reports prepared by the Bank’s risk management function and the Internal Audit Department during 2014, which cover the Group’s credit, operational, market, interest rate, legal, liquidity and reputational risk management, was in compliance with the Bank’s internal documentation. The reports included observations made by the Bank’s risk management function and the Internal Audit Department as to their assessment of the effectiveness of the Group’s procedures and methodologies, and recommendations for improvement;
- as at 31 December 2014, the Board of Directors and Executive Management of the Bank had responsibility for monitoring the Group’s compliance with risk limits and capital adequacy ratios as established by the Bank’s internal documentation. With the objective of monitoring effectiveness of the Group’s risk management procedures and their consistent application during 2014 the Board of Directors and Executive Management of the Bank periodically discussed reports prepared by the risk management function and the Internal Audit Department, and considered proposed corrective actions.
Our procedures with respect to elements of the Group’s internal control and organization of its risk management systems were performed solely for the purpose of examining whether these elements, as prescribed in Federal Law and described above, are in compliance with the requirements establish ed by the Bank of Russia.
Malyutina M.S.
Director, power of attorney dated 16 March 2015 No. 16/15 JSC “KPMG”
21 April 2015
Notes 2014 2013
Interest income 269 623 213 196
Interest expense (173 004) (128 476)
Net interest income 5 96 619 84 720
Impairment of interest earning assets 6 (54 152) (12 370)
Net interest income after impairment of interest earning assets 42 467 72 350
Fees and commissions income 7 22 505 18 586
Fees and commissions expense 7 (8 129) (6 317)
Non-interest loss from financial assets and liabilities at fair value through profit
or loss, net 8 (25 335) (4 380)
Gain from investments available-for-sale and investments in associates, net 16 16 403 13 707 Gain from trading in foreign currencies, operations with foreign currency
derivatives and foreign exchange translation, net 3 884 3 450
Other operating income 9 334 6 480
Non-interest income 18 662 31 526
Non-banking operating revenues 172 438 154 537
Non-banking operating expenses (164 129) (146 425)
Non-banking operating profits 9 8 309 8 112
Banking salaries and employment benefits 10 (30 043) (34 687)
Banking administrative expenses 10 (28 162) (24 920)
Impairment of assets and provisions for other risks 6 (12 990) (8 510)
Impairment of goodwill 6,21 (2 035) (290)
Non-interest expense (73 230) (68 407)
(Loss) profit before profit tax (3 792) 43 581
Profit tax expense 11 (9 906) (10 539)
(Loss) profit for the year (13 698) 33 042
Other comprehensive (loss) income
Items that are or may be reclassified to profit or loss in subsequent periods: Investments available-for-sale:
Net change in fair value of investments available-for-sale 305 7 964 Net change in fair value transferred to profit or loss (142) (10 398) Net impairment of available-for-sale investments transferred to profit or loss 1 222 1 385
Net change in cash flow hedge reserve 29 -
Exchange differences on translation of foreign operations 11 547 1 940
Movements in other comprehensive income of associates (450) -
Total other comprehensive income, net of tax 12 511 891
Total comprehensive (loss) income for the year (1 187) 33 933
(Loss) profit for the year attributable to:
Group’s shareholders (16 546) 32 062
Non-controlling interests 32 2 848 980
(13 698) 33 042
Total comprehensive (loss) income attributable to:
Group’s shareholders (8 184) 32 853
Non-controlling interests 32 6 997 1 080
(1 187) 33 933
Signed on behalf of the Management Board:
Andrey I. Akimov Alexander I. Sobol
Notes 31 December 2014
31 December 2013
Assets
Cash and cash equivalents 12 830 345 521 861
Obligatory reserve with the Central Bank of the Russian Federation 12 32 591 26 155
Due from credit institutions 12 7 921 7 346
Financial assets at fair value through profit or loss 13,14 205 473 293 277
of which pledged under sale and repurchase agreements 71 528 123 914
Loans to customers 15 3 022 863 2 355 869
Investments available-for-sale 16 19 152 45 609
of which pledged under sale and repurchase agreements 7 251 18 312
Investments in associates 16 66 197 52 862
Receivables and prepayments 17 110 300 81 098
Investments held-to-maturity 18 174 859 33 320
of which pledged under sale and repurchase agreements 82 745 4 080
Inventories 59 207 57 152
Deferred tax assets 11 26 425 19 780
Property, plant and equipment 19 103 553 81 649
Intangibles 20 55 710 33 516 Goodwill 21 35 847 23 795 Other assets 18 077 13 691 Total assets 4 768 520 3 646 980 Liabilities
Financial liabilities at fair value through profit or loss 13,14 23 839 3 214
Amounts owed to credit institutions 22 585 612 430 222
Amounts owed to customers 23 2 867 539 2 260 816
Bonds issued 24 537 210 341 074
Deferred tax liabilities 11 8 791 6 628
Subordinated debts 25 131 880 97 092 Other liabilities 26 174 666 104 869 Total liabilities 4 329 537 3 243 915 Equity Share capital 27 76 324 36 370
Additional paid-in capital 110 063 109 103
Treasury shares 27 (9 020) (8 060)
Perpetual debt issued 28 56 258 32 729
Foreign currency translation reserve 9 367 1 969
Fair value reserve for securities available-for sale and cash flow hedge
reserve 911 (503)
Retained earnings 181 105 225 866
Total equity attributable to the Group’s shareholders 425 008 397 474
Non-controlling interests 32 13 975 5 591
Total equity 438 983 403 065
Total liabilities and equity 4 768 520 3 646 980
Signed on behalf of the Management Board:
Andrey I. Akimov Alexander I. Sobol
Chairman of the Board Deputy Chairman of the Board
Share capital Additional paid-in capital Treasury shares Perpetual debt Foreign currency translation reserve Fair value reserve for securities available-for- sale and cash flow hedge reserve Retained earnings Equity attributable to Group’s shareholders Non-controlling interests Total equity 31 December 2012 36 370 102 201 (11 163) 30 373 129 546 201 304 359 760 3 702 363 462
Profit for the year - - - - - - 32 062 32 062 980 33 042
Items that are or may be reclassified to profit or
loss in subsequent periods:
Net change in fair value of investments
available-for-sale - - - 7 964 - 7 964 - 7 964
Net change in fair value of investments
available-for-sale transferred to profit or loss - - - (10 398) - (10 398) - (10 398)
Net impairment of investments
available-for-sale transferred to profit or loss - - - 1 385 - 1 385 - 1 385
Exchange differences on translating
foreign operations - - - - 1 840 - - 1 840 100 1 940
Total items that are or may be reclassified to
profit or loss in subsequent periods - - - - 1 840 (1 049) - 791 100 891
Total comprehensive income - - - - 1 840 (1 049) 32 062 32 853 1 080 33 933
Coupon paid on perpetual debt issued - - - (2 483) (2 483) - (2 483)
Foreign exchange translation of perpetual debt
issued - - - 2 356 - - (2 356) - - -
Transaction costs on perpetual debt issued
(Note 28) - - - (2 146) (2 146) - (2 146)
Tax effect on perpetual debt issued - - - - - - 1 397 1 397 - 1 397
Acquisition and disposal of non-controlling
interests in subsidiaries - - - 2 426 2 426 943 3 369
Dividends paid - - - - - - (5 791) (5 791) (134) (5 925)
Acquisition and sale of treasury shares - 7 577 3 103 - - - - 10 680 - 10 680
Transfer of putable instruments to liability - (675) - - - - - (675) - (675)
Other movements - - - - - - 1 453 1 453 - 1 453
Share capital Additional paid-in capital Treasury shares Perpetual debt Foreign currency translation reserve
Fair value reserve for securities available-for-sale and cash flow hedge reserve Retained earnings Equity attributable to Group’s shareholders Non-controlling interests Total equity 31 December 2013 36 370 109 103 (8 060) 32 729 1 969 (503) 225 866 397 474 5 591 403 065
Loss for the year - - - - - - (16 546) (16 546) 2 848 (13 698)
Items that are or may be reclassified to profit
or loss in subsequent periods:
Net change in fair value of investments
available-for-sale - - - 305 - 305 - 305
Net change in fair value of investments
available-for-sale transferred to profit or loss - - - (142) - (142) - (142)
Net impairment of investments
available-for-sale transferred to profit or loss - - - 1 222 - 1 222 - 1 222
Net change in cash flow hedge reserve - - - 29 - 29 - 29
Exchange differences on translating
foreign operations - - - - 7 398 - - 7 398 4 149 11 547
Movements in other comprehensive
income of associates - - - (450) (450) - (450)
Total items that are or may be reclassified to
profit or loss in subsequent periods - - - - 7 398 1 414 (450) 8 362 4 149 12 511
Total comprehensive income - - - - 7 398 1 414 (16 996) (8 184) 6 997 (1 187)
Preference share issue (Note 27) 39 954 - - - 39 954 - 39 954
Coupon paid on perpetual debt issued - - - (2 808) (2 808) - (2 808)
Foreign exchange translation of perpetual debt
issued - - - 23 529 - - (23 529) - - -
Tax effect on perpetual debt issued - - - 5 267 5 267 - 5 267
Acquisition and disposal of non-controlling
interests in subsidiaries - - - (537) (537) 1 462 925
Acquisition of subsidiaries - - - - - - - - 10 10
Dividends paid - - - - - - (6 334) (6 334) (85) (6 419)
Acquisition and sale of treasury shares - 1 174 (960) - - - - 214 - 214
Transfer of putable instruments to liability - (214) - - - - - (214) - (214)
Other movements - - - - - - 176 176 - 176
31 December 2014 76 324 110 063 (9 020) 56 258 9 367 911 181 105 425 008 13 975 438 983
Signed on behalf of the Management Board:
Andrey I. Akimov Alexander I. Sobol
Chairman of the Board Deputy Chairman of the Board
Notes 2014 2013
Cash flows from operating activities
Interest received 258 315 206 272
Fees and commissions received 22 591 18 450
Interest paid (162 241) (124 513)
Fees and commissions paid (8 229) (6 139)
Non-interest (payments) receipts from financial assets and liabilities
held for trading (6 549) (3 260)
Payments from derivative contracts with foreign currency 13 722 (2 490)
Foreign exchange receipts (payments) (16 093) 9 276
Media business operating receipts 71 524 51 182
Media business operating payments (35 276) (21 496)
Machinery business operating receipts 49 863 57 036
Machinery business operating payments (48 312) (58 640)
Other segment operating receipts 50 505 34 440
Other segment operating payments (46 767) (38 242)
Other operating receipts 6 562 3 369
Banking salaries and employment benefit payments (36 712) (35 847)
Banking administrative expenses and other operating payments (24 304) (20 458) Cash flows from operating activities before changes in operating assets
and liabilities 88 599 68 940
(Increase) decrease in operating assets
Obligatory reserve with the Central Bank of the Russian Federation (6 436) 2 031
Due from credit institutions 2 249 (335)
Financial assets held for trading 71 137 (53 119)
Loans to customers (123 825) (546 871)
Other operating assets (20 084) 908
Increase (decrease) in operating liabilities
Amounts owed to credit institutions 43 879 112 763
Amounts owed to customers 65 900 453 749
Other operating liabilities 51 592 (2 817)
Net cash flows from (used in) operating activities before profit taxes 173 011 35 249
Profit taxes paid (11 433) (17 183)
Net cash flows from (used in) operating activities 161 578 18 066
Cash flows from investing activities
Property, equipment and intangibles purchased (61 913) (47 011)
Property, equipment and intangibles sold 4 786 5 442
Acquisition of subsidiaries, net of cash acquired (22 357) -
Investments available-for-sale and associates purchased and sold 1 035 (3 507)
Investments held-to-maturity purchased (41 288) (19 964)
Dividends received 2 778 3 079
Notes 2014 2013
Cash flows from financing activities 1 (43 895)
Proceeds from issuance of share capital 39 954 -
Treasury shares sold and acquired (868) 10 005
Bonds issued 116 132 105 697
Bonds redeemed or repurchased (75 490) (39 271)
Coupon and transactions costs on perpetual debt paid (3 038) (4 629)
Syndicated loans received - 15 972
Syndicated loans redeemed (43 499) (15 972)
Subordinated debts received 27 048 39 809
Subordinated debts repaid (40 405) (1 667)
Acquisition of non-controlling interests - (240)
Disposal of non-controlling interests 925 3 609
Financing of non-banking activities received 11 137 3 966
Financing of non-banking activities redeemed (7 367) (2 546)
Dividends paid (6 419) (5 925)
Net cash flows from financing activities 18 110 108 808
Effect of change in exchange rates on cash and cash equivalents 245 755 24 810
Change in cash and cash equivalents 308 484 89 723
Cash and cash equivalents, beginning of the year 521 861 432 138
Cash and cash equivalents, end of the year 12 830 345 521 861
Signed on behalf of the Management Board:
Andrey I. Akimov Alexander I. Sobol
Chairman of the Board Deputy Chairman of the Board
NOTE 1–PRINCIPAL ACTIVITIES AND ORGANIZATION The Gazprombank Group (the Group) primarily consists of:
• Gazprombank (Joint-stock Company), which is the parent company,
• subsidiary banks, including GPB-Mortgage, CreditUralBank, Gazprombank (Switzerland) Ltd., Gazprombank International S.A. and Areximbank, and a number of smaller financial companies, which support the banking business,
• several significant non-banking companies.
Gazprombank (Joint-stock Company) (the Bank) was established in 1990. The Bank has a general banking license and a license for operations with precious metals from the Central Bank of the Russian Federation (the CBR), and licenses for securities operations and custody services from the Federal Financial Markets Service of Russia, which in 2013 became a part of the CBR. Its subsidiary banks and companies also have general banking licenses for operations in Switzerland, Luxembourg and Armenia and investment, brokerage and asset management licenses for operations in Cyprus, Luxembourg and Hong Kong.
The Bank is the third largest bank in the Russian Federation in terms of assets and equity, and it provides a broad range of commercial and investment banking services to many of Russia's leading corporations, including, among others, OAO “Gazprom” and its related parties (the Gazprom Group). The principal corporate banking services include: commercial lending, project and acquisition finance, trade finance, financial and operating leasing, deposit taking, settlements and cash management, capital markets transactions, asset management, brokerage, corporate finance and mergers & acquisitions advisory, depositary and custodian services. The Bank is also involved in private equity transactions, foreign exchange and securities trading, and operations with precious metals.
The Bank provides a range of services to private individuals, including employees of its corporate clients, high net worth individuals and the general public. Retail services include: lending, deposit taking, debit and credit card services, brokerage, asset management and a range of other services.
The Bank has controlling stakes in several non-banking investments, which are consolidated in these financial statements and are presented as separate segments (see Note 4), including:
• OAO “Gazprom-Media Holding” and its subsidiaries (the Media segment), a Russian media group of companies, the principal activities of which are TV and radio broadcasting, advertising, publishing, film production and distribution primarily undertaken in the Russian Federation,
• OAO “OMZ” and its subsidiaries (the OMZ Group) and a number of other industrial assets (together - the Machinery segment). OMZ Group produces nuclear power plant equipment, specialty steels, machinery equipment, manufacturing and mining equipment. The OMZ Group manufacturing facilities are based in the Russian Federation and the Czech Republic.
The legal address of the Bank is: Bld.1, 16, Nametkina Str., Moscow, 117420, Russian Federation.
As of 31 December 2014, OAO “Gazprom” owns 35.54% of the outstanding ordinary shares of the Group. A substantial portion of the Group’s funding is from the Gazprom Group. As such the Group is economically dependent on the Gazprom Group (Note 33).
These consolidated financial statements are published on a Bank's website www.gazprombank.ru.
These consolidated financial statements were authorized for issue by the Management Board of the Bank on 21 April 2015.
NOTE 2–BASIS OF PRESENTATION
a) General
These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Management is responsible for the preparation of the consolidated financial statements in accordance with IFRS. The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments and key estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial information and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Key areas of judgments and key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, include:
• estimation of allowance for impairment losses for financial assets measured at amortized cost. These include mainly loans to customers, amounts due from credit institutions, receivables and other assets. The estimation of allowance for impairment losses involves the exercise of judgment and is based on internal credit risk rating systems and statistical data.
• valuation of complex and illiquid financial instruments. Valuation of complex and illiquid financial instruments involves the exercise of judgment and use of valuation models. In the absence of an active market management has to make assumptions in respect of appropriate inputs used in valuation models, some of which may not be based on observable market data.
• estimation of fair values of identifiable assets and liabilities acquired in business combinations. Estimation of fair values of identifiable assets and liabilities acquired in business combinations involves the exercise of judgment and use of valuation models, which among others include assumptions about future business performance and cash flows and appropriate discount rates.
• estimation of impairment losses for non-financial assets (including goodwill). Estimation of impairment losses for non-financial assets involves the exercise of judgment and use of valuation models, which among others include assumptions about future business performance, estimation of cash flows from assets assessed for impairment and estimation of appropriate discount rates.
• assessment of whether the Group has control or significant influence for investments where control or significant influence is determined by contractual arrangements or other factors other than voting rights held by the Group.
• recognition of income from investments, including equity-accounted investees, and estimation of allowance for impairment losses for exposures to counterparties that are located in regions with social unrest and unstable political situation, such as Venezuela (Note 16) and Ukraine (Note 31).
b) Russian economic environment
The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of a developing market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. Management of the Group believes that it takes all the necessary efforts to support the economic stability of the Group in the current environment.
Since September 2014 a drop of oil prices led to significant devaluation of the Russian Rouble against major foreign currencies which in turn accelerated inflation. The political and economic instability witnessed in Ukraine has had and may continue to have a negative impact on the Russian economy. In 2014 the United States OFAC and the European Council implemented coordinated sectoral sanctions against some of the Russian banks and corporations, including the Bank, and some of the Russian officials and businessmen. The sanctions prohibit the U.S. and EU citizens or entities operating on the territory of the U.S. and EU transacting in, providing financing for, or otherwise dealing in the debt instruments of the Group with a maturity of longer than 30 days issued after the date of the sanctions announcement.
These consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.
The Group is not exposed to significant seasonal or cyclical variations in operating income during the financial year.
c) Basis of measurement
These consolidated financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale financial assets are stated at fair value.
d) Functional and presentation currency
The functional currency of the Bank and the majority of its subsidiaries is the Russian Rouble (RUB) as, being the national currency of the Russian Federation, it reflects the economic conditions of the majority of underlying events and circumstances relevant to them.
Some of the Group's principal subsidiaries have functional currency different from the Russian Rouble:
Name Functional currency
GPB Global Resources B.V US dollar
Gazprombank Latin America Ventures B.V. US dollar
ZAO Areximbank Armenian dram
Gazprombank Switzerland Ltd Swiss franc
GPB International SA Euro
ŠKODA JS a.s. Czech crown
Centrex Europe Energy & Gas AG Euro
The consolidated financial statements are presented in millions of RUB, unless otherwise stated. NOTE 3–PRINCIPAL ACCOUNTING POLICIES
a) Principles of consolidation and accounting for associates
(i) Business combinations and goodwill
For acquisitions on or after 1 January 2010 the Group measures goodwill at the acquisition date as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree if the business combination is achieved in stages) and the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as at the acquisition date. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The Group elects on a transaction-by-transaction basis whether to measure non-controlling interests at fair value, or at their proportionate share of the recognised amount of the identifiable net assets of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.
For acquisitions before 1 January 2010 goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisitions. The loss of control is, among other factors, evidenced by an arrangement that principally transfers to a third party the power to govern and the economic benefits related to activities of the subsidiary. In certain cases the exercise of judgment is required to determine whether an arrangement between a Group and a third party results in a loss
of control over a subsidiary before the Group legally transfers the ownership rights to third party, in particular, where such transfers are subject to further regulatory approval.
(ii) Subsidiaries
Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Group consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
(iii) Structured entities
A structured entity is an entity designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. In assessing whether the Group has power over such investees in which it has an interest, the Group considers factors such as the purpose and design of the investee; its practical ability to direct the relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee.
(iv) Funds management
The Group manages and administers assets held in unit trusts and other investment vehicles on behalf of investors. The financial statements of these entities are not included in these consolidated financial statements except when the Group controls the entity.
(v) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.
(vi) Non-controlling interests
The portion of the net assets and the post acquisition profit or loss of a subsidiary attributable to equity interests that are not owned, directly or indirectly, by the Group is presented as non-controlling interests in the consolidated financial statements. The difference, if any, between the consideration paid to acquire the non-controlling interests and its carrying amount is recorded in equity. Dividends paid to non-controlling shareholders decrease the carrying amount of non-controlling interests recorded in equity.
(vii) Consolidation of limited liability companies domiciled in the Russian Federation
In substance the partners' equity of certain limited liability companies domiciled in the Russian Federation meets the definition of a liability according to the statutory legislation. Stakeholder should they decide to exit the limited liability company, are entitled to a payout equal to their share in net assets of the company as of the latest reporting date. The "buy-back" payout performed by the limited liability company is not subject to approval by other stakeholders. Therefore the Group’s non-controlling interests in such limited liability companies consolidated in the Group’s financial statements are accounted for as liabilities.
(viii) Associates
Investments in associated companies where the Group exercises significant influence are accounted for using the equity method. Goodwill arising on the acquisition is included in the carrying value of the investment (net of any accumulated impairment loss). When the investee incurs losses, the Group recognises its share of losses until the carrying amount of the investment is reduced to nil. Recognition of further losses is discontinued.
b) Acquisition of subsidiaries from a parent or entities under common control
Acquisitions of subsidiaries from a parent or entities under common control are accounted for using the predecessor cost accounting method. The assets and liabilities of a subsidiary purchased from a parent or entities under common control are consolidated into the financial statements using their carrying amounts in the IFRS financial statements of the predecessor company, i.e. using their “predecessor cost” starting from the date of obtaining control over the subsidiary purchased.
As a result, when the Group purchases a group of entities, the goodwill arising from the original acquisitions of entities that are parts of the purchased group is included in the consolidated financial statements as an asset. Any difference between the fair value of consideration paid by the Group and the predecessor cost of the Group’s share of net assets purchased (including the predecessor entity’s goodwill) is accounted as an adjustment of equity.
c) Foreign currency translation
Income and expenses, and non-monetary items included in the consolidated statement of financial position at period-end, denominated in currencies other than the functional currency, are recorded by applying the exchange rate prevailing at the date of the transaction. Foreign currency denominated monetary items included in the period end consolidated statement of financial position are translated at the exchange rate prevailing at the period end. Foreign currency differences arising on retranslation are recognised in the profit or loss as gain or loss from foreign exchange, except for differences arising on the retranslation of available-for-sale equity instruments, which are recognised in other comprehensive income, and differences arising from perpetual debt issued, which are recorded in retained earnings. Net gain from foreign exchange dealing includes both the currency spread realised in the transaction and the built-in foreign exchange trading commission.
If foreign subsidiaries or foreign associates have functional currencies that are different from the functional currency of the Bank (the Russian Rouble), the resulting exchange differences arising from translation to Russian Roubles of their financial statements (in the case of a subsidiary) or of their net assets (in the case of an associate) are included in other comprehensive income as a part of the foreign currency translation reserve.
The official USD/RUB exchange rates of the Central Bank of the Russian Federation were as follows (Roubles per 1 USD):
2014 2013
Exchange rate as at 31 December 56.2584 32.7292
Average rate for the year ended 31 December 38.4217 31.8480
The Russian Rouble is not a readily convertible currency outside of the Russian Federation and, accordingly, any conversion of Rouble to USD should not be construed as a representation that the Rouble amounts have been, could be, or will be in the future, convertible into USD at the exchange rates disclosed, or at any other exchange rates.
d) Income and expense recognition
Interest income and expense are recognised on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or the financial liability.
All borrowing costs are recognised in profit or loss using the effective interest method, except for borrowing costs related to qualifying assets, which are recognised as part of the cost of such assets. Transaction costs and interest payments related to perpetual debt issued included in equity are recorded in retained earnings. The Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.
Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Interest earned on assets at fair value is classified within interest income.
Loan origination fees are deferred, together with the related direct costs, and recognised as an adjustment to the effective interest rate of the loan. Loan servicing fees and all other commissions are recognised as revenue as the services are provided.
The Group recognizes advertising revenue net of value added tax (VAT) and discounts when broadcasting or publishing of the related advertisement occurs. Revenue from selling of programming rights is recognised net of VAT and discounts when all of the following conditions are met: sale of the related rights can be confirmed; programs are complete and delivered to clients or ready for delivering; license agreement period has started and clients may use the airtime; and revenue can be reliably measured.
Revenues from sales of goods in the machinery segment are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Sales of services in the machinery segment are recognised in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts. Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up.
e) Financial instruments
(i) Classification
Financial assets or liabilities at fair value through profit or loss are financial assets or liabilities held for trading that are:
• acquired or incurred principally for the purpose of selling or repurchasing in the near term
• part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking
• derivative financial instruments (except for derivative financial instruments that are effective hedging instruments) or
• upon initial recognition, designated as at fair value through profit or loss.
The Group may designate financial assets and liabilities at fair value through profit or loss where either:
• the assets or liabilities are managed, evaluated and reported internally on a fair value basis
• the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or
• the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.
All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Group:
• intends to sell immediately or in the near term
• upon initial recognition designates as at fair value through profit or loss
• upon initial recognition designates as available-for-sale or
As part of its acquisition and equity-backed finance business the Group purchases or keeps certain assets, including equity investments, and simultaneously enters into derivative contracts linked to these assets that effectively transfer the risks and economic benefits associated with the assets to the counterparty of the derivative contract. The pricing of derivatives is usually designed in a way that the Group is earning a return representing compensation for the time value of money and the credit risk of the counterparty. To the extent that the substance of the transactions is that the Group provides the acquisition financing to the counterparty with the underlying assets used as collateral, the Group classifies such transactions as loans and receivables.
Investments held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity, other than those that:
• the Group upon initial recognition designates as at fair value through profit or loss
• the Group designates as available-for-sale or,
• meet the definition of loans and receivables.
Investments available-for-sale are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, investments held-to-maturity or financial instruments at fair value through profit or loss.
Management determines the appropriate classification of financial instruments at the time of the initial recognition. Derivative financial instruments are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the entity has an intention and ability to hold it for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to reoccur in the near term.
(ii) Recognition and de-recognition of financial instruments
Financial assets and liabilities are recognised in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date.
The Group derecognises a financial asset when the contractual rights to receive cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt.
The Group enters into transactions whereby it transfers assets recognised in its consolidated statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised.
In transactions where the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost.
The rights and obligations created or retained in the transfer are recognised separately as assets and liabilities as appropriate. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets.
(iii) Measurement
A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability.
Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for:
• loans and receivables which are measured at amortized cost using the effective interest method
• investments held-to-maturity that are measured at amortized cost using the effective interest method
• equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost.
All financial liabilities, other than those at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability.
(iv) Gain and loss on subsequent measurement
A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows:
• a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in profit or loss
• a gain or loss on an investments available-for-sale is recognised as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Interest in relation to investments available-for-sale is recognised as earned in profit or loss using the effective interest method.
For financial assets and liabilities carried at amortized cost, a gain or loss is recognised in profit or loss when the financial asset or liability is derecognised or impaired, and through the amortization process.
(v) Repurchase and reverse repurchase (repo) agreements
The Group, as an element of its treasury management and trading business, utilizes repo agreements and reverse repo agreements with securities. Repo agreements are accounted for as financing transactions. The related payable is included as amounts owed to credit institutions or amounts owed to customers, as appropriate. Any related expense arising from the pricing spreads for the underlying securities is recognised as interest expense and accrued over the period that the related transactions are open using the effective interest method. Securities pledged as collateral under repo agreements are also included in the consolidated financial statements.
Reverse repo agreements are accounted for as due from credit institutions or loans to customers, as appropriate. Any related income arising from the pricing spreads for the underlying securities is recognised as interest income over the period that the related transactions are open using the effective interest method. Securities received as collateral under reverse repo agreements are not recognised in the consolidated financial statements.
If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value.
(vi) Securitisation and transfer of assets
For securitised financial assets, the Group considers both the degree of transfer of risks and rewards on assets transferred to another entity and the degree of control exercised by the Group over the other entity.
When the Group, in substance, controls the entity to which financial assets have been transferred, the entity is included in these consolidated financial statements and the transferred assets are recognised in the consolidated statement of financial position.
When the Group has transferred financial assets to another entity, but has retained substantially all the risks and rewards relating to the transferred assets, the transferred assets are recognised in the consolidated statement of financial position.
When the Group transfers substantially all the risks and rewards relating to the transferred assets to an entity that it does not control, the assets are derecognised from the consolidated statement of financial position.
If the Group neither transfers nor retains substantially all the risks and rewards relating to the transferred assets, the assets are derecognised if the Group has not retained control over the assets.
(vii) Derivative financial instruments
The Group enters into derivative contracts for trading purposes. Derivative financial instruments include swap, forward, futures, spot transactions and options in interest rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments. The Group classifies these financial instruments as financial assets or liabilities held for trading. Derivatives are initially recognised at fair value, which is normally the transaction price (i.e. the fair value of the consideration given or received for them), and subsequently are measured at their fair value. Fair values are obtained from quoted market prices (if available) or are estimated using appropriate valuation models and available market prices.
The realised trading profits from derivatives and unrealised changes in the fair value of derivative contracts are recognised immediately in profit or loss.
Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated.
Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets and liabilities. Derivatives held for risk management purposes are measured at fair value in the statement of financial position.
The group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationships between the hedging instruments and hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%.
(viii) Cash flow hedge
When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented
in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount recognised in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of profit or loss and other comprehensive income.
If the hedging derivative expires or is sold, terminated or exercised, or the hedge is no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively.
(ix) Due from credit institutions
In the normal course of business, the Group lends or deposits funds for various periods with other credit institutions. Such amounts are categorized as loans originated by the Group and are carried at amortized cost. As these placements of funds are typically unsecured extensions of credit, some of the assets may be impaired. The principles used to create allowance for loan impairment on amounts due from credit institutions are described below for financial assets carried at amortized cost.
(x) Promissory notes
In the normal course of business the Group acquires promissory notes of third parties. These notes generally have short-term to medium-term maturity. Promissory notes are categorized as securities at fair value through profit or loss, investments available-for-sale or held-to-maturity or or amounts due from credit institutions or loans to customers depending on their economic substance. Promissory notes are measured by the Group according to the appropriate accounting policies for the respective assets.
(xi) Trade receivables (payables)
Trade receivables (payables) are initially recognised at fair value, which is the fair value of the consideration given (received), and are subsequently measured at amortized cost. An allowance for impairment of trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is determined using the principles described below for financial assets carried at amortized cost.
(xii) Amounts owed to credit institutions and to customers and subordinated debts
Amounts owed to credit institutions and to customers and subordinated debts are initially recognised at fair value less transaction costs that are directly attributable to the acquisition or issue of the financial liability. Subsequently amounts due are stated at amortized cost and any difference between the carrying amount and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of a liability and the consideration paid is included in net interest income. (xiii) Bonds issued
Bonds issued represent bonds issued by the Group to domestic customers and eurobonds. Eurobonds represent mainly internationally traded Euro Medium Term Notes and Loan Participation Notes issued by the Group. Bonds issued are accounted for according to the same principles used for amounts owed to credit institutions and to customers.
(xiv) Offsetting
Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.