The accounting policy of the Bank is determined according to the regulations of the National Bank of Ukraine and is developed on the basis of International Financial Reporting Standards (“IFRS”) and National generally accepted accounting principles except the cases where the National Bank of Ukraine applies the individual accounting rules with the purpose to comply with the Law of Ukraine ‘On the National Bank of Ukraine’.
The accounting policy of the Bank is the legislatively defined set of principles, methods and practices applied by the Bank in preparing financial statements. The key principle is that accounting policy shall be chosen and applied to comply with all IFRSs and accompanying interpretations. If the Bank performs individual operations with no IFRS to apply specifically to these, then general principles such as understandability, reliability, comparability, relevance are applied.
Some items of financial statements cannot be accurately calculated but estimated only. The estimation process requires judgment that is based on the actual and available information. The estimate is revised if there is the change in the circumstances upon which it was made. The use of valuation techniques may require assumptions not supported by the market data. These financial statements disclose the information if replacing assumption with the alternative treatment may materially influence the amount of profit, income, expenses, total assets or liabilities.
These financial statements have been prepared according to the accounting policy of the Bank specified below on the assumption of the Bank’s ability to continue as a going concern, on a fair value basis for the office building with recognition in equity and for financial instruments, that have been measured at fair value - through profit or loss. These statements are prepared in accordance with the regulations of the National Bank of Ukraine set out in the Instruction on the order of preparing and presenting of financial statements of banks of Ukraine approved by the NBU Board Resolution dated 27 December 2007 No 480. The balances of previous financial statements for 2009 were prepared in accordance with the above mentioned Instruction.
The functional and presentation currency for the financial statements is the national currency of Ukraine – Hryvnia. The financial statements of the Bank are presented in Hryvnia thousand, except when otherwise indicated in the notes. Introduction of new and amended standards and interpretations
Some new IFRSs have become effective and mandatory for the application by the Bank for financial years beginning on 1 January 2010 and are disclosed in Note 3 ‘Adoption of new and revised standards and interpretations providing the context in which the standards should be read’.
The management of the Bank does not expect any material effect of these new standards and interpretations on the financial statements of the Bank.
The main principles and valuation techniques applied by the Bank to reflect assets and liabilities, income and expenses in accounting records.
When reflecting financial instruments in accounting records the Bank uses the following valuation methods: - fair value
- amortized cost - historical cost.
Financial assets and liabilities are measured at fair value, historical cost or amortized cost depending on the classification.
Such estimated figures as useful life of assets, impairment of assets, making allowances and provisions are used in the financial statements.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction, in other words the current bid price for financial assets and asking price for financial liabilities quoted at active market. A financial asset is deemed quoted in an active market if this financial instrument quoted prices are readily and regularly available from an exchange or other entity and if those prices represent actual and regularly occurring market transactions on an arm’s length basis.
If there is no active market, the basis for establishing fair value is recent arm’s length market transactions. Amounts obtained in a forced transaction (distress sale, involuntary liquidation etc) is not fair value.
To establish fair value of the financial instrument for which there is no information about market prices from external sources, such valuation techniques as discounted cash flow analysis and investee financial information analysis are used. The use of valuation techniques may require assumptions not supported by the market data. These financial statements disclose the information if replacing such an assumption with the alternative treatment may materially influence the amount of profit, income, expenses, total assets or liabilities.
Amortized cost is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount using effective interest method, and minus any reduction for impairment for the financial assets.
Historical cost is the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire asset at the time of its acquisition, less transaction costs. Historical cost valuation is applied to equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured as well as to the government securities of Ukraine.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.
In recognition of financial assets and liabilities the Bank applies the criteria, under which assets and liabilities are recognized in the balance sheet only if there are reliable estimates that will enable to determine the amount of money in which the relevant elements of balance sheet must be reflected in the financial statements.
The elements of the balance sheet include the following categories of financial results of events and operations of the Bank which are joined in separate groups according to their economic characteristics - assets, liabilities, equity, income and expenses. The order of reflection of balance sheet items in the accounting records, assets and liabilities revaluation procedures are conducted according to the NBU regulations and internal documents of the Bank. After initial recognition as at the reporting date the Bank performs the assessment of the actual position of assets and liabilities using the accrual principles and compliance of income and expenses, forms special purpose provisions, depreciation of property and equipment and intangible assets, discount / premium on securities, etc.
Subsequent measurement of the financial instruments in the Bank is carried out as follows:
- Debt securities designated at fair value through profit or loss are revalued whenever their market price changes. The change shall be recognized in the Income statement in the period it arose;
- Investments in equity instruments available for sale whose fair value cannot be reliably measured are measured at historical cost less impairment;
- Cash and deposits denominated in foreign currencies, debt securities held to maturity and loans to banks and other borrowers are measured at amortized cost.
Impairment allowance for financial assets
Financial assets impairment is recognized by making provision through profit or loss for all types of assets except those designated at fair value. Overdue loans and opportunities for sale of collateral are the indicators of impairments. Impairment losses are recognized in the Income statement when incurred as a result of one or several events (‘loss events’) that occurred after initial recognition of a financial asset and if this event (or events) influences the expected cash flows from a financial asset or a group of assets that can be reliably measured.
- the contractual rights to the cash flows from the financial asset expire or the transfer of the financial asset that qualifies for derecognition.
Criteria for recognition and measurement of certain items of income and expenses:
- Income and expenses shall be recognized in the moment when assets increase or liabilities decrease, which results in increase or decrease in equity. Income and expenses shall be stated in the accounting records and financial statements when they are incurred, regardless of the date of receipt or payment of cash. The principles of full coverage, single money measure, charges and compliance of income and expenses are used.
All items of income and expenses recognized during the reporting period shall be included in profit or loss. This covers the effects of changes in accounting estimates and corrections of errors.