Annual Financial Report

Annual Financial Report

Bank of Georgia

JSC Bank of Georgia and
Subsidiaries
Consolidated Financial Statements

Years ended 31 December 2010, 2009 and 2008
Together with Independent Auditors’ Report

JSC Bank of Georgia and Subsidiaries Consolidated Financial Statements

CONTENTS

INDEPENDENT AUDITORS’ REPORT
Consolidated statements of financial positionConsolidated statements of financial position
Consolidated income statementsConsolidated income statements
Consolidated statements of comprehensive incomeConsolidated statements of comprehensive income
Consolidated statements of changes in equityConsolidated statements of changes in equity
Consolidated statements of cash flowsConsolidated statements of cash flows

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Principal Activities
2. Bases of Preparation
3. Summary of Significant Accounting Policies
4. Significant Accounting Judgements and Estimates
5. Business Combinations
6. Segment Information
7. Cash and Cash Equivalents 38
8. Amounts Due from Credit Institutions
9. Loans to Customers
10. Finance Lease Receivables
11. Investment Securities
12. Investments in Associates
13. Investment Properties
14. Property and Equipment
15. Goodwill and Other Intangible Assets
16. Taxation
17. Other Impairment Allowance and Provisions
18. Other Assets and Other Liabilities
19. Amounts Due to Credit Institutions
20. Amounts Due to Customers
21. Equity
22. Commitments and Contingencies
23. Net Fee and Commission Income
24. Net Insurance Revenue
25. Salaries and Other Employee Benefits, and General and Administrative Expenses
26. Share-based Payments
27. Risk Management
28. Fair Values of Financial Instruments
29. Maturity Analysis of Financial Assets and Liabilities
30. Related Party Disclosures
31. Capital Adequacy
32. Event after the Reporting Period

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors of JSC Bank of Georgia –

We have audited the accompanying consolidated financial statements of JSC Bank of Georgia and its subsidiaries, which comprise the consolidated statements of financial position as at 31 December 2010, 2009 and 2008, and the consolidated income statements, consolidated statements of comprehensive income, of changes in equity and of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated 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 these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 auditors’ 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 provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JSC Bank of Georgia and its subsidiaries as at 31 December 2010, 2009 and 2008 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards.

10 March 2011

JSC Bank of Georgia and Subsidiaries   Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at 31 December 2010, 2009 and 2008

(Thousands of Georgian Lari)

  Notes   2010   2009   2008
Assets
Cash and cash equivalents 7 611,584 357,889 415,821
Amounts due from credit institutions 8 116,469 64,620 81,403
Loans to customers 9 2,351,697 1,661,331 2,039,022
Finance lease receivables 10 14,419 16,896 41,605
Investment securities:
– available-for-sale 11 294,940 19,590 33,737
– held-to-maturity 11 21 249,196 22,845
Investments in associates 12 5,632 10,323 16,716
Investment properties 13 113,496 79,509 47,289
Property and equipment 14 285,852 278,729 301,784
Goodwill and other intangible assets 15 91,602 85,442 152,459
Current income tax assets 16 2,247 7,997 8,095
Deferred income tax assets 16 18,178 15,487 4,691
Prepayments 23,365 18,140 18,319
Other assets 18 75,420 48,280 75,121
Total assets 4,004,922 2,913,429 3,258,907
 
Liabilities
Amounts due to customers 20 2,004,698 1,272,470 1,193,124
Amounts due to credit institutions 19 1,138,927 928,615 1,216,722
Current income tax liabilities 16 4,251 574 779
Deferred income tax liabilities 16 30,901 24,661 23,615
Provisions 17, 22 4,407 2,126 4,263
Other liabilities 18 128,397 86,566 101,555
Total liabilities 3,311,581 2,315,012 2,540,058
 
Equity 21
Share capital 31,345 31,306 31,253
Additional paid-in capital 477,285 478,779 468,732
Treasury shares (1,510) (1,677) (2,018)
Other reserves 26,816 24,387 26,201
Retained earnings 130,314 46,163 141,491
Total equity attributable to shareholders of the Bank 664,250 578,958 665,659
Non-controlling interests 29,091 19,459 53,190
Total equity 693,341 598,417 718,849
 
Total liabilities and equity 4,004,922 2,913,429 3,258,907

Signed and authorised for release on behalf of the Management Board of the Bank

Irakli Gilauri                   Chief Executive Officer
 
 
 
David Vakhtangishvili Chief Financial Officer
 

10 March 2011

JSC Bank of Georgia and Subsidiaries   Consolidated Financial Statements

CONSOLIDATED INCOME STATEMENTS

For the years ended 31 December 2010, 2009 and 2008

(Thousands of Georgian Lari)

Notes   2010   2009   2008
Interest income
Loans to customers 389,402 361,176 363,013
Investment securities – held-to-maturity 12,498 5,725 16,457
Amounts due from credit institutions 9,795 5,037 10,732
Investment securities – available-for-sale 7,287 1,276 6,727
Finance lease receivables 4,159 5,844 7,010
423,141 379,058 403,939
Interest expense
Amounts due to customers (114,654) (96,749) (85,358)
Amounts due to credit institutions (91,829) (91,582) (97,035)
Debt securities issued (314) (186) (706)
(206,797) (188,517) (183,099)
Net interest income before impairment charge

on interest-earning assets

216,344 190,541 220,840
Impairment charge on loans to customers 9 (49,886 ) (118,882) (122,812)
Reversal of impairment (Impairment charge) on finance lease receivables 10 5,775 (6,859) (1,335)
Net interest income after impairment charge 172,233 64,800 96,693
 
Fee and commission income 74,265 64,599 63,503
Fee and commission expense (10,845) (9,574) (13,534)
Net fee and commission income 23 63,420 55,025 49,969
 
Net gains (losses) from trading securities 1,217 2,763 (5,447)
Net gains from investment securities available-for-sale 789 174 513
Net losses from derivative financial instruments (7,826) (6,266) –
Net gains (losses) from revaluation of investment properties 13 350 (4,087) (389)
Net gains from foreign currencies:
– dealing 33,651 25,945 39,443
– translation differences 98 2,821 7,691
Net insurance premiums earned 24 44,561 45,477 35,911
Share of profit (loss) of associates 12 255 (2,649) (713)
Other operating income 21,927 17,908 14,747
Other non-interest income 95,022 82,086 91,756
 
Salaries and other employee benefits 25 (104,551) (100,505) (108,767)
General and administrative expenses 25 (61,000) (57,339) (68,649)
Net insurance claims incurred 24 (27,898) (30,102) (26,895)
Depreciation, amortization and impairment 14, 15 (28,398) (101,700) (20,532)
Impairment charge on other assets and provisions 17 (3,587) (6,431) (4,551)
Other operating expenses (6,798) (11,740) (9,828)
Other non-interest expenses (232,232) (307,817) (239,222)
 
Profit (loss) before income tax benefit 98,443 (105,906) (804)
Income tax (expense) benefit 16 (15,776) 6,998 978
Profit (loss) for the year 82,667 (98,908) 174
Attributable to:
– shareholders of the Bank 83,640 (91,370) 3,897
– non-controlling interests (973 ) (7,538) (3,723)
82,667 (98,908) 174
Earnings per share: 21
– basic earnings (losses) per share 2.785 (2.996) 0.129
– diluted earnings (losses) per share 2.739 (2.996) 0.129

JSC Bank of Georgia and Subsidiaries Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended 31 December 2010, 2009 and 2008

(Thousands of Georgian Lari)

  Notes   2010   2009   2008
 
Profit (loss) for the year 82,667 (98,908) 174
 
Other comprehensive (loss) income
– Revaluation of property & equipment 14 (2,859) (1,842) (10,455)
– Revaluation of available-for-sale securities 6,077 7,533 (9,687)
– Realized gains on available-for-sale securities reclassified to the consolidated income statement (789) (174) (513)
– Gain (loss) from currency translation differences 5,116 (12,145) (22,435)
– Unrealized (loss) gain from acquiring / selling shares in existing subsidiaries (3,250) 7,624 –
Income tax relating to components of other comprehensive income 16 206 (704) 3,189
Other comprehensive income (loss) for the year, net of tax 4,501 292 (39,901)
Total comprehensive income(loss) for the year 87,168 (98,616) (39,727)
Attributable to:
– shareholders of the Bank 86,580 (91,078) (36,004)
– non-controlling interest 588 (7,538) (3,723)
87,168 (98,616) (39,727)

JSC Bank of Georgia and Subsidiaries Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended 31 December 2010, 2009 and 2008

(Thousands of Georgian Lari)

  Attributable to shareholders of the Bank   Non-controlling interest   Total equity
Share capital   Additional paid-in capital   Treasury shares   Other reserves   Retained earnings   Total
 
31 December 2007 27,155 315,415 (1,737) 67,354 136,342 544,529 13,462 557,991
Total comprehensive income (loss) – – – (39,901) 3,897 (36,004) (3,723) (39,727)
Depreciation of revaluation reserve, net of tax – – – (1,252) 1,252 – – –
Issuance of shares arising from business combination (Note 21) 89 573 – – – 662 – 662
Increase in share capital arising from share-based payments (Note 21) 9 8,590 341 – – 8,940 – 8,940
Share offering costs adjustment – (357) – – – (357) – (357)
Increase in share capital from
issuance of GDRs (Note 21)issuance of GDRs (Note 21)		 4,000 146,594 – – – 150,594 – 150,594
Acquisition of additional interests in existing subsidiaries by
non-controlling shareholders non-controlling shareholders 		– – – – – – 31,278 31,278
Non-controlling interests arising on acquisition of subsidiary – – – – – – 12,173 12,173
Sale of treasury shares – 5,544 256 – – 5,800 – 5,800
Purchase of treasury shares – (7,627) (878) – – (8,505) – (8,505)
31 December 2008 31,253 468,732 (2,018) 26,201 141,491 665,659 53,190 718,849
Total comprehensive income (loss) – – – 1,563 (92,641) (91,078) (7,538) (98,616)
Depreciation of revaluation reserve, net of tax – – – (3,377) 3,377 – – –
Increase in share capital arising from share-based payments (Note 21) 53 2,523 153 – – 2,729 – 2,729
Share offering costs adjustment – 306 – – – 306 – 306
Equity component of compound financial instrument – 9,769 – – – 9,769 – 9,769
Acquisition of additional interests in existing subsidiaries by
non-controlling shareholders non-controlling shareholders 		– – – – (6,064) (6,064) (1,479) (7,543)
Acquisition of non-controlling interests in existing subsidiaries – – – – – – (24,730) (24,730)
Non-controlling interests arising on acquisition of subsidiary – – – – – – 16 16
Sale of treasury shares – 1,154 642 – – 1,796 – 1,796
Purchase of treasury shares – (3,705) (454) – – (4,159) – (4,159)
31 December 2009 31,306 478,779 (1,677) 24,387 46,163 578,958 19,459 598,417
Total comprehensive income – – – 4,692 81,888 86,580 588 87,168
Depreciation of revaluation reserve, net of tax – – – (2,263) 2,263 – – –
Increase in share capital arising from share-based payments (Note 21) 39 8,497 610 – – 9,146 – 9,146
Acquisition of additional interests in existing subsidiaries by
non-controlling shareholders non-controlling shareholders 		– – – – – – 11,973 11,973
Acquisition of non-controlling interests in existing subsidiaries – – – – – – (6,854) (6,854)
Non-controlling interests arising on acquisition of subsidiary – – – – – – 3,925 3,925
Sale of treasury shares – 7,104 448 – – 7,552 – 7,552
Purchase of treasury shares – (17,095) (891) – – (17,986) – (17,986)
31 December 2010 31,345 477,285 (1,510) 26,816 130,314 664,250 29,091 693,341

JSC Bank of Georgia and Subsidiaries Consolidated Financial Statements

CONSOLIDATED CASH FLOW STATEMENTS

For the years ended 31 December 2010, 2009 and 2008

(Thousands of Georgian Lari)

Notes   2010   2009   2008
Cash flows from operating activities
Interest received 412,407 377,043 384,802
Interest paid (194,622) (205,054) (173,534)
Fees and commissions received 74,265 64,599 63,503
Fees and commissions paid (10,845) (9,574) (13,534)
Net realized gains (losses) from trading securities 2,267 587 (5,432)
Net realized gains from investments securities 789 174 498
Net realized gains from foreign currencies 33,651 25,945 39,443
Recoveries of loans to customers and finance lease receivables 9, 10 42,739 32,579 11,176
Insurance premiums received 46,159 31,319 24,262
Insurance claims paid (32,007) (16,801) (11,095)
Other operating income received 9,483 22,022 11,499
Salaries and other employee benefits paid (93,870) (88,365) (106,605)
General and administrative and operating expenses paid (71,872) (80,026) (62,174)
Cash flows from operating activities before changes in operating
assets and liabilities 		218,544 154,448 162,809
 
Net (increase) decrease in operating assets
Amounts due from credit institutions (45,090 ) 14,933 22,488
Loans to customers (813,482) 239,093 (488,574)
Finance lease receivables 8,252 12,448 3,722
Prepayments and other assets 100 (28,696) (3,678)
 
Net increase (decrease) in operating liabilities
Amounts due to credit institutions 190,994 (276,916) 339,654
Amounts due to customers 731,184 81,713 (211,774)
Other liabilities 21,981 455 (9,813)
Net cash flows from (used in) operating activities before income tax 312,483 197,478 (185,166)
 
Income tax paid (3,144) (1,275) (19,580)
Net cash flows from (used in) operating activities 309,339 196,203 (204,746)
 
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired 5 (139) (2,970) (41,740)
Proceeds from sale of investment securities: available-for-sale 1,518 25,323 166,175
Purchase of investment securities: held-to-maturity (28,769) (226,804) –
Purchase of investments in associates 12 – – (13,355)
Proceeds from sale of investments in associates 12 – 24 860
Purchase of investment properties 13 – (495) (12,613)
Proceeds from sale of investment properties 13 5,490 755 –
Purchase of property and equipment and intangible assets 14, 15 (41,839) (27,928) (122,881)
Proceeds from sale of property and equipment and intangible assets 14, 15 13,312 3,404 –
Net cash flows used in investing activities (50,427) (228,691) (23,554)
 
Cash flows from financing activities
Proceeds from increase in share capital – 306 150,594
Purchase of treasury shares (17,986) (4,159) (8,505)
Sale of treasury shares 7,552 1,796 5,800
Purchase of additional interests by non-controlling shareholders 11,973 (1,479) 31,278
Purchase of additional interests in existing subsidiaries, net of cash acquired (6,854) (24,730) –
Redemption of debt securities issued – – (4,472)
Net cash (used in) from financing activities (5,315) (28,266) 174,695
 
Effect of exchange rates changes on cash and cash equivalents 98 2,822 5,602
 
Net increase (decrease) in cash and cash equivalents 253,695 (57,932) (48,003)
 
Cash and cash equivalents, beginning 7 357,889 415,821 463,824
Cash and cash equivalents, ending 7 611,584 357,889 415,821

JSC Bank of Georgia and Subsidiaries Notes to Consolidated Financial Statements

(Thousands of Georgian Lari)

1. Principal Activities

JSC Bank of Georgia (the “Bank”) was established on 21 October 1994 as a joint stock company (“JSC”) under the laws of Georgia. The Bank operates under a general banking license issued by the National Bank of Georgia (“NBG”; the Central Bank of Georgia) on 15 December 1994. The Bank is the ultimate parent of a group of companies (the “Group”) incorporated in Georgia, Ukraine, Belarus and Cyprus, primary business activities include providing banking, leasing, insurance, brokerage and wealth management services, to corporate and individual customers. The list of companies included in the Group is provided in Note 2. The Bank is the Group’s main operating unit and accounts for most of the Group’s activities.

The Bank accepts deposits from the public and extends credit, transfers payments in Georgia and international and exchanges currencies. Its main office is in Tbilisi, Georgia. At 31 December 2010 the Bank has 142 operating outlets in all major cities of Georgia (2009: 141, 2008: 151). The Bank’s registered legal address is 3 Pushkin Street, Tbilisi 0105, Georgia.

As of 31 December 2010, 2009 and 2008 the following shareholders owned more than 4% of the outstanding shares of the Bank. Other shareholders individually owned less than 4% of the outstanding shares.

Shareholder   31 December 2010, %   31 December 2009, %   31 December 2008, %
Bank of New York (Nominees), Limited 90.50% 88.86% 77.45%
East Capital Financial Institutions 4.36% 4.36% 4.37%
Firebird Avrora Fund – – 4.68%
Firebird Republics Fund – – 4.58%
Others (less than 4% individually) 5.14% 6.78% 8.92%
Total 100.00% 100.00% 100.00%

As of 31 December 2010, the members of the Supervisory Board and Board of Directors owned 448,232 shares and Global Depositary Receipts (“GDRs”) (or 1.43%; 2009: 612,962 shares and GDRs or 1.96%, 2008: 468,827 shares and GDRs or 1.50%) of the Bank. Interests of the members of the Supervisory Board and Management Board were as follows:

Shareholder  

31 December 2010,
shares held

 

31 December 2009,
shares held

 

31 December 2008,
shares held

Irakli Gilauri 200,379 216,230 136,303
Sulkhan Gvalia 60,638 136,049 166,907
Allan Hirst 56,311 46,772 10,685
Avto Namicheishvili 34,823 29,999 12,489
Kakha Kiknavelidze 22,509 15,027 4,938
Irakli Burdiladze 17,504 23,035 10,036
David Morisson 15,351 7,342 –
Giorgi Chiladze 14,333 6,333 –
Mikheil Gomarteli 10,634 9,916 –
Al Breach 6,527 – –
Neil Janin 3,945 – –
Archil Gachechiladze 3,700 – –
Jan Hague 1,578 – –
Nicholas Enukidze* – 122,259 75,377
Ramaz Kukuladze** – – 52,092
Total 448,232 612,962 468,827

1. Principal Activities (continued)

In addition to shares held, the members of the Supervisory Board and Management Board were awarded or were committed to award 1,290,711, 463,912 and 198,139 Global Depository Receipts (“GDR”) in 2010, 2009 and 2008, respectively. Out of the total of 1,290,711 in 2010, 915,000 shares that were committed to be awarded to the Management Boards are subject to four-year vesting and the rest of the awards are subject to three-year vesting. As of 31 December 2010, 292,395 GDRs owned by the members of the Supervisory Board and Management Board vested and comprised as follows (in 2009: 419,814, 2008: 313,330):

Member of the Supervisory Board and/or Management Board  

31 December 2010,
GDRs vested

 

31 December 2009,
GDRs vested

 

31 December 2008,
GDRs vested

Irakli Gilauri 198,792 214,643 134,716
Avto Namicheishvili 34,001 29,999 11,667
Irakli Burdiladze 17,134 22,665 9,666
Giorgi Chiladze 14,333 6,333 –
Sulkhan Gvalia 13,801 13,999 26,857
Mikheil Gomarteli 10,634 9,916 –
Archil Gachechiladze 3,700 – –
Kakha Kiknavelidze – – 4,000
Nicholas Enukidze* – 122,259 74,332
Ramaz Kukuladze** – – 52,092
Total 292,395 419,814 313,330

* Resigned as a chairman of the Supervisory Board of the Bank on 18 May 2010.
** Resigned from the Management Board of the Bank on 15 November 2009.

2. Bases of Preparation

General

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

The Bank and its Georgian-based subsidiaries are required to maintain their records and prepare their financial statements for regulatory purposes in Georgian Lari in accordance with IFRS, while Subsidiaries established outside of Georgia are in their respective local currencies. These consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of financial assets and liabilities held for trading, available-for-sale securities, investment properties and revalued property and equipment.

These consolidated financial statements are presented in thousands of Georgian Lari (“GEL”), except per share amounts and unless otherwise indicated.

2. Bases of Preparation (continued)

Subsidiaries

The consolidated financial statements as of 31 December 2010, 2009 and 2008 include the following direct and indirect subsidiaries:

  Ownership / voting, %        
Subsidiaries 31 December 2010   31 December 2009   31 December 2008 Country of incorporation Industry Date of incorporation Date of acquisition
JSC BG Bank 99.4% 99.4% 99.4% Ukraine Banking 26/01/1994 1/10/2007
Valimed, Unitarnoe Predpreyatie (originally LLC) 100.0% 100.0% 100.0% Belarus Investment 14/09/2000 3/06/2008
  • Proscale M, UE
(a) 100.0% – Belarus Business servicing 15/05/2003 4/12/2009
  • JSC Belarusky Narodny Bank
79.99% 99.98% 70.0% Belarus Banking 16/04/1992 3/06/2008
  • BNB Leasing, LLC
99.9% 76.0% 76.0% Belarus Leasing 30/03/2006 3/06/2008
JSC BG Capital (Georgia) (formerly known as JSC Galt and Taggart Securities) 100.0% 100.0% 100.0% Georgia Brokerage and asset management 19/12/1995 28/12/2004
  • Benderlock Investments Limited
100.0% 100.0% – Cyprus Investments 12/05/2009 13/10/2009
  • BG Tax Advisory, LLC (formerly known as Galt and Taggart Tax Advisory, LLC)
100.0% 100.0% 100.0% Georgia Tax consulting 25/09/2007 –
  • BG Commodities (Georgia), LLC
100.0% 100.0% – Georgia Commodity Trading 16/04/2009 –
  • BG Commodities (Ukraine), LLC
100.0% 100.0% – Ukraine Commodity Trading 24/11/2009 –
  • Galt and Taggart Holdings Limited
100.0% 100.0% 100.0% Cyprus Investment 3/07/2006 –
  • BG Trading Limited
100.0% 100.0% 100.0% Cyprus Investment 26/03/2007 –
  • JSC Galt and Taggart Securities, SA (Moldova)
(b) 95.1% 95.1% Moldova Investment 7/07/2008 –
  • BG Capital (Ukraine), LLC
100.0% 100.0% 100.0% Ukraine Brokerage 23/10/2006 –
  • BG Capital (Belarus), LLC
100.0% 100.0% 100.0% Belarus Brokerage 19/02/2008 –
  • Brooksby Investments Limited
100.0% 100.0% 100.0% Cyprus Investments 4/03/2008 18/06/2008
  • Galt & Taggart Securities MMC, LLC
– (c) 75.0% Azerbaijan Investment banking and brokerage services 30/06/2008 –
  • GTAM Limited
– (c) 80.0% Cyprus Investment activity 23/10/2007 –
  • Galt and Taggart Asset Management, LLC
– (c) 100.0% Georgia Asset management 31/05/2007 –
  • JSC Belorussian Investments
– (c) 100.0% Georgia Consumer goods production & distribution 14/05/2008 –
  • JSC Liberty Financial Opportunities
– (c) 100.0% Georgia Investment 3/09/2008 –
JSC Insurance Company Aldagi BCI 100.0% 100.0% 100.0% Georgia Insurance 22/06/2007 –
  • JSC My Family Clinic
100.0% 100.0% 100.0% Georgia Healthcare 3/10/2005 –
  • JSC Kutaisi St. Nicholas Surgery Hospital
55.0% 55.0% 55.0% Georgia Medical services 3/11/2000 20/05/2008
  • Kutaisi Regional Clinical Hospital, LLC
100.0% – – Georgia Medical services 19/07/2010 1/10/2010

2. Bases of Preparation (continued)

Subsidiaries (continued)

  Ownership / voting, %        
Subsidiaries 31 December 2010   31 December 2009   31 December 2008 Country of incorporation Industry Date of incorporation Date of acquisition
Georgian Leasing Company, LLC 100.0% 100.0% 100.0% Georgia Leasing 29/10/2001 31/12/2004
  • JSC DBL.ge
(d) 100.0% 100.0% Georgia Investment 23/04/2007 –
  • JSC DBL Capital
(d) 100.0% 100.0% Georgia Brokerage 27/04/2007 –
JSC GC Holdings (formerly LLC) 100.0% 100.0% 100.0% Georgia Investment 29/10/2007 –
  • GC Ukraine, LLC
(b) 100.0% 100.0% Ukraine Card processing 30/07/2008 –
  • JSC Georgian Card
71.78% 55.8% 55.7% Georgia Card processing 17/01/1997 20/10/2004
  • JSC Nova Technology
– (c) 51.0% Georgia Electronic payment services 19/03/2007 11/11/2007
  • Direct Debit Georgia, LLC
100.0% 100.0% 100.0% Georgia Electronic payment services 7/03/2006 –
  • MetroNet, LLC
100.0% 100.0% 100.0% Georgia Communication

services

23/04/2007 –
JSC SB Real Estate 100.0% 61.4% 52.1% Georgia Real estate 27/09/2006 –
JSC Liberty Consumer 65.3% 65.3% 65.4% Georgia Investment 24/05/2006 –
  • JSC Teliani Valley
52.33% 27.19% 27.19% Georgia Winery 30/06/2000 28/02/2007
  • Teliani Trading (Georgia), LLC
100.0% – – Georgia Distribution 10/01/2006 27/03/2007
  • Teliani Trading (Ukraine), LLC
100.0% – – Ukraine Distribution 03/10/2006 31/12/2007
  • Le Caucase, LLC
100.0% – – Georgia Cognac Production 23/09/2006 20/03/2007
  • Kupa, LLC
70.0% – – Georgia Oak Barrel Production 12/10/2006 20/03/2007
  • Vere+, LLC
– (e) 100.0% Georgia Real estate 22/05/1996 6/02/2007
  • Alegro, LLC
– (f) 100.0% Georgia Commercial 9/09/1996 12/03/2008
  • JSC SB Outdoor & Indoor
(g) 100.0% 100.0% Georgia Advertising 9/06/2006 –
  • JSC Intertour
97.02% 83.6% 83.6% Georgia Travel agency 29/03/1996 25/04/2006
  • Intertour Ukraine, LLC
100.0% – – Ukraine Travel agency 19/02/2010 –
  • Holiday Travel, LLC
100.0% 100.0% 100.0% Georgia Travel agency 11/02/2005 4/09/2006
  • JSC Prime Fitness
100.0% 100.0% 100.0% Georgia Fitness centre 3/07/2006 –
  • Planeta Forte, LLC
51.0% 51.0% – Georgia Newspaper Retail 31/10/1995 1/01/2009
JSC Galt and Taggart Holdings (Georgia) 100.0% 100.0% 100.0% Georgia Investment 4/11/2008 –
  • JSC Club 24
(h) 100.0% 100.0% Georgia Entertainment 27/11/2007 –
  • Metro Service +, LLC
100.0% 100.0% 100.0% Georgia Business servicing 10/05/2006 –
  • SB Transport, LLC
– (i) 100.0% Georgia Transportation 20/02/2007 –
  • JSC SB Trade
– (i) 100.0% Georgia Import and distribution 26/02/2007 –
  • Georgia Financial Investments, LLC
100.0% 100.0% – Israel Information Sharing and Market Research 9/02/2009 –
  • Real Estate Brokerage-Presto, LLC
(h) 100.0% 100.0% Georgia Real estate brokerage 16/11/2007 –
  • JSC SB Immobiliare
(h) 100.0% 100.0% Georgia Real estate, Construction 12/03/2008 –
  • JSC SB Iberia
(j) 100.0% 49.0% Georgia Real estate, Construction 13/12/2007 19/08/2009
  • JSC SB Iberia 2
(j) 100.0% 49.0% Georgia Real estate, Construction 28/03/2008 19/08/2009
  • Bank of Georgia Representative Office UK Limited
100.0% – – London Information Sharing and Market Research 17/08/2010 –
JSC United Securities Registrar of Georgia 100.0% 100.0% 100.0% Georgia Registrar 29/05/2006 –

(a) No longer Group subsidiary due to sale in 2010.
(b) No longer Group subsidiary due to liquidation in 2010.(b) No longer Group subsidiary due to liquidation in 2010.
(c) No longer Group subsidiary due to sale in 2009.(c) No longer Group subsidiary due to sale in 2009.
(d) Merged to JSC BG Capital (Georgia) in 2010.(d) Merged to JSC BG Capital (Georgia) in 2010.
(e) No longer Group subsidiary due to liquidation in 2009.(e) No longer Group subsidiary due to liquidation in 2009.
(f) Transferred to JSC Caucasus Energy and Infrastructure (former subsidiary of the Group) in 2009 in exchange of a loan payable.(f) Transferred to JSC Caucasus Energy and Infrastructure (former subsidiary of the Group) in 2009 in exchange of a loan payable.
(g) Merged to JSC Prime Fitness in 2010.(g) Merged to JSC Prime Fitness in 2010.
(h) Investment in JSC Club 24, Real Estate Brokerage-Presto, LLC and JSC SB Immobiliare had been contributed to the capital of JSC SB Real Estate (SBRE) by JSC Galt and Taggart Holdings (GTH). These subsidiaries (except for GTH) merged to JSC SB Real Estate in 2010.(h) Investment in JSC Club 24, Real Estate Brokerage-Presto, LLC and JSC SB Immobiliare had been contributed to the capital of JSC SB Real Estate (SBRE) by JSC Galt and Taggart Holdings (GTH). These subsidiaries (except for GTH) merged to JSC SB Real Estate in 2010.
(i) JSC Galt and Taggart Holdings (Georgia) contributed its investments in JSC SB Trade and SB Transport, LLC to the capital of Club 24, LLC. Both of these companies merged to Club 24, LLC, subsequently reorganized into a joint stock company.(i) JSC Galt and Taggart Holdings (Georgia) contributed its investments in JSC SB Trade and SB Transport, LLC to the capital of Club 24, LLC. Both of these companies merged to Club 24, LLC, subsequently reorganized into a joint stock company.
(j) Merged to JSC SB Immobiliare in 2010.(j) Merged to JSC SB Immobiliare in 2010.

3. Summary of Significant Accounting Policies

Adoption of new or revised standards and interpretations

The Group has adopted the following amended IFRS and new IFRIC Interpretations during the year. The principal effects of these changes are as follows:

Amendment to IAS 39 “Financial Instruments: recognition and measurement” - Eligible Hedged Items

The amendment to IAS 39 was issued in August 2008, and became effective for annual periods beginning on or after 1 July 2009. The amendment addresses the designation of a one-sided risk in a hedged item, and designation of inflation as a hedged risk or portion in particular situations. It clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as hedged item. The amendment did not affect the Group’s consolidated financial statements as the Group has not entered into any such hedges.

IFRS 3 “Business Combinations” (revised in January 2008) and IAS 27 “Consolidated and Separate Financial Statements” (revised in January 2008)

The revised standards were issued in January 2008 and became effective for financial years beginning on or after 1 July 2009. Revised IFRS 3 introduces a number of changes in the accounting for business combinations that impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. Revised IAS 27 requires that a change in the ownership interest of a subsidiary is accounted for as an equity transaction. Therefore, such a change has no impact on goodwill, nor it gives rise to a gain or loss. Furthermore, the revised standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes introduced by the revised Standards are applied prospectively.

IFRS 2 Share-based Payment: Group Cash-settled Share-based Payment Transactions

The amendment to IFRS 2 was issued in June 2009 and became effective for financial years beginning on or after 1 January 2010. The amendment clarifies the scope and the accounting for group cash-settled share-based payment transactions. This amendment also supersedes IFRIC 8 and IFRIC 11. This amendment had no impact on the Group's consolidated financial statements.

IFRIC 17 “Distribution of Non-Cash Assets to Owners”

IFRIC Interpretation 17 was issued on 27 November 2008 and is effective for annual periods beginning on or after 1 July 2009. IFRIC 17 applies to pro rata distributions of non-cash assets except for common control transactions and requires that a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity; an entity should measure the dividend payable at the fair value of the net assets to be distributed; an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss. The Interpretation also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation. This interpretation had no impact on the Group's consolidated financial statements.

3. Summary of Significant Accounting Policies (continued)

Adoption of new or revised standards and interpretations (continued)

Improvements to IFRSs

In April 2009 the IASB issued the second omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. Most of the amendments are effective for annual periods beginning on or after 1 January 2010. There are separate transitional provisions for each standard. Amendments included in April 2009 “Improvements to IFRS” had no impact on the accounting policies, financial position or performance of the Group, except the following amendments resulting in changes to accounting policies, as described below.

  • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations.
  • IFRS 8 Operating Segment Information: clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. As the Group’s chief operating decision maker does review segment assets and liabilities, the Group continues to disclose this information.
  • IAS 7 Statement of Cash Flows: Explicitly states that only expenditure that results in recognising an asset can be classified as a cash flow from investing activities.
  • IAS 36 Impairment of Assets: The amendment clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in IFRS 8 before aggregation for reporting purposes. The amendment had no impact on the Group as the annual impairment test is performed before aggregation.

Reclassifications

The following reclassifications were made to 2009 and 2008 balances to conform with the year ended 31 December 2010 presentation requirements:

Year Ended   Caption

Consolidated Statement of

Financial Position:

  As previously reported   As reclassified   Comment
 
2009 Cash and cash equivalents 337,372 357,889 Reclassification of national currency denominated mandatory account with NBG due to their non-restrictive nature.
2009 Amounts due from credit institutions 85,137 64,620
 
2008 Cash and cash equivalents 397,591 415,821
2008 Amounts due from credit institutions 99,633 81,403

Subsidiaries

Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights, or otherwise has power to exercise control over their operating and financial activities, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated in full; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group.

3. Summary of Significant Accounting Policies (continued)

Subsidiaries (continued)

Business combinations from 1 January 2010

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group measures the non-controlling interests in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquisition date fair value of the Group’s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in profit or loss or as change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the consideration transferred over the Group’s net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Business combinations prior to 1 January 2010

In comparison to the above mentioned requirements, the following differences applied:

Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interests (formerly known as minority interest) were measured at the proportionate share of the acquiree’s identifiable net assets.

Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognised goodwill.

When the Group acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.

Contingent consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration affected goodwill.

3. Summary of Significant Accounting Policies (continued)

Subsidiaries (continued)

Acquisition of subsidiaries from parties under common control

Acquisitions of subsidiaries from parties under common control are accounted for using the uniting of interests method.

The assets and liabilities of the subsidiary transferred under common control are recorded in these consolidated financial statements at the carrying amounts of the transferring entity (the Predecessor) at the date of the transfer. Related goodwill inherent in the Predecessor's original acquisition is also recorded in these consolidated financial statements. Any difference between the total book value of net assets, including the Predecessor's goodwill, and the consideration paid is accounted for in these consolidated financial statements as an adjustment to the shareholders' equity.

These consolidated financial statements, including corresponding figures, are presented as if the subsidiary had been acquired by the Group on the date it was originally acquired by the Predecessor.

Investments in associates

Associates are entities in which the Group generally has between 20% and 50% of the voting rights, or is otherwise able to exercise significant influence, but which it does not control or jointly control. Investments in associates are accounted for under the equity method and are initially recognised at cost, including goodwill. Subsequent changes in the carrying value reflect the post-acquisition changes in the Group’s share of net assets of the associate. The Group’s share of its associates’ profits or losses is recognised in the consolidated income statement, and its share of movements in reserves is recognised in other comprehensive income. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group is obliged to make further payments to, or on behalf of, the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Financial assets

Initial recognition

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets upon initial recognition.

Date of recognition

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains or losses on financial assets held for trading are recognised in the consolidated income statement.

3. Summary of Significant Accounting Policies (continued)

Financial assets (continued)

Held-to-maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold them to maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments are subsequently measured at amortised cost. Amortised cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the consolidated income statement when the investments are impaired, as well as through the amortisation process.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortised cost using the effective interest method. This calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the consolidated income statement when the investments are impaired, as well as through the amortisation process. Gains and losses are recognised in the consolidated income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the consolidated income statement. However, interest calculated using the effective interest method is recognised in the consolidated income statement.

Determination of fair value

The fair value of financial instruments that are actively traded in organised financial markets is determined by reference to quoted market bid prices for long positions and ask price for short positions at the close of business on the reporting date, without any deduction for transaction costs.

For all other financial instruments where there is no active market, fair value is determined using valuation techniques. Valuation techniques include using recent arm’s length market transactions, which are determined not to be a result of a forced transaction, involuntary liquidation or distress sale, reference to the current market value of similar instrument, discounted cash flow analysis and other relevant valuation models.

Offsetting

Financial assets and liabilities are offset and the net amount is 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 to realise the asset and settle the liability simultaneously.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, amounts due from central banks, excluding obligatory reserves with central banks, and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual encumbrances.

3. Summary of Significant Accounting Policies (continued)

Derivative financial instruments

In the normal course of business, the Group enters into various derivative financial instruments including forwards, swaps and options in the foreign exchange and capital markets. Such financial instruments are held for trading and are initially recognised in accordance with the policy for initial recognition of financial instruments and are subsequently measured at fair value. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the consolidated income statement as gains less losses from trading securities or gains less losses from foreign currencies dealing, depending on the nature of the instrument.

Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts, and the host contract is not itself held for trading or designated at fair value through profit and loss. The embedded derivatives separated from the host are carried at fair value on the trading portfolio with changes in fair value recognised in the consolidated income statement.

Promissory notes

Promissory notes purchased are included in trading securities, or in amounts due from credit institutions or in loans to customers or in available-for-sale securities, depending on their substance and are accounted for in accordance with the accounting policies for these categories of assets.

Borrowings

Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of each or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to credit institutions, amounts due to customers and debt securities issued. These are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated income statement when the borrowings are derecognised as well as through the amortisation process.

If the Group purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognized in the consolidated income statement.

Leases

i. Finance – Group as lessor

The Group recognizes finance lease receivables in the consolidated statement of financial position at value equal to the net investment in lease, starting from the date of commencement of the lease term. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease. Initial direct costs are included in the initial measurement of the finance lease receivables. Lease payments received are apportioned between the finance income and the reduction of the outstanding lease receivable. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding.

ii. Operating – Group as lessee

Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognized as expenses on a straight-line basis over the lease term and included into other administrative and operating expenses.

iii. Operating – Group as lessor

The Group presents assets subject to operating leases in the consolidated statement of financial position according to the nature of the asset. Lease income from operating leases is recognized in the consolidated income statement on a straight-line basis over the lease term as other income. The aggregate cost of incentives provided to lessees is recognized as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are added to the carrying amount of the leased asset.

3. Summary of Significant Accounting Policies (continued)

Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired.

A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Amounts due from credit institutions and loans to customers

For amounts due from credit institutions and loans to customers carried at amortised cost, the Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

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

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. 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 purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

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

3. Summary of Significant Accounting Policies (continued)

Impairment of financial assets (continued)

Held-to-maturity financial investments

For held-to-maturity investments the Group assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement.

If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are credited to the consolidated income statement.

Available-for-sale financial assets

For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement – is reclassified from other comprehensive income to the consolidated income statement. Impairment losses on equity investments are not reversed through the consolidated income statement; increases in their fair value after impairment are recognised in other comprehensive income.

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in the consolidated income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement.

Renegotiated loans

Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions.

The accounting treatment of such restructuring is as follows:

  • If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised.
  • If the loan restructuring is not caused by the financial difficulties of the borrower the Group uses the same approach as for financial liabilities described below.
  • If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after restructuring, the Group recognizes the difference between the present value of the new cash flows discounted using the original effective interest rate and the carrying amount before restructuring in the provision charges for the period. In case loan is not impaired after restructuring the Group recalculates the effective interest rate.

Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original or current effective interest rate.

3. Summary of Significant Accounting Policies (continued)

De-recognition of financial assets and liabilities

Financial assets

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

  • the rights to receive cash flows from the asset have expired;
  • the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and
  • the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated income statement.

Financial guarantees

In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, in ‘Other liabilities’, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is taken to the consolidated income statement. The premium received is recognised in the consolidated income statement on a straight-line basis over the life of the guarantee.

Taxation

The current income tax expense is calculated in accordance with the regulations in force in the respective territories that the Bank and its Subsidiaries operate.

Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

3. Summary of Significant Accounting Policies (continued)

Taxation (continued)

A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Georgia, Ukraine, Belarus and Cyprus also have various operating taxes that are assessed on the Group’s activities. These taxes are included as a component of other operating expenses.

Investment properties

The Group holds certain properties as investments to earn rental income, generate capital appreciation or both. Investment properties are measured initially at cost, including subsequent costs. Subsequent to initial recognition, Investment properties is stated to fair value. Gains or losses arising from changes in fair values of investment properties are included in the consolidated income statement as “Net gains from revaluation of investment properties”.

Property and equipment

Property and equipment, except for buildings, are carried at cost less accumulated depreciation and any accumulated impairment in value. Such cost includes the cost of replacing part of equipment when that cost is incurred if the recognition criteria are met. Buildings are measured at fair value less depreciation and impairment charged subsequent to the date of the revaluation.

The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Following initial recognition at cost, buildings are carried at a revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Any revaluation surplus is credited to the revaluation reserve for property and equipment included in other comprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the consolidated income statement, in which case the increase is recognised in the consolidated income statement. A revaluation deficit is recognised in the consolidated income statement, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the revaluation reserve for property and equipment.

An annual transfer from the revaluation reserve for property and equipment to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the assets original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the devalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings.

Depreciation of an asset, including assets under construction, commences from the date the asset is ready and available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

  Years
Buildings 50
Furniture and fixtures 10
Computers and office equipment 5
Motor vehicles 5

The asset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end.

3. Summary of Significant Accounting Policies (continued)

Property and equipment (continued)

Leasehold improvements are amortized over the life of the related leased asset. The assets residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end.

Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for capitalization.

Goodwill

Goodwill acquired in a business combination is initially measured at cost, being the excess of the consideration transferred over the Group’s net identifiable assets acquired and liabilities assumed. Goodwill on an acquisition of a subsidiary is included in intangible assets. Goodwill on an acquisition of an associate is included in the investments in associates. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

  • represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
  • is not larger than a segment as defined in IFRS 8 “Operating Segments”.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. Impairment losses cannot be reversed in future periods.

Other intangible assets

The Group’s other intangible assets include computer software and licenses. Computer software and licenses are recognized at cost and amortized using the straight-line method over its useful life, but not exceeding a period of ten years.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic lives of 4 to 10 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end.

Intangible assets with indefinite useful lives are not amortised, but tested for impairment annually either individually or at the cash-generating unit level.

Costs associated with maintaining computer software programmes are recorded as an expense as incurred. Software development costs (relating to the design and testing of new or substantially improved software) are recognised as intangible assets only when the Group can demonstrate the technical feasibility of completing the software so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the development. Other software development costs are recognised as an expense as incurred.

3. Summary of Significant Accounting Policies (continued)

Insurance and reinsurance receivables

Insurance and reinsurance receivables are recognized based upon insurance policy terms and measured at cost. The carrying value of insurance and reinsurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with any impairment loss recorded in the consolidated statement of income.

Reinsurance receivables primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Premiums on reinsurance assumed are recognized as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. Amounts due to reinsurers are estimated in a manner consistent with the associated reinsured policies and in accordance with the reinsurance contract. Premiums ceded and claims reimbursed are presented on a gross basis.

An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance receivables are impaired only if there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract that this can be measured reliably.

Insurance liabilities

General insurance liabilities

General insurance contract liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the reporting date, whether reported or not, together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Significant delays can be experienced in the notification and settlement of certain type of general insurance claims, particularly in respect of liability business, environmental and pollution exposures – therefore the ultimate cost of which cannot be known with certainty at the reporting date.

Provision for unearned premiums

The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as unearned premium. The change in the provision for unearned premium is taken to the consolidated income statement in order that revenue is recognized over the period of risk or, for annuities, the amount of expected future benefit payments.

Liability adequacy test

At each reporting date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition costs. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses, as well as investment income from assets backing such liabilities, are used. Any inadequacy is immediately charged to the consolidated income statement by establishing an unexpired risk provision.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.

Retirement and other employee benefit obligations

The Group provides management and employees of the Group, with private pension plans. These are defined contribution pension plans covering substantially all full-time employees of the Group. The Group collects contributions from its employees. When an employee reaches the pension age, aggregated contributions, plus any earnings earned on the employee’s behalf are paid to the employee according to the schedule agreed with the employee. Aggregated amounts are distributed during the period when the employee will receive accumulated contributions.

3. Summary of Significant Accounting Policies (continued)

Share-based payment transactions

Employees (including senior executives) of the Group receive share-based remuneration, whereby employees render services as consideration for the equity instruments (‘equity settled transactions’).

Equity-settled transactions

The cost of equity settled transactions with employees is measured by reference to the fair value at the date on which they are granted.

The cost of equity settled transactions is recognized together with the corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date when the relevant employee is fully entitled to the award (‘the vesting date’). The cumulative expense recognized for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The consolidated income statement charge or credit for the period represents the movement in cumulative expense recognized as at the beginning and end of that period.

No expense is recognized for the awards that do not ultimately vest except for the awards where vesting is conditional upon market conditions (a condition linked to the price of the Bank’s shares) which are treated as vesting irrespective whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity settled award are modified, the minimum expense is recognized as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of the modification.

Where an equity-settled award is cancelled, it is treated as if it has vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However if a new award is substituted for the cancelled award, and designated as the replacement award on the date that it is granted, the cancelled and the new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

Share capital

Share capital

Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognised as additional paid-in capital.

Treasury shares

Where the Bank or its subsidiaries purchases the Bank’s shares, the consideration paid, including any attributable transaction costs, net of income taxes, is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received is included in equity. Treasury shares are stated at par value, with adjustment of premiums against additional paid-in capital.

Dividends

Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated financial statements are authorised for issue.

Segment reporting

The Group’s segmental reporting is based on the following operating segments: Retail banking, Corporate banking, Brokerage, Wealth Management, Asset Management, Insurance and Corporate Center.

3. Summary of Significant Accounting Policies (continued)

Contingencies

Contingent liabilities are not recognised in the consolidated statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the consolidated statement of financial position but disclosed when an inflow of economic benefits is probable.

Income and expense recognition

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

Interest and similar income and expense

For all financial instruments measured at amortised cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount.

Fee and commission income

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

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

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission incomes and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan.

Fee income from providing transaction services

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

Dividend income

Revenue is recognised when the Bank’s right to receive the payment is established.

Insurance premium income

For non-life insurance business, premiums written are recognized at policy inception and earned on a pro rata basis over the term of the related policy coverage. Estimates of premiums written as at the reporting date but not yet received, are assessed based on estimates from underwriting or past experience and are included in premiums earned.

3. Summary of Significant Accounting Policies (continued)

Income and expense recognition (continued)

Insurance claims

General insurance claims incurred include all claim losses occurring during the year, whether reported or not, including the related handling costs and reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years.

Functional and reporting currencies and foreign currency translation

The consolidated financial statements are presented in Georgian Lari, which is the Bank’s presentation currency. The Bank’s functional currency is US Dollar effective 1 January 2007. Prior to 1 January 2007, Georgian Lari was its functional currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into functional currency at functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognised in the consolidated income statement as gains less losses from foreign currencies – translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Differences between the contractual exchange rate of a certain transaction and the NBG exchange rate on the date of the transaction are included in gains less losses from foreign currencies (dealing). The official NBG exchange rates at 31 December 2010, 2009 and 2008 were 1.7728, 1.6858 and 1.6670 Lari to USD 1, 2.3500, 2.4195 and 2.3648 Lari to EUR 1, 2.2272, 2.1156 and 2.1649 Lari to UAH 10 and 5.9093, 5.8882 and 7.5770 to BYR 10,000, respectively.

As at the reporting date, the assets and liabilities of the entities whose functional currency is different from the presentation currency of the Group are translated into Georgian Lari at the rate of exchange ruling at the reporting date and, their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are taken to other comprehensive income. On disposal of a subsidiary or an associate whose functional currency is different from the presentation currency of the Group, the deferred cumulative amount recognised in other comprehensive income relating to that particular entity is recognised in the consolidated income statement.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate.

Standards and interpretations that are issued but not yet effective

Up to the date of approval of the consolidated financial statements, certain new standards, interpretations and amendments to existing standards have been published that are not yet effective for the current reporting period and which the Group has not early adopted, as follows:

Amendments to IAS 24 “Related Party Disclosures”

The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities. The bank does not expect any impact on its financial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard.

3. Summary of Significant Accounting Policies (continued)

Standards and interpretations that are issued but not yet effective (continued)

Amendments to IAS 32 “Financial instruments: Presentation”: Classification of Rights Issues”

In October 2009, the IASB issued amendment to IAS 32. Entities shall apply that amendment for annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment alters the definition of a financial liability in IAS 32 to classify rights issues and certain options or warrants as equity instruments. This is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, in order to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. The Group expects that this amendment will have no impact on the Group's consolidated financial statements.

IFRS 9 “Financial Instruments”

In November 2009 the IASB issued the first phase of IFRS 9 Financial instruments. This Standard will eventually replace IAS 39 Financial Instrument: Recognition and Measurement. IFRS 9 becomes effective for financial years beginning on or after 1 January 2013. Entities may adopt the first phase for reporting periods ending on or after 31 December 2009. The first phase of IFRS 9 introduces new requirements on classification and measurement of financial assets. In particular, for subsequent measurement all financial assets are to be classified at amortised cost or at fair value through profit or loss with the irrevocable option for equity instruments not held for trading to be measured at fair value through other comprehensive income. The Group now evaluates the impact of the adoption of new Standard and considers the initial application date.

IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments”

IFRIC Interpretation 19 was issued in November 2009 and is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies the accounting when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor to extinguish all or part of the financial liability. IFRIC 19 is not expected to have any material impact on the Group’s consolidated financial statements.

Improvements to IFRSs

In May 2010 the IASB issued the third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. Most of the amendments are effective for annual periods beginning on or after 1 January 2011. There are separate transitional provisions for each standard. Amendments included in May 2010 “Improvements to IFRS” will have impact on the accounting policies, financial position or performance of the Group, as described below.

  • IFRS 3 Business combinations: limits the scope of the measurement choices that only the components of NCI that are present ownership interests that entitle their holders to a proportionate share of the entity’s net assets, in the event of liquidation, shall be measured either at fair value or at the present ownership instruments’ proportionate share of the acquiree’s identifiable net assets. As the amendment should be applied from the date the Group applies IFRS 3 Revised, it may me required to restate for effects incurred under IFRS 3 Revised, but before the adoption of this amendment. The Group expects that other amendments to IFRS 3 will have no impact on financial statements of the Group.
  • IFRS 7 Financial instruments: Disclosures; introduces the amendments to quantitative and credit risk disclosures. The additional requirements are expected to have minor impact as information is expected to be readily available.
  • IAS 34 Interim Financial Reporting: adds disclosure requirements about the circumstances affecting fair values and classification of financial instruments, about transfers of financial instruments between levels of the fair value hierarchy, changes in classification of financial assets and changes in contingent liabilities and assets. Additional disclosures required will be introduced in interim financial statements of the Group.
  • Amendments to IFRS 1, IAS 1, IAS 27 and IFRIC 13 will have no impact on the accounting policies, financial position or performance of the Group.

4. Significant Accounting Judgements and Estimates

In the process of applying the Group’s accounting policies, management uses its judgment and made estimates in determining the amounts recognized in the consolidated financial statements. The most significant use of judgments and estimates are as follows:

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.

Determination of collateral value

Management monitors market value of collateral on a regular basis. Management uses its experienced judgment or independent opinion to adjust the fair value to reflect current circumstances. The amount and type of collateral required depends on the assessment of credit risk of the counterparty.

Measurement of fair value of investment properties and property and equipment

Fair value of investment properties as well as of the property and equipment is determined by independent professionally qualified appraisers. Fair value is determined using the combination of internal capitalization method (also known as discounted future cash flow method) and sales comparison method.

The estimates described above are subject to change as new transaction data and market evidence becomes available.

Allowance for impairment of loans and receivables and finance lease receivables

The Group regularly reviews its loans and receivables and finance lease receivables to assess impairment. The Group uses its judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Group uses its judgment to adjust observable data for a group of loans or receivables to reflect current circumstances.

Contingent liabilities

The Group is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Group considers the likelihood of the loss or the incurrence of a liability as well as its ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Group regularly evaluates current information available to determine whether such accruals are required. As of 31 December 2010, the Group did not record any contingent liabilities.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose an appropriate discount rate in order to calculate the present value of those cash flows.

Impairment of long-lived assets

Long-lived assets consist primarily of real estate investments, property, investments in associates, goodwill and intangible assets. The Group evaluates the long-lived assets for impairment annually or when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable.

4. Significant Accounting Judgements and Estimates (continued)

Impairment of investments

The Group holds investments in several companies, including those that do not trade in an active market. Future adverse changes in market conditions or poor operating results could result in losses that may not be reflected in an investment’s current carrying value, thereby requiring an impairment charge in the future. The Group regularly reviews its investments to determine if there have been any indicators that the value may be impaired. These reviews require estimating the outcome of future events and determining whether factors exist that indicate impairment has occurred.

5. Business Combinations

Acquisitions in 2010

JSC Teliani Valley

On 28 February 2010 JSC Liberty Consumer acquired 52.33% of “JSC Teliani Valley”, a winery operating in Georgia and Ukraine. The fair values of identifiable assets, liabilities and contingent liabilities acquired, and goodwill arising from JSC Teliani Valley as of the date of acquisition was:

 

Fair value
recognized on
acquisition

 
Cash and cash equivalents 296
Trading securities 954
Accounts receivable 3,596
Property and equipment 8,038
Goodwill and other intangible assets 151
Deferred income tax assets 78
Other assets 6,751
19,864
 
Amounts owed to credit institutions 8,622
Accounts payable

916

Deferred income tax liabilities 395
Other liabilities 1,698
11,631
Total identifiable net assets 8,233
 
Non-controlling interests (47.67%) 3,925
Fair value of the previously held equity interests (27.19%) 3,451
Goodwill arising on acquisition 3,292
Consideration given 1 4,149
 

The net cash inflow on acquisition was as follows:

2010
Cash paid –
Cash acquired with the subsidiary (296)
Net cash inflow (296)

1 Consideration comprised of the Group’s investment in available-for-sale investment securities in the form of common shares of JSC Nikora.

At the acquisition date, non-controlling interests comprised GEL 3,925 and was measured at the non-controlling interests’ proportionate share of the acquiree’s identifiable net assets.

Since the acquisition date, the Group recorded GEL 8,293, GEL 355 and GEL 115 of revenue, profit and other comprehensive income, respectively. If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

The total amount of goodwill is expected to be deductible for tax purposes upon disposal of the subsidiary.

5. Business Combinations (continued)

Acquisitions in 2010 (continued)

Kutaisi Regional Clinical Hospital, LLC

On 1 October 2010 JSC My Family Clinic acquired 100% of Kutaisi Regional Clinical Hospital, LLC, a medical services provider company operating in Georgia. The fair values of identifiable assets, liabilities and contingent liabilities acquired, and goodwill arising from Kutaisi Regional Clinical Hospital, LLC as of the date of acquisition was:

 

Fair value
recognized on
acquisition

  Carrying
value
 
Property and equipment 658 481
658 481
 
Accounts payable 17 17
Deferred income tax liabilities 27 27
44 44
Fair value of net assets 614 437
 
Share in fair value of net assets acquired (100%) 614
Negative goodwill arising on acquisition (179)
Consideration given 435
 

The net cash outflow on acquisition was as follows:

2010

 

Cash paid 435
Cash acquired with the subsidiary –
Net cash outflow 435

If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

Since the acquisition date, the Group recorded GEL 629 and GEL 98 of revenue and profit, respectively. If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

The total amount of negative goodwill is expected to be taxable upon disposal of the subsidiary.

5. Business Combinations (continued)

Acquisitions in 2009

Planeta Forte, LLC

On 1 January 2009 JSC Liberty Consumer acquired 51% of “Planeta Forte, LLC”, a newspaper retailer company operating in Georgia. The fair values of identifiable assets, liabilities and contingent liabilities of Planeta Forte, LLC as of the date of acquisition were estimated at:

 

Fair value
recognized on
acquisition

  Carrying
value
 
Cash and cash equivalents 4 4
Property and equipment 55 55
Other assets 460 460
519 519
 
Other liabilities 486 486
486 486
Fair value of net assets 33 33
 
Share in fair value of net assets acquired (51%) 17
Goodwill arising on acquisition 364
Consideration given 381
 

The net cash outflow on acquisition was as follows:

2009
Cash paid 381
Cash acquired with the subsidiary (4)
Net cash outflow 377

If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

At the acquisition date, non-controlling interest comprised GEL 16 and was measured at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

The total amount of goodwill is expected to be deductible for tax purposes upon disposal of the subsidiary.

5. Business Combinations (continued)

Acquisitions in 2009 (continued)

JSC SB Iberia

On 19 August 2009 JSC SB Immobiliare, a fully owned subsidiary of the Bank acquired 100% of JSC ”SB Iberia”, a real estate developing company operating in Georgia. The fair values of identifiable assets, liabilities and contingent liabilities of JSC SB Iberia as of the date of acquisition were estimated at:

 

Fair value
recognized on
acquisition

  Carrying
value
 
Cash and cash equivalents 11 11
Investment property 4,547 4,547
Deferred income tax assets 826 826
Prepayments 102 102
Other assets 7 7
5,493 5,493
 
Amounts due to credit institutions 6,900 6,900
Accounts payable (trade & service) 2,156 2,156
Deferred income tax liabilities 12 12
9,068 9,068
Fair value of net assets (3,575) (3,575)
 
Share in fair value of net assets acquired (100%) (3,575)
Goodwill arising on acquisition 3,907
Consideration given 332
 

The net cash outflow on acquisition was as follows:

2009
Cash paid 332
Cash acquired with the subsidiary (11)
Net cash outflow 321

If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

The total amount of goodwill is expected to be deductible for tax purposes upon disposal of the subsidiary.

5. Business Combinations (continued)

Acquisitions in 2009 (continued)

JSC SB Iberia 2

On 19 August 2009 JSC SB Immobiliare, a fully owned subsidiary of the Bank acquired 100% of JSC ”SB Iberia 2”, a real estate developing company operating in Georgia. The fair values of identifiable assets, liabilities and contingent liabilities of JSC SB Iberia 2 as of the date of acquisition were estimated at:

 

Fair value
recognized on
acquisition

  Carrying
value
 
Cash and cash equivalents 14 14
Investment property 8,083 8,083
Deferred income tax assets 778 778
Prepayments 6 6
Other assets 64 64
8,945 8,945
 
Amounts due to credit institutions 5,913 5,913
Deferred income tax liabilities 8 8
5,921 5,921
Fair value of net assets 3,024 3,024
 
Share in fair value of net assets acquired (100%) 3,024
Goodwill arising on acquisition 744
Consideration given 3,768
 

The net cash outflow on acquisition was as follows:

2009
Cash paid 2,286
Cash acquired with the subsidiary (14)
Net cash outflow 2,272

If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

The total amount of goodwill is expected to be deductible for tax purposes upon disposal of the subsidiary.

5. Business Combinations (continued)

Acquisitions in 2008

JSC Belarusky Narodny Bank

On 1 July 2008 the Bank acquired 70% of JSC “Belarusky Narodny Bank”, a banking institution operating in Belarus. The fair values of identifiable assets, liabilities and contingent liabilities of JSC Belarusky Narodny Bank as of the date of acquisition were estimated at:

 

Fair value
recognized on
acquisition

  Carrying
value
 
Cash and cash equivalents 8,908 8,908
Due from credit institutions 1,022 1,022
Loans to customers 36,234 36,234
Deferred tax asset 297 297
Property and equipment 17,445 17,445
All other assets 520 520
64,426 64,426
 
Amounts due to credit institutions 9,501 9,501
Amounts due to customers 18,231 18,231
All other liabilities 513 513
28,245 28,245
Fair value of net assets 36,181 36,181
 
Share in fair value of net assets acquired (70%) 25,327
Recognized Core Deposit Intangible 843
Goodwill arising on acquisition 23,394
Consideration given 49,564
 

The net cash outflow on acquisition was as follows:

2008
Cash paid 49,564
Cash acquired with the subsidiary (8,908)
Net cash outflow 40,656

If the combination had taken place at the beginning of the year, the net income of the Group would have been GEL 1,887 and the total revenue would have been GEL 367,820.

The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill was the positive synergy brought into the Group’s operations.

At the acquisition date, non-controlling interest comprised GEL 10,854 and was measured at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

The total amount of goodwill is expected to be deductible for tax purposes upon disposal of the subsidiary.

5. Business Combinations (continued)

Acquisitions in 2008 (continued)

JSC Kutaisi St. Nickolas Surgery Clinic

On 31 May 2008 JSC Insurance Company Aldagi BCI, a fully owned subsidiary of the Bank, acquired 55% of JSC “Kutaisi St. Nickolas Surgery Clinic”. The fair values of identifiable assets, liabilities and contingent liabilities of JSC “Kutaisi St. Nickolas Surgery Clinic” as of the date of acquisition were estimated at:

 

Fair value
recognized on
acquisition

 

Carrying
value

 
Cash and cash equivalents 7 7
Property and equipment 2,802 2,802
All other assets 223 223
3,032 3,032
 
Amounts due to credit institutions 457 457
All other liabilities 791 791
1,248 1,248
Fair value of net assets 1,784 1,784
 
Share in fair value of net assets acquired (55%) 981
Goodwill arising on acquisition 288
Consideration given 1,269
 

The net cash outflow on acquisition was as follows:

2008
Cash paid 1,091
Cash acquired with the subsidiary (7)
Net cash outflow 1,084

If the combination had taken place at the beginning of the year, there would be no major, material difference in the net income and revenue of the Group.

The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill was the positive synergy brought into the Group’s operations.

At the acquisition date, non-controlling interest comprised GEL 803 and was measured at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

The total amount of goodwill is expected to be deductible for tax purposes upon disposal of the subsidiary.

6. Segment Information

For management purposes, the Group is organised into seven operating segments based on products and services as follows:

Retail Banking   Principally handling individual customers’ deposits, and providing consumer loans, overdrafts, credit card facilities and funds transfer facilities.  
 
Corporate Banking Principally handling loans and other credit facilities and deposit and current accounts for corporate and institutional customers.
 
Brokerage Principally providing brokerage, custody and corporate finance services to its individual as well as corporate customers. Brokerage also possesses its own proprietary book for trading as well as for non-trading purposes, comprising primarily of trading and investment securities.
 
Wealth Management Principally providing wealth management services to VIP individual customers.
 
Asset Management Principally providing asset management services to VIP corporate customers.
 
Insurance Principally providing wide-scale insurance services to corporate and individual customers.
 
Corporate Centre Principally providing back office services to all operating segments of the Bank

For purposes of presentation in these consolidated financial statements, due to the insignificance of certain operating segments to be separately shown, Management has combined Brokerage, Asset Management and Wealth Management operating segments into one. Therefore, operating segment information presented in these consolidated financial statements is classified as follows:

Retail Banking   Brokerage and Asset and Wealth Management
Insurance Corporate Centre
Corporate Banking

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance, as explained in the table below, is measured in the same manner as profit or loss in the consolidated financial statements. Income taxes are managed on a group basis and are not allocated to operating segments. There are no asymmetrical allocations to reportable segments.

Transactions between operating segments are on an arm’s length basis in a manner similar to transactions with third parties.

No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group’s total revenue in 2010, 2009 or 2008.

In 2010 the Group changed its estimates in respect of the allocation of indirect revenues and indirect expenses in JSC Bank of Georgia (stand-alone) among corporate banking, retail banking and wealth management. Effects of these changes in estimates have been applied to prior periods, and respective comparative information for 2009 and 2008 has been properly recalculated. These changes in allocation estimates had no impact on subsidiaries. Instead, it only resulted in re-allocation of certain indirect revenues and indirect expenses in JSC Bank of Georgia stand-alone segment reporting, with no consequence on totals of segments across each line.

6. Segment Information (continued)

The following tables present income and profit and certain asset and liability information regarding the Group’s operating segments for the year ended 31 December 2010:

  Retail banking   Corporate
banking 		  Brokerage and Asset and wealth management   Corporate center   Insurance   Inter –
company elimination 		  Total
Revenue
External operating income:
Net interest income (expense) 108,609 109,090 (9,475) 8,846 (726) – 216,344
Net fees and commission income 42,633 7,948 1,863 10,976 – – 63,420
Net foreign currency gains 9,211 21,929 300 2,042 267 – 33,749
Other external revenues 2,137 1,671 15,207 (5,105) 47,363 – 61,273
Operating income from other segments (108) 885 4,207 3,801 1,807 (10,592) –
Total operating income (expense) 162,482 141,523 12,102 20,560 48,711 (10,592) 374,786
 
Impairment charge on interest earning assets 29,813 15,789 (2,264) – – 773 44,111
 
Results
Segment results 44,618 56,454 (15,047 ) 7,710 5,481 (773) 98,443
Unallocated expenses –
Income before income tax expense 98,443
Income tax expense (15,776)
Profit for the year 82,667
 
Assets and liabilities
Segment assets 1,767,442 1,860,680 126,938 266,829 60,971 (98,363) 3,984,497
Unallocated assets 20,425
Total assets 4,004,922
 
Segment liabilities 1,338,207 1,690,862 373,596 (85,403 ) 57,530 (98,363 ) 3,276,429
Unallocated liabilities 35,152
Total liabilities 3,311,581
 
Other segment information
 
Capital expenditures, of which: 26,164 9,401 4,804 1,574 3,339 – 45,282
Property, plant and equipment 22,467 7,926 1,238 1,503 3,300 – 36,434
Intangible assets 3,697 1,475 3,566 71 39 – 8,848
 
Depreciation 16,300 5,564 1,595 417 634 – 24,510
Amortization 2,538 706 88 92 29 – 3,453
Impairment 318 109 8 – – – 435
 
Investments in associates – – 5,632 – – – 5,632
Share of profit of associates – – 255 – – – 255

6. Segment Information (continued)

The following tables present income and profit and certain asset and liability information regarding the Group’s operating segments for the year ended 31 December 2009:

  Retail banking   Corporate
banking 		  Brokerage and Asset and wealth management   Corporate center   Insurance   Inter –
company elimination 		  Total
Revenue
External operating income:
Net interest income (expense) 120,657 83,644 (4,857) (7,868) (1,035) – 190,541
Net fees and commission income 34,971 9,286 2,931 7,115 722 – 55,025
Net foreign currency gains 9,825 14,869 1,123 2,888 61 – 28,766
Other external revenues (expenses) 1,705 4,509 (11,737) 9,449 49,394 – 53,320
Operating income from other segments 519 (1,678) (7,913) (2,811) (1,352) 13,235 –
Total operating income (expense) 167,677 110,630 (20,453) 8,773 47,790 13,235 327,652
 
Impairment charge on interest earning assets 71,876 42,472 3,626 9,194 – (1,427) 125,741
 
Results
Segment results (46,094) (13,583) (40,530) (10,009) 2,883 1,427 (105,906)
Unallocated expenses –
Loss before income tax benefit (105,906)
Income tax benefit 6,998
Loss for the year (98,908)
 
Assets and liabilities
Segment assets 1,217,852 1,126,010 136,327 407,005 48,351 (45,600) 2,889,945
Unallocated assets 23,484
Total assets 2,913,429
 
Segment liabilities 1,039,246 1,076,514 190,530 (10,149) 39,236 (45,600) 2,289,777
Unallocated liabilities 25,235
Total liabilities 2,315,012
 
Other segment information
 
Capital expenditures, of which: 16,171 6,536 6,284 2,970 982 – 32,943
Property, plant and equipment 13,275 5,592 1,114 2,486 960 – 23,427
Intangible assets 2,896 944 5,170 484 22 – 9,516
 
Depreciation 13,798 5,904 1,426 833 555 – 22,516
Amortization 1,988 657 104 144 19 – 2,912
Impairment 40,306 27,691 4,701 3,574 – – 76,272
 
Investments in associates – – 10,323 – – – 10,323
Share of loss of associates – – (2,649) – – – (2,649)

6. Segment Information (continued)

The following tables present income and profit and certain asset and liability information regarding the Group’s operating segments for the year ended 31 December 2008:

  Retail banking   Corporate
banking 		  Brokerage and Asset and wealth management   Corporate center   Insurance   Inter –
company elimination 		  Total
Revenue
External operating income:
Net interest income (expense) 141,700 78,838 545 (149) (94) – 220,840
Net fees and commission income (expense) 35,190 8,485 5,059 6,573 (5,338) – 49,969
Net foreign currency gains 19,674 19,133 3,364 4,963 – – 47,134
Other external revenues (expenses) 4,025 1,336 (849) 1,825 38,285 – 44,622
Operating income from other segments (744) (284) (3,945) – (466) 5,439 –
Total operating income 199,845 107,508 4,174 13,212 32,387 5,439 362,565
 
Impairment charge on interest earning assets 61,003 61,749 1,532 5,510 – (5,647) 124,147
 
Results
Segment results 13,153 7,503 (15,780) 7,118 (6,951) 5,647 10,690
Unallocated expenses (11,494)
Loss before income tax benefit (804)
Income tax benefit 978
Profit for the year 174
 
Assets and liabilities
Segment assets 1,405,256 1,296,553 109,679 377,077 51,377 6,179 3,246,121
Unallocated assets 12,786
Total assets 3,258,907
 
Segment liabilities 1,155,871 1,153,221 104,520 44,062 57,990 – 2,515,664
Unallocated liabilities 24,394
Total liabilities 2,540,058
 
Other segment information
 
Capital expenditures, of which: 79,322 28,996 8,877 2,842 2,842 – 122,879
Property, plant and equipment 69,615 26,282 8,550 2,601 2,834 – 109,882
Intangible assets 9,707 2,714 327 241 8 – 12,997
 
Depreciation 12,780 3,901 1,310 270 409 – 18,670
Amortization 1,197 251 60 80 30 – 1,618
Impairment 244 – – – – – 244
 
Investments in associates – – 16,716 – – – 16,716
Share of loss of associates – – (713) – – – (713)

Geographic information

The Group operates in three main geographical markets: (a) Georgia, (b) Ukraine and Cyprus and (c) Belarus. The following table shows the distribution of the Group’s external income, total assets and capital expenditure allocated based on the location of the Group’s assets, for the year ended 31 December 2010:

  Georgia

2010

  Ukraine and Cyprus

2010

  Belarus

2010

  Total

2010

External income
Net interest income (loss) 200,789 5,849 9,706 216,344
Net fee and commission income 58,606 3,157 1,657 63,420
Net foreign currency gains 29,437 2,817 1,495 33,749
Other non-interest income 58,389 1,626 1,258 61,273
Total external income (loss) 347,221 13,449 14,116 374,786
 
Total assets 3,624,214 275,680 105,028 4,004,922
 
Capital expenditures 38,115 5,420 1,747 45,282

6. Segment Information (continued)

Geographic information (continued)

The following table shows the distribution of the Group’s external income, total assets and capital expenditure, allocated based on the location of the Group’s assets, for the year ended 31 December 2009:

  Georgia

2009

  Ukraine and Cyprus

2009

  Belarus

2009

  Total

2009

External income
Net interest income 171,203 14,416 4,922 190,541
Net fee and commission income (expense) 50,132 3,404 1,489 55,025
Net foreign currency gains 23,660 3,480 1,626 28,766
Other non-interest income 50,522 2,372 426 53,320
Total external income 295,517 23,672 8,463 327,652
 
Total assets 2,606,676 226,739 80,014 2,913,429
 
Capital expenditures 29,338 3,214 391 32,943

The following table shows the distribution of the Group’s external income, total assets and capital expenditure, allocated based on the location of the Group’s assets, for the year ended 31 December 2008:

  Georgia

2008

  Ukraine and Cyprus

2008

  Belarus

2008

  Total

2008

External income
Net interest income 198,027 20,479 2,334 220,840
Net fee and commission income (expense) 44,751 6,022 (804) 49,969
Net foreign currency gains 43,348 2,257 1,529 47,134
Other non-interest income 43,582 871 169 44,622
Total external income 329,708 29,629 3,228 362,565
 
Total assets 3,096,938 113,782 48,187 3,258,907
 
Capital expenditures 113,865 8,158 856 122,879

Amounts of non-current assets, other than financial instruments, concentrated in foreign locations (outside Georgia) are immaterial compared to total assets of the Group.

7. Cash and Cash Equivalents

  2010   2009   2008
Cash on hand 161,749 154,861 164,463
Current accounts with central banks, excluding obligatory reserves 58,958 44,101 43,961
Current accounts with other credit institutions 161,290 34,944 44,080
Time deposits with credit institutions up to 90 days 229,587 123,983 163,317
Cash and cash equivalents 611,584 357,889 415,821

As of 31 December 2010 GEL 367,956 (2009: GEL 127,816, 2008: GEL 222,332) was placed on current and time deposit accounts with internationally recognized OECD banks and central banks that are the counterparties of the Group in performing international settlements. The Group earned up to 1.74% interest per annum on these deposits (2009: 0.17%, 2008: 1.16%).

8. Amounts Due from Credit Institutions

  2010   2009   2008
Obligatory reserves with central banks 90,378 41,791 39,661
Time deposits with effective maturity of more than 90 days 20,809 18,599 37,414
Inter-bank loan receivables 5,282 4,230 4,328
Amounts due from credit institutions 116,469 64,620 81,403

Obligatory reserves with central banks represent amounts deposited with the NBG (“National Bank of Georgia”), the NBU (“National Bank of Ukraine”) and the NBRB (National Bank of the Republic of Belarus). Credit institutions are required to maintain an interest-earning cash deposit (obligatory reserve) with central banks, the amount of which depends on the level of funds attracted by the credit institution. The Group’s ability to withdraw these deposits is restricted by the statutory legislature. The Group earned up to 2% annual interest on obligatory reserve with NBG in 2010, 2009 and 2008.

As of 31 December 2010 GEL 14,538 (2009: GEL 10,940, 2008: GEL 3,913) was placed on current accounts and inter-bank time deposits with three (2009: seven, 2008: three) internationally recognised OECD banks. Those amounts were pledged to the counterparty bank as security for open commitments.

As of 31 December 2010 inter-bank loan receivables include GEL 4,436 (2009: GEL 4,215, 2008: GEL 4,328) placed with an Azerbaijani bank.

9. Loans to Customers

  2010   2009   2008
Commercial loans 1,424,550 939,814 1,044,959
Residential mortgage loans 409,786 387,415 391,606
Consumer loans 383,615 332,537 496,197
Micro loans 238,462 99,981 151,313
Gold – pawn loans 66,749 62,829 46,374
Others 4,071 5,241 15,174
Loans to customers, gross 2,527,233 1,827,817 2,145,623
Less – Allowance for loan impairment (175,536) (166,486) (106,601)
Loans to customers, net 2,351,697 1,661,331 2,039,022

9. Loans to Customers (continued)

Allowance for loan impairment

Movements of the allowance for impairment of loans to customers by class are as follows:

  Commercial loans

2010

  Consumer loans

2010

  Residential mortgage loans

2010

  Micro loans

2010

  Gold-pawn loans

2010

  Others

2010

  Total

2010

At 1 January 2010 82,042 54,989 23,490 3,788 – 2,177 166,486
Charge 23,932 7,571 18,440 1,474 – (1,531) 49,886
Recoveries 21,090 15,208 3,249 3,150 – 42 42,739
Write-offs (13,074) (42,798) (19,441) (2,138) – – (77,451)
Interest accrued on impaired loans (1,392) (3,306) (3,681) (360) – – (8,739)
Currency translation difference 1,901 209 367 37 – 101 2,615
At 31 December 2010 114,499 31,873 22,424 5,951 – 789 175,536
 
Individual impairment 68,145 13,148 16,606 2,433 – 315 100,647
Collective impairment 46,354 18,725 5,818 3,518 – 474 74,889
114,499 31,873 22,424 5,951 – 789 175,536
Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 192,778 21,996 51,585 9,051 – 973 276,383
 
Commercial loans

2009

Consumer loans

2009

Residential mortgage loans

2009

Micro loans

2009

Gold-pawn loans

2009

Others

2009

Total

2009

At 1 January 2009 45,755 42,153 7,969 4,921 – 5,803 106,601
Charge 44,357 52,839 19,023 5,981 8 (3,326) 118,882
Recoveries 17,839 8,469 2,170 2,016 – 11 30,505
Write-offs (24,295) (43,073) (5,209) (8,207) (8) (1) (80,793)
Interest accrued on impaired loans (1,088) (5,216) (396) (891) – – (7,591)
Currency translation difference (526) (183) (67) (32) – (310) (1,118)
At 31 December 2009 82,042 54,989 23,490 3,788 – 2,177 166,486
 
Individual impairment 75,684 42,824 20,479 1,907 – – 140,894
Collective impairment 6,358 12,165 3,011 1,881 – 2,177 25,592
82,042 54,989 23,490 3,788 – 2,177 166,486
Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 351,835 67,345 84,448 6,731 – 2,037 512,396

9. Loans to Customers (continued)

Allowance for loan impairment (continued)

  Commercial loans

2008

  Consumer loans

2008

  Residential mortgage loans

2008

  Micro loans

2008

  Gold-pawn loans

2008

  Others

2008

  Total

2008

At 1 January 2008 11,120 13,158 2,757 1,676 – 218 28,929
Charge 53,349 50,190 7,164 5,415 – 6,694 122,812
Recoveries 3,265 5,088 1,327 1,496 – – 11,176
Write-offs (17,685) (22,082) (2,724) (3,221) – – (45,712)
Interest accrued on impaired loans (3,067) (3,730) (199) (333) – – (7,329)
Currency translation difference (1,227) (471) (356) (112) – (1,109) (3,275)
At 31 December 2008 45,755 42,153 7,969 4,921 – 5,803 106,601
 
Individual impairment 37,905 25,920 5,068 3,071 – 650 72,614
Collective impairment 7,850 16,233 2,901 1,850 – 5,153 33,987
45,755 42,153 7,969 4,921 – 5,803 106,601
Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 290,561 42,338 35,280 8,505 – 857 377,541

Individually impaired loans

Interest income accrued on loans, for which individual impairment allowances have been recognized as at 31 December 2010 comprised GEL 18,640 (2009: GEL 17,055, 2008: GEL 10,241).

Collateral and other credit enhancements

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

The main types of collateral obtained are as follows:

  • For commercial lending, charges over real estate properties, inventory and trade receivables.
  • For retail lending, mortgages over residential properties.

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

9. Loans to Customers (continued)

Concentration of loans to customers

As of 31 December 2010 concentration of loans granted by the Group to ten largest third party borrowers comprised GEL 383,971 accounting for 15% of gross loan portfolio of the Group (2009: GEL 206,981 and 11% respectively, 2008: GEL 230,733 and 11% respectively). An allowance of GEL 3,837 (2009: GEL 9,891, 2008: GEL 10,224) was established against these loans.

As of 31 December 2010, 2009 and 2008 loans are principally issued within Georgia, and their distribution by industry sector is as follows:

  2010   2009   2008
Individuals 1,006,046 862,365 1,079,945
Trade and services 858,878 578,623 667,557
Construction and development 274,623 150,676 158,702
Mining 137,583 62,622 34,526
Transport and communication 77,792 81,532 52,631
Energy 62,424 11,667 66,145
Agriculture 18,089 13,730 20,134
Others 91,798 66,602 65,983
Loans to customers, gross 2,527,233 1,827,817 2,145,623
Less – allowance for loan impairment (175,536) (166,486) (106,601)
Loans to customers, net 2,351,697 1,661,331 2,039,022
 

Loans have been extended to the following types of customers:

2010 2009 2008
Private companies 1,488,577 934,494 1,029,008
Individuals 1,006,046 862,365 1,079,945
State-owned entities 32,610 30,958 36,670
Loans to customers, gross 2,527,233 1,827,817 2,145,623
Less – allowance for loan impairment (175,536) (166,486) (106,601)
Loans to customers, net 2,351,697 1,661,331 2,039,022

The following is a reconciliation of the individual and collective allowances for impairment losses on loans to customers:

  2010   2009   2008
Individual impairment   Collective impairment   Total Individual impairment   Collective impairment   Total Individual impairment   Collective impairment   Total
2010 2010 2010 2009 2009 2009 2008 2008 2008
At 1 January 140,894 25,592 166,486 72,614 33,987 106,601 9,659 19,270 28,929
Charge (reversal) for the year (8,950) 58,836 49,886 105,477 13,405 118,882 73,311 49,501 122,812
Recoveries 25,247 17,492 42,739 17,237 13,268 30,505 6,690 4,486 11,176
Write-offs (54,534) (22,917) (77,451) (49,587) (31,206) (80,793) (12,757) (32,955) (45,712)
Interest accrued on impairment loans to customers (7,216) (1,523) (8,739) (3,801) (3,790) (7,591) (1,933) (5,396) (7,329)
Currency translation differences 5,206 (2,591) 2,615 (1,046) (72) (1,118) (2,356) (919) (3,275)
At 31 December 100,647 74,889 175,536 140,894 25,592 166,486 72,614 33,987 106,601

10. Finance Lease Receivables

  31 December

2010

  31 December

2009

  31 December

2008

Minimum lease payments receivables 18,521 27,816 50,565
Less – Unearned finance lease income (3,514) (3,776) (6,797)
15,007 24,040 43,768
Less – Allowance for impairment (588) (7,144) (2,163)
Finance lease receivables, net 14,419 16,896 41,605

The difference between the minimum lease payments to be received in the future and the finance lease receivables represents unearned finance income.

As of 31 December 2010, concentration of investments in five largest leases comprised GEL 3,541 or 24% of total finance lease receivables (2009: GEL 16,013 or 67%, 2008: GEL 32,112 or 73%) and finance income received from them as of 31 December 2010 comprised GEL 479 or 12% of total finance income from lease (2009: GEL 1,567 or 27%, 2008: GEL 3,512 or 50%).

Future minimum lease payments to be received after 31 December 2010, 31 December 2009 and 31 December 2008 are as follows:

  31 December

2010

  31 December

2009

  31 December

2008

Within 1 year 10,266 19,693 37,550
From 1 to 5 years 8,255 8,123 13,015
More than 5 years – – –
Minimum lease payment receivables 18,521 27,816 50,565

Minimum lease payments to be received after 31 December 2010, 2009 and 2008 are denominated in the following currencies:

  31 December

2010

  31 December

2009

  31 December

2008

Euros 7,993 5,851 5,919
US Dollars 5,840 9,554 41,959
Belarusian Roubles 4,688 1,035 2,687
Ukrainian Hryvnas – 11,376 –
Minimum lease payment receivables 18,521 27,816 50,565

The equipment the Group leases out at 31 December 2010, 2009 and 2008 can be segregated into the following categories:

  31 December 2010   31 December 2009   31 December 2008
Amount   Number
of projects 		Amount   Number
of projects 		Amount   Number
of projects
Air and land transport 10,022 141 7,559 116 37,650 126
Machinery & equipment 4,356 38 3,885 31 3,930 46
Construction equipment 4,143 30 16,372 21 8,985 46
Minimum lease
payment receivables 		18,521 209 27,816 168 50,565 218

10. Finance Lease Receivables (continued)

Allowance for impairment of finance lease receivables

Movements of the allowance for impairment of finance lease receivables are as follows:

  Finance lease receivables 2010   Finance lease receivables 2009   Finance lease receivables 2008
At 1 January 7,144 2,163 816
(Reversal) Charge (5,775) 6,859 1,335
Recoveries – 2,074 –
Amounts written-off (1,210) (3,689) –
Currency translation difference 429 (263) 12
At 31 December 588 7,144 2,163
 
Individual impairment 232 6,916 1,600
Collective impairment 356 228 563
588 7,144 2,163
Gross amount of lease receivables, individually determined to be impaired, before deducting any individually assessed impairment allowance – 13,703 2,730

11. Investment Securities

Available-for-sale securities comprise:

  2010   2009   2008
Ministry of Finance treasury bills 128,539 4,044 5,266
Certificates of deposit of central banks 104,969 – –
Ministry of Finance treasury bonds 52,120 – –
Corporate shares 11,294 13,418 21,723
Corporate bonds – 2,946 6,748
296,922 20,408 33,737
Less – Allowance for impairment (Note 17) (1,982) (818) –
Available-for-sale securities 294,940 19,590 33,737

Corporate shares as of 31 December 2010 are primarily comprised of investments in a chain of drug stores of GEL 4,282 (2009: 4,413, 2008: nil), a Georgian retail chain of GEL 3,146 (2009: GEL 2,677, 2008: GEL 9,175) and a real estate company of GEL 1,145 (2009, 2008: nil).

Nominal interest rates and maturities, in years, of these securities are as follows:

  31 December 2010   31 December 2009   31 December 2008
%   Maturity %   Maturity %   Maturity
Ministry of Finance treasury bills 10.03 1 9.50 1-2 years 11.95% 1-3 years
Certificates of deposit of central banks 9.98 1 – – – –
Ministry of Finance treasury bonds 15.32% 1-2 – – – –
Corporate bonds – – 19.76% 1-2 years 14.41% 1-3 years

11. Investment Securities (continued)

Held-to-maturity securities comprise:

  2010   2009   2008
Carrying value   Nominal value Carrying
value 		  Nominal
value 		Carrying
value 		  Nominal
value
Corporate Bonds 21 20 – – – –
Certificates of deposit of central banks – – 105,143 105,624 14,826 15,000
Ministry of Finance treasury bills – – 144,053 149,124 – –
State debt securities – – – – 8,019 8,047
Held-to-maturity securities 21 20 249,196 254,748 22,845 23,047

Contractual interest rates and maturities of these securities are as follows:

  31 December 2010   31 December 2009   31 December 2008
%   Maturity %   Maturity %   Maturity
Corporate Bonds 10.0 2011 – – – –
Certificates of deposit of central banks – – 3.11 2010 11.79 2009
Ministry of Finance treasury bills – – 6.33 2010 – –
State debt securities – – – – 13.00 2009

During the second half of 2010, the Group sold part of investment securities classified as held-to-maturity. Following this transaction, the Group reclassified the remaining investments as available-for-sale, as prescribed by paragraph 52 of IAS 39. Information about the reclassified financial assets is presented in the table below:

  31 December 2010
Amortised cost   Fair value  

Fair value gain (loss)
recognised in other
comprehensive income

Central banks’ treasury bills 123,785 124,045 260
Certificates of deposit of central banks 104,982 104,969 (13)
Central banks’ treasury bonds 51,542 52,120 578
Total reclassified 280,309 281,134 825

12. Investments in Associates

The following associates are accounted for under the equity method:

2010

Associates

  Ownership / Voting, %   Country   Date of incorporation   Industry   Date of
acquisition
JSC N Tour 30.00% Georgia 1/11/2001 Travel services 29/05/2008
JSC Hotels and Restaurants Management Group – m/Group 25.00% Georgia 30/05/2005 Food retail 29/05/2008
JSC iCall 27.03% Georgia 22/03/2005 Call center 22/11/2006
JSC Info Georgia XXI 50.00% Georgia 26/04/2001 Business services 20/05/2008
JSC Caucasus Automotive Retail 36.14% Georgia 18/04/2008 Car retail 2/05/2008
Style +, LLC 32.45% Georgia 1/08/2005 Advertising 7/08/2008
 

12. Investments in Associates (continued)

2009

Associates

Ownership / Voting, % Country Date of incorporation Industry Date of
acquisition
JSC N Tour 30.00% Georgia 1/11/2001 Travel services 29/05/2008
JSC Hotels and Restaurants Management Group – m/Group 25.00% Georgia 30/05/2005 Food retail 29/05/2008
JSC Teliani Valley 27.19% Georgia 30/06/2000 Winery 13/02/2007
JSC iCall 27.03% Georgia 22/03/2005 Call center 22/11/2006
JSC Info Georgia XXI 50.00% Georgia 26/04/2001 Business services 20/05/2008
JSC Caucasus Automotive Retail 30.00% Georgia 18/04/2008 Car retail 2/05/2008
Style +, LLC 32.45% Georgia 1/08/2005 Advertising 7/08/2008
 
 
2008

Associates

Ownership / Voting, % Country Date of incorporation Industry Date of
acquisition
JSC SB Iberia 49.00% Georgia 13/12/2007 Construction 20/03/2008
JSC SB Iberia 2 49.00% Georgia 28/03/2008 Construction
JSC Teliani Valley 27.19% Georgia 30/06/2000 Winery 13/02/2007
JSC One Team 25.00% Georgia 23/04/2007 Entertainment
JSC iCall 27.03% Georgia 22/03/2005 Call centre 22/11/2006
JSC N Tour 30.00% Georgia 1/11/2001 Travel Services 29/05/2008
JSC Hotels and Restaurants Management Group – m/Group 50.00% Georgia Food retail 29/05/2008
JSC Info Georgia XXI 50.00% Georgia 26/04/2001 Business service 20/05/2008
JSC Caucasus Automotive Retail 30.00% Georgia 18/04/2008 Car retail 2/05/2008
Style +, LLC 32.45% Georgia 1/08/2005 Advertising 7/08/2008

Movements in investments in associates were as follows:

  2010   2009   2008
Investments in associates, beginning of year, gross 12,834 16,990 5,208
Purchase cost – – 13,355
Write-off (1,768) – –
Disposal – (24) (860)
Transfers (reclassifications) (3,451) (1,483) –
Net share of (loss) profit 255 (2,649) (713)
Investments in associates, end of year, gross 7,870 12,834 16,990
Less – Allowance for impairment (Note 17) (2,238) (2,511) (274)
Investments in associates, end of year, net 5,632 10,323 16,716

Investments in associates at 31 December 2010 include goodwill of GEL 3,399 (2009: GEL 3,120, 2008: GEL 7,354). Write-off of GEL 1,768 comprises investment in JSC Teliani Valley of GEL 1,495. Reclassification of GEL 3,451 in 2010 comprises investment in JSC Teliani Valley. Reclassifications of GEL 1,483 in 2009 comprise investments in SB Iberia and SB Iberia 2. Subsequent to acquisition of controlling stakes in these companies, the Group added previous investments of GEL 1,483 to total acquisition cost of these companies and this amount affected the respective price allocation, contributing to respective goodwill arising on these acquisitions.

12. Investments in Associates (continued)

The following table summarises certain financial information of the associates:

Aggregated assets and liabilities of associates   2010   2009   2008
Assets 16,610 33,861 58,171
Liabilities (8,608) (18,329) (32,023)
Net assets 8,002 15,532 26,148
 
Aggregated revenue and profit of associates 2010 2009 2008
Revenue 20,654 48,672 34,663
Profit (loss) 712 445 (1,607)
 

13. Investment Properties

2010 2009 2008
At 1 January 79,509 47,289 35,065
Acquisition through business combinations (Note 5) – 12,630 –
Additions* 35,146 495 12,613
Disposals (5,490) (755) –
Net change in fair value through profit and loss 350 (4,087) (389)
Transfers from property and equipment and other assets 3,981

23,937

–
At 31 December 113,496 79,509 47,289

*2010 additions comprise foreclosed properties, no cash transactions were involved.

Investment properties are stated at fair value, which has been determined based on the valuation performed by Georgian Valuation Company, an accredited independent appraiser, as at 31 December 2010, 2009 and 2008. Georgian Valuation Company is an industry specialist in valuing these types of investment properties. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction at the date of valuation, in accordance with International Valuation Standards Committee standards.

Rental income and direct operating expenses arising from investment properties comprise:

  2010   2009   2008
Rental income 2,750 3,026 1,211
Direct operating expenses (136) (114) (76)

The entire amount of direct operating expenses participated in the generation of rental income during the respective periods.

14. Property and Equipment

The movements in property and equipment during 2010 were as follows:

  Land & buildings   Furniture & fixtures   Computers & equipment   Motor vehicles   Leasehold improvements   Assets under construction   Total
Cost or revaluation
31 December 2009 137,705 90,082 34,753 7,622 7,870 55,719 333,751
Acquisition through business combinations (Note 5) 3,171 258 4,628 269 – 370 8,696
Additions 805 11,250 2,824 585 830 20,140 36,434
Disposals (2,224) (3,843) (643) (607) (2,315) (11,762) (21,394)
Transfers 21,929 (17) (19) 196 994 (23,083) –
Transfers to investment properties (3,714) – – – – (267) (3,981)
Revaluation (9,365) – – – – – (9,365)
Currency translation adjustment 2,209 2,829 640 276 151 1,649 7,754
31 December 2010 150,516 100,559 42,183 8,341 7,530 42,766 351,895
 
Accumulated impairment
31 December 2009 3,435 262 200 14 – – 3,911
Impairment charge 435 – – – – – 435
Disposals (1,648) – (82) – – – (1,730)
31 December 2010 2,222 262 118 14 – – 2,616
Accumulated depreciation
31 December 2009 4,463 23,870 16,173 3,680 2,925 – 51,111
Depreciation charge 3,891 11,510 6,048 1,715 1,346 – 24,510
Currency translation difference 103 31 6 19 – – 159
Disposals (322) (3,219) (326) (227) (1,753) – (5,847)
Revaluation (6,506) – – – – – (6,506)
31 December 2010 1,629 32,192 21,901 5,187 2,518 – 63,427
 
Net book value:
31 December 2009 129,807 65,950 18,380 3,928 4,945 55,719 278,729
31 December 2010 146,665 68,105 20,164 3,140 5,012 42,766 285,852
 

The movements in property and equipment during 2009 were as follows:

Land & buildings Furniture & fixtures Computers & equipment Motor vehicles Leasehold improvements Assets under construction Total
Cost or revaluation
31 December 2008 147,030 76,603 36,500 7,825 8,466 58,550 334,974
Acquisition through business combinations (Note 5) – 22 – 33 – – 55
Additions 2,025 12,813 1,609 821 593 5,566 23,427
Disposals (4,638) (350) (3,426) (1,084) (1,896) (173) (11,567)
Transfers 588 503 222 49 653 (2,015) –
Transfers to investment properties – – – – – (6,387) (6,387)
Revaluation (3,205) – – – – – (3,205)
Currency translation adjustment (4,095) 491 (152) (22) 54 178 (3,546)
31 December 2009 137,705 90,082 34,753 7,622 7,870 55,719 333,751
 
Accumulated impairment
31 December 2008 625 1 84 1 – – 711
Impairment charge 2,810 261 116 13 – – 3,200
31 December 2009 3,435 262 200 14 – – 3,911
Accumulated depreciation
31 December 2008 1,049 14,168 11,867 2,593 2,802 – 32,479
Depreciation charge 3,380 10,257 5,579 1,681 1,619 – 22,516
Currency translation difference 280 26 20 15 4 – 345
Disposals – (163) (811) (392) (1,500) – (2,866)
Revaluation (246) (418) (482) (217) – – (1,363)
31 December 2009 4,463 23,870 16,173 3,680 2,925 – 51,111
 
Net book value:
31 December 2008 145,356 62,434 24,549 5,231 5,664 58,550 301,784
31 December 2009 129,807 65,950 18,380 3,928 4,945 55,719 278,729
 

14. Property and Equipment (continued)

The movements in property and equipment during 2008 were as follows:

Land & buildings Furniture & fixtures

Computers & equipment

Motor vehicles Leasehold improvements Assets under construction Total
Cost or revaluation
31 December 2007 135,084 42,285 21,516 5,765 4,111 12,973 221,734
Acquisition through business combinations (Note 5) 18,162 696 1,095 75 – 219 20,247
Additions 1,174 33,398 13,215 3,416 779 57,902 109,884
Disposals (4,677) (1,934) (468) (1,491) (1,023) (1,976) (11,569)
Transfers 7,815 167 480 263 4,096 (12,821) –
Revaluation (11,669) – – – – – (11,669)
Currency translation adjustment 1,141 1,991 662 (203) 503 2,253 6,347
31 December 2008 147,030 76,603 36,500 7,825 8,466 58,550 334,974
 
Accumulated impairment
31 December 2007 467 – – – – – 467
Impairment charge 158 1 84 1 – – 244
31 December 2008 625 1 84 1 – – 711
Accumulated depreciation
31 December 2007 62 7,531 6,602 1,306 1,110 – 16,611
Depreciation charge 2,832 7,048 5,515 1,480 1,795 – 18,670
Currency translation difference (68) (116) (88) (63) 2 – (333)
Disposals (563) (295) (162) (130) (105) – (1,255)
Revaluation (1,214) – – – – – (1,214)
31 December 2008 1,049 14,168 11,867 2,593 2,802 – 32,479
 
Net book value:
31 December 2007 134,555 34,754 14,914 4,459 3,001 12,973 204,656
31 December 2008 145,356 62,434 24,549 5,231 5,664 58,550 301,784

The Group engaged Georgian Valuation Company, an independent appraiser, to determine the fair value of its buildings. Fair value is determined by reference to market-based evidence. The most recent revaluation report for the Bank’s buildings was 31 December 2010. If the buildings were measured using the cost model, the carrying amounts of the buildings as of 31 December 2010, 2009 and 2008 would be as follows:

  2010   2009   2008
Cost 79,800 60,797 66,917
Accumulated depreciation and impairment (7,550) (10,487) (7,353)
Net carrying amount 72,250 50,310 59,564

15. Goodwill and Other Intangible Assets

Movements in goodwill and intangible assets during 2010 were as follows:

  Goodwill   Core deposit intangible   Computer software and license   Total
Cost
31 December 2009 138,849 2,530 24,681 166,060
Acquisition through business combinations (Note 5) 3,435 – 8 3,443
Additions – – 5,405 5,405
Disposals – – (296) (296)
Currency translation difference – – 938 938
31 December 2010 142,284 2,530 30,736 175,550
 
Accumulated amortization
and impairment
31 December 2009 73,072 – 7,546 80,618
Amortization charge – – 3,453 3,453
Disposals – – (117) (117)
Currency translation difference – – (6) (6)
31 December 2010 73,072 – 10,876 83,948
 
Net book value:
31 December 2009 65,777 2,530 17,135 85,442
31 December 2010 69,212 2,530 19,860 91,602
 

Movements in goodwill and intangible assets during 2009 were as follows:

Goodwill Core deposit intangible Computer software and license Total
Cost
31 December 2008 134,238 2,499 20,791 157,528
Acquisition through business combinations (Note 5) 5,015 – – 5,015
Additions – 33 4,468 4,501
Disposals (411) – (577) (988)
Currency translation difference 7 (2) (1) 4
31 December 2009 138,849 2,530 24,681 166,060
 
Accumulated amortization
and impairment
31 December 2008 – – 5,069 5,069
Amortization charge – – 2,912 2,912
Charge for impairment 73,072 – – 73,072
Disposals – – (404) (404)
Currency translation difference – – (31) (31)
31 December 2009 73,072 – 7,546 80,618
 
Net book value:
31 December 2008 134,238 2,499 15,722 152,459
31 December 2009 65,777 2,530 17,135 85,442

15. Goodwill and Other Intangible Assets (continued)

Impairment charge of Goodwill in 2009 comprise: JSC BG Bank – GEL 68,016, SB Iberia – GEL 3,907, SB Iberia 2 – GEL 744, JSC United Securities Registrar of Georgia – GEL 366 and JSC Intertour – GEL 39. In all of these instances, the main reason for impairment was insufficient future operating cash flows expected to be received per forecasts of the respective cash generating units.

Movements in goodwill and intangible assets during 2008 were as follows:

  Goodwill   Core deposit intangible   Computer software and license   Total
Cost
31 December 2007 110,498 1,688 7,611 119,797
Acquisition through business combinations (Note 5) 23,682 843 117 24,642
Additions – – 12,997 12,997
Disposals – – (170) (170)
Currency translation difference 58 (32) 236 262
31 December 2008 134,238 2,499 20,791 157,528
 
Accumulated amortization
and impairment
31 December 2007 426 – 3,382 3,808
Amortization charge – – 1,618 1,618
Disposals (426) – (12) (438)
Currency translation difference – – 81 81
31 December 2008 – – 5,069 5,069
 
Net book value:
31 December 2007 110,072 1,688 4,229 115,989
31 December 2008 134,238 2,499 15,722 152,459

As of 31 December 2010 goodwill acquired through business combinations has been allocated to the following cash-generating units for impairment testing purposes:

  • JSC Bank of Georgia
  • JSC Belarusky Narodny Bank
  • JSC Insurance Company Aldagi – BCI
  • JSC My Family Clinic
  • JSC Intertour
  • Planeta Forte, LLC

The recoverable amount of each cash-generating unit has been determined based on a value-in-use calculation through a cash flow projection based on the approved budget under the assumption that business will not grow and the cash flows will be stable. The discount rate applied to cash flow projections is the weighted average cost of capital (“WACC”) of each particular cash-generating unit.

15. Goodwill and Other Intangible Assets (continued)

Carrying amount of goodwill (less impairment) allocated to each of the cash-generating units follows:

     

WACC applied for
impairment

  Carrying amount of goodwill

Effective annual
growth rate in
three-year
financial budgets

2010   2009   2008 31 December
2010 		  31 December
2009 		  31 December
2008
JSC Belarusky Narodny Bank 90.30% 8.51% 16.26% N/A 23,394 23,394 23,394
JSC Bank of Georgia 20.17% 8.82% 8.70% 7.5% 22,398 22,398 22,391
JSC Insurance Company Aldagi – BCI 20.17% 12.61% 17.20% 15.8% 18,742 18,742 18,742
JSC Teliani Valley 27.17% 14.56% N/A N/A 3,292 – –
JSC Intertour 20.00% 14.96% 14.08% 12.0% 659 659 698
Planeta Forte, LLC 20.00% 2.78% 17.20% N/A 364 364 –
JSC My Family Clinic

20.17%

12.61% 17.20% 15.8% 220 220 220
Teliani Trading (Ukraine), LLC 27.17% 14.56% N/A N/A 143 – –
JSC BG Bank – – 10.01% 11.7% – – 68,016
JSC United Securities Registrar of Georgia – – 19.85% 14.0% – – 366
JSC Nova Technology (disposed) N/A N/A N/A 14.0% – – 411
Total 69,212 65,777 134,238

The three-year effective growth rate indicated in the table above represents the effective average annual growth rate that is embedded into the respective three-year financial budget of the respective entity, as approved by its management, calculated individually per each respective entity. Third year operating cash flows were taken at perpetuity and zero growth-rate was applied beyond the third year.

Goodwill amount that arose from JSC Intellect Bank and JSC Tbiluniversal Bank acquisition is allocated to JSC Bank of Georgia, mainly due to the fact that JSC Bank of Georgia has utilized the assets and liabilities of the said financial institutions.

Impairment testing of goodwill and other intangible assets with indefinite lives

Goodwill acquired through business combinations with indefinite lives have been allocated to four individual cash-generating units, which are also reportable segments, for impairment testing: corporate banking, retail banking, insurance and asset & wealth management and brokerage.

The carrying amount of goodwill allocated to each of the cash-generating units is as follows:

  2010   2009   2008
Retail banking 35,827 38,102 78,420
Insurance 18,962 18,962 18,962
Corporate banking 9,965 7,690 35,381
Brokerage and asset & wealth management 4,458 1,023 1,475
Total 69,212 65,777 134,238

15. Goodwill and Other Intangible Assets (continued)

Key assumptions used in value in use calculations

The recoverable amounts of the cash generating units have been determined based on a value-in-use calculation, using cash flow projections based on financial budgets approved by senior management covering from one to three-year period. Discount rates were not adjusted for either a constant or a declining growth rate beyond the three-year periods covered in financial budgets.

The following rates are used by the Bank for corporate banking and retail banking:

  Corporate Banking   Retail Banking
2010, %   2009, %   2008, % 2010, %   2009, %   2008, %
Discount rate 8.9% 9.1% 7.5% 8.9% 8.8% 7.5%

The following rates are used by the Bank for Insurance and Brokerage and Asset & Wealth Management:

  Insurance  

Asset & wealth management and
brokerage

2010, %   2009, %   2008, % 2010, %   2009, %   2008, %
Discount rate 12.6% 17.2% 15.8% 14.5% 16.45% 12% – 14%

The calculation of value-in-use for both Asset Management and Retail Banking units is most sensitive to interest margins and discount rates assumptions:

Discount rates

Discount rates reflect management’s estimate of return of capital employed (ROCE) required in each business. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. Discount rates are calculated by using WACC.

16. Taxation

The corporate income tax expense comprises:

  2010   2009   2008
Current income tax expense (12,365) (1,872) (6,762)
Deferred income tax (expense) benefit (3,411) 8,870 7,740
Income tax (expense) benefit (15,776) 6,998 978
Deferred income tax benefit (expense) recognized in other comprehensive income 206 (704) 3,189

Deferred tax related to items charged or credited to other comprehensive income during the year is as follows:

  2010   2009   2008
Net gains (losses) on investment securities available for sale 146 (620) 1,530
Revaluation of buildings (58) 124 1,659
Other 118 (208) –
Income tax (expense) benefit to other comprehensive income 206 (704) 3,189

16. Taxation (continued)

The income tax rate applicable to the majority of the Group’s income is the income tax rate applicable to subsidiaries income which ranges from 15% to 26% (2009: from 15% to 26%, 2008: from 15% to 26%). The tax rate for interest income on state securities changed from 10% to 7.5%, effective 1 January 2009 and further from 7.5% to 0%, effective 9 August 2009. Reconciliation between the expected and the actual taxation charge is provided below.

The effective income tax rate differs from the statutory income tax rates. As of 31 December 2010, 2009 and 2008 a reconciliation of the income tax expense based on statutory rates with actual is as follows:

  2010   2009   2008
Income (loss) before income tax (expense) benefit 98,443 (105,906) (804)
Statutory tax rate 15% 15% 15%
 
Theoretical income tax (expense) benefit at statutory tax rate (14,766) 15,886 121
Tax at the domestic rates applicable to profits in the respective country (291) 3,614 837
Non-deductible share-based compensation expenses (1,325) (717) (1,240)
Other operating income 229 408 (207)
State securities at lower tax rates 564 677 1,020
Tax effect of inter-company transactions – – 783
Non-deductible expenses:
– Business trips (288) – –
– Entertainment (71) – –
– Charity (10) – –
– Impairment of intangible assets – (10,308) –
– Other impairment recoveries – (2,460) (171)
– Other 182 (102) (165)
Income tax (expense) benefit (15,776) 6,998 978

Applicable taxes in Georgia, Ukraine and Belarus include corporate income tax (profits tax), individuals’ withholding taxes, property tax and value added tax, among others. However, regulations are often unclear or nonexistent and few precedents have been established. This creates tax risks in Georgia, Ukraine and Belarus, substantially more significant than typically found in countries with more developed tax systems. Management believes that the Group is in substantial compliance with the tax laws affecting its operations. However, the risk remains that relevant authorities could take differing positions with regard to interpretative issues.

As of 31 December tax assets and liabilities consist of the following:

  2010   2009   2008
Current income tax assets 2,247 7,997 8,095
Deferred income tax assets 18,178 15,487 4,691
Income tax assets 20,425 23,484 12,786
 
Current income tax liabilities 4,251 574 779
Deferred income tax liabilities 30,901 24,661 23,615
Income tax liabilities 35,152 25,235 24,394

16. Taxation (continued)

Deferred tax assets and liabilities as of 31 December and their movements for the respective years follows:

    Origination and reversal of temporary differences     2008   Origination and reversal of temporary differences   Effect of business combi-nation   2009   Origination and reversal of temporary differences   Effect of business comb-nation   2010
2007 In the income statement   In other compre-hensive income Effect of business combi-nation In the income statement   In other compre-hensive income In the income statement   In other compre-hensive income
Tax effect of deductible
temporary differences: 		 
Amounts due to credit institutions 35   (35)   –   –   –   –   –   – –   – –   –   –
Investment securities: available-for-sale – 296 1,530 – 1,826 (295) (620) – 911 20 279 – 1,210
Loans to customers 80 390 – – 470 9,659 – – 10,129 440 – – 10,569
Investment properties – – – – – – – 1,604 1,604 349 – – 1,953
Securities issued 55 (55) – – – – – – – – – – –
Reinsurance assets 124 119 – – 243 129 – – 372 (117) – – 255
Reinsurance premiums receivables – 2,073 – – 2,073 (376) – – 1,697 – – – 1,697
Allowances for impairment
and provisions for other lossesand provisions for other losses		 225 240 – – 465 732 – – 1,197 867 – – 2,064
Tax losses carried forward 1,313 16,689 – – 18,002 1,516 (26) – 19,492 (15,020) – – 4,472
Finance lease receivables 7 277 – – 284 35 – – 319 – – – 319
Intangible assets 181 58 – – 239 25 – – 264 24 – – 288
Property and equipment 2 (175) 1,659 297 1,783 149 289 – 2,221 (20) 290 78 2,569
Other assets 115 348 – – 463 359 – – 822 147 34 – 1,003
Other liabilities 302 433 – – 735 1,190 – – 1,925 (698) – – 1,227
Gross deferred tax assets 2,439 20,658 3,189 297 26,583 13,123 (357) 1,604 40,953 (14,008) 603 78 27,626
Unrecognized deferred tax assets (207) 207 – – – – (131) – (131) 131 – – –
Deferred tax assets 2,232 20,865 3,189 297 26,583 13,123 (488) 1,604 40,822 (13,877) 603 78 27,626
       
Tax effect of taxable temporary differences:
Fair value measurement of securities – – – – – – – – – 203 – – 203
Amounts due to credit institutions 1,710 341 – – 2,051 (317) – – 1,734 39 – – 1,773
Amounts due to customers 625 (117) – – 508 – – – 508 1,078 (119) – 1,467
Securities available-for-sale 182 – – – 182 – – – 182 249 133 – 564
Loans to customers 4,491 2,612 – – 7,103 13,776 – – 20,879 (10,314) – – 10,565
Reinsurance assets 27 – – – 27 – – – 27 13 – – 40
Insurance premium receivables 6 (6) – – – – – – – – – – –
Allowances for impairment and provisions for other losses 38 1,185 – – 1,223 (1,223) – – – 770 – – 770
Other insurance liabilities & pension fund obligations – – – – – – – – – 7 – – 7
Property and equipment 20,156 8,324 – – 28,480 (6,194) 165 – 22,451 (3,756) 348 379 19,422
Investment properties 3,203 (342) – – 2,861 (2,313) – – 548 20 – – 568
Intangible assets 1,008 1,289 – – 2,297 87 28 – 2,412 1,364 – – 3,776
Other assets 936 (595) – – 341 399 23 20 783 (677) 35 – 141
Other liabilities – 434 – – 434 38 – – 472 538 – 43 1,053
Deferred tax liabilities 32,382 13,125 – – 45,507 4,253 216 20 49,996 (10,466) 397 422 40,349
 
Net deferred tax assets (liabilities) (30,150) 7,740 3,189 297 (18,924) 8,870 (704) 1,584 (9,174) (3,411) 206 (344) (12,723)

17. Other Impairment Allowance and Provisions

The movements in other impairment allowances and provisions were as follows:

  Impairment allowance
for investments
in associates 		  Impairment allowance for other assets   Impairment allowance for available-for-sale investment securities   Provision for guarantees and commitments   Total
31 December 2007 – 6 – 1,003 1,009
Charge 274 580 – 3,697 4,551
Write-offs – (57) – (437) (494)
Recoveries – 20 – – 20
31 December 2008 274 549 – 4,263 5,086
Charge (reversal) 2,237 5,513 818 (2,137) 6,431
Write-offs – (342) – – (342)
31 December 2009 2,511 5,720 818 2,126 11,175
Charge (reversal) 1,495 (2,130) 1,941 2,281 3,587
Write-offs (1,768) (345) (777) – (2,890)
Recoveries – 64 – – 64
31 December 2010 2,238 3,309 1,982 4,407 11,936

Allowance for impairment of assets is deducted from the carrying amounts of the related assets. Provisions for claims, guarantees and commitments are recorded in liabilities.

18. Other Assets and Other Liabilities

Other assets comprise:

  2010   2009   2008
Insurance premiums receivable 21,413 20,619 20,497
Accounts receivable 17,093 4,026 7,243
Inventory 9,828 1,212 1,966
Reinsurance assets 7,307 4,920 21,493
Settlements on operations with securities 5,182 3,027 39
Receivables from money transfers 3,358 2,508 5,208
Derivative financial assets 2,933 1,129 255
Operating taxes receivables 1,793 1,296 1,363
Assets purchased for finance lease purposes 1,434 2,316 –
Receivable from documentary operations 1,338 4,338 –
Trading securities owned 1,218 2,268 92
Foreclosed assets 1,049 946 3,464
Prepayments for purchase of property and equipment 959 344 245
Receivables from sale of assets 797 1,420 2,317
Assets held-for-sale 314 – 4,469
Operating lease receivables 266 426 448
Receivables from factoring operations – – 4,539
Other 2,447 3,205 2,032
78,729 54,000 75,670
Less – Allowance for impairment of other assets (Note 17) (3,309) (5,720) (549)
Other assets 75,420 48,280 75,121

Foreclosed assets represent assets repossessed from the borrowers of the Bank. These assets are not used for their intended purposes and are being held for short-term purposes with intent of sale.

18. Other Assets and Other Liabilities (continued)

Other liabilities comprise:

  2010   2009   2008
Insurance contracts liabilities 32,695 30,304 44,340
Accruals for employee compensation 25,111 21,860 14,165
Debt securities issued 21,610 660 5
Derivative financial liabilities 17,525 7,460 1,323
Creditors 8,412 4,226 5,858
Pension benefit obligations 4,949 3,856 1,642
Other insurance liabilities 4,431 6,152 9,424
Accruals and deferred income 3,268 35 –
Accounts payable 2,617 6,269 12,803
Other taxes payable 2,418 2,862 4,783
Dividends payable 303 314 314
Amounts payable for share acquisitions 259 254 –
Amounts payable for purchase of intangible assets 9 78 5,959
Other 4,790 2,236 939
Other liabilities 128,397 86,566 101,555

The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are not indicative of the credit risk.

  2010   2009   2008
Notional amount   Fair values Notional amount   Fair value Notional amount   Fair value
Asset   Liability Asset   Liability Asset   Liability
Interest rate contracts
Forwards and Swaps – foreign 338,369 – 14,527 332,108 – 6,447 – – –
 
Foreign exchange contracts
Forwards and Swaps – domestic 66,058 777 597 24,410 – 288 2,501 – 252
Options – foreign 54,121 1,815 2,211 1,096 82 – – – –
 
Equity / Commodity contracts
Put options – foreign – – – – – – 700 177 –
Call options – foreign 3,014 341 – 8,429 1,047 – 1,667 78 –
 
Embedded derivatives from investment deposits – – 190 – – 725 – – 1,071
Total derivative assets / liabilities 461,562 2,933 17,525 366,043 1,129 7,460 4,868 255 1,323

19. Amounts Due to Credit Institutions

Amounts due to credit institutions comprise:

  2010   2009   2008
Borrowings from international credit institutions 1,003,926 913,579 1,108,014
Time deposits and inter-bank loans 130,284 12,761 91,389
Sub-total 1,134,210 926,340 1,199,403
Correspondent accounts 4,717 2,275 17,319
Amounts due to credit institutions 1,138,927 928,615 1,216,722

19. Amounts Due to Credit Institutions (continued)

During 2010 the Group received short-term funds from Georgian banks in different currencies. As of 31 December 2010 the Group had an equivalent of GEL 13,030 (2009: GEL 1,566, 2008: GEL 32,795) in foreign currencies received as deposits from Georgian banks. In 2010 the Group paid up to 4.0% interest on these deposits (2009: 0.2%, 2008: 4.85%).

Borrowings from international credit institutions, time deposits and inter-bank loans were comprised of:

As of 31 December 2010

 

Credit institution

  Grant
date 		  Contractual maturity   Currency   Interest
rate per annum 		  Facility amount in original currency   Outstanding
Balance as of
31 December 2010
in GEL (*)
BG Finance B.V. 8-Feb-07 8-Feb-12 USD 9.00% 200,000 270,880
International Financial Corporation 13-Jan-09 15-Jul-13 USD LIBOR +5.5% 50,000 89,015
European Bank for Reconstructions and Development 13-Jan-09 15-Jan-14 USD LIBOR +5.5% 50,000 88,258
National Bank of Georgia 30-Dec-10 6-Jan-11 GEL 7.5% 66,300 66,300
Merrill Lynch International ** 17-Aug-07 17-Aug-12 USD LIBOR+5.99% 35,000 62,476
Netherland Development Finance Company ** 18-Jul-08 15-Oct-18 USD LIBOR + 7.25% 30,000 52,916
Overseas Private Investment Corporation 23-Dec-08 19-Dec-18 USD 5.75% 29,000 45,209
Asian Development Bank 1-Dec-10 1-Jun-16 USD LIBOR+5.5% 50,000 43,566
European Bank for Reconstructions and Development** 13-Jan-09 15-Jan-19 USD LIBOR + 10% 23,956 43,402
International Financial Corporatation ** 13-Jan-09 15-Jan-19 USD LIBOR + 10% 23,956 43,396
International Financial Corporation ** 13-Jan-09 15-Jan-19 USD LIBOR +8% 26,044 42,796
European Bank for Reconstructions and Development ** 13-Jan-09 15-Jan-19 USD LIBOR +8% 26,044 42,708
European Bank for Reconstructions and Development 12-Nov-10 5-Dec-15 USD LIBOR+5.25% 20,000 35,272
European Fund for Southeast Europe 15-Dec-10 15-Jun-18 USD LIBOR+5.5% 30,000 35,016
Semper Augustos B.V. ** 31-Oct-07 25-Oct-17 USD 11.65% 15,000 27,134
European Fund for Southeast Europe 15-Dec-10 15-Jun-18 USD LIBOR+5.5% 20,000 24,529
Overseas Private Investment Corporation ** 23-Dec-08 19-Dec-18 USD 7.75% 10,000 17,477
Netherland Development Finance Company 22-Jan-07 15-Mar-14 USD LIBOR+3.3% 12,500 13,502
International Financial Corporation 21-Oct-10 15-Dec-14 USD LIBOR+4.0% 5,000 8,774
World Business Capital 17-Feb-06 1-Oct-16 USD LIBOR+2.75% 10,000 8,699
JSC Cartu Bank 23-Dec-10 6-Jan-11 GEL 7.5% 7,500 7,512
JSC HSBC Bank Georgia 15-Nov-10 15-Feb-11 USD 4.0% 4,000 7,112
OJSC Pasha Bank 8-Nov-10 8-Feb-11 EUR 5.0% 3,000 7,050
World Business Capital 29-May-07 25-Mar-17 USD LIBOR+2.75% 4,151 6,441
JSC International Bank of Azerbaijan - Georgia 31-Dec-10 3-Jan-11 GEL 7.5% 6,400 6,400
JSC BTA Bank 10-Nov-10 22-Feb-11 USD 4.0% 3,000 5,335
UAB Medicinos Bankas 12-Nov-10 11-Feb-11 USD 4.0% 3,000 5,335
Balances less than 5,000 KGEL various various various various various 27,700
Total 1,134,210

19. Amounts Due to Credit Institutions (continued)

As of 31 December 2009

 

Credit institution

  Grant
date 		  Contractual maturity   Currency   Interest
rate per annum 		  Facility amount in original currency   Outstanding
Balance as of
31 December 2009
in GEL (*)
BG Finance B.V. 8-Feb-07 8-Feb-12 USD 9.00% 200,000 303,164
International Financial Corporation 13-Jan-09 15-Jul-13 USD LIBOR +5.5% 50,000 85,979
European Bank for Reconstructions and Development 13-Jan-09 15-Jan-14 USD LIBOR +5.5% 50,000 85,920
Merrill Lynch International ** 17-Aug-07 17-Aug-12 USD LIBOR+5.99% 35,000 59,472
Netherland Development Finance Company ** 18-Jul-08 15-Oct-18 USD LIBOR + 7.25% 30,000 49,570
Overseas Private Investment Corporation 23-Dec-08 19-Dec-18 USD 5.75% 29,000 48,602
European Bank for Reconstructions and Development** 13-Jan-09 15-Jan-19 USD LIBOR + 10% 23,956 42,365
International Financial Corporatation ** 13-Jan-09 15-Jan-19 USD LIBOR + 10% 23,956 42,344
European Bank for Reconstructions and Development ** 13-Jan-09 15-Jan-19 USD LIBOR +8% 26,044 40,700
International Financial Corporation ** 13-Jan-09 15-Jan-19 USD LIBOR +8% 26,044 40,694
Semper Augustos B.V. ** 31-Oct-07 25-Oct-17 USD 11.65% 15,000 25,803
Netherland Development Finance Company 22-Jan-07 15-Mar-14 USD LIBOR+3.3% 12,500 17,029
Overseas Private Investment Corporation ** 23-Dec-08 19-Dec-18 USD 7.75% 10,000 16,844
Citibank International PLC 17-Aug-07 20-Feb-10 USD LIBOR+2.75% 8,333 14,157
Citibank International PLC 17-Aug-07 20-Aug-10 USD LIBOR+2.75% 8,333 14,000
World Business Capital 17-Feb-06 1-Oct-16 USD LIBOR+2.75% 10,000 9,705
World Business Capital 29-May-07 25-Mar-17 USD LIBOR+2.75% 4,151 6,998
Commerzbank AG 30-Dec-05 30-Dec-10 USD LIBOR+1.3% 3,837 6,172
Balances less than 5,000 KGEL various various various various various 16,822
Total 926,340
As of 31 December 2008

 

Credit institution

  Grant
date 		  Contractual maturity   Currency   Interest
rate per annum 		  Facility amount in original currency   Outstanding
Balance as of
31 December 2008
in GEL (*)
BG Finance B.V. 8-Feb-07 8-Feb-12 USD 9% 200,000 340,864
Rubrika Finance Company Netherlands B.V. 6-Jun-08 6-Jun-10 USD LIBOR+9% 140,000 230,740
Merrill Lynch International 21-Dec-07 21-Jan-09 USD LIBOR+7.65% 65,000 111,806
Citibank International PLC 17-Aug-07 17-Feb-09 USD LIBOR+2.2% 43,500 73,780
Merrill Lynch International ** 17-Aug-07 17-Aug-12 USD LIBOR+5.99% 35,000 59,488
National Bank of Georgia 30-Sep-08 30-Sep-09 GEL 13% 58,900 58,900
Netherland Development Finance Company ** 30-Jun-08 15-Oct-18 USD LIBOR+7.25% 30,000 50,351
Overseas Private Investment Corporation 19-Dec-08 19-Dec-18 USD 5.75% 29,000 47,605
Citibank International PLC 20-Aug-07 20-Aug-10 USD LIBOR+2.75 25,000 41,875
Semper Augustos B.V. ** 31-Oct-07 25-Oct-17 USD 11.65% 15,000 25,515
Netherland Development Finance Company 22-Jan-07 15-Mar-14 USD LIBOR+3.3% 12,500 20,387
Overseas Private Investment Corporation ** 19-Dec-08 19-Dec-18 USD 7.75% 10,000 16,379
JSC TBC Bank 31-Dec-08 5-Jan-09 EUR 5% 5,000 11,824
World Business Capital 17-Feb-06 1-Oct-16 USD LIBOR+2.75% 10,000 11,242
Hillside Apex Fund Ltd ** 14-Aug-06 14-Aug-16 USD LIBOR+6.20% 5,000 8,630
JSC TBC Bank 26-Dec-08 5-Jan-09 USD 4% 5,000 8,340
World Business Capital 29-Mar-07 25-Mar-17 USD LIBOR+2.75% 5,226 7,633
JSC HSBC Bank Georgia 29-Jul-08 29-Jan-09 USD 9% 4,000 6,926
Commerzbank AG 16-Dec-05 30-Dec-10 USD LIBOR+1.3% 5,000 5,408
JSC TBC Bank 29-Dec-08 6-Jan-09 GEL 4.5% 5,000 5,001
Balances less than GEL 5,000 various various various various various 56,709
Total 1,199,403

* - includes accrued interest

** - total subordinated loans comprised GEL 332,305 as at 31 December 2010 (2009: GEL 317,792, 2008: GEL 160,363)

Agreements for significant borrowings contain certain covenants requiring the Group for different limits for capital adequacy, liquidity, currency position, credit exposures, leverage and others. At 31 December 2010, 2009 and 2008, the Group complied with all the financial covenants of the loans received from credit institutions.

The borrowings received on 13 January 2009 from European Bank for Reconstructions and Development and International Financial Corporation, comprising USD 26,044 thousand each, had a convertibility feature valid for 5 years from the loan granting date (convertibility period). Number of estimated potential shares to be issued under these convertible facilities comprises 3,474,614 ordinary shares (Note 21) of the Bank.

20. Amounts Due to Customers

The amounts due to customers include the following:

  2010   2009   2008
Current accounts 864,327 559,987 612,502
Time deposits 1,140,371 712,483 580,622
Amounts due to customers 2,004,698 1,272,470 1,193,124
 
Held as security against letters of credit and guarantees (note 22) 20,336 56,758 70,441

At year-end, amounts due to customers of GEL 360,166 (18%) were due to the 10 largest customers (2009: GEL 217,264 (17%), 2008: GEL 323,662 (27%)).

Amounts due to customers include accounts with the following types of customers:

  2010   2009   2008
Individuals 894,312 637,789 495,747
Private enterprises 942,540 578,849 627,049
State and budget organizations 167,846 55,832 70,328
Amounts due to customers 2,004,698 1,272,470 1,193,124

The breakdown of customer accounts by industry sector is as follows:

  2010   2009   2008
Individuals 894,312 637,789 495,747
Trade and services 399,528 273,190 296,110
Energy 256,275 116,810 134,275
State and budget organizations 167,846 55,832 70,328
Mining and processing 113,283 27,638 16,364
Construction and development 93,827 79,082 40,146
Transport and communication 35,226 47,166 70,806
Agriculture 21,379 13,588 8,426
Other 23,022 21,375 60,922
Amounts due to customers 2,004,698 1,272,470 1,193,124

21. Equity

Share capital

As of 31 December 2010, authorized share capital comprised 43,308,125 common shares, of which 31,344,860 were issued and fully paid (2009: 43,308,125 common shares, of which 31,306,071 were issued and fully paid, 2008: 39,835,619 common shares, of which 31,253,283 were issued and fully paid). Each share has a nominal value of one (1) Georgian Lari. Shares issued and outstanding as of 31 December 2010 are described below:

  Number
of shares 		  Amount
of shares
Ordinary Ordinary
31 December 2007 27,154,918 27,155
Increase in share capital 4,089,000 4,089
Increase in share capital arising from share-based payments (Note 26) 9,365 9
31 December 2008 31,253,283 31,253
Increase in share capital arising from share-based payments (Note 26) 52,788 53
31 December 2009 31,306,071 31,306
Increase in share capital arising from share-based payments (Note 26) 38,789 39
31 December 2010 31,344,860 31,345

21. Equity (continued)

Share capital of the Group was paid by the shareholders in Georgian Lari and they are entitled to dividends in Georgian Lari. 2010 net income attributable to ordinary shareholders of the Bank comprise GEL 83,640 (2009: net loss of GEL 91,370, 2008: net income of GEL 3,897). At 31 December 2010 weighted average number of ordinary shares outstanding during the year was 30,037,041 (2009: 30,494,397, 2008: 30,160,451). At 31 December 2010 the diluted number of ordinary shares was 33,511,655 (2009: 30,494,397, 2008: 30,160,451). The basic and diluted earnings per share amounted to GEL 2.785 and GEL 2.739, respectively (2009: both basic and diluted loss per share amounted to GEL 2.996, 2008: both basic and diluted earnings per share amounted to GEL 0.129). The 3,474,614 potential shares underlying the convertible debt instruments held by the Group as at 31 December 2010 (Note 19) were treated as dilutive, because their conversion would decrease earnings per share from continuing operations, as prescribed in IAS 33 – “Earnings per share”. This conversion would also reduce the Group’s interest expenses on these debt instruments and increase 2010 profit attributable to ordinary shareholders of the Bank by GEL 8,143 to a total of GEL 91,783.

Treasury shares

Treasury shares of GEL 1,072 as of 31 December 2010 comprise the Bank’s shares owned by the Bank and its subsidiaries (2009: GEL 668, 2008: GEL 890). Purchases and sales of treasury shares were conducted by the Bank’s subsidiaries in the open market: JSC BG Capital, BG Trading LLC, Galt and Taggart Holdings Limited LLC, GC Holdings LLC and JSC Insurance Company Aldagi BCI.

Treasury shares amounting to GEL 438 as of 31 December 2010 (2009: GEL 1,009, 2008: GEL 1,128) are kept by the Bank’s custodian –Abacus Corporate Trustee Limited.

During the year ended 31 December 2010, 38,789 ordinary shares of GEL 39 par value and additional paid-in capital of GEL 523 have been vested as compensation to top management (2009: 52,788 ordinary shares of GEL 53 par value and additional paid-in capital of GEL 430, 2008: 9,365 ordinary shares of GEL 9 par value and additional paid-in capital of GEL 470).

Dividends

No dividends were declared nor paid during 2010, 2009 and 2008.

Nature and purpose of other reserves

Revaluation reserve for property and equipment and investment properties

The revaluation reserve for property and equipment and investment properties is used to record increases in the fair value of buildings and investment properties and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity.

Unrealised gains (losses) on investment securities available-for-sale

This reserve records fair value changes on investments available-for-sale.

Unrealised gains (losses) from dilution or sale / acquisition of shares in existing subsidiaries

This reserve records unrealised gains (losses) from dilution or sale / acquisition of shares in existing subsidiaries.

Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Movement of foreign currency translation reserve was as follows:

  Foreign currency translation reserve
31 December 2007 5,454
Currency translation loss recognised in other comprehensive loss (22,435)
31 December 2008 (16,981)
Currency translation loss recognised in other comprehensive loss (12,145)
31 December 2009 (29,126)
Currency translation gain recognised in other comprehensive income 5,116
31 December 2010 (24,010)

Movements in other reserves during 2010, 2009 and 2008 are presented in the statements of other comprehensive income.

22. Commitments and Contingencies

Legal

In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Group.

Financial commitments and contingencies

As of 31 December 2010, 2009 and 2008 the Group’s financial commitments and contingencies comprised the following:

  2010   2009   2008
Credit-related commitments
Undrawn loan facilities 138,057 76,999 90,023
Letters of credit 58,779 30,038 32,547
Guarantees issued 374,230 240,613 304,906
571,066 347,650 427,476
Operating lease commitments
Not later than 1 year 7,016 6,281 5,874
Later than 1 year but not later than 5 years 13,984 13,396 12,832
Later than 5 years 6,037 6,497 5,993
27,037 26,174 24,699
 
Capital expenditure commitments 39,523 9,309 19,851
 
Less – Provisions (Note 17) (4,407) (2,126) (4,263)
Less – Cash held as security against letters of credit and guarantees (Note 20) (20,336) (56,758) (70,441)
Financial commitments and contingencies, net 612,883 324,249 397,322

As of 31 December 2010 the capital expenditures represented the commitment for purchase of property and capital repairs of GEL 32,311 and software and other intangible assets of GEL 7,212. As of 31 December 2009 the capital expenditures represented the commitment for purchase of property and capital repairs of GEL 1,512 and software and other intangible assets of GEL 7,797. As of 31 December 2008 the capital expenditures represented the commitment for purchase of property GEL 2,132, equipment of GEL 4,721 and software and other intangible assets of GEL 12,998.

23. Net Fee and Commission Income

  2010   2009   2008
Settlements operations 50,511 33,907 33,659
Guarantees and letters of credit 12,362 10,764 8,625
Cash operations 8,061 6,145 6,947
Advisory 1,129 578 2,032
Currency conversion operations 677 1,024 1,766
Brokerage service fees 545 1,891 2,626
Other 980 10,290 7,848
Fee and commission income 74,265 64,599 63,503
 
Settlements operations (7,324) (4,299) (3,974)
Guarantees and letters of credit (1,164) (2,106) (2,038)
Cash operations (780) (1,619) (564)
Insurance brokerage service fees (646) (534) (5,965)
Currency conversion operations (14) (28) (430)
Other (917) (988) (563)
Fee and commission expense (10,845) (9,574) (13,534)
Net fee and commission income 63,420 55,025 49,969

24. Net Insurance Revenue

Net insurance premiums earned, net insurance claims incurred and respective net insurance revenue for the years ended 31 December 2010, 2009 and 2008 comprised:

  2010   2009   2008
Life insurance contracts premium written 2,562 2,865 3,456
General insurance contracts premium written 53,744 56,694 53,201
Total premiums written 56,306 59,559 56,657
 
Gross change in life provision 96 (377) 86
Gross change in general insurance contracts unearned premium provision (1,001) 1,690 (6,311)
Total gross premiums earned on insurance contracts 55,401 60,872 50,432
 
Reinsurers’ share of life insurance contracts premium written (1,321) (1,086) (981)
Reinsurers’ share of general insurance contracts premium written (11,038) (9,502) (15,271)
Reinsurers’ share of change in life provision (57) 254 (4)
Reinsurers’ share of change in general insurance contracts
unearned premium provision unearned premium provision 		1,576 (5,061) 1,735
Total reinsurers’ share of gross earned premiums
on insurance contracts 		(10,840) (15,395) (14,521)
     
Net insurance premiums earned 44,561 45,477 35,911
 
Life insurance claims paid (1,272) (830) (455)
General insurance claims paid (28,493) (43,137) (30,175)
Total insurance claims paid (29,765) (43,967) (30,630)
 
Reinsurers’ share of life insurance claims paid 988 523 351
Reinsurers’ share of general insurance claims paid 1,497 12,356 5,443
Gross change in total reserves for claims (1,486) 12,563 (6,053)
Reinsurers’ share of change in total reserves for claims 868 (11,577) 3,994
Net insurance claims incurred (27,898 ) (30,102) (26,895)
 
Net insurance revenue 16,663 15,375 9,016

25. Salaries and Other Employee Benefits, and General and Administrative Expenses

  2010   2009   2008
Salaries and bonuses (103,352) (96,745) (104,039)
Social security costs (1,199) (3,760) (4,728)
Salaries and other employee benefits (104,551) (100,505) (108,767)
 
Marketing and advertising (12,534) (9,847) (12,251)
Occupancy and rent (10,082) (10,431) (12,811)
Repairs and maintenance (6,205) (5,313) (5,441)
Legal and other professional services (6,149) (7,010) (6,391)
Communication (4,975) (5,482) (6,117)
Operating taxes (4,188) (4,960) (3,496)
Office supplies (3,786) (2,484) (2,813)
Security (3,055) (4,647) (4,951)
Travel expenses (1,975) (2,019) (2,948)
Corporate hospitality and entertainment (1,709) (1,307) (1,393)
Banking services (756) (623) (2,293)
Insurance (678) (399) (2,886)
Personnel training and recruitment (416) (177) (545)
Penalties (178) (510) (745)
Other (4,314) (2,130) (3,568)
General and administrative expenses (61,000) (57,339) (68,649)

25. Salaries and Other Employee Benefits, and General and Administrative Expenses (continued)

Salaries and bonuses include GEL 8,920, GEL 10,530 and GEL 7,820 of the Executives’ Equity Compensation Plan costs in 2010, 2009 and 2008, respectively, associated with the existing share-based compensation scheme approved in the Group (Notes 26 and 30).

26. Share-based Payments

Executives’ Equity Compensation Plan

Abacus Corporate Trustee Limited (the “Trustee”) acts as the trustee of the Bank’s Executives’ Equity Compensation Plan (“EECP”).

In May 2008 the Bank’s Supervisory Board resolved to recommend to the Trustee to award 172,000 Bank’s ordinary shares in the form of restricted GDRs to the Group’s 22 executives pursuant to the EECP in respect of the year ended 31 December 2007. The awards are subject to three year vesting, with a continuous employment being the only vesting condition. The Group considers 21 February 2008 as the grant date for 54,000 of the Bank of Georgia shares in the form of restricted GDRs and 6 May 2008 grant date for the remaining 118,000 of the Bank’s ordinary shares in the form of restricted GDRs. The Bank estimates that the fair value of the shares on 21 February 2008 was Georgian Lari 39.72 per share and on 6 May 2008 – Georgian Lari 33.68 per share.

In February 2009 the Bank’s Supervisory Board resolved to recommend to the Trustee to award 306,500 Bank’s ordinary shares in the form of restricted GDRs to the Group’s 17 executives pursuant to the EECP in respect of the year ended 31 December 2008. The awards are subject to three year vesting, with a continuous employment being the only vesting condition. The Group considers 12 February 2009 as the grant date. The Bank estimates that the fair value of the shares on 12 February 2009 was Georgian Lari 5.02 per share.

In February 2010 the Bank’s Supervisory Board resolved to recommend to the Trustee to award 432,495 Bank’s ordinary shares in the form of restricted GDRs to the Group’s 19 executives pursuant to the EECP in respect of the year ended 31 December 2009. The awards are subject to three year vesting, with a continuous employment being the only vesting condition. The Group considers 18 February 2010 as the grant date. The Bank estimates that the fair value of the shares on 18 February 2010 was Georgian Lari 17.29 per share.

Additionally, in March 2010 Deputies of the CEO of the Bank and in May 2010 CEO of the Bank signed a three-year guaranteed share-based compensation agreement with the Bank for the total of 915,000 GDRs. Total amount of GDRs guaranteed to each executive will be awarded in three equal instalments during the 3 consecutive years starting January 2011, of which each award will be subject to four-year vesting period. The Group considers 29 March 2010 as the grant date for the awards of the Deputies and 25 May 2010 as the grant date for the award of the CEO. The Bank estimates that the fair value of the shares on 29 March 2010 was Georgian Lari 18.48 per share and the fair value of shares on 25 May 2010 was Georgian Lari 18.16.

One-off Award

In August 2009 the Bank’s Supervisory Board resolved to buy through its brokerage subsidiary the Bank’s 420,000 ordinary shares in the form of restricted GDRs and award them to the Group’s 21 executives to reinforce long-term motivation of these executives. The awards are subject to three year cliff-vesting, with a continuous employment being the only vesting condition. The Group considers 10 August 2009 as the grant date. The Bank estimates that the fair value of the shares on 10 August 2009 was Georgian Lari 9.61 per share.

Top Grant, Special Grant and Annual Grants to top executives

In August 2007 the Bank’s Supervisory Board resolved to propose to the Trustee of the Bank’s EECP the award of shares of the Bank in the form of restricted GDRs to the top three executives of the Bank (top two from January 1, 2008 as one resigned before 31 December 2007). Each award will vest fully, or partially, or will not vest at all, at the third anniversary of the date of the grant, depending solely on clearly defined and measurable market-based condition. The awards of each executive comprise top grant and annual grant.

26. Share-based Payments (continued)

Top Grant, Special Grant and Annual Grants to top executives (continued)

Top grant is a one-time award and was given in 2007 only and its value is restricted by the 200% of the annual base salary of the respective executive in 2007. Annual grant is awarded every year during the three consecutive years’ period that such executive is employed by the Bank. In 2007 its value was restricted by 100% of the annual base salary of the respective executive during the vesting period. Based on the changes approved by the Bank’s Supervisory Board, the value of the annual grant in 2008 was restricted by the 200%.

The Bank estimated the annual expense of share-based compensation related to 2007 top and annual grants equal 300% of the annual base salary of each executive in 2007.

Based on the Bank’s share price performance calculated by an independent consultant the Bank estimated the annual expense of share-based compensation related to 2008 annual grant equals to nil.

In September 2009 the Bank’s Supervisory Board resolved to adopt changes to the original version of the annual grant approved in August 2007. Namely, the 2009 Annual Grant comprising 245,773 GDRs was granted to the two top executives of the Bank without market-based vesting conditions, with continuous employment being the only 3-year, cliff-vesting condition. The Group considers 11 September 2009 as the grant date. The Bank estimates that the fair value of the shares on 11 September 2009 was Georgian Lari 12.83 per share.

By the same resolution, in September 2009, the Bank’s Supervisory Board resolved to award a Special Grant to the same two executives comprising 68,139 GDRs. The award is subject to two year vesting, with a continuous employment being the only vesting condition. The Group considers 11 September 2009 as the grant date. The Bank estimates that the fair value of the shares on 11 September 2009 was Georgian Lari 12.83 per share.

Summary

Fair value of the shares granted at the measurement date is determined based on available market quotations.

The weighted average fair value of share-based awards at the grant date comprised Georgian Lari 17.96 per share in 2010 (2009: Georgian Lari 9.46, 2008: Georgian Lari 33.42).

The Group’s total share-based payment expenses for 2010 comprised GEL 8,920 (2009: 10,530, 2008: 7,820).

Below is the summary of the key share-based payments related data:

Ordinary shares   2010   2009   2008
Number of shares awarded 38,789 128,908 29,298
– Among them, to supervisory board members 38,789 55,158 16,010
Number of shares vested 38,789 52,788 9,365
Weighted average value at grant date, per share (GEL in full amount) 17.20 9.04 41.44
Value at grant date, total (GEL) 667 1,165 1,214
Expense recognized during the year (GEL) (667) (1,390) (1,017)
 
GDRs 2010 2009 2008
Number of GDRs awarded 1,341,918 1,130,412 258,139
– Among them, to top management* 461,922 463,912 198,139
Number of GDRs vested 610,000 153,000 282,606
Weighted average value at grant date, per share (GEL in full amount) 17.99 9.51 32.51
Value at grant date, total (GEL) 24,135 10,747 8,391
Expense recognized during the year (GEL) (8,253) (9,140) (6,803)

26. Share-based Payments (continued)

Summary (continued)

All instruments   2010   2009   2008
Total number of equity instruments awarded 1,380,707 1,259,320 287,437
– Among them, to top management* and supervisory board members 500,711 519,070 214,149
Total number of equity instruments vested 648,789 205,788 291,971
Weighted average value at grant date, per share (GEL in full amount) 17.96 9.46 33.42
Value at grant date, total (GEL) 24,802 11,912 9,605
Total expense recognized during the year (GEL) (notes 25 and 30) (8,920) (10,530) (7,820)

* The Chairman and the Chief Executive Officer

27. Risk Management

Introduction

Risk is inherent in the Group’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Group is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. It is also subject to operating risks.

The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank’s strategic planning process.

Risk management structure

The Supervisory Board is ultimately responsible for identifying and controlling risks.

Supervisory Board

The Supervisory Board is responsible for the overall risk management approach and for approving the risk strategies and principles.

Management Board

The Management Board has the responsibility to monitor the overall risk process within the Group.

Audit Committee

The Audit Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. It is responsible for the fundamental risk issues and manages and monitors relevant risk decisions. It is an independent body and is directly monitored by the Supervisory Board.

Bank Treasury

The Bank’s Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Bank.

Internal audit

Risk management processes throughout the Group are audited annually by the internal audit function that examines both the adequacy of the procedures and the Group’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee.

27. Risk Management (continued)

Introduction (continued)

Risk measurement and reporting systems

The Group’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Group also runs worse case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.

Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks types and activities.

Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is presented and explained to the Management Board, and the head of each business division. The report includes aggregate credit exposure, hold limit exceptions, liquidity ratios and risk profile changes. Senior management assesses the appropriateness of the allowance for credit losses on a quarterly basis. The Management Board receives a comprehensive risk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risks of the Group.

For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, relevant and up-to-date information.

A daily briefing is given to the Management Board and all other relevant employees of the Group on the utilisation of market limits, proprietary investments and liquidity, plus any other risk developments.

Risk mitigation

As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions. While these are intended for hedging, these do not qualify for hedge accounting.

The Group actively uses collateral to reduce its credit risks (see below for more detail).

Excessive risk concentration

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

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

Credit risk

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

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

27. Risk Management (continued)

Credit risk (continued)

Derivative financial instruments

Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the statement of the financial position

Credit-related commitments risks

The Group makes available to its customers guarantees which may require that the Group make payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Bank to similar risks to loans and these are mitigated by the same control processes and policies.

The table below shows the maximum exposure to credit risk for the components of the statement of financial position, including derivatives. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements.

  Notes   Gross maximum exposure

2010

  Gross maximum exposure

2009

  Gross maximum exposure

2008

Cash and cash equivalents (excluding cash on hand) 7 449,835 203,028 251,358
Amounts due from credit institutions 8 116,469 64,620 81,403
Loans to customers 9 2,351,697 1,661,331 2,039,022
Finance lease receivables 10 14,419 16,896 41,605
Investment securities:
– Available-for-sale 11 283,646 6,172 12,014
– Held-to-maturity 11 21 249,196 22,845
3,216,087 2,201,243 2,448,247
Financial commitments and contingencies 22 546,323 288,766 352,772
Total credit risk exposure 3,762,410 2,490,009 2,801,019

Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

For more detail on the maximum exposure to credit risk for each class of financial instrument, references shall be made to the specific notes. The effect of collateral and other risk mitigation techniques is shown below.

27. Risk Management (continued)

Credit risk (continued)

Credit quality per class of financial assets

The credit quality of financial assets is managed by the Group through internal credit ratings. The table below shows the credit quality by class of asset for loan-related lines in the statement of financial position, based on the Group’s credit rating system.

      Neither past due nor impaired        
Notes High grade

2010

  Standard

grade

2010

  Sub-standard

grade

2010

Past due or individually impaired

2010

Total

2010

Amounts due from credit institutions 8 115,622 847 – – 116,469
 
Loans to customers: 9
Corporate lending 924,320 254,675 42,449 203,106 1,424,550
Consumer lending 334,430 13,841 703 34,641 383,615
Residential mortgages 324,474 13,889 9,251 62,172 409,786
Micro loans 220,820 4,317 3,636 9,689 238,462
Gold – pawn loans 66,749 – – – 66,749
Other 2,168 696 7 1,200 4,071
1,872,961 287,418 56,046 310,808 2,527,233
 
Finance lease receivables 10 10,533 311 872 3,291 15,007
Investment securities:
Available-for-sale 11 285,628 – – – 285,628
Held-to-maturity 11 21 – – – 21
285,649 – – – 285,649
Total 2,284,765 288,576 56,918 314,099 2,944,358
      Neither past due nor impaired        
Notes High grade

2009

  Standard

grade

2009

  Sub-standard

grade

2009

Past due or individually impaired

2009

Total

2009

Amounts due from credit institutions 8 63,703 917 – – 64,620
 
Loans to customers: 9
Corporate lending 447,481 122,983 94,215 275,135 939,814
Residential mortgages 267,593 26,133 9,772 83,917 387,415
Consumer lending 227,765 26,748 1,915 76,109 332,537
Micro loans 76,003 9,506 6,884 7,588 99,981
Gold – pawn loans 62,829 – – – 62,829
Other – 3,221 352 1,668 5,241
1,081,671 188,591 113,138 444,417 1,827,817
 
Finance lease receivables 10 7,913 11,441 115 4,571 24,040
Investment securities:
Available-for-sale 11 6,172 – – 818 6,990
Held-to-maturity 11 249,196 – – – 249,196
255,368 – – 818 256,186
Total 1,408,655 200,949 113,253 449,806 2,172,663

27. Risk Management (continued)

Credit risk (continued)

Credit quality per class of financial assets (continued)

      Neither past due nor impaired        
Notes High grade

2008

  Standard

grade

2008

  Sub-standard

grade

2008

Past due or individually impaired

2008

Total

2008

Amounts due from credit institutions 8 81,403 – – – 81,403
 
Loans to customers: 9
Corporate lending 639,988 112,558 23,428 268,985 1,044,959
Residential mortgages 337,445 13,477 1,868 38,816 391,606
Consumer lending 381,299 42,126 11,576 61,196 496,197
Micro loans 129,666 4,894 5,182 11,571 151,313
Gold – pawn loans 46,374 – – – 46,374
Other 713 2,514 9,414 2,533 15,174
1,535,485 175,569 51,468 383,101 2,145,623
 
Finance lease receivables 10 12,201 2,232 204 29,131 43,768
Investment securities:
Available-for-sale 11 12,014 – – – 12,014
Held-to-maturity 11 22,845 – – – 22,845
34,859 – – – 34,859
Total 1,663,948 177,801 51,672 412,232 2,305,653

Past due loans to customers include those that are only past due by a few days. An analysis of past due loans, by age, is provided below. The majority of the past due loans are not considered to be impaired.

It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. Attributable risk ratings are assessed and updated regularly.

The credit risk assessment policy for non-past due and individually non-impaired financial assets has been determined by the Bank as follows:

A financial asset that has neither been in past due more than 30 days nor individually impaired is assessed as a financial asset with High Grade;

A financial asset that is neither past due nor impaired for reporting date, but historically used to be past due more than 30 is assessed as a financial asset with Standard Grade;

A financial asset that is neither past due nor impaired for reporting date, but historically used to be past due more than 60 days or borrower of this loan has at least an additional borrowing in past due more than 60 days as of reporting date is assessed as a financial asset with Sub-Standard Grade.

27. Risk Management (continued)

Credit risk (continued)

Aging analysis of past due but not impaired loans per class of financial assets

  Less than

30 days

2010

  31 to

60 days

2010

  61 to
90 days

2010

  More than

90 days

2010

  Total

2010

Loans to customers:
Corporate lending 2,925 – 2,115 5,290 10,330
Micro-loans 503 6 128 – 637
Consumer lending 12,538 11 3 93 12,645
Residential mortgages 6,967 1,387 275 1,956 10,585
Other – 143 84 – 227
 
Finance lease receivables 1,212 – – 2,079 3,291
 
Total 24,145 1,547 2,605 9,418 37,715
  Less than

30 days

2009

  31 to

60 days

2009

  61 to
90 days

2009

  More than

90 days

2009

  Total

2009

Loans to customers:
Corporate lending 12,057 1,124 2,841 28,509 44,531
Micro-loans 615 4 – 9 628
Consumer lending 14,259 58 – 4 14,321
Residential mortgages 3,502 57 – 16 3,575
Other
 
Finance lease receivables 1,461 9 – – 1,470
 
Total 31,894 1,252 2,841 28,538 64,525
  Less than

30 days

2008

  31 to

60 days

2008

  61 to
90 days

2008

  More than

90 days

2008

  Total

2008

Loans to customers:
Corporate lending 12,107 4,937 6,990 15,118 39,152
Micro-loans 2,751 270 67 196 3,284
Consumer lending 21,375 764 336 2,469 24,944
Residential mortgages 6,887 6 – 86 6,979
Other 256 712 2,160 3,128 6,256
 
Finance lease receivables – 46 – 24,380 24,426
 
Total 43,376 6,735 9,553 45,377 105,041

See Notes 9 and 10 for more detailed information with respect to the allowance for impairment of loans to customers and finance lease receivables, respectively.

The Group specifically monitors performance of the loans with overdue payments in arrears for more than 90 days. Gross carrying value (i.e. carrying value before deducting any allowance for impairment) of such loans comprised GEL 117,580, GEL 139,954 and GEL 61,474 as at 31 December 2010, 2009 and 2008 respectively.

27. Risk Management (continued)

Credit risk (continued)

Carrying amount per class of financial assets whose terms have been renegotiated

The table below shows the carrying amount for renegotiated financial assets, by class.

  2010   2009   2008
 
Loans to customers:
Commercial lending 263,163 473,845 384,404
Micro loans 4,664 7,540 5,952
Residential mortgages 4,386 38,137 6,193
Consumer lending 2,092 26,624 19,384
Other – 11 8,194
 
Financial lease receivables 1,882 2,349 3,173
     
Total 276,187 548,506 427,300

Impairment assessment

The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 150 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Group addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances.

Individually assessed allowances

The Group determines the allowances appropriate for each individually significant loan on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support and the realisable value of collateral, and the timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Collectively assessed allowances

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

The collective assessment takes into account the impairment that is likely to be present in the portfolio even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: historical losses on the portfolio, current economic conditions, the appropriate delay between the time a loss is likely to have been uncured and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Local management is responsible for deciding the length of this period which can extend for as long as one year, depending on a product. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy.

Financial guarantees and letters of credit are assessed and provision made in a similar manner as for loans.

27. Risk Management (continued)

Credit risk (continued)

The geographical concentration of the Group’s assets and liabilities is set out below:

  2010   2009   2008
Georgia   OECD   CIS and other foreign countries   Total Georgia   OECD   CIS and other foreign countries   Total Georgia   OECD   CIS and other foreign countries   Total
Assets:
Cash and cash equivalents 188,426 364,616 58,542 611,584 154,405 127,816 75,668 357,889 171,466 208,997 35,358 415,821
Amounts due from
credit institutionscredit institutions		 91,715 14,538 10,216 116,469 39,447 12,664 12,509 64,620 45,851 3,414 32,138 81,403
Loans to customers 2,135,962 8 215,727 2,351,697 1,520,174 – 141,157 1,661,331 2,008,652 – 30,370 2,039,022
Finance lease receivables 10,036 – 4,383 14,419 8,927 – 7,969 16,896 37,405 – 4,200 41,605
Investment securities:
– available-for-sale 281,134 – 4,494 285,628 – – 6,172 6,172 12,014 – – 12,014
– held-to-maturity 21 – – 21 249,196 – – 249,196 22,845 – – 22,845
All other assets 498,175 9,508 108,109 615,792 455,769 8,056 80,082 543,907 586,214 1,210 37,050 624,474
3,205,469 388,670 401,471 3,995,610 2,427,918 148,536 323,557 2,900,011 2,884,447 213,621 139,116 3,237,184
Liabilities:
Amounts due to customers 1,638,164 101,960 264,574 2,004,698 1,024,771 10,375 237,324 1,272,470 1,152,244 2,477 38,403 1,193,124
Amounts due to credit institutions 145,398 962,691 30,838 1,138,927 20,102 899,651 8,862 928,615 129,091 1,080,179 7,452 1,216,722
All other liabilities 157,404 4,232 6,320 167,956 85,588 9,618 18,721 113,927 118,978 7,216 4,018 130,212
1,940,966 1,068,883 301,732 3,311,581 1,130,461 919,644 264,907 2,315,012 1,400,313 1,089,872 49,873 2,540,058
Net balance sheet position 1,264,503 (680,213) 99,739 684,029 1,297,457 (771,108) 58,650 584,999 1,484,134 (876,251) 89,243 697,126

Liquidity risk and funding management

Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a regular basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.

The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the Group maintains a cash deposit (obligatory reserve) with the NBG, the amount of which depends on the level of customer funds attracted.

The liquidity position is assessed and managed by the Bank primarily on a stand-alone basis, based on certain liquidity ratios established by the NBG. As at 31 December, these ratios were as follows:

  2010, %   2009, %   2008, %
Average liquidity ratio for the year 35.6% 36.5% 31.4%
Maximum Liquidity ratio 44.5% 45.7% 48.6%
Minimum Liquidity ratio 29.1% 21.9% 20.8%

Average liquidity ratio is calculated on stand-alone bases for JSC Bank of Georgia as annual average (arithmetic mean) of daily liquidity ratios computed as ratio of liquid assets to liabilities determined by National Bank of Georgia as follows:

Liquid assets – comprise cash, cash equivalents and other assets that have character to be immediately converted into cash. Those assets include investment securities issued by Georgian Government plus Certificates of Deposit issued by NBG and not including amounts due from credit institutions, other than inter-bank deposits, and/or debt securities of Governments and Central Banks of non-OECD countries, amounts in nostro accounts which are under lien, impaired inter-bank deposits, amounts on obligatory reserve with NBG that are pledged due to borrowings from NBG.

27. Risk Management (continued)

Liquidity risk and funding management (continued)

Liabilities – comprise sum of total liabilities and off-balance sheet commitments not including subordinated loans, those commitments that are to be exercised or settled later than six month from reporting date, financial guarantees and letters of credit fully collateralized by cash covers in the bank, commitments due to dealing operations with foreign currencies. Maximum and minimum rates of liquidity ratio are taken from historical data of appropriate reporting years.

The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2010 based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history.

Financial liabilities

As at 31 December 2010

 

Less than 3
months

  3 to 12

months

  1 to 5

years

  Over

5 years

  Total
Amounts due to customers 1,394,442 505,079 153,963 8,859 2,062,343
Amounts due to credit institutions 151,404 145,753 780,504 530,547 1,608,208
Debt securities issued and other liabilities 8,049 56,838 15,649 4,949 85,485
Total undiscounted financial liabilities 1,553,895 707,670 950,116 544,355 3,756,036
Financial liabilities

As at 31 December 2009

 

Less than 3
months

  3 to 12

months

  1 to 5

years

  Over

5 years

  Total
Amounts due to customers 899,697 332,714 83,097 7,624 1,323,132
Amounts due to credit institutions 76,468 86,724 726,243 511,713 1,401,148
Debt securities issued and other liabilities 18,079 23,581 7,468 3,856 52,984
Total undiscounted financial liabilities 994,244 443,019 816,808 523,193 2,777,264
Financial liabilities

As at 31 December 2008

 

Less than 3
months

  3 to 12

months

  1 to 5

years

  Over

5 years

  Total
Amounts due to customers 869,050 266,412 74,947 4,712 1,215,121
Amounts due to credit institutions 291,471 131,625 922,928 259,148 1,605,172
Debt securities issued and other liabilities 1,373 90 5 – 1,468
Total undiscounted financial liabilities 1,161,894 398,127 997,880 263,860 2,821,761

The table below shows the contractual expiry by maturity of the Group’s financial commitments and contingencies.

 

Less than 3
months

  3 to 12

months

  1 to
5 years 		  Over

5 years

  Total
2010 245,684 290,662 76,464 24,816 637,626
2009 98,735 108,050 149,063 27,285 383,133
2008 187,311 94,245 166,843 23,627 472,026

The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.

The maturity analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.

Included in due to customers are term deposits of individuals. In accordance with the Georgian legislation, the Bank Group is obliged to repay such deposits upon demand of a depositor. Refer to Note 20.

27. Risk Management (continued)

Market risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchanges, and equity prices. The Group classifies exposures to market risk into either trading or non-trading portfolios. Trading and non-trading positions are managed and monitored using other sensitivity analysis. Except for the concentrations within foreign currency, the Group has no significant concentration of market risk.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Group’s income statement.

The sensitivity of the income statement is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate non-trading financial assets and financial liabilities held at 31 December 2010. The sensitivity of equity is calculated by revaluing fixed rate available-for-sale financial assets at 31 December 2010 for the effects of the assumed changes in interest rates based on the assumption that there are parallel shifts in the yield curve. During 2010, 2009 and 2008 sensitivity analysis did not reveal significant potential effect on the Group Equity.

Currency   Increase in basis points

2010

  Sensitivity of net
interest income

2010

  Sensitivity of other comprehensive income

2010

EUR 0.01% 1 –
USD 0.00% 46 –
UAH 0.75% – 34
 
Currency Decrease in basis points

2010

Sensitivity of net interest income

2010

Sensitivity of other comprehensive income

2010

EUR -0.01% (1) –
USD -0.00% (46) –
UAH -0.75% – (34)
 
Currency Increase in basis points

2009

Sensitivity of net
interest income

2009

Sensitivity of other comprehensive income

2009

EUR 0.10% 2 –
USD 0.10% 186 –
UAH 0.75% – 52
 
Currency Decrease in basis points

2009

Sensitivity of net interest income

2009

Sensitivity of other comprehensive income

2009

EUR -0.10% (2) –
USD -0.10% (186) –
UAH -0.75% – (52)
 
Currency Increase in basis points

2008

Sensitivity of net
interest income

2008

Sensitivity of other comprehensive income

2008

UAH 0.75% – 72
EUR 1.50% 79 –
USD 0.55% 3,434 –
 
Currency Decrease in basis points

2008

Sensitivity of net interest income

2008

Sensitivity of other comprehensive income

2008

UAH -1.25% – (121)
EUR -1.50% (79) –
USD -0.55% (3,434) –

27. Risk Management (continued)

Market risk (continued)

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Management Board has set limits on positions by currency based on the NBG regulations. Positions are monitored on a daily basis.

The tables below indicate the currencies to which the Group had significant exposure at 31 December 2010 on its trading and non-trading monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the Georgian Lari, with all other variables held constant on the income statement (due to the fair value of currency sensitive non-trading monetary assets and liabilities). A negative amount in the table reflects a potential net reduction in income statement or equity, while a positive amount reflects a net potential increase. During 2010, 2009 and 2008 sensitivity analysis did not reveal significant potential effect on Group Equity.

Currency   Change in currency rate in %

2010

  Effect on profit before tax

2010

  Effect on other comprehensive income

2010

  Change in currency rate in %

2009

  Effect on profit before tax

2009

  Effect on other comprehensive income

2009

  Change in currency rate in %

2008

  Effect on profit before tax

2008

  Effect on other comprehensive income

2008

 
EUR 0.8% 234 – 12.7% (3,792) – 14.9% (832) –
GBP 0.8% 1 – 16.1% 63 – 24.9% 17 –
RUR 0.7% 3 – 0.3% (1) – 0.3% (6) –
UAH 0.3% – 91 0.3% – 228 2.8% 8 –
USD 0.3% 323 – 1.3% (669) – 9.2% (1,216) –

Prepayment risk

Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier or later than expected, such as fixed rate mortgages when interest rates fall.

The Group uses regression models to project the impact of varying levels of prepayment on its net interest income. The model makes a distinction between the different reasons for repayment (e.g. relocation, refinancing and renegotiation) and takes into account the effect of any prepayment penalties. The model is back tested against actual outcomes.

The effect on profit for one year and on equity is as follows:

  Effect on net

interest income

 

Effect on other
comprehensive income,
2010

2010 (67,605) –
2009 (14,557) –
2008 (34,546) –

Operational risk

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

27. Risk Management (continued)

Operating environment

As an emerging market, Georgia does not possess a well-developed business and regulatory infrastructure that would generally exist in a more mature market economy. Operations in Georgia may involve risks that are not typically associated with those in developed markets (including the risk that the Georgian Lari is not freely convertible outside of the country and undeveloped debt and equity markets). However over the last few years the Georgian government has made a number of developments that positively affect the overall investment climate of the country, specifically implementing the reforms necessary to create banking, judicial, taxation and regulatory systems. This includes the adoption of a new body of legislation (including new Tax Code and procedural laws). In management’s view, these steps contribute to mitigate the risks of doing business in Georgia.

The existing tendency aimed at the overall improvement of the business environment is expected to persist. The future stability of the Georgian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Government. However, the Georgian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world.

28. Fair Values of Financial Instruments

Financial instruments recorded at fair value

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

  • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
  • Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
  • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:

  Level 1   Level 2   Level 3   Total

2010

Financial assets
Investment securities – available-for-sale 4,958 284,573 5,409 294,940
Other assets – derivative financial assets 2,250 683 – 2,933
Other assets – trading securities owned 1,218 – – 1,218
8,426 285,256 5,409 299,091
Financial liabilities
Other liabilities – derivative financial liabilities 2,211 15,314 – 17,525
16,927 598 – 17,525
 
Level 1 Level 2 Level 3 Total

2009

Financial assets
Investment securities – available-for-sale 4,320 11,005 4,265 19,590
Other assets – derivative financial assets 1,129 – – 1,129
Other assets – trading securities owned 2,268 – – 2,268
7,717 11,005 4,265 22,987
Financial liabilities
Other liabilities – derivative financial liabilities 288 7,172 – 7,460
288 7,172 – 7,460

28. Fair Values of Financial Instruments (continued)

Financial instruments recorded at fair value (continued)

  Level 1   Level 2   Level 3   Total

2008

Financial assets
Investment securities – available-for-sale 17,644 16,093 – 33,737
Other assets – derivative financial assets 255 – – 255
Other assets – trading securities owned 92 – – 92
17,991 16,093 – 34,084
Financial liabilities
Other liabilities – derivative financial liabilities 1,323 – – 1,323
1,323 – – 1,323

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

Derivatives

Derivatives valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves.

Trading securities and investment securities available-for-sale

Trading securities and investment securities available-for-sale valued using a valuation technique or pricing models primarily consist of unquoted equity and debt securities. These securities are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates.

Movements in level 3 financial instruments measured at fair value

The following tables show a reconciliation of the opening and closing amounts of Level 3 financial assets and liabilities which are recorded at fair value:

  At 1 January 2010   Purchase of AFS securities   At 31 December 2010
Financial assets
Investment securities – available-for-sale 4,265 1,144 5,409
Total level 3 financial assets 4,265 1,144 5,409
Total net level 3 financial assets / (liabilities) 4,265 1,144 5,409
 
At 1 January 2009 Transfer from other assets At 31 December 2009
Financial assets
Investment securities – available-for-sale – 4,265 4,265
Total level 3 financial assets – 4,265 4,265
 
Total net level 3 financial assets / (liabilities) – 4,265 4,265

28. Fair Values of Financial Instruments (continued)

Financial instruments recorded at fair value (continued)

No financial instruments were transferred during 2010 from level 1 and level 2 to level 3 of the fair value hierarchy. Gains or losses on level 3 financial instruments during 2010 comprised nil.

No financial instruments were transferred during 2010 between level 1 and level 2 of the fair value hierarchy.

Impact on fair value of level 3 financial instruments measured at fair value of changes to key assumptions

The following table shows the impact on the fair value of level 3 instruments of using reasonably possible alternative assumptions:

  Carrying
amount 		  Effect of reasonably possible alternative assumptions   Carrying
amount 		  Effect of reasonably possible alternative assumptions
31 December 2010 31 December 2009
Financial assets
Investment securities – available-for-sale 5,409 +/- 814 4,265 +/- 642

In order to determine reasonably possible alternative assumptions the Group adjusted key unobservable model inputs as follows:

For equities, the Group adjusted the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiple by increasing and decreasing the assumed multiple ratio by 10%, which is considered by the Group to be within a range of reasonably possible alternatives based on the EBITDA multiples used across peers within the same geographic area of the same industry.

Fair value of financial assets and liabilities not carried at fair value

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

  Carrying

value 2010

  Fair value

2010

  Unrecognised

loss 2010

  Carrying

value 2009

  Fair value

2009

  Unrecognised

loss 2009

  Carrying

value 2008

  Fair value

2008

  Unrecognised

loss 2008

Financial assets
Cash and cash equivalents 611,584 611,584 – 357,889 357,889 – 415,821 415,821 –
Amounts due from credit institutions 116,469 116,469 – 64,620 64,620 – 81,403 81,403 –
Loans to customers 2,351,697 2,319,388 (32,309) 1,661,331 1,621,779 (39,552) 2,039,022 1,991,449 (47,573)
Finance lease receivables 14,419 14,419 – 16,896 16,896 – 41,605 41,605 –
Investment securities:
– held-to-maturity 21 21 – 249,196 249,196 – 22,845 22,845 –
 
Financial liabilities
Amounts due to customers 2,004,698 2,019,793 (15,095) 1,272,470 1,271,298 1,172 1,193,124 1,201,746 (8,622)
Amounts due to credit institutions 1,138,927 1,138,927 – 928,615 928,615 – 1,216,722 1,216,722 –
Total unrecognised change in unrealised fair value (47,404) (38,380) (56,195)

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

Assets for which fair value approximates carrying value

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

28. Fair Values of Financial Instruments (continued)

Fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity.

29. Maturity Analysis of Financial Assets and Liabilities

The table below shows an analysis of financial assets and liabilities according to when they are expected to be recovered or settled. See Note 27 “Risk management” for the Group’s contractual undiscounted repayment obligations.

  2010   2009   2008
Within one year   More than one year   Total Within one year   More than one year   Total Within one year   More than one year   Total
Financial assets
Cash and cash equivalents 611,584 – 611,584 357,889 – 357,889 415,821 – 415,821
Amounts due from credit institutions 107,707 8,762 116,469 60,121 4,499 64,620 68,975 12,428 81,403
Loans to customers 1,191,914 1,159,783 2,351,697 655,906 1,005,425 1,661,331 897,167 1,141,855 2,039,022
Finance lease receivables 8,828 5,591 14,419 12,466 4,430 16,896 33,375 8,230 41,605
Investment securities:
– available–for–sale 242,535 52,405 294,940 19,590 – 19,590 33,737 – 33,737
– held–to–maturity 21 – 21 249,196 – 249,196 22,845 – 22,845
Total 2,162,589 1,226,541 3,389,130 1,355,168 1,014,354 2,369,522 1,471,920 1,162,513 2,634,433
 
Financial liabilities
Amounts due to customers 1,859,761 144,937 2,004,698 1,197,697 74,773 1,272,470 1,124,598 68,526 1,193,124
Amounts due to credit institutions 193,386 945,541 1,138,927 37,866 890,749 928,615 402,094 814,628 1,216,722
Total 2,053,147 1,090,478 3,143,625 1,235,563 965,522 2,201,085 1,526,692 883,154 2,409,846
Net 109,442 136,063 245,505 119,605 48,832 168,437 (54,772) 279,359 224,587

The Group’s capability to discharge its liabilities relies on its ability to realize an equivalent amount of assets within the same period of time. In the Georgian marketplace, many short-term credits are granted with the expectation of renewing the loans at maturity. As such, the ultimate maturity of assets may be different from the analysis presented above. In addition, the undiscounted financial liability analysis gap does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than one month in the tables above.

The Group’s principal sources of liquidity are as follows:

  • deposits;
  • borrowings from international credit institutions;
  • inter-bank deposit agreement;
  • debt issues;
  • proceeds from sale of securities;
  • principal repayments on loans;
  • interest income; and
  • fees and commissions income.

29. Maturity Analysis of Financial Assets and Liabilities (continued)

As of 31 December 2010 deposits amounted to GEL 2,004,698 (2009: GEL 1,272,470, 2008: GEL 1,193,124) and represented 61% (2009: 55%, 2008: 47%) of Group’s total liabilities. These funds continue to provide a majority of the Group’s funding and represent a diversified and stable source of funds. As of 31 December 2010 amounts owed to credit institutions amounted to GEL 1,138,927 (2009: GEL 928,615, 2008: GEL 1,216,722) and represented 34% (2009: 40%, 2008: 48%) of total liabilities.

In management’s opinion, liquidity is sufficient to meet the Group’s present requirements.

30. Related Party Disclosures

In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

The volumes of related party transactions, outstanding balances at the year end, and related expenses and income for the year are as follows:

  2010   2009   2008
Parent   Asso-ciates   Key management personnel Parent   Asso-ciates   Key management personnel Parent   Asso-ciates   Key management personnel
Loans outstanding at 1 January, gross – 9,255 5,791 265 21,644 5,572 – 13,598 520
Loans issued during the year – 624 7,125 – 7,736 5,616 1,339 12,085 8,229
Loan repayments during the year – (707) (6,877) (265) (10,322) (8,633) (1,074) (9,709) (3,375)
Other movements – (6,981) (1,281) – (9,803) 3,236 – 5,670 198
Loans outstanding at 31 December, gross – 2,191 4,758 – 9,255 5,791 265 21,644 5,572
Less: allowance for impairment at 31 December – (1,564) (119) – (870) (212) – (3,181) (1,064)
Loans outstanding at 31 December, net – 627 4,639 – 8,385 5,579 265 18,463 4,508
 
Interest income on loans – 344 611 – 1,250 799 – 2,125 468
Loan impairment charge – 661 65 – 594 (92) – 3,099 120
 
Deposits at 1 January 12,098 506 6,919 12,733 177 18,324 12,733 4,485 626
Deposits received during the year 41,646 16,185 36,658 – 27,989 42,908 – 79,356 53,081
Deposits repaid during the year (16,851) (16,127) (33,522) (635) (27,792) (54,647) – (83,638) (35,450)
Other movements (483) 162 (1,056) – 132 334 – (26) 67
Deposits at 31 December 36,410 726 8,999 12,098 506 6,919 12,733 177 18,324
 
Interest expense on deposits 1,681 68 471 – 5 425 – 2 14
Other income 1,671 – 69 437 – 35 767 _ 32

30. Related Party Disclosures (continued)

Compensation of key management personnel was comprised of the following:

  2010   2009   2008
Salaries and other benefits 20,530 17,833 9,975
– Among them, termination benefits 426 759 10
Share-based payments compensation (notes 25, 26) 8,920 10,530 7,820
– Among them, termination benefits 1,183 2,178 –
Social security costs 441 256 94
Recruitment costs – – 28
Total key management compensation 29,891 28,619 17,917

The number of key management personnel at 31 December 2010 was 163 (2009: 151, 2008: 105).

31. Capital Adequacy

The Group maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the ratios established by the NBG in supervising the Bank and the ratios established by the Basel Capital Accord 1988.

During 2009, the Bank and the Group had complied in full with all its externally imposed capital requirements.

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

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

NBG capital adequacy ratio

The NBG requires banks to maintain a minimum capital adequacy ratio of 12% of risk-weighted assets, computed based on the bank’s stand-alone special purpose financial statements prepared in accordance with NBG regulations and pronouncements. As of 31 December 2010, 2009 and 2008, the Bank’s capital adequacy ratio on this basis was as follows:

  2010   2009   2008
Core capital 494,128 535,427 573,146
Supplementary capital 423,389 269,729 162,902
Less: Deductions from capital (367,418) (347,853) (269,427)
Total regulatory capital 550,099 457,303 466,621
 
Risk-weighted assets 3,800,624 2,717,084 3,458,133
 
Total capital adequacy ratio 14.5% 16.8% 13.5%

Regulatory capital consists of Core capital, which comprises share, additional paid-up capital, retained earnings including current year profit, foreign currency translation and non-controlling interests less accrued dividends, net long positions in own shares and goodwill. Certain adjustments are made to IFRS-based results and reserves, as prescribed by the NBG. The other component of regulatory capital is Supplementary capital, which includes subordinated long-term debt, preference shares and revaluation reserves.

31. Capital Adequacy (continued)

Capital adequacy ratio under Basel Capital Accord 1988

The Bank’s capital adequacy ratio based on consolidated statement of financial position and computed in accordance with the Basel Capital Accord 1988, with subsequent amendments including the amendment to incorporate market risks, as of 31 December 2010, 2009 and 2008, follows:

  2010   2009   2008
Tier 1 capital 637,971 548,710 637,753
Tier 2 capital 404,788 369,480 273,311
Less: Deductions from capital (70,722) (67,454) (134,238)
Total regulatory capital 972,037 850,736 776,826
 
Risk-weighted assets 3,653,247 2,454,763 2,950,653
 
Total capital ratio 26.6% 34.7% 26.3%
Tier 1 capital ratio 17.5% 22.4% 21.6%
Minimum capital adequacy ratio 8% 8% 8%

32. Event after the Reporting Period

On 18 February 2011 the Group disposed 80% equity interest in JSC BG Bank for a total consideration of USD 9.6 million. Net realized loss on disposal of this foreign subsidiary comprised GEL 5,446.

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