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Abu Dhabi Comm Bnk (IRSH)

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Monday 27 January, 2020

Abu Dhabi Comm Bnk

Annual Financial Report

RNS Number : 9782A
Abu Dhabi Commercial Bank PJSC
27 January 2020
 

 

               

 

 

 

Abu Dhabi Commercial Bank PJSC 

 

 

Consolidated financial statements for the year ended December 31, 2019 

 

 

       Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/9782A_1-2020-1-27.pdf

 

 

 

 

Table of contents

Independent Auditor's Report........................................................................................................................................................................................................................................................................ 4

Consolidated statement of financial position.................................................................................................................................................................................................................................. 11

Consolidated income statement.................................................................................................................................................................................................................................................................. 12

Consolidated statement of comprehensive income................................................................................................................................................................................................................... 13

Consolidated statement of changes in equity................................................................................................................................................................................................................................. 14

Consolidated statement of cash flows.................................................................................................................................................................................................................................................... 15

Notes to the consolidated financial statements

1.     General information................................................................................................................................................................................................................................................................................... 16

2.     Application of new and revised International Financial Reporting Standards (IFRSs)............................................................................................................... 16

3.     Summary of significant accounting policies.......................................................................................................................................................................................................................... 18

3.1.. Basis of preparation............................................................................................................................................................................................................................................................................ 18

3.2.. Measurement............................................................................................................................................................................................................................................................................................ 18

3.3.. Functional and presentation currency.............................................................................................................................................................................................................................. 18

3.4.. Use of estimates and judgements.......................................................................................................................................................................................................................................... 18

3.5.. Basis of consolidation......................................................................................................................................................................................................................................................................... 19

3.6.. Business combination under common control........................................................................................................................................................................................................... 22

3.7.. Change in accounting policy........................................................................................................................................................................................................................................................ 23

3.8.. Financial instruments........................................................................................................................................................................................................................................................................ 26

3.9.. Foreign currencies................................................................................................................................................................................................................................................................................ 33

3.10.Offsetting..................................................................................................................................................................................................................................................................................................... 34

3.11.................................................................................................................................................................................................................................................. Sale and repurchase agreements....................... 34

3.12................................................................................................................................................................................................................................................. Securities borrowing and lending....................... 34

3.13.................................................................................................................................................................................................................................................................. Cash and cash equivalents....................... 35

3.14........................................................................................................................................................................................................................................................... Amortised cost measurement....................... 35

3.15........................................................................................................................................................................................................................................................................ Fair value measurement....................... 35

3.16.......................................................................................................................................................................................................................................................................................................... Derivatives....................... 36

3.17......................................................................................................................................................................................................................................................................................... Hedge accounting....................... 36

3.18................................................................................................................................................................................................................. Treasury shares and contracts on own shares....................... 38

3.19................................................................................................................................................................................................................................................................................. Financial guarantees....................... 38

3.20....................................................................................................................................................................................................................................................................................................... Acceptances....................... 38

3.21............................................................................................................................................................................................................................................................................. Collateral repossessed....................... 39

3.22............................................................................................................................................................................................................................................................................. Investment properties....................... 39

3.23...................................................................................................................................................................................................................................................................... Property and equipment....................... 39

3.24........................................................................................................................................................................................................................................................................ Capital work in progress....................... 40

3.25........................................................................................................................................................................................................................................................................................... Intangible assets....................... 40

3.26.............................................................................................................................................................................................................................................................................................. Borrowing costs....................... 40

3.27............................................................................................................................................................................................................................................. Impairment of non-financial assets....................... 40

3.28....................................................................................................................................................................................................................................................................................... Employee benefits....................... 41

3.29........................................................................................................................................................................................................................................... Provisions and contingent liabilities....................... 42

3.30...................................................................................................................................................................................................................................................................................... Segment reporting....................... 43

3.31................................................................................................................................................................................................................................................................................................................ Taxation....................... 43

3.32............................................................................................................................................................................................................................................... Revenue and expense recognition....................... 43

3.33........................................................................................................................................................................................................................................................................................... Islamic financing....................... 44

4.     Critical accounting judgements and key sources of estimation uncertainty.......................................................................................................................................... 46

5.     Cash and balances with central banks, net.......................................................................................................................................................................................................................... 50

6.     Deposits and balances due from banks, net........................................................................................................................................................................................................................ 50

7.     Reverse-repo placements...................................................................................................................................................................................................................................................................... 51

8.     Derivative financial instruments.................................................................................................................................................................................................................................................... 51

9.     Investment securities................................................................................................................................................................................................................................................................................ 54

10.  Loans and advances to customers, net..................................................................................................................................................................................................................................... 56

11.  Investment in associates........................................................................................................................................................................................................................................................................ 56

12.  Investment properties............................................................................................................................................................................................................................................................................. 57

13.  Other assets, net............................................................................................................................................................................................................................................................................................ 58

14.  Property and equipment, net........................................................................................................................................................................................................................................................... 59

15.  Intangible assets, net................................................................................................................................................................................................................................................................................ 60

16.  Due to banks..................................................................................................................................................................................................................................................................................................... 62

17.  Deposits from customers....................................................................................................................................................................................................................................................................... 62

18.  Euro commercial paper........................................................................................................................................................................................................................................................................... 63

19.  Borrowings.......................................................................................................................................................................................................................................................................................................... 64

20.  Other liabilities................................................................................................................................................................................................................................................................................................ 67

21.  Share capital...................................................................................................................................................................................................................................................................................................... 69

22.  Other reserves................................................................................................................................................................................................................................................................................................. 70

 

23.  Islamic financing............................................................................................................................................................................................................................................................................................ 72

24.  Employees' incentive plan shares, net...................................................................................................................................................................................................................................... 73

25.  Capital notes...................................................................................................................................................................................................................................................................................................... 73

26.  Interest income............................................................................................................................................................................................................................................................................................... 74

27.  Interest expense............................................................................................................................................................................................................................................................................................ 74

28.  Net fees and commission income................................................................................................................................................................................................................................................... 74

29.  Net trading income...................................................................................................................................................................................................................................................................................... 75

30.  Other operating income.......................................................................................................................................................................................................................................................................... 75

31.  Operating expenses.................................................................................................................................................................................................................................................................................... 75

32.  Impairment allowances........................................................................................................................................................................................................................................................................... 75

33.  Earnings per share...................................................................................................................................................................................................................................................................................... 76

34.  Discontinued operations........................................................................................................................................................................................................................................................................ 76

35.  Cash and cash equivalents................................................................................................................................................................................................................................................................... 77

36.  Related party transactions................................................................................................................................................................................................................................................................... 77

37.  Commitments and contingent liabilities.................................................................................................................................................................................................................................. 80

38.  Operating segments................................................................................................................................................................................................................................................................................... 80

39.  Financial instruments............................................................................................................................................................................................................................................................................... 83

40.  Fair value hierarchy................................................................................................................................................................................................................................................................................... 85

41.  Risk Management......................................................................................................................................................................................................................................................................................... 87

42.  Credit Risk Management........................................................................................................................................................................................................................................................................ 88

42.1   Maximum exposure to credit risk...................................................................................................................................................................................................................................... 95

42.2   Gross exposure.................................................................................................................................................................................................................................................................................... 95

42.3   Expected credit losses.................................................................................................................................................................................................................................................................. 99

42.4   Concentration of credit risk................................................................................................................................................................................................................................................. 103

42.5   Credit risk measurement and mitigation policies............................................................................................................................................................................................ 105

43.  Interest rate risk framework, measurement and monitoring.......................................................................................................................................................................... 107

44.  Liquidity risk framework, measurement and monitoring................................................................................................................................................................................... 110

45.  Market risk framework, measurement and management.................................................................................................................................................................................. 116

46.  Operational risk management....................................................................................................................................................................................................................................................... 119

47.  Trust activities.............................................................................................................................................................................................................................................................................................. 121

48.  Subsidiaries.................................................................................................................................................................................................................................................................................................... 121

49.  Capital adequacy ratio and capital management........................................................................................................................................................................................................ 122

50.  Social contributions................................................................................................................................................................................................................................................................................. 127

51.  Legal proceedings..................................................................................................................................................................................................................................................................................... 127

52.  Business combinations......................................................................................................................................................................................................................................................................... 127

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

 

To the Shareholders

Abu Dhabi Commercial Bank PJSC

 

 

Report on the audit of the consolidated financial statements

 

Opinion

 

We have audited the consolidated financial statements of Abu Dhabi Commercial Bank PJSC, Abu Dhabi (the "Bank") which comprise the consolidated statement of financial position as at 31 December 2019, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Bank as at 31 December 2019, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

 

Basis for Opinion

 

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the other ethical requirements that are relevant to our audit of the Bank's consolidated financial statements in the United Arab Emirates, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key audit matters

 

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

 

 

The financial statement risk

 

The Bank acquired Union National Bank PJSC and Al Hilal Bank PJSC with effect from 1 May 2019 and accounted for these business combination transactions using the acquisition method of accounting. The purchase price allocation, which resulted in a goodwill of AED 4,593 million as at the date of acquisition, was still provisional as at 31 December 2019 because of the size and complexity of these transactions. Goodwill arising from the acquisitions and the relating carrying amounts of assets and liabilities will be adjusted on a retrospective basis upon the finalisation of the purchase price allocation process, which will be finalised by 30 April 2020 in accordance with IFRSs.

 

Fair values were determined using various valuation methodologies and techniques, which were applied to different assets, liabilities and contingent liabilities. Certain calculations were based on substantial management judgements and complex valuation models that required specific customer or market information, significant unobservable inputs and assumptions, especially with regard to the choice of the valuation method to be used and the inputs to be considered, which depend on current market environments and estimates over future developments. The Bank prepared its own assessments and, for certain assets, used external appraisals to determine the fair values of assets and liabilities acquired.

 

We considered this as a key audit matter because of the quantitative materiality of the transactions and the significant judgements and estimates made by management in determining the fair values of acquired assets and liabilities. Auditing these complex judgements and assumptions involves, inter alia, challenging auditor judgements and utilising our internal fair value specialists to assess the fair value of different types of assets, due to the nature and extent of audit evidence and effort required to address these matters.

 

For further information on this key audit matter refer to Note 3.6, 15 and 52 to the consolidated financial statements.

 

How the matter was addressed in the audit

 

We performed the following procedures on the preliminary purchase price allocation, which included, but was not limited, to the following:

·    We assessed the design and implementation of controls over the transaction;

·    We considered whether the transaction falls within the scope of IFRS 3 Business Combinations by assessing whether the assets acquired and liabilities assumed constitute a business and whether the transaction should be accounted for by applying the acquisition method;

·    We verified that the results of the operations of the entities acquired were included in the consolidated financial statements of the Bank from the date of acquisition, as defined by IFRS 3;

·    We evaluated the approach and key assumptions used in the Bank's fair value adjustments relative to the acquired portfolio of financial assets at amortised cost, in particular loans and advances to customers, and challenged management's judgements on specific customer or market related factors, such as expected default rates;

·    We evaluated the accounting policy adopted by management for the identification of purchased or originated credit impaired financial assets (POCI) and assessed the adequacy of the recognition, presentation and measurement policy for these assets;

·    We evaluated the identification and valuation of intangible assets based on our understanding of the businesses of the acquired entities, and discussed with the Bank the business rationale for the acquisitions and the Bank's external appraiser's valuation results;

·    We engaged our internal valuation specialists to perform an assessment of the identified intangible assets and the determination of their respective fair values and useful lives;

·    We assessed the competence, objectivity and capabilities of the external appraisers for the valuation of investment properties and owner-occupied properties engaged by the Bank and, for a sample of properties, engaged our internal specialists in assessing the valuation methodologies and reasonableness of underlying assumptions; and

·    We assessed the disclosures included in Note 52 against the relevant IFRS disclosure requirements.

 

 

 

 

 

 

The financial statement risk

 

As described in Notes 10 and 42 to the consolidated financial statements, the Bank had loans and advances of AED 250 billion as at 31 December 2019 representing 61.7% of total assets. The determination of the Bank's expected credit losses for loans and advances to customers measured at amortised cost is a material and complex estimate requiring significant management judgement in the evaluation of the credit quality and the estimation of inherent losses in the portfolio.

 

The financial statement risk arises from several aspects requiring substantial judgement of management, such as the estimation of probabilities of default and loss given defaults for various stages, the determination of significant increases in credit risk (SICR) and credit-impairment status (default), the use of different modelling techniques and consideration of manual adjustments. In calculating expected credit losses, the Bank considered credit quality indicators for each loan and portfolios, stratifies loans and advances by risk grades and estimates losses for each loan based upon their nature and risk profile.

 

Auditing these complex judgements and assumptions involves especially challenging auditor judgement due to the nature and extent of audit evidence and effort required to address these matters.

 

For further information on this key audit matter refer to Note 3 and Note 42 to the consolidated financial statements.

 

How the matter was addressed in the audit

 

We established an audit approach which includes both testing the design and operating effectiveness of internal controls over the determination of expected credit losses and risk-based substantive audit procedures. Our procedures over internal controls focused on the governance over the process controls around the ECL methodology, completeness and accuracy of loan data used in the expected loss models, management review of outcomes, management validation and approval processes, the assignment of borrowers' risk classification, consistency of application of accounting policies and the process for calculating individual allowances.

 

The primary substantive procedures which we performed to address this key audit matter included, but were not limited to, the following:

·    For a risk-based sample of individual loans, we performed a detailed credit review, assessed the appropriateness of information for evaluating the credit-worthiness and staging classification of individual borrowers and challenged the assumptions underlying the expected credit loss allowance calculations, such as estimated future cash flows, collateral valuations and estimates of recovery as well as considered the consistency of the Bank's application of its impairment policy. Further, we evaluated controls over approval, accuracy and completeness of impairment allowances and governance controls, including assessing key management and committee meetings that form part of the approval process for loan impairment allowances;

·    For loans not tested individually, we evaluated controls over the modelling process, including model monitoring, validation and approval. We tested controls over model outputs and the mathematical accuracy and computation of the expected credit losses by re-performing or independently calculating elements of the expected credit losses based on relevant source documents with the involvement of our modelling specialists. We challenged key assumptions, inspected the calculation methodology and traced a sample back to source data. We evaluated key assumptions such as thresholds used to determine SICR and forward looking macroeconomic scenarios including the related weighting;

·    We evaluated post model adjustments and management overlays in the context of key model and data limitations identified by the Bank in order to assess the reasonableness of these adjustments, focusing on PD and LGD used for corporate loans, and challenged their rationale;

·    We assessed the reasonableness of forward looking information incorporated into the impairment calculations by involving our specialists to challenge the multiple economic scenarios chosen and weighting applied to capture non-linear losses; and

·    We tested, utilising our internal IT specialists, the IT application used in the credit impairment process and verified the integrity of data used as input to the models including the transfer of data between source systems and the impairment models. We evaluated system-based and manual controls over the recognition and measurement of impairment allowances.

 

 

 

 

The financial statement risk

 

The Bank is vitally dependent on its complex information technology environment for the reliability and continuity of its operations and financial reporting process due to the extensive volume and variety of transactions which are processed daily across the Bank's businesses; this includes cyber risks.

 

Inappropriate granting of or ineffective monitoring of access rights to IT systems therefore presents a risk to the accuracy of financial accounting and reporting. Appropriate IT controls are required to protect the Bank's IT infrastructure, data and applications, ensure transactions are processed correctly and limit the potential for fraud and error as a result of change to an application or underlying data.

 

Unauthorised or extensive access rights cause a risk of intended or unintended manipulation of data that could have a material effect on the completeness and accuracy of financial statements. Therefore, we considered this area as key audit matter.

 

For further information on this key audit matter refer to Note 41.

 

How the matter was addressed in the audit

 

Our audit approach depends to a large extent on the effectiveness of automated and IT-dependent manual controls and therefore we updated our understanding of the Bank's IT-related control environment and identified IT applications, databases and operating systems that are relevant for the financial reporting process and to our audit.

 

For relevant IT-dependent controls within the financial reporting process we identified, with the involvement of our internal IT specialists, supporting general IT controls and evaluated their design, implementation and operating effectiveness. We updated our understanding of applications relevant for financial reporting and tested key controls particularly in the area of access protection, integrity of system interfaces and linkage of such controls to the reliability, completeness and accuracy of financial reporting including computer-generated reports used in financial reporting. Our audit procedures covered, but were not limited to, the following areas relevant for financial reporting:

·    IT general controls relevant to automated controls and computer-generated information covering access security, program changes, data centre and network operations;

·    Controls regarding initial access granted to IT systems for new employees or employees changing roles, whether that access was subject to appropriate screening and it was approved by authorised persons;

·    Controls regarding removal of employee or former employee access rights within an appropriate period of time after having changed roles or leaving the Bank;

·    Controls regarding the appropriateness of system access rights for privileged or administrative authorisations (superuser) being subject to a restrictive authorisation assignment procedure and regular review thereof;

·    Password protection, security settings regarding modification of applications, databases and operating systems, the segregation of department and IT users and segregation of employees responsible for program development and those responsible for system operations;

·    Program developers approval rights in the modification process and their capability to carry out any modifications in the productive versions of applications, databases and operating systems. We analysed the segregation of duties on critical trading and payment systems in order to assess whether the segregation between front and back office was effective; and

·    We performed journal entry testing as stipulated by the International Standards on Auditing.

 

 

 

 

 

 

Other information

 

The Board of Directors and management are responsible for the other information. The other information comprises the annual report of the Bank but does not include the consolidated financial statements and our auditor's report thereon. The annual report is expected to be made available to us after the date of this auditor's report. Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

 

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

 

When we read the annual report of the Bank, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

 

Responsibilities of management and those charged with governance for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and their preparation in compliance with the applicable provisions of the UAE Federal Law No. (2) of 2015, 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.

 

In preparing the consolidated financial statements, management is responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

 

The Board of Directors and Board Audit & Compliance Committee are responsible for overseeing the Bank's financial reporting process.

 

Auditor's responsibilities for the audit of the consolidated financial statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

 

·    Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

·    Obtain an understanding of internal control relevant to the audit 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 Bank's internal control.

·    Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

·    Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

·    Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

·    Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities of the Bank to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

From the matters communicated with the Bank's Board Audit & Compliance Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

Report on other legal and regulatory requirements

 

As required by the UAE Federal Law No. (2) of 2015, we report that:

 

·    we have obtained all the information we considered necessary for the purposes of our audit;

·    the consolidated financial statements of the Bank have been prepared and comply, in all material respects, with the applicable provisions of the UAE Federal Law No. (2) of 2015;

·    the Bank has maintained proper books of account;

·    the financial information included in the Directors' report is consistent with the Bank's books of account;

·    Note 40 to the consolidated financial statements of the Bank discloses purchased or investment in shares during the financial year ended 31 December 2019;

·    Note 36 to the consolidated financial statements of the Bank discloses material related party transactions, the terms under which these were conducted and principles of managing conflict of interests;

·    based on the information that has been made available to us nothing has come to our attention which causes us to believe that the Bank has contravened during the financial year ended 31 December 2019 any of the applicable provisions of the UAE Federal Law No. (2) of 2015 or of its Articles of Association which would materially affect its activities or its financial position as at 31 December 2019; and

·    Note 52 to the consolidated financial statements of the Bank discloses social contributions made during the financial year ended 31 December 2019.

 

Further, as required by the Decree of the Chairman of the Abu Dhabi Accountability Authority No. (1) of 2017 pertaining to Auditing the Financial Statements of Subject Entities, we report that, based on the procedures performed and information provided to us, nothing has come to our attention that causes us to believe that the Bank has not complied, in all material respects, with any of the provisions of the following laws, regulations and circulars, which would materially affect its activities or its consolidated financial statements as at 31 December 2019:

 

·    law of establishment; and

·    relevant provisions of applicable laws, resolutions and circulars organising the Bank's operations.

 

 

 

 

 

Further, as required by the UAE Federal Law No. (14) of 2018, we report that we have obtained all the information and explanations we considered necessary for the purpose of our audit.

 

 

Deloitte & Touche (M.E.)

 

 

 

 

 

Signed by:

Mohammad Khamees Al Tah

Registration No. 717

26 January 2019

Abu Dhabi

United Arab Emirates

 

 

 

 

 

Consolidated statement of financial position

As at December 31, 2019          

                                                                                    

 

 

As at

As at

As at

 

 

December 31

December 31

December 31

 

 

2019

2018

2019

 

Notes

 AED'000

AED'000

 USD'000

 

 

 

 

 

Assets

 

 

 

 

Cash and balances with central banks, net

5

24,904,966

19,589,957

6,780,552

Deposits and balances due from banks, net

6

23,064,974

19,627,076

6,279,601

Reverse-repo placements

7

-

2,203,800

                      -  

Trading securities

 

-

60,134

                      -  

Derivative financial instruments

8

6,789,717

4,447,247

1,848,548

Investment securities

9

73,440,113

52,362,234

19,994,586

Loans and advances to customers, net

10

250,017,326

166,425,762

68,068,970

Investment in associates

11

407,768

205,158

111,018

Investment properties

12

1,693,707

576,671

461,124

Other assets, net

13

16,750,208

13,330,894

4,560,360

Property and equipment, net

14

2,197,571

982,605

598,304

Intangible assets, net

15

5,332,497

18,800

1,451,810

Assets held for sale

34

535,830

-

145,883

Total assets

 

405,134,677

279,830,338

110,300,756

Liabilities

 

 

 

 

Due to banks

16

5,732,779

3,071,408

1,560,789

Derivative financial instruments

8

6,949,891

5,695,911

1,892,157

Deposits from customers

17

262,093,782

176,653,857

71,356,870

Euro commercial paper

18

2,062,338

3,279,302

561,486

Borrowings

19

51,882,054

43,027,749

14,125,253

Other liabilities

20

20,302,794

15,296,568

5,527,577

Liabilities related to assets held for sale

34

413,395

         -  

112,550

Total liabilities

 

349,437,033

247,024,795

95,136,682

Equity

 

 

 

 

Share capital

21

6,957,379

5,198,231

1,894,195

Share premium

 

17,878,882

2,419,999

4,867,651

Other reserves

22

9,257,919

6,859,271

2,520,534

Retained earnings

 

15,544,207

14,328,042

4,232,019

Capital notes

25

6,000,000

4,000,000

1,633,542

Equity attributable to equity holders of the Bank

 

55,638,387

32,805,543

15,147,941

Non-controlling interests

 

59,257

                      -  

16,133

Total equity

 

55,697,644

32,805,543

15,164,074

 

 

 

 

 

Total liabilities and equity

 

405,134,677

279,830,338

110,300,756

 

These consolidated financial statements were duly approved by delegated members of the Board of Directors and authorised for issue on January 26, 2020 and signed on its behalf by:

 

 

 

Eissa Al Suwaidi

 

Ala'a Eraiqat

 

Deepak Khullar

Chairman

 

Group Chief Executive Officer

 

Group Chief Financial Officer

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Consolidated income statement 

For the year ended December 31, 2019

 

 

Notes

2019(*)

 

2018

 

2019

AED'000

 

AED'000

 

USD'000

 

 

 

 

 

 

 

Interest income

26

13,877,686

 

10,314,941

 

3,778,298

Interest expense

27

(6,364,907)

 

(4,202,662)

 

(1,732,891)

Net interest income

 

7,512,779

 

6,112,279

 

2,045,407

Income from Islamic financing

23

2,495,966

 

1,276,746

 

679,544

Islamic profit distribution

23

(767,609)

 

(169,901)

 

(208,987)

Net income from Islamic financing

 

1,728,357

 

1,106,845

 

470,557

Total net interest and Islamic financing income

 

9,241,136

 

7,219,124

 

2,515,964

Net fees and commission income

28

1,816,162

 

1,394,576

 

494,462

Net trading income

29

460,909

 

431,805

 

125,486

Net losses from investment properties

12

(66,736)

 

(56,459)

 

(18,169)

Other operating income

30

270,669

 

192,399

 

73,692

Operating income

 

11,722,140

 

9,181,445

 

3,191,435

Operating expenses

31

(4,517,679)

 

(3,083,501)

 

     (1,229,970)

Operating profit before impairment allowances

 

7,204,461

 

6,097,944

 

1,961,465

Impairment allowances

32

(2,352,054)

 

(1,265,787)

 

(640,363)

Operating profit after impairment allowances

 

4,852,407

 

4,832,157

 

1,321,102

Share in profit of associates

11

17,765

 

10,070

 

4,836

Profit before taxation

 

4,870,172

 

4,842,227

 

1,325,938

Overseas income tax expense

 

              (40,926)

 

(2,373)

 

           (11,142)

Profit for the year from continuing operations

 

4,829,246

 

4,839,854

 

1,314,796

Loss from discontinued operations

34

(36,759)

 

-

 

(10,008)

Profit for the year

 

4,792,487

 

4,839,854

 

1,304,788

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

Equity holders of the Bank

 

4,789,686

 

4,839,854

 

       1,304,026

Non-controlling interests

 

2,801

 

-

 

                   762

Profit for the year

 

4,792,487

 

4,839,854

 

1,304,788

 

 

 

 

 

 

 

Basic and diluted earnings per share (AED)

33

0.71

 

0.90

 

0.19

 

(*) Refer Note 3.1 for basis of preparation

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Consolidated statement of comprehensive income 

For the year ended December 31, 2019

 

 

2019(*)

 

2018

 

2019

 

AED'000

 

AED'000 

 

USD'000

 

 

 

 

 

 

Profit for the year

4,792,487

 

4,839,854

 

1,304,788

 

 

 

 

 

 

Items that may be re-classified subsequently to the consolidated income statement

 

 

 

 

 

 

 

 

 

 

 

Exchange difference arising on translation of foreign operations (Note 22)

                  32,889

 

(21,054)

 

               8,954

Net movement in cash flow hedge reserve (Note 22)

171,505

 

41,592

 

46,693

Net movement in revaluation reserve of debt instruments designated at FVTOCI (Note 22)

             1,277,703

 

(726,006)

 

            347,864

 

1,482,097

 

(705,468)

 

403,511

 

 

 

 

 

 

Items that may not be re-classified subsequently to the consolidated income statement

 

 

 

 

 

 

 

 

 

 

 

Net movement in revaluation reserve of equity instruments designated at FVTOCI (Note 22)

                (50,616)

 

(92,693)

 

            (13,781)

Actuarial gains on defined benefit obligation (Note 20)

16,773

 

13,157

 

4,567

 

(33,843)

 

(79,536)

 

(9,214)

 

 

 

 

 

 

Other comprehensive income/(loss) for the year

1,448,254

 

(785,004)

 

394,297

 

 

 

 

 

 

Total comprehensive income for the year

6,240,741

 

4,054,850

 

1,699,085

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

Equity holders of the Bank

6,235,518

 

4,054,850

 

1,697,663

Non-controlling interests

5,223

 

-

 

1,422

Total comprehensive income for the year

6,240,741

 

4,054,850

 

1,699,085

 

(*) Refer Note 3.1 for basis of preparation

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Consolidated statement of changes in equity 

For the year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

attributable to

Non- 

 

 

 

 

 

Share capital

Share premium

Other reserves

Retained earnings

Capital notes

equity holders of the Bank

controlling interests

Total equity

 

 

 

 

AED'000

AED'000

AED'000

AED'000

AED'000

AED'000

AED'000

AED'000

 

 

 

 

 

 

 

 

 

 

 

 

As at January 1, 2019

 

5,198,231

2,419,999

6,859,271

14,328,042

4,000,000

32,805,543

-

32,805,543

Issue of ordinary shares as consideration for business combinations (Note 21)

 

1,759,148

15,458,883

-

-

-

17,218,031

-

17,218,031

Addition on business combinations (Note 52)

 

-

-

-

-

3,836,500

3,836,500

54,783

3,891,283

Profit for the year

 

-

-

-

            4,789,686

-

4,789,686

2,801

4,792,487

Other comprehensive income for the year (Note 22)

 

-

-

1,429,059

16,773

-

1,445,832

2,422

1,448,254

Transfer to statutory and legal reserve (Note 49)

 

-

-

957,936

(957,936)

-

-

-

-

Other movements (Note 22)

 

-

-

11,653

18

-

11,671

-

11,671

Amounts transferred within equity upon disposal of investments in equity instruments designated at FVTOCI (Note 22)

 

-

-

-

23,853

-

23,853

-

23,853

Adjustment arising from changes in non-controlling interests

 

-

-

-

13

-

13

(749)

(736)

Repayment of Tier 1 capital notes (Note 25)

 

-

-

-

-

(1,836,500)

(1,836,500)

-

(1,836,500)

Dividends paid to equity holders of the Bank (Note 21)

 

-

-

-

(2,391,186)

-

(2,391,186)

-

(2,391,186)

Capital notes coupon paid (Note 33)

 

-

-

-

(265,056)

-

(265,056)

-

(265,056)

As at December 31, 2019 (*)

 

6,957,379

17,878,882

9,257,919

15,544,207

6,000,000

55,638,387

59,257

55,697,644

 

 

 

 

 

 

 

 

 

 

 

 

As at January 1, 2018 (as previously reported)

 

5,198,231

2,419,999

7,484,927

13,341,783

4,000,000

32,444,940

-

32,444,940

Effect of change in accounting policy for IFRS 9

 

-

-

149,349

(1,510,228)

-

(1,360,879)

-

(1,360,879)

As at January 1, 2018 (restated)

 

5,198,231

2,419,999

7,634,276

11,831,555

4,000,000

31,084,061

-

31,084,061

Profit for the year

 

-

-

-

4,839,854

-

4,839,854

-

4,839,854

Other comprehensive loss for the year (Note 22)

 

-

-

(798,161)

13,157

-

(785,004)

-

(785,004)

Amounts transferred within equity upon disposal of investments in equity instruments designated at FVTOCI (Note 22)

 

-

-

-

1,588

-

1,588

-

1,588

Other movements (Note 22)

 

-

-

23,156

(66)

-

23,090

-

23,090

Dividends paid to equity holders of the Bank

 

-

-

-

(2,183,257)

-

(2,183,257)

-

(2,183,257)

Capital notes coupon paid (Note 33)

 

-

-

-

(174,789)

-

(174,789)

-

(174,789)

As at December 31, 2018 (*)

 

5,198,231

2,419,999

6,859,271

14,328,042

4,000,000

32,805,543

-

32,805,543

 

(*) Refer Note 3.1 for basis of preparation

 

For the year ended December 31, 2019, the Board of Directors has proposed to pay a cash dividend representing 38% of the paid up capital (Note 21).

 

The accompanying notes form an integral part of these consolidated financial statements.
 

 

 

Consolidated statement of cash flows

For the year ended December 31, 2019

 

 

 

2019(*)

 

2018

 

2019

 

AED'000

 

AED'000

 

USD'000

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Profit before taxation including loss from discontinued operations (Note 34)

 

4,833,454

 

4,842,227

 

1,315,942

Adjustments for:

 

 

 

 

 

 

Depreciation on property and equipment

 

367,059

 

175,927

 

99,934

Amortisation of intangible assets (Note 15)

 

64,175

 

-

 

17,472

Net losses from investment properties (Note 12)

 

66,736

 

56,459

 

18,169

Impairment allowances

 

2,611,404

 

1,483,876

 

710,973

Share in profit of associates (Note 11)

 

(17,765)

 

(10,070)

 

(4,837)

Discount unwind

 

(232,051)

 

(19,380)

 

(63,178)

Net losses from disposal of investment securities (Note 30)

 

820

 

10,474

 

223

Interest income on investment securities

 

(2,385,551)

 

(1,663,637)

 

(649,483)

Dividend income (Note 30)

 

(13,191)

 

(1,722)

 

(3,591)

Interest expense on borrowings and euro commercial paper

 

1,817,590

 

1,437,105

 

494,852

Net gains from trading securities (Note 29)

 

(815)

 

(11,052)

 

(222)

Ineffective portion of hedges - losses/(gains) (Note 8)

 

46,633

 

(16,012)

 

12,696

Employees' incentive plan expense (Note 24)

 

11,671

 

23,090

 

3,178

Cash flows from operating activities before changes in operating assets and liabilities

 

7,170,169

 

6,307,285

 

 

1,952,128

Decrease in balances with central banks

 

1,011,166

 

-

 

275,297

Increase in due from banks

 

(449,647)

 

(5,075,891)

 

(122,420)

Net movement in derivative financial instruments

 

50,627

 

(86,671)

 

13,784

Net disposals of trading securities

 

60,949

 

436,219

 

16,594

Increase in loans and advances to customers

 

(1,602,510)

 

(5,724,086)

 

(436,294)

Decrease/(increase) in other assets

 

178,656

 

(393,940)

 

48,640

(Decrease)/increase in due to banks

 

(1,958,908)

 

473,116

 

(533,326)

(Decrease)/increase in deposits from customers

 

(9,742,010)

 

13,575,599

 

(2,652,331)

(Decrease)/increase in other liabilities

 

(634,724)

 

352,496

 

(172,808)

Net cash (used in)/from operations

 

(5,916,232)

 

9,864,127

 

(1,610,736)

Overseas income tax paid

 

(33,906)

 

(968)

 

(9,231)

Net cash (used in)/from operating activities

 

(5,950,138)

 

9,863,159

 

(1,619,967)

INVESTING ACTIVITIES

 

 

 

 

 

 

Net proceeds from redemption/disposal of investment securities

 

30,940,003

 

25,222,247

 

8,423,634

Net purchases of investment securities

 

(29,737,663)

 

(29,504,274)

 

(8,096,287)

Interest received on investment securities

 

2,574,043

 

1,785,592

 

700,801

Dividend received from investment securities (Note 30)

 

13,191

 

1,722

 

3,591

Dividend received from associates (Note 11)

 

14,194

 

10,284

 

3,864

Addition on business combinations (Note 52)

 

11,037,392

 

-

 

3,005,007

Disposal of investment properties (Note 12)

 

6,276

 

1,650

 

1,709

Net purchases of property and equipment

 

(273,344)

 

(198,436)

 

(74,420)

Net cash from/(used in) investing activities

 

14,574,092

 

(2,681,215)

 

3,967,899

FINANCING ACTIVITIES

 

 

 

 

 

 

Net (decrease)/increase in euro commercial paper (Note 18)

 

(1,257,754)

 

324,195

 

(342,432)

Net proceeds from borrowings (Note 19)

 

18,012,653

 

20,109,045

 

4,904,071

Repayment of borrowings

 

(19,799,050)

 

(17,105,210)

 

(5,390,430)

Interest paid on borrowings and euro commercial paper

 

(1,236,577)

 

(868,623)

 

(336,667)

Payment of lease liabilities

 

(89,064)

 

-

 

(24,248)

Dividends paid to equity holders of the Bank

 

(2,391,186)

 

(2,183,257)

 

(651,018)

Repayment of capital notes (Note 25)

 

(1,836,500)

 

-

 

(500,000)

Capital notes coupon paid (Note 33)

 

(265,056)

 

(174,789)

 

(72,163)

Net cash (used in)/from financing activities

 

(8,862,534)

 

101,361

 

(2,412,887)

 

 

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(238,580)

 

7,283,305

 

(64,955)

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the year (Note 35)

 

23,094,853

 

15,811,548

 

6,287,736

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the year  (Note 35)

 

22,856,273

 

23,094,853

 

6,222,781

 

(*) Refer Note 3.1 for basis of preparation

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

1.  General information

 

Abu Dhabi Commercial Bank PJSC ("ADCB" or the "Bank") is a public joint stock company with limited liability incorporated in the emirate of Abu Dhabi, United Arab Emirates (UAE). The Bank and its subsidiaries (together referred to as the "Group") is principally engaged in the business of retail, commercial and Islamic banking and provision of other financial services.

 

On March 21, 2019, the shareholders of ADCB and Union National Bank PJSC ("UNB") approved the merger of two banks pursuant to Article 283 (1) of UAE Federal Law No. 2 of 2015 and subsequent acquisition of 100% of issued share capital of Al Hilal Bank PJSC ("AHB") by the combined bank. The merger was effected through issuance of 0.5966 new shares in ADCB for every one share of UNB, subject to the terms and conditions of the merger. Following the merger, ADCB and UNB shareholders owns approximately 76% and 24% of the combined bank, respectively. On the effective date of the merger, UNB shares were delisted from the Abu Dhabi Securities Exchange. The combined bank retained ADCB's legal registrations.

 

The combined bank issued a mandatory convertible bond ("bond") of AED 1,000,000 thousand to the shareholder of AHB as consideration to acquire the entire issued share capital of AHB. The bond was converted immediately into 117,647,058 ADCB shares.

 

The effective date of the above merger and acquisition was May 1, 2019.

 

The registered head office of ADCB is at Abu Dhabi Commercial Bank Head Office Building, Sheikh Zayed Bin Sultan Street, Plot C- 33, Sector E-11, P. O. Box 939, Abu Dhabi, UAE.

 

2.  Application of new and revised International Financial Reporting Standards (IFRSs)

 

In the current year, the Group applied for the first time, IFRS 16 Leases. As required by IAS 1 Presentation of Financial Statements, the nature and effect of these changes are disclosed in Note 3.7 of the consolidated financial statements.

The Group has also applied the following amendments to IFRSs issued by the International Accounting Standards Board ("IASB") that are mandatorily effective for an accounting period that begins on or after January 1, 2019. The application of these amendments to IFRSs has not had any material impact on the amounts reported for the current and prior periods but may affect the accounting for the Group's future transactions or arrangements.

§ Annual Improvements to IFRSs 2015-2017 Cycle amending IFRS 3, IFRS 11, IAS 12 and IAS 23

§ IFRIC 23 Uncertainty over Income Tax Treatments

§ Amendments in IFRS 9 Financial Instruments relating to prepayment features with negative compensation

§ Amendment to IAS 19 Employee Benefits

§ Amendments in IAS 28 Investments in Associates and Joint Ventures relating to long-term interests in associates and joint ventures

 

Other than the above, there are no other significant IFRSs and amendments that were effective for the first time for the financial year beginning on or after January 1, 2019.

 

 

2.   Application of new and revised International Financial Reporting Standards (IFRSs) (continued)

 

Standards and Interpretations in issue but not yet effective

 

The Group has not early adopted new and revised IFRSs that have been issued but are not yet effective.

 

 

New standards and significant amendments to standards applicable to the Group:

Effective for annual periods beginning on or after

Amendments to references to the Conceptual Framework in IFRS Standards - amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32 to update those pronouncements with regard to references to and quotes from the framework or to indicate where they refer to a different version of the Conceptual Framework.

 

January 1, 2020

Amendment to IFRS 3 regarding the definition of business.

 

January 1, 2020

Amendments to IAS 1 and IAS 8 regarding the definition of materiality.

 

January 1, 2020

Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest Rate Benchmark Reform

January 1, 2020

IFRS 17 Insurance Contracts which requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. IFRS 17 supersedes IFRS 4 Insurance Contracts as of January 1, 2022.

 

January 1, 2022

Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) relating to the treatment of the sale or contribution of assets from an investor to its associate or joint venture.

Effective date deferred indefinitely. Adoption is still permitted.

 

Management anticipates that these amendments will be adopted in the consolidated financial statements in the initial period when they become mandatorily effective. The impact of these standards and amendments are currently being assessed by the management.

 

Update on prospective changes in reference rates (Ibor)

 

The impact of the replacement of interbank offered rates ('Ibors') with alternative risk-free rates on the Group's products and services remains a key area of focus. The Group have a significant and growing volume of contracts referencing Ibors, such as Libor and Eibor, extending past 2021 when it is likely that these Ibors will cease being published. The management has started a project to coordinate the Group's transition activities aims to minimise the volume of such contracts outstanding upon the cessation of these Ibors, and therefore the associated disruption to financial flows and potential economic losses. The project is significant in terms of scale and complexity and will impact multiple products, currencies, systems and processes. The process of adopting new reference rates exposes the Group to operational and financial risks such as earnings volatility resulting from contract modifications and changes in hedge accounting. The Group continue to engage with various stakeholders to support an orderly transition and to mitigate the risks resulting from the transition.

 

 

 

 

3.    Summary of significant accounting policies

 

 

 

3.1    Basis of preparation

 

The consolidated financial statements have been prepared on a going concern basis and in accordance with

International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). IFRSs comprise accounting standards issued by the IASB as well as Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

 

The consolidated financial statements comprise of results for the year ended December 31, 2019 for ADCB and its subsidiaries and the results for the eight month period ended December 31, 2019 for erstwhile UNB (including its subsidiaries) and AHB group while the comparatives are of ADCB only.

 

Certain disclosure notes have been rearranged from the Group's prior year consolidated financial statements to conform to the current year's presentation.

 

3.2    Measurement

 

The consolidated financial statements have been prepared under the historical cost convention except as modified by the revaluation of financial assets and liabilities at fair value through profit and loss, financial assets and liabilities at fair value through other comprehensive income and investment properties.

 

3.3    Functional and presentation currency

 

The consolidated financial statements are prepared and presented in United Arab Emirates Dirhams (AED), which is the Group's functional and presentation currency. Except as indicated, financial information presented in AED has been rounded to the nearest thousand.

 

The United States Dollar (USD) amounts in the primary financial statements are presented for the convenience of the reader only by converting the AED balances at the pegged exchange rate of 1 USD = 3.673 AED.

 

3.4    Use of estimates and judgements

 

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

 

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in Note 4.

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.5    Basis of consolidation

 

These consolidated financial statements incorporate the financial statements of the Bank and its subsidiaries (collectively referred to as the "Group").

 

Subsidiaries

 

Subsidiaries are entities that are controlled by the Bank. Control is achieved when the Bank:

 

§  has power over the investee;

§  is exposed, or has rights, to variable returns from its involvement with the investee; and

§  has the ability to use its power to affect its returns.

 

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

 

When the Bank has less than a majority of voting rights of an investee, still it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank's voting rights in an investee are sufficient to give it power, including:

 

§  the size of the Bank's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

§  potential voting rights held by the Bank;

§  rights arising from other contractual arrangements; and

§  any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time the decision needs to be made, including voting patterns at previous shareholders' meetings.

 

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.

 

Profit or loss and each component of other comprehensive income are attributed to owners of the Bank and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Bank and non-controlling interests even if this results in non-controlling interests having a deficit balance.

 

When necessary, adjustments are made to the consolidated financial statements of subsidiaries to align their accounting policies with the Bank's accounting policies.

 

All intragroup balances and income, expenses and cash flows resulting from intragroup transactions are eliminated in full on consolidation.

 

Changes in the Bank's ownership interests in existing subsidiaries

 

Changes in the Bank's ownership interests in subsidiaries that do not result in the Bank losing control over the subsidiaries are accounted for as equity transactions. The carrying amount of the Bank's interests is adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the shareholders of the Bank. When the Bank loses control of a subsidiary, a gain or loss is recognised in the consolidated income statement and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), liabilities of the subsidiary and any non-controlling interests.

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.5   Basis of consolidation (continued)

 

Changes in the Bank's ownership interests in existing subsidiaries (continued)

 

All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Bank had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to income statement or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary, at the date when control is lost, is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

                                     

Special Purpose Entities                                                                                                                   

 

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. A SPE is consolidated if, based on an evaluation of the substance of its relationship with the Bank, the Bank has power over the SPE, is exposed to or has rights to variable returns from its involvement with the SPE and its ability to use its power over the SPE at inception and subsequently to affect the amount of its return, the Bank concludes that it controls the SPE.

 

The assessment of whether the Bank has control over a SPE is carried out at inception and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE, or additional transactions between the Bank and the SPE except whenever there is a change in the substance of the relationship between the Bank and a SPE.

 

Funds under management

 

The Bank manages and administers assets held in unit trusts on behalf of investors. The financial statements of these entities are not included in the consolidated financial statements except when the Bank controls the entity, as referred to above. 

 

Investment in associates

Associates are those entities in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies. Investments in associates are accounted for using the equity method and are recognised initially at cost. The cost of the investments includes transaction costs.

 

The consolidated financial statements includes the Group's share of the profit or loss and other comprehensive income of investment in associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.

 

When the Group's share of losses exceeds its interest in an equity‐accounted investee, the carrying amount of the investment, including any long‐term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

 

The carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 - Impairment of Assets, as a single asset by comparing with the recoverable amount (higher of value in use and fair value less cost of disposal). Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of the impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the investment in prior years.

 

 

3.   Summary of significant accounting policies (continued)

 

3.5   Basis of consolidation (continued)

 

Investment in associates (continued)

 

The Group discontinues the use of equity method of accounting from the date when the investment ceases to be an associate or when the investment is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IFRS 9. The difference between the carrying amount of the associate at the date equity method was discontinued and the fair value of the retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation of that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued.

 

Joint arrangements

 

Joint arrangements are arrangements of which the Group has joint control, established by contracts requiring unanimous consent for decisions about the activities that significantly affect the arrangements' returns. They are classified and accounted for as follows:

 

Joint operation - when the Group has rights to the assets and obligations for the liabilities, relating to an arrangement, it accounts for each of its assets, liabilities and transactions, including its share of those held or incurred jointly, in relation to the joint operation.

 

Joint venture - when the Group has rights only to the net assets of the arrangements, it accounts for its interest using the equity method, as for associates.

 

Non-current assets held for sale

 

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

 

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

 

When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

When the Group is committed to a sale plan involving disposal of an investment in an associate or, a portion of an investment in an associate, the investment, or the portion of the investment in the associate, that will be disposed of is classified as held for sale when the criteria described above are met. The Group then ceases to apply the equity method in relation to the portion that is classified as held for sale. Any retained portion of an investment in an associate that has not been classified as held for sale continues to be accounted for using the equity method.

 

 

3.   Summary of significant accounting policies (continued)

 

3.6    Business combination under common control

 

A business combination involving entities under common control is a business combination in which all the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. Currently, there is no specific guidance on accounting for common control transactions under IFRSs, therefore the management needs to use judgement to develop an accounting policy that provides relevant and reliable information in accordance with IAS 8.

 

The Group accounts for business combinations under common control using the acquisition method. Under acquisition method, the consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

 

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:

 

§  deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; and

§  assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that standard.

 

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

 

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests' proportionate share of the recognised amounts of the acquiree's identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.

 

When a business combination is achieved in stages, the Group's previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of.

 

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date.

 

The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date but does not exceed twelve months.

 

 

3.   Summary of significant accounting policies (continued)

 

3.6   Business combination under common control (continued)

 

Impairment testing of goodwill

 

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (Note 52) less accumulated impairment losses, if any.

 

For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination.

 

A cash-generating unit ("CGU") to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.

 

On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

 

3.7    Change in accounting policy

 

General impact of application of IFRS 16 Leases

 

IFRS 16 'Leases' replaces IAS 17 'Leases' along with three Interpretations (IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC 15 'Operating Leases-Incentives' and SIC 27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'). The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related lease liability in connection with all former operating leases except for those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application.

 

IFRS introduces significant changes to the lessee accounting by removing the distinction between operating and finance lease and requires the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

 

The date of initial application of IFRS 16 for the Group is January 1, 2019. The Group has applied IFRS 16 using simplified modified approach. Management has assessed that the impact of adoption of IFRS 16 on the Group's consolidated financial statements is not material.

 

Impact on Lessee Accounting

 

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance-sheet.

 

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered or modified before January 1, 2019. The lease liability for such leases are measured at the present value of the remaining lease payments using the incremental borrowing rate as of January 1, 2019.

 

The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of initial application of IFRS 16, being 1 January 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.

 

The Group has applied a single discount rate to portfolio of leases, as the leases are of reasonably similar characteristics. 

 

3.   Summary of significant accounting policies (continued)

 

3.7   Change in accounting policy (continued)

 

Impact on Lessee Accounting (continued)

 

On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term.

 

Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16.

 

For those leases previously classified as finance leases, the right-of-use asset and lease liability are measured at the date of initial application at the same amounts as under IAS 17 immediately before the date of initial application.

 

The following is a reconciliation of the financial statement line items from IAS 17 to IFRS 16 as at January 1, 2019:

 

 

 

 

 

 

 

 

 

IFRS 16

 

 

 

 

Carrying amount

 

 

 

Carrying amount

 

 

 

 

December 31 2018

 

Re-measurement

 

January 1, 2019

 

 

 

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

 

982,605

 

141,722

 

1,124,327

Other assets - Prepayments

 

 

 

78,314

 

(10,764)

 

67,550

Impact on total assets

 

 

 

 

 

130,958

 

 

Other liabilities - Lease liabilities

 

 

 

-

 

130,958

 

130,958

Impact on total liabilities

 

 

 

 

130,958

 

 

 

The following is a reconciliation of total operating lease commitments as at December 31, 2018 (as disclosed in the financial statements of December 31, 2018) to the lease liabilities recognised at January 1, 2019:

 

 

 

 

 

 

 

AED'000

 

 

 

 

 

 

Total operating lease commitments as at December 31, 2018

 

 

 

 

152,170

Recognition exemptions:

 

 

 

 

 

Lease of low value assets

 

 

 

 

-

Lease with remaining lease term of less than 12 months

 

 

 

 

(9,825)

 

 

 

 

 

 

Operating lease liabilities before discounting

 

 

 

 

142,345

Discounted using incremental borrowing rate

 

 

 

 

3.5% p.a.

Total lease liabilities recognized under IFRS 16 as at January 1, 2019

 

 

 

 

130,958

 

Impact on Lessor Accounting

 

IFRS 16 does not change substantially how a lessor accounts for leases. Under IFRS 16, a lessor continues to classify leases as either finance lease or operating lease and account for those two types of leases differently. However, IFRS 16 has changed and expanded the disclosures required, in particular regarding how a lessor manages the risks arising from its residual interest in leased assets.

 

 

3.   Summary of significant accounting policies (continued)

 

3.7   Change in accounting policy (continued)

 

Accounting policies for accounting of leases till December 31, 2018

 

The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

 

Group as a lessee - Leases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight line basis over the lease term. Contingent rentals payable are recognised as an expense in the period in which they are incurred.

 

Group as a lessor - Leases where the Group does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Rental income are recognised in the consolidated income statement on a straight line basis over the lease term. Contingent rents are recognised as revenue in the period in which they are earned.

 

Accounting policies introduced on adoption of IFRS 16

 

The Group as lessee

 

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangement in which it is the lessee, except for short-term (defined as leases with a lease term of 12 months or less) and leases of low value asset. For these leases, the Group recognises the lease payments as an operating lease on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. This expense is presented within other expenses in the consolidated income statement.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by the rate implicit in the lease.  If this rate cannot be readily determined, the Group uses its incremental borrowing rate. The lease liability is subsequently measured by increasing the carrying amount to reflect the interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

 

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the period of lease term or useful life of the underlying asset whichever is shorter.  The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as per the Group's impairment policy for non-financial assets.

 

As a practical expedient, IFRS 16 permits a lessee not to separate non-lease component, and instead account for any lease and associated non-lease component as a single arrangement. The Group has used this practical expedient.

 

The Group has presented right of use asset within 'Property and equipment' and lease liabilities within 'Other liabilities' in the consolidated statement of financial position.

 

The Group as lessor

 

Leases where the Group does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Rental income are recognised in the consolidated income statement on a straight line basis over the lease term. Contingent rents are recognised as revenue in the period in which they are earned.

3.   Summary of significant accounting policies (continued)

 

3.8    Financial instruments

 

Financial assets

 

All financial assets are recognised and derecognised on settlement date basis (other than derivative contracts which are recognised and derecognised on trade date basis) where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at FVTPL. Settlement date is the date that the Group physically receives or transfers the assets. Transaction costs directly attributable to the acquisition of financial assets classified as at FVTPL are recognised immediately in profit or loss.

 

All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Specifically:

 

(i)     debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI), are subsequently measured at amortised cost;

(ii)    debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are SPPI, are subsequently measured at fair value through other comprehensive income (FVTOCI);

(iii)   all other debt instruments (e.g. debt instruments managed on a fair value basis, or held for sale) and equity investments are subsequently measured at FVTPL. However, the Group may make the following irrevocable election/designation at the date of initial application of IFRS 9 or at the date of initial recognition of a financial asset on an asset-by-asset basis:

§ the Group may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies, in other comprehensive income (OCI) with dividend income recognised in profit or loss; and

§ the Group may irrevocably designate a debt instrument that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch (referred to as the fair value option).

 

The Group holds equity investments and mutual funds as strategic investments and has elected to carry these investments at FVTOCI with changes in fair value through other comprehensive income.

 

(a) Debt instruments at amortised cost or at FVTOCI

 

The Group assesses the classification and measurement of a financial asset based on the contractual cash flow characteristics of the asset and the Group's business model for managing the asset.

 

For an asset to be classified and measured at amortised cost or at FVTOCI, its contractual terms should give rise to cash flows that are solely payments of principal and interest on the principal outstanding (SPPI).

 

For the purpose of SPPI test, principal is the fair value of the financial asset at initial recognition. That principal amount may change over the life of the financial asset (e.g. if there are repayments of principal). Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. The SPPI assessment is made in the currency in which the financial asset is denominated.

 

Contractual cash flows that are SPPI are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are SPPI. An originated or an acquired financial asset can be a basic lending arrangement irrespective of whether it is a loan in its legal form.

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial assets (continued)

 

(a) Debt instruments at amortised cost or at FVTOCI (continued)

 

An assessment of business models for managing financial assets is fundamental to the classification of a financial asset. The Group determines the business models at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The Group's business model does not depend on management's intentions for an individual instrument, therefore the business model assessment is performed at a higher level of aggregation rather than on an instrument-by-instrument basis.

 

The Group has more than one business model for managing its financial instruments which reflects how the Group manages its financial assets in order to generate cash flows. The Group's business models determine whether cash flows will result from collecting contractual cash flows, selling financial assets or both.

 

At initial recognition of a financial asset, the Group determines whether newly recognised financial assets are part of an existing business model or whether they reflect the commencement of a new business model. The Group reassess its business models during each reporting period to determine whether the business models have changed since the preceding period.

 

Debt instruments that are subsequently measured at amortised cost or at FVTOCI are subject to impairment.

 

(b) Financial assets at FVTPL

 

Financial assets at FVTPL are:

 

(i)     assets with contractual cash flows that are not SPPI; or/and

(ii)    assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or

(iii)   assets designated at FVTPL using the fair value option.

 

These assets are measured at fair value, with any gains/losses arising on remeasurement recognised in profit or loss.

 

(c)  Reclassifications

 

If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that results in reclassifying the Group's financial assets. Changes in contractual cash flows are discussed under the accounting policy on modification and derecognition of financial assets.

 

(d) Impairment

 

The Group recognises allowances for expected credit loss (ECLs) on the following financial instruments that are not measured at FVTPL:

 

§ balances with central banks;

§ deposits and balances due from banks;

§ reverse-repo placements;

§ debt investment securities;

§ loans and advances to customers;

§ loan commitments issued; and

§ financial guarantee contracts issued.

 

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial assets (continued)

 

(d) Impairment (continued)

 

No impairment loss is recognised on equity investments.

 

With the exception of purchased or originated credit impaired financial assets (which are considered separately below), ECLs are required to be measured through a loss allowance at an amount equal to:

 

§ 12-month ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or

§ full lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3).

 

A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL. More details on the determination of a significant increase in credit risk are provided in Note 3.8(h).

 

ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as the present value of the difference between the cash flows due to the Group under the contract and the cash flows that the Group expects to receive arising from the weighting of multiple future economic scenarios, discounted at the asset's EIR. However, for unfunded exposures, ECL is measured as follows:

 

§ for undrawn loan commitments, the ECL is the difference between the present value of the contractual cash flows that are due to the Group if the holder of the commitment draws down the loan and the cash flows that the Group expects to receive if the loan is drawn down; and

§ for financial guarantee contracts, the ECL is the difference between the expected payments to reimburse the holder of the guaranteed debt instrument less any amounts that the Group expects to receive from the holder, the debtor or any other party.

 

Refer note 42 for more details on measurement of ECL.

 

(e) Credit-impaired financial assets

 

A financial asset is 'credit-impaired' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence of credit-impairment includes observable data about the following events:

 

§ significant financial difficulty of the borrower or issuer;

§ a breach of contract such as a default or past due event;

§ for economic or contractual reasons relating to the borrower's financial difficulty, concessions given to the borrower that would not otherwise be considered;

§ the disappearance of an active market for a security because of financial difficulties; or

§ the purchase of a financial asset at a deep discount that reflects the incurred credit losses.

 

 

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial assets (continued)

 

(e)  Credit-impaired financial assets (continued)

 

It may not be possible to identify a single discrete event - instead, the combined effect of several events may have caused financial assets to become credit-impaired. The Group assesses whether debt instruments that are financial assets measured at amortised cost or FVTOCI are credit-impaired at each reporting date. To assess if sovereign and corporate debt instruments are credit impaired, the Group considers factors such as bond yields, credit ratings and the ability of the borrower to raise funding.

 

A loan is considered credit-impaired when a concession is granted to the borrower due to a deterioration in the borrower's financial condition, unless there is evidence that as a result of granting the concession the risk of not receiving the contractual cash flows has reduced significantly and there are no other indicators of impairment. For financial assets where concessions are contemplated but not granted, the asset is deemed credit impaired when there is observable evidence of credit-impairment including meeting the definition of default. The definition of default (see below) includes unlikeliness to pay indicators and a backstop if amounts are overdue for 90 days or more.

 

(f)  Purchased or originated credit-impaired financial assets

 

The Group measures expected credit loss on a lifetime basis for purchased or originated credit impaired financial assets (POCI) throughout the life of the instrument. However, expected credit loss is not recognised in a separate loss provision on initial recognition for POCI instruments as the lifetime expected credit loss is inherent within the gross carrying amount of the instruments. The Group recognises the change in lifetime expected credit losses arising subsequent to initial recognition in the income statement and the cumulative changes as a loss provision. Where lifetime expected credit losses on POCI instruments are less than those at initial recognition, then the favourable differences are recognised as impairment gains in the income statement (and impairment loss where the expected credit losses are greater).

 

(g) Definition of default

 

Critical to the determination of ECL is the definition of default. The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk.

 

The Group considers the following as constituting an event of default:

 

§ the borrower is past due for more than 90 days on any material credit obligation to the Group; or

§ the borrower is unlikely to pay its credit obligations to the Group in full.

 

The definition of default is appropriately tailored to reflect different characteristics of different types of assets. The decision to use cross-default is based on case by case assessment of borrower and facility conditions such as collateral and materiality of exposure.

 

When assessing if the borrower is unlikely to pay its credit obligation, the Group takes into account both qualitative and quantitative indicators. The information assessed depends on the type of the asset, for example, in corporate lending a qualitative indicator used is the breach of covenants, which is not relevant for retail lending. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. The Group uses a variety of sources of information to assess default which are either developed internally or obtained from external sources.

 

 

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial assets (continued)

 

(h) Significant increase in credit risk (SICR)

 

The Group monitors all financial assets, issued loan commitments and financial guarantee contracts that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk, the Group will measure the loss allowance based on lifetime rather than 12-month ECL.

 

In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument with the risk of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial instrument was first recognised. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort, based on the Group's historical experience and expert credit assessment including forward-looking information. For corporate lending, forward-looking information includes the future prospects of the industries in which the Group's counterparties operate, obtained from economic expert reports, financial analysts, governmental bodies and other similar organisations, as well as consideration of various internal and external sources of actual and forecast economic information. For retail, lending forward looking information includes the same economic forecasts as corporate lending with additional forecasts of local economic indicators, particularly for regions with a concentration to certain industries, as well as internally generated information of customer payment behaviour. Refer note 42 for more details about forward looking information and criteria used to determine significant increase in credit risk.

 

The Group uses different criteria to determine whether credit risk has increased significantly per portfolio of assets. The criteria used are both deterioration in internal/external ratings as well as qualitative assessment. For further details on SICR refer to note 42.

 

Regardless of the analysis above, a significant increase in credit risk is presumed if a customer is more than 30 days past due in making a contractual payment.

 

The qualitative factors that indicate significant increase in credit risk are reflected in PD models on a timely basis. However, the Group still considers separately some qualitative factors to assess if credit risk has increased significantly. For corporate lending there is particular focus on assets that are included on a 'watch list' given an exposure is on a watch list once there is a concern that the creditworthiness of the specific counterparty has deteriorated. For retail lending the Group considers credit scores and events such as unemployment, bankruptcy or death. As a back-stop when an asset becomes 30 days past due, the Group considers that a significant increase in credit risk has occurred and the asset is in stage 2 of the impairment model, i.e. the loss allowance is measured as the lifetime ECL.

 

(i)  Modification and derecognition of financial assets

 

Modification of financial assets

 

A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date.

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial assets (continued)

 

(i)   Modification and derecognition of financial assets (continued)

 

Modification of financial assets (continued)

 

In addition, the introduction or adjustment of existing covenants of an existing loan would constitute a modification even if these new or adjusted covenants do not yet affect the cash flows immediately but may affect the cash flows depending on whether the covenant is or is not met (e.g. a change to the increase in the interest rate that arises when covenants are breached).

 

The Group renegotiates loans to customers in financial difficulty to maximise collection and minimise the risk of default. A loan forbearance is granted in cases where although the borrower made all reasonable efforts to pay under the original contractual terms, there is a high risk of default or default has already happened and the borrower is expected to be able to meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repayment), reduction in the amount of cash flows due (principal and interest forgiveness) and amendments to covenants.

 

When a financial asset is modified the Group assesses whether this modification results in derecognition. In accordance with the Group's policy a modification results in derecognition when it gives rise to substantially different terms. To determine the substantially different terms the Group considers the qualitative factors (i.e. contractual cash flows after modification, change in currency or counterparty, interest rates, maturity, covenants) and a quantitative assessment (i.e. compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, discounted at the original effective interest).

 

In case where the financial asset is derecognised the loss allowance for ECL is remeasured at the date of derecognition to determine net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based on 12-month ECL except in the rare occasions where the new loan is considered to be originated credit impaired. This applies only in the case where the fair value of the new loan is recognised at a significant discount to its revised par amount because there remains a high risk of default which has not been reduced by the modification. The Group monitors credit risk of modified financial assets by evaluating qualitative and quantitative information, such as if the borrower is in past due status under the new terms.

 

When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Group determines if the financial asset's credit risk has increased significantly since initial recognition by comparing the credit rating at initial recognition and the original contractual terms; with credit rating at the reporting date based on the modified terms.

 

Where a modification does not lead to derecognition the Group calculates the modification gain/loss comparing the gross carrying amount before and after the modification (excluding the ECL allowance). Then the Group measures ECL for the modified asset, where the expected cash flows arising from the modified financial asset are included in calculating the expected cash shortfalls from the original asset.

 

 

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial assets (continued)

 

(i) Modification and derecognition of financial assets (continued)

 

Derecognition of financial assets

 

The Group derecognises a financial asset only when the contractual rights to the asset's cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

 

On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain/loss that had been recognised in OCI and accumulated in equity is recognised in profit or loss, with the exception of equity investment designated as measured at FVTOCI, where the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss but is transferred to retained earnings.

 

(j)  Presentation of allowance for ECL

 

Loss allowances for ECL are presented in the consolidated financial statements as follows:

 

§ for financial assets measured at amortised cost (loans and advances, balances due from central banks and other banks, reverse-repo placements and other financial assets): as a deduction from the gross carrying amount of the assets;

§ for debt instruments measured at FVTOCI: as part of revaluation reserve of  investments designated at FVTOCI  and recognised in other comprehensive income; and

§ for loan commitments and financial guarantee contracts: as a provision.

 

Financial liabilities

 

Financial liabilities are classified as either financial liabilities at 'FVTPL' or 'other financial liabilities'. The classification of financial liabilities at initial recognition depends on the purpose and management's intention for which the financial liabilities were incurred and their characteristics.

 

Financial liabilities are recognised in the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial liabilities (other than financial liabilities at FVTPL) are deducted from the fair value of the financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial liabilities at FVTPL are recognised immediately in profit or loss. If the transaction price differs from fair value at initial recognition, the Group will account for such difference as follows:

 

§ if fair value is evidenced by a quoted price in an active market for an identical liability or based on a valuation technique that uses only data from observable markets, then the difference is recognised in profit or loss on initial recognition (i.e. day 1 profit or loss);

§ in all other cases, the fair value will be adjusted to bring it in line with the transaction price (i.e. day 1 profit or loss will be deferred by including it in the initial carrying amount of the liability).

3.   Summary of significant accounting policies (continued)

 

3.8   Financial instruments (continued)

 

Financial liabilities (continued)

 

Financial liabilities are subsequently measured at amortised cost except for financial liabilities at fair value through profit or loss. Gains and losses on financial liabilities, other than derivative instruments, designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in fair value of the financial liability that is attributable to the changes in credit risk of that liability, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially in profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains or losses attributable to changes in the credit risk of the liability are also presented in the profit or loss.

 

Derecognition of financial liabilities

 

Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

 

The exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing liabilities, are accounted for as an extinguishment of the original financial liability and a recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors such as, currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any cost or fees incurred is recognised as part of the gain or loss on extinguishment. If an exchange or modification is not accounted for as an extinguishment, any cost or fees incurred adjust the carrying amount of the liability and are amortised using EIR method over the remaining term of the modified liability.

 

3.9  Foreign currencies

 

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements of the Group are presented in AED, which is the Group's functional and presentation currency.

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange prevailing at the statement of financial position date. Any resulting exchange differences are included in the consolidated income statement. Non-monetary assets and liabilities are translated at historical exchange rates or year-end exchange rates if held at fair value, as appropriate. The resulting foreign exchange gains or losses are recognised in either consolidated income statement or consolidated other comprehensive income statement depending upon the nature of the asset or liability.

 

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.9   Foreign currencies (continued)

 

In the consolidated financial statements, the results and financial positions of branches and subsidiaries whose functional currency is not AED, are translated into the Group's presentation currency as follows:

 

(a)  assets and liabilities at the rate of exchange prevailing at the statement of financial position date;

(b) income and expenses at the average rates of exchange for the reporting period; and

(c)  all resulting exchange differences arising from the retranslation of opening assets and liabilities and   arising from retranslation of the result for the reporting period from the average rate to the exchange rate prevailing at the period end are recognised in other comprehensive income and accumulated in equity under 'foreign currency translation reserve' (Note 22).

 

On disposal or partial disposal (i.e. of associates or jointly controlled entities not involving a change of accounting basis) of a foreign operation, exchange differences relating thereto and previously recognised in reserves are recognised in the consolidated income statement on a proportionate basis, except in the case of partial disposal (i.e. no loss of control) of a subsidiary that includes a foreign operation, where the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in the consolidated income statement.

 

3.10      Offsetting

 

Financial assets and liabilities are offset and reported net in the consolidated statement of financial position only when there is a legally enforceable right to set off the recognised amounts and when the Group intends to settle either on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.

 

The Group is party to a number of arrangements, including master netting agreements that give it the right to offset financial assets and financial liabilities but, where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented on a gross basis.

 

3.11      Sale and repurchase agreements

 

Securities sold subject to a commitment to repurchase them at a predetermined price at a specified future date (repos) are continued to be recognised in the consolidated statement of financial position and a liability is recorded in respect of the consideration received under borrowings. The difference between sale and repurchase price is treated as interest expense using the effective interest rate yield method over the life of the agreement. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the consolidated statement of financial position.  Amounts placed under these agreements are included in reverse-repo placements. The difference between purchase and resale price is treated as interest income using the effective yield method over the life of the agreement.

 

3.12      Securities borrowing and lending

 

Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower. Borrowed securities are not recognised in the statement of financial position nor are lent securities derecognised. Cash collateral received or given is treated as a financial asset or liability. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded. The securities borrowing and lending activity arrangements are generally entered into through repos and reverse repos.

 

 

3.   Summary of significant accounting policies (continued)

 

3.13      Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, balances held with central banks, deposits and balances due from banks, due to banks, items in the course of collection from or in transmission to other banks and highly liquid assets with original maturities of less than three months from the date of acquisition, which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

 

3.14      Amortised cost measurement

 

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

 

3.15      Fair value measurement

 

The Group measures its financial assets and liabilities at market price that it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market, or in its absence in the most advantageous market for the assets or liabilities. The Group considers principal market as the market with the greatest volume and level of activity for financial assets and liabilities. 

 

The Group measures its non-financial assets at a price that take into account a market participant's ability to generate economic benefits by using the assets for their highest and best use.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. The fair value of a liability reflects its non-performance risk.

 

When applicable, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability takes place with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

When there is no quoted price in an active market, the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account into pricing a transaction.

 

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or a liability nor based on valuation technique that uses only data from observable markets, the instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, the difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out.

 

 

3.   Summary of significant accounting policies (continued)

 

3.15   Fair value measurement (continued)

 

If an asset or a liability measured at fair value has a bid and an ask price, the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price.

 

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either the market or credit risk, are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

 

Different levels of fair value hierarchy based on the inputs to valuation techniques are discussed in Note 40. The Group's policy is to recognise transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer.

 

3.16      Derivatives

 

A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in the price of one or more underlying financial instrument, reference rate or index.

 

Derivative financial instruments are initially measured at fair value at trade date, and are subsequently re-measured at fair value at the end of each reporting period. All derivatives are carried at their fair values as assets where the fair values are positive and as liabilities where the fair values are negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions are with the same counterparty, a legal right of offset exists and the parties intend to settle the cash flows on a net basis.

 

Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative's components using appropriate pricing or valuation models.

 

The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the consolidated income statement under 'net gain on dealing in derivatives' (Note 29).

 

3.17      Hedge accounting

 

Derivatives designated as hedges are classified as either: (i) hedges of the change in the fair value of recognised assets or liabilities or firm commitments ('fair value hedges'); (ii) hedges of the variability in future cash flows attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction that could affect future reported net income ('cash flow hedges'); or (iii) a hedge of a net investment in a foreign operation ('net investment hedges'). Hedge accounting is applied to derivatives designated in this way provided certain criteria are met.

 

At the inception of a hedging relationship, to qualify for hedge accounting, the Group documents the relationship between the hedging instruments and the hedged items as well as its risk management objective and its strategy for undertaking the hedge. The Group also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the hedging instruments, primarily derivatives, that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. Interest income and expense on designated qualifying hedge instruments is included in 'Net interest income'.

 

 

3.   Summary of significant accounting policies (continued)

 

3.17   Hedge accounting (continued)

 

Fair value hedges

 

Where a hedging relationship is designated as a fair value hedge, the hedged item is adjusted for the change in fair value in respect of the risk being hedged. Gains or losses on the changes in fair value of both the derivative and the hedged item attributable to hedged risk are recognised in the consolidated income statement and the carrying amount of the hedged item is adjusted accordingly. If the derivative expires, is sold, terminated, exercised, no longer meets the criteria for fair value hedge accounting or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point to the carrying value of a hedged item, for which the effective interest method is used, is amortised in the consolidated income statement as part of the recalculated effective interest rate over the period to maturity or derecognition.

 

Cash flow hedges

 

The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under cash flow hedge reserve. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item.  The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement.

 

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to consolidated income statement in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are removed from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. This transfer does not affect other comprehensive income. Furthermore, if the Group expects that some or all of the loss accumulated in other comprehensive income will not be recovered in the future, that amount is immediately reclassified to profit or loss.

 

Hedge accounting is discontinued only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria. This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss.

 

Net investment hedge

 

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income and held in the net investment hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement. Gains and losses accumulated in equity are reclassified from other comprehensive income and included in the consolidated income statement on the disposal of the foreign operation.

 

Hedge effectiveness testing

 

To qualify for hedge accounting, the Group requires that at the inception of the hedge and through its life, each hedge must be expected to be highly effective (prospective effectiveness) and demonstrate actual effectiveness (retrospective effectiveness) on an ongoing basis.

 

 

3.   Summary of significant accounting policies (continued)

 

3.17   Hedge accounting (continued)

 

Hedge effectiveness testing (continued)

 

The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method the Group adopts for assessing hedge effectiveness depends on its risk management strategy.

 

For prospective effectiveness, the hedging instrument must be expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other in the range of 80 per cent to 125 per cent. Hedge ineffectiveness is recognised in the consolidated income statement.

 

Derivatives that do not qualify for hedge accounting

 

All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognised immediately in the consolidated income statement in "net gains from dealing in derivatives" under net trading income (Note 29).

 

3.18      Treasury shares and contracts on own shares

 

Own equity instruments of the Group which are acquired by the Group or any of its subsidiaries (treasury shares) are deducted from other reserves and accounted for at weighted average cost. Consideration paid or received on the purchase, sale, issue or cancellation of the Group's own equity instruments is recognised directly in equity.

 

No gain or loss is recognised in the consolidated income statement on the purchase, sale, issue or cancellation of own equity instruments.

 

Contracts on own shares that require physical settlement of a fixed number of own shares for a fixed consideration are classified as equity and added to or deducted from equity. Contracts on own shares that require net cash settlement or provide a choice of settlement are classified as trading instruments and changes in the fair value are reported in the consolidated income statement.

 

3.19      Financial guarantees

 

Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified party fails to meet its obligation when due in accordance with the contractual terms.

 

Financial guarantee contracts are initially recognised at their fair value, which is likely to equal the premium received on issuance. The received premium is amortised over the life of the financial guarantee. The guarantee liability (the notional amount) is subsequently recognised at the higher of this amortised amount and the present value of any expected payments (when a payment under guarantee has become probable). The premium received on these financial guarantees is included within other liabilities.

 

3.20      Acceptances

 

Acceptances arise when the Bank is under an obligation to make payments against documents drawn under letters of credit. Acceptances specify the amount of money, the date and the person to which the payment is due. After acceptance, the instrument becomes an unconditional liability (time draft) of the Bank and is therefore recognised as a financial liability in the consolidated statement of financial position with a corresponding contractual right of reimbursement from the customer recognised as a financial asset.

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.21      Collateral repossessed

 

The Bank acquires collaterals in settlement of certain loans and advances.  These collaterals are recognised at net realisable value on the date of acquisition and are classified as investment properties.  Subsequently, the fair value is determined on a periodic basis by independent professional valuers. Fair value adjustments on these collaterals are included in the consolidated income statement in the period in which these gains or losses arise.

 

3.22      Investment properties

 

Investment property is property held either to earn rental income or for capital appreciation or both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is reflected at valuation based on fair value at the statement of financial position date. Refer note 3.15 for policy on fair valuation.

 

The fair value is determined on a periodic basis by independent professional valuers. Fair value adjustments on investment property are included in the consolidated income statement in the period in which these gains or losses arise.

 

Investment properties under development that are being constructed or developed for future use as investment property are measured initially at cost including all direct costs attributable to the design and construction of the property including related staff costs. Subsequent to initial recognition, investment properties under development are measured at fair value. Gains and losses arising from changes in the fair value of investment property under development is included in the consolidated income statement in the period in which they arise.

 

An investment property is derecognised upon disposal or when the investment property and investment property under development are permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between net disposal proceeds and the carrying amount of the asset) in included in profit or loss in the period in which the property is derecognised.

 

3.23      Property and equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment loss, if any. Cost includes expenditure that is directly attributable to the acquisition of the asset.

 

Depreciation is charged to the consolidated income statement so as to write off the depreciable amount of property and equipment over their estimated useful lives using the straight-line method. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated.

 

Estimated useful lives are as follows:

 

Freehold properties

15 to 40 years

Leasehold and freehold improvements

7 to 10 years

Furniture, equipment and vehicles

3 to 5 years

Computer equipment, software and accessories

4 to 10 years

 

Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.

 

Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset at that date and is recognised in the consolidated income statement.

3.   Summary of significant accounting policies (continued)

 

3.24      Capital work in progress

 

Capital work in progress is stated at cost. When the asset is ready for use, capital work in progress is transferred to the appropriate property and equipment category and depreciated in accordance with the Group's policies.

 

3.25      Intangible assets

 

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Group. Intangible assets acquired separately or in a business combination (other than goodwill) are measured on initial recognition at fair value and subsequently at cost less accumulated amortisation and impairment loss.

 

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 life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates and accounted for on a prospective basis. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement.

 

An intangible asset is derecognised on disposal or when no future economic benefits are expected from use. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in consolidated income statement when the asset is derecognised.

 

3.26      Borrowing costs

 

Borrowing costs directly attributable to the acquisition or construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use are added to the cost of those assets, until such time as the assets are substantially ready for their intended use.

 

All other borrowing costs are recognised in the consolidated income statement in the period in which they are incurred.

 

3.27      Impairment of non-financial assets

 

At each consolidated statement of financial position date, the Group reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.27   Impairment of non-financial assets (continued)

 

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount.  An impairment loss is recognised in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

 

3.28      Employee benefits

 

(i)  Employees' end of service benefits

 

(a) Defined benefit plan

 

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The liability recognised in the statement of financial position in respect of defined benefit gratuity plans is the present value of the defined benefit obligation at the end of the reporting period together with adjustments for unrecognised past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation.

 

Past-service costs are recognised immediately in income, unless the changes to the gratuity plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

 

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses are recognised immediately in other comprehensive income. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions.

 

The Group provides end of service benefits for its expatriate employees.  The entitlement to these benefits is based upon the employees' length of service and completion of a minimum service period.  The expected costs of these benefits are accrued over the period of employment.

 

(b) Defined contribution plan

 

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in consolidated income statement in the periods during which services are rendered by employees.

 

Pension contributions are made by the Group to the Abu Dhabi Retirement Pensions and Benefits Fund for UAE citizens in accordance with UAE Federal Law No. 7 of 1999 and to respective pension authorities for other employees including GCC Nationals as per applicable laws.
 

3.   Summary of significant accounting policies (continued)

 

3.28   Employee benefits (continued)

 

(ii) Termination benefits

 

Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting date, then they are discounted to their present value.

 

(iii) Short-term employee benefits

 

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

 

(iv)  Employees' incentive plan shares

 

The cost of the equity-settled share-based payments is expensed over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement over the remaining vesting period, with a corresponding adjustment to the employees' incentive plan reserve.

 

Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised 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 modification.

 

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the counterparty are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

 

The dilutive effect of outstanding incentive plan shares is reflected in the computation of diluted earnings per share (Note 33).

 

3.29      Provisions and contingent liabilities

 

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 the obligation can be made. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

 

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.29   Provisions and contingent liabilities (continued)

 

Provisions for onerous contracts are recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligation under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.

 

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset only if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

 

Contingent liabilities, which include certain guarantees and letters of credit, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the Group's control; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements, unless they are remote.

 

3.30      Segment reporting

 

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

 

Refer to note 38 on Business Segment reporting.

 

3.31      Taxation

 

Provision is made for taxes at rates enacted or substantively enacted as at statement of financial position date on taxable profits of overseas branches and subsidiaries in accordance with the fiscal regulations of the respective countries in which the Group operates.

 

3.32      Revenue 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 is recognised.

 

(i)          Interest income and expense

 

Interest income and expense for all financial instruments except for those classified as held for trading or those measured or designated at fair value through profit or loss (FVPTL) are recognised in 'net interest income' as 'interest income' and 'interest expense' in the profit or loss account using the effective interest method. Interest on financial instruments classified as held for trading or those measured or designated at FVTPL is recognised in 'Net gains from trading securities' under 'Net trading income'.

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.32   Revenue and expense recognition (continued)

 

(i)     Interest income and expense (continued)

 

The effective interest rate (EIR) is the rate that exactly discounts estimated future cash flows of the financial instrument through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. The future cash flows are estimated taking into account all the contractual terms of the instrument. The calculation of the EIR includes all fees and points paid or received between parties to the contract that are incremental and directly attributable to the specific lending arrangement, transaction costs, and all other premiums or discounts. For financial assets at FVTPL transaction costs are recognised in profit or loss at initial recognition.

 

(ii)         Dividend income

 

Dividend income is recognised on the ex-dividend date when the Group's right to receive the payment is established.

 

(iii)       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:

 

(a)  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 income 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. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis.

 

(b)  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.

 

3.33      Islamic financing

 

The Group engages in Shari'ah compliant Islamic banking activities through various Islamic instruments such as Murabaha, Ijara, Musharaka, Salam, Mudaraba, Sukuk and Wakala.

 

Murabaha financing

 

A sale contract whereby the Group sells to a customer commodities and other assets at an agreed upon profit mark up on cost. The Group purchases the assets based on a promise received from customer to buy the item purchased according to specific terms and conditions. Profit from Murabaha is quantifiable at the commencement of the transaction. Such income is recognised as it accrues over the period of the contract on effective profit rate method on the balance outstanding. 

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.33   Islamic financing (continued)

 

Ijara financing

 

Ijara financing is an agreement whereby the Group (lessor) leases or constructs an asset based on the customer's (lessee) request and promise to lease the assets for a specific period against certain rent instalments. Ijara could end in transferring the ownership of the asset to the lessee at the end of the lease period. Also, the Group transfers substantially all the risks and rewards related to the ownership of the leased asset to the lessee. Ijara income is recognised on an effective profit rate basis over the lease term.

 

Musharaka

 

Musharaka is an Islamic contract in which two parties (Islamic financial institution and its customer) pool their respective funds to form a partnership. In Musharaka both parties are involved in management of the business/partnership. Profit is shared on the basis of pre-agreed ratio and loss is shared in the ratio of capital contribution. It's not mandatory in Musharaka for all parties to participate in the management of business. Practically, this form of investment is used by the Islamic financial institution to finance its customers.

 

Mudaraba

 

A contract between the Group and a customer, whereby one party provides the funds (Rab Al Mal) and the other party (the Mudarib) invests the funds in a project or a particular activity and any  profits generated are distributed between the parties according to the profit shares that were pre-agreed in the contract. The Mudarib would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudaraba, otherwise, losses are borne by the Rab Al Mal. Income is recognised based on expected results adjusted for actual results on distribution by the Mudarib, whereas if the Group is the Rab Al Mal the losses are charged to the Group's consolidated income statement when incurred.

 

Salam

 

Bai Al Salam is a sale contract where the customer (seller) undertakes to deliver/supply a specified tangible asset to the Group (buyer) at mutually agreed future date(s) in exchange for an advance price fully paid on the spot by the buyer.

Revenue on Salam financing is recognised on the effective profit rate basis over the period of the contract, based on the Salam capital outstanding.

 

Wakala

 

An agreement between the Group and customer whereby one party (Rab Al Mal) provides a certain sum of money to an agent (Wakil), who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to guarantee the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. The Group may be Wakil or Rab Al Mal depending on the nature of the transaction.

 

Estimated income from Wakala is recognised on the effective profit rate basis over the period, adjusted by actual income when received. Losses are accounted for when incurred.

 

Sukuk

 

Certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity. It is asset-backed trust certificates evidencing ownership of an asset or its usufruct (earnings or benefits) and complies with the principle of Shari'ah.

 

 

 

4.    Critical accounting judgements and key sources of estimation uncertainty

 

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of these consolidated financial statements. IFRS requires the management, in preparing the Group's consolidated financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's Framework for the Preparation and Presentation of Financial Statements. The judgements and assumptions involved in the Group's accounting policies that are considered by the Board of Directors (the "Board") to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.

 

4.1         Critical judgments in applying the changes in Group's accounting policies

 

The following are the critical judgments, apart from those involving estimations, that the management has made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements:

 

Business model assessment

 

Classification and measurement of financial assets depends on the results of the SPPI and the business model test. The Group determines the business model at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. This assessment includes judgment reflecting all relevant evidence including how the performance of the assets is evaluated and their performance measured, the risks that affect the performance of the assets and how these are managed and how the managers of the assets are compensated. The Group monitors financial assets measured at amortised cost or fair value through other comprehensive income that are derecognised prior to their maturity to understand the reason for their disposal and whether the reasons are consistent with the objective of the business for which the asset was held. Monitoring is part of the Group's continuous assessment of whether the business model for which the remaining financial assets are held continues to be appropriate and if it is not appropriate whether there has been a change in business model and so a prospective change to the classification of those assets.

 

Impairment losses

 

§ Significant increase of credit risk: ECLs are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL for stage 2 or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward looking information.

§ Establishing groups of assets with similar credit risk characteristics: When ECLs are measured on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics (e.g. instrument type, credit risk grade, collateral type, date of initial recognition, remaining term to maturity, industry, geographic location of the borrower, etc). The Group monitors the appropriateness of the credit risk characteristics on an ongoing basis to assess whether they continue to be similar. This is required in order to ensure that should credit risk characteristics change there is appropriate re-segmentation of the assets. This may result in new portfolios being created or assets moving to an existing portfolio that better reflects the similar credit risk characteristics of that group of assets. Re-segmentation of portfolios and movement between portfolios is more common when there is a significant increase in credit risk (or when that significant increase reverses) and so assets move from 12-month to lifetime ECLs, or vice versa, but it can also occur within portfolios that continue to be measured on the same basis of 12-month or lifetime ECLs but the amount of ECL changes because the credit risk of the portfolios differ.

4.   Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.1   Critical judgments in applying the changes in Group's accounting policies (continued)

 

Impairment losses (continued)

 

§ Models and assumptions used: The Group uses various models and assumptions in measuring ECL of financial assets. Judgement is applied in identifying the most appropriate model for each type of asset, as well as for determining the assumptions used in these models, including assumptions that relate to key drivers of credit risk. Refer note 42 for more details on ECL.

 

Valuation of financial instruments

 

The best evidence of fair value is a quoted price for the instrument being measured in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employ only observable market data and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that include one or more significant market inputs that are unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of management judgement to calculate a fair value than those based wholly on observable inputs.

 

Valuation techniques used to calculate fair values are discussed in note 40. The main assumptions and estimates which management consider when applying a model with valuation techniques are:

 

§ the likelihood and expected timing of future cash flows on the instrument. These cash flows are estimated based on the terms of the instrument, and judgement may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive to changes in market rates;

§ selecting an appropriate discount rate for the instrument. The determination of this rate is based on an assessment of what a market participant would regard as the appropriate spread of the rate for the instrument over the appropriate risk-free rate; and

§ when applying a model with unobservable inputs, estimates are made to reflect uncertainties in fair values resulting from a lack of market data inputs, for example, as a result of illiquidity in the market. For these instruments, the fair value measurement is less reliable. Inputs into valuations based on unobservable data are inherently uncertain because there is little or no current market data available from which to determine the level at which an arm's length transaction would occur under normal business conditions. However, in most cases there is some market data available on which to base a determination of fair value, for example historical data, and the fair values of most financial instruments are based on some market observable inputs even when unobservable inputs are significant.

 

Fair valuation of investment properties

 

The fair values of investment properties is based on the highest and best use of the properties, which is their current use. The fair valuation of the investment properties is carried out by independent valuers based on models whose inputs are observable in an active market such as market conditions, market prices, future rental income, etc.

 

The fair value movements on investment properties are disclosed in more detail in note 12.

 

Consolidation of Funds

 

The changes introduced by IFRS 10 - Consolidated Financial Statements require an investor to consolidate an investee when it controls the investee. The investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The new definition of control requires the Group to exercise significant judgement on an ongoing basis to determine which entities are controlled, and therefore are required to be consolidated.

4.   Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.1   Critical judgments in applying the changes in Group's accounting policies (continued)

 

Lease accounting under IFRS 16

 

The following are the critical judgments in the application of IFRS 16, apart from those involving estimations, that the management has made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements:

 

§ identifying whether a contract (or part of a contract) includes a lease;

§ determining whether it is reasonably certain that an extension or termination option will be exercised;

§ classification of lease arrangements (when the entity is a lessor).

 

Tax positions

 

The income tax positions taken are considered by the Group to be supportable and are intended to withstand challenge from tax authorities. However, it is acknowledged that these positions are uncertain and include interpretations of complex tax laws which could be disputed by tax authorities. Evolving insights, for example following final tax assessments for prior years, can result in additional tax burdens or benefits, and new tax risks may arise.

 

The Group judges these positions on their technical merits and this on a regular basis using all the information available (legislation, case law, regulations, established practice, authoritative doctrine as well as the current state of discussions with tax authorities, where appropriate). A liability is recorded for each item that is not probable of being sustained on examination by the tax authorities, based on all relevant information. The liability is calculated taking into account the most likely outcome or the expected value, depending on which is thought to give a better prediction of the resolution of each uncertain tax position in view of reflecting the likelihood of an adjustment being recognized upon examination. These estimates are based on facts and circumstances existing at the end of the reporting period. The tax liability and income tax expense include expected penalties and late payment interests arising from tax disputes.

 

Management has used its best estimate of the correct value of liability to recognize in each case, which includes a judgement on the length of the future time period to use in such assessments.

 

4.2    Key sources of estimation uncertainty

 

The following are key estimations that the management has used in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the Group's consolidated financial statements:

 

§ Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and determining the forward looking information relevant to each scenario: When measuring ECL the Group uses reasonable and supportable forward looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other.

§ Probability of default (PD) constitutes a key input in measuring ECL. PD is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.

§ Loss given default (LGD) is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements.

 

 

 

4.   Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.2   Key sources of estimation uncertainty (continued)

 

Lease accounting under IFRS 16

 

The following are key estimations that the management has used in the process of applying the Group's accounting policies for IFRS 16 and that have the most significant effect on the amounts recognised in the Group's consolidated financial statements:

 

§ determination of the appropriate rate to discount the lease payments;

§ assessment of whether a right-of-use asset is impaired.

 

Fair valuation of assets acquired and liabilities assumed in business combination

 

As stated in note 3.6 above, the identifiable assets acquired and the liabilities assumed in business combination are recognised at their fair value. In estimating the fair value of an asset or a liability, the Group uses market‑observable data to the extent it is available. Where Level 1 inputs are not available, the Group engages third party qualified valuers to perform the valuation. Such valuations are sensitive to changes in one or more unobservable inputs which are considered reasonably possible within the next financial year. 

 

 

 

5.    Cash and balances with central banks, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Cash on hand

 

 

 

 

1,830,228

 

1,499,000

Balances with central banks

 

 

 

 

2,854,588

 

3,404,794

Reserves maintained with central banks

 

 

 

 

15,379,030

 

11,004,968

Certificate of deposits with central banks

 

 

 

 

4,841,367

 

3,673,000

Reverse‐repo with Central Bank

 

 

 

 

-

 

8,423

Gross cash and balances with central banks

 

 

 

 

24,905,213

 

19,590,185

Less: Allowance for impairment (Note 42.3)

 

 

 

 

(247)

 

(228)

Total cash and balances with central banks, net

 

 

 

 

24,904,966

 

19,589,957

The geographical concentration is as follows:

 

 

 

 

 

 

 

Within the UAE

 

 

 

 

24,120,803

 

19,534,940

Outside the UAE

 

 

 

 

784,410

 

55,245

 

 

 

 

 

24,905,213

 

19,590,185

Less: Allowance for impairment (Note 42.3)

 

 

 

 

(247)

 

(228)

 

 

 

 

 

24,904,966

 

19,589,957

 

Reserves maintained with central banks represent deposits with the central banks at stipulated percentages of its demand, savings, time and other deposits. These are available for day-to-day operations only under certain specified conditions.

 

6.    Deposits and balances due from banks, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Nostro balances

 

 

 

 

1,151,543

 

1,913,798

Margin deposits

 

 

 

 

1,315,686

 

256,474

Time deposits

 

 

 

 

5,616,585

 

6,888,240

Wakala placements

 

 

 

 

3,305,700

 

3,579,525

Loans and advances to banks

 

 

 

 

11,725,422

 

7,023,366

Gross deposits and balances due from banks

 

 

 

 

23,114,936

 

19,661,403

Less: Allowance for impairment (Note 42.3)

 

 

 

 

(49,962)

 

(34,327)

Total deposits and balances due from banks, net

 

 

 

 

23,064,974

 

19,627,076

The geographical concentration is as follows:

 

 

 

 

 

 

 

Within the UAE

 

 

 

 

8,013,181

 

8,730,693

Outside the UAE

 

 

 

 

15,101,755

 

10,930,710

 

 

 

 

 

23,114,936

 

19,661,403

Less: Allowance for impairment (Note 42.3)

 

 

 

 

(49,962)

 

(34,327)

 

 

 

 

 

23,064,974

 

19,627,076

 

 

 

7.    Reverse-repo placements

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Banks and financial institutions

 

 

 

 

 

-

 

2,203,800

Total reverse-repo placements

 

 

 

 

 

-

 

2,203,800

The geographical concentration is as follows:

 

 

 

 

 

 

 

Within the UAE

 

 

 

 

 

-

 

2,020,150

Outside the UAE

 

 

 

 

 

-

 

183,650

 

 

 

 

 

 

-

 

2,203,800

 

The Group enters into reverse repurchase agreements under which bonds with fair value of AED Nil (December 31, 2018 - bonds with fair value of AED 2,271,007 thousand) were received as collateral against reverse-repo placements. The risks and rewards relating to these bonds remains with the counterparties. The terms and conditions of these collaterals are governed by Global Master Repurchase Agreements (GMRA).

 

8.    Derivative financial instruments

 

In the ordinary course of business the Group enters into various types of derivative transactions that are affected by variables in the underlying instruments. 

 

A derivative is a financial instrument or other contract with all three of the following characteristics:

(a)   its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the 'underlying');

(b)  it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

(c)   it is settled at a future date.

 

Derivative financial instruments which the Group enters into includes forward foreign exchange contracts, interest rate futures, forward rate agreements, commodity swaps, interest rate swaps and currency and interest rate options.

 

The Group uses the following derivative financial instruments for hedging and trading purposes.

 

Forward and Futures transactions

 

Currency forwards represent commitments to purchase foreign and domestic currencies, including non-deliverable forward transactions (i.e. the transaction is net settled). Foreign currency and interest rate futures are contractual obligations to receive or pay a net amount based on changes in currency rates or interest rates or to buy or sell foreign currency or a financial instrument on a future date at a specified price established in an organised financial market. The credit risk for futures contracts is negligible as they are collateralised by cash or marketable securities and changes in the futures' contract value are settled daily with the broker. Forward rate agreements are individually negotiated interest rate futures that call for a cash settlement at a future date for the difference between a contracted rate of interest and the current market rate based on a notional principal amount.

 

 

 

8.   Derivatives financial instruments (continued)


Swap transactions

 

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates (for example: fixed rate for floating rate) or a combination of all these (for example: cross-currency interest rate swaps). No exchange of principal takes place except for certain cross currency interest rate swaps. The Group's credit risk represents the potential loss if counterparties fail to fulfill their obligation. This risk is monitored on an ongoing basis through market risk limits on exposures and credit risk assessment of counterparties using the same techniques as those of lending activities.

 
Option transactions

 

Foreign currency and interest rate options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a foreign currency or a specific rate of interest or any financial instrument at a predetermined price. The seller receives a premium from the purchaser in consideration for the assumption of foreign exchange or interest rate risk. Options may be either exchange-traded or negotiated between the Group and a customer over the counter (OTC).

 

Derivative contracts can be exchange traded or OTC. The Group values exchange traded derivatives using inputs at market-clearing levels. OTC derivatives are valued using market based inputs or broker/dealer quotations.  Where models are required, the Group uses a variety of inputs, including contractual terms, market prices, market volatilities, yield curves and other reference market data.

 

Fair value measurement models

 

For OTC derivatives that trade in liquid markets such as generic forwards, swaps and options, model inputs can generally be verified and model selection conforms to market practice. Certain OTC derivatives trade in less liquid markets with limited pricing information and the determination of fair value for these derivatives is inherently more difficult. Subsequent to initial recognition, the Group only updates valuation inputs when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker dealer quotations or other empirical market data. In the absence of such evidence, Management's best estimates are used.

 

Derivatives held or issued for trading purposes

 

The Group's trading activities are predominantly related to offering hedging solutions to customers at competitive prices in order to enable them to transfer, modify or reduce current and expected risks. The Group also manages risk taken as a result of client transactions or initiates positions with the expectation of profiting from favourable movement in prices, rates or indices.

 

Derivatives held or issued for hedging purposes

 

The Group uses derivative financial instruments for hedging purposes as part of its asset and liability management activities in order to reduce its own exposure to fluctuations in currency and interest rates.  The Group uses forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps to hedge currency rate and interest rate risks. In all such cases, the hedging relationship and objectives including details of the hedged item and hedging instrument are formally documented and the transactions are accounted for based on the type of hedge.

 

 

 

8.   Derivatives financial instruments (continued)

 

The table below shows the positive (assets) and negative (liabilities) fair values of derivative financial instruments.

 

 

 

 

 

   Fair values

 

 

 

 

 

 

Assets

 

Liabilities

 

Notional

 

 

 

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

As at December 31, 2019

 

 

 

 

 

 

Derivatives held or issued for trading

 

 

 

 

 

 

 Foreign exchange derivatives

 

532,891

 

521,455

 

331,658,208

 Interest rate and cross currency swaps

 

4,241,279

 

4,234,121

 

265,245,648

 Interest rate and commodity options

 

421,623

 

331,066

 

57,957,412

 Forward rate agreements

 

111

 

26

 

560,031

 Futures (exchange traded)

 

15

 

-

 

7,254,310

 Commodity and energy swaps

 

157,052

 

150,144

 

2,091,119

 Swaptions

 

213,455

 

219,663

 

40,292,838

Total derivatives held or issued for trading

 

5,566,426

 

5,456,475

 

705,059,566

Derivatives held as fair value hedges

 

 

 

 

 

 

 Interest rate and cross currency swaps

 

1,050,963

 

1,421,646

 

82,493,134

Derivatives held as cash flow hedges

 

 

 

 

 

 

Interest rate and cross currency swaps

 

76,819

 

51,881

 

7,000,783

Forward foreign exchange contracts

 

95,509

 

19,889

 

8,285,366

Total derivatives held as cash flow hedges

 

172,328

 

71,770

 

15,286,149

 

 

 

 

 

 

 

Total derivative financial instruments

 

6,789,717

 

6,949,891

 

802,838,849

 

 

 

 

 

 

 

   Fair values

 

 

 

 

 

 

Assets

 

Liabilities

 

Notional

 

 

 

 

AED'000

 

AED'000

 

AED'000

As at December 31, 2018

 

 

 

 

 

 

 

 

Derivatives held or issued for trading

 

 

 

 

 

 

 Foreign exchange derivatives

 

719,659

 

440,214

 

268,624,410

 Interest rate and cross currency swaps

 

2,548,601

 

2,516,720

 

232,645,162

 Interest rate and commodity options

 

524,402

 

593,051

 

49,190,144

 Forward rate agreements

 

9

 

303

 

1,100,000

 Futures (exchange traded)

 

56

 

275

 

1,212,100

 Commodity and energy swaps

 

107,552

 

92,133

 

3,105,642

 Swaptions

 

176,872

 

173,068

 

45,421,133

Total derivatives held or issued for trading

 

4,077,151

 

3,815,764

 

601,298,591

Derivatives held as fair value hedges

 

 

 

 

 

 

 Interest rate and cross currency swaps

 

347,962

 

1,645,460

 

70,385,718

Derivatives held as cash flow hedges

 

 

 

 

 

 

Interest rate and cross currency swaps

 

17,923

 

154,190

 

5,479,207

Forward foreign exchange contracts

 

4,211

 

80,497

 

18,445,248

Total derivatives held as cash flow hedges

 

22,134

 

234,687

 

23,924,455

 

 

 

 

 

 

 

 

 

Total derivative financial instruments

 

4,447,247

 

5,695,911

 

695,608,764

 

The notional amounts indicate the volume of transactions and are neither indicative of the market risk nor credit risk.

 

 

 

8.   Derivatives financial instruments (continued)

 

The net hedge ineffectiveness (losses)/gains recognised in the consolidated income statement are as follows:

 

 

2019

 

2018

 

AED'000

 

AED'000

Net change in the fair value of the hedged items attributable to risk hedged

             (997,113)

 

978,821

Net change in the fair value of the hedging instruments

                950,115

 

(962,809)

Fair value hedging ineffectiveness - (losses)/gains

(46,998)

 

16,012

Add: Cash flow hedging ineffectiveness - gains

365

 

-

Net hedge ineffectiveness (losses)/gains

(46,633)

 

16,012

 

The table below provides the Group's forecast of net cash flows in respect of its cash flow hedges and the periods in which these cash flows are expected to impact consolidated income statement, excluding any hedging adjustment that may be applied.

 

 

 

 

Less than 3 months

 

3 months to less than 1 year

 

1 year to less than 2 years

 

2 years to less than 5 years

 

Total

Forecasted net cash flows

AED'000

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

 

2019

30,421

 

64,672

 

34,141

 

25,633

 

154,868

2018

(19,388)

 

(16,314)

 

3,001

 

(8,860)

 

(41,561)

 

 

 

 

 

 

 

 

 

 

 

As at December 31, 2019, the Group received cash collateral of AED 758,274 thousand (December 31, 2018 - AED 207,554 thousand) and bonds with fair value of AED 186,117 thousand (December 31, 2018 - AED 26,847 thousand) against positive fair value of derivative assets.

 

As at December 31, 2019, the Group placed cash collateral of AED 1,315,686 thousand (December 31, 2018 - AED 275,060 thousand) and bonds of AED 1,956,945 thousand (December 31, 2018 - AED 2,317,131 thousand) against the negative fair value of derivative liabilities.  These collaterals are governed by collateral service agreements under International Swaps and Derivatives Association (ISDA) agreements.

 

9.    Investment securities

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

GCC(*)

 

Rest of

 

 

 

 

UAE

 

countries

 

the world

 

Total

 

 

AED'000

 

AED'000

 

AED'000

 

AED'000

As at December 31, 2019

 

 

 

 

 

 

 

Quoted:

 

 

 

 

 

 

 

 Government securities

     11,991,052

 

     16,262,483

 

            9,335,345

 

          37,588,880

 Bonds - Public sector

     10,209,692

 

       1,780,786

 

            4,695,439

 

          16,685,917

 Bonds - Banks and financial institutions

       6,882,385

 

           479,304

 

            5,083,594

 

          12,445,283

 Bonds - Corporate

       1,302,004

 

           473,176

 

               302,977

 

            2,078,157

 Equity instruments (**)

           251,237

 

           110,809

 

                  81,623

 

               443,669

 Mutual funds

             72,201

 

                      -  

 

                  86,990

 

               159,191

Total quoted

     30,708,571

 

19,106,558

 

          19,585,968

 

         69,401,097

Unquoted:

 

 

 

 

 

 

 

 Government securities

       3,509,814

 

           174,598

 

                           -  

 

            3,684,412

 Bonds - Banks and financial institutions

                      -  

 

                      -  

 

               134,226

 

               134,226

 Equity instruments

           183,077

 

                      -  

 

                  35,106

 

               218,183

 Mutual funds

                      -  

 

               1,615

 

                       580

 

                    2,195

 Total unquoted

       3,692,891

 

176,213

 

169,912

 

4,039,016

Total investment securities

34,401,462

 

     19,282,771

 

          19,755,880

 

73,440,113

 

(*) Gulf Cooperation Council

(**) includes investments in perpetual bonds issued by other banks
 

9.   Investment securities (continued)

 

 

 

 

Other

 

 

 

 

 

 

 

GCC(*)

 

Rest of

 

 

 

UAE

 

countries

 

the world

 

Total

 

AED'000

 

AED'000

 

AED'000

 

AED'000

As at December 31, 2018

 

 

 

 

 

 

 

Quoted:

 

 

 

 

 

 

 

 Government securities

        4,934,961

 

        9,028,003

 

             9,022,797

 

          22,985,761

 Bonds - Public sector

        6,918,084

 

        1,019,842

 

             4,308,028

 

          12,245,954

 Bonds - Banks and financial institutions

        3,525,733

 

           798,208

 

             4,009,956

 

             8,333,897

 Bonds - Corporate

           604,407

 

           174,855

 

                271,557

 

             1,050,819

 Equity instruments

                   333

 

 -

 

 -

 

                       333

 Mutual funds

             68,136

 

 -

 

                  81,767

 

                149,903

Total quoted

      16,051,654

 

      11,020,908

 

          17,694,105

 

          44,766,667

Unquoted:

 

 

 

 

 

 

 

 Government securities

        7,210,099

 

 -

 

 -

 

             7,210,099

 Bonds - Banks and financial institutions

 -

 

           133,625

 

 -

 

                133,625

 Equity instruments

           241,654

 

 -

 

                  10,189

 

                251,843

 Total unquoted

        7,451,753

 

           133,625

 

                  10,189

 

             7,595,567

Total investment securities

      23,503,407

 

      11,154,533

 

          17,704,294

 

          52,362,234

 

(*) Gulf Cooperation Council

 

As at December 31, 2019, the allowance for impairment on debt instruments designated at FVTOCI amounting to AED 260,417 thousand (December 31, 2018 - AED 183,435 thousand) (Note 42.3) is included in revaluation reserve of investments carried at FVTOCI and recognised in other comprehensive income.

 

The Group hedges interest rate and foreign currency risks on certain fixed rate and floating rate investments through interest rate and currency swaps and designates these as fair value and cash flow hedges, respectively. The net negative fair value of these swaps at December 31, 2019 was AED 1,010,614 thousand (December 31, 2018 - net negative fair value AED 85,541 thousand). The hedge ineffectiveness gains and losses relating to these hedges were included in the consolidated income statement.

 

The Group entered into repurchase agreements whereby bonds were pledged and held by counterparties as collateral. The risks and rewards relating to the investments pledged remains with the Group. The bonds placed as collateral are governed under Global Master Repurchase Agreements (GMRA). The following table reflects the carrying value of these bonds and the associated financial liabilities:

 

 

 

As at December 31, 2019

 

As at December 31, 2018

 

 

Carrying value of pledged securities

 

Carrying value of associated liabilities

 

Carrying value of pledged securities

 

Carrying value of associated liabilities

 

 

 

 

 

 

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Repurchase financing

 

       1,041,439

 

           851,056

 

240,856

 

228,653

 

Further, the Group pledged investment securities with fair value amounting to AED 1,964,034 thousand (December 31, 2018 - AED 2,333,615 thousand) as collateral against margin calls. The risks and rewards on these pledged investments remains with the Group.

 

 

10.   Loans and advances to customers, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Overdrafts (retail and corporate)

 

 

 

 

          12,682,973

 

     5,091,419

Retail loans

 

 

 

 

48,824,706

 

 26,296,282

Corporate loans

 

 

 

 

       180,835,988  

 

131,833,632

Credit cards

 

 

 

 

            4,970,067

 

     4,461,828

Other facilities

 

 

 

 

          10,037,002

 

     5,469,473

Gross loans and advances to customers

 

 

 

 

257,350,736

 

173,152,634

Less: Allowance for impairment (Note 42.3)

 

 

 

 

          (7,333,410)

 

(6,726,872)

Total loans and advances to customers, net

 

 

 

 

250,017,326

 

166,425,762

 

For Islamic financing assets included in the above table, refer note 23.

 

The Group hedges certain fixed rate and floating rate loans and advances to customers for interest rate risk using interest rate swaps and designates these instruments as fair value and cash flow hedges, respectively. The net positive fair value of these swaps at December 31, 2019 was AED 28,252 thousand (December 31, 2018 - net negative fair value of AED 60,106 thousand).

 

11.  Investment in associates

 

Investment in associates has been accounted in the consolidated financial statements using the equity method at the net fair value of the identifiable assets and liabilities of the associate on the date of acquisition.

 

 

 

 

 

 

 

 

 

AED'000

As at January 1, 2018

 

 

 

 

 

205,372

Share in profit of associate

 

 

 

 

 

              10,070

Dividend received from associate

 

 

 

 

 

            (10,284)

As at January 1, 2019

 

 

 

 

 

205,158

Addition on business combinations (Note 52)

 

 

 

 

 

            197,855

Share in profit of associates

 

 

 

 

 

              17,765

Dividend received from associates

 

 

 

 

 

(14,194)

Impact of currency translation

 

 

 

 

 

                 1,184

As at December 31, 2019

 

 

 

 

 

407,768

 

 

 

 

11.   Investment in associates (continued)

 

Details of the investment in associates as at December 31, 2019 are as follows:

 

 

Effective ownership interest

Country of incorporation

Principal activities

Name of associate

2019

2018

Four N Property LLC

35.00%

35.00%

UAE

Residential facilities for lower income group.

Orient UNB Takaful PJSC

47.54%

-

UAE

General insurance services.

Arab Orient Takaful Insurance Company

19.32%

-

Egypt

General insurance services.

Al Hilal Global Sukuk Fund

31.89%

-

UAE

Investment activities.

Al Hilal GCC Equity Fund

48.99%

-

UAE

Investment activities.

Al Hilal Global balance Fund

76.43%

-

UAE

Investment activities.

 

For balances and transactions with associates, refer note 36.

 

12.   Investment properties

 

 

 

 

 

 

 

AED'000

As at January 1, 2018

 

 

 

 

 

634,780

Disposal during the year

 

 

 

 

 

(1,900)

Revaluation of investment properties

 

 

 

 

 

(56,209)

As at January 1, 2019

 

 

 

 

 

576,671

Addition on business combinations (Note 52)

 

 

 

 

 

1,180,799

Additions during the year

 

 

 

 

 

8,550

Disposals during the year

 

 

 

 

 

(5,859)

Revaluation of investment properties

 

 

 

 

 

(67,153)

Impact of currency translation

 

 

 

 

 

699

As at December 31, 2019

 

 

 

 

 

1,693,707

 

 

For the year 2019, net losses from investment properties include net gains of AED 417 thousand (2018: loss of AED 250 thousand) on disposal of investment properties.

 

Additions during the year represent real estate acquired on settlement of certain loans and advances. These being non-cash transactions have not been reflected in the consolidated statement of cash flows.

 

Fair valuations

 

Valuations are carried out by registered independent valuers having an appropriate recognised professional qualification and experience in the location and category of the property being valued.

 

In estimating the fair values of the properties, the highest and best use of the properties is their current use.

 

The valuation methodologies considered by external valuers include:

 

§ Direct comparable method: This method seeks to determine the value of the property from transactions of comparable properties in the vicinity applying adjustments to reflect differences to the subject property.

§ Investment method: This method is used to assess the value of the property by capitalising the net operating income of the property at an appropriate yield an investor would expect for an investment of the duration of the interest being valued.

 

 

12.   Investment properties (continued)

 

Fair valuations (continued)

 

All investment properties of the Group are primarily located within the UAE.

 

Details of rental income and direct operating expenses relating to investment properties during the year are as follows:

 

 

2019

 

2018

 

AED'000

 

AED'000

Rental income

                  82,563

 

41,328

Direct operating expenses

24,236

 

8,079

 

Lease receivables

 

Group as lessor

 

Operating leases relate to properties owned by the Group with varied lease terms, with an option to extend the lease term. All operating lease contracts contain market review clause in the event that the lessee exercises its option to renew. The lessee does not have an option to purchase the property at the expiry of the lease period.

 

 

 

2019

 

2018

 

AED'000

 

AED'000

Non-cancellable operating lease receivables

 

 

 

Not later than one year

              33,210

 

23,789

Later than one year but not later than five years

              22,811

 

25,342

Later than five years

              23,271

 

27,463

Total non-cancellable operating lease receivables

79,292

 

76,594

 

13.   Other assets, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

AED'000

 

AED'000

 

 

 

 

 

 

 

Interest receivable

 

 

 

            3,286,001

 

2,229,084

Advance tax

 

 

 

                    3,451

 

5,597

Prepayments

 

 

 

               139,116

 

78,314

Acceptances (Note 20)

 

 

 

          12,726,229

 

10,531,047

Others

 

 

 

               614,693

 

501,081

Gross other assets

 

 

 

16,769,490

 

13,345,123

Less: Allowance for impairment (Note 42.3)

 

 

 

               (19,282)

 

(14,229)

Total other assets, net

 

 

 

16,750,208

 

13,330,894

 

 

14.   Property and equipment, net

 

 

 Freehold properties and improvements

 Leasehold improvements

 Furniture, equipment and vehicles

 Computer equipment, software and accessories

 Capital work in progress

Right of use asset

 

 Total 

 

 AED'000 

 AED'000

 AED'000

 AED'000

 AED'000

AED'000

 AED'000

Cost or valuation

 

 

 

 

 

 

 

As at January 1, 2018

872,782

191,420

213,297

1,047,216

76,853

-

2,401,568

Exchange difference

(277)

(9)

(201)

(475)

(97)

-

(1,059)

Additions during the year

-

231

436

813

198,421

-

199,901

Transfers

16,817

16,178

12,483

149,123

(194,601)

-

-

Transfer to expenses

-

-

-

-

(970)

-

(970)

Disposals during the year

-

(11)

(623)

(78)

-

-

(712)

As at January 1, 2019

889,322

207,809

225,392

1,196,599

79,606

-

2,598,728

Addition on business combinations (Note 52)

663,645

             121,478

               53,651

             116,459

43,065

              90,069

1,088,367

Recognition of right of use asset on adoption of IFRS 16 (Note 3.7)

                       -  

                       -  

                       -  

                       -  

                       -  

            141,722

141,722

Exchange difference

                3,416

                1,630

                    696

1,599

                    109

                 3,429

10,879

Additions during the year

                      47

                3,553

                2,169

               12,766

            254,809

               80,347

353,691

Transfers

                    463

              20,926

                6,374

             193,127

          (220,890)

                       -  

-

Transfer to expenses

                       -  

                       -  

                       -  

                       -  

              (1,672)

                       -  

(1,672)

Transfer to held for sale

              (2,952)

                 (383)

              (1,848)

              (6,545)

                       -  

                       -  

(11,728)

Disposals during the year

              (6,154)

                 (966)

              (1,637)

                 (362)

                       -  

                       -  

(9,119)

As at December 31, 2019

1,547,787

354,047

284,797

1,513,643

155,027

315,567

4,170,868

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

 

 

As at January 1, 2018

            401,515

            146,074

            174,317

            719,566

                       -  

                       -  

1,441,472

Exchange difference

                    (86)

                      (2)

                 (134)

                 (381)

                       -  

                       -  

(603)

Charge for the year (Note 31)

              36,626

              12,135

              14,107

            113,059

                       -  

                       -  

175,927

Disposals during the year

                       -  

                    (11)

                 (594)

                    (68)

                       -  

                       -  

(673)

As at January 1, 2019

            438,055

            158,196

            187,696

            832,176

                       -  

                       -  

1,616,123

Exchange difference

                      (6)

                      80

                      53

                      80

                       -  

                    136

343

Charge for the year (Note 31)

58,771

              29,338

              23,023

             183,559

                       -  

               71,423

366,114

Transfer to held for sale

                 (983)

                 (102)

              (1,300)

              (5,333)

                       -  

                       -  

(7,718)

Disposals during the year

                    (69)

                    (81)

              (1,071)

                 (344)

                       -  

                       -  

(1,565)

As at December 31, 2019

495,768

187,431

208,401

1,010,138

-

71,559

1,973,297

 

 

 

 

 

 

 

 

Carrying amount

 

 

 

 

 

 

 

As at December 31, 2019

         1,052,019

             166,616

               76,396

             503,505

             155,027

             244,008

2,197,571

 

 

 

 

 

 

 

 

As at December 31, 2018

451,267

49,613

37,696

364,423

79,606

-

982,605

 

15.  Intangible assets, net

 

 

 

Other intangible assets

 

 

 Goodwill

Trade mark and license

 Core deposits

Customer relationships

 Total 

 

 AED'000 

 AED'000

 AED'000

 AED'000

 AED'000

Cost or valuation

 

 

 

 

 

As at January 1, 2019

18,800

-

-

-

18,800

Recognised on business combinations (Note 52)

4,592,872

244,000

457,000

84,000

5,377,872

As at December 31, 2019

4,611,672

244,000

457,000

84,000

5,396,672

 

 

 

 

 

 

Accumulated amortisation

 

 

 

 

 

As at January 1, 2019

-

-

-

-

-

Amortisation during the period (Note 31)

-

-

54,004

10,171

64,175

As at December 31, 2019

-

-

54,004

10,171

64,175

 

 

 

 

 

 

Carrying amount

 

 

 

 

 

As at December 31, 2019

4,611,672

244,000

402,996

73,829

5,332,497

 

 

 

 

 

 

As at December 31, 2018

18,800

-

-

-

18,800

 

Goodwill

 

Goodwill arising on business combinations during 2019

 

On May 1, 2019, Union National Bank PJSC (or "UNB") merged with Abu Dhabi Commercial Bank PJSC in a stock transaction. The merged entity subsequently completed 100% acquisition of Al Hilal Bank PJSC (or "AHB"). Based on the preliminary fair valuation and purchase price allocation exercise performed by an external consultant following the merger and acquisition, the Bank recognised AED 785,000 thousand as intangible assets and AED 4,592,872 thousand as goodwill. As the purchase price allocation exercise is expected to complete within twelve months from the date of business combinations, it is possible that different values may be attributed to the assets, liabilities and contingent liabilities acquired, and hence, there can be a change in the value of goodwill recognised on merger and acquisition (Refer note 52 for details).

 

Impairment assessment of goodwill

 

For the purposes of impairment testing, goodwill acquired in a business combination is required to be allocated to the CGUs. In a goodwill impairment test, the recoverable amounts of the goodwill-carrying CGUs are compared with the respective carrying amounts. The recoverable amount is the higher of a CGU's fair value less costs of disposal and its value in use.

 

The key guidance offered by the standard is that CGU selection will be influenced by 'how management monitors the entity's operations (such as by product lines, businesses, individual locations, districts or regional areas) or how management makes decisions about continuing or disposing of the entity's assets and operations'.

 

Management has identified four CGUs for which the residual Goodwill will be allocated and performance monitored by management. The four CGUs are consistent with the operating segments of ADCB determined in accordance with IFRS 8 Operating Segments. The CGUs are as follows:

 

·          Wholesale banking

·          Consumer banking

·          Investments and treasury and

·          Property management

 

However, the allocation logic will be finalised in the first quarter of 2020 (within the measurement period) and currently the testing is based on overall cost synergies achieved by ADCB against the initial integration plan. After the allocation logic is finalised, impairment assessment will be based on cost synergies achieved by each CGU.

15.   Intangible assets, net (continued)

 

Goodwill arising on acquisition of RBS portfolio

On October 1, 2010, the Bank acquired the retail banking, wealth management and small and medium enterprise businesses (the "Business") of The Royal Bank of Scotland ("RBS") in the U.A.E. for a consideration of AED 168,900 thousand. Based on the fair valuation and purchase price allocation exercise performed by an external consultant immediately following the acquisition in 2010, the Bank recognised AED 143,400 thousand as intangible assets which were fully amortised during the previous years and AED 18,800 thousand as goodwill.

 

No impairment loss on goodwill was recognised during the year ended December 31, 2019 (2018 - AED Nil).

 

Other intangible assets

 

Trade mark and license

AHB has built a strong franchise and has a reputation as a progressive Islamic bank offering a wide range of client-centric Shari'ah compliant retail banking products. The AHB brand plays a key part in generating revenues for the Bank.

 

 

Egypt license

This has been recognised as an intangible asset as Central Bank of Egypt has not issued a new banking license to any entity for the past 20 years, and has therefore restricted engagement in banking activities to banks already licensed and operating in Egypt. The license plays a key part in generating revenues for the Bank. Egypt license was valued considering the market approach using comparable transactions.

 

 

Customer relationships

 

 

 

 

Customer relationship intangible assets represent the value attributable to the business expected to be generated from customers that existed as at the acquisition date. In determining the fair value of customer relationships, trade finance customers were considered. These relationships are expected to generate material recurring income in the form of fees and commission.

 

Core deposit intangible

The value of core deposit intangible asset arises from the fact that the deposit base of the Group represents a cheaper source of funding than wholesale or money market funding. The spread between the cost of deposit funding and the cost of wholesale/money market funding represents the value of the core deposit intangible.

Intangible asset

Useful life

 

Customer relationships

3 to 6 years

 

Core deposit intangible

4.5 to 7 years

 

Trade mark and license

Indefinite

 

       

 

 

 

16.  Due to banks

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Vostro balances

 

 

 

 

 

            1,739,098

 

870,881

Margin deposits

 

 

 

 

 

               460,583

 

200,090

Time deposits

 

 

 

 

 

            3,533,098

 

2,000,437

Total due to banks

 

 

 

 

 

5,732,779

 

3,071,408

 

The Group hedges certain foreign currency time deposits for foreign currency and floating interest rate risks using foreign exchange and interest rate swaps and designates these swaps as either cash flow or fair value hedges. The net positive fair value of these swaps at December 31, 2019 was AED 14,719 thousand (December 31, 2018 - net negative fair value of AED 3,008 thousand).

 

17.  Deposits from customers

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Time deposits

 

 

 

 

157,307,229

 

95,078,854

Current account deposits

 

 

 

 

78,022,123

 

54,855,845

Savings deposits

 

 

 

 

21,873,206

 

13,534,209

Murabaha deposits

 

 

 

 

2,490,166

 

11,549,497

Long term government deposits

 

 

 

 

351,702

 

377,014

Margin deposits

 

 

 

 

2,049,356

 

1,258,438

Total deposits from customers

 

 

 

 

262,093,782

 

176,653,857

 

For Islamic deposits (excluding Murabaha deposits) included in the above table, refer note 23.

 

The Group hedges certain foreign currency time deposits for foreign currency and floating interest rate risks using foreign exchange and interest rate swaps and designates these swaps as either cash flow or fair value hedges. The net positive fair value of these swaps at December 31, 2019 was AED 52,648 thousand (December 31, 2018 - net negative fair value of AED 40,044 thousand).

 

 

 

18.   Euro commercial paper

 

The details of euro commercial paper ("ECP") issuances under the Bank's ECP programme are as follows:

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2019

 

2018

Currency

 

 

 

 

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

US dollar (USD)

 

 

 

 

 

               889,733

 

2,338,833

Arab Emirati Dirham (AED)

 

 

 

 

 

               199,789

 

-

Euro (EUR)

 

 

 

 

 

               404,553

 

715,882

Swiss franc (CHF)

 

 

 

 

 

               247,332

 

-

GB pound (GBP)

 

 

 

 

 

               320,931

 

224,587

Total euro commercial paper

 

 

 

 

 

2,062,338

 

3,279,302

                   

 

The Group hedges certain ECP for foreign currency exchange rate risk through foreign exchange swap contracts and designates these instruments as cash flow hedges. The net positive fair value of these hedge contracts as at December 31, 2019 was AED 6,060 thousand (December 31, 2018 - net negative fair value of AED 34,895 thousand).

 

The effective interest rate on ECPs issued ranges between negative 0.439% p.a. to positive 3.189% p.a.  (December 31, 2018 - between negative 0.164% p.a. to positive 3.23% p.a.).

 

Reconciliation of ECP movement to cash flows arising from financing activities is as follows:

 

 

 

 

AED'000

As at January 1, 2018

 

 

2,909,845

Net proceeds from issuances

 

 

8,438,096

Repayments

 

 

(8,113,901)

Other movements

 

 

45,262

As at January 1, 2019

 

 

3,279,302

Net proceeds from issuances

 

 

            3,777,878

Repayments

 

 

          (5,035,632)

Other movements

 

 

                  40,790  

As at December 31, 2019

 

 

2,062,338

 

 

 

 

Net proceeds from issuances include effects of changes in foreign exchange rates. Other movements include discount amortised.

 

19.   Borrowings

 

The details of borrowings as at December 31, 2019 are as follows:

 

 

 

 

Within 1 year

 

1-3 years

 

3-5 years

 

Over 5 years

 

Total

Instrument

Currency

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

 

 

 

Global medium term notes

Australian dollar (AUD)

 

-

 

807,944

 

-

 

474,343

 

1,282,287

 

Chinese renminbi (CNH)

 

-

 

352,333

 

106,035

 

-

 

458,368

 

Euro (EUR)

 

214,601

 

81,860

 

81,741

 

-

 

378,202

 

Swiss franc (CHF)

 

-

 

301,889

 

2,034,085

 

-

 

2,335,974

 

Japanese yen (JPY)

 

-

 

162,125

 

-

 

-

 

162,125

 

Hong Kong dollar (HKD)

 

150,386

 

367,352

 

180,651

 

-

 

698,389

 

US dollar (USD)

 

3,616,709

 

3,779,972

 

7,472,489

 

17,974,140

 

32,843,310

 

Great Britain pound (GBP)

 

-

 

345,247

 

-

 

-

 

345,247

 

Indonesian rupiah (IDR)

 

-

 

-

 

-

 

535,180

 

535,180

 

 

 

3,981,696

 

6,198,722

 

9,875,001

 

18,983,663

 

39,039,082

 

 

 

 

 

 

 

 

 

 

 

 

Islamic sukuk notes

US dollar (USD)

 

-

 

-

 

1,879,762

 

-

 

1,879,762

Bilateral loans - floating rate

US dollar (USD)

 

1,466,928

 

2,932,797

 

1,240,208

 

-

 

5,639,933

Syndicated loan - floating rate

US dollar (USD)

 

734,600

 

-

 

-

 

-

 

734,600

Certificate of deposits issued

Great Britain pound (GBP)

 

408,327

 

-

 

-

 

-

 

408,327

 

US dollar (USD)

 

322,237

 

-

 

-

 

-

 

322,237

 

Canadian dollar (CAD)

 

211,430

 

-

 

-

 

-

 

211,430

Subordinated notes - fixed rate

US dollar (USD)

 

-

 

-

 

2,795,627

 

-

 

2,795,627

Borrowings through repurchase agreements

US dollar (USD)

 

632,161

 

-

 

-

 

202,333

 

834,494

 

Egyptian pound (EGP)

 

98

 

6,026

 

-

 

10,438

 

16,562

Total borrowings 

 

 

7,757,477

 

9,137,545

 

15,790,598

 

19,196,434

 

51,882,054

 

The Group hedges certain borrowings for foreign currency exchange rate risk and interest rate risk using either interest rate or cross currency swaps and designates these swaps as either fair value or cash flow hedges. The net positive fair value of these swaps as at December 31, 2019 was AED 638,810 thousand.

 

19.   Borrowings (continued)

 

The details of borrowings as at December 31, 2018 are as follows:

 

 

 

 

 

 

 

Within 1 year

 

1-3 years

 

3-5 years

 

Over 5 years

 

Total

Instrument

 

Currency

 

 

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global medium term notes

Australian dollar (AUD)

 

649,799

 

78,613

 

723,569

 

372,866

 

1,824,847

 

 

Chinese renminbi (CNH)

 

379,195

 

130,085

 

64,709

 

-

 

573,989

 

 

Euro (EUR)

 

 

 

167,632

 

219,047

 

-

 

83,532

 

470,211

 

 

Swiss franc (CHF)

 

-

 

298,691

 

648,917

 

373,533

 

1,321,141

 

 

Japanese yen (JPY)

 

50,092

 

83,592

 

-

 

-

 

133,684

 

 

Hong Kong dollar (HKD)

 

-

 

297,650

 

179,361

 

71,798

 

548,809

 

 

US dollar (USD)

 

 

5,308,791

 

3,772,456

 

3,137,192

 

11,479,505

 

23,697,944

 

 

 

 

 

 

6,555,509

 

4,880,134

 

4,753,748

 

12,381,234

 

28,570,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bilateral loans - floating rate

US dollar (USD)

 

 

-

 

4,947,819

 

1,237,915

 

-

 

6,185,734

Syndicated loan - floating rate

US dollar (USD)

 

 

2,201,050

 

734,600

 

-

 

-

 

2,935,650

Certificate of deposits issued

Great Britain pound (GBP)

 

163,944

 

-

 

-

 

-

 

163,944

 

 

Indian rupee (INR)

 

312,804

 

-

 

-

 

-

 

312,804

 

 

US dollar (USD)

 

 

1,872,803

 

97,713

 

-

 

-

 

1,970,516

Subordinated notes - fixed rate

US dollar (USD)

 

 

-

 

-

 

2,659,823

 

-

 

2,659,823

Borrowings through repurchase agreements

US dollar (USD)

 

 

-

 

-

 

-

 

202,333

 

202,333

 

 

Indian rupee (INR)

 

26,320

 

-

 

-

 

-

 

26,320

 Total borrowings

 

 

 

 

 

11,132,430

 

10,660,266

 

8,651,486

 

12,583,567

 

43,027,749

 

 

The Group hedges certain borrowings for foreign currency exchange rate risk and interest rate risk using either interest rate or cross currency swaps and designates these swaps as either fair value or cash flow hedges. The net negative fair value of these swaps as at December 31, 2018 was AED 1,286,457 thousand. 

 

 

 

 

 

 

19.   Borrowings (continued)

 

Interests are payable in arrears and the contractual coupon rates as at December 31, 2019 are as follows: 

 

Instrument

CCY

Within 1 year

1-3 years

3-5 years

Over 5 years

Global medium term notes

AUD

-

Fixed rate between 3.73% p.a.

to 3.92% p.a. and quarterly

coupons with 138 basis points

over bank bill swap rate

(BBSW)

-

Fixed rate between 2.69% p.a. to 4.50% p.a.

 

CNH

-

Fixed rate between 4.05% p.a. to 5.02% p.a.

Fixed rate of 4.60% p.a.

-

 

EUR

Quarterly coupons between 50 to 59 basis points over Euribor

Fixed rate of 0.04% p.a.

Fixed rate of 0.75% p.a.

-

 

CHF

-

-

Fixed rate between 0.05% p.a. and 0.735% p.a.

-

 

JPY

-

Fixed rate of 0.445% p.a.

-

-

 

HKD

Fixed rate between 2.30% p.a. to  2.46% p.a.

Fixed rate between 2.69% p.a. to 3.20% p.a.

Fixed rate between 2.84% p.a. to 2.87% p.a.

-

 

USD

Fixed rate of 2.625% p.a. and quarterly coupons between 63 to 90 basis points over Libor

Fixed rate of 2.75% p.a. and quarterly coupons between 80 to 140 basis points over Libor

Fixed rate of 4.00% p.a. and quarterly coupons between 110 to 155 basis points over Libor

Fixed rate between 3.82% p.a. to 5.785% p.a. and quarterly coupons with 140 basis points over Libor (*)

 

GBP

-

Fixed rate between 1.40% p.a. to 2.03% p.a.

-

-

 

IDR

-

-

 -

Fixed rate between 7.50% p.a. to 8.16% p.a.

 

 

 

 

 

 

 

 

 

 

 

 

Islamic Sukuk notes

USD

-

-

Fixed rate of 4.375% p.a.

-

Bilateral loans - floating rate

USD

Monthly and quarterly coupons of 60 basis points over Libor

Monthly coupons between 50 to 85 basis points over Libor

Monthly coupons of 95 basis points over Libor 

-

Syndicated loan - floating rate

USD

Monthly coupons with 73 basis point over Libor

-

-

-

Certificate of deposits issued

GBP

Fixed rate between 0.79% p.a. to 0.92% p.a.

-

-

 

USD

Fixed rate between 1.90% p.a. to 2.84% p.a.

-

-

-

 

CAD

Fixed rate of 2.40% p.a.

-

-

-

Subordinated notes - fixed rate

USD

-

-

Fixed rate of 4.50% p.a.

-

Borrowings through repurchase agreements

USD

Fixed rate between 1.00% p.a. to 3.85% p.a.

-

-

Semi-annual coupons between negative 20 to negative 18 basis points over Libor

 

EGP

Fixed rate between 0.50% p.a. to 3.50% p.a.

Fixed rate of 3.00% p.a.

-

Fixed rate between 0.50% p.a. to 3.50% p.a.

 

 (*) includes AED 17,117,078 thousand accreting notes issued with original tenors ranging from 30 years to 40 years with yield ranging between 3.823% p.a. to 5.785% p.a. and are callable at the end of every 5th, 6th, 7th  or 10th year from issue date

 

 

19.   Borrowings (continued)

 

The subordinated fixed rate note qualifies as Tier 2 capital and is eligible for grandfathering at the rate of 10% per annum in accordance with capital guidance issued by the UAE Central Bank. Further, the subordinated fixed rate note has entered its five years to maturity and is being amortised at the rate of 20% per annum till its maturity in 2023 (Note 49).

 

Reconciliation of borrowings movement to cash flows arising from financing activities is as follows:

 

 

 

 

AED'000

As at January 1, 2018

 

 

40,555,195

Net proceeds from issuances

 

 

20,109,045

Repayments

 

 

(17,105,210)

Other movements

 

 

(531,281)

As at January 1, 2019

 

 

43,027,749

Net proceeds from issuances

 

 

          18,012,653

Addition on business combinations (Note 52)

 

 

            8,152,427

Repayments

 

 

(19,799,050)

Other movements

 

 

            2,488,275

As at December 31, 2019

 

 

51,882,054

 

Net proceeds from issuances include effects of changes in foreign exchange rates on borrowings. Other movements include interest capitalised on accreting notes, discount on issuances amortised and changes in fair value hedges.

 

20.   Other liabilities

 

 

As at

 

As at

 

December 31

 

December 31

 

2019

 

2018

 

AED'000

 

AED'000

 

 

 

 

Interest payable

1,758,479

 

1,409,503

Recognised liability for defined benefit obligation

633,262

 

487,995

Accounts payable and other creditors

353,293

 

215,558

Deferred income

813,968

 

672,303

Acceptances (Note 13)

12,726,229

 

10,531,047

Impairment allowance on letters of credit, guarantees and other commitments (Note 42.3)

1,432,363

 

349,752

Others (*)

2,585,200

 

1,630,410

Total other liabilities

20,302,794

 

15,296,568

(*) includes AED 226,828 thousand pertaining to lease liability as at December 31, 2019 (December 31, 2018 - AED Nil)

 

Defined benefit obligation

 

The Group provides gratuity benefits to its eligible employees in UAE. The most recent actuarial valuations of the present value of the defined benefit obligation were carried out in the last quarter of 2019 by a registered actuary in the UAE. The present value of the defined benefit obligation and the related current and past service cost, were measured using the Projected Unit Credit Method.

 

 

 

 

20.   Other liabilities (continued)

 

Key assumptions used in the actuarial valuation are as follows:

 

Discount rate: 2.80% p.a.

Salary increment rate: 3.00% p.a.

 

Demographic assumptions for mortality and retirement were used in valuing the liabilities an