Consolidated statement of cash flows

for the year ended December 31, 2012

 

 

 

		2012	2011	2012
		AED'000	AED'000	USD'000
OPERATING ACTIVITIES
Profit before taxation and non-controlling interests		2,816,165	3,081,332	766,721
Adjustments for:
Depreciation (Note 14)		131,286	149,348	35,744
Amortisation of intangible assets (Note 15)		31,527	31,527	8,583
Dividends income  (Note 30)		(25,043)	(8,879)	(6,818)
Decrease in fair value of investment property (Note 12)		28,836	11,900	7,851
Impairment allowance on loans and advances (Note 41.9)		1,874,123	2,303,106	510,243
Recovery of doubtful loans and advances (Note 41.9)		(183,015)	(220,746)	(49,827)
Discount unwind (Note 41.9)		(129,920)	(177,216)	(35,372)
Loss on credit default swaps (Note 32)		-	204,438	-
(Recovery)/impairment allowance on investment securities (Note 32)		(2,726)	53,590	(742)
Impairment allowance on property and  equipment, net (Note 14)		21,337	57,440	5,809
Net loss/(gain) from available for sale investments (Note 30)		4,224	(6,852)	1,150
Net gain from trading securities (Note 29)		(104,018)	(29,482)	(28,320)
Share of profit of associates, net		-	(158,658)	-
Imputed interest on mandatory convertible securities		-	(29,131)	-
Net gain on sale of investment in associate (Note 11)		-	(1,314,315)	-
Ineffective portion of hedges - (gain)/losses (Note 8)		(22,559)	5,673	(6,142)
Board of directors' remuneration		5,375	5,584	1,463
Employees' incentive plan benefit expense (Note 24)		48,339	32,882	13,161
Operating profit before changes in operating assets and liabilities		4,493,931	3,991,541	1,223,504
Increase in balance with Central Bank		(1,500,000)	(750,000)	(408,385)
Decrease in due from banks		4,430,974	453,360	1,206,364
Decrease in net trading derivative financial instruments		1,216	76,493	331
Increase in loans and advances		(10,215)	(3,888,011)	(2,781)
Decrease in other assets		23,206	453,947	6,318
Decrease in due to banks		(108,820)	(2,034,819)	(29,627)
Increase  in deposits from customers		19,836	4,204,202	5,400
Decrease in other liabilities		(876,006)	(886,812)	(238,499)
Cash from operations		6,474,122	1,619,901	1,762,625
Board of Directors' remuneration paid		(10,750)	(5,250)	(2,927)
Overseas tax paid		(8,221)	-	(2,238)
Net cash from operations		6,455,151	1,614,651	1,757,460
INVESTING ACTIVITIES
Net proceeds from disposal of associate		-	7,111,817	-
Dividends received from associate		-	36,697	-
Dividends income		25,043	8,879	6,818
Recovery of investment securities written off		12,669	-	3,449
Overseas tax refund, net		39,624	-	10,788
Gain on sale of investment		-	36,334	-
Net purchase of trading securities		(43,388)	(15,755)	(11,813)
Net proceeds from disposal of available for sale investment securities		1,408,955	622,487	383,598
Net purchase of available for sale securities		(4,332,960)	(7,504,405)	(1,179,679)
Additions to investment properties		(85,625)	(100,985)	(23,312)
Purchase of property and equipment, net		(113,733)	(119,620)	(30,964)
Net cash (used in)/from investing activities		(3,089,415)	75,449	(841,115)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of cash flows

for the year ended December 31, 2012 (continued)

 

 

 

 

		2012	2011	2012
		AED'000	AED'000	USD'000
FINANCING ACTIVITIES
Increase/ (decrease) in Euro commercial paper		3,742,432	(242,173)	1,018,903
Net (repayment of) / increase in borrowings		(5,758,213)	1,497,179	(1,567,714)
Dividends paid to non-controlling interests		(5,517)	(22,290)	(1,502)
Dividends paid to equity holders of the parent		(1,119,119)	-	(304,688)
Net proceeds from sale of treasury shares by Funds subsidiaries (Note 3.1)		9,119	-	2,483
Net movement in non-controlling interests		(36,599)	-	(9,964)
Dividend received on treasury shares (Note 3.1)		842	-	229
Capital notes coupon paid		(240,000)	(236,667)	(65,342)
Purchase of employees' incentive plan shares		(40,000)	(100,800)	(10,890)
Net cash (used in)/ generated from financing activities		(3,447,055)	895,249	(938,485)
Net (decrease)/increase in cash and cash equivalents		(81,319)	2,585,349	(22,140)
Cash and cash equivalents at the beginning of the year		19,261,633	16,676,284	5,244,115
Cash and cash equivalents at the end of the year (Note 35)		19,180,314	19,261,633	5,221,975

 

 

There is no impact on cash flows on initial consolidation of the three funds as the transfers were made without any exchange of consideration (Note 3.1).

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012

 

1             Activities and areas of operations

 

Abu Dhabi Commercial Bank P.J.S.C. ("ADCB" or the "Bank") is a public joint stock company with limited liability incorporated in the Emirate of Abu Dhabi, United Arab Emirates (U.A.E.). ADCB is principally engaged in the business of retail banking, commercial banking and Islamic banking and provision of other financial services through its network of fifty branches and four pay offices in the U.A.E., two branches in India, one offshore branch in Jersey and its subsidiaries and associates.

 

The registered head office of ADCB is at Abu Dhabi Commercial Bank Head Office Building, Salam Street, plot C- 33, Sector E-11, P. O. Box 939, Abu Dhabi, U.A.E.

 

ADCB is registered as a public joint stock company in accordance with the U.A.E. Federal Commercial Companies Law No. (8) of 1984 (as amended).

 

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

 

2.1      New and revised IFRSs effective for accounting periods beginning January 1, 2012

 

There are no IFRSs or IFRIC interpretations that were effective for the first time for the financial year beginning January 1, 2012 that have had a material impact on Bank's consolidated financial statements.

 

2.2         Standards and Interpretations in issue not yet effective

Except as indicated below, the Bank has not early adopted new and revised IFRSs that have been issued but are not yet effective.

New Standards and amendments to Standards:	Effective for annual periods beginning on or after
The amendments to IFRS 7, Financial Instruments: Disclosures - The amendment to IFRS 7 introduces disclosure requirements for financial assets and liabilities that are offset in statement of financial position or are subject to master netting arrangements or similar agreements.	January 1, 2013
Amendments to IAS 19, Employee Benefits - Amended Standard resulting from the Post-Employment Benefits and Termination Benefits projects, requiring recognition of changes in defined benefit obligations and in fair value of plan assets when they occur, with all actuarial gains and losses recognized immediately through other comprehensive income.	January 1, 2013

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

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

(continued)

 

2.2         Standards and Interpretations in issue not yet effective (continued)

 

New Standards and amendments to Standards:	Effective for annual periods beginning on or after
The amendments to IAS 32 , Financial Instruments: Presentation - The amendments clarify the offsetting criteria in IAS 32 to address inconsistencies in their application. An entity will have a legally enforceable right to set off only if it is non-contingent in nature and is enforceable in the normal course of business and in the event of default, insolvency or bankruptcy	January 1, 2014
IFRS 13, Fair Value measurement - represents the completion of the joint project to establish a single source for the requirements on how to measure fair value under IFRS. The Standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and improving disclosure requirements for use across IFRSs. It applies to both financial instruments and non-financial instruments. In general, disclosure requirements will be more extensive.	January 1, 2013
Annual Improvements 2009-2011 Cycle made amendments to the following standards: -       IFRS 1 - Permit the repeated application of IFRS 1, borrowing costs on certain qualifying assets, requiring an entity to measure government loans with a below market rate of interest at fair value on initial recognition -       IAS 1 - Clarification of the requirements for comparative information -       IAS 16 - Classification of servicing equipment -       IAS 32 - Clarify that tax effect of a distribution to holders of equity instruments should be accounted for in accordance with IAS 12 Income Taxes -       IAS 34 - Clarify interim reporting of segment information for total assets in order to enhance consistency with the requirements in IFRS 8 Operating Segments	January 1, 2013
IFRS 9, Financial Instruments: Classification and Measurement (intended as complete replacement for IAS 39)	January 1, 2015

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

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

(continued)

 

2.2         Standards and Interpretations in issue not yet effective (continued)

Key requirements of IFRS 9 are described as follows:

 

IFRS 9 requires all recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debt investments 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 outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.

 

Management anticipates that these IFRSs and amendments will be adopted in the consolidated financial statements in the initial period when they become mandatorily effective.  The Bank is yet to assess IFRS 9's full impact, particularly as the hedging and impairment aspects of IFRS 9 are still outstanding, and intends to adopt IFRS 9 in the initial period when it becomes mandatorily effective.

 

Early adoption of standards

 

Effective 1 January 2013, IFRS 10 replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements and SIC-12 Consolidation - Special Purpose Entities. Under IFRS 10, the only basis for consolidation is control. In addition, IFRS 10 includes a new definition of control that contains three elements: (a) power over an investee, (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor's returns. A detailed review has been carried out on the Bank's connected entities in light of the new definitions and guidance in IFRS 10. The Bank has determined based on the results of this review that it will need to consolidate several funds where it has an investment as well as where it manages the fund. The impact of the change is dealt with in Note 3.1 below.

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

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).

 

As required by the Securities and Commodities Authority of the U.A.E. ("SCA") Notification No. 2624/2008 dated October 12, 2008, the Bank's exposure in cash and balances with Central Banks, deposits and balances due from banks, trading and investment securities outside the U.A.E. have been presented under the respective notes.

 

Certain items have been reclassified, consolidated and rearranged from the Bank's prior year financial statements to conform to the current year's presentation and improve the transparency of certain line items of the consolidated statement of financial position, consolidated income statement and consolidated statement of changes in equity and the notes to the accounts.

 

Change in accounting policy

The Bank has early adopted IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, as well as the consequential amendments to IAS 28 Investments in Associates and Joint Ventures (2011), with a date of initial application of January 1, 2012.

Subsidiaries

As a result of the adoption of IFRS 10, the Bank has changed its accounting policy with respect to determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that is applicable to all investees; among other things, it requires the consolidation of an investee if the Bank controls the investee on the basis of de facto circumstances.

In accordance with the transitional provisions of IFRS 10, the Bank re-assessed the control conclusion for its investees at 1 January 2012. As a consequence, the Bank has changed its control conclusion in respect of its investments in Al Nokhitha Fund, ADCB MSCI UAE Index Fund and Arabian Index Fund (the "Funds").

 

Although the Bank owns less than half of the units of these Funds, the management has determined that the Bank has de facto control over the Funds because it is exposed to significant variable returns from its involvement with the Funds and has power and rights given by the prospectus of the Funds to affect the amount of its returns. Accordingly, the Bank applied acquisition accounting to the investment at 1 January 2012, as if the investee had been consolidated from that date. Previously, two of the investments in the Funds were accounted for as associates using the equity method and one of the investments was accounted for as an available for sale investment using fair value accounting.

 

The following table summarises the adjustments made to the Bank's relevant line items of statements of financial position as at January 1, 2012 and its income statement for the year ended December 31, 2011 as a result of the consolidation of the Funds. The transition rules of IFRS 10, on early adoption, permit the amendment of the current year's financial information without restating previous year's financial information.

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies

 

3.1       Basis of preparation (continued)

 

Change in accounting policy (continued)

 

Statement of financial position (extract)

 

The impact of early adoption of IFRS 10 as at January 1, 2012 (adoption date) is as follows:

 

	As at December 31, 2012		January 1, 2012
			As previously stated	Adjustments	As restated
	AED'000		AED'000	AED'000	AED'000
Assets
Trading securities	641,877		15,755	478,716	494,471
Investment securities	18,712,916		15,052,103	(35,016)	15,017,087
Loans and advances, net	123,195,295		124,754,737	(8,469)	124,746,268
Other assets	5,925,962		10,021,494	(1,314)	10,020,180
Investment in associates	-		81,817	(81,817)	-
Overall impact on total assets				352,100
Liabilities
Deposits from customers	109,216,925		109,170,825	(6,060)	109,164,765
Other liabilities	6,994,845		11,903,567	(375)	11,903,192
Overall impact on total liabilities				(6,435)
Equity
Controlling interests
Treasury shares	(30,937)		-	(39,030)	(39,030)
Non-controlling interests	437,800		5,517	397,565	403,082
Overall impact on equity				358,535

 

Income statement

 

Had the adoption of IFRS 10 been applied to 2011, the impact is as stated below:

 

	Year ended December 31, 2012		Year ended December 31, 2011
			As previously stated	Adjustments	As restated
	AED '000		AED'000	AED'000	AED'000
Net interest income	5,113,310		4,542,119	(1,342)	4,540,777
Net fees and commission income	940,035		898,157	(9,388)	888,769
Net trading income	302,686		334,769	(116,973)	217,796
Other operating income	174,032		166,287	18,578	184,865
Overall impact on operating income				(109,125)
Operating expenses	(2,069,264)		(2,063,225)	(666)	(2,063,891)
Share of profit of associates	-		158,658	22,718	181,376
Overall impact on net profit				(87,073)
Overall impact on net profit attributable to non-controlling interests				(86,001)

 

Impact on Earnings per share (EPS)

 

 There is no impact on EPS of 2011 due to consolidation of Funds.

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3           Summary of significant accounting policies

 

3.1       Basis of preparation (continued)

 

Change in accounting policy (continued)

Joint arrangements

As a result of the adoption of IFRS 11, the Bank has changed its accounting policy with respect to interests in joint arrangements.

Under IFRS 11, the Bank classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Bank's rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the Bank considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification.

The Bank currently has no significant interests in joint arrangements; accordingly, early adoption of IFRS 11 has no impact on the recognised assets, liabilities and comprehensive income of the Bank.

 

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 (including derivatives) at fair value through profit and loss, available for sale financial assets 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 Bank's functional and presentation currency. Except as indicated, financial information presented in AED has been rounded to the nearest thousand.

 

The US Dollar (USD) amounts in the primary segment of the financial statements are presented for the convenience of the reader only by converting the AED balances at 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.

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.5         Basis of consolidation

 

The consolidated financial statements incorporate the financial statements of Abu Dhabi Commercial Bank P.J.S.C. and its subsidiaries (collectively referred to as "ADCB or the  "Bank") as set in Note 49.

 

Subsidiaries

 

Subsidiaries are entities controlled by the Bank. The Bank controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

 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. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Bank, the Bank's power over the SPE, exposures or 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 an 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 an SPE.

 

Funds 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, or is the principal investor. Information about the Funds managed by the Bank is set out in Note 48.

 

Loss of control

 

Upon the loss of control, the Bank derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Bank retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or in accordance with the Bank's accounting policy for financial instruments depending on the level of influence retained.

 

Transactions eliminated on consolidation

 

Intra-group balances, and income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.5         Basis of consolidation (continued)

 

Investmentsin associates

 

Associates are those entities in which the Bank has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exist when the Bank holds between 20% and 50% of the voting power of another entity.

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 include the Bank's share of the profit or loss and other comprehensive income of equity-accounted investees, after adjustments to align the accounting policies with those of the Bank, from the date that significant influence commences until the date that significant influence ceases.

When the Bank'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 Bank has an obligation or has made payments on behalf of the investee.

 

Joint arrangements

Joint arrangements are arrangements of which the Bank 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 Bank 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 Bank has rights only to the net assets of the arrangements, it accounts for its interest using the equity method, as for associates.

 

3.6         Foreign currencies

                                    

Items included in the financial statements of each of the Bank'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 Bank are presented in AED, which is the Bank's 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 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 recognized in either the income statement or shareholders' equity depending upon the nature of the  asset or liability.

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.6         Foreign currencies (continued)

 

In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not AED, are translated into the Bank's presentation currency at the rate of exchange ruling at the statement of financial position date. The results of branches, subsidiaries, joint ventures and associates whose functional currency is not AED are translated into AED at the average rates of exchange for the reporting period. Exchange differences arising from the retranslation of opening foreign currency net investments, and exchange differences 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 in the '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.

 

3.7         Financial instruments

 

(i)      Date of recognition

 

All financial assets and liabilities are initially recognized on the date at which the Bank becomes a  party to the contractual provision of the instrument except for "regular way" purchases and sales of financial assets which are recognized on settlement date basis (other than derivative contracts). Settlement date is the date that the Bank physically receives or transfers the assets. Regular way purchases or sales are those that require delivery of assets within the time frame generally established by regulation or convention in the market place. Any significant change in the fair value of assets which the Bank has committed to purchase at the consolidated statement of financial position date is recognised in the consolidated income statement for assets classified as held for trading, in other comprehensive income for assets classified as available for sale and no adjustments are recognised for assets carried at cost or amortised cost.

 

(ii)         Initial measurement of financial instruments

 

The classification of financial instruments at initial recognition depends on the purpose and the management's intention for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value, plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss.

 

(iii)       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.

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.7         Financial instruments (continued)

 

(iii)       Derivatives (continued)

 

Derivative financial instruments are initially measured at fair value at contract date, and are subsequently re-measured at fair value.  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.

 

(iv)        Investment securities

 

Investment securities are initially measured at fair value plus, in the case of investment securities not at fair value through profit or loss, incremental direct transaction costs, and subsequently accounted for depending on their classification as either held to maturity, fair value through profit or loss or available for sale.

 

Investment securities are classified into the following categories depending on the nature and purpose of the investment:

 

i)             Investments at fair value through profit or loss;

ii)           Available for sale and

iii)          Held-to-maturity investments.

 

Financial assets and liabilities designated at fair value through profit or loss ( FVTPL)

 

Financial assets and liabilities are classified as at FVTPL when either held for trading or when designated as at FVTPL.

 

A financial asset or liability is classified as held for trading if:

 

§ It has been acquired principally for the purpose of selling it in the near term; or

§ On initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or

§ It is a derivative that is not designated and effective as a hedging instrument.

 

 

 

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.7         Financial instruments (continued)

 

Financial assets and liabilities designated at fair value through profit or loss ( FVTPL)

(continued)

 

A financial asset or liability other than held for trading may be designated as at FVTPL upon initial recognition if:

 

§ Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise for measuring assets or liabilities on a different basis; or

§ It  forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

§ It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

 

Financial assets and liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in consolidated income statement. 

 

Held-to-maturity

 

Investments which have fixed or determinable payments with fixed maturities which the Bank has the positive intention and ability to hold to maturity, are classified as held to maturity investments.

 

Held-to-maturity investments are initially recognised at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest rate method, less any impairment losses, with revenue recognised on an effective yield basis.

 

Amortised cost is calculated by taking into account any discount or premium on acquisition using an effective interest rate method.

 

If there is objective evidence that an impairment on held to maturity investments carried at amortised cost has been incurred, the amount of impairment loss recognised in the consolidated income statement is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the investments' original effective interest rate.

 

Investments classified as held to maturity and not close to their maturity, cannot ordinarily be sold or reclassified without impacting the Bank's ability to use this classification and cannot be designated as a hedged item with respect to interest rate or prepayment risk, reflecting the longer-term nature of these investments.

 

Available for sale

 

Investments not classified as either "fair value through profit or loss" or "held to maturity" are classified as "available for sale". Available for sale assets are intended to be held for an indefinite period of time and may be sold in response to liquidity requirements or changes in interest rates, commodity prices or equity prices.

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.7         Financial instruments (continued)

 

Available for sale (continued)

 

Available for sale investments are initially recognised at fair value plus any directly attributable transaction costs and are subsequently measured at fair value. The fair values of quoted financial assets in active markets are based on current prices. If the market for a financial asset is not active, and for unquoted securities, the Bank establishes fair value by using valuation techniques (e.g. recent arms length transactions, discounted cash flow analysis and other valuation techniques). Only in very rare cases where  fair value cannot be measured reliably, investments are carried at cost and tested for impairment, if any.

 

Gains and losses arising from changes in fair value are recognised in the other comprehensive income statement and recorded in cumulative changes in fair value with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in the consolidated income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in equity in the cumulative changes in fair value is included in the consolidated income statement for the year.

 

If an available for sale investment is impaired, the difference between the acquisition cost (net of any principal repayments and amortisation) and the current fair value, less any previous impairment loss recognised in the consolidated income statement is removed from equity and recognised in the consolidated income statement. Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the nature of the available-for-sale financial asset concerned:

 

For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset.

 

For an available-for-sale equity security, a subsequent decline in the fair value of the instrument is recognised in the income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security.

 

Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognised directly in equity.

 

§ If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement to the extent of the increase in fair value;

 

§ For an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive income, accumulating in equity.

 

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.7         Financial instruments (continued)

 

Deposits and balances due from banks and loans and advances

 

'Deposits and balances due from banks' and 'Loans and advances' include non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments that are not quoted in an active market and it is expected that substantially all of the initial investments will be recovered other than because of credit deterioration. Placements with banks represent time bound term deposits placed.

 

After initial measurement at fair value plus any directly attributable transaction costs, amounts  'Deposits and balances due from banks' and 'Loans and advances, net' are subsequently measured at amortised cost using the effective interest rate, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The losses arising from impairment are recognised in the consolidated income statement.

 

Debt issued and other borrowed funds

 

Financial instruments issued by the Bank are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. These are recognized initially at fair value, net of transaction costs.

 

After initial measurement, debt issued and other borrowings are subsequently measured at amortised cost using the effective interest rate. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.

 

A compound financial instrument which contains both a liability and an equity component is separated at the issue date. A portion of the net proceeds of the instrument is allocated to the debt component on the date of issue based on its fair value (which is generally determined based on the quoted market prices for similar debt instruments). The equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the debt component.

 

Other financial liabilities

 

Other financial liabilities, are initially measured at fair value, net of transaction costs.

 

Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

 

Reclassification of financial assets

 

Effective from 1 July 2008, accounting standards permit re-classification in certain circumstances, non-derivative financial assets out of the Held-for-trading category and into the Available-for-sale, Loans and receivables, or Held-to-maturity categories. From this date it was also permitted to reclassify, in rare circumstances, financial instruments out of the Available-for-sale category and into the Loans and receivables category.

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.7         Financial instruments (continued)

 

Reclassification of financial assets (continued)

 

Reclassifications are recorded at fair value at the date of reclassification, which is recognized as the new amortised cost.

 

For a financial asset reclassified out of the Available-for-sale category, any previous gain or loss on that asset recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired then the amount recorded in equity is recycled to the income statement.

 

The Bank may in rare circumstances reclassify a non-derivative trading asset out of the Held-for-trading category and into the Loans and receivables category if it meets the definition of loans and receivables and the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the effective interest rate from the date of the change in estimate.

 

Reclassification is at the election of management, and is determined on an instrument by instrument basis. The Bank does not reclassify any financial instrument into the fair value through profit or loss category after initial recognition.

 

(v)     Derecognition of financial assets and financial liabilities

 

(a)     Financial assets

 

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

 

§ The rights to receive cash flows from the asset have expired; or

§ The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement; and either:

-     the Bank has transferred substantially all the risks and rewards of the asset, or

-     the Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

 

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank's continuing involvement in the asset. In that case, the Bank also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained.

 

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3        Summary of significant accounting policies (continued)

 

3.7     Financial instruments (continued)

 

(v)     Derecognition of financial assets and financial liabilities (continued)

 

(b)     Financial liabilities

 

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or extinguishment is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss.

 

(vi)        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 Bank 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 Bank's trading activity.

 

The Bank 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.

 

3.8         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 paid under these agreements are included in 'Deposits and balances due from banks'.  The difference between purchase and resale price is treated as interest income using the effective yield method over the life of the agreement.

 

3.9         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 on the statement of financial position nor are lent securities derecognised. Cash collateral received or given is treated as a loan or deposit. 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.

 

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.10      Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, unrestricted 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 Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

 

3.11      Loan impairment

 

Refer to credit risk management section - Note 41.

 

3.12      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.

 

3.13      Fair value measurement

 

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.

 

If a market for a financial instrument is not active, then the Bank establishes fair value using  valuation techniques. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank and incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

 

Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The valuations are computed using calibration and valuation techniques that use prices from observable current market transactions in the same or similar instruments or based off other available observable market data.

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.13      Fair value measurement (continued)

 

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument, i.e. without modification or repackaging, or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the quoted market price in an active market for an identical asset and liability (i.e. Level 1 input) or the value based on a valuation model that uses data only from observable markets is immediately recognised in profit or loss. Any difference between the fair value at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognised in profit or loss immediately but is deferred and recognised as a gain or loss when the instrument is redeemed, transferred or sold, or the fair value becomes observable.

 

In particular, the fair value of the financial assets and liabilities is determined as below:

 

§ The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets is determined with reference to quoted market prices.

 

§ The fair value of other financial assets and financial liabilities (excluding derivative instruments) is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments.

 

§ The fair values of derivative financial instruments are measured at fair value are generally obtained by reference to quoted market prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives.

 

§ The fair value of available for sale monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the balance sheet date. The change in fair value attributable to translation differences is recognised in the consolidated income statement, and other changes are recognised in equity.

 

3.14      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.

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.14      Hedge accounting (continued)

 

At the inception of a hedging relationship, to qualify for hedge accounting, the Bank 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 Bank 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 expenses on designated qualifying hedge swaps is included in 'Net interest income'.

 

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 that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated in equity. The gain or loss relating to the ineffective part is recognised immediately in the consolidated income statement. Amounts accumulated in equity are reclassified from other comprehensive income and transferred to the consolidated income statement in the periods in which the hedged item affects profit or loss, in the same line of the consolidated income statement as the recognised hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the cumulative gains or losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued when the Bank revokes the hedging relationship, when the hedging instrument expires or is sold, terminated or exercised, or when a hedge no longer meets the criteria for hedge accounting.

 

Any cumulative gains or losses recognised in equity remain in equity until the forecast transaction is recognised, in the case of a non-financial asset or a non-financial liability, or until the forecast transaction affects the consolidated income statement. If the forecast transaction is no longer expected to occur, the cumulative gains or losses recognised in equity are immediately transferred to the consolidated income statement from other comprehensive income.

 

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.

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.14      Hedge accounting (continued)

 

Hedge effectiveness testing

 

To qualify for hedge accounting, the Bank 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.

 

The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method the Bank 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 gain on dealing in derivatives under Net trading income.

 

3.15      Equity instruments

 

Debt and equity instruments are classified as either financial liability or equity in accordance with the substance of the contractual arrangement.

 

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Bank are recognised at the proceeds received, net of direct issue costs.

 

A financial instrument is classified as equity if, and only if, both conditions (a) and (b) below are met.

 

(a)          The instrument includes no contractual obligation:

 

§ to deliver cash or another financial asset to another entity; or

§ to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Bank.

 

(b)         If the instrument will or may be settled in the Bank's own equity instruments, it is:

 

§ a non-derivative that includes no contractual obligation for the Bank to deliver a variable number of its own equity instruments; or

§ a derivative that will be settled only by the Bank exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.16      Treasury shares and contracts on own shares

 

Own equity instruments of the Bank which are acquired by the Bank or any of its subsidiaries (treasury shares) are deducted from equity and accounted for at weighted average cost. Consideration paid or received on the purchase, sale, issue or cancellation of the Bank'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.

 

3.17      Financial guarantees

 

Financial guarantees are contracts that require the Bank 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.

 

3.18      Acceptances

 

Acceptances have been considered within the scope of IAS 39 Financial Instruments: Recognition and Measurement) and are recognised as a financial liability in the consolidated statement of financial position with a contractual right of reimbursement from the customer as a financial asset. Therefore, commitments in respect of acceptances have been accounted for as financial assets and financial liabilities.

 

3.19      Collateral pending sale

 

The Bank occasionally acquires real estate and other collateral in settlement of certain loans and advances. Such assets are stated at the lower of their net realisable value.  Gains or losses on disposal and unrealised losses on revaluation are recognised in the consolidated income statement.

 

3.20      Impairment of non-financial assets

 

At each consolidated statement of financial position date, the Bank 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 Bank estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.20      Impairment of non-financial assets (continued)

 

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.

 

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.

 

3.21      Leasing

 

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.

 

Bank as a lessee - Leases which do not transfer to the Bank 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 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.

 

Bank as a lessor - Leases where the Bank does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income.

 

Contingent rents are recognised as revenue in the period in which they are earned.

 

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. The fair values are the estimated amounts for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction. The fair value is determined on 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.

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.22      Investment properties (continued)

 

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 properties under development are included in the consolidated income statement in the period in which they arise. Upon completion of construction or development, such properties are transferred to investment properties.

 

3.23      Property and equipment

 

Property and equipment (including property and equipment under operating leases where the bank is the lessor) 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. 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.

 

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 25 years
Leasehold and freehold improvements	5 to 10 years
Furniture, equipment and vehicles	3 to 5 years
Computer equipment and accessories	3 to 10 years

 

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.

 

3.24      Business combinations and Goodwill

 

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Bank. The cost of acquisition is measured at the fair value of the consideration given at the date of exchange. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair value of the Bank's share of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Bank's share of the identifiable assets, liabilities and contingent liabilities of the business acquired, the difference is recognised immediately in the consolidated income statement.

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.24      Business combinations and Goodwill (continued)

 

Goodwill acquired on business combination is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.

 

For the purpose of impairment testing, goodwill is allocated to each of the Bank's cash generating units that is expected to benefit from the synergies of the combination. 

 

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is 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 of goodwill is recognised directly in profit or loss in the consolidated income statement. 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.

 

3.25      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 Bank's policies.

 

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      Deposits from customers and borrowings

 

Deposits from customers and borrowingsare initially measured at fair value which is normally consideration received, net of directly attributable to transaction costs incurred and subsequently measured at their amortised cost using the effective interest method.

 

3.28      Mandatory convertible securities

 

The components of mandatory convertible securities issued by the Bank are classified separately as equity and financial liability in accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished upon conversion or at the instrument's maturity date. The equity component is determined by deducting the amount of the liability component from the fair value of the convertible securities  as a whole. This is recognised and included as a separate component in the consolidated statement of changes in equity, and is not subsequently re-measured.

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.29      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 balance sheet in respect of defined benefit gratuity plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized 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.

 

The Bank 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 and national insurance contributions for the U.A.E. and GCC citizens are made by the Bank to the Abu Dhabi Retirement Pensions and Benefits Fund in accordance with UAE Federal Law No. 7 of 1999.

 

ii)   Termination benefits

 

Termination benefits are recognised as an expense when the Bank 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 Bank 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.

 

 

 

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.29      Employee benefits (continued)

 

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 Bank 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 Bank's estimate of equity instruments that will eventually vest. At the end of each reporting period, the Bank 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).

 

3.30      Provisions and contingent liabilities

 

Provisions are recognised when the Bank 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.

 

Provisions for onerous contracts are recognised when the expected benefits to be derived by the Bank 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 Bank recognizes 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.

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.30      Provisions and contingent liabilities (continued)

 

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 Bank'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.

 

3.31      Segment reporting

 

A segment is a distinguishable component of the Bank 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.

 

3.32      Taxation

 

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

 

3.33      Intangible assets

 

The Bank's intangible assets other than goodwill include intangible assets acquired in business combinations.

 

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 bank. Intangible assets acquired separately are measured on initial recognition at fair value and subsequently at cost less accumulated amortisation and impairment loss.

 

Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date which is regarded as their cost.

 

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 least at each financial year-end. 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. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.33      Intangible assets (continued)

 

 

Estimated useful lives are as follows:

 

Credit card customer relationships	3 years
Wealth Management customer relationships	4 years
Core deposit intangibles	5 years

 

3.34      Revenue and expense recognition

 

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank 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

 

For all financial instruments measured at amortised cost, interest bearing financial assets classified as available- for-sale and financial instruments designated at fair value through profit or loss, interest and similar income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

 

The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate.

 

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

 

ii)   Dividend income

 

Dividend income is recognised when the Bank's right to receive the payment is established. 

 

iii) Fee and commission income

 

The Bank 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.

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.34      Revenue and expense recognition (continued)

 

(iii)       Fee and commission income (continued)

 

(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.

 

(iv)        Net trading income

 

Results arising from trading activities include all gains and losses from changes in fair value and related interest income or expense and dividends for financial assets and financial liabilities 'held-for-trading'. This includes any ineffectiveness recorded in hedging transactions.

 

3.35      Islamic financing

 

The Bank engages in Shari'ah compliant Islamic banking activities through various Islamic instruments such as Murabaha, Ijara, Salam, Mudaraba, Sukuk and Wakala. The accounting policy for initial recognition, subsequent measurement and derecognition of Islamic financial assets and liabilities are same as disclosed in Note 3.7.

 

Murabaha financing

 

A sale contract whereby the Bank sells to a customer commodities and other assets at an agreed upon profit mark up on cost. The Bank 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. 

 

Ijara financing

 

Ijara financing is an agreement whereby the Bank (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 installments. Ijara could end in transferring the ownership of the asset to the lessee at the end of the lease period. Also, the Bank 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.

 

Mudaraba

 

A contract between the Bank 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.

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

3             Summary of significant accounting policies (continued)

 

3.35      Islamic financing (continued)

 

Mudaraba (continued)

 

Income is recognised based on expected results adjusted for actual results on distribution by the Mudarib, whereas if the Bank is the Rab Al Mal the losses are charged to the Bank's income statement on their declaration by the Mudarib.

 

Salam

 

Bai Al Salam is a Sale contract where the Customer (Seller) undertakes to deliver/supply a specified tangible asset to the Bank (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 bank 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 Bank may be Wakil or Rab Al Mal depending on the nature of the transaction.

 

Estimated income from Wakala is recognised on an accrual basis over the period, adjusted by actual income when received. Losses are accounted for on the date of declaration by the agent.

 

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.

 

Sukuk forms part of debts issued and other borrowed funds as mentioned in Note 3.7. Income is accounted for on a time apportioned basis over the term of the Sukuk.

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

4             Significant accounting judgments, estimates and assumptions

 

The reported results of the Bank are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of these consolidated financial statements. IFRS require the management, in preparing the Bank'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 Bank's accounting policies that are considered by the Board of Directors 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 Bank would affect its reported results.

 

Impairment losses on loans and advances

 

The Bank reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the consolidated income statement. In particular, management judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

 

Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, credit utilisation, loan to collateral ratios, etc.), and judgments to the effect of concentrations of risks and economic data (real estate prices indices, country risk and the performance of different individual groups, etc).

 

The impairment loss on loans and advances is disclosed in more detail in Note 41.9.

 

Impairment of available for sale investments

 

The Bank exercises judgment to consider impairment on the available for sale investments.  This includes determination of whether any decline in the fair value below  cost of equity instruments is significant or prolonged. In making this judgment, the Bank evaluates among other factors, the normal volatility in market price.  In addition, the Bank considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance or changes in technology.

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

4        Significant accounting judgments, estimates and assumptions (continued)

 

Derivative financial instruments

 

Subsequent to initial recognition, the fair values of derivative financial instruments measured at fair value are generally obtained by reference to quoted market prices, discounted cash flow models and recognised pricing models as appropriate. When independent prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The main factors which management considers when applying a model are:

 

a) The likelihood and expected timing of future cash flows on the instrument. These cash flows are  usually governed by the terms of the instrument, although management judgement may be required in situations where the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt.

 

b) An appropriate discount rate for the instrument. Management determines this rate, based on its assessment of the appropriate spread of the rate for the instrument over the risk-free rate. When valuing instruments by reference to comparable instruments, management takes into account the maturity, structure and rating of the instrument with which the position held is being compared. When valuing instruments on a model basis using the fair value of underlying components, management considers, in addition, the need for adjustments to take account of a number of factors such as bid-offer spread, credit profile, servicing costs of portfolios and model uncertainty.

 

Fair valuation of investment properties

 

The fair value of investment properties is based on current prices in an active market for properties of a similar nature, condition or location. The Bank uses the valuation carried out by independent valuers as the fair value of its investment properties. The valuation is based upon assumptions such as market conditions, market prices, future rental income and period, etc.

 

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

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

5             Cash and balances with Central Banks

	2012	2011
	AED'000	AED'000
Cash on hand	552,773	547,769
Balances with Central Banks	666,128	28,242
Reserves maintained with Central Banks	5,618,973	5,053,934
Certificate of deposits with U.A.E. Central Bank	2,500,000	1,000,000
	9,337,874	6,629,945

 

 

The geographical concentration is as follows:

	2012	2011
	AED'000	AED'000
Within the U.A.E.	9,278,553	6,601,201
Outside the U.A.E.	59,321	28,744
	9,337,874	6,629,945

 

6         Deposits and balances due from banks

 

	2012	2011
	AED'000	AED'000
Nostro balances	243,079	257,728
Margin deposits	480,291	814,561
Time deposits	12,757,803	16,777,704
Reverse repo placements	1,830,945	-
Murabaha placements	1,095,000	2,249,000
Wakala placements	110,000	740,939
	16,517,118	20,839,932

 

The geographical concentration is as follows:

	2012	2011
	AED'000	AED'000
Within the U.A.E.	7,496,926	12,798,544
Outside the U.A.E.	9,020,192	8,041,388
	16,517,118	20,839,932

 

The Bank hedges its foreign currency Reverse repo placements for foreign currency exchange rate risk using foreign exchange forward contracts and designates these instruments as cash flow hedges. The positive fair value of these swaps at December 31, 2012 was AED 7,252 thousand (December 31, 2011- AED Nil).

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

7             Trading securities

 

Quoted:	2012	2011
	AED'000	AED'000
Bonds	117,070	15,755
Equity instruments	524,807	-
	641,877	15,755

 

Bonds represent investments in Government and public sector bonds. Equity instruments are equities held by the three funds subsidiaries and is invested in U.A.E.  and G.C.C. securities.

 

The fair value of trading investments is based on quoted market prices.

 

 

The geographical concentration is as follows:

	2012	2011
	AED'000	AED'000
Within the U.A.E.	454,690	15,755
Outside the U.A.E.	187,187	-
	641,877	15,755

 

8             Derivative financial instruments

 

In the ordinary course of business the Bank enters into various types of derivative transactions that are affected by variables in the underlying instruments.  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 which the Bank enters into includes forward foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps and currency and interest rate options.

 

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

 

Forward and Futures transactions

 

Currency forwards represent commitments to purchase foreign and domestic currencies, including non-deliverable spot 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 exchange. 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.

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

8             Derivative 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 (i.e., cross-currency interest rate swaps). No exchange of principal takes place, except for certain cross currency swaps. The Bank's credit risk represents the potential loss if counterparties fail to fulfill their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its 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 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 Bank and a customer over the counter (OTC).

 

Fair value measurement models

 

Derivative contracts can be exchange traded or over the counter (OTC).  The Bank 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 Bank uses a variety of inputs, including contractual terms, market prices, yield curves, and other reference market data.  

 

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 Bank 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 best estimates are used.

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

8             Derivative financial instruments (continued)

 

The fair values of derivative financial instruments held are set out below:

	Fair values
	Assets	Liabilities
At December 31, 2012	AED'000	AED'000
Derivatives held for trading:
Foreign exchange contracts	182,709	178,041
Interest rate and cross currency swaps	3,990,096	4,000,297
Options	193,652	162,315
Futures	1,262	-
Commodity and energy swaps	191	147
Swaptions	8,964	8,964
	4,376,874	4,349,764
Derivatives held as fair value hedges:
Interest and cross currency swaps	458,069	406,575
Derivatives held as cash flow hedges:
Interest rate swaps	27,752	-
Forward foreign exchange contracts	130,531	11,999
	4,993,226	4,768,338

 

	Fair values
	Assets	Liabilities
At December 31, 2011	AED'000	AED'000
Derivatives held for trading:
Foreign exchange contracts	110,015	96,112
Interest rate and cross currency swaps	4,070,651	4,050,688
Options	166,578	173,714
Futures	354	227
Commodity and energy swaps	23,067	21,835
Swaptions	5,903	5,666
	4,376,568	4,348,242
Derivatives held as fair value hedges:
Interest and cross currency swaps	468,196	444,350
Derivatives held as cash flow hedges:
Interest rate swaps	-	2,714
Forward foreign exchange contracts	-	26,262
	4,844,764	4,821,568

 

The net hedge ineffectiveness gains relating to the fair value and cash flow hedges amounting to AED 22,559 thousand (2011 - Losses of AED 5,673 thousand) has been recognised in the consolidated income statement.

 

Derivatives held or issued for trading purposes

 

The Bank'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 Bank 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.

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

8             Derivative financial instruments (continued)

 

Derivatives held or issued for hedging purposes

 

The Bank 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 exchange and interest rates.  The Bank uses forward foreign exchange contracts, cross currency swaps and interest rate swaps to hedge exchange 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.

 

9             Investment securities

	2012
	U.A.E.	Other G.C.C. countries	Rest of the world	Total
	AED'000	AED'000	AED'000	AED'000
Available for sale investments
Quoted:
Bonds	5,880,700	935,042	7,530,965	14,346,707
Government securities	2,604,477	1,236,175	246,697	4,087,349
Equity instruments	424	-	-	424
Total quoted	8,485,601	2,171,217	7,777,662	18,434,480
Unquoted:
Bonds	-	2,057	-	2,057
Equity instruments	204,921	-	701	205,622
Mutual funds	70,757	-	-	70,757
Total unquoted	275,678	2,057	701	278,436
Total available for sale investments	8,761,279	2,173,274	7,778,363	18,712,916

 

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

9             Investment securities (continued)

 

	2011
	U.A.E.	Other G.C.C. countries	Rest of the world	Total
	AED'000	AED'000	AED'000	AED'000
Available for sale investments
Quoted:
Floating rate notes (FRNs)	367,708	-	-	367,708
Collateralised debt obligations (CDOs)	-	-	44,194	44,194
Bonds	4,641,033	857,742	5,605,453	11,104,228
Government securities	1,847,763	1,141,628	241,639	3,231,030
Equity instruments	6,905	-	-	6,905
Mutual funds	35,016	-	-	35,016
Total quoted	6,898,425	1,999,370	5,891,286	14,789,081
Unquoted:
Equity instruments	201,967	-	483	202,450
Mutual funds	60,572	-	-	60,572
Total unquoted	262,539	-	483	263,022
Total available for sale investments	7,160,964	1,999,370	5,891,769	15,052,103

 

At December 31, 2012 quoted bond investments include bonds of fair value AED 5,082,992 thousand (December 31, 2011: AED 4,687,545 thousand) issued by public sector companies.

 

The Bank hedges interest rate risk on certain fixed rate/ floating rate investments through interest rate swaps and designates these as fair value and cash flow hedges, respectively. The net negative fair value of these interest rate swaps at December 31, 2012 was AED 384,649 thousand (December 31, 2011 - net negative fair value AED 447,064 thousand). The hedge ineffectiveness gains and losses relating to these hedges were included in the consolidated income statement.

 

The Bank entered into repurchase agreements and total return swap agreements whereby bonds were pledged and held by counterparties as collateral. The risks and rewards relating to the investments pledged remain with the Bank. The following table reflects the carrying value of these bonds and the associated financial liabilities:

 

	2012		2011
	Fair value of pledged assets	Carrying  value of associated liabilities	Fair value of pledged assets	Carrying  value of associated liabilities
	AED'000	AED'000	AED'000	AED'000
Repurchase financing	1,220,647	1,063,133	4,237,403	3,776,167

 

 

 

 

 

Notes to the consolidated financial statements

for the year ended December 31, 2012 (continued)

 

9             Investment securities (continued)

 

Further, the Bank pledged investment securities with fair value amounting to AED 1,651,988 thousand (December 31, 2011 - AED 1,110,902 thousand) as collateral against margin calls. The risks and rewards relating to the investments pledged remain with the Bank.

 

The movement in investment securities for December 31, 2012 and December 31, 2011 is as follows:

 

	2012	2011
	AED'000	AED'000
Fair value at January 1,	15,052,103	8,263,138
Acquisitions	4,330,235	7,504,405
Disposals	(1,408,955)	(622,487)
Fair value adjustments	802,108	(48,951)
Exchange differences	(26,064)	9,588
Eliminated on consolidation of funds (Note 3.1)	(35,016)	-
Net impairment loss	(1,495)	(53,590)
Fair value at December 31,	18,712,916	15,052,103

 

10          Loans and advances, net

	2012	2011
	AED'000	AED'000
Overdrafts (Retail and Corporate)	5,775,020	9,949,513
Corporate Loans	101,206,881	101,565,326
Retail Loans	12,563,043	12,303,074
Credit Cards	2,076,531	2,133,144
Islamic financing (Note 23)	6,600,046	3,749,732
Other facilities	1,437,494	765,824
	129,659,015	130,466,613
Less: Allowance for impairment (Note 41.9)	(6,463,720)	(5,711,876)
	123,195,295	124,754,737

 

 

The Bank hedges certain variable rate loans and advances for interest rate risk using interest rate swaps and designates these instruments as cash flow hedges. The positive fair value of these swaps at December 31, 2012 was AED 13,499 thousand (December 31, 2011- AED negative fair value of AED 3,796 thousand).

 

The Bank entered into repurchase agreements whereby loans are pledged and held by counter parties as collateral. The risks and rewards relating to the loans pledged will remain with the Bank. The following table reflects the carrying value of these loans and the associated financial liabilities:

 

	2012		2011
	Carrying value of pledged assets	Carrying  value of associated liabilities	Carrying value of pledged assets	Carrying  value of associated liabilities
	AED'000	AED'000	AED'000	AED'000
Repurchase agreements	4,756,807	2,358,230	4,756,807	2,358,230