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Monday 26 January, 2015

Abu Dhabi Comm Bnk

Final Results

RNS Number : 0652D
Abu Dhabi Commercial Bank PJSC
25 January 2015
 



 

 

 

 

 

 

 

 

 

Abu Dhabi Commercial Bank PJSC
Consolidated financial statements
For the year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

Report of the independent auditor on the consolidated financial statements.................................................................................................................................................... 4

Consolidated statement of financial position...................................................................................................................................................................................................................................... 6

Consolidated income statement...................................................................................................................................................................................................................................................................... 7

Consolidated statement of comprehensive income...................................................................................................................................................................................................................... 8

Consolidated statement of changes in equity.................................................................................................................................................................................................................................... 9

Consolidated statement of cash flows.................................................................................................................................................................................................................................................... 10

1.     Activities and areas of operations.................................................................................................................................................................................................................................................. 11

2.     Application of new and revised International Financial Reporting Standards (IFRSs)................................................................................................................ 11

3.     Summary of significant accounting policies.......................................................................................................................................................................................................................... 14

3.1... Basis of preparation............................................................................................................................................................................................................................................................................ 14

3.2... Measurement............................................................................................................................................................................................................................................................................................ 14

3.3... Functional and presentation currency.............................................................................................................................................................................................................................. 14

3.4... Use of estimates and judgements.......................................................................................................................................................................................................................................... 14

3.5... Basis of consolidation......................................................................................................................................................................................................................................................................... 15

3.6... Foreign currencies................................................................................................................................................................................................................................................................................ 17

3.7... Financial instruments........................................................................................................................................................................................................................................................................ 18

3.8... Sale and repurchase agreements........................................................................................................................................................................................................................................... 23

3.9... Securities borrowing and lending.......................................................................................................................................................................................................................................... 23

3.10 Cash and cash equivalents........................................................................................................................................................................................................................................................... 23

3.11 Loan impairment................................................................................................................................................................................................................................................................................... 23

3.12 Amortised cost measurement.....................................................................................................................................................................................................................................................24

3.13 Fair value measurement................................................................................................................................................................................................................................................................ 24

3.14 Hedge accounting................................................................................................................................................................................................................................................................................. 25

3.15 Equity instruments............................................................................................................................................................................................................................................................................. 26

3.16 Treasury shares and contracts on own shares.......................................................................................................................................................................................................... 27

3.17 Financial guarantees.......................................................................................................................................................................................................................................................................... 27

3.18 Acceptances........................................................................................................................................................................................................................................................................................... .... 27

3.19 Collateral pending sale.................................................................................................................................................................................................................................................................... 27

3.20 Impairment of non-financial assets..................................................................................................................................................................................................................................... 27

3.21 Leasing........................................................................................................................................................................................................................................................................................................... 28

3.22 Investment properties.................................................................................................................................................................................................................................................................... 28

3.23 Property and equipment............................................................................................................................................................................................................................................................. 28

3.24 Business combinations and Goodwill................................................................................................................................................................................................................................ 29

3.25 Capital work in progress............................................................................................................................................................................................................................................................... 29

3.26 Borrowing costs..................................................................................................................................................................................................................................................................................... 29

3.27 Mandatory convertible securities......................................................................................................................................................................................................................................... 30

3.28 Employee benefits.............................................................................................................................................................................................................................................................................. 30

3.29 Provisions and contingent liabilities................................................................................................................................................................................................................................... 31

3.30 Segment reporting.............................................................................................................................................................................................................................................................................. 32

3.31 Taxation........................................................................................................................................................................................................................................................................................................ 32

3.32 Intangible assets................................................................................................................................................................................................................................................................................... 32

3.33 Revenue and expense recognition....................................................................................................................................................................................................................................... 33

3.34 Islamic financing................................................................................................................................................................................................................................................................................... 33

4.     Significant accounting judgments, estimates and assumptions......................................................................................................................................................................... 35

5.     Cash and balances with central banks...................................................................................................................................................................................................................................... 37

6.     Deposits and balances due from banks................................................................................................................................................................................................................................... 37

7.     Trading securities......................................................................................................................................................................................................................................................................................... 37

8.     Derivative financial instruments.................................................................................................................................................................................................................................................... 38

9.     Investment securities................................................................................................................................................................................................................................................................................ 41

10.   Loans and advances, net........................................................................................................................................................................................................................................................................ 42

11.   Investment properties............................................................................................................................................................................................................................................................................. 42

12.   Other assets....................................................................................................................................................................................................................................................................................................... 43

13.   Property and equipment, net............................................................................................................................................................................................................................................................ 44

14.   Intangible assets............................................................................................................................................................................................................................................................................................ 45

15.   Due to banks..................................................................................................................................................................................................................................................................................................... 46

16.   Deposits from customers....................................................................................................................................................................................................................................................................... 47

17.   Euro commercial paper........................................................................................................................................................................................................................................................................... 47

18.   Borrowings.......................................................................................................................................................................................................................................................................................................... 48

19.   Other liabilities................................................................................................................................................................................................................................................................................................ 51

20.   Share capital...................................................................................................................................................................................................................................................................................................... 52

21.   Other reserves, net of treasury shares..................................................................................................................................................................................................................................... 53

22.   Islamic financing............................................................................................................................................................................................................................................................................................ 54

23.   Employees' incentive plan shares, net...................................................................................................................................................................................................................................... 55

24.   Capital notes...................................................................................................................................................................................................................................................................................................... 55

25.   Interest income............................................................................................................................................................................................................................................................................................... 56

26.   Interest expense............................................................................................................................................................................................................................................................................................ 56

27.   Net fees and commission income................................................................................................................................................................................................................................................... 56

28.   Net trading income...................................................................................................................................................................................................................................................................................... 56

29.   Other operating income.......................................................................................................................................................................................................................................................................... 56

30.   Operating expenses.................................................................................................................................................................................................................................................................................... 57

31.   Impairment allowances........................................................................................................................................................................................................................................................................... 57

32.   Earnings per share...................................................................................................................................................................................................................................................................................... 57

33.   Operating lease............................................................................................................................................................................................................................................................................................... 58

34.   Cash and cash equivalents................................................................................................................................................................................................................................................................... 58

35.   Related party transactions................................................................................................................................................................................................................................................................... 59

36.   Commitments and contingent liabilities.................................................................................................................................................................................................................................. 60

37.   Operating segments................................................................................................................................................................................................................................................................................... 61

38.   Financial instruments............................................................................................................................................................................................................................................................................... 63

39.   Fair value hierarchy................................................................................................................................................................................................................................................................................... 63

40.   Risk management......................................................................................................................................................................................................................................................................................... 66

41.   Credit risk management......................................................................................................................................................................................................................................................................... 66

41.1 Analysis of maximum exposure to credit risk before credit risk mitigants..................................................................................................................................... 67

41.2  Concentration of credit risk....................................................................................................................................................................................................................................................... 68

41.3 Credit risk management overview....................................................................................................................................................................................................................................... 70

41.4 Credit risk measurement and mitigation policies................................................................................................................................................................................................... 70

41.5  Portfolio monitoring and identifying credit risk..................................................................................................................................................................................................... 71

41.6  Identification of impairment.................................................................................................................................................................................................................................................... 73

42.   Interest rate risk framework, measurement and monitoring.............................................................................................................................................................................. 76

43.   Liquidity risk framework, measurement and monitoring....................................................................................................................................................................................... 79

44.   Foreign exchange risk framework, measurement and monitoring................................................................................................................................................................. 84

45.   Market risk framework, measurement and management...................................................................................................................................................................................... 86

46.   Operational risk management.......................................................................................................................................................................................................................................................... 89

47.   Foreign currency balances................................................................................................................................................................................................................................................................... 90

48.   Trust activities................................................................................................................................................................................................................................................................................................. 90

49.   Subsidiaries........................................................................................................................................................................................................................................................................................................ 90

50.   Capital adequacy and capital management......................................................................................................................................................................................................................... 91

51.   Disposal of fund subsidiaries............................................................................................................................................................................................................................................................. 95

52.   Investment in associate........................................................................................................................................................................................................................................................................... 96

53.   Legal proceedings......................................................................................................................................................................................................................................................................................... 96

 



 

 

 

Report of the independent auditor on the consolidated financial statements 

 

To the Shareholders of

Abu Dhabi Commercial Bank PJSC

Abu Dhabi, UAE

 

Report on the consolidated financial statements

 

We have audited the accompanying consolidated financial statements of Abu Dhabi Commercial Bank PJSC ("the Bank") and its subsidiaries (together referred to as "the Group") which comprise the consolidated statement of financial position as at December 31, 2014 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes.

 

Management's responsibility for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor's responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing.  Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 2014 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

 

Report on other legal and regulatory requirements

 

Further, in respect of the Bank, as required by the UAE Federal Law No. (8) of 1984, as amended, we report that we have obtained all the information we considered necessary for the purposes of our audit; the financial statements of the Bank comply, in all material respects, with the applicable provisions of the UAE Federal Law 



 

Report of the independent auditor on the consolidated financial statements (continued)

 

No. (8) of 1984, as amended, and its Articles of Association; the Bank has maintained proper books of account and the financial statements are in agreement therewith; the financial information included in the Directors' report is consistent with the books of account of the Bank; and nothing has come to our attention which causes us to believe that the Bank has breached any of the applicable provisions of the UAE Federal Law No. (8) of 1984, as amended, or of its Articles of Association which would materially affect its activities or its financial position as at December 31, 2014. Further, as required by the UAE Union Law No. (10) of 1980, as amended, we report that we have obtained all the information and explanations we considered necessary for the purpose of our audit.

 

For PricewaterhouseCoopers

January 25, 2015

 

 

 

 

 

Jacques E. Fakhoury

Registered Auditor Number 379

Abu Dhabi, United Arab Emirate

 

 

 


Consolidated statement of financial position

As at December 31, 2014

 



2014


2013


2014


Notes

 AED'000


AED'000


USD'000

ASSETS







Cash and balances with central banks

5

15,092,192


9,961,206


4,108,955

Deposits and balances due from banks

6

16,019,461


11,344,700


4,361,411

Trading securities

7

199,599


884,640


54,342

Derivative financial instruments

8

4,288,506


3,616,203


1,167,576

Investment securities

9

21,651,838


20,854,772


5,894,865

Loans and advances, net

10

140,562,498


131,648,670


38,269,126

Investment in associate

52

195,854


-


53,323

Investment properties

11

615,778


560,690


167,650

Other assets

12

4,551,844


3,404,638


1,239,271

Property and equipment, net

13

806,188


805,322


219,490

Intangibles assets

14

35,705


61,695


9,720

Total assets


204,019,463


183,142,536


55,545,729

LIABILITIES







Due to banks

15

4,089,019


4,291,011


1,113,264

Derivative financial instruments

8

5,000,067


3,965,587


1,361,303

Deposits from customers

16

126,011,227


115,427,708


34,307,440

Euro commercial paper

17

6,375,284


5,940,435


1,735,716

Borrowings

18

30,320,121


23,785,568


8,254,866

Other liabilities

19

5,804,912


4,910,917


1,580,428

Total liabilities


177,600,630


158,321,226


48,353,017

EQUITY







Share capital

20

5,595,597


5,595,597


1,523,441

Share premium


3,848,286


3,848,286


1,047,723

Other reserves, net of treasury shares

21

5,791,798


5,135,440


1,576,857

Retained earnings


7,172,755


5,597,275


1,952,832

Capital notes

24

4,000,000


4,000,000


1,089,028

Equity attributable to equity holders of the Bank

26,408,436


24,176,598


7,189,881

Non-controlling interests

10,397


644,712


2,831

Total equity


26,418,833


24,821,310


7,192,712








Total liabilities and equity


204,019,463


183,142,536


55,545,729

 

These consolidated financial statements were approved by the Board of Directors and authorised for issue on January 25, 2015 and signed on its behalf by:

 

 

 

 

  _____                                              ____________                                                                                                                                              

Mohamed Sultan Ghannoum Al Hameli                  Ala'a Eraiqat                                       Deepak Khullar

Vice Chairman                                                                         Chief Executive Officer               Chief Financial Officer                

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

Consolidated income statement

For the year ended December 31, 2014

 




2014


2013


2014


Notes


AED'000


AED'000


USD'000









Interest income

25


6,367,955


6,519,957


1,733,720

Interest expense

26


(1,288,783)


(1,551,605)


(350,880)

Net interest income



5,079,172


4,968,352


1,382,840

Income from Islamic financing

22


617,433


596,818


168,100

Islamic profit distribution

22


(112,096)


(135,988)


(30,519)

Net income from Islamic financing



505,337


460,830


137,581









Total net interest and Islamic financing income



5,584,509


5,429,182


1,520,421

Net fees and commission income

27


1,242,948


992,536


338,401

Net trading income

28


406,988


537,393


110,805

Revaluation of investment properties

11


22,330


-


6,079

Other operating income

29


272,623


360,508


74,225

Operating income



7,529,398


7,319,619


2,049,931

Operating expenses

30


(2,563,060)


(2,358,186)


(697,811)

Operating profit before impairment allowances



4,966,338


4,961,433


1,352,120

Impairment allowances

31


(762,247)


(1,334,298)


(207,527)

Profit before taxation



4,204,091


3,627,135


1,144,593

Overseas income tax expense



(2,707)


(7,491)


(737)

Net profit for the year



4,201,384


3,619,644


1,143,856









Attributed to:








Equity holders of the Bank



4,049,731


3,365,309


1,102,567

Non-controlling interests



151,653


254,335


41,289

Net profit for the year



4,201,384


3,619,644


1,143,856









Basic earnings per share

32


0.74


0.59


0.20









Diluted earnings per share

32


0.74


0.58


0.20

 

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

 

 

 



 

Consolidated statement of comprehensive income

For the year ended December 31, 2014

 



2014


2013


2014



AED'000


AED'000


 USD'000








Net profit for the year


4,201,384


3,619,644


1,143,856








Items that may be re-classified subsequently

to the consolidated income statement














Exchange difference arising on translation of foreign operations


(3,699)


 

(25,353)                         


(1,007)

Fair value changes on cash flow hedges


(52,083)


14,044


(14,180)

Fair value changes on available-for-sale investments


(99,466)


(65,690)


(27,080)



(155,248)


(76,999)


(42,267)








Items that may not be re-classified subsequently

to the consolidated income statement







Actuarial losses on defined benefit liability


(25,887)


-


(7,048)








Total comprehensive income for the year


4,020,249


3,542,645


1,094,541








Attributed to:







Equity holders of the Bank


3,868,596


3,288,310


1,053,252

Non-controlling interests


151,653


254,335


41,289

Total comprehensive income for the year


4,020,249


3,542,645


1,094,541

 

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

 

 

 

 

 

 

 

 

 


Consolidated statement of changes in equity 

For the year ended December 31, 2014

 


 

 

Share capital


 

 

Share premium


Other reserves, net of treasury shares

 

 

Retained earnings

 

 

 

Capital notes


Equity attributable to equity holders of the Bank


   Non-controlling interests

 

 

 

Total equity


AED'000


AED'000


AED'000


AED'000


AED'000


AED'000


 AED'000


AED'000

















Balance at January 1, 2014

5,595,597


3,848,286


5,135,440


5,597,275


4,000,000


24,176,598


644,712


24,821,310

Net profit for the year

-


-


-


4,049,731


-


4,049,731


151,653


4,201,384

Other comprehensive loss for the year

-


-


(155,248)


(25,887)


-


(181,135)


-


(181,135)

Other movements (Note 21)

-


-


811,606


(792,635)


-


18,971


-


18,971

Dividends to equity holders of the parent

-


-


-


(1,560,857)


-


(1,560,857)


-


(1,560,857)

Net increase in non-controlling interests

-


-


-


-


-


-


50,527


50,527

Disposal of  fund subsidiaries (Note 51)

-


-


-


-


-


-


(836,495)


(836,495)

Net gains on treasury shares arising on disposal of fund subsidiaries (Note 51)

-


-


-


91,521


-


91,521


-


91,521

Capital notes coupon paid (Note 24)

-


-


-


(186,393)


-


(186,393)


-


(186,393)

















Balance at December 31, 2014

5,595,597


3,848,286


5,791,798


7,172,755


4,000,000


26,408,436


10,397


26,418,833

 

Balance at January 1, 2013

5,595,597


3,848,286


6,288,591


4,537,315


4,000,000


  24,269,789


437,800


  24,707,589

Net profit for the year

-


-


-


3,365,309


-


3,365,309


254,335


3,619,644

Other comprehensive loss for the year

-


-


(76,999)


-


-


(76,999)


-


(76,999)

Other movements (Note 21)

-


-


(1,076,152)


(673,062)


-


(1,749,214)


-


(1,749,214)

Dividends paid to equity holders of the parent, net

-


-


-


(1,397,983)


-


(1,397,983)


-


(1,397,983)

Net decrease in non-controlling interests

-


-


-


-


-


                      -  


(47,423)


(47,423)

Net realised gain on treasury shares

-


-


-


5,696


-


5,696


-


5,696

Capital notes coupon paid (Note 24)

-


-


-


(240,000)


-


(240,000)


-


(240,000)

















Balance at December 31, 2013

5,595,597


3,848,286


5,135,440


5,597,275


4,000,000


24,176,598


644,712


24,821,310

 

For the year ended December 31, 2014, the Board of Directors has proposed to pay cash dividends representing 40% of the paid up capital (Note 20).

 

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

 



 


Consolidated statement of cash flows

For the year ended December 31, 2014

 


2014

2013

2014


AED'000

AED'000

USD'000

OPERATING ACTIVITIES




Profit before taxation

4,204,091

3,627,135

1,144,593

Adjustments for:




  Depreciation on property and equipment (Note 13)

132,008

127,222

35,940

  Amortisation of intangible assets (Note 14)

25,990

30,431

7,076

  Revaluation of investment properties (Note 11)

(22,330)

-

(6,079)

  Impairment allowance on loans and advances, net (Note 41.6)

1,040,551

1,554,120

283,297

  Discount unwind (Note 41.6)

(160,011)

(144,016)

(43,564)

  Impairment recoveries, net of allowances on investment

  securities (Note 31)

(48,952)

(31,858)

(13,328)

  Net gains from disposal of available-for-sale investments (Note 29)

(22,201)

(32,911)

(6,044)

  Net gains from trading securities (Note 28)

(98,071)

(307,282)

(26,701)

  Ineffective portion of hedges - losses (Note 8)

4,091

9,238

1,114

  Employees' incentive plan benefit expense (Note 23)

29,309

39,448

7,980

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

 

5,084,475

 

4,871,527

 

1,384,284

(Increase)/decrease in balances with central banks

(2,050,000)

1,025,000

(558,127)

Increase in due from banks

(2,799,044)

(5,692,166)

(762,059)

(Increase)/decrease in net trading derivative financial instruments

(19,229)

42,957

(5,235)

Net proceeds from disposal of trading securities

20,026

64,519

5,452

Increase in loans and advances, net

(10,018,841)

(9,864,527)

(2,727,700)

Increase in other assets

(440,627)

(39,573)

(119,964)

Increase/(decrease) in due to banks

65,024

(278,943)

17,703

Increase in deposits from customers

10,571,899

6,164,461

2,878,274

(Decrease)/increase in other liabilities

(63,752)

507,322

(17,356)

Cash from/(used in) operations

349,931

(3,199,423)

95,272

Overseas tax paid, net

(7,554)

(9,717)

(2,057)

Net cash from/(used in)  operations

342,377

(3,209,140)

93,215

INVESTING ACTIVITIES




Impairment recoveries on available-for-sale investments

48,952

31,858

13,328

Overseas tax refund/(paid), net

3,575

(34,196)

973

Net purchase of available-for-sale investments

(7,751,616)

(4,643,834)

(2,110,432)

Net proceeds from disposal of available-for-sale investments

6,990,331

2,257,177

1,903,167

Additions to investment properties (Note 11)

(12,091)

(17,236)

(3,292)

Cash received on disposal of fund subsidiaries (Note 51)

95,112

-

25,895

Net purchase of property and equipment

(132,874)

(82,610)

(36,176)

Net cash used in investing activities

(758,611)

(2,488,841)

(206,537)

FINANCING ACTIVITIES




Net increase in euro commercial paper

678,931

1,404,151

184,844

Net proceeds from borrowings

27,665,694

12,933,276

7,532,179

Repayment of borrowings

(20,967,704)

(14,553,447)

(5,708,604)

Net proceeds from sale of treasury shares by fund subsidiaries

1,751

14,621

477

Dividends paid to shareholders, net

(1,560,857)

(1,397,983)

(424,954)

Share buyback (Note 20)

(11,691)

(1,796,957)

(3,183)

Net movement in non-controlling interests

50,527

(47,423)

13,756

Purchase of employees' incentive plan shares

(31,459)

(630)

(8,565)

Capital notes coupon paid (Note 24)

(186,393)

(240,000)

(50,747)

Net cash from/(used in) financing activities

5,638,799

(3,684,392)

1,535,203





Net increase/(decrease) in cash and cash equivalents

5,222,565

(9,382,373)

1,421,881




                                    

Cash and cash equivalents at the beginning of the year

9,797,941

19,180,314

2,667,557

Cash and cash equivalents at the end of the year (Note 34)

15,020,506

9,797,941

4,089,438

 

Operating activities include dividend income and interest income on available-for-sale investments.

 

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

 


1.    Activities and areas of operations

 

Abu Dhabi Commercial Bank PJSC ("ADCB" or the "Bank") is a public joint stock company with limited liability incorporated in the emirate of Abu Dhabi, United Arab Emirates (UAE). ADCB is principally engaged in the business of retail, commercial and Islamic banking and provision of other financial services through its network of fifty branches and four pay offices in the UAE, two branches in India, one offshore branch in Jersey and its subsidiaries and one representative office located in London.

 

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

 

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

 

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

 

Amendments:

 

IAS 32 - Financial Instruments: Presentation requires presentation to clarify certain aspects because of diversity in application of the requirements on offsetting, focused on four main areas:

 

§ the meaning of 'currently has a legally enforceable right of set-off ',

§ the application of simultaneous realisation and settlement,

§ the offsetting of collateral amounts and

§ the unit of account for applying the offsetting requirements.

 

IAS 39 - Financial Instruments: Recognition and Measurement: make it clear that there is no need to discontinue hedge accounting if a hedging derivative is novated, provided certain criteria are met.

 

IFRS 10 - Consolidated Financial Statements, IFRS 12 - Disclosure of Interests in Other Entities and IAS 27 - Separate Financial Statements relate only to investment entities, therefore will not apply to the Bank.

 

These amendments do not have any material impact on the Bank's consolidated financial statements.

 

Other than the above, there are no other IFRSs or IFRIC interpretations that were effective for the first time for the financial year beginning January 1, 2014 that are relevant to the Bank's consolidated financial statements.

 

Annual improvements to IFRSs 2010-2012

         

The annual improvements to IFRSs 2010-2012 include a number of amendments to various IFRSs, which are summarised below:

 

The amendments to IFRS 2: (i) change the definitions of 'vesting condition' and market condition; and (ii) add definitions for 'performance condition' and 'service condition' which were previously included within the definition of 'vesting condition'. These amendments are effective for share-based payment transactions for which the grant date is on or after 1 July 2014.

 

The amendments to IFRS 3 clarify that contingent consideration that is classified as an asset or a liability should be measured at fair value at each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39 or a non-financial asset or liability. Changes in fair value (other than measurement period adjustments) should be recognised in income statement. The amendments to IFRS 3 are effective for business combinations for which the acquisition date is on or after 1 July 2014.

 



 

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

 

Annual improvements to IFRSs 2010-2012 (continued)

 

The amendments to IFRS 8 (i) require an entity to disclose judgments made by management in applying the aggregation criteria to operating segments, including the description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments have 'similar economic characteristics'; and (ii) clarify that a reconciliation of the total of the reportable segments' assets to the entity's assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker.

 

The amendments to the basis of conclusion of IFRS 13 clarify that the issue of IFRS 13 and consequential amendments to IAS 39 and IFRS 39 did not remove the ability to measure short term receivables and payables with no stated interest rate at their invoice amounts without discounting, if the effect of discounting is immaterial. As the amendments do not contain any effective date, they are considered to be immediately effective.

 

The amendments to IAS 16 and IAS 38 remove perceived inconsistencies in the accounting for accumulated depreciation/amortisation when an item of property, plant and equipment or an intangible asset is revalued. The amended standards clarify that the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/amortisation is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses.

 

The amendments to IAS 24 clarify that a management entity providing key management personnel services to a reporting entity is a related party of the reporting entity. Consequently, the reporting entity should disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required.

 

Annual improvements to IFRSs 2011-2013

 

The annual improvements to IFRSs 2011-2013 include a number of amendments to various IFRSs, which are summarised below.

 

The amendments to IFRS 3 clarify that the standard does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself.

 

The amendments to IFRS 13 clarify that the scope of the portfolio exception for measuring the fair value of a group of financial assets and liabilities on a net basis includes all contracts that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts do not meet the definition of financial assets or liabilities within IAS 32.

 

Management do not anticipate that the application of these improvements will have a significant impact on the Bank's consolidated financial statements.

 

Standards and Interpretations in issue but not yet effective

 

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

 

 

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

Effective for annual periods beginning on or after

Amendments:


IAS 27 - Separate Financial Statements permits investments in subsidiaries, joint ventures and associates to be optionally accounted for using the equity method in separate financial statements.

January 1, 2016

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

 

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

 

 

New standards and significant amendments to standards applicable to the Bank

Effective for annual periods beginning on or after

Amendments (continued):


IFRS 7 - Financial Instruments: Disclosures (with consequential amendments to IFRS 1) adds additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of determining the disclosures required and clarifies the applicability of the amendments to IFRS 7 on offsetting disclosures to condensed interim financial statements.

 

January 1, 2016

IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) clarifies the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:

-    require full recognition in the investor's financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations)

-    require the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognised only to the extent of the unrelated investors' interests in that associate or joint venture.

These requirements apply regardless of the legal form of the transaction, e.g. whether the sale or contribution of assets occurs by an investor transferring shares in a subsidiary that holds the assets (resulting in loss of control of the subsidiary), or by the direct sale of the assets themselves.

 

January 1, 2016

New Standards:


IFRS 15 - Revenue from Contracts with Customers provides a single, principles based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point in which revenue is recognised, accounting for variable consideration, costs of fulfilling and obtaining a contract and various related matters.  New disclosures about revenue are also introduced.

 

January 1, 2017

IFRS 9 - Financial Instruments: Classification and Measurement - A finalised version has been issued which contains accounting requirements for financial instruments, replacing IAS 39 - Financial Instruments: Recognition and Measurement. The standard contains requirements in the following areas:

-    Classification and measurement - financial assets are classified by reference to the business model within which they are held and their contractual cash flow characteristics. It introduces a 'fair value through other comprehensive income' category for certain debt instruments. Financial liabilities are classified in a similar manner as under IAS 39, however there are differences in the requirements applying to the measurement of an entity's own credit risk.

-    Impairment -  IFRS 9 introduces an 'expected credit loss' model for the measurement of the impairment of financial assets, so it is no longer necessary for a credit event to have occurred before a credit loss is recognised

-    Hedge accounting - introduces a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures

-    Derecognition - The requirements for the derecognition of financial assets and liabilities are carried forward from IAS 39.

January 1, 2018

 

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 impact of these standards and amendments are currently being assessed by the management.



 

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 UAE ("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 UAE have been presented under the respective notes.

 

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

 

3.2      Measurement

 

The consolidated financial statements have been prepared under the historical cost convention except as modified by the revaluation of financial assets and liabilities at fair value through profit and loss, 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 United States Dollar (USD) amounts in the primary financial statements are presented for the convenience of the reader only by converting the AED balances at the pegged exchange rate of 1 USD = 3.673 AED.

 

3.4      Use of estimates and judgements

 

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

 

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

 

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

 



 

3.   Summary of significant accounting policies (continued)

 

3.5      Basis of consolidation

 

The consolidated financial statements incorporate the financial statements of Abu Dhabi Commercial Bank PJSC, its subsidiaries (collectively referred to as "ADCB or the "Bank") and its associate.

 

Subsidiaries

 

The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank and its subsidiaries. Control is achieved when the Bank:

 

§  has power over the investee;

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

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

 

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

 

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

 

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

§  potential voting rights held by the Bank;

§  rights arising from other contractual arrangements; and

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

 

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

 

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

 

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

 

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

 

 



 

3.   Summary of significant accounting policies (continued)

 

3.5   Basis of consolidation (continued)

 

Subsidiaries (continued)

 

Changes in the Bank's ownership interests in existing subsidiaries:

 

Changes in Bank's ownership interests in subsidiaries that do not result in the Bank losing control over the subsidiaries are accounted for as equity transactions. The carrying amount of the Bank's interests is adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the shareholders of the Bank.

 

When the Bank loses control of a subsidiary, a gain or loss is recognised in the income statement and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Bank had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to income statement or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

 

Special Purpose Entities                                                                                                                   

 

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. 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.

 

 



 

3.   Summary of significant accounting policies (continued)

 

3.5   Basis of consolidation (continued)

 

Investment in associate

 

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 functional and presentation currency.

 

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



 

3.   Summary of significant accounting policies (continued)

 

3.6      Foreign currencies (continued)

 

In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of branches and subsidiaries whose functional currency is not AED, are translated into the Bank's presentation currency at the rate of exchange prevailing at the statement of financial position date. The results of branches and subsidiaries 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 21).

 

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

 

Date of recognition

 

All financial assets and liabilities are initially recognised 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 recognised 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.

 

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.



 

3.   Summary of significant accounting policies (continued)

 

3.7   Financial instruments (continued)

 

Derivatives

 

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

 

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

 

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

 

The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the consolidated income statement under net gain on dealing in derivatives (Note 28).

 

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.

 

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. 



3.   Summary of significant accounting policies (continued)

 

3.7   Financial instruments (continued)

 

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.

 

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:

 

3.   Summary of significant accounting policies (continued)

 

3.7   Financial instruments (continued)

 

Available-for-sale (continued)

 

§ For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the consolidated 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. 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 consolidated 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. A subsequent decline in the fair value of the instrument is recognised in the consolidated income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security. Impairment losses recognised on the equity security are not reversed through the consolidated income statement.

 

Deposits and balances due from banks and loans and advances, net

 

Deposits and balances due from banks and loans and advances, net 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.

 

After initial measurement at fair value plus any directly attributable transaction costs, 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 recognised 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.

3.   Summary of significant accounting policies (continued)

 

3.7   Financial instruments (continued)

 

Reclassification of financial assets

 

Reclassifications are recorded at fair value at the date of reclassification, which is recognised 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 consolidated income statement.

 

The Bank may in rare circumstances reclassify a non-derivative trading asset out of the held-for-trading category 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.

 

Derecognition of financial assets and financial liabilities

 

Financial assets

 

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised 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 neither transferred its rights to receive cash flows from an asset nor 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.

 

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.

3.   Summary of significant accounting policies (continued)

 

3.7   Financial instruments (continued)

 

Derecognition of financial assets and financial liabilities (continued)

 

Financial liabilities (continued)

 

The difference between the carrying value of the original financial liability and the consideration paid is recognised in consolidated income statement.

 

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 placed 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 in the statement of financial position nor are lent securities derecognised. Cash collateral received or given is treated as a financial asset or liability. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded. The securities borrowing and lending activity arrangements are generally entered into through repos and reverse repos.

 

3.10   Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, balances held with central banks, deposits and balances due from banks, due to banks, items in the course of collection from or in transmission to other banks and highly liquid assets with original maturities of less than three months from the date of acquisition, which are subject to insignificant risk of changes in their fair value, and are used by the 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 41.6.

3.   Summary of significant accounting policies (continued)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3.   Summary of significant accounting policies (continued)

 

3.13   Fair value measurement (continued)

 

The Bank's policy is to recognise transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer.

 

3.14   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.

 

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 expense on designated qualifying hedge instruments 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.

 

 

3.   Summary of significant accounting policies (continued)

 

3.14   Hedge accounting (continued)

 

Net investment hedge

 

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

 

Hedge effectiveness testing

 

To qualify for hedge accounting, the 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 gains on dealing in derivatives" under Net trading income (Note 28).

 

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.



 

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 other reserves 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 acquires collaterals in settlement of certain loans and advances.  On initial recognition, these collaterals are recognised at net realisable value on the date of acquisition.  Subsequently, the fair value is determined on a periodic basis by independent professional valuers. Fair value adjustments on these collaterals are included in the consolidated income statement in the period in which these gains or losses arise.

 

3.20   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.

 

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.

3.   Summary of significant accounting policies (continued)

 

3.20   Impairment of non-financial assets (continued)

 

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

                                           

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

 

3.21   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 consolidated income statement on a straight line basis over the lease term. Contingent rentals payable are recognised as an expense in the period in which they are incurred.

 

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. Operating lease receivables are recognised as an income in the consolidated income statement on a straight line basis over the lease term. Contingent rents are recognised as revenue in the period in which they are earned.

 

3.22   Investment properties

 

Investment property is property held either to earn rental income or for capital appreciation or both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is reflected at valuation based on fair value at the statement of financial position date. Refer Note 3.13 for policy on fair valuation.

 

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

 

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

 

3.23   Property and equipment

 

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

3.   Summary of significant accounting policies (continued)

 

3.23   Property and equipment (continued)

 

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

25 years

Leasehold and freehold improvements

7 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 business acquisitions 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.

 

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 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 gain 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.

 

3.   Summary of significant accounting policies (continued)

 

3.26   Borrowing costs (continued)

 

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

 

3.27   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.

 

3.28   Employee benefits

 

(i)  Employees' end of service benefits

 

(a) Defined benefit plan

 

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

 

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

 

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

 

The 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 UAE 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.

 

3.   Summary of significant accounting policies (continued)

 

3.28   Employee benefits (continued)

 

(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.

 

(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 32).

 

3.29   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 recognises any impairment loss on the assets associated with that contract.

3.   Summary of significant accounting policies (continued)

 

3.29   Provisions and contingent liabilities (continued)

 

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

 

Contingent liabilities, which include certain guarantees and letters of credit, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the 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.

 

3.30   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 37 on Business Segment reporting.

 

3.31   Taxation

 

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

 

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

 

Estimated useful lives are as follows:

 

Credit card customer relationships

3 years

Wealth Management customer relationships

4 years

Core deposit intangibles

5 years

 

3.   Summary of significant accounting policies (continued)

 

3.33   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.

 

(b)  Fee income from providing transaction services

 

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

 

3.34   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. These are accounted in accordance with IAS 39 - Financial instrument: Recognition and Measurement.

3.   Summary of significant accounting policies (continued)

 

3.34   Islamic financing (continued)

 

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 instalments. 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. 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 consolidated income statement when incurred.

 

Salam

 

Bai Al Salam is a sale contract where the customer (seller) undertakes to deliver/supply a specified tangible asset to the 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 the effective profit rate basis over the period, adjusted by actual income when received. Losses are accounted for when incurred.

 

Sukuk

 

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

 

Sukuk forms part of debts issued and other borrowed funds as mentioned in Note 18.



 

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 price indices, country risk and the performance of different groups, etc).

 

The impairment loss on loans and advances is disclosed in more detail in Note 41.6.

 

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.

 

Valuation of financial instruments

 

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



 

4.   Significant accounting judgments, estimates and assumptions (continued)

 

Valuation of financial instruments (continued)

 

Valuation techniques used to calculate fair values are discussed in Note 39. The main assumptions and estimates which management consider when applying a model with valuation techniques are:

 

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

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

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

 

Fair valuation of investment properties

 

The fair value of investment properties is based on current prices in an active market for properties of a similar nature, condition or location. The Bank bases its estimate of fair value of its investment properties on valuations carried out by independent valuers. The valuations are 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 11.

 

Consolidation of Funds

 

The changes introduced by IFRS 10 - Consolidated Financial Statements require an investor to consolidate an investee when it controls the investee. The investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The new definition of control requires the Bank to exercise significant judgement on an ongoing basis to determine which entities are controlled, and therefore are required to be consolidated. This judgement has been applied in relation to the Bank's equity investments in three mutual funds where, through its investment management role, the Bank has lost de-facto control over Al Nokhitha Investments Feeder Fund, MSCI UAE Index Feeder Fund and Arabian Index Feeder Fund on redemption of units held by the Bank in these investees (Refer Note 51). There are no other investments where significant judgement is required as to whether or not to consolidate.   



 

5.    Cash and balances with central banks

 


2014


2013


AED'000


AED'000

Cash on hand

786,474


586,709

Balances with central banks

1,359,247


370,743

Reserves maintained with central banks

9,401,659


7,448,647

Certificate of deposits with UAE Central Bank

3,525,000


1,475,000

Reverse repo with Central Bank

19,812


80,107

Total cash and balances with central banks

15,092,192


9,961,206

The geographical concentration is as follows:




Within the UAE

15,048,413


9,857,886

Outside the UAE

43,779


103,320


15,092,192


9,961,206

 

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

 

6.    Deposits and balances due from banks

 


2014


2013


AED'000


AED'000

Nostro balances

769,268


1,031,020

Margin deposits

179,426


232,021

Time deposits

10,681,616


8,061,659

Reverse repo placements

2,830,049


                            -  

Murabaha placements

-


1,870,000

Wakala placements

1,375,546


150,000

Certificate of deposits

183,556


-

Total deposits and balances due from banks

16,019,461


11,344,700

The geographical concentration is as follows:




Within the UAE

7,179,030


4,614,768

Outside the UAE

8,840,431


6,729,932


16,019,461


11,344,700

 

The Bank entered into collateral swap agreements under which bonds with fair value of AED 2,814,042 thousand (December 31, 2013 - AED Nil) were received as collateral against reverse-repo placements. The risks and rewards relating to these bonds remain with the counter parties.

 

The Bank hedges its foreign currency time deposits for foreign currency exchange rate risk using foreign exchange swap contracts and designates these instruments as cash flow hedges. The net negative fair value of these swaps was AED 1,153 thousand as at December 31, 2014 (December 31, 2013 - AED Nil).

 

7.    Trading securities

 


2014


2013


AED'000


AED'000

Bonds

199,599


136,772

Equity instruments

-


747,868

Total trading securities

199,599


884,640

The geographical concentration is as follows:




Within the UAE

176,540


659,568

Outside the UAE

23,059


225,072


199,599


884,640

 

Bonds represent investments mainly in public sector and banking institution bonds. The fair value of trading securities is based on quoted market prices. The decline in trading securities is mainly because of the disposal of fund subsidiaries in March 2014 (Note 51).

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

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

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

(c)   it is settled at a future date.

 

Derivative financial instruments which the 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 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.


Swap transactions

 

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates (for example: fixed rate for floating rate) or a combination of all these (for example: cross-currency interest rate swaps). No exchange of principal takes place except for certain cross currency 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 through market risk limits on exposures and credit risk assessment of counterparties using the same techniques as those of lending activities.

 
Option transactions

 

Foreign currency and interest rate options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a foreign currency or a 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).

 

Derivative contracts can be exchange traded or 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, market volatilities, yield curves and other reference market data.  

8.   Derivative financial instruments (continued)

 

Fair value measurement models

 

For OTC derivatives that trade in liquid markets such as generic forwards, swaps and options, model inputs can generally be verified and model selection conforms to market practice. Certain OTC derivatives trade in less liquid markets with limited pricing information and the determination of fair value for these derivatives is inherently more difficult. Subsequent to initial recognition, the 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.

 

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.

 

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.

 

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

 



Fair values



Assets


Liabilities

December 31, 2014


AED'000


AED'000






Derivatives held or issued for trading





 Foreign exchange derivatives


824,724


846,365

 Interest rate and cross currency swaps


2,713,510


2,713,377

 Options


117,054


170,155

 Futures (exchange traded)


2,536


146

 Commodity and energy swaps


295,998


295,557

 Swaptions


91,383


16,221

Total derivatives held or issued for trading


4,045,205


4,041,821

Derivatives held as fair value hedges





 Interest rate and cross currency swaps


220,978


708,262

Derivatives held as cash flow hedges





Interest rate and cross currency swaps


19,109


29,722

Forward foreign exchange contracts


3,214


220,262

Total derivatives held as cashflow hedges


22,323


249,984






Total derivative financial instruments


4,288,506


5,000,067






 



 

8.   Derivative financial instruments (continued)

 



Fair values



Assets


Liabilities

December 31, 2013


AED'000


AED'000






Derivatives held or issued for trading





 Foreign exchange derivatives


104,597


87,341

 Interest rate and cross currency swaps


2,869,393


2,853,585

 Options


58,591


156,821

 Futures (exchange traded)


1,767


                   -  

 Commodity and energy swaps


36,767


36,385

 Swaptions


70,685


23,513

Total derivatives held or issued for trading


3,141,800


3,157,645

Derivatives held as fair value hedges





 Interest rate and cross currency swaps


295,327


807,917

Derivatives held as cash flow hedges





Interest rate and cross currency swaps


42,273


-

Forward foreign exchange contracts


136,803


25

Total derivatives held as cashflow hedges


179,076


25






Total derivative financial instruments


3,616,203


3,965,587

 

The contractual notional value of derivatives outstanding as at December 31, 2014 were AED 294,969,979 thousand (December 31, 2013 - AED 300,502,784 thousand). These notional amounts indicate the volume of transactions and are neither indicative of the market risk nor credit risk.

 

The net hedge ineffectiveness losses recognised in the consolidated income statement are as follows:

 


2014


2013


AED'000


AED'000

(Losses)/gains on the hedged items attributable to risk hedged

(28,594)


554,369

Gains/(losses) on the hedging instruments

25,306


(564,084)

Fair value ineffectiveness

(3,288)


(9,715)

Cash flow hedging ineffectiveness

(803)


477


(4,091)


(9,238)

 

 

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

 

 


Less than 3 months


3 months to less than 1 year


1 year to less than 2 years


2 years to less than 5 years


Total

Forecast net cash flows

AED'000


AED'000


AED'000


AED'000


AED'000











2014

(81,344)


(145,603)


(15,914)


(26,659)


(269,520)

2013

104,430


42,034


1,334


17,508


165,306











 

 

As at December 31, 2014, the Bank received cash collateral of AED 262,370 thousand (December 31, 2013 - AED 341,993 thousand) against derivative assets from certain counterparties.

 

As at December 31, 2014, the Bank placed cash collateral of AED 552,202 thousand (December 31, 2013 - AED 280,378 thousand) and investment securities of AED 1,787,944 thousand (December 31, 2013 - AED 1,502,425 thousand) against the negative fair value of derivative liabilities. 

 



 

9.    Investment securities

 



Other





GCC

Rest of



UAE

countries

the world

Total

December 31, 2014

AED'000

AED'000

AED'000

AED'000

Available-for-sale investments





Quoted:





 Government securities

1,528,323

1,678,831

1,523,242

4,730,396

 Bonds - Public sector

4,407,000

45,090

286,869

4,738,959

 Bonds - Banks and financial institutions

2,740,513

757,993

7,026,279

10,524,785

 Bonds - Corporate

116,358

-

42,292

158,650

 Equity instruments

824

-

-

824

 Mutual funds

165,835

-

-

165,835

Total quoted

8,958,853

2,481,914

8,878,682

20,319,449

Unquoted:





 Government securities

-

895,713

-

895,713

 Bonds - Public sector

57,699

-

-

57,699

 Bonds - Corporate

-

-

761

761

 Equity instruments

314,855

-

13,281

328,136

 Mutual funds

50,080

-

-

50,080

 Total unquoted

422,634

895,713

14,042

1,332,389

Total available-for-sale investments

9,381,487

3,377,627

8,892,724

21,651,838

 

December 31, 2013





Available-for-sale investments





Quoted:





 Government securities

2,675,550

1,294,248

487,908

4,457,706

 Bonds - Public sector

5,428,547

491,255

-

5,919,802

 Bonds - Banks and financial institutions

2,249,622

834,683

6,926,363

10,010,668

 Bonds - Corporate

90,833

-

-

90,833

 Equity instruments

1,028

-

-

1,028

Total quoted

10,445,580

2,620,186

7,414,271

20,480,037

Unquoted:





 Bonds - Public sector

58,147

-

-

58,147

 Bonds - Banks and financial institutions

-

-

32

32

 Bonds - Corporate

-

-

1,131

1,131

 Equity instruments

230,476

-

13,240

243,716

 Mutual funds

71,709

-

-

71,709

 Total unquoted

360,332

-

14,403

374,735

Total available-for-sale investments

10,805,912

2,620,186

7,428,674

20,854,772

 

The Bank hedges interest rate and foreign currency risks on certain fixed rate and floating rate investments through interest rate and cross currency 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, 2014 was AED 18,271 thousand (December 31, 2013 - net negative fair value AED 210,427 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 remained with the Bank. The following table reflects the carrying value of these bonds and the associated financial liabilities:

 


2014


2013


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 financing

4,765,545


4,589,111


2,390,637 


          2,274,631 









 

 

9.   Investment securities (continued)

 

Further, the Bank pledged investment securities with fair value amounting to AED 1,802,584 thousand (December 31, 2013 - AED 1,508,768 thousand) as collateral against margin calls. The risks and rewards on these pledged investments remained with the Bank.

 

The movement in investment securities is as follows:

 






2014


2013






AED'000


AED'000

Opening balance





20,854,772


    18,712,916

Purchases, net (*)





8,015,861


4,643,834

Disposals including capital refunds





(6,968,130)


(2,224,266)

Fair value adjustments





(156,396)


(277,800)

Exchange difference





(94,269)


88









Closing balance





21,651,838


20,854,772

 (*) included in current year purchases is AED 169,976 thousand arising on deconsolidation of fund subsidiaries (Note 51).

 

10. Loans and advances, net

 




2014


2013




AED'000


AED'000







Overdrafts (Retail and Corporate)



3,653,030


4,396,183

Retail loans



17,753,730


14,957,734                            

Corporate loans



103,580,954


101,121,762

Credit cards



2,776,695


2,238,316

Islamic financing assets (Note 22)



11,155,913


10,666,627

Other facilities



8,419,919


5,157,995

Gross loans and advances



147,340,241


138,538,617

Less: Allowance for impairment (Note 41.6)



(6,777,743)


(6,889,947)

Total loans and advances, net



140,562,498


131,648,670

 

The Bank hedges certain fixed rate and floating rate loans and advances for interest rate risk using interest rate swaps and designates these instruments as fair value and cash flow hedges, respectively. The net positive fair value of these swaps at December 31, 2014 was AED 4,152 thousand (December 31, 2013 - net positive fair value of AED 9,103 thousand).

 

11. Investment properties

 


     Completed and in use

Under development

 

Total


AED'000

AED'000

AED'000





January 1, 2013

               264,695

                 264,700

                 529,395

Additions during the year

14,147

17,148

31,295

Transfer on completion of construction

281,848

(281,848)

                              -  

January 1, 2014

560,690

-

560,690

Additions during the year

32,758

-

32,758

Revaluation of investment properties

22,330

-

22,330

December 31, 2014

615,778

-

615,778

 

Included in commitments and contingent liabilities (Note 36) is AED 1,740 thousand (December 31, 2013 - AED 11,872 thousand) being future committed expenditure on investment property.

11.   Investment properties (continued)

 

Additions during the year include AED 20,667 thousand (December 31, 2013 - AED 14,059 thousand), being land and real estate acquired on settlements of certain loans and advances. This being a non-cash transaction has not been reflected in the consolidated statement of cash flows.

 

As approved by the Central Bank of the UAE, the Bank can hold these real estate assets for a maximum period of three years and can extend the holding period with further approval. The Bank can also rent these properties and earn rental income. 

 

Fair valuations

 

Valuations are carried out by registered independent valuers having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. The properties were valued during the last quarter of the year.

 

The valuation methodologies considered by external valuers include:

 

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

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

 

All investment properties of the Bank are located within the UAE.

 

Details of rental income and direct operating expenses relating to investment properties are as follow:

 


2014


2013


AED'000


AED'000

Rental income

39,917


19,748

Direct operating expenses

6,013


2,403

 

12. Other assets

 



2014

2013



AED'000

AED'000

Interest receivable


1,017,819

911,968

Advance tax


21,959

79,603

Clearing receivables


368

404

Prepayments


65,830

38,985

Acceptances


2,906,420

2,140,725

Others


539,448

232,953

Total other assets


4,551,844

3,404,638

 

Acceptances arise when the Bank is under an obligation to make payments against documents drawn under letters of credit. Acceptances specify the amount of money, the date and the person to which the payment is due. After acceptance, the instrument becomes an unconditional liability (time draft) of the bank and is therefore recognised as a financial liability (Note 19) in the consolidated statement of financial position with a corresponding contractual right of reimbursement from the customer recognised as a financial asset.


13. Property and equipment, net

 



 Freehold properties and improvements

 Leasehold improvements

 Furniture, equipment and vehicles

 Computer equipment and accessories

 Capital work in progress

 

 Total 



 AED'000 

 AED'000

 AED'000

 AED'000

 AED'000

 AED'000

Cost or valuation








At January 1, 2013


846,011

131,619

          159,139

453,536

28,817

1,619,122

Exchange difference


(430)

(2)

(734)

-                               

(3)

(1,169)

Additions during the year


-

347

2,366

1,674

78,875

83,262

Transfers


3,652

4,664

6,547

46,179

(61,042)

-                               

Transfer to expenses


-

-

-

-

(4)

(4)

Disposals during the year


(251)

-                              

(576)

(166)

                             -  

(993)

At January 1, 2014


848,982

136,628

166,742

501,223

46,643

1,700,218

Exchange difference


(61)

-

(88)

-

-

(149)

Additions during the year


410

86

2,090

6,164

124,288

133,038

Transfers


5,435

7,611

8,694

109,457

(131,197)

-

Disposals during the year


-

-

(996)

(366)

-

(1,362)

At December 31, 2014


854,766

144,325

176,442

616,478

39,734

1,831,745









Accumulated depreciation








At January 1, 2013


               227,237

                  73,588

               125,954

               342,409

                             -  

               769,188

Exchange difference


(50)

(2)

(542)

                             -  

                             -  

(594)

Charge for the year


37,304

18,023

12,965

58,930

                             -  

127,222

Disposals during the year


(179)

                             -  

(575)

(166)

                             -  

(920)

At January 1, 2014


264,312

91,609

137,802

401,173

-

894,896

Exchange difference


(17)

-

(24)

(53)

-

(94)

Transfers


-

-

(2,539)

2,539

-

-

Charge for the year


37,083

17,288

10,989

66,648

-

132,008

Disposals during the year


-

-

(920)

(333)

-

(1,253)

At December 31, 2014


301,378

108,897

145,308

469,974

-

1,025,557









Carrying amount








At December 31, 2014


553,388

35,428

31,134

146,504

39,734

806,188

At December 31, 2013


584,670

45,019

28,940

100,050

46,643

805,322

 

 

 

 


14. Intangible assets

 




Other intangible assets




 

 

 

Goodwill

 

Credit card customer relationship

Wealth management customer relationship

 

 

Core deposit intangible

 

 

 

Total



AED'000

AED'000

AED'000

AED'000

AED'000

Cost or valuation







As at January 1, 2013


           18,800

               12,700

                18,000

        112,700

   162,200








As at December 31, 2014


          18,800

              12,700

               18,000

     112,700

      162,200

Accumulated amortisation







As at January 1, 2013


                     -  

           9,409

                 9,950

        50,715

        70,074

Amortisation during the year


                     -  

3,291

4,600

22,540

30,431

As at January 1, 2014


                     -  

12,700

14,550

73,255

100,505

Amortisation during the year


                     -  

-

3,450

22,540

25,990

As at December 31, 2014


                     -  

12,700

18,000

95,795

126,495








Carrying amount







At December 31, 2014


          18,800

-

-

16,905

35,705

At December 31, 2013


          18,800

-

3,450

39,445

61,695

 

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

 

Goodwill

 

For the purpose of impairment testing, goodwill is allocated to the Bank's operating divisions which represent the lowest level within the Bank at which goodwill is monitored for internal management purposes, which is not higher than the Bank's business segments.

 

The aggregate carrying amounts of goodwill allocated to each unit are as follows:

 

Cash generating unit (CGU)


AED'000

Credit cards


10,784

Loans


5,099

Overdrafts


94

Wealth management business


2,823

Total goodwill


18,800

 

 

 



 

14.  Intangible assets (continued)

 

Other intangible assets

 

Customer relationships

 

 

 

 

Customer relationship intangible assets represent the value attributable to the business expected to be generated from customers that existed as at the acquisition date. In determining the fair value of customer relationships, credit card and wealth management customers were considered separately, given their differing risk profiles, relationships and loyalty. These relationships are expected to generate material recurring income in the form of interest, fees and commission.

 

Core deposit intangible

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

Impairment assessment of goodwill

 

No impairment losses on goodwill were recognised during the year ended December 31, 2014 (2013 - AED Nil).

 

The recoverable amounts for the CGUs have been assessed based on their value in use. Value in use for each unit was determined by discounting the future cash flows expected to be generated from the continuing use of these units. Value in use was based on the following key assumptions:

 

§ Cash flows were projected based on past experience, actual operating results and the business plan in 2014. Cash flows were extrapolated using a rate expected to be realized by these businesses. The forecast period is based on the Bank's current perspective with respect to the operation of these units and range from 2-3 years.

 

§ Appropriate discount rates were applied in determining the recoverable amounts for the CGUs. These discount rates were estimated based on capital asset pricing model using data from U.S. bond and UAE capital markets.

 

The key assumptions described above may change as economic and market conditions change. The Bank estimates that reasonable changes in these assumptions are not expected to cause the recoverable amount of the units to decline below the carrying amount.

 

15. Due to banks

 


2014


2013


AED'000


AED'000

Vostro balances

578,213


192,242

Margin deposits

96,200


255,097

Time deposits

3,414,606


3,843,672

Total due to banks

4,089,019


4,291,011

 

 

 

 

 

 

 

 

 

16. Deposits from customers

 


2014


2013


AED'000


AED'000

Time deposits

57,075,373


65,550,746

Current account deposits

46,823,595


37,131,506

Savings deposits

8,895,672


6,951,691

Murabaha deposits

12,114,262


4,974,515

Long term government deposits (Note 41.5)

425,898


436,008

Margin deposits

676,427


383,242

Total deposits from customers

126,011,227


115,427,708





For Islamic deposits (excluding Murabaha deposits) included in the above table, refer to Note 22.

 

The Bank hedges certain foreign currency time deposits for foreign currency and floating interest rate risks using foreign exchange and interest rate swaps and designates these as cash flow hedges. The net negative fair value of these swaps at December 31, 2014 was AED 47,920 thousand (December 31, 2013 - net positive fair value of AED 59,578 thousand).

 

17. Euro commercial paper

 

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

 







2014


2013

Currency






AED'000


AED'000

Swiss Franc (CHF)






619,295


618,385

Euro (EUR)






1,082,659


1,568,178

GB Pound (GBP)






1,441,410


1,329,692

US Dollar (USD)






3,231,920


2,424,180

Total euro commercial paper






6,375,284


5,940,435

 

The Bank hedges certain ECP for foreign currency exchange risk through foreign exchange swap contracts and designates these instruments as cash flow hedges. The net negative fair value of these hedge contracts as at December 31, 2014 was AED 166,883 thousand (December 31, 2013 - net positive fair value of AED 77,202 thousand).

 

ECP are issued at a discount and the discount rate ranges between 0.08% to 0.77% (December 31, 2013 - 0.12% to 1.03%).

 

For maturity analysis of ECP borrowings, refer to Note 43.


18. Borrowings

 

The details of borrowings as at December 31, 2014 are as follows:

 





Within 1 year


1-3 years


3-5 years


Over 5 years


Total

Instrument


Currency


AED'000


AED'000


AED'000


AED'000


AED'000

Global medium term notes


Australian dollar (AUD)


                     -  


                -  


   839,792


                   -  


       839,792



Chinese renminbi (CNH)


                     -  


     173,580


              -  


                   -  


       173,580



Euro (EUR)


                     -  


                -  


              -  


          55,463


          55,463



Malaysian ringgit (MYR)


         871,058


     847,028


              -  


                   -  


    1,718,086



Swiss franc (CHF)


         575,705


     388,677


              -  


                   -  


       964,382



Turkish lira (TRY)


                     -  


       94,003


              -  


                   -  


          94,003



UAE dirham (AED)


                     -  


     500,000


              -  


                   -  


       500,000



Japanese yen (JPY)


                     -  


     200,609


     54,254


                   -  


       254,863



US dollar (USD)


-


1,889,547


7,681,016


1,622,610


  11,193,173


















1,446,763


4,093,444


8,575,062


1,678,073


15,793,342














Islamic sukuk notes


US dollar (USD)


                     -  


 1,832,850


              -  


                   -  


    1,832,850

Bilateral loans - floating rate


US dollar (USD)


      1,469,200


 1,831,011


              -  


                   -  


    3,300,211

Subordinated notes - floating rate


US dollar (USD)


1,058,855


                -


              -  


                   -  


    1,058,855

                                       - fixed rate


US dollar (USD)


                     -  


                -  


              -  


    3,819,331


    3,819,331



Swiss franc (CHF)


                     -  


                -  


              -  


       380,130


       380,130

Borrowings through repurchase agreements


US dollar (USD)


      4,589,111


                -  


-


                   -  


    4,589,111


















8,563,929


7,757,305


8,575,062


5,877,534


30,773,830














Fair value adjustment on borrowings hedged










(453,709)


























30,320,121

 

Included in borrowings is AED 19,425,136 thousand which have been hedged using interest rate and cross currency swaps. These swaps are designated as either fair value or cash flow hedges. The net negative fair value of these swaps as at December 31, 2014 was AED 484,870 thousand.



 

18.  Borrowings (continued)

 

The details of borrowings as at December 31, 2013 are as follows:

 





Within 1 year


1-3 years


3-5 years


Over 5 years


Total

Instrument


Currency


AED'000


AED'000


AED'000


AED'000


AED'000

Global medium term notes


Chinese renminbi (CNH)


                    -  


                    -  


173,580


                    -  


173,580



Malaysian ringgit (MYR)


                    -  


871,027


847,028


                    -  


1,718,055



Swiss franc (CHF)


                    -  


575,705


388,677


                    -  


964,382



Turkish lira (TRY)


                    -  


94,003


                    -  


                    -  


94,003



UAE dirham (AED)


                    -  


                    -  


500,000


                    -  


500,000



Japanese yen (JPY)


-


92,046


-


-


92,046



US dollar (USD)