BANK OF BAKU AUDITORS REPORT AND
FINANCIAL STATEMENTS AT
31 DECEMBER 2001
Note 2 - Significant accounting polices
The following significant accounting policies have been applied in the preparation of these financial statements:
Basis of presentation of financial statements
The Bank maintains its accounting records and prepares its statutory financial statements in accordance with the Law on Banks and Banking Activity dated 14 June 1996, Azeri tax legislation, and rules and regulations of the National Bank of the Azerbaijan Republic. These financial statements have been prepared from those accounting records and adjusted as necessary in order to comply, in all material respects, with International Accounting Standards (IAS) issued by the International Accounting Standards Committee.
In 2001, the Bank adopted IAS 39 Financial Instruments: Recognition and Measurement. The financial effect of adopting IAS 39 in 2001 is insignificant to report in the statement of changes in the shareholders equity. Further information is disclosed in accounting policies for investment securities and originated loans and provision for loan impairment in related notes.
Related parties
For the purpose of these financial statements, parties are considered to be related if one party has the ability to control or to exercise significant influence over the other party in financial and operational decisions. Accordingly, shareholders, subsidiaries, associates, directors, key management personnel and companies and individuals that are directly and/or indirectly related to them are considered related parties.
Investment securities
The Bank classified its investment securities as held-to-maturity assets.
Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturity that management has both the intent and the ability to hold to maturity other than loans and receivables originated by the Bank. Management determines the appropriate classification of its investments at the time of the purchase. Held-to-maturity investments are carried at amortized cost using the effective yield method, less any provision for impairment.
Interest earned whilst holding investment securities is reported as interest income. All regular way purchases and sales of investment securities are
recognized at trade date, which is the date the Bank commits to purchase or sell the asset.
Originated loans and provision for loan impairment
Loans originated by the Bank by providing money directly to the borrower or to a sub-participation agent at draw down are
categorized as loans originated by the Bank and are carried at amortized cost.
All loans and advances are recognized when cash is advanced to borrowers.
A credit risk provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect all the amounts due. The amount of the provision for non-performing commercial loans is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the interest rate at inception. For consumer loans, the credit risk provision is calculated using a default rate that is based on historical patterns of losses. For restructured loans, the Bank initially determines as to whether there has been an impairment as result of restructuring and if so, a provision for loan impairment is recorded representing the difference between the recoverable amount, being the present value of excepted cash flows from restructured loan discounted using the interest rate of the original loan, and the carrying amount.
A general provision of 5% for loan impairment is established to cover losses that are judged to be present in the lending portfolio at the balance sheet date, but which have not been specifically identified as such.
Excepted cash flows are based on internal credit ratings allocated to the borrowers, and reflecting the current economic climate in which the borrowers operate.
The movement in provision is charged against the income for the year. When a loan is deemed un-collectable, it is written off against the related provision for impairment. The loan is written off after all the necessary legal proceedings have been completed and the amount of the loan loss is finally determined. Subsequent recoveries are credited to the income statement if previously written off.
Cash and cash equivalents
For the purpose of cash flow statement, cash and cash equivalents comprise cash in hand, balances with the NBAR (excluding 50% of mandatory reserves), correspondent accounts including overnight deposits and short-term (up to three months) placements with other banks and investment securities with original maturity of less than 3 months
(Note 4).
Intangible assets
Intangible assets consist of computer software and are stated at cost, less accumulated
amortization. Amortization on intangible assets is calculated over the useful lives of intangible assets, which do not exceed 4 years.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance costs of premises and equipment, including the refurbishment cost of buildings or leased office premises, are
capitalized if they result in an enlargement or substantial improvement of the respective asset and depreciated on a straight-line basis over the estimated economic life of the asset or the term of the lease contract, whichever is the shortest. Other repair and maintenance costs are charged to income.
Depreciation
Depreciation is applied on a straight-line basis over the estimated useful lives of the assets as follows:
Name
years
Premises
33
Computers and office equipment
5
Motor vehicles
5
Fixture, furniture and others
7
Computer software development costs
Generally, costs associated with developing computer software programs are
recognized as expense as incurred. However, expenditure that enhances and extends the benefits of computer software programs beyond their original specifications and lives is
recognized as a capital improvement and is added to the original cost of the software. Computer software development
costs recognized as assets are amortized using the straight-line method over their useful lives, not exceeding 4 years.
Deferred taxation
Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax assets resulting from temporary differences in the recognition of expense for income tax and financial reporting purposes are
recognized to the extent that it is probable that future taxable profit will be available for
utilization of the deferred tax asset. Currently enacted tax rates are used to determine deferred income tax.
The principal temporary differences arise from provisions for loan impairment, accrued interest income and expenses and other accrued expenses
(Note 21).
Interest income and expense
Interest income and expense are recognized in the income statement on an accrual basis using the effective yield method based on the actual purchase price. Interest income is suspended when loans become doubtful of collection such as when classified as non-performing, or when the borrower defaults. Such income is excluded from interest income until received. Interest income includes accrued discount on treasury bills and government bonds.
Fee and commission income and expense
Fee and commission income and expense on banking services are recorded as income or expense at the time of effecting the transactions to which they relate.
Foreign currency transactions
Transactions denominated in foreign currency are recorded at the exchange rate prevailing at the transaction date. Exchange differences resulting from the settlement of transactions denominated in foreign currency are included in the statement of income using the exchange rate prevailing at the transaction date.
Monetary assets and liabilities denominated in foreign currency are translated into AZM using the exchange rates of the NBAR prevailing at the balance sheet date. Foreign currency gains and losses arising from the translation of monetary assets and liabilities are reflected in the statement of income under the net gains from dealing in foreign currency. At 31 December 2001, the principal rate of exchange used for translating foreign currency balances was US$ 1 = AZM 4,775 and EUR 1 = AZM 4,230 (2000: US$ 1 = AZM 4,565 and EUR 1 = AZM 4,238).
