 BANK OF BAKU
AUDITORS REPORT AND FINANCIAL
STATEMENTS AT
31 DECEMBER 1997
Note 3 - Principal accounting policies
Basis of accounting
The balance sheet has been prepared under the historical
cost convention as modified by the revaluation of fixed assets.
Loans and advances to credit institutions
In the normal course of business, the Bank loans or
deposits funds for various periods of time with other credit institutions.
As these placements of funds are typically unsecured extensions of credit,
management provides a general provision against the risk of possible losses.
The Bank also makes specific reserves on a case by case basis.
Loans to customers
Loans are stated at the unpaid principal balance of loans
less specific and general reserves for loan losses as presented in Note 4.
The Bank estimates amounts of possible losses on loans and advances at the
balance sheet date to determine the reserves, and believes these are
reasonable, having regard to the uncertainty inherent in lending in the Banks
market area at the present time.
The Bank recognises the risks that the economic and
regulatory conditions may have an impact on the debtors ability to repay
loans. It recognises that Azerbaijan law and practice for the perfection of
security interests in collateral and guarantees are not well developed. It
also recognises that it is rarely possible to rely on financial analysis to
assess a borrowers capacity to repay loans, since Azerbaijan companies
typically do not provide financial statements that comply with IAS, nor are
they audited.
The Bank has determined specific reserves for possible
loan losses on a case by case basis. Specific reserves are assessed with
reference to the credit standing and performance of the borrower and take
into account the value of any collateral or third party guarantees. The Bank
also maintains a general provision against the loan portfolio as a whole.
In determining its provision, the Bank classifies loans
and advances into five categories by reference to debt service capability
and repayment history and bases the provision on the following percentages
of unpaid principal:
|
Pass |
2% |
|
Watch |
5% |
|
Substandard |
20% |
|
Doubtful |
50% |
|
Loss |
100% |
At the time a loan is contractually due, interest or
principal is 90 days or more overdue, or management otherwise believes the
contractual interest or principal due will not be collected, the loan is
classified as non-performing and any accrued interest is reversed.
Maturity of loans
The maturity of the loan portfolio is presented in Note 6
and shows the remaining period from the balance sheet date to the
contractual maturity. Long term credits and overdraft facilities are
generally not available in Azerbaijan except for programmes set up by
international financial institutions. However, in the Azerbaijan
marketplace, many short-term credits are granted with the expectation of
renewing the loans at maturity. Accordingly, the effective maturity of a
loan portfolio may be longer than indicated by a classification based on
contractual term.
Tangible fixed assets
Fixed assets are recorded at historical cost or at revalued
amounts less accumulated depreciation. Depreciation is provided to write off the
cost or valuation on a straight line basis over the estimated useful economic
life of the asset. The economic lives are as follows:
|
|
Years
|
|
Office equipment
|
5
|
|
Fixtures and fittings |
5
|
|
Computers |
3
|
Foreign currency translation
Monetary assets and liabilities denominated in foreign
currencies are translated to Manats at rates of exchange prevailing at the
balance sheet date. The Manat to US dollar (USD) exchange rate at 31
December 1997 was 3,888 Manats to one USD.
Income and expense recognition
Interest income and expense is recognised on an accrual
basis. Commissions and other income are credited to income when the related
transactions are completed. Non-interest expenses are recognised at the time
the transaction occurs.
Taxation
Taxation is calculated in accordance with the regulations
of the Azerbaijan Republic and of the City of Baku and is based on the
results reported by the Bank under AAL after adjustments for tax purposes.
Deferred taxes are provided on timing differences between the accounting and
taxation treatment of income and expense using the liability method.
Provision is made for deferred taxes only to the extent that it is probable
that an actual liability will crystallise.
Note 1 Principal activities
Note 2 Basis of presentation
Note 3 Principal accounting policies
Note 4 Reserves for losses
Note 5 Taxation
Note 6 Asset and liability maturities
Note 7 Currency denominations of assets and liabilities
Note 8 Cash and due from National Bank
Note 9 Loans and advances to credit institutions
Note 10 Loans to customers
Note 11 Tangible fixed assets
Note 12 Share capital
Note 13 Reserves
Note 14 Related parties
Note 15 Financial commitments and contingencies
Note 16 Capital adequacy
|
