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CONTENTS
INDEPENDENT AUDIT OPINION
FINANCIAL STATEMENTS
Statement of Financial Position ............................................................................................................................... 3
Statement of Comprehensive Income ...................................................................................................................... 4Statement of Changes in Equity .............................................................................................................................. 5Statement of Cash Flows ........................................................................................................................................ 6
Notes to Financial Statements
INDEPENDENT AUDITORS REPORT
1 Introduction ............................... ............................... ............................... ................................ ............................... ...... 72 Operating Environment of the Bank .................... ............................... ................................ ............................... ............ 73 Summary of Significant Accounting Policies ..................................... ............................... ................................ ............. 84 Critical Accounting Estimates and Judgments in Applying Accounting Policies............................................................ 155 Adoption of New or Revised Standards and Interpretations ..................................... ............................... ...................... 166 Cash and Cash Equivalents ............................ ................................ ............................... ............................... ............... 187 Due from Other Banks and Financial Institutions ..................................................... ................................ .................... 208 Loans and Advances to Customers ..................................... ............................... ............................... ........................... 219 Premises, Equipment and Intangible Assets ....................................... ................................ ............................... ........... 2310 Other Financial Assets ........................................................ ............................... ................................ ......................... 2411 Other Assets .............................. ............................... ............................... ............................... ................................ .... 2512 Other Borrowed Funds .............................. ................................ ............................... ............................... .................... 2513 Customer Accounts .............................. ............................... ................................ ............................... ......................... 2514 Other Financial Liabilities ............................... ............................... ............................... ............................... ............... 2615 Interest Income and Expense ................................ ............................... ............................... ................................ ......... 2716 Fee and Commission Income and Expense............................................... ............................... ................................ ..... 2717 Administrative and Other Operating Expenses ................................ ............................... ................................ .............. 2818 Income Tax ................................................................................................................................................................ 2819 Earnings per Share ............................... ................................ ............................... ............................... ......................... 3020 Segment Analysis ................................ ................................ ............................... ............................... ......................... 3021 Financial Risk Management .......................................... ............................... ............................... ............................... . 3222 Capital Management ...................................................... ............................... ............................... ............................... 4523 Contingencies and Commitments ............. ............................... ................................ ............................... ..................... 4624 Fair Value of Financial Instruments ................................ ................................ ............................... .............................. 4725 Related Party Transactions .............................. ............................... ............................... ............................... ............... 4926 Events After the Reporting Date ................................ ............................... ................................ ............................... .... 50
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
7
1 Introduction
"Deka-Bank" CB Open Joint Stock Company (the "Bank") was established as a Commercial Bankon December 9, 1992. In connection with the Law of the Republic of Azerbaijan On Banks passed on 04March 2004, the organizational and legal form of the Bank was changed and re-registered as Deka Bank
CB OJSC on 04 February 2005.
Principal activity. The Banks principal business activity is commercial banking operations within theRepublic of Azerbaijan. The Bank has operated under a full banking licencee No 68 issued by the Central
Bank of the Republic of Azerbaijan (CBA) since December 15 February 2005.
The Bank's principal business activities is to provide banking services to legal entities and individuals,
attract long and short-term deposits, grant loans and letters of guarantee to customers, dealing operations ofsecurities and foreign currencies and other commercial operations under the current legislation.
As at 31 December 2011 the Bank has total of 7 branches (31 December 2010: 7 branches), 5(five) ofwhich are in Baku and by 1(one) branch in cities of Sumgayit and Barda
Registered address and place of business. The Banks registered address is:
Khagani street, 14/16,Baku,AZ 1001Azerbaijan Republic
Presentation currency. These financial statements are presented in thousands of Azerbaijani Manats
(AZN thousands). At 31 December 2011, the principal rate of exchange used for translating foreigncurrency balances was USD 1 = AZN 0.7865 and EUR 1 = AZN 1.0178.
2 Operating Environment of the Bank
Azerbaijan Respublic. The Republic of Azerbaijan displays certain characteristics of an emerging market,including the existence of a currency that is not freely convertible in most countries outside of the
Republic of Azerbaijan, relatively high inflation and strong economic growth.
The tax, currency and customs legislation within the Republic of Azerbaijan is subject to varying
interpretations and frequent changes. Furthermore, the need for further developments in the bankruptcylaws, the absence of formalized procedures for the registration and enforcement of collateral, and otherlegal and fiscal impediments contribute to the challenges faced by banks currently operating in theRepublic of Azerbaijan. The future economic direction of the Republic of Azerbaijan is largely dependent
upon the effectiveness of economic, financial and monetary measures undertaken by the Government,
together with tax, legal, regulatory, and political developments
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
8
2 Operating Environment of the Bank (continued)
Recent volatility in global financial markets.The ongoing global liquidity crisis which commenced inthe middle of 2007 has resulted in, among other things, a lower level of capital market funding, at times
much higher than normal interbank lending rates resulting in a significant reduction in the number of newloans and advances made to customers, and higher funding costs where it remains possible to obtain debt
finance from International Institutions or other local banks. The uncertainties in the global financialmarket, has also led to bank failures and bank rescues in the United States of America, Western Europeand in Russia. Such circumstances could affect the ability of the Bank to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The
borrowers of the Bank may also be affected by the lower liquidity situation which could in turn impacttheir ability to repay their outstanding loans. Deteriorating operating conditions for borrowers may also
have an impact on Management's cash flow forecasts and assessment of the impairment of financial andnonfinancial assets. To the extent that information is available, Management has properly reflected
revised estimates of expected future cash flows in their impairment assessments.
Management is unable to reliably estimate the effects on the Bank's consolidated financial position of anyfurther deterioration in the liquidity of the financial markets and the increased volatility in the currency
and equity markets. Management believes it is taking all the necessary measures to support thesustainability and growth of the Banks business in the current circumstances.
3 Summary of Significant Accounting Policies
Basis of Preparation. These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) under the historical cost convention, except for therevaluation of premises and equipment, investment properties, available-for-sale financial assets and held-
for-trading financial assets. The principal accounting policies applied in the preparation of these financialstatements are set out below. These policies have been consistently applied to all the periods presented,unless otherwise stated.
Financial instruments - key measurement terms. Depending on their classification financial instrumentsare carried at fair value, or amortized cost as described below.
Fair value is the amount for which an asset could be exchanged, or a liability settled, betweenknowledgeable, willing parties in an arms length transaction. Fair value is the current bid price for
financial assets and current asking price for financial liabilities which are quoted in an active market. Forassets and liabilities with offsetting market risks, the Bank may use mid-market prices as a basis forestablishing fair values for the offsetting risk positions and apply the bid or asking price to the net open
position as appropriate. A financial instrument is regarded as quoted in an active market if quoted pricesare readily and regularly available from an exchange or other institution and those prices represent actualand regularly occurring market transactions on an arms length basis.
Valuation techniques such as discounted cash flows models or models based on recent arms lengthtransactions or consideration of financial data of the investees are used to fair value certain financialinstruments for which external market pricing information is not available. Valuation techniques mayrequire assumptions not supported by observable market data. Disclosures are made in these financialstatements if changing any such assumptions to a reasonably possible alternative would result in
significantly different profit, income, total assets or total liabilities.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
9
3 Summary of Significant Accounting Policies (continued)
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal ofa financial instrument. An incremental cost is one that would not have been incurred if the transaction had
not taken place. Transaction costs include fees and commissions paid to agents (including employeesacting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities
exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts,financing costs or internal administrative or holding costs.
Amortized cost is the amount at which the financial instrument was recognized at initial recognition lessany principal repayments, plus accrued interest, and for financial assets less any write-down for incurredimpairment losses. Accrued interest includes amortization of transaction costs deferred at initialrecognition and of any premium or discount to maturity amount using the effective interest method.Accrued interest income and accrued interest expense, including both accrued coupon and amortized
discount or premium (including fees deferred at origination, if any), are not presented separately and areincluded in the carrying values of related balance sheet items.
The effective interest method is a method of allocating interest income or interest expense over therelevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying
amount. The effective interest rate is the rate that exactly discounts estimated future cash payments orreceipts (excluding future credit losses) through the expected life of the financial instrument or a shorter
period, if appropriate, to the net carrying amount of the financial instrument. The effective interest ratediscounts cash flows of variable interest instruments to the next interest repricing date except for the
premium or discount which reflects the credit spread over the floating rate specified in the instrument, orother variables that are not reset to market rates. Such premiums or discounts are amortized over the
whole expected life of the instrument.
The present value calculation includes all fees paid or received between parties to the contract that are anintegral part of the effective interest rate.
Initial recognition of financial instruments. Trading securities, derivatives and other financialinstruments at fair value through profit or loss are initially recorded at fair value. All other financialinstruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition isbest evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a
difference between fair value and transaction price which can be evidenced by other observable currentmarket transactions in the same instrument or by a valuation technique whose inputs include only datafrom observable markets.
All purchases and sales of financial assets that require delivery within the time frame established byregulation or market convention (regular way purchases and sales) are recorded at trade date, which isthe date that the Bank commits to deliver a financial asset. All other purchases are recognized when the
entity becomes a party to the contractual provisions of the instrument.
After the initial recognition financial assets and liabilities are evaluated in the amortized cost based on theeffective interest method.
Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to knownamounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash
equivalents include all interbank placements with original maturities of less than three months. Fundsrestricted for a period of more than three months on origination are excluded from cash and cash
equivalents. Cash and cash equivalents are carried at amortized cost.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
10
3 Summary of Significant Accounting Policies (continued)
Mandatory cash balances with the CBAR. Mandatory cash balances in AZN and foreign currency heldwith the CBAR are carried at amortized cost and represent non-interest bearing mandatory reserve
deposits, which are not available to finance the Banks day-to-day operations, and hence are notconsidered as part of cash and cash equivalents for the purposes of the consolidated cash flow statement.
Due from other banks. Amounts due from other banks are recorded when the Bank advances money tocounterparty banks with no intention of trading the resulting unquoted non-derivative receivable due onfixed or determinable dates. Amounts due from other banks are carried at amortized cost.
Loans and advances to customers. Loans and advances to customers are recorded when the Bankadvances money to purchase or originate an unquoted non-derivative receivable from a customer due onfixed or determinable dates and has no intention of trading the receivable. Loans and advances to
customers are carried at amortized cost.
Impairment of financial assets carried at amortized cost. Impairment losses are recognized in profit orloss when incurred as a result of one or more events (loss events) that occurred after the initial
recognition of the financial asset and which have an impact on the amount or timing of the estimatedfuture cash flows of the financial asset or group of financial assets that can be reliably estimated. If theBank determines that no objective evidence exists that impairment was incurred for an individuallyassessed financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses them for impairment. The primary factors thatthe Bank considers whether a financial asset is impaired is its overdue status and realizability of relatedcollateral, if any.
The following other principal criteria are also used to determine that there is objective evidence that animpairment loss has occurred:
- Any installment is overdue and the late payment cannot be attributed to a delay caused by the settlementsystems;
- The borrower experiences a significant financial difficulty as evidenced by the borrowers financialinformation that the Bank obtains;
- The borrower considers bankruptcy or a financial reorganization;
- There is an adverse change in the payment status of the borrower as a result of changes in the national orlocal economic conditions that impact the borrower; or
- The value of collateral significantly decreases as a result of deteriorating market conditions.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis ofsimilar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flowsfor groups of such assets by being indicative of the debtors ability to pay all amounts due according tothe contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment areestimated on the basis of the contractual cash flows of the assets and the experience of management inrespect of the extent to which amounts will become overdue as a result of past loss events and the success
of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data toreflect the effects of current conditions that did not affect past periods and to remove the effects of past
conditions that do not exist currently.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
11
3 Summary of Significant Accounting Policies (continued)
If the terms of an impaired financial asset held at amortized cost are renegotiated or otherwise modified
because of financial difficulties of the borrower or issuer, impairment is measured using the originaleffective interest rate before the modification of terms.
Impairment losses are always recognized through an allowance account to write down the assets carryingamount to the present value of expected cash flows (which exclude future credit losses that have not beenincurred) discounted at the original effective interest rate of the asset. The calculation of the present value
of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may resultfrom foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognized (such as an improvement in thedebtors credit rating), the previously recognized impairment loss is reversed by adjusting the allowanceaccount through profit or loss.
Uncollectible assets are written off against the related impairment loss provision after all the necessary
procedures to recover the asset have been completed and the amount of the loss has been determined.Amounts previously written off and then recovered are recognized as impairment losses in profit or loss
during the year.
Credit related commitments. The Bank enters into credit related commitments, including letters of creditand financial guarantees. Financial guarantees represent irrevocable assurances to make payments in theevent that a customer cannot meet its obligations to third parties and carry the same credit risk as loans.
Financial guarantees and commitments to provide a loan are initially recognized at their fair value, which
is normally evidenced by the amount of fees received. This amount is amortized on a straight line basisover the life of the commitment, except for commitments to originate loans if it is probable that the Bankwill enter into a specific lending arrangement and does not expect to sell the resulting loan shortly afterorigination; such loan commitment fees are deferred and included in the carrying value of the loan oninitial recognition. At each balance sheet date, the commitments are measured at the higher of (i) theremaining unamortized balance of the amount at initial recognition and (ii) the best estimate of
expenditure required to settle the commitment at the balance sheet date.
Derecognition of financial assets. The Bank derecognizes financial assets when (a) the assets are
redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred therights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement
while (i) also transferring substantially all the risks and rewards of ownership of the assets or ii) neither
transferring nor retaining substantially all risks and rewards of ownership but not retaining control.Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety toan unrelated third party without needing to impose additional restrictions on the sale.
Premises and equipment. Premises are stated at revalued amounts, as described below, less accumulateddepreciation and provision for impairment, where required.
Premises are subject to revaluation with sufficient regularity to ensure that the carrying amount does notdiffer materially from that which would be determined using fair value at the end of the reporting period.
Increases in the carrying amount arising on revaluation are credited to revaluation reserve in othercomprehensive income. Decreases that offset previous increases of the same asset are charged against
revaluation reserve directly in other comprehensive income; all other decreases are charged to thestatement of comprehensive income. The revaluation reserve for premises and equipment included in
other comprehensive income is transferred directly to retained earnings when the surplus is realized onthe retirement or disposal of the asset.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
12
3 Summary of Significant Accounting Policies (continued)
Construction in progress is carried at cost less provision for impairment where required. Cost includes
borrowing costs incurred on specific or general funds borrowed to finance construction of qualifyingassets. Upon completion, assets are transferred to premises and equipment at their carrying amount.Construction in progress is not depreciated until the asset is available for use.
All other items of premises and equipment are stated at cost less accumulated depreciation and
impairment losses, if any.
The costs of minor repairs and maintenance are expensed when incurred. The cost of replacing majorparts or components of premises and equipment items are capitalized and the replaced part is retired.
If impaired, premises and equipment are written down to the higher of their value in use and fair valueless costs to sell. The decrease in carrying amount is charged to profit or loss to the extent it exceeds theprevious revaluation surplus in equity. An impairment loss recognized for an asset in prior years isreversed if there has been a change in the estimates used to determine the assets value in use or fair valueless costs of sell.
Gains and losses on disposals determined by comparing proceeds with carrying amount are recognized asprofit or loss from disposal of fixed assets.
Depreciation. Land is not depreciated. Depreciation on other items of premises and equipment iscalculated using the straight-line method to allocate their cost or revalued amounts to their residual valuesover their estimated useful lives and annual depreciation calculated on them are as follows:
Premises 5%;Computer and communication equipment 25%;
Furniture, fixtures and other 25%;Vehicles 25%;
The residual value of an asset is the estimated amount that the Bank would currently obtain from disposalof the asset less the estimated costs of disposal, if the asset were already of the age and in the conditionexpected at the end of its useful life. The residual value of an asset is nil if the Bank expects to use the
asset until the end of its physical life. The assets residual values and useful lives are reviewed, andadjusted if appropriate, at each balance sheet date.
Intangible assets. The Banks intangible assets, except goodwill have definite useful life and primarilyinclude capitalized computer software.
Acquired computer software licenses are capitalized based on the costs incurred to acquire and bring to
use the specific software. Development costs that are directly associated with identifiable and uniquesoftware controlled by the Bank are recorded as intangible assets if the inflow of incremental economicbenefits exceeding costs is probable. Capitalized costs include staff costs of the software developmentteam and an appropriate portion of relevant overheads. All other costs associated with computer software,e.g. its maintenance, are expensed when incurred. Capitalized computer software is amortized on astraight line basis over expected useful lives of 5 to 10 years.
Operating leases. Where the Bank is a lessee in a lease which does not transfer substantially all the risks
and rewards incidental to ownership from the lessor to the Bank, the total lease payments are charged toprofit or loss on a straight-line basis over the period of the lease.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
13
3 Summary of Significant Accounting Policies (continued)
Due to other banks. Amounts due to other banks are recorded when money or other assets are advancedto the Bank by counterparty banks. The non-derivative liability is carried at amortized cost. If the other
Banks purchases its own debt, it is removed from the balance sheet and the difference between thecarrying amount of the liability and the consideration paid is included in gains or losses arising from
retirement of debt.
Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporatecustomers and are carried at amortized cost.
Income taxes. Income taxes have been provided for in these consolidated financial statements inaccordance with Azerbaijani legislation enacted or substantively enacted by the end of the reportingperiod. The income tax charge comprises current tax and deferred tax and is recognised in the statement
of comprehensive income except if it is recognised directly in the statement of other comprehensiveincome because it relates to transactions that are also recognised, in the same or a different period.
Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect oftaxable profits for the current and prior periods. Taxable profits are based on estimates if financialstatements are authorized prior to filing relevant tax returns. Taxes, other than on income, are recorded
within administrative and other operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and
temporary differences arising between the tax bases of assets and liabilities and their carrying amounts forfinancial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are notrecorded for temporary differences on initial recognition of an asset or a liability in a transaction other
than a business combination if the transaction, when initially recorded, affects neither accounting nortaxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the
balance sheet date which are expected to apply to the period when the temporary differences will reverseor the tax loss carry forwards will be utilized. Deferred tax assets for deductible temporary differences
and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit willbe available, against which the deductions can be utilized.
Uncertain tax positions. The Company's uncertain tax positions are reassessed by management at everyperiod end date. Liabilities are recorded for income tax positions that are determined by management as
more likely than not to result in additional taxes being levied if the positions were to be challenged by thetax authorities. The assessment is based on the interpretation of tax laws that have been enacted orsubstantively enacted by the period end date and any known Court or other rulings on such issues.
Liabilities for penalties, interest and taxes other than on income are recognised based on managementsbest estimate of the expenditure required to settle the obligations at the period end date.
Dividends. Dividends are recorded in equity in the period in which they are declared. Dividends declaredafter the balance sheet date and before the financial statements are authorized for issue are disclosed inthe subsequent events note. The statutory accounting reports of the Bank are the basis for profitdistribution and other appropriations. Azerbaijani legislation identifies the basis of distribution as thecurrent year net profit.
Income and expense recognition. Interest income and expense are recorded on an accrual basis using theeffective interest method. This method defers, as part of interest income or expense, all fees paid orreceived between the parties to the contract that are an integral part of the effective interest rate,
transaction costs and all other premiums or discounts.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
14
3 Summary of Significant Accounting Policies (continued)
Fees integral to the effective interest rate include origination fees received or paid by the entity relating tothe creation or acquisition of a financial asset or issuance of a financial liability, for example fees for
evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms ofthe instrument and for processing transaction documents. Commitment fees received by the Bank to
originate loans at market interest rates are integral to the effective interest rate if it is probable that theBank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortlyafter origination. The Bank does not designate loan commitments as financial liabilities at fair valuethrough profit or loss.
When loans and other debt instruments become doubtful of collection, they are written down to thepresent value of expected cash inflows and interest income is thereafter recorded for the unwinding of thepresent value discount based on the assets effective interest rate which was used to measure the
impairment loss.
All other fees, commissions and other income and expense items are generally recorded on an accrualbasis by reference to completion of the specific transaction assessed on the basis of the actual serviceprovided as a proportion of the total services to be provided. Loan syndication fees are recognized as
income when the syndication has been completed and the Bank retains no part of the loan package foritself or retains a part at the same effective interest rate as for the other participants.
Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for athird party, such as the acquisition of loans, shares or other securities or the purchase or sale of
businesses, and which are earned on execution of the underlying transaction, are recorded on itscompletion. Portfolio and other management advisory and service fees are recognized based on the
applicable service contracts, usually on a time-proportion basis. Asset management fees related toinvestment funds are recorded rateably over the period the service is provided. The same principle isapplied for wealth management, financial planning and custody services that are continually providedover an extended period of time.
The authorized capital. Ordinary shares and preference shares are non-diskretiondividendli both classifiedas equity. Costs directly attributable to issue of new shares are shown in equity as an extract. Anyamount over the par value of shares issued equityshare of earned premium is saved as a.
Shareholders Capital. Ordinary shares and preference shares are both classified as equity.Costs directly attributable to issue of new shares are shown in equity as an extract. Any amount over thepar value of shares issued is treated as share premium.
Foreign currency translation. The functional currency of the Banks consolidated entities is the currency
of the main economic environment in which they operate. The functional currency of the Banks entitiesand the Banks presentation currency is the national currency of the Republic of Azerbaijan, Azerbaijani
Manat (AZN).
Monetary assets and liabilities are translated into entitys functional currency at the official exchange rateof the CBAR at the respective balance sheet dates. Foreign exchange gains and losses resulting from the
settlement of transactions and from the translation of monetary assets and liabilities into Banksfunctional currency at year-end official exchange rates of the CBA are recognized in profit or loss.
Translation at year-end rates does not apply to non-monetary items, including equity investments. Effectsof exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or
loss.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
15
3 Summary of Significant Accounting Policies (continued)
At 31 December 2011, the principal rate of exchange used for translating foreign currency balances wasUSD 1 = AZN 0.7865 and EUR 1 = AZN 1.0178 (31 December 2010: USD 1 = AZN 0.7979 and EUR 1
= AZN 1.0560).
Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of
financial position only when there is a legally enforceable right to offset the recognized amounts, andthere is an intention to either settle on a net basis, or to realize the asset and settle the liabilitysimultaneously.
Earnings per share. Preference shares are irredeemable and is considered as the shares with voting rights.Earnings per share is calculated by means of dividing profit or loss attributable to the Bank's shareholdersby the average number of shares during the year.
Staff costs and related contributions. Wages, salaries, payments to the Republic of Azerbaijan StateSocial Protection Fund, annual leave, sick leave, bonuses and other benefits are calculated as the services
are provided by the employees.
Segment reporting. Segment is an identifiable component of the Bank related to presentation of goodsand rendering services (business segment) or presentation of goods and rendering services in specific
economic circumstances with risks and benefits different from other segments. Segments whose revenue,result or assets are ten percent or more of all the segments are reported separately.
4 Critical Accounting Estimates and Judgments in Applying Accounting Policies
The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities
within the next financial year. Estimates and judgements are continually evaluated and are based onmanagements experience and other factors, including expectations of future events that are believed to bereasonable under the circumstances. Management also makes certain judgements, apart from those
involving estimations, in the process of applying the accounting policies. Judgements that have the mostsignificant effect on the amounts recognised in the financial statements and estimates that can cause a
significant adjustment to the carrying amount of assets and liabilities within the next financial yearinclude:
Impairment losses on loans and advances. The Bank regularly reviews its loan portfolios to assessimpairment. In determining whether an impairment loss should be recorded in the statement of
comprehensive income the Bank makes judgments as to whether there is any observable data indicatingthat there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the
decrease can be identified with an individual loan in that portfolio. This evidence may include observabledata indicating that there has been an adverse change in the payment status of borrowers in a group, or
national or local economic conditions that correlate with defaults on assets in the group. Managementuses estimates based on historical loss experience for assets with credit risk characteristics and objective
evidence of impairment similar to those in the portfolio when scheduling its future cash flows. Themethodology and assumptions used for estimating both the amount and timing of future cash flows arereviewed regularly to reduce any differences between loss estimates and actual loss experience. To theextent that the assessed delay in repayment of principal on 5% of the total loans and advances tocustomers differs by +/- one month, the provision would be approximately AZN 9,156 higher or lower.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
16
4 Critical Accounting Estimates and Judgments in Applying Accounting Policies (continued)
Tax legislation. Azerbaijani tax, currency and customs legislation is subject to varying interpretations.Refer to Note 23.
Initial recognition of related party transactions.In the normal course of business the Bank enters intotransactions with its related parties. IAS 39 requires initial recognition of financial instruments based on
their fair values. Judgement is applied in determining if transactions are priced at market or non-marketinterest rates, where there is no active market for such transactions. The basis for judgement is pricing forsimilar types of transactions with unrelated parties and effective interest rate analysis. Terms andconditions of related party balances are disclosed in Note 25.
5 Adoption of New or Revised Standards and Interpretations
The basis for judgement is pricing for similar types of transactions with unrelated parties and effectiveinterest rate analysis. A number of new standards, amendments to standards and interpretations are not yet
effective as of June 30, 2011, and have not been applied in preparing these consolidated financialstatements. Of these pronouncements, potentially the following will have an impact on the Bankstransactions. The Bank plans to adopt these pronouncements when they become effective. The Bank hasnot yet analysed the likely impact of these new standards on its financial statements.
IFRS 9 Financial Instruments will be effective for annual periods beginning on or after January 1,2013. The new standard is to be issued in phases and is intended ultimately to replace IAS 39 Financial
Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009and relates to the classification and measurement of financial assets. The second phase regarding
classification and measurement of financial liabilities was published in October 2010. The remaining
parts of the standard are expected to be issued during 2011. The Bank recognises that the new standardintroduces many changes to the accounting for financial instruments and is likely to have a significantimpact on the Banks consolidated financial statements. The impact of these changes will be analysed
during the course of the project as further phases of the standard are issued. The Bank does not intend toadopt this standard earlier.
IFRS 10Consolidated Financial Statements will be effective for annual periods beginning on or after 1January 2013. The new standard supersedes IAS 27 Consolidated and Separate Financial Statementsand SIC-12 Consolidation Special Purpose Entities. IFRS 10 introduces a single control model whichincludes entities that are currently within the scope of SIC-12. Under the new three-step control model, an
investor controls an investee when it is exposed, or has rights, to variable returns from its involvementwith that investee, has the ability to affect those returns through its power over that investee and there is alink between power and returns. Consolidation procedures are carried forward from IAS 27 (2008). Whenthe adoption of IFRS 10 does not result in a change in the previous consolidation or non-consolidation of
an investee, no adjustments to accounting are required on initial application.
When the adoption results in a change in the consolidation or non-consolidation of an investee, the newstandard may be adopted with either full retrospective application from date that control was obtained orlost or, if not practicable, with limited retrospective application from the beginning of the earliest periodfor which the application is practicable, which may be the current period. Early adoption of IFRS 10 ispermitted provided an entity also early-adopts IFRS 11, IFRS 12 and IAS 28 (2011).
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
17
5 Adoption of New or Revised Standards and Interpretations (continued)
IFRS 11Joint Arrangements will be effective for annual periods beginning on or after 1 January 2013with retrospective application required. The new standard supersedes IAS 31 Interests in Joint
Ventures. The main change introduced by IFRS 11 is that all joint arrangements are classified either asjoint operations, which are consolidated on a proportionate basis, or as joint ventures, for which the equity
method is applied. The type of arrangement is determined based on the rights and obligations of theparties to the arrangement arising from joint arrangements structure, legal form, contractual arrangementand other facts and circumstances. When the adoption of IFRS 11 results in a change in the accountingmodel, the change is accounted for retrospectively from the beginning of the earliest period presented.
Under the new standard all parties to a joint arrangement are within the scope of IFRS 11 even if allparties do not participate in the joint control. Early adoption of IFRS 11 is permitted provided the entity
also early-adopts IFRS 10, IFRS 12 and IAS 28 (2011).
IFRS 12 Disclosure of Interests in Other Entities will be effective for annual periods beginning on orafter 1 January 2013. The new standard contains disclosure requirements for entities that have interests insubsidiaries, joint arrangements, associates and unconsolidated structured entities. Interests are widely
defined as contractual and non-contractual involvement that exposes an entity to variability of returnsfrom the performance of the other entity. The expanded and new disclosure requirements aim to provide
information to enable the users to evaluate the nature of risks associated with an entitys interests in otherentities and the effects of those interests on the entitys financial position, financial performance and cash
flows. Entities may early present some of the IFRS 12 disclosures without a need to early-adopt the othernew and amended standards. However, if IFRS 12 is early-adopted in full, then IFRS 10, IFRS 11 and
IAS 28 (2011) must also be early adopted.IFRS 13Fair Value Measurement will be effective for annual periods beginning on or after 1 January2013. The new standard replaces the fair value measurement guidance contained in individual IFRSs with
a single source of fair value measurement guidance. It provides a revised definition of fair value,establishes a framework for measuring fair value and sets out disclosure requirements for fair valuemeasurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value,
nor does it eliminate the practicability exceptions to fair value measurement that currently exist in certainstandards. The standard is applied prospectively with early adoption permitted. Comparative disclosureinformation is not required for periods before the date of initial application.IAS 28 (2011) Investments in Associates and Joint Ventures combines the requirements in IAS 28(2008) and IAS 31 that were carried forward but not incorporated into IFRS 11 and IFRS 12. The
amended standard will become effective for annual periods beginning on or after 1 January 2013 withretrospective application required. Early adoption of IAS 28 (2011) is permitted provided the entity also
early-adopts IFRS 10, IFRS 11and IFRS 12.
Amendment to IAS 12 Income Taxes Deferred Tax: Recovery of Underlying Assets. Theamendment introduces an exception to the current measurement principles for deferred tax assets and
liabilities arising from investment property measured using the fair value model in accordance with IAS40 Investment Property. The exception also applies to investment property acquired in a businesscombination accounted for in accordance with IFRS 3 Business Combinations provided the acquirersubsequently measures the assets using the fair value model. In these specified circumstances themeasurement of deferred tax liabilities and deferred tax assets should reflect a rebuttable presumption thatthe carrying amount of the underlying asset will be recovered entirely by sale unless the asset isdepreciated or the business model is to consume substantially all the asset. The amendment is effective
for periods beginning on or after 1 January 2012 and is applied retrospectively.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
18
5 Adoption of New or Revised Standards and Interpretations (continued)
Amendment to IFRS 7 Disclosures Transfers of Financial Assets introduces additional disclosurerequirements for transfers of financial assets in situations where assets are not derecognised in their
entirety or where the assets are derecognised in their entirety but a continuing involvement in thetransferred assets is retained. The new disclosure requirements are designated to enable the users of
financial statements to better understand the nature of the risks and rewards associated with these assets.The amendment is effective for annual periods beginning on or after 1 July 2011.
Unless otherwise described above, the new standards and interpretations are not expected to significantly
affect the Banks financial statements.
6 Cash and Cash Equivalents
In Azerbaijani Manats 2011 2010
Cash on hand 6,749,084 823,627-Cash balances with the CBAR (other than mandatoryreserve deposits) 299,018 2,971,766-Mandatory reserves 141,654 69,129
Correspondent accounts and overnight placements withOther Banks
- Azerbaijan Respublic (annual interest rate 1%) - 1,086- Other Countries (annual interest rate1-3%) 41,518 18,120
Total cash and cash equivalents 7,231,274 3,883,728
The balances with the Central Bank of Azerbaijan represent the obligatory minimum reserve depositswith the CBA. These accounts do not bear any interest.
The analysis by credit quality of cash and cash equivalents at 31 December 2011 is as follows:
In Azerbaijani Manats Cash on hand
Cash balances
with the
CBAR
Corresponden
t accounts and
overnight
placements
with Other
Banks Total
Current and not im ared- Cash on hand 6,749,084 - - 6,749,084- Government of the Re ublic of Azerbai an - 440,672 - 440,672- 15 reatest Azerbai ani Banks - - - -- Other Azerbai ani Banks - - - -- OECD Countries - - -- non-OECD Countries - - 41,518 41,518
Total current and not impared 6,749,084 440,672 41,518 7,231,274
Total cash and cash equivalents 6,749,084 440,672 41,518 7,231,274
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
19
6 Cash and Cash Equivalents (continued)
The analysis by credit quality of cash and cash equivalents at 31 December 2010 is as follows:
In Azerbaijani Manats Cash on hand
Cash balances
with the
CBAR
Corresponden
t accounts and
overnight
placements
with Other
Banks Total
Current and not impared- Cash on hand 823,627 823,627- Government of the Re ublic of Azerbai an 3,040,895 3,040,895- 15 greatest Azerbaijani Banks 1,002 1,002- Other Azerbaijani Banks 84 84- OECD Countries 752 752- non-OECD Countries 17,368 17,368
Total current and not impared 823,627 3,040,895 19,206 3,883,728
Total cash and cash equivalents 823,627 3,040,895 19,206 3,883,728
The analysis by credit quality of cash and cash equivalents at 31 December 2011 is as follows:
In Azerbaijani Manats
Cash balances withthe CBAR
including
mandatory reserves
Correspondent
accounts andovernight
placements with
Other Banks Total
Current and not im ared 440,672 - 440,672- CBAR - - -- AAA rated - - -- AA-AA+ rate - - -- A-A+ rate - 41,519 41,519- A below rated - - -- Not-rated - - -
Total cash and cash equivalents excludingcash on hand 440,672 41,519 482,191
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
20
6 Cash and Cash Equivalents (continued)
The analysis by credit quality of cash and cash equivalents at 31 December 2010 is as follows:
In Azerbaijani Manats
Cash balances
with the CBAR
including
mandatoryreserves
Correspondent
accounts and
overnight
placements withOther Banks
Total
Current and not impared- CBAR 3,040,895 - 3,040,895- AAA rated - - -
- AA-AA+ rate - - -- A-A+ rate - 752 752- A below rated - 18,370 18,370- Not-rated - 84 84
Total cash and cash equivalents excluding cash
on hand 3,040,895 19,206 3,060,100
7 Due from Other Banks and Financial Institutions
(In Azerbaijani Manats)31 December
201131 December
2010
Long-term placements with other banks 7,865 7,979
Accrued interest payable - -
Total due from other banks and financial institutions 7,865 7,979
On 31 December 2011 and 31 December 2010 long-term placements with other banks arise from the
Azerkart kept mandatory in the International Bank of Azerbaijan.
The analysis by credit quality of cash and cash equivalents at 31 December 2011 and 31 December 2010is as follows:
In Azerbaijani Manats 2011 2010
Current and not impared- Rated Azerbaijani Banks: - -- A below rated: 7,865 7,979
Total due from other banks and financial institutions 7,865 7,979
Because the Management has not found any objective proof for the impairment of Due from Other Banksand Financial Institutions the allowance for impairment has not been calculated for the years ending 31
December 2011 and 31 December 2010.
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DEKA BANK CB OJSC
NOTES ON FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
21
8 Loans and Advances to Customers
In Azerbaijani Manats 2011 2010
Corporate loans 18,067,063 20,649,235
Car purchase 6,715,405 7,244,793Consumer loans 2,917,347 9,396,081Mortgage 11,032,245 1,021,844
Loans to enterpreneurs 231,480 1,007,603
Less: Provision for loan impairment (3,829,753) (3,776,806)
Total loans and advances to customers 35,133,787 35,542,750
2011 2010
In Azerbaijani Manats Amount % Amount %
Individuals- car purchase 6,715,405 17% 7,244,793 18.43%- consumer loans 2,917,347 7% 9,396,081 23.89%- mortgage 11,032,244 28% 1,021,844 2.60%- loans to enterpreneurs 231,480 1% 1,007,603 2.56%
Total loans to individuals 20,896,476 54% 18,670,321 47.48%
Corporate loans-trade and services 8,273,491 21% 4,581,779 11.65%-manufacturing 789,189 2% 8,443,979 21.48%
-construction 7,414,228 19% 3,927,339 9.99%-argiculture 1,080,304 3% 885,815 2.25%-vehicles purchase 47,614 0% 604,275 1.54%-other loans 462,237 1% 2,206,048 5.61%
Total corporate loans 18,067,063 46% 20,649,235 52.52%
Total loans and advances to
customers (before impairment) 38,963,539 100% 39,319,556 100%
At 31 December 2011, the Banks top 27 borrowers had an aggregated loan amount of AZN 18,536,963or 53% of the total loan portfolio.At 31 December 2011, the Bank does not have any loan to customer
whose balance exceed 10% of the Banks Equity.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
22
8 Loans and Advances to Customers (continued)
The movement of the provision for loan impairment during 2011 is as follows:
In Azerbaijani Manats Total
Loan loss provision as at 1 January 2010 (3,294,709)Provision during the year (482,097)
Loan loss provision as at 1 January 2011 (3,776,806)Provision during the year (52,947)
Loan loss provision as at 31 December 2011 (3,829,753)
As at 31 December 2011 and 31 December 2010 the loan classification based on the collateral is set outbelow. The table below states the loan amount collaterized by each type collateral, and do not reflect thefair value of the collaterals:
In Azerbaijani Manats 31 December 2011 31 December 2010
Unsecured loans 11,472,135 8,259,909Loans collateralised by:
- residental real estate 14,677,896 19,694,213-vehicles 7,549,344 7,083,923- precious metals 813,715 504,705
- cash deposits and securities 528,388 -- guarantee letters 92,309 -
Total loans and advances to customers 35,133,787 35,542,750
The Bank applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments:
Recognition and Measurement, and created portfolio provisions for impairment losses that were incurredbut have not been specifically identified with any individual loan by the balance sheet date. The Bankspolicy is to classify each loan as current and not impaired until a specific objective evidence of
impairment of the loan is identified. In connection with this policy and application of the portfolioimpairment methodology provision for impairment losses was higher than the amount of individually
impaired loans.
The primary factors that the Bank considers whether a loan is impaired are its overdue status and
realisability of related collateral, if any. As a result, the Bank presents above an ageing analysis of loansthat are individually determined to be impaired. Current and not impaired but renegotiated loans reflectthe loans whose contracts have been reamended. Past due but not impaired loans represent collatorizedloans whose fair value is able to repay the impaired interest and principal amount of the loan. Past due but
not impaired amounts are the outstanding principal of the loans .
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
23
9 Premises, Equipment and Intangible Assets
In AzerbaijaniManats Buildings
Furniture
andfixtures
Computerequipment Vehicles
Total
fixedassets
Intangibleassets Total
Net book value as
at 31 December
2009 2,493,333 19,970 30,545 206,965 2,750,813 9,352 2,760,165
Additions 130,000 25,790 6,967 - 162,757 - 162,757Disposals/Sales - (894) (3,707) - (4,601) - (4,601)Transfers - 420 (420) - - - -Depreciation charge
for the year (140,875) (8,918) (13,261) (68,352) (231,406) (3,269) (234,675)
Net book value as
at 31 December
2010 2,482,458 36,368 20,124 138,613 2,677,563 6,083 2,683,646
Additions 425,118 148,931 39,233 142,953 756,235 121,040 877,275Disposals/Sales - (65) (300) (54,515) (54,880) - (54,880)
Transfers - - - - - - -Depreciation charge
for the year (142,500) (19,125) (18,977) (69,347) (249,949) (12,495) (262,444)
Net book value as
at 31 December
2011 2,765,076 166,109 40,080 157,704 3,128,969 114,628 3,243,597
Cost at 31 December
2009 2,720,000 72,367 124,361 273,510 3,190,238 32,687 3,222,925AccumulatedDepreciation (226,667) (52,397) (93,816) (66,545) (439,425) (23,335) (462,760)
Net book value as
at 31 December
2009 2,493,333 19,970 30,545 206,965 2,750,813 9,352 2,760,165
Cost at 31 December
2010 2,850,000 97,683 127,201 273,510 3,348,394 32,687 3,381,081
AccumulatedDepreciation (367,542) (61,315) (107,077) (134,897) (670,831) (26,604) (697,435)
Net book value as
at 31 December
2010 2,482,458 36,368 20,124 138,613 2,677,563 6,083 2,683,646
Cost at 31 December2011 3,275,118 247,050 165,629 315,949 4,003,746 153,646 4,157,392AccumulatedDepreciation (510,042) (80,941) (125,549) (158,245) (874,777) (39,018) (913,795)
Net book value asat 31 December
2011 2,765,076 166,109 40,080 157,704 3,128,969 114,628 3,243,597
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
24
10 Other Financial Assets
In Azerbaijani Manats 2011 2010
Receivables on Debit and Credit cards 24,945 5,156Other financial assets - -
Total Other Financial Assets 24,945 5,156
The analysis by credit quality of the Banks other assets at 31 December 2011 is as follows:
In Azerbaijani Manats
Settlementswith payment
systemoperators
Amounts in
course of
settlement Depositsplaced Other Total
Current and not impaired
- Top 5 money transfer entities Western Union- 20,591 - - 20,591- Top 5 card issuing companies Azericard 1,607 - - 1,607- Other companies - 2,747 - - 2,747
Total other financial assets 24,945 - - 24,945
The analysis by credit quality of the Banks other assets at 31 December 2010 is as follows:
In Azerbaijani Manats
Settlementswith payment
systemoperators
Amounts in
course of
settlementDeposits
placed Other Total
Current and not impaired- Top 5 money transfer entities Western Union- 4,961 - - 4,961
- Top 5 card issuing companies Azericard 195 - - 195- Other companies - - - - -
Total other financial assets 5,156 - 5,156
The primary factors that the Bank considers whether a receivable is impaired are its overdue status and
realisability of related collateral, if any.
For the disclosure of fair values of each class of other financial assets, see Note 24.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
25
11 Other Assets
In Azerbaijani Manats 2011 2010
Prepayments for premises, equipment and intangible assets 46,138 118,001Prepayments -
Total other assets 46,138 118,001
As at 31 December 2011, AZN 46, 138 of total other assets represent the prepayments for the accountingsystem and its supporting software.
12 Other Borrowed Funds
In Azerbaijani Manats 31 December 2011 31 December 2010
Other Borrowed Funds 15,167,876 6,882,075
Other Borrowed Funds 15,167,876 6,882,075
As at 31 December 2011, the Bank has borrowings total of AZN 15, 167, 876 ( 31 December 2010: AZN6,882,075) from Central Bank of Azerbaijani Respublic, State Agency on Loans to Agriculture field
under the Ministry of Agriculture and National Fund on Entrepreneurship Support.
13 Customer Accounts
In Azerbaijani Manats 2011 2010
Other le al entities-Current accounts 1,562,774 5,846,350-Term Deposits 2,545,777 1,605,856
Individuals-Current Accounts 121,619 49,994-Term Deposits 6,001,383 11,588,678
Total Customer Accounts 10,231,553 19,090,878
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
26
13 Customer Accounts (continued)
Economic sector concentrations within customer accounts are as follows:31 December 2011 31 December 2010
In Azerbaijani Manats Amount % Amount %
Individuals 6,123,002 59.83% 11,638,672 60.96%Trade and Services 658,393 6.43% 3,284,190 17.20%Insurance 2,616,821 25.59% 1,646,701 8.63%Construction 63,909 0.62% 2,509,763 13.15%Industry 1,653 0.02% 7,080 0.04%Agriculture 1662 0.02% 436 0.00%Transportation 61 0.00% 10 0.00%Other 766,052 7.49% 4,026 0.02%
Total Customer Accounts 10,231,553 100% 19,090,878 100%
As at 31 December 2011, the Bank had 19 customers with balance of more than AZN 100,000 in theiracccounts. The aggregate balance of these accounts totals AZN 3,153,800 which constituted 31% of totalcustomer accounts of the Bank.
For the fair value disclosures of each class of Current Accounts balances see Note 24. Interest analysis onCurrent Accounts is disclosed in Note 21. Transactions on Related Parties are disclosed in Note 25.
14 Other Financial Liabilities
Other financial liabilities constitute of the following:
In Azerbaijani Manats 2011 2010
Other tax payables excluding income tax payable 9,225 29,447
Payables on professional services 17,749 11,800Amounts in course of settlement 380 1,401
Accrued expenses 3,447 2,520Payables on money transfer operations 8,112 60Other 34,953 6,749
Total Other Financial Liabilities 73,866 51,977
For the disclosure of fair values of each class of other financial liabilities, see Note 24.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
27
15 Interest Income and Expense
In Azerbaijani Manats 2011 2010
Interest IncomeLoans and advances to customers 6,652,309 4,487,195
Correspondent accounts with other banks - -Other - -
Total interest income 6,652,309 4,487,195
Interest expenseTerm deposits of legal entities (341,463) -Term deposits of individuals (1,377,232) (1,582,794)Due to Other Banks (171,930) (220,841)
Total interest expense (1,890,625) (1,803,635)
Net interest income 4,761,684 2,683,560
16 Fee and Commission Income and Expense
In Azerbaijani Manats 2011 2010
Fee and commission income- Cash operations 362,352 332,727- Settlement transactions 168,670 93,102- Foreign exchange operations 110,312 79,578- Letters of credit and guarantee 230 -- Plastic card operations 1,744 7,409- Other operations 3,699 102,584
Total fee and commission income 647,007 615,400
Fee and commission ex enses- Settlement transactions (51,920) (41,261)- Broker operations (443) -- Cash operations - -- Foreign exchange operations - -- Other operations (9,746) -
Total fee and commission expenses (62,109) (41,261)
Net fee and commission income 574,898 574,139
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
28
17 Administrative and Other Operating Expenses
In Azerbaijani Manats 31 December 2011 31 December 2010
Staff costs 481,213 435,683Depreciation and amortization 262,444 239,255Security expenses 116,790 115,168
Rent expenses 128,232 93,628Income tax of employees and payments to SocialProtection Fund 105,115 95,052
Communication expenses 68,645 64,765Professional Services 54,713 43,722Office Supplies 36,452 22,679Repairs and maintainance expenses on premises andequipment 16,825 2,417Utilities 13,042 15,455
Taxes, other than income tax 12,782 9,803Transportation and business trip expenses 8,039 11,530Advertisement and marketing 1,986 6,189
Other 15,655 1,285
Total Administrative and other operating expenses 1,321,933 1,156,631
18 Income Tax
The Bank calculates its tax reports and notes in accordance with the tax legislation of the Azerbaijan
Republic and these numbers may differ from those prepared under the rules of International FinancialReporting Standards.
Permanent differences arise periodically when some expenses are not recognized or some income isexempt from the profit tax according to the tax legislation of the Azerbaijani Republic.
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the taxvalues and the balance sheet value of the items. As at 31 December 2011 and December 2010 thetemporary differences arise mainly from the difference in recognition of income and expenses.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
29
18 Income Tax (continued)
As at 31 December 2011 and 2010 the tax effect of temporary differences deductible from the taxexpenses are as follows:
In Azerbaijani Manats 31 December 2011 31 December 2010
Taxable temporary differences:
Carrying value of premises and equipment 3,243,598 -
Accumulated other liabilities - -
Total taxable temporary differences 3,243,598 -
Taxable temporary differences:
Carrying value of premises and equipment (1,451,090) (1,867,880)
Total taxable temporary differences (1,451,090) (1,867,880)
Net deferred taxable temporary differences 1,792,508 (1,867,880)Net deferred tax liability at the statutory tax rate (2011- 20%;
2010-20%) 358,502 (373,576)
Deferred tax charged to the Capital (373,576) -
Effect of changes in statutory tax rate - -
Deferred tax liability charged to the Statement of
Comprehensive Income (15,074) 24,528
Relationships between tax expenses and accounting profit at 31 December 2011 and 2010 are explained
as follows:
In Azerbaijani Manats 31 December 2011 31 December 2010Profit before income tax 4,520,280 1,106,287
Tax at the statutory tax rate (904,056) (221,257)Current Income tax expense prepayment in previous years 2,390 221,395Effect of three year tax holiday - -
Effect of change in income tax rate -
Income tax expense for the year (901,666) (138)
Current income tax expense (916,741) (24,666)
Change in the deferred tax liabilities 15,075 24,528
Income tax expense for the year (901,666) (138)
On 14 November 2008, a new law on Stimulation of Increasing the Capitalization of Banks, Insuranceand Reinsurance Companies was enacted. According to the law the profit tax rate for banks, insurance
and reinsurance companies was reduced to 0% for three fiscal years from 1 January 2009. Managementconsidered the impact of the enactment of this law on the Banks deferred tax calculation.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
30
19 Earnings per Share
Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Bank by
the weighted average number of ordinary shares in issue during the year, excluding treasury shares.
The Bank has no dilutive potential ordinary shares thereforethe diluted earnings per share equal the basicearnings per share.
In Azerbaijani Manats, except the number of shares 31 December 2011 31 December 2011
Profit/(loss) attributable to owners of ordinary shares during theyear 3,618,610 1,106,149
Weighted average number of ordinary shares in issue (inthousands of units) 47,970 47,970
Earnings/(loss) per ordinary share basic (in AZN per share)
75.43 23.06
The average number of ordinary shares outstanding during the reporting period is equal to the number ofordinary shares outstanding at the beginning of the period considering the new shares issued andredeemed during the period multiplied by the average days of shares used. The average days of sharesused is defined as the period the shares used divided by the reporting periods days.
20 Segment Analysis
Starting from 1 January 2010, the Bank prepares its segment analysis in accordance with IFRS 8,
Operating segments, which replaced IAS 14, Segment reporting. Comparatives were adjusted to conformto the presentation of current period amounts.
Following the management approach of IFRS 8, operating segments are reported in accordance with theinternal reporting provided to the Board of Directors (the chief operating decision-maker), which is responsible
for allocating resources to the reportable segments and assesses its performance. All operating segments usedby the Bank meet the definition of a reportable segment under IFRS 8.
The Bank is organised on a basis of following operating segments:
Retail banking representing private banking services, private customer current accounts, savings,deposits, investment savings products, custody, credit and debit cards, consumer loans and
mortgages.
Corporate banking representing direct debit facilities, current accounts, deposits, overdrafts, loanand other credit facilities, foreign currency and derivative products.
There are no other material items of income or expense between the operating segments. Segment assetsand liabilities comprise operating assets and liabilities, being the majority of the balance sheet, butexcluding taxation.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(In Azerbaijani Manats)
31
20 Segment Analysis (continued)
The Board of Directors reviews financial information prepared based on Azerbaijan accounting standards
adjusted to meet the requirements of internal reporting. Such financial information differs in certainaspects from International Financial Reporting Standards:
(i) the fair value changes in available for sale securities are reported within the other
comprehensive income;
(ii) funds are generally reallocated between segments at internal interest rates set by the treasurydepartment, which are determined by reference to market interest rate benchmarks,contractual maturities for loans and observed actual maturities of customer accounts balances;
(iii) income taxes are not allocated to segments;
(iv) loan provisions are recognized based on management judgment and availability of
information rather than based on the incurred loss model prescribed in IAS 39;
Segment information for the reportable operating segments of the Bank for the years ended 31 December
2011 and is set out below:
In Azerbaijani ManatsCorporate
banking
Retail
banking
Shared
services Total
Total revenue comprises:- Net interest income 1,900,090 3,182,470 - 5,082,560
- Net fee and commission income 218,661 366,237 - 584,898- Other income 65,331 109,420 - 174,751
Total Segment income: 2,184,082 3,658,127 - 5,842,209
-Administrative expenses (494,198) (827,735) - (1,321,933)
Segment results 1,689,884 2,830,392 - 4,520,276
-Income tax - - (901,666) (901,666)
Net Income 1,689,884 2,830,392 (901,666) 3,618,610
Segment assets 18,832,712 16,301,076 10,553,818 45,687,606Shared assets - - - -
Total Assets 18,832,712 16,301,076 10,553,818 45,687,606
Segment assets 5,011,214 6,127,155 15,735,197 26,873,566Shared liabilities - - - -
Total Liabilities 5,011,214 6,127,155 15,735,197 26,873,566
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(in Azerbaijani Manats)
32
20 Segment Analysis (continued)
Segment information for the reportable operating segments of the Bank for the years ended 31 December2010 and is set out below:
In Azerbaijani ManatsCorporate
banking
Retail
banking
Shared
services Total
Total revenue comprises:- Net interest income 2,014,763 (351,938) 6 1,662,831
- Net fee and commission income 283,503 290,635 1 574,139- Other income 16,183 9,765 - 25,948
Total Segment income: 2,314,449 (51,538) 7 2,262,918
-Administrative expenses (141,968) (1,014,663) - (1,156,631)
Segment results 2,172,481 (1,066,201) 7 1,106,287
-Income tax - - (138) (138)
Net Income 2,172,481 (1,066,201) (131) 1,106,149
Segment assets 18,386,517 17,156,234 6,698,509 42,241,260
Shared assets - - - -
Total Assets 18,386,517 17,156,234 6,698,509 42,241,260
Segment assets 7,452,206 11,638,672 7,846,220 26,937,098Shared liabilities - - - -
Total Liabilities 7,452,206 11,638,672 7,846,220 26,937,098
Geographical information
Revenues are fully comprises for the Azerbaijani Republic and are classified according to the customers
operational territories. Glirlr Azrbaycan Respubikasna aid edilir v mtrilrin mkan sasndapayladrlb. All other non-current assets of the Bank except for the financial assets are located within the
territories of Azerbaiajan Republic.
21 Financial Risk Management
The risk management function within the Bank is carried out in respect of financial risks (credit, market,geographical, currency, liquidity and interest rate), operational risks and legal risks. The primaryobjectives of the financial risk management function are to establish risk limits, and then ensure that
exposure to risks stays within these limits. The operational and legal risk management functions areintended to ensure proper functioning of internal policies and procedures to minimise operational and
legal risks.
Credit risk. The Bank takes on exposure to credit risk which is the risk that one party to a financialinstrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure tocredit risk arises as a result of the Banks lending and other transactions with counterparties giving rise to
financial assets.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(in Azerbaijani Manats)
33
21 Financial Risk Management (continued)
According to the Credit Policy of the Bank which is approved by the Supervisory Board there are certainlimits set for the loan portfolio in order to ensure its diversification and minimization of possible credit
risks may accrue. These limits are as follows:
i. Limits for business portfolio and consumer loans portfolio;
ii. Limits by sectors of economy;
iii. Regional limits;
iv. Concentration limits; and
v. Limits by collateral type.
In addition, there are certain limits introduced and regularly monitored by the CBAR which are alsomandatory to comply for all financial institutions of Azerbaijan. The exposure to any one borrower,
including banks and brokers, is further restricted by the CBARs regulatory sub-limits covering on andoff- statement of financial position exposures and daily delivery risk limits in relation to trading items
such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Thefollowing sub-limits are applied by the Bank:
(1) the maximum loan amount for one borrower or related borrowers is, as follows:
(i) 20 per cent of the Banks total equity if the market value of the collateral is at least equal to 100 per
cent of the value of the loan; and
(ii) 7 per cent of the Banks total equity if the market value of the collateral is less than 100 per cent ofthe value of the loan;
(2) for large loans without collateral exceeding 10 per cent of the Banks total equity, such loans in
aggregate must not exceed 800 per cent in total of the Banks total equity;
(3) the total maximum amount of the Banks loans to related parties must not exceed:
(i) 20 per cent of the Banks total equity; and
(ii) 10 per cent of the Banks equity per legal person; or
(iii) 3 per cent of the Banks equity per physical person.
These rates are calculated based on the figures from the Banks financial statements prepared in
accordance with local standards.
The limits, other than the limits of the CBAR are developed and revised by the Risk ManagementDepartment on a quarterly basis. In the case of material change to the market environment, the limits mayalso be reviewed. A proposal for any change to the limits is first provided to the Credit Committee and
subsequently to the Management Board for approval.
The Lending Operations and Reporting department reviews the adherence to all limits on a regular basisand some of the limits (maximum exposure to a single borrower or group of related borrowers, maximum
exposure to related parties) are checked prior to the issue of any new loan.
The Credit Policy of the Bank regulates the authorities and responsibilities of each body of the Bankinvolved in lending process and determine the limits for credit granting approval the rules for monitoringof loans, the principles of rating system implemented by the bank, lending procedures etc.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(in Azerbaijani Manats)
34
21 Financial Risk Management (continued)
Loan Approval Procedure and Delegation. The loan approval process is conducted in accordance withthe procedures described in Lending Policy of the Bank. The delegation of authorities for loan granting
approval process has been defined within the limits approved by Supervisory Board of the Bank for eachlevel of decision-making authority.
The Bank performs a detailed evaluation of potential borrowers before granting loans. This analysis isbased on their financial situation, position on the market, type and value of collateral provided for securethe loan and on credit history of the potential borrower. Monitoring is implemented at least every six
months on a periodic basis during the whole duration of a loan and also depends on the Banks internalrisk rating assigned to the borrower. In most cases, the scheduled monitoring is conducted on a quarterly
basis. When a loan becomes overdue, a notification is sent to the borrower, guarantees and if necessary, to
owners of collaterals within 10 days. On the 31th day of overdue the credit files of the customers whichhave refused to co-operate with the bank and received moratorium on loan repayment, but have not paidtheir debt are surendered to Problem Credits Bureau on that day. Loans are reviewed under past orproblem credit status if payment is diverged for more than 30 days from the payment schedule added to
loan agreement between customers and the Bank. Problem credit cases are reviewed by the ProblemCredit Bureau from the 31th to the 60th days of overdue. The Problem Credit Bureau uses all necessary
methods for loans repayment.
The appraisal of the collateral value provided to secure a loan is conducted by independent qualifiedcompanies and by the Banks professional staff depending on type of collateral and amount of credit
granted.
Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as aresult of another party to a financial instrument failing to perform in accordance with the terms of the
contract. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits andmonitoring procedures.
Maximum exposure to credit risk. The Banks maximum exposure to credit risk for balance sheet itemsis usually presented in the balance sheet value of the financial assets in the statement of financial position.The ability of the interchange of assets and liabilities is not significant to reduce potencial credit risk.
For off-balance sheet items, especially letters of credit and guarantees the maximum exposure of credit
risk represents total amount of liabilities. The Banks credit risk for off-balance sheet items is disclosed in
Note 23 Contingencies and Commitments.
Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a
result of another party to a financial instrument failing to perform in accordance with the terms of thecontract. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits andmonitoring procedures.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(in Azerbaijani Manats)
35
21 Financial Risk Management (continued)
Credit exposure associated with assets reported on the face of the Statatement of Financial Position is asfollows:
In Azerbaijani Manats 2011 2010
Loans and advances to Customers:
Loans and advances to Individuals-Car purchase loans 6,448,657 6,952,669-Consumer loans 2,541,123 8,303,893
-Mortgage loans 9,624,742 979,021-Loans to Entrepreneurs 218,187 920,651
Loans and advances to Legal Entities:-Big new borrowers 7,116,343 8,141,159-Loans granted to middle size entrepreneurships 8,860,572 10,235,052
-Other 324,163 10,305
Due from BanksLoans to Banks - -
Total 35,133,787 35,542,750
Credit exposure associated with the off-balance sheet items is as follows:
In Azerbaijani Manats Total Exposure
2011 2010
Letters of Guarantee 1,370,231 5,344,939
Liabilities on Unused Credit Lines 249,323 204,893
Total Credit Related Commitments 1,619,554 5,549,832
Market risk. The Bank takes on exposure to market risks. Market risks arise from open positions ininterest rate, currency and equity products, all of which are exposed to general and specific market
movements. Management Board sets limits on the value of risk that may be accepted, which is monitoredon a daily basis. However, the use of this approach does not prevent losses outside of these limits in theevent of more significant market movements.
Currency risk. Management sets limits on the level of exposure by currency and in total for bothovernight and intra-day positions, which are monitored daily.
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(in Azerbaijani Manats)
36
21 Financial Risk Management (continued)
The table below summarizes the Banks exposure to foreign currency exchange rate risk at the end of thebalance sheet date:
In Azerbaijani Manats As at 31 December 2011
Financial Assets Financial Liabilities Net Position
AZN 41,539,540 (24,813,040) 16,726,500USD 489,167 1,507,962 1,018,795EUR 351,717 552,564 200,847Other 14,700 - 14,700
TOTAL 42,395,124 26,873,566 15,521,558
In Azerbaijani Manats As at 31 December 2011
Financial Assets Financial Assets Financial Assets
AZN 38,255,228 24,753,219 13,502,009USD 455,203 1,434,396 979,193EUR 727,359 749,483 (22,124)
Other 1,823 - 1,823
TOTAL 39,439,613 26,937,098 12,502,515
The following table presents sensitivities of profit and loss and equity to reasonably possible changes inexchange rates applied at the period end date, with all other variables held constant:
31 December 2011 31 December 2010
In Azerbaijani Manats Impact on profit or loss Impact on profit or loss
US Dollars strengthening by 2% (20,376) (19,584)
US Dollars weakenin b 2% 20,376 19,584Euro stren thenin b 10% 20,085 2,212Euro weakenin b 10% 20,085 2,212
TOTAL - -
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DEKA BANK CB OJSC
NOTES TO FINANCIAL STATEMENTS
As at 31 December 2011(in Azerbaijani Manats)
37
21 Financial Risk Management (continued)
Other than as a result of any impact on the Banks profit or loss, there is no other impact on the Banksequity as a result of such changes in exchange rat