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Home/ About Us/ Statements & Reports/ Notes to Financial statements
Notes to Financial statements
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010
 

1          General information

 

Bank of Sharjah P.J.S.C. (the “Bank”), is a public joint stock company incorporated by an Emiri Decree issued on December 22, 1973 by His Highness The Ruler of Sharjah and was registered in February 1993 under the Commercial Companies Law Number 8 of 1984 (as amended).  The Bank commenced its operations under a banking license issued by the United Arab Emirates Central Bank dated January 26, 1974. The Bank is engaged in commercial and investment banking activities. 

 

The Bank’s registered office is located at Al Hosn Avenue, P.O. Box 1394, Sharjah, United Arab Emirates. The Bank operates through four branches in the United Arab Emirates situated in the Emirates of Sharjah, Dubai, Abu Dhabi, and the city of Al Ain.

 

The consolidated financial statements are prepared and presented in United Arab Emirates Dirhams (AED), which is the Bank’s functional and presentation currency.

 

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

 

2.1       New and revised IFRSs affecting amounts reported in the current year (and/or prior years)

 

The following new and revised Standards have been adopted in the current year in these consolidated financial statements.  Details of other Standards and Interpretations adopted but that have had no effect on the consolidated financial statements are set out in section 2.2.

New and revised IFRSs affecting presentation and disclosure only

 

Amendments to IFRS 7 Financial Instruments: Disclosures (as part of Improvements to IFRSs issued in May 2010)

 

The amendments to IFRS 7 clarify the required level of disclosures  about credit risk and collateral held and provide relief from disclosures previously required regarding renegotiated loans. The Bank has applied the amendments in advance of their effective date (annual periods beginning on or after 1 January 2011). The amendments have been applied retrospectively.

 

IFRS 9 Financial Instruments: Recognition and Measurement

 

The Bank has adopted IFRS 9 Financial Instruments (IFRS 9) in 2010 in advance of its effective date. The Bank has chosen December 31 2010 as its date of initial application (i.e. the date on which the Bank has assessed its existing financial assets). The Standard has been applied retrospectively and as permitted by IFRS 9, comparative amounts have not been restated.

 

IFRS 9 specifies how an entity should classify and measure its financial assets. It requires all financial assets to be classified in their entirety on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are measured either at amortized cost or fair value.

 

Debt instruments are measured at amortized cost only if (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If either of the two criteria is not met the financial instrument is classified as at fair value through profit or loss (FVTPL). Additionally, even if the asset meets the amortized cost criteria the entity may choose at initial recognition to designate the financial asset as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. 

 

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

 

2.1     New and revised IFRSs affecting amounts reported in the current year (and/or prior years) (continued)

 

IFRS 9 Financial Instruments: Recognition and Measurement (continued)

 
Only financial assets that are classified as measured at amortized cost are tested for impairment.

 

All derivatives, including embedded derivatives that are embedded in financial liabilities or host contracts outside the scope of IAS 39 that are separately accounted for, are classified FVTPL, except if designated in an effective cash flow hedge or hedge of a foreign operation hedge accounting relationship. In accordance with IFRS 9, embedded derivatives within the scope of that Standard are not separately accounted for financial assets.

 

Investments in equity instruments are classified and measured as at FVTPL except if the equity investment is not held for trading and is designated by the Bank as at fair value through other comprehensive income (FVTOCI). If the equity investment is designated as at FVTOCI, all gains and losses, except for dividend income are recognised in other comprehensive income and are not subsequently reclassified to profit or loss.
 
The management has reviewed and assessed all of the Bank’s existing financial assets as at the date of initial application of IFRS 9. As a result:

 

·         the Bank’s investments in debt instruments meeting the required criteria are measured at amortized cost;
·         the Bank’s equity investments not held for trading have been designated as at FVTOCI; and
·         the Bank’s remaining investments in equity investments and debt instruments are measured at FVTPL.
 
This change in accounting policy has been applied retrospectively, in accordance with the transitional provisions of IFRS 9, where no restatement of comparative figures was applied.

 

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

 

2.1     New and revised IFRSs affecting amounts reported in the current year (and/or prior years) (continued)

 

IFRS 9 Financial Instruments: Recognition and Measurement (continued)

 
The impact of this change in accounting policy at the beginning of the current year (as at 1 January 2010) has been to increase retained earnings opening balance by AED 98.4 million and to decrease investments revaluation reserves opening balance by AED 110.8 million as follows:

 

 

Retained

Earnings

Investment

revaluation

reserves

 

AED '000

AED '000

Due to reclassification of financial assets to:

 

 

Financial assets measured at FVTOCI

98,400

(98,400)

Financial assets measured at amortized cost

-

(12,405)

  

             

             

 

98,400

(110,805)

 

=======

=======

                                                                                    

Had IFRS 9 not been adopted during the current year, the consolidated income statement would have been impacted by a decrease in profit by AED 80 million which is all attributable to shareholders of the parent resulting from impairment of available for sale investments.

 

Additional disclosures required, reflecting the revised classification and measurement of financial assets of the Bank as a result of adopting IFRS 9, are shown in Notes 8 and 33 to the consolidated financial statements.

 

2.2     New and revised IFRS applied with no material effect on the consolidated financial statements

The following new and revised IFRSs have also been adopted in these consolidated financial statements. The application of these new and revised IFRSs has not had any material impact on the amounts reported for the current and prior years but may affect the accounting for future transactions or arrangements.

 

New and revised IFRSs

Summary of requirement

 

 

Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards – Additional Exemptions for First-time Adopters

 

The amendments provide two exemptions when adopting IFRSs for the first time relating to oil and gas assets, and the determination as to whether an arrangement contains a lease.

 

 

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

 

2.2    Standards and Interpretations adopted with no effect on the consolidated financial statements (continued)

 

Amendments to IFRS 2 Share-based Payment – Group Cash-settled Share-based Payment Transactions

 

The amendments clarify the scope of IFRS 2, as well as the accounting for group cash-settled share-based payment transactions in the separate (or individual) financial statements of an entity receiving the goods or services when another group entity or shareholder has the obligation to settle the award.

 

Amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (as part of Improvements to IFRSs issued in 2008)

 

The amendments clarify that all the assets and liabilities of a subsidiary should be classified as held for sale when the Bank is committed to a sale plan involving loss of control of that subsidiary, regardless of whether the Bank will retain a non-controlling interest in the subsidiary after the sale.

Amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (as part of Improvements to IFRSs issued in 2009)

The amendments to IFRS 5 clarify that the disclosure requirements in IFRSs other than IFRS 5 do not apply to non-current assets (or disposal groups) classified as held for sale or discontinued operations unless those IFRSs require (i) specific disclosures in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations, or (ii) disclosures about measurement of assets and liabilities within a disposal group that are not within the scope of the measurement requirement of IFRS 5 and the disclosures are not already provided in the consolidated financial statements.

 

 

IFRS 9 Financial Instruments (IASB project to replace IAS 39 completely)

 

 

 

New requirements on accounting for financial liabilities measured at fair value through profit and loss (FVTPL) and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. The new requirements address the problem of volatility in profit and loss (P&L) arising from an issuer choosing to measure its own debt at fair value. This is often referred to as the ‘own credit’ problem.

 

The application of these new requirements has no effect on the financial statements of the Bank for the year ended 31 December 2010 as all financial liabilities are measured at amortised cost by using the effective interest rate method.

 

Amendments to IAS 1 Presentation of Financial Statements (as part of Improvements to IFRSs issued in 2009)

The amendments to IAS 1 clarify that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current.

 

This amendment had no effect on the amounts reported in prior years because the Bank has not previously issued instruments of this nature.

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

 

2.2    Standards and Interpretations adopted with no effect on the consolidated financial statements (continued)

 

Amendments to IAS 7 Statement of Cash Flows (as part of Improvements to IFRSs issued in 2009)

The amendments to IAS 7 specify that only expenditures that result in a recognised asset in the statement of financial position can be classified as investing activities in the statement of cash flows.

 

Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items

 

The amendments provide clarification on two aspects of hedge accounting: identifying inflation as a hedged risk or portion, and hedging with options.

 

Improvements to IFRSs issued in 2009

Except for the amendments to IFRS 5, IAS 1 and IAS 7 described earlier in section 2.2, the application of Improvements to IFRSs issued in 2009 has not had any material effect on amounts reported in the consolidated financial statements

 

IFRIC 17 Distributions of Non-cash Assets to Owners

The Interpretation provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders.

 

2.3       New and revised IFRSs in issue but not yet effective

 

The Bank has not early applied the following new and revised IFRSs that have been issued but are not yet effective:

 

New and revised IFRSs

 

Summary of requirement

 

Amendments to IFRS 1                   Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters1

Amendments to IFRS 7                   Disclosures – Transfers of Financial Assets2

IAS 24 (as revised in 2009)            Related Party Disclosures3

Amendments to IAS 32                   Classification of Rights Issues4

Amendments to IFRIC 14               Prepayments of a Minimum Funding Requirement3

IFRIC 19                                         Extinguishing Financial Liabilities with Equity Instruments1

 

Improvements to IFRSs issued in 2010 (except for the amendments to IFRS 7 described earlier in section 2.1)5

 

1 Effective for annual periods beginning on or after 1 July 2010.

2 Effective for annual periods beginning on or after 1 July 2011.

3 Effective for annual periods beginning on or after 1 January 2011.

4 Effective for annual periods beginning on or after 1 February 2010.

5 Effective for annual periods beginning on or after 1 July 2010 and 1 January 2011, as appropriate.

 

Management anticipates that the adoption of these standards and interpretations in future periods will have no material impact on the consolidated financial statements of the Bank in the period of initial application.
 

3          Summary of significant accounting policies

 

3.1       Statement of compliance

 

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and applicable requirements of the Laws of the U.A.E.

 

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

 

3.2       Basis of preparation

 

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments and investment properties which are carried at fair value.  Historical cost is generally based on the fair value of the consideration given in exchange for assets.

 

3.3       Basis of consolidation

 

The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank (its subsidiaries). Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

 

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition and up to the effective date of disposal, as appropriate.

 

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Bank.

 

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

 

Non-controlling interests in the net assets (excluding goodwill) of consolidated subsidiaries are identified separately from the Bank’s equity therein. The interests of non-controlling shareholders may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

 

3          Summary of significant accounting policies (continued)

 

3.3        Basis of consolidation (continued)

 

Changes in the Bank's ownership interests in subsidiaries that do not result in the Bank losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Bank's interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted

and the fair value of the consideration paid or received is recognised directly in equity and attributed to shareholders of the Parent.

 

When the Bank loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. When assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative gain or loss have been recognised in other comprehensive income and accumulated in equity, the amounts previously recognised in other comprehensive income and accumulated in equity are accounted for as if the Parent had directly disposed of the relevant assets (i.e. reclassified to profit or loss or transferred directly to retained earnings as specified by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 Financial Instruments or, when applicable, the cost on initial recognition of an investment in an associate or a jointly controlled entity.

 

The Bank’s interest, held directly or indirectly, in the subsidiaries is as follows:

 

 

 

 

Name of Subsidiary

Proportion of ownership interest

 

 

Year of

incorporation

 

Country

of incorporation

 

 

 

Principal activities

 

 

 

 

 

Emirates Lebanon Bank S.A.L

51%

1965

Lebanon

Financial institution

 

 

 

 

 

BOS Real Estate FZC

100%

2009

U.A.E.

Real estate development activities

 

 

 

 

 

BOS Capital FZC

  100%

2009

U.A.E.

Investment of own financial resources

Polyco General Trading L.L.C.

100%

2008

U.A.E

General trading

Borealis Gulf FZC

100%

2010

U.A.E.

Real estate development activities

 

3.4       Cash and cash equivalents

 

Cash and cash equivalents disclosed in the consolidated statement of cash flows consist of cash on hand, current accounts and other balances with central banks, certificate of deposits, balances with banks and money market placements which are maturing within three months.

 

3.5       Due from banks

 

Due from banks are stated at cost less any amounts written off and allowance for impairment, if any.

 

3          Summary of significant accounting policies (continued)

 

3.6       Financial assets

 

All financial assets are recognised and derecognised on the trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs that are directly attributable to the acquisition of the financial asset, except for those financial assets measured subsequently at fair value through profit or loss, which are initially measured at fair value.

 

Effective interest method

 

The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

 

Income is recognised on an effective interest rate basis for debt instruments other than those financial assets designated as at FVTPL.

 

Financial assets as per IFRS 9

 

All recognised financial assets are subsequently measured in their entirety at either amortized cost or fair value.

 

Classification of financial assets:

 

For the purposes of classifying financial assets an instrument is an ‘equity instrument’ if it is a non-derivative and meets the definition of ‘equity’ for the issuer except for certain non-derivative puttable instruments presented as equity by the issuer. All other non-derivative financial assets are ‘debt instruments’.

 
Financial assets measured at amortized cost:
 
Debt instruments, including loans and advances are measured at amortized cost if both of the following conditions are met:
 
·   the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
 
·   the contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
 
Debt instruments meeting these criteria are measured initially at fair value plus transaction costs (except if they are designated as at fair value through profit or loss (FVTPL)). They are subsequently measured at amortized cost using the effective interest method less any impairment, with interest revenue recognised on an effective yield basis in other income in the consolidated income statement.
 

3          Summary of significant accounting policies (continued)

 
3.6       Financial assets (continued)

 

Financial assets as per IFRS 9 (continued)

 
Financial assets measured at amortized cost: (continued)
 
Subsequent to initial recognition, the Bank is required to reclassify debt instruments from amortized cost to FVTPL if the objective of the business model changes so that the amortized cost criteria is no longer met.
 
The Bank may irrevocably elect at initial recognition to classify a debt instrument that meets the amortized cost criteria above as FVTPL if that designation eliminates or significantly reduces an accounting mismatch had the financial asset been measured at amortized cost.

 

Financial assets measured at FVTPL
 
Debt instrument financial assets that do not meet the amortized cost criteria described above, or that meet the criteria but the Bank has chosen to designate as at FVTPL at initial recognition, are measured at FVTPL.
 
Subsequent to initial recognition, the Bank is required to reclassify debt instruments from FVTPL to amortized cost if the objective of the business model changes so that the amortized cost criteria starts to be met and the instrument’s contractual cash flows meet the amortized cost criteria. Reclassification of debt instruments designated as at FVTPL at initial recognition is not permitted.
 
Investments in equity instruments are classified as financial assets measured at FVTPL, unless the Bank designates an investment that is not held for trading as at fair value through other comprehensive income (FVTOCI) at initial recognition.
 
Financial assets measured at FVTPL are measured at fair value, with any gains or losses arising on re-measurement recognised in consolidated income statement. The net gain or loss recognised in consolidated income statement is included in the other income in the consolidated income statement. Fair value is determined in the manner described in note 36.
 
Interest income on debt instruments at FVTPL is included in the other income. Dividend income on investments in equity instruments at FVTPL is recognised in consolidated income statement when the Bank’s right to receive the dividends is established.
 

3          Summary of significant accounting policies (continued)

 

3.6       Financial assets (continued)

 

Financial assets as per IFRS 9 (continued)

 
Financial assets at FVTOCI
 
At initial recognition, the Bank can make an irrevocable election (on an instrument-by-instrument basis) to designate investments in equity instruments as at FVTOCI. Designation at FVTOCI is not permitted if the equity investment is held for trading.
 
A financial asset is held for trading if:
 
•     it has been acquired principally for the purpose of selling it in the near term;
•     on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has evidence of a recent actual pattern of short-term profit-taking; or
•     it is a derivative that is not designated and effective as a hedging instrument or a financial guarantee.
 
Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value with gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated in the investments revaluation reserve. Where the asset is disposed of, the cumulative gain or loss previously accumulated in the investments revaluation reserve is not transferred to consolidated income statement, but is reclassified to retained earnings.
 
Dividends on these investments in equity instruments are recognised in consolidated income statement when the Bank’s right to receive the dividends is established, unless the dividends clearly represent a recovery of part of the cost of the investment.

 

Foreign exchange gains and losses

 

The fair value of financial assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange component forms part of its fair value gain or loss. For financial assets measured at FVTPL, the foreign exchange component is recognised in the consolidated income statement. For financial assets measured at FVTOCI any foreign exchange component is recognised in other comprehensive income.

 

For foreign currency denominated debt instruments measured at amortized cost, the foreign exchange gains and losses are determined based on the amortized cost of the asset and are recognised in the other income in the consolidated income statement.

3          Summary of significant accounting policies (continued)
 
3.6       Financial assets (continued)
 
Financial assets as per IAS 39 – applicable for comparative figure only and financial assets that have already been derecognized at date of initial application
 
Financial assets are classified into the following specified categories: financial assets as ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity investments’ (HTM), ‘available-for-sale’ (AFS) financial assets and ‘loans and advances’ classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
 
Financial assets at FVTPL
 
Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.
 
A financial asset is classified as held for trading if:

 

  •  it has been acquired principally for the purpose of selling in the near future;

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

  • it is a derivative that is not designated and effective as a hedging instrument.

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

 

  • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
  • the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

  • it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in the consolidated income statement. The net gain or loss incorporates any dividend or interest earned on the financial asset.

 

Held for trading

 

Investments are considered as held for trading if they have been acquired principally for the purpose of selling in the near term, or if they form part of an identified portfolio of financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking.  Trading securities are initially recognised and subsequently measured at fair value with any unrealised gain or loss arising from the change in fair value and realised gains and losses taken to the consolidated income statement. Interest income and dividend income are recorded in the consolidated income statement according to the terms of the contracts, or when the right to the payment has been established.

 
3          Summary of significant accounting policies (continued)
 
3.6       Financial assets (continued)
 
Financial assets as per IAS 39 – applicable for comparative figure only and financial assets that have already been derecognized at date of initial application (continued)

 

Non-trading investments

 

These are classified as follows:

·            Held to maturity

·            Available for sale

 

All investments are initially recognised at cost, being the fair value of consideration paid plus transaction costs that are directly attributable to the acquisition.

 

Held to maturity

 

Investments which have fixed or determinable payments with fixed maturities which the Bank has the intention and ability to hold to maturity, are classified as held to maturity investments. Held to maturity investments are carried at amortized cost, using effective interest rate method less any impairment.  Amortized cost is calculated by taking into account any discount or premium on acquisition using an effective interest rate method.

 

Any gain or loss on such investments is recognised in the consolidated income statement when the investment is derecognised or impaired.

 

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

 

Available for sale

 

Investments not classified as either “held for trading” or “held to maturity” are classified as “available for sale”.

 

After initial recognition, investments which are classified as “available for sale” are remeasured at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income in the cumulative changes in fair value with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in the consolidated income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in other comprehensive income in the cumulative changes in fair value is included in the consolidated income statement for the year.

 

Dividends on available for sale equity instruments are recognised in the consolidated income statement when the Bank’s right to receive the dividends is established.

 

3          Summary of significant accounting policies (continued)

 

3.7       Fair values

 

All financial instruments are recognised initially at fair value. The fair value of a financial instrument on initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received.

 

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

 

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

 

§  The fair value of derivative instruments is calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives.

 

3.8       Investments in associates

 

An associate is an entity over which the Bank has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

 

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in associates are carried in the consolidated statement of financial position at cost as adjusted for post-acquisition changes in the Bank’s share of the net assets of the associate, less any impairment in the value of individual investments and share of changes in the statement of changes in equity. Losses of an associate in excess of the Bank’s interest in that associate (which includes any long-term interests that, in substance, form part of the Bank’s net investment in the associate) are recognised only to the extent that the Bank has incurred legal or constructive obligations or made payments on behalf of the associate.

 

Any excess of the cost of acquisition over the Bank’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Bank’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

 

Where a Bank’s subsidiary or other associate transacts with an associate of the Bank, profits and losses are eliminated to the extent of the Bank’s interest in the relevant associate.

 

3          Summary of significant accounting policies (continued)

 

3.9       Loans and advances

 

Loans and advances are non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments.

 

Loans and advances are stated at amortized cost less any amounts written off and allowance for doubtful accounts.  The carrying values of loans and advances which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair value being hedged with the resultant adjustment recognised in the consolidated income statement.

 

Allowance for impairment is made against loans and advances when their recovery is in doubt taking into consideration IFRS requirements for fair value measurement.  Loans and advances are written off only when all possible courses of action to achieve recovery have proved unsuccessful.

 

3.10     Investment properties

 

Investment properties are held to earn rental income and/or capital appreciation. Investment property includes cost of initial purchase, developments transferred from property under development, subsequent cost of development and fair value adjustments. Investment property is reflected at valuation based on fair value at the end of the reporting period. The fair values are the estimated amounts for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction. The fair value is determined on periodic basis by independent professional valuers. Fair value adjustments on investment property are included in the consolidated income statement in the period in which these gains or losses arise.

 

3.11     Property and equipment

 

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

 

Depreciation is charged so as to write off the cost or valuation of assets, over their estimated useful lives using the straight-line method as follows:

  Years
Buildings  20 - 40
Furniture and office equipment 2 - 6
Installation, partitions and decorations 3 - 4
Leasehold improvements 5 - 10
Motor vehicles 3

 

Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset at that date and is recognised in the consolidated income statement.

 

Capital work in progress is carried at cost, less any accumulated impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Bank’s accounting policy. Depreciation of these assets commences when the assets are ready for their intended use.

 

3          Summary of significant accounting policies (continued)

 

3.12     Intangible assets acquired separately

 

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

 

Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

 

Amortisation is charged so as to write off the cost of intangible assets, over their estimated useful lives using the straight-line method as follows:

 

Years

  Banking license

Infinite

  Legal corporate setup in Lebanon

10

  Customer base

10

  Branch network

10

 

3.13     Impairment of tangible and intangibles

 
At the end of each reporting period, the Bank reviews the carrying amounts of its tangible and intangibles to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Bank estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

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

 

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

 

3          Summary of significant accounting policies (continued)

 

3.14     Impairment of financial assets

 

Financial assets that are measured at amortised cost are assessed for impairment at the end of each reporting period.  Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the asset have been affected.

 

Objective evidence of impairment could include:

 

·         significant financial difficulty of the issuer or counterparty; or

 

·         breach of contract, such as a default or delinquency in interest or principal payments; or

 

·         it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or

 

·         the disappearance of an active market for that financial asset because of financial difficulties.

 

The amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows reflecting the amount of collateral and guarantee, discounted at the financial asset’s original effective interest rate.

 

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and advances, where the carrying amount is reduced through the use of an allowance account. When a loan is considered uncollectible, it is written off against the allowance account.  Subsequent recoveries of amounts previously written off are credited against the allowance account.  Changes in the carrying amount of the allowance account are recognised in the consolidated income statement.

 

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the financial asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

 

Impairment of loans and advances measured at amortised costs are assessed by the Bank as follows:

 

Individually assessed loans

 

Individually assessed loans mainly represent corporate and commercial loans which are assessed individually in order to determine whether there exists any objective evidence that a loan is impaired. Loans are classified as impaired as soon as there is doubt about the borrower’s ability to meet payment obligations to the Bank in accordance with the original contractual terms. Doubt about the borrower’s ability to meet payment obligations generally arises when:

 

a)      Principal and interest are not serviced as per contractual terms; and

b)      When there is significant deterioration in the borrower’s financial condition and the amount expected to be realised from disposal of collaterals if any are not likely to cover the present carrying value of the loan.

 

Impaired loans are measured on the basis of the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

 

Impairment loss is calculated as the difference between the loan’s carrying value and its present impaired value.

 

3          Summary of significant accounting policies (continued)

 

3.14     Impairment of financial assets (continued)

 

Collectively assessed loans

 

Impairment losses of collectively assessed loans include the allowances calculated on:

 

a)                  Performing loans

b)                  Retail loans with common features and which are not individually significant.

 

Performing loans

 

Where individually assessed loans are evaluated and no evidence of loss has been identified, these loans are classified as performing loans portfolios with common credit risk characteristics based on industry, product or loan rating.  Impairment covers losses which may arise from individual performing loans that are impaired at the end of the reporting period but were not specifically identified as such until some time in the future.  The estimated impairment is calculated by the Bank’s management for each identified portfolio based on historical experience and the assessed inherent losses which are reflected by the economic and credit conditions.

 

Retail loans with common features and which are not individually significant

 

Impairment of retail loans is calculated by applying a formulaic approach which allocates progressively higher loss rates in line with the overdue instalment date.

 

Renegotiated loans

 

Retail loans, which are subject to collective impairment review and whose terms have been renegotiated, are no longer considered to be past due and consequently impaired only when the minimum required number of payments under the new arrangements has not been received and the borrower has not complied with the revised terms and conditions.

 

Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to continuous review to determine whether they remain impaired or are considered to be past due depending upon the borrower complying with the revised terms and conditions and making the minimum required payments for the loans to be moved to performing category.


Loans that are either subject to collective impairment assessment or are individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated.

 

3          Summary of significant accounting policies (continued)

 

3.15   Derecognition of financial assets

 

The Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

 

On derecognition of a financial asset measured at amortised cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognised in the consolidated income statement.

 

On derecognition of a financial asset that is classified as FVTOCI, the cumulative gain or loss previously accumulated in the investments revaluation reserve is not reclassified to the consolidated income statement, but is reclassified to retained earnings.

 

3.16     Collateral pending sale

 

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

 

3.17     Derivative financial instruments

 

A derivative is a financial instrument whose value changes in response to an underlying variable, that requires little or no initial investment and that is settled at a future date.

The Bank enters into a variety of derivative financial instruments to manage the exposure to foreign exchange rate risks, including forward foreign exchange contracts and currency swaps.

 

Derivative financial instruments are initially measured at cost, being the fair value at contract date, and are subsequently re-measured at fair value.  All derivatives are carried at their fair values as assets where the fair values are positive and as liabilities where the fair values are negative.

 

Fair values are generally obtained by reference to quoted market prices, discounted cash flow models and recognised pricing models as appropriate.

 

For the purpose of hedge accounting, the Bank classifies hedges into two categories:  (a) fair value hedges, which hedge the exposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges, which hedge exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted transaction that will affect future reported net income.

 

In order to qualify for hedge accounting, it is required that the hedge should be expected to be highly effective, i.e. the changes in fair value or cash flows of the hedging instrument should effectively offset corresponding changes in the hedged item and should be reliably measurable. At inception of the hedge, the risk management objectives and strategies are documented including the identification of the hedging instrument, the related hedged item, the nature of risk being hedged, and how the Bank will assess the effectiveness of the hedging relationship.  Subsequently, the hedge is required to be assessed and determined to be an effective hedge on an ongoing basis.

 

3.         Summary of significant accounting policies (continued)

 

3.17     Derivative financial instruments (continued)

 

Fair value hedges

 

Where a hedging relationship is designated as a fair value hedge, the hedged item is adjusted for the change in fair value in respect of the risk being hedged. Gains or losses on the re-measurement of both the derivative and the hedged item are recognised in the consolidated income statement. Fair value adjustments relating to the hedging instrument are allocated to the same consolidated income statement category as the related hedged item. Any ineffectiveness is also recognised in the same consolidated income statement category as the related hedged item. If the derivative expires, is sold, terminated, exercised, no longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point, to a hedged item for which the effective interest method is used, is amortized in the consolidated income statement as part of the recalculated effective interest rate over the period to maturity.

 

Cash flow hedges

 

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in the cash flow hedging reserve in equity. The ineffective part of any gain or loss is recognised immediately in the consolidated income statement as trading revenue/loss. Amounts accumulated in equity are transferred to the consolidated income statement in the periods in which the hedged item affects profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the cumulative gains or losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the cumulative gains or losses recognised in other comprehensive income remain in equity until the forecast transaction is recognised, in the case of a non-financial asset or a non-financial liability, or until the forecast transaction affects the consolidated income statement. If the forecast transaction is no longer expected to occur, the cumulative gains or losses recognised in other comprehensive income are immediately transferred to the consolidated income statement and classified as trading revenue/loss.

 

Derivatives that do not qualify for hedge accounting

 

All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognised immediately in the consolidated income statement as trading revenue/loss. However, the gains and losses arising from changes in the fair values of derivatives that are managed in conjunction with financial instruments designated at fair value are included in net income from financial instruments designated at fair value under other non-interest revenue/loss.

 

Derivatives embedded in other financial instruments or other non-financial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with unrealised gains or losses reported in the consolidated income statement.

 

3          Summary of significant accounting policies (continued)

 

3.18   Other financial liabilities

 

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

 

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

 

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period.  The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

 

3.19     Customers’ deposits and syndicated loan

 

Customers’ deposits and syndicated loan are initially measured at fair value which is normally consideration received net of directly attributable transaction costs incurred, and subsequently measured at their amortized cost using the effective interest method.

 

3.20     Convertible bonds

 

The equity component of the convertible bond is recognised as equity in the statement of financial position. On issuance of the convertible bond, the fair value of the liability component is determined using a market rate for an equivalent non convertible bond; and this amount is carried as a liability using the amortized cost basis until extinguished on conversion or redemption.

 

The remainder of the proceeds is allocated to the conversion option that is recognised and included in Equity. The carrying amount of the convertible option is not re-measured in subsequent years and is allocated to share premium or reserves upon conversion or redemption.

 

3.21     Business combinations

 

Acquisitions of subsidiaries and businesses are accounted for using the purchase method.  The cost of the business combination is measured at the aggregated of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Bank in exchange for control of the acquiree, plus any costs directly attributable to the business combination.  The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal Banks) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

 

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Bank’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Bank’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in income statement.

 

The interest of non-controlling shareholders in the acquiree is initially measured at the non-controlling shareholder’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

 

3          Summary of significant accounting policies (continued)

 

3.22     Goodwill

 

Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

 

For the purpose of impairment testing, goodwill is allocated to each of the Bank’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

 

3.23   Employees’ end of service benefits

 

The Bank provides end of service benefits for its expatriate employees.  The entitlement to these benefits is based upon the employees’ length of service and completion of a minimum service period.  The expected costs of these benefits are accrued over the period of employment.

 

Pension and national insurance contributions for the U.A.E. citizens are made by the Bank in accordance with Federal Law No. 7 of 1999.

 

3.24     Provisions and contingent liabilities

 

Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

 

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the Bank’s control. Contingent liabilities are not recognised in the consolidated financial statements but are disclosed in the , unless they are remote.

 

3.25     Acceptances

 

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

 

3.26     Financial guarantees

 

Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified party fails to meet its obligation when due in accordance with the contractual terms.

 

Financial guarantees are initially recognised at their fair value, which is the premium received on issuance. The received premium is amortized over the life of the financial guarantee. The guarantee liability (the notional amount) is subsequently recognised at the higher of this amortized amount and the present value of any expected payments (when a payment under guarantee has become probable). The premium received on these financial guarantees is included within other liabilities.

 

3          Summary of significant accounting policies (continued)

 

3.27     Leasing

                               

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

 

The Bank as lessor

                               

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term.

 

The Bank as lessee

                                               

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

 

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

 
3.28  Recognition and de-recognition of financial instruments

 

The Bank recognises a financial asset or liability in its consolidated statement of financial position only when it becomes party to the contractual provisions of that instrument. Financial assets are derecognised when the right to receive cash flows from the assets has expired or when the Bank has transferred its contractual right to receive the cash flows of the financial assets, and substantially all the risks and rewards of ownership, or where control is not retained. Financial liabilities are derecognised when they are extinguished - that is when the obligation specified in the contract is discharged, cancelled or expired.

 

3.29  Offsetting of financial assets and liabilities

 

Financial assets and liabilities are offset and reported net in the consolidated statement of financial position only when there is a legally enforceable right to set off the recognised amounts and when the Bank intends to settle either on a net basis, or to realise the asset and settle the liability simultaneously.

 

3.30     Revenue and expense recognition 

 

Interest income and expense and loan commitment fees are recognised on a time proportion basis, taking into account the principal outstanding and the rate applicable.  Commission and fee income are generally accounted for on the date the transaction arises.  Interest accruing on loans and advances considered doubtful is excluded from income until received.  Subsequently, notional interest is recognised on doubtful loans and advances and other financial assets based on the rate used to discount the net present value of future cash flows.  Other fees receivable or payable are recognised when earned. 

 

Gain or loss on trading and investment securities comprises all gains and losses from changes in the fair value of held for trading securities and gains or losses on disposal of investment securities. Gain or loss on disposal of trading investments represents the difference between the sale proceeds and the carrying value of such investments on the date of sale less any associated selling costs. Gain or loss on disposal of available for sale investments represents the difference between sale proceeds and their original cost less associated selling costs. 

 

3          Summary of significant accounting policies (continued)

 

3.30     Revenue and expense recognition (continued)

 

Dividend revenue from investments is recognised when the Bank’s right to receive payments has been established.

 

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

 

3.31     Foreign currencies

                           

Items included in the financial statements of each of the Bank’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements of the Bank are presented in AED, which is the Bank’s presentation currency.

 

Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange prevailing at the statement of financial position date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated into the functional currency using rate of exchange at the date of initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into the functional currency using the rate of exchange at the date the fair value was determined. Any exchange component of a gain or loss on a non-monetary item is recognised directly in equity if the gain or loss on the non-monetary item is recognised directly in equity. Any exchange component of a gain or loss on the non-monetary is recognised directly in the consolidated income statement if the gain or loss on the non-monetary item is recognised in the income statement.

 

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

 

On disposal or partial disposal (i.e. of associates or jointly controlled entities not involving a change of accounting basis) of a foreign operation, exchange differences relating thereto and previously recognised in reserves are recognised in the consolidated income statement on proportionate basis except in the case of partial disposal (i.e. no loss of control) of a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in consolidated income statement.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

 

3          Summary of significant accounting policies (continued)

 
3.32     Trade and settlement date accounting

 

The “regular way” purchases and sales of financial assets are recognised on the trade date basis i.e. the date that the Bank commits to purchase or sell the asset. Regular way purchases or sales are those that require delivery of assets within the time frame generally established by regulation or convention in the market place. Any significant change in the fair value of assets which the Bank has committed to purchase at the end of the reporting period is recognised in the consolidated income statement for assets classified as held for trading or FVTPL, and in the consolidated statement of changes in equity for assets classified as available for sale or FVTOCI.

 

3.33     Dividends

 

Dividends are recognised outside profit or loss in equity in the year in which they are declared. Dividends declared after end of the reporting period are disclosed as proposed dividends.

 

4          Critical accounting judgements and key sources of estimation of uncertainty

 

While applying the accounting policies as stated in Note 3, management of the Bank has made certain judgments, estimates and assumptions that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period of the revision in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Significant areas where management has used estimates, assumptions or exercised judgements are as follows:

 

i.      Impairment of financial assets measured at amortised cost and loans and advances

 

The Bank’s accounting policy for allowances in relation to impaired financial assets carried at amortised cost is described in Note 3. Impairment is calculated on the basis of discounted estimated future cash flows or by applying a certain percentage on the performing unclassified loans and advances book based on market trend and historical pattern of defaults. For retail loans and advances impairment is calculated based on formulaic approach depending on past due instalments and payments.

 

The allowance for loans and advances losses is established through charges to income in the form of an allowance. Increases and decreases in the allowance due to changes in the measurement of the impaired loans and advances are included in the allowance for loans and advances losses and affect the consolidated income statement accordingly.

 

4          Critical accounting judgements and key sources of estimation of uncertainty (continued)

 

i.      Impairment of financial assets measured at amortised cost and loans and advances (continued)

 

Loans and advances

 

The impairment allowance for loan losses is established through charges to the consolidated income statement in the form of an impairment allowance for doubtful loans and advances. 

 

Individually assessed loans

 

Impairment losses for individually assessed loans are determined by an evaluation of exposure on a case-by-case basis.  This procedure is applied to all classified corporate loans and advances which are individually significant accounts or are not subject to the portfolio-based-approach.

 

The following factors are considered by management when determining allowance for impairment on individual loans and advances which are significant:

 

·                     The amount expected to be realised on disposals of collaterals.

·                     The Bank’s ability to enforce its claim on the collaterals and associated cost of litigation.

·                     The expected time frame to complete legal formalities and disposals of collaterals.

 

The Bank’s policy requires quarterly review of the level of impairment allowances on individual facilities and regular valuation of the collateral and its enforceability.

 

Impaired loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable.

 

Collectively assessed loans

 

Collective assessment of allowance for impairment is made for overdue retail loans with common features which are not individually significant and performing loans which are not found to be individually impaired.

 

The following factors are considered by management when determining allowance for impairment for such loans:

 

Retail loans – All the loans falling under similar overdue category are assumed to carry similar credit risk and allowance for impairment is taken on a gross basis.

 

Other performing loans – The management of the Bank assesses, based on historical experience and the prevailing economic and credit conditions, the magnitude of loans which may be impaired but not identified as of the end of the reporting period.

 

4        Critical accounting judgements and key sources of estimation of uncertainty (continued)

 

ii.         Classification of properties

 

In the process of classifying properties, management has made various judgments. Judgment is needed to determine whether a property qualifies as an investment property, property and equipment and/or property held for resale. The Bank develops criteria so that it can exercise that judgment consistently in accordance with the definitions of investment property, property and equipment and property held for resale. In making its judgment, management considered the detailed criteria and related guidance for the classification of properties as set out in IAS 2, IAS 16 and IAS 40, in particular, the intended usage of property as determined by the management.

 

iii.                Fair value of investment properties and investment properties under development

 

The best evidence of fair value is current prices in an active market for similar lease and other contracts. In the absence of such information, the Bank determined the amount within a range of reasonable fair value estimates. In making its judgment, the Bank considered recent prices of similar properties in the same location and similar conditions, with adjustments to reflect any changes in the nature, location or economic conditions since the date of the transactions that occurred at those prices. Such estimation is based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.

 

The determination of the fair value of revenue-generating properties requires the use of estimates such as future cash flows from assets (such as leasing, tenants’ profiles, future revenue streams, capital values of fixtures and fittings, and the overall repair and condition of the property) and discount rates applicable to those assets.  In addition, development risks (such as construction and leasing risks) are also taken into consideration when determining the fair value of investment properties under development.  These estimates are based on local market conditions existing at the end of the reporting period.

 

The continuing volatility in the global financial system and in real estate industry has contributed to the significant reduction in transaction volumes in the UAE.  Therefore, in arriving at their estimates of market values as at 31 December 2010, the valuers have used their market knowledge and professional judgement and have not only relied solely on historic transactional comparables. In these circumstances, there is greater degree of uncertainty than which exists in a more active market in estimating market values of investment property.

 

iv.                Useful lives of property and equipment and intangible assets

 

Management reviews the residual values and estimated useful lives of property, plant and equipment and intangible assets at the end of each annual reporting period in accordance with IAS 16 and IAS 38. Management determined that current year expectations do not differ from previous estimates based on its review.

 

v.              Impairment of properties under development

 

Properties classified under capital work in progress are assessed for impairment based on assessment of cash flows on individual cash-generating units when there is indication that those assets have suffered an impairment loss. Cash flows are determined with reference to recent market conditions, prices existing at the end of the reporting period, contractual agreements and estimations over the useful lives of the assets and discounted using a range of discounting rates that reflects current market assessments of the time value of money and the risks specific to the asset. The net present values are compared to the carrying amounts to assess any probable impairment.

 

4          Critical accounting judgements and key sources of estimation of uncertainty (continued)

 

4.2       Key sources of estimation uncertainty

                        

The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:

 

Valuation of unquoted equity investments

 

Valuation of unquoted equity investments is normally based on recent market transactions on an arm’s length basis, fair value of another instrument that is substantially the same, expected cash flows discounted at current rates for similar instruments or other valuation models.  In the absence of an active market for these investments or any recent transactions that could provide evidence of the current fair value, these investments are carried at cost less recognised impairment losses, if any.  Management believes that the carrying values of these unquoted equity investments are not materially different from their fair values.    

 

Derivative financial instruments

 

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

 

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

 

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

 

5          Cash and balances with central banks

 

(a)         The analysis of the Bank’s cash and balances with central banks is as follows:

 

 

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Cash on hand

52,372

52,737

Statutory deposit with Central Banks

874,964

802,955

Current account with Central Banks

62,549

24,708

Certificates of deposit with Central Banks

843,665

302,356

 

                     

                     

 

 

 

 

1,833,550

1,182,756

 

                     

                     

 

(b)        The geographical analysis of the cash and balances with central banks is as follows:

 

 

 

 

Banks abroad

917,451

834,160

Banks in the U.A.E.

916,099

348,596

 

                     

                     

 

 

 

 

1,833,550

1,182,756

 

                     

                     

 

The statutory deposits with the Central Banks are not available to finance the day to day operations of the Bank. However, as per notice 4310/2008, the Central Bank of the U.A.E. has allowed banks to borrow up to 100% of their AED and US$ reserve requirement limit.  As of 31 December 2010, the statutory deposit with the Central Bank of the U.A.E. amounted to AED 322 million (31 December 2009: AED 295 million).

 

6          Deposits and balances due from banks

 

(a)                The analysis of the Bank’s deposits and balances due from banks is as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Demand

530,792

448,052

Time

2,741,660

1,784,692

 

                     

                     

 

 

 

 

3,272,452

2,232,744

 

                     

                     

 

 

 

(b)               The above represent deposits and balances due from:

 

 

 

Banks abroad

1,961,082

959,496

Banks in the U.A.E.

1,311,370

1,273,248

 

                     

                     

 

 

 

 

3,272,452

2,232,744

 

                     

                     

 

7          Loans and advances, net

 

 

 

(a)        The analysis of the Bank’s loans and advances measured at amortised cost is as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Overdrafts

6,019,681

5,869,024

Commercial loans

5,338,981

4,949,290

Bills receivable

1,093,946

774,940

Other advances

215,535

214,524

 

                    

                     

 

 

 

 

12,668,143

11,807,778

Less: Allowance for doubtful loans and advances

(467,216)

(275,502)

Less: Interest in suspense

(94,087)

(81,794)

 

                    

                     

 

 

 

 

12,106,840

11,450,482

 

=========

=========

 

 

 

 

As mentioned in note 2 to the consolidated financial statements the Bank has opted to early adopt IFRS 9 – Financial Instruments: Measurement and Recognition.  The adoption of IFRS 9 did not result in any change with regards to the measurement of the loans and advances which are carried at amortized cost prior and post adoption of the standard.

 

(b)               The loans and advances of the Bank are as follows:

 

2010

2009

 

AED’000

AED’000

 

 

 

Loans and advances in the U.A.E.

10,427,669

9,254,594

Loans and advances outside the U.A.E.

2,240,474

2,553,184

 

-----------------------

-----------------------

 

12,668,143

11,807,778

 

=========

=========

 

(c)                The risk classification of loans and advances are as follows:

 

2010

2009

 

AED’000

AED’000

 

 

 

Performing loans

10,471,677

10,392,006

Other loans exceptionally monitored

1,885,642

1,156,076

Non-performing loans

310,824

259,696

 

                    

 

                    

 

 

12,668,143

11,807,778

Less: Allowance for doubtful loans and advances

(467,216)

(275,502)

Less: Interest in suspense

(94,087)

                  (81,794)         

 

-----------------------

-----------------------

 

12,106,840

11,450,482

 

=========

=========

 

 

 

  

7          Loans and advances, net (continued)

 

(d)               Loans and advances are stated net of allowance for doubtful loans and advances. The movement in the allowance during the year was as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

At 1 January

275,502

183,802

Additions through credit extension premium

116,420

-

Additions during  the year (Note 29)

84,970

100,733

Write offs

(220)

(9,033)

Recoveries

(9,456)

-

 

-----------------------

-----------------------

At 31 December

467,216

275,502

 

=========

=========

 

Additions through credit extension premium represents the fees charged to clients upon sanctioning/granting any new facilities on the limit and allocated directly to collective impairment provision.

 

(e)                The movement in the interest in suspense account during the year was as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

At 1 January

81,794

80,295

Additions during the year

14,180

12,736

Write offs during the year

(460)

(11,237)

Recoveries

(1,427)

-

 

-----------------------

-----------------------

At 31 December

94,087

81,794

 

=========

=========

 

At 31 December 2010, the gross amount of loans and advances on which interest is not being accrued, or is suspended, amounted to AED 311 million (2009: AED 275 million). Unrecognised interest for the year relating to such loans amounted to AED 14 million (2009: AED 13 million).

 

7          Loans and advances, net (continued)

 

(f)                The composition of the loans and advances portfolio by industry is as follows:

 

 

2010

2009

 

AED’000

AED’000

Economic sector

 

 

Trading

4,217,082

3,688,034

Personal loans for commercial purposes

2,570,718

2,251,281

Services

1,387,790

1,377,052

Manufacturing

1,485,607

1,341,763

Construction

1,152,603

914,367

Government

253,099

463,934

Public utilities

576,183

547,111

Mining and quarrying

514,107

504,811

Transport and communication

238,184

208,413

Personal loans for individual purposes

117,991

115,707

Agriculture

76,709

46,084

Financial Institution

56,532

34,280

Others

21,538

314,941

 

-----------------------

-----------------------

 

12,668,143

11,807,778

Less: Allowance for doubtful loans and advances

               (467,216)

                  (275,502)

Less: Interest in suspense

           (94,087)

                (81,794)       

 

-----------------------

-----------------------

 

12,106,840

11,450,482

 

===========

===========

 

(g)                  As of 31 December 2010, loans and advances measured at amortised cost include AED 271.5 million (2009: AED 255.5 million) of loans and advances that are past due but not impaired.

 

8          Other financial assets

 

(a)                Other financial assets of the Bank as of 31 December 2010 classified in accordance with IFRS 9 are as follows:

 

 

2010

 

AED’000

 

Other financial assets measured at fair value

 

 

(i)                 Investments measured at FVTPL

 

Quoted equity

69,557

Debt instruments

99

 

                    

 

 

 

69,656

 

                    

(ii)               Investments carried at FVTOCI

 

Quoted equity

168,077

Unquoted equity

650,371

 

                    

 

 

 

818,448

 

                    

Total other financial assets measured at fair value

888,104

 

                    

Other financial assets measured at amortized cost

 

Debt securities

902,530

 

                    

 

 

Total other financial assets

1,790,634

 

                    

 

The Bank has opted for the early adoption of IFRS 9 which has resulted in a change to the Bank’s accounting policy for the classification and measurement of financial assets. This change in accounting policy has been applied retrospectively and, as permitted by IFRS 9, the Bank has elected not to restate the comparative amounts, with the difference between the previous carrying amounts and the carrying amounts as at 1 January 2010 for impacted accounts, recognized in the opening retained earnings of the current financial year       (Note 2).

 

8          Other financial assets (continued)

 

(b)               The investments of the Bank as of 31 December 2009 classified in accordance with IAS 39 are as follows:

 

2009

AED’000

Financial assets carried at FVTPL

 

Held for trading

 

 

Quoted equity

 

85,184

Quoted debt instruments

 

162,691

 

 

                    

 

 

 

 

 

247,875

 

Non-trading investments

 

 

                    

(i)                 Available for sale investments

 

 

Quoted equity

 

190,960

Unquoted equity

 

592,757

Quoted debt instruments

 

597,389

 

 

                    

 

 

 

 

 

1,381,106

 

 

 

(ii)               Held to maturity investments (carried at amortized cost)

 

 

Quoted debt instruments

 

10,115

 

 

                    

 

Total non-trading investments

 

1,391,221

 

 

                    

 

Total other financial assets

1,639,096

 

                    

       

                                                                                                                                              

The majority of the quoted investments are listed on the securities exchanges in the U.A.E. (Abu Dhabi Securities Exchange and Dubai Financial Market).

 

(c)                The composition of the investment portfolio by geography is as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

United Arab Emirates

410,397

448,811

G.C.C. countries (other than U.A.E.)

10,360

11,146

Middle East and Africa (other than G.C.C. countries)

1,366,580

1,174,128

United States

-

651

Europe

3,297

4,360

 

                    

                    

 

 

 

 

1,790,634

1,639,096

 

                    

                    

 

8          Other financial assets (continued)

 

(d)   In 2008 certain trading securities were reclassified to available for sale investments in accordance with the amendments to IAS 39 issued on 13 October 2008 with respect to reclassification of financial assets.  With the early adoption of IFRS 9 these investments are included in the investments measured at fair value through other comprehensive income. The fair value of the trading securities at the date of reclassification was AED 184.5 million and at 31 December 2010 was AED 65.7 million (31 December 2009: AED 83.7 million). The fair value loss on these securities for the year ended    31 December 2010 amounting to AED 18 million have been recognised under cumulative changes in fair values in the consolidated statement of changes in equity.

 

(e)    Other financial assets measured at FVTOCI are strategic equity investments and mutual funds that are not held to benefit from changes in their fair value and are not held for trading. The management believes therefore that designating these investments as at FVTOCI will provide a more meaningful presentation of its medium to long-term interest in its investment than fair valuing the interest through profit or loss.

 

(f)    During the year ended 31 December 2010, dividends received from financial assets measured at FVTOCI amounting to AED 5.8 million (2009: AED 6.1 million) recognized as investment income in the consolidated income statement.

 

9          Investment in an associate

 

During the year, the Bank sold its 35% share of the equity of an associate.  The principal business activity of this Company was land development in prime industrial areas within the U.A.E.

 

The Company’s financial position at the point of sale is summarized as follows:

 

 

 AED’000

 

 

Total assets

Unaudited

 

495,114

Total liabilities

(266,331)

 

                  

 

 

Net assets

228,783

 

                  

 

 

Bank’s share of the net assets

80,074

Proceeds from the disposal

              87,500

 

                  

 

 

Gain on disposal of investment in an associate

7,426

 

                  

 

10        Investment properties

 

 

 

 

 

31 December 2009

 

Changes in fair value

 

31 December 2010

 

     

    AED’000

   AED’000

          AED’000

 

 

 

 

 

Plots of land in the U.A.E.

 

79,615

(1,119)

78,496

Daman building flats

 

6,096

(717)

5,379

Opus building

 

33,740

(19,413)

14,327

Tamani Arts offices

 

52,950

(11,225)

41,725

The Octavian

 

12,396

(2,658)

9,738

 

 

                  

                  

                  

Carrying value at

     31 December

 

 

 

184,797

 

(35,132)

 

149,665

 

 

                    

                    

                    

 

Investment properties represent plots of land and properties under development held by the Bank for undetermined future use.  The fair value of investment properties is estimated periodically by considering recent prices for similar properties in the same location and similar conditions, with adjustments to reflect any changes in the nature, location or economic conditions since the date of the transactions that occurred at these prices.  As of 31 December 2010, the fair value has been arrived at on the basis of a valuation carried out on December 2010 by independent qualified valuer.

 

11        Goodwill and other intangibles

 

(a)           The analysis of the Bank’s goodwill and other intangibles is as follows:

 

 

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Goodwill

184,733

184,733

 

                   ------------------ 

                   ------------------ 

Other intangibles

 

 

  Banking license

18,365

  18,365

  Legal corporate setup in Lebanon

38,651

   42,945

  Customer base

28,099

    31,221

  Branch network

3,305

      3,673

 

                   ------------------ 

                   ------------------ 

 

88,420

96,204

 

                   ------------------ 

                   ------------------ 

Total

273,153

280,937

 

                    

                    

  

11        Goodwill and other intangibles (continued)

 

(b)       The movement on other intangible assets during the year was as follows:

 

 

 

 

 

Other intangibles

 

 

Baking license

AED’000

Legal corporate setup in Lebanon

AED’000

 

 

Customer base

AED’000

 

 

Branch network

AED’000

 

 

 

Total

AED’000

 

 

 

 

 

 

Balance at 1 January 2009

-

-

-

-

-

Additions

18,365

42,945

31,221

3,673

96,204

 

                

                

                

               

              

 

 

 

Balance at 31 December 2009

18,365

42,945

31,221

3,673

96,204

Amortization

-

(4,294)

(3,122)

(368)

(7,784)

 

                

                

                

               

              

 

 

 

Balance at 31 December 2010

18,365

38,651

28,099

3,305

88,420

 

                

                

                

               

                

 

 

 

 

 

 

               

 

In 2007 the Bank acquired all the outstanding shares of Banque de la Bekaa SAL, a Lebanese bank. During 2009, the Bank had recapitalised Banque de la Bekaa SAL by increasing its capital to US$ 50 million plus a cash contribution of US$ 100 million in order to reach a total initial equity of US$ 150 million. Also the Bank had changed its name to Emirates Lebanon Bank SAL (“ELBank”) which then acquired the assets and liabilities of BNPI in Lebanon as explained below.

 

On 29 September 2008, the Bank, through its fully owned subsidiary EL Bank, obtained the final approval from the Central Bank of Lebanon on the acquisition of the assets and liabilities (operations) of BNPI in Lebanon. In accordance with the sale and purchase agreement, as a result of the transaction, EL Bank was 81% owned by the Bank and 19% owned by BNPI France.

 

The effective date of acquisition was 30 September 2008. The operations of the BNPI have been fully transferred to EL Bank on that date.  The acquisition is accounted for using the purchase method of accounting, and the financial statements of the acquired BNPI branches have been consolidated. On 31 December 2008, the final determination of the net assets fair value was not made and the difference between the consideration paid and the provisional fair value of the net assets at the transaction date was booked provisionally under goodwill pending the completion of the due diligence, and the valuation of the individual fair value of the intangibles acquired.

 

In 2009 the Bank’s management has completed the ongoing due diligence and made a final determination of the net assets fair value which resulted in an adjustment of AED 1.1 million on the carrying amount of goodwill. Also, the fair value of the intangibles acquired in the above stated transactions was determined and separated from the carrying value of goodwill, to be amortized as per the Bank’s accounting policy on intangibles stated in note 3.

 

11        Goodwill and other intangibles (continued)

 

The provisional and final fair values of net assets acquired were as follows:

 

 

Provisional

Final

 

AED’000

AED’000

Assets

 

 

Cash and deposits with central banks

    459,429

    459,429

Deposits and balances due from banks

  533,007

  533,007

Loans and advances, net

1,590,163

1,590,163

Investment in securities

     467,839

     467,839

Other assets

         84,206

         83,099

Property and equipment

   60,998

   60,998

Intangibles

-

96,204

 

                  

                  

 

 

 

 

3,195,642

3,290,739

 

                  

                  

Liabilities

 

 

Customers' deposits

(2,586,673)

(2,586,673)

Due to banks

(229,976)

(229,976)

Other liabilities

(190,902)

(190,902)

 

                  

                  

 

 

 

 

(3,007,551)

(3,007,551)

 

                  

                  

 

 

 

Fair value of net assets acquired

188,091

283,188

Goodwill

279,830

184,733

 

                  

                  

 

 

 

Total acquisition cost

467,921

467,921

 

                  

                  

 

 

 

 

12        Other assets

 

2010

2009

 

AED’000

AED’000

 

 

 

Acceptances- contra

609,122

407,272

Receivable from sale of investments

260,176

328,467

Clearing receivables

22,740

5,348

Interest receivable

1,460

1,358

Prepayments

8,222

5,836

Positive fair value of derivatives (Note 13)

59

200

Others

62,325

54,381

 

                    

                    

 

964,104

802,862

 

                    

                    

 

12        Other assets (continued)

 

The Bank reports under other assets, positive fair value of derivate contracts used by the Bank in the ordinary course of business. Refer to Note 13 below for further details about the nature, and type of derivative contracts utilised by the Bank, together with the notional amounts and maturities. 

 

Receivable from sale of investments arose on account of sale of 20% interest in a privately held company to develop and promote real estate and tourism activities in Tunisia. This participation was originally purchased from a company related to a Director, under a memorandum of understanding dated 19 December 2007 which had a forward sale agreement whereby this investment would be sold back at an agreed profit and on an instalment basis. In 2008, the Bank executed the forward sale agreement and sold the investment at a net profit of AED 120 million whereby the sale proceeds are recoverable in four equal annual instalments of US$ 25 million (AED 91.8 million) due from 2009 to 2012.

 

13        Derivatives

 

In the ordinary course of business the Bank enters into various types of transactions that involve derivatives.  A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in the price of one or more underlying financial instrument, reference rate or index. Derivative financial instruments, which the Bank enters into includes forwards and swaps.

 

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

 

Forward currency transactions- Currency forwards represent commitments to purchase foreign and domestic currency, including undelivered spot transactions.

 

Swap transactions- Currency swaps are commitments to exchange one set of cash flows for another. Currency swaps result in an economic exchange of currencies. No exchange of principal takes place, except for certain cross currency swaps. The Bank’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to fulfil their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities.

 

Derivative related credit risk

 

Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that are favourable to the Bank.  The Bank enters into derivative contracts with a number of financial institutions of good credit rating.


13        Derivatives (continued)

 

Derivatives held or issued for hedging purposes

 

The Bank uses derivative financial instruments for hedging purposes as part of its asset and liability management activities in order to reduce its own exposure to fluctuations in exchange rates.  The Bank uses forward foreign exchange contracts to hedge exchange rate risks.  In all such cases the hedging relationship and objective, including details of the hedged item and hedging instrument, are formally documented and the transactions are accounted for as fair value hedges.

 

The following table shows the positive and negative fair values of derivative financial instruments, together with the notional amounts analysed by the term to maturity, and the nature of the risk being hedged. 

 

 

Notional amounts by term to maturity

 

 

 

 

Held as fair value hedges

 

 

Positive fair value

AED’000

 

Negative fair value

AED’000

 

 

Notional amount

AED’000

 

 

Within 3 months

AED’000

 

 

3-12 months

AED’000

2010

 

 

 

 

 

Currency swaps

-

-

1,344,273

1,344,273

-

Forward foreign exchange contracts

59

-

47,081

16,260

30,821

 

                

                

                

               

              

 

 

 

 

 

 

Total

59

-

1,391,354

1,360,533

30,821

 

                

                

                

               

                

 

 

 

 

 

 

2009

 

 

 

 

 

Currency swaps

-

-

1,800

1,800

-

Forward foreign exchange contracts

200

-

256,184

256,184

-

 

                

                

                

               

              

 

 

 

 

 

 

Total

200

-

257,984

257,984

-

 

                

                

                

               

                

 

 

 

 

 

 

The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year end, do not necessarily reflect the amounts of future cash flows involved.  These notional amounts, therefore, are neither indicative of the Bank’s exposure to credit risk, which is generally limited to the fair value of the derivatives, nor market risk.

 

14        Property and equipment

 

Land &

buildings

Furniture

and office

equipment

Leasehold

improvements installation,

partitions

and decoration

Motor

vehicles

Capital

work in

progress

Total

 

AED’000

AED’000

AED’000

AED’000

AED’000

AED’000

Cost

 

 

 

 

 

 

At 1 January  2009

173,600

68,027

39,707

3,860

11,219

296,413

Additions during the year

-

6,025

843

1,957

7,479

16,304

Disposals

-

(6,136)

(430)

(1,149)

-

(7,715)

 

                

             

                

                

               

               

 

 

 

 

 

 

 

At 1 January  2010

173,600

67,916

40,120

4,668

18,698

305,002

Additions during the year

18,811

6,211

4,450

668

-

30,140

Disposals

-

(262)

(9)

(430)

-

(701)

Transfers

18,698

-

-

-

(18,698)

-

 

 

 

 

 

 

 

 

                

             

                

                

               

               

 

 

 

 

 

 

 

At 31 December  2010

211,109

73,865

44,561

4,906

-

334,441

 

                

             

                

                

               

               

Accumulated depreciation

 

 

 

 

 

 

At 1 January 2009

3,941

52,903

31,806

3,325

-

91,975

Charge for the year

1,981

5,534

2,186

574

-

10,275

Disposals

-

(3,832)

(371)

(1,149)

-

(5,352)

 

                

             

                

                

               

               

 

 

 

 

 

 

 

At 1 January 2010

5,922

54,605

33,621

2,750

-

96,898

Charge for the year

2,083

5,529

2,639

700

-

10,951

Disposals

-

(251)

(9)

(430)

-

(690)

 

                

             

                

                

               

               

 

 

 

 

 

 

 

At 31 December  2010

8,005

59,883

36,251

3,020

-

107,159

 

                

             

                

                

               

               

Net book value:

 

 

 

 

 

 

 

At 31 December 2010

 

203,104

 

13,982

 

8,310

 

1,886

 

-

 

227,282

 

                

             

                

               

               

               

 

 

 

 

 

 

 

At 31 December 2009

167,678

13,311

6,499

1,918

18,698

208,104

 

                

             

                

               

               

               

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital work in progress represented cost incurred for the construction of the Bank’s new office premises in the Control Tower, U.A.E., which was transferred to land and buildings during the year. 

 

15        Customers' deposits

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Current and other accounts

3,376,180

3,079,351

Saving accounts

1,440,798

1,411,630

Time deposits

9,560,349

7,622,317

 

                    

                    

 

 

 

 

14,377,327

12,113,298

 

                    

                    

 

16        Deposits and balances due to banks

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Demand

175,319

134,269

Time

248,660

369,204

 

                    

                    

 

 

 

 

423,979

503,473

 

                    

                    

Due to banks represent due to:

 

 

 

 

 

Banks in the U.A.E.

336

55,447

Banks outside the U.A.E.

423,643

448,026

 

                    

                    

 

 

 

 

423,979

503,473

 

                    

                    


 

17        Other liabilities

 

                       

2010

2009

 

AED’000

AED’000

 

 

 

Acceptances- contra

609,122

407,272

Provision for employees’ end of service benefits

53,442

51,181

Interest payable

73,944

48,738

Unearned income

49,621

18,079

Managers’ cheques

8,828

3,454

Others

75,535

85,058

 

                    

                    

 

 

 

 

870,492

613,782

 

                    

                    

 

 

 

The Bank reports under other liabilities, negative fair value of derivate contracts used by the Bank in the ordinary course of business.  Refer to Note 13 for further details about the nature, and type of derivative contracts utilised by the Bank, together with the notional amounts and maturities. 

 

The movement in the provision for employees’ end of service benefits is as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

At 1 January

51,181

53,634

Charged during the year

22,960

2,560

Payments during the year

(20,699)

(5,013)

 

                    

                    

 

 

 

At 31 December

53,442

51,181

 

                    

                    

 

 

 

 

18        Syndicated loan

 

On 29 July 2010, the Bank signed a new US$ 150 million (AED 551 million) syndicated term loan facility with a group of multinational mandated lead arrangers and book-runners. The purpose of the facility was to finance general corporate activities. The facility has a tenor of one year and the principal is payable at maturity. The facility carries an interest rate of one year LIBOR plus a margin of 150 basis points, and the interest is payable on a quarterly basis.

 

On 28 June 2010, a US$ 200 million (AED 735 million) syndicated term loan facility with a group of multinational mandated lead arrangers and book-runners matured and was settled. This syndicated term loan facility was obtained on 28 June 2007 and had a tenor of 36 months.

 

19        Issued and paid up capital and reserves

 

(a)        Issued and paid up capital and treasury shares

 

 

2010

 

2009

 

Number of

shares

 

AED’000

 

Number of

shares

 

AED’000

 

 

 

 

 

 

At 1 January

2,000,000,000

2,000,000

 

1,737,472,086

1,737,472

Bonus issue through transfer

from statutory reserve 

 

-

 

-

 

 

262,527,914

 

262,528

Bonus issue

100,000,000

100,000

 

-

-

Shares held in treasury 

(1,414,444)

(2,657)

 

-

-

 

___________

_________

 

___________

_________

 

 

 

 

 

 

At 31 December

2,098,585,556

2,097,343

 

2,000,000,000

2,000,000

 

                       

                  

 

                       

                  

       

   

 

At the Annual General Meeting of the shareholders held on 6 March 2010, the shareholders approved in addition to the cash dividend a 5% bonus issue amounting to AED 100 million (2009: 15.11% bonus issue from the excess in the statutory reserve amounting to AED 262.5 million).  Consequently, the Bank’s paid up share capital was increased to AED 2.1 billion comprising of 2.1 billion shares of AED 1 each (2009: 2 billion shares of AED 1 each). 

 

During the year the Board has decided to buy back 10% of the bank’s outstanding shares. After obtaining the required regulatory approvals, the Bank started acquiring its shares on the open market. As of 31 December 2010 the bank has acquired 1.4 million shares amounting to AED 2.70 million. As such, the number of shares outstanding as of 31 December 2010 is 2.09 billion shares (2009: 2.00 billion shares).

 

At an extraordinary general meeting of the shareholders held on 29 March 2009, the shareholders approved the transfer of AED 262.5 million from the statutory reserve to share capital by issuing 15.11% bonus shares comprising of 262,527,914 shares. Consequently, the Bank’s share capital was increased to AED 2 billion comprising of 2 billion shares of AED 1 each.

 

 

(b)        Statutory reserve

 

In accordance with Union Law of U.A.E. 10% of the profit for the year is to be transferred to statutory reserve.  Such transfers to reserves may cease when they reach the levels established by the respective regulatory authorities (in the U.A.E. this level is 50% of the issued and paid up share capital).

 

(c)        Contingency reserve

 

Contingency reserve is calculated at 10% of the profit for the year is to be transferred to a contingency reserve until such time this reserves becomes 50% of the issued and paid up share capital.

 

20        Earnings per share

 

Earnings per share are computed by dividing the profit for the year by the average number of shares outstanding during the year as follows:

 

                       

2010

2009

Basic earnings per share

 

 

 

 

 

Profit attributable to owners of the parent company for the year (AED’000)

 

397,452

 

467,969

 

                    

                    

Weighted average number of shares outstanding

      during the year (in thousand)

2,099,529

2,100,000

 

                    

                    

 

 

 

Basic earnings per share (AED)

0.189

0.223

 

                    

                    

  

21        Dividends

 

At the Annual General Meeting of the shareholders held on 6 March 2010, the shareholders approved a cash dividend of AED 240 million representing Fils 12 per share outstanding on 31 December 2009 (2009: cash dividend AED 260.6 million representing Fils 15 per outstanding share on 31 December 2008) and a 5% bonus issue amounting to AED 100 million (2009: 15.11% bonus issue from the excess in the statutory reserve amounting to AED 262.5 million). Consequently, the Bank’s paid up share capital was increased to AED 2.1 billion comprising of 2.1 billion shares of AED 1 each (2009: 2 billion shares of AED 1 each). 

 

The shareholders also approved Directors’ remuneration of AED 7.5 million (2009: AED 6 million) and charity donations of AED 2.5 million (2009: AED 2.5 million). In addition to the above, an amount of AED 2.2 million was paid as Directors’ remuneration to Emirates Lebanon Bank S.A.L., a subsidiary of the Bank. 

 

In respect of the current year, the Board of Directors, in their meeting dated 29 January 2011, had proposed a cash dividend for distribution to the Shareholders of 15%.  Subsequent to this meeting, based on the instructions of the U.A.E. Central Bank which limited the cash dividend of the national banks in the U.A.E. up to 50% of the 2010 year’s profit, the Board of Directors amended their recommendation to distribute 10% instead of 15% whereby the dividend will be decided and approved by the shareholders of the Annual General Meeting. Accordingly, the previously issued consolidated financial statements on         29 January 2011 were recalled.

 

22        Commitments and contingent liabilities

                       

2010

2009

 

AED’000

AED’000

 

 

 

Financial guarantees for loans

1,586,546

1,576,129

Other guarantees

1,962,350

2,713,830

Letters of credit

886,979

974,939

Capital commitments

104,333

104,333

 

                    

                    

 

 

 

 

4,540,208

5,369,231

Irrevocable commitments to extend credit

1,597,656

1,501,560

 

                    

                    

 

 

 

 

 6,137,864

6,870,791

 

                    

                    

 

 

 

 

Credit-related commitments include commitments to extend credit, standby letters of credit, and guarantees which are designed to meet the requirements of the Bank’s customers.

 

Commitments to extend credit represent contractual commitments to make loans and advances and revolving credits.  Commitments generally have fixed expiry dates, or other termination clauses.  Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

 

Letters of credit and guarantees commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract.  These contracts would have market risk if issued or extended at a fixed rate of interest.  However, these contracts are primarily made at floating rates.

 

23        Cash and cash equivalents

 

2010

2009

 

AED’000

AED’000

 

 

 

Cash and balances with central banks (note 5)

1,833,550

1,182,756

Deposits and balances due from banks (note 6)

3,272,452

2,232,744

Deposits and balances due to banks (note 16)

(423,979)

(503,473)

 

                    

                    

 

 

 

 

 4,682,023

2,912,027

Less:  Deposits and balances due from banks  – maturity more than three months

 

               (545,634)

 

             (362,364)

Less:  Statutory reserves with central banks (note 5)

(874,964)

(802,955)

 

                    

                    

 

 

 

 

3,261,425

1,746,708

 

                  =========

=========

 

24        Fiduciary assets

 

The Bank holds investments amounting to AED 1.23 billion (31 December 2009: AED 1.25 billion) which are held on behalf of customers and not treated as assets in the consolidated statement of financial position.

 

25        Interest income

 

2010

2009

 

AED’000

AED’000

 

 

 

Interest on loans and advances

984,296

916,637

Interest on certificates of deposit and treasury

  bills with central banks

 

77,572

 

52,454

Interest on placements with banks

6,203

14,226

 

                  

                  

 

 

 

 

1,068,071

983,317

 

                  =========

=========

 

26        Interest expense

 

2010

2009

 

AED’000

AED’000

 

 

 

Interest on customer deposits

498,430

395,301

Interest on bank deposits

13,203

13,434

Interest on syndicated Loan

6,388

9,234

 

                  

                  

 

 

 

 

518,021

417,969

 

                  =========

=========

 

27        Net fee and commission income

 

2010

2009

 

AED’000

AED’000

 

 

 

Corporate banking credit related fees

30,250

28,390

Trade finance activities

30,413

29,405

Letters of guarantee

49,888

53,818

Other

10,626

10,162

 

                  

                  

 

121,177

121,775

 

                  =========

=========

 

28       Investment income

 

2010

2009

 

AED’000

AED’000

 

 

 

Dividends

5,810

6,116

Gain on sale of investments

547

     1,097

Revaluation (loss)/gain on investments held for trading

(12,011)

                  29,789

Other investment income

12,041

                   8,640

 

                    

                    

 

 

 

 

6,387

45,642

 

            =========

=========

 

29        Net impairment charge on financial assets

 

2010

2009

 

AED’000

AED’000

 

 

 

Collective impairment of loans and advances

 80,183

70,408

Specific provision of loans and advances

 4,787

30,325

 

                    

                    

 

 

 

Total charge for the year (Note 7)

 84,970

100,733

Recoveries during the year

 (9,507)

(10,834)

 

                    

                    

 

 

 

Net impairment of loans and advances

75,463

89,899

 

                    

                    

 

 

 

Net impairment charge on financial assets

75,463

89,899

 

            =========

=========

 

30        General and administrative expenses

 

2010

2009

 

AED’000

AED’000

 

 

 

Salaries and employee related expenses

131,278

119,575

Depreciation on property and equipment

10,951

10,275

Other

51,148

48,593

 

                    

                    

 

                    

                    

 

193,377

178,443

 

            =========

=========

 

31        Related party transactions

 

The Bank enters into transactions with major shareholders, directors, senior management and their related concerns in the ordinary course of business at commercial interest and commission rates. 

 

Transactions between the Bank and its subsidiaries have been eliminated on consolidation and are not disclosed in this note.

 

The related parties balances included in the consolidated statement of financial position and the significant transactions with related parties are as follows:

 

 

2010

2009

 

AED’000

AED’000

 

 

 

Loans and advances

1,908,688

2,093,782

 

                    

                    

 

 

 

Deposits

718,768

1,014,393

 

                    

                    

 

 

 

Letters of credit, guarantee and acceptances

1,008,338

1,060,493

 

                    

                    

 

 

 

Interest income

118,161

124,750

 

                    

                    

 

 

 

Interest expense

38,201

37,339

 

                    

                    

 

 

 

Key management compensation

21,980

24,442

 

                    

                    

 

 

 

 

The Board of Directors has proposed a remuneration of AED 7.5 million (2009: AED 7.5 million) for the Board Members. This is subject to the approval of the shareholders at the Annual General Meeting.

 

32        Segmental information

 

32.1   IFRS 8 Operating Segments

 

IFRS  8 requires operating segments to be identified on the basis of internal reports about components of the Bank that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. In contrast, the predecessor Standard (IAS 14: Segment Reporting) required an entity to identify two segments (business and geographical), using a risks and rewards approach, with the entity’s system of internal financial reporting to key management personnel serving only as the starting point for the identification of such segments. However, the business segments reported earlier as per the requirements of IAS 14 Segment Reporting are also used by the General Manager to allocate resources to the segments and to assess its performance.

 

32.2  Products and services from which reportable segments derive their revenues

 

Information reported to the Bank’s chief operating decision maker for the purposes of resource allocation and assessment of segment performance is specifically focussed on the type of business activities undertaken as a Bank. For operating purposes, the Bank is organised into two major business segments:

 

(i)           Commercial Banking, which principally provides loans and other credit facilities, deposits and current accounts for corporate, government, institutional and individual customers; and

 

(ii)         Investment Banking, which involves the management of the Bank’s investment portfolio.

 

The following table presents information regarding the Bank’s operating segments for the year ended 31 December 2010:

                       

Commercial

Investment

 

 

 

Banking

Banking

Unallocated

Total

 

AED’000

AED’000

AED’000

AED’000

 

 

 

 

 

Revenue from external customers

 

 

 

 

- Net interest income

550,050

-

-

550,050

- Net fee and commission income

121,177

-

-

121,177

- Investment income

-

6,387

-

6,387

- Exchange profit

20,334

-

-

20,334

- Net loss on investment

 properties  revaluation

 

-

 

(35,132)

 

-

 

(35,132)

- Other income

-

6,100

-

6,100

- Income from sale of

associate and subsidiaries

 

-

 

19,523

 

-

 

19,523

 

                    

                    

                    

                    

 

 

 

 

 

Operating income

691,561

(3,122)

-

688,439

 

                    

                    

                    

                    

 

 

 

 

 

Other material non-cash items

 

 

 

 

- Net impairment charge on

financial assets

(75,463)

-

-

(75,463)

- Depreciation of property and equipment

-

-

(10,951)

(10,951)

- Amortization  of intangible assets

(7,784)

-

-

(7,784)

 

                    

                    

                    

                    

 

 

 

 

 

Profit for the year after taxes

453,612

(30,846)

(18,819)

403,947

 

                    

                    

                    

                    

 

 

 

 

 

Segment assets

18,095,118

2,200,474

322,088

20,617,680

 

                    

                    

                    

                    

 

 

 

 

 

Segment liabilities

15,410,428

550,950

261,370

16,222,748

 

                    

                    

                    

                    

 

 

 

 

 

Additions to non-current assets

-

-

30,140

30,140

 

                    

                    

                    

                    

 

 

 

 

 

 

The following table presents information regarding the Bank’s operating segments for the year ended 31 December 2009:

 

                       

Commercial

Investment

 

 

 

Banking

Banking

Unallocated

Total

 

AED’000

AED’000

AED’000

AED’000

 

 

 

 

 

Revenue from external customers

 

 

 

 

- Net interest income

565,348

-

-

565,348

- Net fee and commission income

121,775

-

-

121,775

- Investment income

-

45,642

-

45,642

- Exchange profit

23,092

-

-

23,092

- Net loss on investment

 properties  revaluation

 

-

 

(12,108)

 

-

 

(12,108)

- Other income/(loss)

8,565

(1,105)

-

7,460

 

                    

                    

                    

                    

 

 

 

 

 

Operating income

718,780

32,429

-

751,209

 

                    

                    

                    

                    

 

 

 

 

 

Other material non-cash items

 

 

 

 

- Net impairment charge on

financial assets

(89,899)

-

-

(89,899)

- Depreciation of property and equipment

(10,275)

-

-

(10,275)

 

                    

                    

                    

                    

 

 

 

 

 

Profit for the year after taxes

466,602

16,265

      (7,370)

 475,497

 

                    

                    

                    

                    

 

 

 

 

 

Segment assets

15,280,161

2,251,132

530,559

18,061,852

 

                    

                    

                    

                    

 

 

 

 

 

Segment liabilities

13,030,949

734,600

199,604

13,965,153

 

                    

                    

                    

                    

 

 

 

 

 

Additions to non-current assets

-

8,538

16,304

24,842

 

                    

                    

                    

                    

 

 

 

 

 

 

Revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the year (2009: Nil). Transactions between segments, inter-segment cost of funds and allocation of expenses are not determined by management for resource allocation purpose. The accounting policies of the reportable segments are the same as the Bank’s accounting policies described in note 3.

 

For the purposes of monitoring segment performance and allocating resources between segments:

 

• All assets are allocated to reportable segments except for property and equipment, goodwill and other intangibles and certain amounts included in other assets; and

 

• All liabilities are allocated to reportable segments except for certain amounts included in other liabilities.

 

32.3   Geographical information

 

The Bank operates in two principal geographical areas – United Arab Emirates (country of domicile) and Lebanon (referred to as ‘foreign’).

 

The Bank’s revenue from external customers and information about its non-current assets by geographical location are detailed below:

 

 

Country of domicile

Foreign

Total

2010

AED’000

AED’000

AED’000

 

 

 

 

Operating income (from external customers)

 

572,591

 

115,848

 

688,439

 

                 

 

                 

                 

Non-current assets

1,163,506

450,698

1,614,204

 

                 

 

                 

                 

2009

 

 

 

Operating income (from external customers)

 

645,847

 

105,362

 

751,209

 

                 

 

                 

                 

Non-current assets

1,106,305

370,395

1,476,700

 

                 

 

                 

                 

 

 

 

 

 

32.4     Information about major customers

 

In 2010, two customers accounted for more than 10% of the Bank’s revenue from external customers and in 2009 one customer accounted for more than 10% of the Bank’s revenues from external customers.

 

33        Classification of financial assets & liabilities

 

(a)             The table below sets out the Bank’s classification of each class of financial assets and liabilities and their carrying amounts as at 31 December 2010:

 

 

 

FVTPL

 

FVTOCI  

Amortized cost

 

Total

 

AED’000

AED’000

AED’000

AED’000

 

 

 

 

 

Financial assets:

 

 

 

 

Cash and balances with central banks

-

-

1,833,550

1,833,550

Deposits and balances due from banks

-

-

3,272,452

3,272,452

Loans and advances, net

-

-

12,106,840

12,106,840

Other financial assets measured at fair value

69,656

818,448

-

888,104

Other financial assets measured at amortized cost

-

-

902,530

902,530

Other assets

-

-

955,882

955,882

 

              

                

                   

                  

Total

69,656

818,448

19,071,254

19,959,358

 

                

                

                   

                  

 

 

 

 

 

Financial liabilities:

 

 

 

 

Customers’ deposits

-

-

14,377,327

14,377,327

Deposits and balances due to banks

-

-

423,979

423,979

Other liabilities

-

-

767,429

767,429

Syndicated loan

-

-

550,950

550,950

 

                 

               

                   

                  

Total

-

-

16,119,685

16,119,685

 

                

                

                   

                  


33        Classification of financial assets & liabilities (continued)

 

(b)               The table below sets out the Bank’s classification of each class of financial assets and liabilities and their carrying amounts as at 31 December 2009:

 

 

 

 

At fair value through profit & loss

 

 

Available for sale investments

 

 

 

Loans and advances

 

 

 

Held to maturity  

 

 

Other amortized

cost

 

 

 

 

Total

 

AED’000

AED’000

AED’000

AED’000

AED’000

AED’000

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

Cash and balances with    

    central banks

-

-

-

-

1,182,756

1,182,756

Deposits and balances due from banks

-

-

-

-

2,232,744

2,232,744

Loans and advances, net

-

-

11,450,482

-

-

11,450,482

Financial assets carried at FVTPL

 

247,875

 

-

 

-

 

-

 

-

 

247,875

Non trading investments

-

1,381,106

-

10,115

-

1,391,221

Other assets

-

-

-

-

797,026

797,026

 

                

                

                  

                

                   

                  

Total

247,875

1,381,106

11,450,482

10,115

4,212,526

17,302,104

 

                

                

                   

                

                   

                  

 

Financial liabilities:

 

 

 

 

 

 

Customers’ deposits

-

-

-

-

12,113,298

12,113,298

Deposits and balances due to

   banks

-

-

-

-

503,473

503,473

Other liabilities

-

-

-

-

544,522

544,522

Syndicated loan

-

-

-

-

734,600

734,600

 

                

                

                

                

                   

                   

Total

-

-

-

-

13,895,893

13,895,893

 

                

                

                

                

                   

                  

 

 

33        Classification of financial assets & liabilities (continued)

 

The table below illustrates the classification and measurement of financial assets under IFRS 9 and IAS 39 at the date of initial application, December 31, 2010.

 

                                                                                                                                                                                                                        Original             New                                                                   

                                                                                         Original measurement                  New measurement             carrying          carrying

                                                                                               Category IAS39                        Category IFRS 9              amount                                                                           amount                                

                                                                                                                                                                                          AED'000                                                             AED’000                        

 

Cash and balances with central banks                       Other amortized cost                  Financial assets at amortized cost                                                                                  1,833,550                                  1,833,550

 

Deposits and balances due from banks                     Other amortized cost                  Financial assets at amortized cost                                                                                  3,272,452                                  3,272,452

 

Financial assets carried at FVTPL                             

- Held for trading:

  Debt securities                                                         Financial assets at FVTPL          Financial assets at FVTPL                               99                                                              99

  Debt securities                                                         Financial assets at FVTPL          Financial assets at amortized cost                   150,000                                                     150,000

- Investments designated as at FVTPL:

  Equities                                                                    Financial assets at FVTPL          Financial assets at FVTPL    69,557                69,557

 

Loans and advances, net                                           Loans and advance                    Financial assets at amortized cost                                                                                  12,106,840                                12,106,840

 

Non-trading investments                                                                                                                                                    

- Available for sale:

  Debt securities                                                         Available for sale investments   Financial assets at amortized cost                702,290                                                     689,354                                    

  Equities                                                                   Available for sale investments   Financial assets at FVTOCI                                                                                  818,448                                     818,448

- Held to maturity:

  Debt securities                                                         Held to maturity                         Financial assets at amortized cost                63,176                                                       63,176

 

Interest receivable and other assets                                                                                                                                   

Interest and other assets                                             Other amortized cost                  Financial assets at amortized cost                955,882                                                     955,882

Positive fair value of derivatives                               Financial assets at FVTPL          Financial assets at FVTPL           59                59


 

34        Risk management

 

The Bank has Senior Management committees to oversee the risk management. The Executive Committee under delegation from the Board of Directors define policies, processes and systems to manage and monitor credit risk. It also, sets policies, system and limits for interest rate risk, foreign exchange risk and liquidity risk.  The Bank also has a Credit Risk function which independently reviews adherence to all risk management policies and processes.  The Bank’s internal audit function which is part of risk review primarily evaluates the effectiveness of the controls addressing operational risk. This function is outsourced to a regional accounting firm to ensure independence and objectivity.

 

Credit risk management

 

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.  The Bank attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counter-parties, and continually assessing the creditworthiness of counter-parties.  In addition to monitoring credit limits, the Bank manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counter-parties in appropriate circumstances, and limiting the duration of exposure.  In certain cases, the Bank may also close out transactions or assign them to other counter-parties to mitigate credit risk.

 

Concentrations of credit risk arise when a number of counter-parties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.  Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location.

 

Policies relating to credit are reviewed and approved by the Bank’s Executive Committee. All credit lines are approved in accordance with the Bank’s credit policy set out in the Credit Policy Manual. Credit and Marketing functions are segregated. In addition, whenever possible, loans are secured by acceptable forms of collateral in order to mitigate credit risk.  The Bank further limits risk through diversification of its assets by economic and industry sectors.

 

All credit facilities are administered and monitored by the Credit Administration Department. Periodic reviews are conducted by Credit Risk and facilities are risk graded based on criterion established in the Credit Policy Manual.

 

Cross border exposure and financial institutions exposure limits for money market and treasury activities are approved as per guidelines established by the Bank’s Executive Committee and are monitored by the Senior Management on a daily basis.

 

The Executive Committee is responsible for setting credit policy of the Bank.  It also establishes industry caps, approves policy exceptions and conducts periodic portfolio reviews to ascertain portfolio quality.

 

Commercial/Institutional lending underwriting:

 

All credit applications for commercial and institutional lending are subject to the Bank’s credit policies, underwriting standards and industry caps (if any) and to regulatory requirements, as applicable from time to time. The Bank does not lend to companies operating in industries that are considered by the Bank inherently risky and where specialised industry knowledge is required.  In addition, the Bank sets credit limits for all customers based on their creditworthiness.

 

All credit facilities extended by the Bank are made subject to prior approval pursuant to a delegated signature authority system under the ultimate authority of the Executive Committee or the Bank’s Executive Director and General Manager under the supervision of the Board.  At least two signatures are required to approve any commercial or institutional credit application.

 

Credit review procedures and loan classification

 

The Bank’s Credit Risk department subjects the Bank’s risk assets to an independent quality evaluation on a regular basis in conformity with the guidelines of the Central Bank of the U.A.E. and Bank’s internal policies in order to assist in the early identification of accrual and potential performance problems.  The Credit Risk department validates the risk ratings of all commercial clients, provides an assessment of portfolio risk by product and industry and monitors observance of all approved credit policies, guidelines and operating procedures across the Bank.  

 

All commercial/institutional loan facilities of Bank are assigned one of ten risk ratings (A-J) where A is being excellent and J being loss with no reimbursement capacity and total provisioning. Current risk rating system is being substantially strengthened to provide more objectivity and granularity and also to comply with Basel II requirements and in preparation for the IRB guidelines.

 

If a credit is impaired, interest suspended will not be credited to the income statement. Specific allowance for impairment of classified assets is made based on recoverability of outstanding and risk ratings of the assets.

 

The Bank also complies with IAS 39, in accordance with which it assesses the need for any impairment losses on its loan portfolio by calculating the net present value of the expected future cash flows for each loan.  As required by Central Bank of the U.A.E. guidelines, the Bank takes the higher of the loan loss provisions required under IAS 39 and Central Bank regulations.

 

Executive Committee (EC)

 

In addition to its credit related activity, the Executive Committee has a broad range of authority delegated by the Board of Directors to manage the Bank’s asset and liability structure and funding strategy.  EC reviews liquidity ratios, asset and liability structure, interest rate and foreign exchange exposures, internal and statutory ratio requirements, funding gaps and general domestic and international economic and financial market conditions. EC formulates liquidity risk management guidelines for the Bank’s operation on the basis of such review. 

 

Executive Committee (EC) (continued)

 

The Bank’s Senior Management monitors the liquidity on a daily basis and uses an interest rate simulation model to measure and monitor interest rate sensitivity and varying interest rate scenarios.

 

The members of EC comprise the Chairman, three Board Members, in addition to the Executive Director and General Manager. The EC meets once or more every 45 days, as circumstances dictate. The quorum requires all members to be present at the meeting and decisions taken should be unanimous.

 

Maximum exposure to credit risk

 

Loans and advances to customers

 

2010

2009

 

AED’000

AED’000

Carrying amount

 

 

Individually impaired

 

 

Grade (H-J) - gross amount

310,825

259,696

 

                   

                   

 

 

 

Neither past due nor impaired

 

 

Grade A

871,008

1,077,131

Grade B

6,317,197

6,975,910

Grade C

3,235,931

1,825,797

Grade D

1,579,887

1,299,951

Grade E

81,796

84,230

Grade F

-

29,574

 

                   

                   

 

 

 

 

12,396,644

11,552,289

Past due but not impaired

271,499

255,489

 

                   

                   

 

 

 

Total carrying amount

12,668,143

11,807,778

 

                   

                   

 

 

 

 

 

 

Allowance for impairment

 (561,303)

(357,296)

 

                    

                    

 

 

 

Impaired loans and securities

 

Impaired loans and securities are loans and securities for which the Bank determines that it is likely the collectibility of all principal and interest due according to the contractual terms of the loan/securities agreement(s) would be doubtful. These loans are graded H to J in the Bank’s internal credit risk grading system.

 

Allowances for impairment

 

The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loans and advances portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for Banks of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.

 

Write-off policy

 

The Bank writes off a loan/security balance (and any related allowances for impairment losses) when the Bank determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

 

The Bank holds collaterals against loans and advances in the form of mortgage interests over properties, vehicles and machineries, cash margins, fixed deposits, guarantees and others. The Bank accepts guarantees mainly from well reputed local or international banks, well established local or multinational corporate and high net-worth private individuals. Management has estimated the fair value of collaterals to be AED 10.6 billion (2009: AED 9.47 billion).

 

No collaterals are held against investment securities.

 

Liquidity risk management

 

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities.

 

The Bank manages its liquidity in accordance with U.A.E. Central Bank requirements and Bank’s internal guidelines.  The U.A.E. Central Bank sets cash ratio requirements on overall deposits ranging between 1.0 percent for time deposits and 14.0 percent for demand deposits, according to the tenor of the deposits.  The U.A.E. Central Bank also imposes a mandatory 1:1 utilisation ratio, whereby, loans and advances (combined with inter-bank placements having a remaining term of 'greater than three months) should not exceed stable funds as defined by the U.A.E. Central Bank. Stable funds are defined by the U.A.E. Central Bank to mean free own funds, inter-bank deposits with a remaining term of more than six months and stable customer deposits.  To guard against liquidity risk, the Bank diversified its funding sources and manages its assets with liquidity in mind, seeking to maintain a preferable proportion between cash, cash equivalents and readily marketable securities.  Executive Committee sets and monitors liquidity ratios and regularly revises and updates the Bank’s liquidity management policies to ensure that the Bank would be in a position to meet its obligations as they fall due. Management of liquidity risk within the parameters prescribed by the Executive Committee has been delegated to an Asset and Liability Committee (ALCO) comprising the Deputy General Manager and senior executives from treasury, finance and investment departments.

 

The Bank’s approach to managing liquidity is to ensure, that it will always have sufficient liquidity to meet its liabilities when they fall due, under both normal and stressed conditions, without incurring unacceptable losses or potential damage to the Bank’s reputation.

 

The Treasury department communicates with other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. The Treasury maintains a portfolio of short-term liquid assets to ensure liquidity is maintained within the Bank’s operation as a whole.

 

The daily liquidity position is monitored and regular liquidity stress testing is performed under a variety of scenarios covering both normal and severe market conditions. All liquidity policies and procedures are subject to review and approval by the Executive Committee. The Daily position sheet, which reports the liquidity and exchange positions of the Bank is reviewed by Senior Management.  A summary report, including any exceptions and remedial action taken, is submitted to Executive Committee.

 

The maturity profile of the assets and liabilities at 31 December 2010 based on the remaining period from the end of the reporting period to the contractual maturity date is as follows:

 

Within

3 months

Over 3 months

to 1 year

Over

1 year

 

Undated

 

Total

 

AED’000

AED’000

AED’000

AED’000

AED’000

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and balances with central banks

1,287,916

341,827

203,807

-

1,833,550

Deposits and balances due from banks

2,959,330

313,122

-

-

3,272,452

Loans and advances, net

7,081,916

1,530,090

3,494,834

-

12,106,840

Other financial assets measured at fair value

237,733

-

-

650,371

888,104

Other financial assets measured at amortized cost

34,416

200,649

667,465

-

902,530

Investment properties

-

-

-

149,665

149,665

Other assets

668,054

91,825

192,974

11,251

964,104

Property and equipment

-

-

-

227,282

227,282

Goodwill and other intangibles

-

-

-

273,153

273,153

 

                   

                   

                   

                   

                   

 

 

 

 

 

 

Total assets

12,269,365

2,477,513

4,559,080

1,311,722