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	-