NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 ACCOUNTING POLICIES 3.1 Basis of preparation The consolidated financial statements have been prepared on a historical cost basis as modified for the re-measurement at fair value of freehold land, trading and available-for-sale financial assets and all derivatives. In addition, as more fully discussed below in note 3.3 (i), assets and liabilities that are fair value hedged are adjusted to the extent of the fair value of the risk being hedged. The consolidated financial statements are presented in US Dollars which is the Group’s functional currency, and all values are rounded to the nearest thousand (US Dollar thousand) except where otherwise indicated. In order to further enhance the reader’s understanding of the loss/gain on non-trading investments, a presentational change has been made during the year to the consolidated statement of income. The collective impairment charge relating to “non-trading investments” is now included as part of “net (loss) gain on available-for-sale investments” with comparatives appropriately restated (refer note 8). Statement of compliance 54 ANNUAL REPORT 2008 The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law. New standards and interpretations issued but not yet effective The following standards and interpretations have been issued by the International Accounting Standards Board (IASB) but are not yet mandatory for year ended 31 December 2008: - IFRS 1 First time Adoption of International Financial Reporting Standards - cost of an investment in a subsidiary, jointly controlled entity or associate (Amendments) effective 1 January 2009 - IFRS 2 Share-based Payment (Revised) effective 1 January 2009 - IFRS 3 Business Combinations (Revised) and consequential amendments to IAS 27 Consolidated and Separate Financial Statements effective 1 July 2009 - IFRS 8 Operating Segments effective 1 January 2009 - IAS 1 - Presentation of Financial Statements (Revised) effective 1 January 2009 - IAS 23 Borrowing Costs (Revised) effective 1 January 2009 The application of the above is not expected to have a material impact on the consolidated financial statements as and when they become effective, with exception of the application of IAS 1 (Revised) and IFRS 8. The application of IAS 1 (Revised) and IFRS 8 may result in amendments to the presentation of the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 ACCOUNTING POLICIES (continued) 3.2 Significant accounting judgements and estimates The preparation of the consolidated financial statements requires management to make judgements and estimates that affect the reported amount of financial assets and liabilities and disclosure of contingent liabilities. These judgements and estimates also affect the revenues and expenses and the resultant provisions as well as fair value changes reported in equity. Judgements Judgements are made in the classification of available-for-sale, held-for-trading and held-to-maturity investments based on management’s intention at acquisition of the financial asset, and the allocation of goodwill to cash generating units. Judgements are also made in determination of the objective evidence that a financial asset is impaired. Estimates Pension plans Estimates and assumptions are used in determining the Group’s pension liabilities. The principal actuarial assumptions used for the defined benefit plan are set out in note 27 to the consolidated financial statements. Impairment losses on loans and advances and non-trading investments 55 Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing loans, portfolios of performing loans with similar risk characteristics where the risk of default has increased, as well as provisions for non-trading investments. These are more fully described in note 3.3 (g). Fair value of financial instruments Estimates are also made in determining the fair values of financial assets and derivatives that are not quoted in an active market.Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions. ANNUAL REPORT 2008 The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 3.3 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, except for reclassification of certain financial instruments, as detailed in note 11.