Annual Report 2008 - ProCredit Bank

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Annual Report 2008
transaction costs. Subsequently, they are measured at amortised
cost using the effective interest method.
The Bank assesses at each balance sheet date whether there is objective
evidence that loans and receivables are impaired.
An allowance for loan impairment is established if there is objective
evidence that the Bank will not be able to collect all amounts due
according to the original contractual terms of loans. The amount of
the provision is the difference between the carrying amount and
the recoverable amount, being the present value of expected cash
flows, including amounts recoverable from guarantees and collateral,
discounted at the original effective interest rate of loans. The
carrying amount of loans and receivables is reduced through the allowance
account and the amount of loss is recognized in the income
statement. Interest on impaired assets continues to be recognized
through unwinding of the discount in interest income.
If the amount of the impairment subsequently decreases due to
an event occurring after the impairment was recognized, the previously
recognized impairment loss is reserved by adjusting the
allowance account. Subsequent recoveries of amounts previously
written off are recognized as a reversal of impairment losses in the
income statement. The provision for loan impairment is further analyzed
in note 2.10.
b) Financial assets available-for-sale
Available-for-sale financial assets are non-derivative investments
that are designated as available-for-sale or are not classified as another
category of financial assets.
Available-for-sale financial assets are initially recognised at fair
value plus transaction cost that are directly attributable to its acquisition
or issue. Regular-way purchases and sales of financial
assets available for sale are recognised on trade date, which is the
date when the Bank commits to purchase or sell the asset.
Available-for-sale financial assets are subsequently measured at
their fair value. Gains and losses from a change in the fair value of
available-for-sale financial assets are recognized directly in a fair
value reserve within equity. Equity instruments classified as available
for sale that do not have a quoted market price in an active
market and whose fair value cannot be reliably measured are stated
at cost less impairment.
Available-for-sale financial assets include equity securities. Dividends
on available-for-sale equity instruments are recognised in
the income statement when the entity’s right to receive payment
is established.
Financial assets are derecognised when the rights to receive cash
flows from the financial assets have expired or where the Bank has
transferred substantially all risks and rewards of ownership.
2.7 Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported
in the balance sheet when there is a legally enforceable
right to set off the recognized amounts and when there is an intention
to settle on a net basis, or realize the asset and settle the liability
simultaneously.
Income and expenses are presented on a net basis only when permitted
by financial reporting standards, or for gains and losses
arising from a group of similar transactions.
2.8 Interest income and expense
Interest income and expense are recognized in the income statement
for all interest bearing instruments on an accrual basis using
the effective interest rate, i.e. at the rate that discounts estimated
future cash flows to net present value over the life of the underlying
contract. Such income and expense is presented as interest
and similar income or interest expense and similar charges in the
income statement. Interest income and expense also includes fee
and commission income and expense in respect of loans to and receivables
from customers or borrowings from other banks, recognized
on an effective interest basis.
The effective interest method is a method of calculating the amortised
cost of a financial asset or a financial liability and of allocating
the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts over the expected life
of the financial instrument or, when appropriate, a shorter period
to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Bank estimates
cash flows considering all contractual terms of the financial instrument
(for example, prepayment options) but does not consider future
credit losses. The calculation includes all fees and points paid
or received between parties to the contract that are an integral part
of the effective interest rate, transaction costs and all other premiums
or discounts.
2.9 Fee and commission income and expenses
Fees and commission income and expenses mainly comprise fees
received from enterprises arising from domestic and foreign payments,
the issue of guarantees and letters of credit and credit card
business. Fees and commissions, except for those which form part
of the effective interest rate of the instrument, are generally recognized
on an accrual basis when the service has been provided.
2.10 Impairment losses on loans and advances
The Bank assesses at each balance sheet date whether there is objective
evidence that a financial asset or group of financial assets is
impaired. A financial asset or a group of financial assets is impaired
and impairment losses are incurred if there is objective evidence of
impairment as a result of one or more events that occurred after the
initial recognition of the asset (a “loss event”) and that loss event
(or events) has an impact on the estimated future cash flows of the
financial asset or group of financial assets that can be reliably estimated.
Objective evidence that a financial asset or group of assets
is impaired includes observable data that comes to the attention of
the Bank about the following loss events:
• significant financial difficulty of the borrower;
• a breach of contract, such as a default or delinquency in interest
or principal payments;
• the Bank granting to the borrower, for economic or legal reasons
relating to the borrower’s financial difficulty, a concession
that it would not otherwise consider;
• it becoming probable that the borrower will enter bankruptcy or
other financial reorganisation;
• the disappearance of an active market for the financial asset
because of financial difficulties;
• observable data indicating that there is a measurable decrease
in the estimated future cash flows from a group of financial assets
since the initial recognition of those assets, although the
decrease cannot yet be identified with the individual financial
assets in the group.
If there is objective evidence that an impairment loss on loans
and receivables carried at amortised cost has been incurred, the
amount of the loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future
cash flows discounted at the financial asset’s original effective interest
rate. The carrying amount of the asset is reduced through the
use of an allowance account and the amount of loss is recognized in
the income statement. If a loan or receivable has a variable interest
rate, the discount rate for measuring any impairment loss is the current
effective interest rate determined under the contract.