Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 and Independent Auditors’ Report Joint-Stock Company “Development Bank of the Republic of Belarus” CONTENTS Independent Auditors’ Report 2-6 Consolidated Financial Statements Consolidated Statement of Financial Position 7 Consolidated Statement of Comprehensive Income 8-9 Consolidated Statement of Changes in Equity 10-11 Consolidated Statement of Cash Flows 12-13 Notes to the Consolidated Financial Statements 1. Principal activities ...................................................................................................................... 14 2. Basis of presentation .................................................................................................................. 17 3. Application of new and revised standards and interpretations ................................................... 23 4. Significant accounting policies .................................................................................................. 24 5. Transition to IFRS 9 ................................................................................................................... 45 6. Net interest income..................................................................................................................... 48 7. Movement of allowances for impairment of financial instruments ............................................ 48 8. General administrative expenses ................................................................................................ 50 9. Income tax .................................................................................................................................. 50 10. Cash and cash equivalents .......................................................................................................... 52 11. Due from banks .......................................................................................................................... 53 12. Investment securities .................................................................................................................. 54 13. Loans to customers ..................................................................................................................... 57 14. Investment property.................................................................................................................... 62 15. Property and equipment and intangible assets............................................................................ 63 16. Other assets ................................................................................................................................ 64 17. Due to banks ............................................................................................................................... 64 18. Customer accounts ..................................................................................................................... 65 19. Debt securities issued ................................................................................................................. 66 20. Government grants ..................................................................................................................... 66 21. Other liabilities ........................................................................................................................... 66 22. Share capital ............................................................................................................................... 67 23. Risk management ....................................................................................................................... 67 24. Capital management ................................................................................................................... 86 25. Economic environment............................................................................................................... 86 26. Fair value of financial instruments ............................................................................................. 87 27. Contingent liabilities .................................................................................................................. 90 28. Non-controlling interest ............................................................................................................. 91 29. Transactions with related parties ................................................................................................ 91 30. Offset of financial assets and financial liabilities ....................................................................... 94 31. Reconciliation of changes in liabilities and cash flows from financing activities...................... 95 32. Earnings per Share...................................................................................................................... 95 33. Segment Analysis ....................................................................................................................... 95 34. Subsequent events .................................................................................................................... 101 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Consolidated Statement of Comprehensive Income For the year For the year ended 31 In thousands of Belarusian Rubles ended 31 December December 2017 Notes 2018 restated* Interest income calculated using effective interest rate method 6 475 221 418 450 Other interest income 6 53 459 36 043 Interest expenses 6 (148 646) (102 421) Net interest income 380 034 352 072 Fee and commission income 9 093 3 076 Fee and commission expenses (1 930) (4 897) Net fee and commission income/(expenses) 7 163 (1 821) Net gain/(loss) on derivative financial instruments 372 (110) Effect of initial recognition of financial instruments at fair value 13 (23 815) (56 915) Net income from foreign exchange operations 9 677 10 297 Net (loss)/gain on securities transactions (259) 973 General administrative expenses 8 (78 188) (59 304) Recovery of allowance for impairment of financial instruments 7 64 904 4 972 Net other income 26 653 9 470 Non-interest expenses (656) (90 617) Income from wholesale trade of subsidiaries 93 705 67 218 Cost of wholesale trade of subsidiaries (91 412) (64 190) Income from non-banking transactions 2 293 3 028 Profit before tax 388 834 262 662 Income tax expenses 9 (61 713) (34 318) NET INCOME FOR THE YEAR 327 121 228 344 TOTAL NET INCOME FOR THE YEAR, ATTRIBUTABLE TO Shareholders of the Development Bank 317 532 217 130 Non-controlling interest 9 589 11 214 Basic earnings per share (BYN) 32 2,36 1,73 Diluted earnings per share (BYN) 32 2,36 1,73 8 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Consolidated Statement of Comprehensive Income (continued) For the year For the year ended 31 ended 31 In thousands of Belarusian Rubles December December 2017 Notes 2018 restated* NET INCOME FOR THE YEAR 327 121 228 344 Other comprehensive income Other comprehensive income, that may be subsequently reclassified to profit or loss: (Accrual)/recovery of fair value reserve of investment securities (30 859) 199 Expected credit losses 9 978 - Related deffered income tax asset 9 8 389 - (Accrual)/recovery of foreign currency translation reserve (1 040) 1 069 TOTAL OTHER COMPREHENSIVE (LOSS)/INCOME (13 532) 1 268 TOTAL COMPREHENSIVE INCOME 313 589 229 612 TOTAL COMPREHENSIVE INCOME, ATTRIBUTABLE TO Shareholders of the Development Bank 304 282 218 109 Non-controlling interest 9 307 11 503 TOTAL COMPREHENSIVE INCOME 313 589 229 612 * The Group has initially applied IFRS 9 at 1 January 2018. Under the transition methods chosen, comparative information is not restated (see Note 5). As a result of adoption of IFRS 9 the Group changed presentation of certain captions, comparative information is re-presented accordingly (see Note 5). The notes on pages 14-101 form an integral part of these consolidated financial statements. 9 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Consolidated Statement of Changes in Equity Total equity Fair value attributable to the In thousands of Belarusian Rubles reserve of shareholders of Non- Share Foreign currency investment Retained the Development controlling Notes capital translation reserve securities earnings Bank interest Total Balance as at 1 January 2017 1 451 694 4 - 29 212 1 480 910 64 041 1 544 951 Total comprehensive income Net income for the year - - - 217 130 217 130 11 214 228 344 Other comprehensive income, that may be subsequently reclassified to profit or loss - 780 199 - 979 289 1 268 Total comprehensive income for the year - 780 199 217 130 218 109 11 503 229 612 Transactions with shareholders of the Development Bank Distribution of profit from the family capital fund management 18 - - - (36 275) (36 275) - (36 275) Dividends paid 22 - - - (32 924) (32 924) - (32 924) Total transactions with shareholders of the Development Bank - - - (69 199) (69 199) - (69 199) Balance as at 31 December 2017 1 451 694 784 199 177 143 1 629 820 75 544 1 705 364 10 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Consolidated Statement of Changes in Equity (continued) Total equity Fair value attributable to the In thousands of Belarusian Rubles reserve of shareholders of Non- Share Foreign currency investment Retained the Development controlling Notes capital translation reserve securities earnings Bank interest Total Balance as at 31 December 2017 restated* 1 451 694 784 199 177 143 1 629 820 75 544 1 705 364 Impact of adopting IFRS 9 5 - - 13 261 (74 739) (61 478) 13 648 (47 830) Restated balance as at 1 January 2018 1 451 694 784 13 460 102 404 1 568 342 89 192 1 657 534 Total comprehensive income/(loss) Net income for the year - - - 317 532 317 532 9 589 327 121 Other comprehensive loss, that may be subsequently reclassified to profit or loss - (758) (12 492) - (13 250) (282) (13 532) Total comprehensive income/(loss) for the year - (758) (12 492) 317 532 304 282 9 307 313 589 Transactions with shareholders of the Development Bank Contributions to share capital 22 245 000 - - - 245 000 - 245 000 Distribution of profit from the family capital fund management 18 - - - (55 318) (55 318) - (55 318) Dividends paid 22 - - - (33 531) (33 531) - (33 531) Total transactions with shareholders of the Development Bank - - - (88 849) (88 849) - (88 849) Balance as at 31 December 2018 1 696 694 26 968 331 087 2 028 775 98 499 2 127 274 * The Group has initially applied IFRS 9 at 1 January 2018. Under the transition methods chosen, comparative information is not restated (see Note 5). As a result of adoption of IFRS 9 the Group changed presentation of certain captions, comparative information is re-presented accordingly (see Note 5). The notes on pages 14-101 form an integral part of these consolidated financial statements. 11 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Consolidated Statement of Cash Flows For the year For the year ended 31 In thousands of Belarusian Rubles ended 31 December 2017 December 2018 restated* CASH FLOWS FROM OPERATING ACTIVITIES Interest received 505 015 453 737 Interest paid (141 195) (98 762) Fees and commission received 9 073 3 136 Fees and commission paid (1 678) (4 811) General administrative expenses (71 214) (55 752) Other receipts, net 12 739 18 880 312 740 316 428 (Increase)/decrease in operating assets Due from banks (90 796) (150 359) Loans to customers (756 522) (418 200) Derivative financial instruments 372 (110) Other assets (208 930) (64 305) Increase/(decrease) in operating liabilities Due to banks 599 544 415 386 Customer accounts 278 814 (116 296) Government grants 151 784 142 434 Other liabilities 18 868 3 366 Net cash inflow from operating activities before tax 305 874 128 344 Income tax paid (19 782) (13 141) Net cash inflow from operating activities 286 092 115 203 CASH FLOWS FROM INVESTING ACTIVITIES Sale of investment securities 1 219 221 1 259 152 Purchase of investment securities (1 777 621) (1 409 312) Acquisition of property and equipment and intangible assets (15 992) (19 824) Proceeds from disposal of property and equipment and intangible 104 86 assets Sale of investment property 23 570 Net cash outflow from investing activities (550 718) (169 898) 12 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Consolidated Statement of Cash Flows (continued) For the year For the year ended 31 In thousands of Belarusian Rubles ended 31 December 2017 December 2018 restated* CASH FLOWS FROM FINANCING ACTIVITIES (NOTE 31) Issue of shares 245 000 - Proceeds from issue of debt securities 535 829 303 833 Repayment of debt securities (510 876) (246 283) Dividends paid (33 531) (32 924) Net cash inflow from financing activities 236 422 24 626 Net cash and cash equivalents outflow (28 204) (30 069) Effect of exchange rate fluctuations on cash and cash equivalents 3 226 (726) Cash and cash equivalents at the beginning of the period 68 112 98 907 (Note 10) Cash and cash equivalents at the end of the period 43 134 68 112 (Note 10) * The Group has initially applied IFRS 9 at 1 January 2018. Under the transition methods chosen, comparative information is not restated (see Note 5). As a result of adoption of IFRS 9 the Group changed presentation of certain captions, comparative information is re-presented accordingly (see Note 5). The notes on pages 14-101 form an integral part of these consolidated financial statements. 13 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 1. Principal activities These consolidated financial statements include the financial information of Joint-Stock Company “Development Bank of the Republic of Belarus” (hereinafter referred to as “Development Bank” or JSC “Development Bank of the Republic of Belarus”) and consolidated financial information of the Development Bank’s subsidiaries – Joint-Stock Company “Promagroleasing” (hereinafter referred to as JSC “Promagroleasing”) and Unitary Enterprise “BR-Consult” (hereinafter collectively referred to as “the Group”). State registration of Joint-Stock Company “Development Bank of the Republic of Belarus” was performed on 1 August 2011 in accordance with the Edict of the President of the Republic of Belarus No. 261 “On establishment of Joint-Stock Company “Development Bank of the Republic of Belarus” dated 21 June 2011 (hereinafter referred to as Edict No. 261). Since 5 August 2016, the Development Bank is subject to a number of requirements of the National Bank of the Republic of Belarus (hereinafter – “the National Bank”) regarding the supervision provided for banks and non-banking financial institutions. Financing of investment projects in the framework of state programs and activities is carried out in accordance with the annual financing plan. The financing plan of the Development Bank in 2018 was approved by Resolution of the Council of Ministers of the Republic of Belarus No. 200 dated 15 March 2018 as amended. Formation of the financing plan is carried out in two directions: directed lending and non-directed lending. As part of the implementation of the IMF conditions for a gradual reduction in directed lending to the economy, the limits of directed lending to banks and the Development Bank in 2018 were approved by Resolution of the Council of Ministers of the Republic of Belarus No. 1046 dated 29 December 2017, as amended. Legal address of the Development Bank: 35 Masherova Ave., Minsk, Republic of Belarus. The core activity of the Development Bank is the financing of investment projects and activities undertaken to acquire goods for further transfer under finance lease according to decisions of the President of the Republic of Belarus and/or the Government of the Republic of Belarus, as well as those included in programs approved by the President of the Republic of Belarus and/or the Government of the Republic of Belarus i.e. development of the financing system of state programs and activities. In August 2014 the Development Bank initiated a program of financial support for small and medium-sized enterprises, the program is carried out with the assistance of partner banks - residents of the Republic of Belarus. Starting from 2015 the Development Bank manages the funds of family capital in accordance with the Edict of the President of the Republic of Belarus No. 572 “On additional measures of state support for families with children” dated 9 December 2014 (hereinafter - Edict No. 572). The Development Bank performs the following banking transactions: - funding of projects included in state programs and activities; - attraction of budget funds into deposits; - opening and keeping correspondent and other accounts, which are directly related to the tasks to be executed by the Development Bank and operations related thereto; - opening and keeping special accounts for legal entities participating in state programs and events in order to accumulate funds intended to repay the debt to the Development Bank, as well as to repay a part of loan interests from the budget funds; - non-cash settlements through correspondent and other accounts opened in the name of the Development Bank in the National Bank and other banks; 14 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - foreign transactions directly related to the tasks to be executed by the Development Bank, and its operations; - granting export loans for the amount not less than 1 million US dollars to organizations residents of the Republic of Belarus to acquire goods from other residents of the Republic of Belarus and lease them out to non-resident organizations of the Republic of Belarus, as well as to non- resident organizations of the Republic of Belarus, including foreign banks, to pay or to prepay for goods (works, services) acquired from residents of the Republic of Belarus; - special accounts opening and keeping for entities in accordance with the Edict of the President of the Republic of Belarus dated 2 April 2015 No. 146 “On the financing of the purchase of modern technology and equipment” as amended and supplemented; - special accounts opening and keeping for woodworking companies in accordance with the Edict of the President of the Republic of Belarus dated 24 June 2015 No. 257 “On issues associated with acquisition of banks’ assets, which arose from lending to woodworking companies, and on defining of limit of internal public debt” (hereinafter – “woodworking companies”). In accordance with the provisions of Edict No. 261 the Development Bank does not need to receive special permission (license) for performing banking activities in order to perform the above transactions. The Development Bank has a license to carry out professional and exchange activities in the securities market. The Bank is the parent company of Unitary Enterprise “BR-Consult” (hereinafter – UE BR- Consult). The percentage of ownership as at 31 December 2018 and 31 December 2017 was 100%. Unitary Enterprise “BR-Consult” manages the shares of woodworking companies owned by the Republic of Belarus. Unitary Enterprise “BR-Consult” is a parent company of Limited Liability Company “BR-Forest” (hereinafter referred to as LLC “BR-Forest”) with a 100% ownership interest. LLC “BR-Forest” was registered on 31 May 2017 and provides timber logging services to enterprises of the woodworking industry in the Republic of Belarus. Unitary Enterprise “BR-Consult” is a parent company of Limited Liability Company “BR-Wood” (hereinafter - LLC “BR-Wood”) with a 100% ownership interest. LLC “BR-Wood” was registered on July 17, 2018 and is engaged in organizing new sawing and pellet productions. The Development Bank is a parent company of JSC “Promagroleasing”. As at 31 December 2018 and 31 December 2017 the share was 83,07% and 72,93%, respectively. JSC “Promagroleasing” renders leasing services. JSC “Promagroleasing” is a parent company of the following subsidiaries: Name Country of registration Type of business Ownership activity LLC “Promagroleasing-Center” Russian Federation Financial leasing 100% LLC “Promagroleasing-Ukraine” Ukraine Financial leasing 100% LLC “Oblmehotryad” Republic of Belarus Agriculture 100% The average number of employees of the Group for the year ended 31 December 2018 and the year ended 31 December 2018 was 746 and 623 employees, respectively. 15 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Information on the shareholders of the Development Bank is presented below: 31 December 2018 31 December 2017 Name Share (%) Share (%) Council of Ministers of the Republic of Belarus 96,212 95,473 JSC “Belaruskali” 3,776 4,513 National Bank 0,012 0,014 Total 100,000 100,000 Certain matters of corporate governance In 2016, the National Bank introduced banking supervision over the activities of the Development Bank. In this regard, the Development Bank has improved the system of corporate governance primarily in accordance with the requirements of the National Bank regarding banking supervision. In addition, the methodological procedures were developed taking into account international documents on corporate governance recommended by the Basel Committee on Banking Supervision, the Organization for Economic Cooperation and Development, the International Finance Corporation, the documents of the State Property Committee of the Republic of Belarus, and best practices for building effective corporate governance in organizations. The corporate governance system of the Development Bank is aimed at maintaining its financial stability and ability to operate on a long-term basis as a loss-free financial organization. The Development Bank has an institution of independent directors and the committees of the Supervisory Board are established for preliminary consideration of the most important issues within the competence of the Supervisory Board. As at 31 December 2018 the Supervisory Board of the Development Bank consisted of 5 independent directors (62,5 per cent of the Supervisory Board). Four committees of the Supervisory Board operate under the leadership of the independent directors of the Development Bank: - Risk Management Committee; - Audit Committee; - Strategic Development Committee; - Committee on Budget, Remunerations and Appointments. The Risk Management Committee performs internal monitoring of the implementation of the Strategic Development Plan of the Development Bank and decisions of the Supervisory Board, taken in relation to the Development Bank's risks, internal monitoring of the state and development of the Development Bank's risk management system, risk profile and tolerance indicators of risks specific for the Development Bank, performs assessment of the effectiveness of risk management at the Development Bank, takes decisions on the risks within its authority defined by the Supervisory Board, submits to the Supervisory Board recommendations on risk management, proposals for improving the risk management system and reports on the risk management status and the Development Bank’s risk level. The majority of the above functions is also conducted by the Risk Management Committee in respect of the Group. The Audit Committee is responsible for considering the issues of the internal control system operation on a consolidated basis, for providing of the proper operation of the Internal Audit Sector of the Development Bank, choosing of an audit organization that performs an external audit of the Development Bank and interaction with this organization. The Committee submits to the Supervisory Board reports on the functioning of the internal control system and on activities of Internal Audit Sector. 16 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Strategic Development Committee conducts preliminary consideration of the draft of the development strategy of the Development Bank, indicative performance indicatiors for the Development Bank with further consideration of the reports on their implementation and performance, strategy in the area of supporting of small and medium enterprises, elaborates proposals on its improvement , monitors its performance and evaluates the prospects of further development of this area, agrees the concepts of developing new areas in Development Bank's operation. The Committee issues recommendations on improving approaches to family capital management and performs other functions. The Committee on Budget, Remunerations and Appointments considers the financial planning and monitoring of budget execution, support, development and improving of corporate governance, selection and assessment of the candidates to the Supervisory Board, arranging of annual self- assessment of the efficiency of the Supervisory Board and its members activities, formation of remuneration and compensation systems and defining the order of its application, as well as all forms of labour remuneration and payments used in the Development Bank as determined by labour remuneration system subject to legislation requirements. The Development Bank applies unified methods of organizing and improving the Group's corporate governance system taking into account the scope, nature and goals of the Group's members. Belarusian business environment The Group’s operations are primarily located in Belarus. Consequently, the Group is exposed to the economic and financial markets of Belarus, which display emerging market characteristics. The legal, tax and regulatory frameworks continue to develop but are subject to varying interpretations of their requirements and frequent changes, which, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in Belarus. The monetary policy regulations adopted by the National Bank and effective over the past two years, have resulted in reduced inflation and a less-volatile Belarusian Ruble. However, the fairly recent devaluation of the Belarusian Ruble and the subsequent period of high inflation still leads to a certain level of uncertainty in the business environment. The consolidated financial statements reflect management’s assessment of how the Belarusian business environment has impacted the operations and financial position of the Group. The business environment in the future may differ from management’s assessment. 2. Basis of presentation Statement of compliance These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (hereinafter referred to as “IFRS”). These consolidated financial statements have been prepared on the Group’s going concern assumption. The Management believes that the going concern assumption is appropriate for the Group due to sufficient capital adequacy ratio (Note 24), and that on the basis of previous experience, short-term liabilities will be refinanced in the medium course of business. Functional currency and presentation currency The functional currency of each consolidated entity of the Group is the currency of the country where the entity performs its main activity. The functional currency of the Development Bank, JSC “Promagroleasing”, LLC “Oblmekhotryad”, UE “BR-Consult”, LLC “BR-Forest” and LLC “BR- 17 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Wood” is Belarusian Ruble. The presentation currency of these consolidated financial statements of the Group is Belarusian Ruble. These consolidated financial statements are presented in thousands of Belarusian Rubles (hereinafter – thousands of Rubles or thousands of Belarusian Rubles). Basis of measurement These consolidated financial statements are prepared on the historical cost basis, except for the records on the investment securities that are measured at fair value through other comprehensive income and derivative financial instruments that are measured at fair value. Use of estimates and judgements In preparing these consolidated financial statements, management has made professional judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. Judgements Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognized in the consolidated financial statements is included in the following notes: Applicable to 2018 only: - classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and interest on the principal amount outstanding – Note 4. - information on establishing the criteria for determining whether credit risk on the financial asset has increased significantly since initial recognition, determining methodology for incorporating forward-looking information into measurement of ECL and selection and approval of models used to measure ECL is presented in Note 23. Applicable to 2018 and 2017: - to determine Levels of fair value hierarchy the Group uses judgment with regard to the definition of an active market. The description of measurement methods and key input data for financial instruments carried at fair value is presented in Note 26. Assumptions and estimations uncertainty Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the consolidated financial statements for the year ended 31 December 2018 includes in the following. (a) Impairment of financial instruments Applicable to 2018 only: Assessment of whether credit risk on the financial asset has increased significantly since its initial recognition and incorporation of forward-looking information in the measurement of ECL – Note 23. 18 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Applicable to 2017 only: Impairment allowances for individually assessed loans are defined based on specific assessment and constitute the most reliable assessment of the Group’s management as for future cash flows, which are expected to be received by the Group. Loan impairment occurs as a result of one or many events happening after loan’s initial recognition that have influence on expected future cash flows, which can be assessed with a reasonable degree of reliability. Objective indications of impairment include: - delayed payments on loan agreement; - significant deterioration in financial position of a borrower; - deterioration in business environment, negative changes in the borrower’s markets; - provision of a borrower with concessions economically or legally connected with the borrower's financial difficulties that would not otherwise be provided; - probability of bankruptcy or other financial reorganizations of a borrower. Impairment allowances for collectively assessed loans are defined based on available information on decrease of expected future cash flows on the group of financial assets. The Group’s judgements about estimated losses are based on the past performance, the past customer behavior, the credit quality of counterparties and general economic conditions, which are not necessarily indications of future losses (Note 13). (b) Determination of fair value of investment securities The Group measures the fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: Level 1: Quoted market price (unadjusted) in an active market for identical instruments. Level 2: Valuation techniques based on observable inputs, either directly (i.e., as the prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair values of investment financial assets is based on quoted market prices or over-the-counter price quotations. Determination of fair value of financial instruments, which have no active market, is less objective and requires use of judgments based on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments, for which observable market prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the 19 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements financial instrument at the reporting date, which would have been determined by market participants acting independently of each other. (c) Determination of fair value of assets raised on terms other than market ones Bonds acquired by the Group within government programs of support of branches of the economy due to the specifics of state lending programs and issuer types, form a separate market segment. Therefore, the Management believes that the contractual interest rates are market rates for such bonds, and therefore the Group recognizes bonds at fair value upon initial recognition, which is equal to the nominal value. Loans acquired by the Group from other state-owned banks and those issued by the Group in accordance with the resolutions of state authorities, not having similar financial instruments in the market, were granted under state programs, and due to their uniqueness, as well as the specifics of state lending program and final borrower types, form a separate market segment. Therefore, the Management believes that the contractual interest rates are market rates for such loans, and therefore the Group recognizes loans at fair value upon initial recognition, which is equal to the nominal value. Loans issued by the Group to other banks within the frames of financial support programs to small and medium entities and within the frames of programs of financing woodworking companies by other banks do not have similar financial instruments in the market, were granted under state programs and the resolutions of state authorities, and due to their uniqueness, as well as the specifics of state lending program and end counter-party types, form a separate market segment. Therefore, the Management believes that the contractual interest rates are market rates for such loans, and therefore the Group recognizes loans at fair value upon initial recognition, which is equal to the nominal value. Loans issued by the Group directly to the woodworking companies are recognized at fair value upon initial recognition. The fair value of loans is calculated based on the expected future cash flows at a discount rate reflecting the current market assessment of the temporary value of cash and the risks for these loans. The difference between the nominal value and fair value at initial recognition is recorded in the item “Effect of initial recognition of financial instruments at fair value” of the consolidated statement of comprehensive income. (d) Determination of fair value of financial liabilities raised on terms other than market ones Initial recognition of financial liabilities of the Group is performed on fair value. In case of attraction of financial liabilities at interest rates, which are different from the market ones, in order to form the interrelated assets at interest rates, which including the margin of the Development Bank, are also different from the market ones, fair value of the financial liabilities is determined as nominal value of the financial liabilities. In case of raising liabilities that do not have related assets on terms other than market ones fair value of liabilities is measured according to the following valuation technique: discounting of liabilities at interest rate determined as average market rate for similar liabilities at the date of initial recognition. In case of raising liabilities from entities controlled by the Government benefit from government loans is recognized as a government grant and is measured as the difference between initial cost of liability and actually received amount. Government grant is systematically recognized in consolidated statement of comprehensive income over periods when the Group recognizes expenses, which grants should compensate. 20 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements (e) Recognition of deferred taxes Deferred tax liabilities are generally recognized for all taxable temporary differences, except when temporary differences arise from initial recognition (other than in a business merger) of assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available, against which deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. (f) Assessment of the necessity to consolidate the financial statements of the woodworking companies In accordance with Edict of the President of the Republic of Belarus dated 24 June 2015 No. 257 “On issues associated with acquisition of banks’ assets, which arose from lending to woodworking enterprises, and on defining of limit of internal public debt” (hereinafter - Edict No. 257) the Group participates in the management of business activities of the entities of the woodworking industry. On the basis of the relevant resolutions of the authorities of the Republic of Belarus and the powers of the Group in respect of the order of interaction between the Group and the entities of the woodworking industry, these entities are not subject to consolidation in preparing the consolidated financial statements of the Group for the following reasons: - the Group is not exposed to risks associated with variable returns from the participation in the management of the woodworking companies; - management rights are transferred on the basis of decisions of the state authorities of the Republic of Belarus and the period of management can be limited by the decisions of the state authorities of the Republic of Belarus; - business plans developed in the framework of Edict No. 257, under which the activities of the woodworking companies are conducted, are subject to agreement by the concern “Bellesbumprom”, the Ministry of Economy and the Ministry of Finance of the Republic of Belarus. Changes in accounting policies and presentation IFRS 9 Financial instruments In July 2014, the IASB issued the final version of IFRS 9 “Financial Instruments” (hereinafter – “IFRS 9”). IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. It replaces IAS 39 “Financial Instruments: Recognition and Measurement” (hereinafter – “IAS 39”). In October 2017, the IASB issued “Prepayment Features with Negative Compensation” (Amendments to IFRS 9). The amendments are effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. The Group has adopted IFRS 9 issued in July 2014 with a date of initial application of 1 January 2018 and early adopted amendments to IFRS 9 on the same date. The requirements of IFRS 9 represent a significant change from IAS 39. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. 21 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The key changes to the Group’s accounting policies resulting from its adoption of IFRS 9 are summarised below. Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (hereinafter – “FVOCI”) and fair value through profit or loss (hereinafter – “FVTPL”). IFRS 9 classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts, which is a financial asset in the scope of the standard are never bifurcated. Instead, the whole hybrid instrument is assessed for classification. For an explanation of how the Group classifies financial assets under IFRS 9, see Note 5. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. For an explanation of how the Group classifies financial liabilities under IFRS 9, see Note 5. Impairment of financial assets IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model. The new impairment model also applies to certain loan commitments and financial guarantee contracts but not to equity investments. Under IFRS 9, credit losses are recognized earlier than under IAS 39. For an explanation of how the Group applies the impairment requirements of IFRS 9, see Note 5. Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below. - Comparative periods have not been restated. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for the year ended 31 December 2017 and as at 31 December 2017 does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented as at and for the year ended 31 December 2018 under IFRS 9. - The determination of the business model within which a financial asset is held was made on the basis of the facts and circumstances that existed at the date of initial application. - If a debt security had low credit risk at the date of initial application of IFRS 9, then the Group has assumed that credit risk on the asset had not increased significantly since its initial recognition. For more information and details on the changes and implications resulting from the adoption of IFRS 9, see Note 5. 22 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 3. Application of new and revised standards and interpretations Amendments to the standards effective for reporting periods beginning on or after 1 January 2018 The Group applied the following amendments to IFRS that became effective for reporting periods beginning on or after 1 January 2018: - Amendments to IAS 7 Disclosure Initiative (effective for annual reporting periods starting from 1 January 2017 or after this date. Earlier application is permitted). According to amendments new disclosures are required that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including changes both related and not related to cash flows. In order to meet the new disclosure requirements, the Group presented a reconciliation of the balance of liabilities at the beginning and at the end of the reporting period with disclosure of changes in the financial activities. - Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses (effective for annual reporting periods starting from 1 January 2017 or after this date. Earlier application is permitted). Amendments clarify accounting of deferred tax assets related to unrealized loss arising on debt instruments measured at fair value. The amendments did not have any significant impact on the Group’s consolidated financial statements. - Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions, IFRS 10 Consolidated Financial Statements and IAS 28 Sale or Contribution of Assets in a Transaction Between an Investor and its Associated or Joint Enterprise. The amendments did not have any significant impact on the Group’s consolidated financial statements. Standards issued but not yet adopted A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2019 and earlier application if permitted; however, the Group has not early adopted the following new or amended standards in the preparing these Consolidated Financial Statements. IFRS 16 Leases IFRS 16 “Leases” (hereinafter – “IFRS 16”) introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance including IAS 17 “Leases”, IFRIC 4 “Determining whether an Arrangement contains a Lease”, SIC-15 “Operating Leases — Incentives” and SIC-27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease”. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted for entities that apply IFRS 15 “Revenue from Contracts with Customer” at or before the date of initial application of IFRS 16. The Group commenced an initial assessment of the possible impact of applying IFRS 16 to its consolidated financial statements. To date, the most significant identified impact is the need for the Group to recognize assets and liabilities under operating lease agreements regarding premises. In addition, the nature of the costs recognized for these contracts will change, because, in accordance 23 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements with IFRS 16, instead of the lease expenses that are evenly recognized over the life of the contract, the Group will have to reflect the cost of depreciation of assets in the form of the right to use and interest expenses related to the lease obligations. The Group has not yet decided whether it will use optional simplifications. In respect of financial leases, the Group does not expect significant impact on the financial statements. As a lessee, the Group can either apply the standard using a: - retrospective approach; or - modified retrospective approach with optional practical expedients. The lessee applies the chosen approach consistently to all of its leases. Currently, The Group plans to apply IFRS 16 initially on 1 January 2019. The Group has not yet selected the type of transition. As a lessor, the Group, when transferring in IFRS 16, is not required to make any adjustments for leases in which it is a lessor except where it is an intermediate lessor in a sub-lease. The Group has not yet quantified the impact of IFRS 16 on its assets and liabilities. The quantitative effect will depend, in particular, on which method of transition to the new standard will be chosen, the extent to which the Group will use practical simplification and exemption from recognition, as well as which new lease agreements will be entered into by the Group. The Group plans to disclose information on the selected transition option and quantitative information before applying the standard. Other standards The following new standards and amendments are not expected to have a significant impact on the Group’s consolidated financial statements: - Annual Improvements to IFRSs 2014-2017 Cycle – Amendments to IAS 1 “Presentation of Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures”; - Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2 “Share-based Payment”); - Transfers of Investment Property (Amendments to IAS 40 “Investment Property”); - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures”); - IFRIC 22 “Foreign Currency Transactions and Advance Consideration”; - IFRIC 23 “Uncertainty over Income Tax Treatments”. 4. Significant accounting policies Financial instruments Initial recognition of financial instruments Financial assets and liabilities are recognized in the statement of financial position when the Group becomes a party to the contractual obligation of the relevant financial instrument. Financial assets and liabilities are initially recognized at fair value; financial assets or financial liabilities, which are not classified as recognized at fair value through profit or loss, are recognized at fair value plus transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. 24 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Classification of financial assets since 1 January 2018 On initial recognition a financial asset is classified as measured at: amortized cost, FVOCI or FVTPL. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: - the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated at the Group's discretion as at FVTPL: - the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and - the contractual terms of the financial asset provide for appearance in due time of cash flows that are solely payments of principal and interest on the principal amount outstanding. For debt financial assets measured at FVOCI, gains and losses are recognized in other comprehensive income, except for the following items, which are recognized in profit or loss in the same manner as for financial assets measured at amortized cost: - interest revenue calculated using the effective interest method; - expected credit losses and recovered impairment losses; - foreign exchange gains and losses. When a debt financial asset measured at FVOCI is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. On initial recognition of an investment into equity instruments that is not held for trading, the Group may at its own discreption take an irrevocable decision to record subsequent changes in fair value of investments in other comprehensive income. This election is made on an investment-by- investment basis. Gains and losses on such equity instruments are never reclassified to profit or loss and no impairment is recognized in profit or loss. Dividends are recognized in profit or loss unless they clearly represent a recovery of part of the initial cost of the investment, in which case they are recognized in other comprehensive income. Cumulative gains and losses recognized in other comprehensive income are transferred to retained earnings on disposal of an investment. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may at its own discretion without the right of subsequent reclassification designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. 25 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Business model assessment The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: - the stated policies and objectives for the portfolio and the operation of those policies in practice. More specifically, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets; - how the performance of the portfolio is evaluated and reported to the Group’s management; - the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; - how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and - the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation but as part of an overall assessment of how the Group’s stated objective for managing the financial assets is achieved and how cash flows are realised. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Assessment whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, “principal” is defined as the fair value of the financial asset on initial recognition. “Interest” is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest (“SPPI criterion”), the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers: - contingent events that would change the amount and timing of cash flows; - leverage features; - prepayment and extension terms; - terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements); - features that modify consideration of the time value of money – e.g. periodical reset of interest rates. The Group holds a portfolio of long-term fixed rate loans for which the Group has the option to revise the interest rate following the change of key rate set by the National Bank. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Group has determined that the contractual cash flows of these loans are solely payments of principal and interest because the option varies the interest rate in a way that is consideration for the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding. Instead, the Group considers these loans as in essence floating rate loans. 26 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Classification of financial assets before 1 January 2018 The Group classifies financial assets at initial recognition. Financial assets classification at initial recognition is performed on the basis of intention, for which they were acquired and their financial characteristics. Subsequent reclassifications are allowed only if required by IFRS. All financial instruments are classified into the following categories. Financial assets at fair value through profit or loss are financial assets acquired principally for the purpose of sale/redemption in a short period, or forming part of a portfolio of identifiable financial instruments that are managed together, and the structure of which actually indicates the intention of making a profit in the short term, as well as financial assets, which at initial recognition are classified by the Group as at fair value through profit or loss, or are derivative financial instruments, except when they are effective hedging instruments. Financial assets at fair value through profit or loss are measured initially and subsequently at fair value. Fair value movements on financial assets at fair value through profit or loss are recognized in the consolidated statement of comprehensive income for respective period. Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the intent and ability to hold to maturity. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that are classified into other categories of financial instruments. Loans and receivables include amounts due from credit institutions or acquired from other banks, as well as loans and receivables from customers and other financial assets, which comply with these classification criteria. Loans and receivables include non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, except for those: - for which there is an intention to sell immediately or in the near future and that are to be classified as held for trading, measured at initial recognition at fair value through profit or loss; - which, upon initial recognition, are designated as available for sale; - for which the Group will not be able to cover the full amount of its initial investment for reasons other than a decrease in creditworthiness, and which should be classified as available for sale. Available for sale financial assets are non-derivative financial assets that are not included into any of the other categories described above. Classification of financial liabilities Financial liabilities, except for those at fair value through profit and loss, are classified as the financial liabilities accounted at amortized cost. Reclassification before 1 January 2018 Financial assets at FVTPL, including derivatives, after initial recognition are generally not reclassified to other categories of financial assets. Financial assets at FVTPL that are designated for sale could be reclassified to other categories of financial assets as follows: - if they could correspond to the definition of loans and receivables: there was no intention of selling them in the near future with respect to these assets; they had fixed or determinable payments; did not have quotations; did not contain conditions that could prevent their owner from reimbursing virtually the entire amount of the initial investment for any reason, except for 27 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements a deterioration in their credit quality - they could be reclassified to the category of loans and receivables; - if they did not meet the criteria for classification as loans and receivables above, they could be reclassified to the category of financial assets available for sale or held to maturity. These reclassifications were made with the intention and the ability of the Group to retain them for the foreseeable future (at least 12 months from the balance sheet date). These reclassifications were made only in rare cases. A rare case is caused by a single event, which was unusual and, most likely, will not happen in the near future. An example of such a case could be the worsening of the situation on world markets. Reclassification was carried out at fair value at the date of reclassification. This cost became a fair value or amortized cost of the reclassified financial asset. Previously recognized profit or loss was not restored. Reclassification since 1 January 2018 Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. The Group should reclassify financial assets only if the Group changes its business model for managing those financial assets. Such changes are expected to be very infrequent. Such changes are determined by the Group’s senior management as a result of external or internal changes and must be significant to the Group’s operations and demonstrable to external parties. Financial liabilities are not reclassified subsequent to their initial recognition. Derecognition of financial instruments Derecognition of financial assets (or, if applicable, of the part of a financial asset or of the part of the group of similar financial assets) takes place only when: - the contractual rights to the cash flows from the financial asset expire; - the Group transfers the contractual rights to receive the cash flows of the financial asset, or if the Group retains the right to obtain cash receipt from such asset and simultaneously assumes an obligation to pay it in full to the third party without significant delays; - the Group either transfers substantially all risks and rewards related to the asset, or does not transfer and does not retain all related risks and rewards, but at the same time transfers the control over this asset. The control is retained when the counterparty has no practical ability to sell the asset in its entirety to an unrelated third party without additional restrictions on the transfer. If the Group neither transferred nor retained substantially all risks and rewards related to the ownership of the transferred asset, and remained the control over this asset, than the Group continues to recognize this asset to the extent that it continues to participate in this asset. The Group derecognizes a financial liability when the obligation specified in the contract is discharged or cancelled or expires. When one existing financial liability is replaced with a different liability to the same creditor on significantly different terms, or where significant changes are made to the terms of the existing liability, the initial liability is derecognized and a new liability is recognized with the recognition of the difference in the carrying value of liabilities in the consolidated statement of comprehensive income. 28 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Financial assets From 1 January 2018 any cumulative gain/loss recognized in other comprehensive income in respect of equity investment securities designated as at FVOCI is not recognized in profit or loss on derecognition of such securities. Financial liabilities From 1 January 2018 any cumulative gain/loss recognized in other comprehensive income in respect of financial liabilities designated as at FVTPL is not recognized in profit or loss on derecognition of such financial liabilities. Modification of financial assets and financial liabilities Financial assets If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different (referred to as “substantial modification”), then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognized and a new financial asset is recognized at fair value. Changes in cash flows on existing financial assets or financial liabilities are not considered as modification, if they result from existing contractual terms, e.g. changes in interest rates initiated by the Group due to changes in the National Bank refinancing rate, if the loan contract entitles the Group to do so. The Group performs a quantitative and qualitative evaluation of whether the modification is substantial, i.e. whether the cash flows of the original financial asset and the modified or replaced financial asset are substantially different. The Group assesses whether the modification is substantial based on quantitative and qualitative factors in the following order: qualitative factors, quantitative factors, combined effect of qualitative and quantitative factors. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset deemed to have expired. In making this evaluation the Group analogizes to the guidance on the derecognition of financial liabilities. The Group concludes that the modification is substantial as a result of the following qualitative factors: - change the currency of the financial asset; - change in collateral or other credit enhancement; - change of terms of financial asset that lead to non-compliance with SPPI criterion. If the cash flows of the modified asset carried at amortized cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. The gross carrying amount of the financial asset is recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset's original effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortized over the remaining term of the modified financial asset. If such modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using effective interest method. 29 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements For fixed-rate loans, where the borrower has an option to prepay the loan at par without significant penalty, the Group treats the modification of an interest rate to a current market rate using the guidance on floating-rate financial instruments. This means that the effective interest rate is adjusted prospectively. As part of credit risk management activities, the Group renegotiates loans to customers in financial difficulties (referred to as “forbearance activities”). If the Group plans to modify a financial asset in a way that would result in forgiveness of part of the existing contractual cash flows, then a portion of the asset is written off before the modification takes place. This is likely to result in the remaining contractual cash flows that are still recognized as the original financial asset at the point of modification to be similar to the new modified contractual cash flows. If based on quantitative assessment the Group concludes that modification of financial assets modified as part of the Group’s forbearance policy is not substantial, the Group performs qualitative evaluation of whether the modification is substantial. Financial liabilities The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognized at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognized in profit or loss. If a modification (or exchange) does not result in the derecognition of the financial liability the Group applies accounting policy consistent with the requirements for adjusting the gross carrying amount of a financial asset when a modification does not result in the derecognition of the financial asset, i.e. the Group recognises any adjustment to the amortized cost of the financial liability arising from such a modification (or exchange) in profit or loss at the date of the modification (or exchange). Group performs a quantitative and qualitative evaluation of whether the modification is substantial considering qualitative factors, quantitative factors and combined effect of qualitative and quantitative factors. The Group concludes that the modification is substantial as a result of the following qualitative factors: - change the currency of the financial liability; - change in collateral or other credit enhancement; - inclusion of conversion option; - change in the subordination of the financial liability. For the quantitative assessment the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognized as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortized over the remaining term of the modified liability. Impairment before 1 January 2018 At each reporting date, the Group assesses whether financial assets or groups of financial assets are credit-impaired. Impairment losses are recognized when incurred as a result of one or more events 30 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements (“loss events”) occurring after the initial recognition of financial assets that have an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group does not have objective evidence of impairment for an individually assessed financial asset (regardless of its materiality), this asset is included in a group of financial assets with similar credit risk characteristics and is assessed in scope with them for impairment. The Group initially assesses amounts due from banks and loans to customers on individual basis whether there is objective evidence of impairment for individually significant financial assets and, in aggregate, for financial assets that are not individually significant. Evidence that a financial asset is credit-impaired includes the following observable data: - any payment delay; - significant financial difficulty of the borrower or issuer, confirmed by their financial information; - it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; - negative change in national or local economic environment, that may impact the business of the borrower of issuer; - a breach of contract such as a default or past due event; - the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; - the disappearance of an active market for a security. A significant or prolonged decline in the fair value of an available for sale equity investment to a value below the actual cost of that security is an objective indication of impairment. Assets that are individually assessed for impairment and for which impairment losses are recognized should not be assessed for impairment on an aggregate basis. In some cases, the information necessary to assess impairment losses on financial assets may be limited or not fully reflect current circumstances. In such cases, the Group uses its experience and judgment to estimate the amount of impairment losses. In the case of objective evidence of impairment losses, the amount of the loss is the difference between the carrying amount of the asset and the present value of the estimated future cash flows (which does not include future expected losses on loans that have not yet been incurred). The carrying amount of the asset is reduced through the use of a provision account, and the amount of the loss is recognized in the consolidated statement of comprehensive income. The present value of expected future cash flows is discounted at the initial effective interest rate for the asset. If the loan is provided at a floating interest rate, the current effective interest rate will be the discount rate for estimating impairment losses. The calculation of the present value of the estimated future cash flows of financial assets provided as collateral reflects cash that can be received in the event of foreclosure, less the costs of obtaining and selling collateral, irrespective of whether the foreclosure is available. If, in a subsequent period, the amount of the impairment loss decreases and this decrease can be objectively related to an event occurring after the impairment was recognized (such as an increase in the customer's credit rating), the previously recognized impairment loss is reversed by adjusting the provision in the consolidated statement of comprehensive income. If the decrease in the fair value of available for sale financial assets is recognized in other comprehensive income and there are objective indicators of the impairment of the asset, the 31 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements cumulative loss recognized in other comprehensive income is transferred from other comprehensive income to profit or loss as a reclassification adjustment, irrespective of whether the financial asset is not eliminated. If, in a subsequent period, the fair value of debt instruments classified as available for sale increases and this increase is objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed and recognized in the consolidated statement of comprehensive income. Impairment since 1 January 2018 Estimates for the allowance for expected credit losses used by the Group are also outlined in Note 23. The Group recognises loss allowances for expected credit losses (hereinafter – “ECL”) on the following financial instruments that are not measured at FVTPL: - financial assets that are debt instruments; - lease receivables; - financial guarantee contracts issued; and - loan commitments issued. No impairment loss is recognized on equity investments. The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: - debt investment securities that are determined to have low credit risk at the reporting date; and - other financial instruments (other than lease receivables) on which credit risk has not increased significantly since their initial recognition. Expected loss allowances for lease receivables are always measured at an amount equal to lifetime ECL. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows: - financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); - financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; - undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and - financial guarantee contracts: the present value of expected payments to reimburse the holder less any amounts that the Group expects to recover. Restructured financial assets If under the parties` mutual agreement the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, 32 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements then an assessment is made of whether the financial asset should be derecognized and ECL are measured as follows. - If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. - If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortized cost and debt financial assets carried at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data: - significant financial difficulty of the borrower or issuer; - a breach of contract such as a default or past due event; - the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; - it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or - the disappearance of an active market for a security because of financial difficulties. A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a loan that is overdue for 90 days or more and a loan with internal rating “Default” are considered impaired. When assessing whether an investment in Government bonds (other financial assets) where Gevernment is the borrower is credit-impaired, the Group considers the following factors: - The market’s assessment of creditworthiness as reflected in the bond yields. - The rating agencies’ assessments of creditworthiness. - The country’s ability to access the capital markets for new debt issuance. - The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. - The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Purchased or originated credit-impaired financial assets (hereinafter – “POCI-assets”) POCI-assets are assets that are credit-impared at initial recognition. POCI-assets include the following assets of the Group: - new financial assets issued by the Group in the framework of restructuring a credit-impared asset (replacement of a credit-impared asset by another asset with a similar level of credit risk); 33 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - an asset that arose when the financial asset was derecognized as a result of a significant modification of the terms of the contracts in the framework of the restructuring of the credit- impared financial assets; - acquired credit-impared financial assets; - issuance of loans to borrowers with an internal credit rating of “Default”. POCI-assets do not have an allowance for impairment at the initial recognition. Instead, the amount of ECL for the entire period is included in the calculation of the effective interest rate. For the calculation of the effective interest rate on acquired or created credit-impared financial assets, the expected cash flows are used, taking into account the initial assessment of the ECL for the entire period. The estimated value of the contractual cash flows for the asset is reduced by the amount of ECL for the entire period of its validity. The effective interest rate is adjusted for credit risk. Upon initial recognition of POCI-assets (usually created assets), the fair value of such loans is determined based on the expected cash flows as a result of cash flows and / or forced sale of collateral. Subsequent estimation of ECL on POCI-assets is always made in the amount equal to lifetime ECL. ECL of such assets is the amount of changes in lifetime ECL from the day of the initial recognition of the asset. The amount reflecting positive changes in the amount of lifetime ECL is recognized as an impairment gain, even if the amount of these changes is greater than the amount previously recognized in profit or loss as an impairment loss. Interest on POCI-assets is accrued at effective interest rate, adjusted for credit risk, determined at the time of initial recognition of the asset. Presentation of allowance for ECL in the consolidated statement of financial position Loss allowances for ECL are presented in the consolidated statement of financial position as follows: - financial assets measured at amortized cost: as a deduction from the gross carrying amount of the assets; - loan commitments and financial guarantee contracts: generally, as a provision; - where a financial instrument includes both a drawn and an undrawn component, and the Group cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Group presents a combined loss allowance for ECL for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision; and - debt instruments measured at FVOCI: no loss allowance for ECL is recognized in the consolidated statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance for ECL is disclosed and is recognized in the fair value reserve. Write-offs before 1 January 2018 Assets for which there are no realistic prospects for repayment and for which all necessary procedures have been completed for the purpose of full or partial recovery, and the final amount of the loss is determined are written off against the provision for impairment. When considering whether an asset is a bad asset, the following factors are analyzed: the length of the overdue debt 34 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements and the prospects for its collection, the quality and adequacy of collateral, the liquidation or bankruptcy proceedings against the borrower, etc. Write-offs since 1 January 2018 Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. Cash and cash equivalents The financial statement caption includes free balances on correspondent accounts in the National Bank, correspondent, current and deposit accounts in other banks with the original maturity within 90 days, which can be converted into cash within a short period of time. Due from banks In the medium course of business, the Group places deposits and grants loans to other banks. Funds due from other banks with a fixed maturity term are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. Those that do not have fixed maturities are carried at amortized cost based on expected maturities. Loans to customers before 1 January 2018 Loans and receivables include non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, except for those: - for which there is an intention to sell immediately or in the near future and that are to be classified as held for trading, measured at initial recognition at fair value through profit or loss; - which, upon initial recognition, are designated as available for sale; - for which the Group will not be able to cover the full amount of its initial investment for reasons other than a decrease in the creditworthiness and which should be classified as available for sale. Loans to customers are initially recognized at the fair value of the amounts given, plus the related transaction costs. Subsequently, loans to customers are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment. Loans to customers are reflected, starting from the moment of issue of funds, or from the moment of purchasing a loan from other banks. Loans to customers since 1 January 2018 “Loans to customers” caption in the consolidated statement of financial position include: - loans to customers measured at amortized cost; they are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortized cost using the effective interest method; - loans to customers mandatorily measured at FVTPL due to non-compliance with the SPPI- criterion; these are measured at fair value with changes recognized immediately in profit or loss; and - finance lease receivables. 35 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Investment securities before 1 January 2018 The “investment securities” caption in the consolidated statement of financial position at 31 December 2017 includes securities available for sale and recognized at fair value. Investment securities since 1 January 2018 The “investment securities” caption in the consolidated interim statement of financial position includes: - debt investment securities measured at amortized cost; these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortized cost using the effective interest method; - debt securities measured at FVOCI. Financial guarantees and loan commitments since 1 January 2018 Financial guarantees issued or commitments to provide a loan at a below-market interest rate are initially measured at fair value and the initial fair value is amortized over the life of the guarantee or the commitment. Subsequently, they are measured at the higher of this amortized amount and the amount of loss allowance. The Group has issued no loan commitments that are measured at FVTPL. For other loan commitments the Group recognises loss allowance according to the method disclosed in Note 4. Liabilities arising from financial guarantees and loan commitments are included into allowances. Offset of financial instruments Financial assets and liabilities are offset and reported net in the consolidated statement of financial position when the Group has a legally enforceable right to set off the recognized amounts and the Group intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Government grants Government grants are assistance provided by the Government, government agencies and public institutions in the form of a transfer of resources or reimbursement to the Group in exchange for the fulfillment of certain conditions in the past or future, relating to the Group’s operations. Government grants are not recognized unless there is reasonable assurance that the Group will meet all the associated terms and receive these grants. Government grants are recognized in profit or loss on a systematic basis over the periods, in which the Group recognizes as expenses the related costs, for compensation of which the grants are intended. With respect to the recording of government grants related to income, these government grants are offset against the respective expenses. Property and equipment Property and equipment are recorded at historical cost net of accumulated depreciation and allowance for impairment. Property and equipment, acquired prior to 1 January 2015, are recorded 36 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements at historical cost, adjusted for hyperinflation, net of accumulated depreciation and impairment allowance. Depreciation Depreciation of an item of property and equipment is charged from the moment the property and equipment is put into operation. Depreciation is charged on a straight-line basis during the following useful lives: Average annual Property and equipment group depreciation rate Buildings 1,1% Vehicles 16,7% Computer equipment, furniture and other equipment 16,6% Residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The residual value and useful lives are reviewed and, if necessary, adjusted at each reporting date. Intangible assets Intangible assets are recorded at historical cost net of accumulated amortization and allowance for impairment. Intangible assets, acquired prior to 1 January 2015, are recorded at historical cost adjusted for hyperinflation less accumulated amortization and impairment allowance. Software and acquired licenses for software are capitalized based on expenses for acquisition, implementation and adjustment of special software. Intangible assets are amortized using straight-line method of amortization during the expected useful lives, and recorded in profit or loss. Average annual amortization rate for intangible assets was 24,4% as at 31 December 2018 ( 26,8% as at 31 December 2017). Investment property Investment property includes property used to receive rental income, capital increase or both (including property under construction). Investment property is initially recorded at acquisition cost, including acquisition expenses. Subsequently, investment property is recorded at historical cost less accumulated depreciation and impairment losses. Depreciation is accrued on a straight-line basis based on the useful life of the objects, which is 50 years. Non-financial assets impairment Other non-financial assets other that deferred tax assets are assessed at each reporting date for any indications of impairment. The recoverable amount of non-financial assets is the greater of the fair value less costs to sell and its value in use. In determining the value in use, the estimated future cash flows are discounted to their current present value using a pre-tax discount rate that reflects the current market assessment of the temporary value of cash and the risks of this asset. For an asset that does not generate cash inflows that are largely independent of cash flows generated by other assets, the recoverable amount is determined by the group of assets that generate cash, to which the asset belongs. An impairment loss is recognized when the carrying amount of an asset or a group of cash-generating assets exceeds its recoverable amount. 37 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements All impairment losses from non-financial assets are recognized in profit or loss and are reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss on an asset is recoverable to the extent that the carrying amount of the asset does not exceed the carrying amount (less depreciation) that would have been incurred if the impairment loss was not recorded in the consolidated financial statements. Assets for which there are no realistic probability for repayment and in respect of which all necessary procedures have been completed for the purpose of full or partial recovery and the final amount of the loss is determined are written off against the impairment allowance. When considering the issue of recognizing an asset as a bad asset, the following factors are analyzed by the Group: the duration of the overdue and the probability of its collection, the quality and adequacy of collateral, the liquidation or bankruptcy proceedings against the borrower, etc. Operating lease Operating leases are leases, under which all the risks and rewards, incidental to the ownership of an asset are substantially reserved by the lessor. Lease payments under an operating lease are recognized as operating expenses on a straight-line basis over the lease term. Finance lease Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of an asset to the lessee. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The Group as a lessor recognizes leased assets within loans granted, which are initially measured in the amount equal to net investment in the lease. Subsequently net investments in the lease are recognized in the consolidated statement of financial position net of expected credit losses. The Group recognizes the finance income based on a pattern reflecting a constant periodic rate of return on the Group's net investment in the finance lease. Share capital Share capital is recognized at initial cost restated for inflation. Expenses for shares issue are recorded directly in equity. Non-cash contributions are included into the share capital at fair value of the contributed assets. Ordinary shares are accounted for as share capital. Family capital fund management The funds raised by the Development Bank in the framework of family capital asset management program are recognized at fair value of acquired resources. The difference between the fair value and the amount received is recognized as a government grant (Note 20). The funds, which are to be transferred to a special fund in order to accumulate part of income generated from family capital management, for the subsequent transfer of these funds to the republican budget (Note 18) are recognized as a distribution of retained earnings as liabilities in “Customer accounts”. 38 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Contingent liabilities Contingent liabilities are not recognized in the consolidated statement of financial position. Information on such liabilities is disclosed in the notes to the consolidated financial statements, except when the outflow of resources is unlikely. Provisions Provisions are recognized in the consolidated financial statements when the Group has a legal or constructive obligation arising as a result of past events prior to the reporting date. Meanwhile, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Provisions are determined by discounting the estimated future cash flows using a pre-tax discount rate that reflects the current market valuation of the temporary value of cash and, if applicable, the specific risks of the obligation. Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided or work is performed. According to the requirements of the legislation of the Republic of Belarus the Group makes statutory payments to the Social Security Fund of the Ministry of Labor and Social Security of the Republic of Belarus from its employee salaries. The Group carries no further pension obligations in respect of its retired and former employees. Taxation Tax expenses are recognized in the consolidated financial statements in accordance with requirements of the legislation of the Republic of Belarus. Income tax expense in the consolidated statement of comprehensive income includes current tax payments and changes in the amount of deferred income tax. The current tax expense is calculated based on taxable profit for the period using tax rates that have been enacted during the reporting period. Current income tax balances include amounts due to state budget or due from state budget in relation to the taxable profit and deductible expenses of the current or previous periods. Deferred tax is recognized in respect of temporary differences between the carrying values of assets and liabilities defined for the purposes of their presentation in consolidated financial statements and their tax base. Deferred tax is not recognized for the following temporary differences: - differences related to goodwill initial recognition in consolidated financial statements which do not decrease the tax base; - the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; and - temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that where the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future. Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available 39 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements against which they can be used. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognise a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the business plans for individual subsidiaries in the Group. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will allow to reimburse this deffered tax asset. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. In addition, there are various operating taxes in the Republic of Belarus applicable to the Group. These taxes are recognized as operating expenses. Interest income and expenses since 1 January 2018 Effective interest rate Interest income and expenses are recognized in profit or loss using the effective interest method. The “effective interest rate” is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to: - the gross carrying amount of the financial asset; or - the amortized cost of the financial liability. When calculating the effective interest rate for financial instruments other than credit-impaired assets upon initial recognition, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not expected credit losses. For credit-impaired financial assets upon initial recognition, a credit-adjusted effective interest rate is calculated using estimated future cash flows including expected credit losses. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability. Amortized cost and gross carrying amount The “amortized cost” of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance (or impairment allowance before 1 January 2018). The “gross carrying amount of a financial asset” measured at amortized cost is the amortized cost of a financial asset before adjusting for any expected credit loss allowance. 40 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Calculation of interest income and expense In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortized cost of the liability. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortized cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis. For financial assets that were credit-impaired on initial recognition, interest income is calculated by applying the credit-adjusted effective interest rate to the amortized cost of the asset. The calculation of interest income does not revert to a gross basis, even if the credit risk of the asset improves. For information on when financial assets are credit-impaired, see Note 4. Presentation Interest income and expenses presented in the consolidated statement of comprehensive income include: - interest income and expenses calculated using the effective interest method on financial assets and financial liabilities measured at amortized cost; - interest income calculated using effective interest method on debt instruments measured at FVOCI; - interest income on finance lease receivables, presented as “Other interest income”. Interest income and expenses before 1 January 2018 Interest income and expenses are recognized in the consolidated statement of comprehensive income on an accrual basis using the effective interest rate method. The effective interest rate method is a method of calculating the amortized 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 through 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 effective interest rate the Group evaluates cash flows in accordance with contractual terms of the financial instrument, but does not account for future losses on loans. This calculation includes all commission fees and duties paid and received under the contract, being integral part of effective interest rate, transaction costs and other premiums or discounts. Once a financial asset or a group of similar financial assets has been written off as a result of an impairment, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Commissions and other income and expenses Commission fees for origination of loans, commission fees for loans servicing and other commission fees being integral part of overall income from loans, as well as corresponding income on transactions, are recognized as deferred income and amortized as interest income during expected period of validity of financial instrument using effective interest rate method. 41 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Other commission fees, as well as other income and expenses are recorded in income or loss as at the date of provision of corresponding service. Finance lease payments Finance lease payments are recognized in profit or loss on a straight-line basis throughout the lease term. The amount of benefits received reduces the total amount of lease expenses over the whole lease term. Income of subsidiaries from wholesale trade since 1 January 2018 Income from wholesale trade is recognized when the customer receives control of goods or services. Defining the time frames of transferring control - at a specific point in time or over time - requires judgment. Under contracts that allow customer to return the goods, income is recognized to the extent that there is a very high probability that thereafter it will not be necessary to reverse this amount and reflect a significant decrease in the total amount of recognized income. Therefore, the amount of recognized income is adjusted by the amount of expected returns of goods, which is estimated based on past historical data. Income of subsidiaries from wholesale trade before 1 January 2018 Income from wholesale trade is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of income can be measured reliably. Income is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Foreign currency Foreign currency transactions are accounted for at the exchange rates set by the National Bank against respective foreign currencies at the date of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency (foreign currencies) are translated into Belarusian Rubles at the reporting date rate. Profits and losses arising from these translations are included in net gain on foreign exchange operations. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into Belarusian Rubles at the exchange rates set by National Bank against respective foreign currencies at the date of fair value determination. Non-monetary assets and liabilities denominated in foreign currencies that are measured at historical cost (or historical cost restated for inflation) are translated into Belarusian Rubles at the exchange rates set by the National Bank against respective foreign currencies at the date of acquisition. The exchange rates of the Belarusian Ruble to the main Group’s operational foreign currencies are presented below: Russian Reporting date Euro US Dollar Ruble 31 December 2016 2,0450 1,9585 0,032440 31 December 2017 2,3553 1,9727 0,034279 31 December 2018 2,4734 2,1598 0,031128 42 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Basis of consolidation The consolidated financial statements include financial statements of the Development Bank and the companies controlled by the Development Bank and the companies controlled by the subsidiaries of the Development Bank. A company is considered as controlled by the Development Bank when the Development Bank is exposed to risks of variable returns from its involvement with the investee or has a right to acquire such returns, and also has power to affect the amount of the returns in exercising its competence. The Group measures the non-controlling interest proportionally to the share of net assets of acquired company. Gains and losses of subsidiary companies for the reporting period are related to the Group’s share and to the non-controlling shareholders even if this results in a negative balance in the consolidated statement of financial position. Non-controlling interests are included in the consolidated statement of financial position within equity, separately from the Group’s equity. Non-controlling interests in profit or loss are recognized in the consolidated statement of comprehensive income. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by the Group. In the consolidated financial statements significant intra-group transactions and balances, related income and expenses are eliminated. Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular, the Group consolidates investees that it controls on the basis of de facto circumstances, including cases when protective rights arising from collateral agreements on lending transactions become significant. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Foreign operations Assets and liabilities of foreign companies, controlled by the subsidiary of the Development Bank, including goodwill and amounts of adjustments to fair value in case of acquisition are translated into Belarusian Rubles at relevant exchange rate as at the reporting date. Income and expenses of foreign subsidiaries are translated into Belarusian rubles at the rate applicable at the date of the transaction. It is also possible to recalculate at the average exchange rates for the reporting period, if fluctuations in rates during the reporting period were not significant. Foreign currency differences are recognized in other comprehensive income and recorded as part of equity in accumulated translation reserve, excluding part of the accumulated translation reserve attributable to non-controlling interest. However, if a foreign operation is not a 100% subsidiary of the Group, then part of these foreign currency differences is referred in the appropriate proportion to the non- controlling interest. Loss of control When control over subsidiary is lost, the Group ceases to recognize its assets and liabilities, as well as non-controlling interests and other capital components attributable to such subsidiary. Any positive or negative difference arisen as a result of loss of control is recognized within profit or loss for the period. If the Group keeps a share of investments in former subsidiary that share is 43 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements measured at fair value as at the date of loss of control. Subsequently that share is recognized as an investment in associated entity (using equity method) or as a financial asset available for sale, depending on the extent of the Group’s influence on that subsidiary. Related parties transactions The Group is controlled by the state and discloses transactions with related parties such as other state-owned companies and key management personnel when these transactions are significant. Preparation of consolidated statement of cash flows The consolidated statement of cash flows was prepared using direct method. Operating segments The operating segment is a Group’s component that represents commercial activities related to income and expenses received by the Group (including income and expenses related to transactions with the Group’s other components), and for which there is financial information that is regularly assessed by the Group's management when allocating resources between segments and conducting an analysis of their financial performance. The segment activity analysis is presented in Note 33. Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date in the principal market, or in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Group determines that fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. 44 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 5. Transition to IFRS 9 Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets and financial liabilities as at 1 January 2018. In thousands of Belarusian Note Original New Original New carrying Rubles classification classification carrying amount under IAS 39 under IFRS 9 amount under IFRS 9 under IAS 39 Financial assets Loans and Cash and cash equivalents 10 receivables Amortized cost 68 112 68 112 Loans and Due from banks 11 receivables Amortized cost 465 150 464 279 Investment securities 12 Available for sale Amortized cost 1 099 959 1 078 378 Investment securities 12 Available for sale FVOCI 627 849 627 849 Loans and Loans to customers 13 receivables Amortized cost 3 578 120 3 532 767 Loans and Other financial assets 16 receivables Amortized cost 5 793 6 072 Total financial assets 5 844 983 5 777 457 Financial liabilities Due to banks 17 Amortized cost Amortized cost 1 495 630 1 495 630 Customer accounts 18 Amortized cost Amortized cost 630 437 630 437 Debt securities issued 19 Amortized cost Amortized cost 1 887 880 1 887 880 Other financial liabilities 21 Amortized cost Amortized cost 20 676 20 676 Total financial liabilities 4 034 623 4 034 623 Provisions for contingent liabilities 21 Not applicable Not applicable 6 435 1 075 Total provisions for contingent liabilities 6 435 1 075 The Group’s accounting policies on the classification of financial instruments under IFRS 9 are set out in Note 4. The application of these policies resulted in the reclassifications set out in the table above and explained below. Some investment securities purchased as part of state programs are held by the Group in a separate portfolio for the purpose of supporting long-term profitability. These investment securities can be sold, but such sales are not expected to occur more often than occasionally. The Group believes that these securities are held within the business model, the purpose of which is to withhold assets to receive the contractual cash flows. These assets are classified as measured at amortized cost in accordance with IFRS 9. The remaining part of investment debt securities is held by the Group in separate portfolios to meet daily liquidity requirements. The Group is looking for ways to minimize the cost of managing liquidity and for this purpose actively manages the portfolio income. Such revenues consist of payments received under the contract, as well as from profits and losses from the sale of financial assets. This investment strategy often leads to significant sales volumes. The Group believes that in accordance with IFRS 9, these securities are held within the framework of a business model, the purpose of which is achieved both through the receipt of contractual cash flows and through the sale of financial assets. 45 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9 on transition to IFRS 9 on 1 January 2018. In thousands of Belarusian Rubles IAS 39 carrying Reclassifica Remeasure IFRS 9 carrying amount as at 31 tion ment amount as at 1 December 2017 January 2018 Financial assets Amortized cost Cash and cash equivalents Opening balance 68 112 Remeasurement - Closing balance 68 112 Due from banks Opening balance 465 150 Remeasurement (871) Closing balance 464 279 Investment securities Opening balance - Reclassified from “Available for sale” 1 099 959 Remeasurement (21 581) Closing balance 1 078 378 Loans to customers Opening balance 3 578 120 Remeasurement (45 353) Closing balance 3 532 767 Other financial assets Opening balance 5 793 Remeasurement 279 Closing balance 6 072 Total measured at amortized cost 4 117 175 1 099 959 (67 526) 5 149 608 Available for sale Opening balance 1 727 808 Reclassified to measured at FVOCI – debt securities (627 849) - Reclassified to measured at amortized cost (1 099 959) - Closing balance - FVOCI – debt securities Investment securities Opening balance - Reclassified from “Available for sale” 627 849 Remeasurement - Closing balance 627 849 Total measured at FVOCI 1 727 808 (1 099 959) - 627 849 Financial liabilities Amortized cost Due to banks 1 495 630 - 1 495 630 Customer accounts 630 437 - 630 437 Debt securities issued 1 887 880 - 1 887 880 Other financial liabilities 20 676 - 20 676 Total measured at amortized cost 4 034 623 - - 4 034 623 Provisions for contingent liabilities Opening balance 6 435 Remeasurement (5 360) Closing balance 1 075 Total provisions for contingent liabilities 6 435 - (5 360) 1 075 The fair value of investment securities reclassified from the category “Securities available for sale” in accordance with IAS 39 to amortized cost category in accordance with IFRS 9 as of 31 December 2017 was 1 099 959 thousand of Rubles. At the same time, the amortized cost of these investment securities was also 1 099 959 thousand of Rubles, due to the fact that these 46 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements investment securities are traded on the domestic market and in most cases are traded at a value close to the nominal taking into account the coupon yield due at the auction date. Therefore, the effect of reclassification to the category “Investment securities measured at amortized cost” in accordance with IFRS 9 is not material. Effective interest rates on securities reclassified to “Investment securities measured at amortized cost” under IFRS 9 are as follows: - bonds with floating rate issued by banks – RR*; - bonds with fixed interest rate issued by banks – from 2,5% to 5%; - bonds issued by corporate bodies – from 5% to 9,11%; - bonds with floating interest rates issued by local authorities – from ½ RR to RR+2%; - bonds with fixed interest rates issued by local authorities – from 2% to 3%. * RR – refinancing rate, established by the National Bank The following table shows the effects of the transition to IFRS 9 on retained earnings, fair value reserve of investment securities and non-controlling interest as at 1 January 2018. In thousands of Belarusian Rubles Fair value reserve Retained of investment Non-controlling earnings securities interest Total Opening balance under IAS 39 as at 31 December 2017 177 143 199 75 544 252 886 Recognition of expected credit losses under IFRS 9: Loans to customers (61 935) - 16 582 (45 353) Investment securities measured at FVOCI (13 261) 13 261 - - Investment securities measured at amortized cost (21 246) - (335) (21 581) Due from banks (863) - (8) (871) Other financial assets 170 - 109 279 Provision for contingent liabilities 5 360 - - 5 360 Tax recognition effect 17 036 - (2 700) 14 336 Opening balance under IFRS 9 as at 1 January 2018 102 404 13 460 89 192 205 056 When assessing the occurrence of default on financial assets, the Group takes into account information obtained from its own and external sources. For portfolios for which the Group does not have sufficient historical information, comparative information from external sources is used. Portfolios for which comparative information from external sourses was used is represented below: In thousands of Belarusian Сomparative information from external sources Rubles Position exposed to Probability of default for 12 The amount of loss in case of credit risk as at 31 months default December 2017 Funds with the National From 0,112% to 13,248% From 81,658% to 98,875% Bank and other banks 540 249 depending on the rating of the depending on the country of bank or the state * residence of the bank ** Investment securities (with From 2,260% to 9,780% From 89,762% to 99,987%, the exception of bonds 1 582 540 depending on the rating of the depending on the issuer's type issued by commercial issuer *** and country of residence ** organizations) * S&P study on default levels of financial institutions or sovereign bonds ** External data on bank defaults *** S&P study on default levels of sovereign bonds and defaults of financial institutions 47 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 6. Net interest income For the year ended For the year ended In thousands of Belarusian Rubles 31 December 2018 31 December 2017 Interest income calculated using effective interest rate method Interest income on loans to customers 308 617 247 312 Interest income on investment securities 139 733 143 772 Interest income on due from banks 26 871 27 366 475 221 418 450 Other interest income Interest income from finance lease receivables 53 459 36 043 53 459 36 043 Interest expenses Interest expenses for loans from other banks (84 453) (41 881) Interest expenses for customer accounts (36 931) (33 374) Interest expenses for bonds issued by the bank (27 262) (27 166) (148 646) (102 421) 7. Movement of allowances for impairment of financial instruments The following tables show the reconciliation of provisions for losses at the beginning and the end of the period by classes of financial instruments. The comparative information for the year ended 31 December 2017 is the calculation of the allowance for impairment and reflects the basis of measurement in accordance with IAS 39. Other financial In thousands of assets and Belarusian Rubles Due from Investment Loans to contingent banks securities customers liabilities Total At 1 January 2017 2 413 62 027 763 410 5 871 833 721 Accruals / (recovery) for the period 4 437 (4 499) (18 247) 13 337 (4 972) Foreign currency differences 137 (204) 40 242 83 40 258 Provision write-off - (25 000) (409 248) - (434 248) At 31 December 2017 6 987 32 324 376 157 19 291 434 759 The movements of allowance for impairment of financial instruments for the year ended 31 December 2018 are shown below in terms of the stages of estimated expected credit losses: In thousands of Belarusian Rubles Stage 1* Stage 2* Stage 3* POCI* Total Due from banks At 1 January 2018 (under IAS 39) 6 987 Impact of adopting IFRS 9 with regard to the changes in the basis of assessment (Note 5) 871 At 1 January 2018 (under IFRS 9) 765 4 571 2 522 - 7 858 Transfer to 12-month ECL - - - - - Transfer to lifetime ECL not credit-impaired - - - - - Transfer to lifetime ECL credit-impaired - (4 800) 4 800 - - Originated or purchased financial assets 584 - - - 584 Write-offs - - (2 359) - (2 359) Net remeasurement of loss allowance** (265) - 3 681 - 3 416 Foreign exchange 17 229 (396) - (150) Total at 31 December 2018 1 101 - 8 248 - 9 349 48 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements In thousands of Belarusian Rubles Stage 1* Stage 2* Stage 3* POCI* Total Investment securities measured at amortized cost At 1 January 2018 (under IAS 39) 32 324 Impact of adopting IFRS 9 with regard to the changes in the basis of assessment (Note 5) 21 581 At 1 January 2018 (under IFRS 9) 53 905 - - - 53 905 Transfer to 12-month ECL - - - - - Transfer to lifetime ECL not credit-impaired - - - - - Transfer to lifetime ECL credit-impaired - - - - - Originated or purchased financial assets 11 381 - - - 11 381 Financial aessets that have been derecognized*** (763) - - - (763) Net remeasurement of loss allowance** (14 659) - - - (14 659) Foreign exchange 103 - - - 103 Total at 31 December 2018 49 967 - - - 49 967 Investment securities measured at FVOCI At 1 January 2018 (under IAS 39) - Impact of adopting IFRS 9 with regard to the changes in the basis of assessment (Note 5) 13 261 At 1 January 2018 (under IFRS 9) 13 261 - - - 13 261 Transfer to 12-month ECL - - - - - Transfer to lifetime ECL not credit-impaired - - - - - Transfer to lifetime ECL credit-impaired - - - - - Originated or purchased financial assets 12 188 - - - 12 188 Financial aessets that have been derecognized*** (354) - - - (354) Net remeasurement of loss allowance** (2 137) - - - (2 137) Foreign exchange 942 - - - 942 Total at 31 December 2018 23 900 - - - 23 900 Loans to customers At 1 January 2018 (under IAS 39) 376 157 Impact of adopting IFRS 9 with regard to the changes in the basis of assessment (Note 5) 45 353 At 1 January 2018 (under IFRS 9) 50 510 230 678 140 322 - 421 510 Transfer to 12-month ECL - - - - - Transfer to lifetime ECL not credit-impaired (65 381) 93 629 (28 248) - - Transfer to lifetime ECL credit-impaired (513) (26 364) 26 877 - - Originated or purchased financial assets 68 604 2 273 - - 70 877 Write-offs - - (54 079) - (54 079) Recovery of allowance for earlier cancelled debts - - 71 543 - 71 543 Unwinding descount - - 5 522 - 5 522 Net remeasurement of loss allowance** (10 702) (104 782) (11 829) (26 985) (154 298) Foreign exchange 659 2 166 2 920 - 5 745 Total at 31 December 2018 43 177 197 600 153 028 (26 985) 366 820 Other financial assets At 1 January 2018 (under IAS 39) 12 856 Impact of adopting IFRS 9 with regard to the changes in the basis of assessment (Note 5) (279) At 1 January 2018 (under IFRS 9) - 939 11 638 - 12 577 Transfer to 12-month ECL - - - - - Transfer to lifetime ECL not credit-impaired - - - - - Transfer to lifetime ECL credit-impaired - (200) 200 - - Originated or purchased financial assets - 288 1 456 - 1 744 Net remeasurement of loss allowance** - (60) (8 072) - (8 132) Foreign exchange - (7) 165 - 158 Total at 31 December 2018 - 960 5 387 - 6 347 49 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements In thousands of Belarusian Rubles Stage 1* Stage 2* Stage 3* POCI* Total Provision for contingent liabilities At 1 January 2018 (under IAS 39) 6 435 Impact of adopting IFRS 9 with regard to the changes in the basis of assessment (Note 5) (5 360) At 1 January 2018 (under IFRS 9) 1 075 - - - 1 075 Originated or purchased financial assets 10 802 - - - 10 802 Net remeasurement of loss allowance ** (1 075) - - - (1 075) Foreign exchange - - - - - Total at 31 December 2018 10 802 - - - 10 802 * Stage 1 – 12-monts expected credit losses. Stage 2 – Lifetime expected credit losses for not credit-impared assets. Stage 3 – Lifetime expected credit losses for credit-impared assets. POCI – Credit-impared assets upon initial recognition. ** - including repayment effect (early repayment) *** - excluding repayment effect (early repayment) 8. General administrative expenses For the year For the year In thousands of Belarusian Rubles ended 31 ended 31 December 2018 December 2017 Staff costs 23 512 19 409 Charity 12 321 9 799 Taxes, other than income tax 8 747 3 129 Depreciation and amortization 7 003 3 508 Contributions to the Social Security Fund 6 908 5 158 Insurance 4 144 6 964 Rent, utilities and repair expenses 2 707 2 253 Transport and fuel expenses 2 590 458 Consultative and information services expenses 2 062 900 Advertising 1 222 934 Office supplies and other office expenses 604 500 Expenses of subsidiaries for the sale of goods 595 1 166 Telecommunication and mail expenses 345 256 Other 5 428 4 870 Total general administrative expenses 78 188 59 304 9. Income tax The Group provides for taxes based on the tax accounting maintained and prepared in accordance with the tax legislation of the Republic of Belarus for entities of the Group - residents of the Republic of Belarus, in accordance with the tax legislation of the Russian Federation and Ukraine for components of the Group - residents of the Russian Federation and Ukraine, respectively. Due to the fact that certain expenses are non-deductible for tax purposes, as well as in view of the non-taxable income, the Group is subject to certain permanent tax differences. During the years ended 31 December 2018 and 31 December 2017, the national rate of income tax for the Belarusian companies was 18%. During the years ended 31 December 2018 and 31 December 2017, the national rate of income tax for Belarusian banks and the Development Bank amounted to 25%. During the years ended 31 December 2018 and 31 December 2017, income tax rate for the companies - residents of the Russian Federation and the Ukraine was 20% and 18%, respectively. Offset of deferred tax assets and liabilities of the individual Group companies in the consolidated statement of financial position is not performed. 50 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Movements of deferred income tax balances of the Group are presented below: 31 December 2018 31 December 2017 In other In thousands of Belarusian In Effect of compre- Rubles profit/ transition hensive loss to IFRS 9 income Total Total Tax effect of temporary differences that reduce income tax base Investment securities 12 796 - 8 389 21 185 5 846 Loans to customers - - - - 14 691 Finance lease receivables 19 571 (11 145) - 8 426 24 693 Other assets 2 803 (1 386) - 1 417 2 441 Due to banks - - - - 1 681 Other liabilities 1 661 - - 1 661 325 Total tax effect of temporary differences that reduce income tax base 36 831 (12 531) 8 389 32 689 49 677 Offset against deferred tax liability (12 736) (8 886) Deferred tax asset 19 953 40 791 Unrecognized deferred tax asset (11 973) (5 271) Total recognized deferred tax asset 7 980 35 520 31 December 2018 31 December 2017 In other In thousands of Belarusian In Effect of compre- Rubles profit/ transition hensive loss to IFRS 9 income Total Total Tax effect of temporary differences that give rise to income tax base Cash and cash equivalents (214) 214 - - (6) Due from banks (6 024) - - (6 024) (7 496) Loans to customers (33 063) 26 653 - (6 410) (14 321) Investment property (167) - - (167) (503) Property and equipment and intangible assets (2 506) - - (2 506) (2 553) Deferred tax liability (41 974) 26 867 - (15 107) (24 879) Offset against deferred tax asset 12 736 8 886 Net deferred tax liability (2 371) (15 993) Net deferred tax position 5 609 19 527 51 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Changes in net deferred tax position are as follows: Deferred tax position as at 1 January 2017 35 717 In profit or loss (16 190) Deferred tax position as at 31 December 2017 19 527 In profit or loss (36 643) Effect of transition to IFRS 9 14 336 In other comprehensive income 8 389 Deferred tax position as at 31 December 2018 5 609 The table below presents the comparison of the theoretical income tax expense with the actual income tax expense: For the year ended For the year ended In thousands of Belarusian Rubles 31 December 2018 31 December 2017 Profit before tax 388 834 262 662 Income tax rate 25% 25% Tax on the income tax rate 97 209 65 666 Tax effect of tax-exempt income (2 819) (20 797) Tax effect of non-deductible expenses 4 599 5 289 Movement of unrecognized deferred tax assets 6 702 5 271 Effect of differences in income tax rates applied to the entities of the Group (9 161) 49 Tax-exempt income on securities and other permanent differences (34 817) (21 160) Income tax expense 61 713 34 318 Tax-exempt income from securities is the income from transactions with securities, which are included in the list of the securities, income from transactions with which is not considered in determining gross profit in accordance with the Tax Code of the Republic of Belarus. Income tax expenses are presented as follows: For the year ended For the year ended In thousands of Belarusian Rubles 31 December 2018 31 December 2017 Current income tax expenses 25 070 18 128 Deferred income tax expenses 36 643 16 190 Income tax expenses 61 713 34 318 10. Cash and cash equivalents 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Current and correspondent accounts with banks 34 909 32 498 Accounts with banks with initial maturity up to 90 days 8 216 33 897 Due from the National Bank 9 1 717 Total cash and cash equivalents 43 134 68 112 Current and correspondent accounts in banks are mainly balances on transactions with major international banks, leading Belarusian banks with an international long-term rating of at least “B-”, assigned by international rating agencies S&P and/or Fitch, as at 31 December 2017. Information on the stages of estimating the expected credit losses and the ratings of banks at 31 December 2018 is represented in the table below. Unless otherwise noted, the amounts of 52 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements financial assets in the table reflect the values of the gross carrying amount. Lifetime expected Lifetime expected Credit- In thousands of 12-monts credit losses for credit losses for impared assets Belarusian Rubles expected not credit- credit-impared upon initial credit losses impared assets assets recognition Total Cash and cash equivalents, measured at amortized cost International rating: B 30 035 - - - 30 035 BBB+ 2 279 - - - 2 279 BBB- 10 116 - - - 10 116 ССС/С 194 - - - 194 Without international rating*: Medium risk 509 1 - - 510 Total Cash and cash equivalents 43 133 1 - - 43 134 Allowance for impairment - - - - - Total Cash and cash equivalents net of allowance for impairment 43 133 1 - - 43 134 *Description of internal sysmem of risk assessment for banks without international credit rating is in Note 23. 11. Due from banks Amounts due from banks are represented by deposits primarily placed with resident banks of the Republic of Belarus with the “B” long-term rating. Amounts due from non-resident banks are represented by export credits and deposits placed in other banks, mainly having an international long-term rating in the range from “B” to “BBB-”, or not having an international rating as at 31 December 2018 and 31 December 2017. The table below provides information on the credit quality of due from banks, measured at amortized cost, as at 31 December 2018. Unless otherwise noted, the amounts of financial assets in the table reflect the gross carrying amount. Lifetime 12-monts expected credit Lifetime expected Credit- In thousands of expected losses for not credit losses for impared assets Belarusian Rubles credit credit-impared credit-impared upon initial losses assets assets recognition Total Due from banks measured at amortized cost International rating: B 412 949 - - - 412 949 Without international rating*: Medium risk 93 616 - 60 688 - 154 304 Total due from banks 506 565 - 60 688 - 567 253 Allowance for impairment (1 101) - (8 248) - (9 349) Total due from banks net of allowance for impairment 505 464 - 52 440 - 557 904 *Description of internal sysmem of risk assessment for banks without international credit rating is in Note 23. The amount of placements in 2018 amounted to 3 378 928 thousand of Rubles, which led to an increase in the allowance for impairment by 584 thousand of Rubles. The amount of repayments in 2018 amounted to 3 288 132 thousand of Rubles, which led to a decrease in the allowance for impairment by 132 thousand of Rubles. 53 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The transfer of funds in banks from Stage 2 to Stage 3 in the amount of 66 266 thousand of Rubles led to an increase in the allowance for impairment by 4 245 thousand of Rubles. (a) Cash concentration in other banks 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Resident banks 506 565 398 118 Non-resident banks 60 688 74 019 Total due from banks 567 253 472 137 Allowance for impairment* (9 349) (6 987) Total due from banks net of allowance for impairment 557 904 465 150 * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. As at 31 December 2018 and 31 December 2017 there were no deposits placed by the Group with banks, which amounted to more than 10% of the Group’s equity. As at 31 December 2018 the total of 184 873 thousand of Rubles (31 December 2017: 169 169 thousand of Rubles), denominated in Belarusian Rubles and foreign currencies were placed with agent banks at interest rates far below the average interbank market rates under the programs of Start-up companies financing and support of woodworking enterprises. These investments mature in 2019-2023. These assets form a separate market segment due to the specific character of the financing program and the end recipients of the resources. Therefore, the Management believes that the contractual interest rates are market rates for such financial instruments and the Group recognizes amounts due from banks at fair value upon initial recognition, which is equal to the par value. (b) Maximum credit risk The maximum credit risk on amounts due from other banks is equal to their net carrying value, as recorded in the consolidated statement of financial position. 12. Investment securities Range of 31 December 31 December In thousands of Belarusian Rubles interest rates* Maturity 2018 2017*** Investment securities measured at FVOCI Long-term government bonds 4,5% - 7,625% 2019 - 2030 1 148 936 586 920 including those pledged under repo transactions 4,5% - 6,9% 2020 - 2030 87 751 30 529 Bonds issued by the National Bank 3,46% - 3,87% 2019 23 285 40 928 Total investment securities measured at FVOCI 1 172 221 627 848 Investment securities measured at amortized cost Bonds issued by banks with floating interest rate RR – RR+2% 2019 - 2051 638 084 702 240 including those pledged under repo transactions - - 9 531 Bonds issued by commercial organizations 5% - 8,4% 2019 - 2025 298 789 177 592 Bonds issued by local authorities with floating interest rate ½ RR – RR+2% 2019 - 2028 188 597 135 724 54 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Range of 31 December 31 December In thousands of Belarusian Rubles interest rates* Maturity 2018 2017 Bonds issued by local authorities with fixed interest rate 2% - 3% 2024 - 2027 75 811 78 859 Bonds issued by banks with fixed interest rate 2,5% - 5% 2019 - 2024 27 344 37 869 Total investment securities measured at amortized cost 1 228 625 1 132 284 Total investment securities 2 400 846 1 760 132 Allowance for impairment** (49 967) (32 324) Total investment securities net of 2 350 879 1 727 808 allowance for impairment * RR – refinancing rate, established by the National Bank ** Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. ***Comparative data as of 31 December 2017 reprsent the amounts of securities classified as available for sale under IAS 39 As at 31 December 2018 bonds issued by local authorities in the amount of 43 205 thousand of Rubles (31 December 2017: 68 078 thousand of Rubles), denominated in Belarusian Rubles at interest rates from 50% to 75% of the refinancing rate of the National Bank were obtained in accordance with government programs of support of linen, dairy and agricultural branches of the economy. These bonds mature in 2019-2028. These bonds form a separate market segment due to the specific character of government lending programs and the issuers’ type. Therefore, the Management believes that the contractual interest rates are market rates for such bonds, and therefore the Group recognizes the bonds at fair value upon initial recognition, which is equal to the nominal value. The investment securities were issued by state authorities and “B” rated banks as at 31 December 2018 (“B-” as at 31 December 2017) in the national and foreign currencies except for the securities issued by non-rated commercial entities. Approaches to defining the fair value of investment securities and the analysis by levels of the fair value sources hierarchy are described in Note 26. The table below provides information on the credit quality of investment securities, measured at amortized cost, as at 31 December 2018. Unless otherwise noted, the amounts of financial assets in the table reflect the gross carrying amount. 31 December 2018 12- monts Lifetime expected Lifetime expected Credit- In thousands of expected credit losses for credit losses for impared assets Belarusian Rubles credit not credit-impared credit-impared upon initial losses assets assets recognition Total Investment securities measured at amortized cost International rating B 1 167 414 - - - 1 167 414 Without international rating*: Low risk 61 211 - - - 61 211 Total investment securities measured at amortized cost 1 228 625 - - - 1 228 625 Allowance for impairment (49 967) - - - (49 967) Total investment securities measured at amortized cost net of allowance for impairment 1 178 658 - - - 1 178 658 *Description of internal sysmem of risk assessment for issuers without international credit rating is in Note 23. 55 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The table below provides information on the credit quality of investment securities, measured at FVOCI, as at 31 December 2018. Unless otherwise noted, the amounts of financial assets in the table reflect the amounts of fair value. 31 December 2018 12- monts Lifetime expected Lifetime expected Credit- In thousands of expected credit losses for credit losses for impared assets Belarusian Rubles credit not credit-impared credit-impared upon initial losses assets assets recognition Total Investment securities measured at FVOCI International rating B 1 172 221 - - - 1 172 221 Total investment securities measured at FVOCI 1 172 221 - - - 1 172 221 Allowance for impairment (23 900) - - - (23 900) Book value – fair value of investment securities measured at FVOCI* 1 172 221 - - - 1 172 221 * Debt investment securities that are measured at fair value through other comprehensive income are stated at fair value, while the allowance for impairment is recognized in other comprehensive income. The amount of new investment securities measured at FVOCI in 2018 amounted to 1 595 343 thousand of Rubles, which led to an increase in the allowance for impairment by 12 188 thousand of Rubles. The amount of new investment securities measured at amortized cost in 2018 amounted to 182 278 thousand of Rubles, which led to an increase in the allowance for impairment by 11 381 thousand of Rubles. The amount of sales and redemptions of investment securities measured at FVOCI in 2018 amounted to 1 003 606 thousand of Rubles, which led to a decrease in the allowance for impairment by 354 thousand of Rubles. The amount of redemption of investment securities measured at amortized cost in 2018 amounted to 215 615 thousand of Rubles, which led to a decrease in the allowance for impairment by 763 thousand of Rubles. The investment securities traded on the domestic market are generally traded at close to par value, taking into account the coupon yield due at the auction date. Respectively, the effect of revaluation at fair value is insignificant. As at 31 December 2018 bonds issued by banks amounting to 5 241 thousand of Rubles (31 December 2017: 10 850 thousand of Rubles) were pledged as collateral for counter guarantee granted to a Subsidiary of the Group. As at 31 December 2018 long-term government bonds with the fair value of 29 681 thousand of Rubles (31 December 2017: 28 805 thousand of Rubles) were provided as collateral for the performance of obligations by third parties. As at 31 December 2018 the investment securities with the fair value of 87 751 thousand of Rubles, were provided as collateral for funds raised under repo transactions with banks (Note 17) in the amount of 88 521 thousand of Rubles, with maturity no later than October 2019. As at 31 December 2017 the investment securities with the fair value of 40 060 thousand of Rubles, were provided as collateral for funds raised under repo transactions with banks (Note 17) in the amount of 39 567 thousand of Rubles, with maturity in January 2018. 56 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 13. Loans to customers 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Loans to organizations 3 357 517 2 670 054 Finance lease receivables 901 954 584 768 Loans to republican and regional state administration 578 614 699 455 bodies Total loans to customers 4 838 085 3 954 277 Allowance for impairment* (366 820) (376 157) Total loans to customers net of allowance for 4 471 265 3 578 120 impairment * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. Participation in government loan granting programs Loans acquired by the Group from other state-owned banks and granted by the Group within the frames of state programs realization due to their uniqueness as well as the specifics of the borrower type and state programs themselves form a separate market segment due to absence of similar financial instruments at the market. Therefore, the Management believes that the contractual interest rate up to 7,5% per annum for loans in Belarusian Rubles is the market rate for such loans. The Group initially recognizes the loans granted at fair value equal to the nominal value. The Group has also issued loans denominated in foreign currencies at the rates up to 9%, which is close to the rates, at which the loans are granted by the commercial banks of the Republic of Belarus, including the funds raised with syndicated loans at the rate close to the rates, at which the commercial banks of the Republic of Belarus raise funds. (a) The quality of loan portfolio The following table presents the information on the impairment of the loans to customers as at 31 December 2018: Share of Loans less allowance for In thousands of Belarusian Rubles Gross Allowance allowance impairment in amount of for for the gross loans impairment impairment amount of loans Undue 4 489 221 (219 981) 4 269 240 4,9% Overdue: 348 864 (146 839) 202 025 42,1% from 1 to 29 days 123 226 (36 773) 86 453 29,8% from 30 to 89 days 68 941 (9 207) 59 734 13,4% from 90 to 179 days 47 638 (14 473) 33 165 30,4% from 180 to 359 days 90 813 (72 656) 18 157 80,0% over 360 days 18 246 (13 730) 4 516 75,2% Total loans 4 838 085 (366 820) 4 471 265 7,6% 57 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The following table presents the information on the impairment of the loans to customers as at 31 December 2017: Share of Loans less allowance for In thousands of Belarusian Rubles Gross Allowance allowance impairment in amount of for for the gross loans impairment* impairment amount of loans Undue 3 716 576 (265 184) 3 451 392 7,1% Overdue: 237 701 (110 973) 126 728 46,7% from 1 to 29 days 28 685 (4 108) 24 577 14,3% from 30 to 89 days 98 377 (12 981) 85 396 13,2% from 90 to 179 days 10 425 (3 168) 7 257 30,4% from 180 to 359 days 26 040 (17 342) 8 698 66,6% over 360 days 74 174 (73 374) 800 98,9% Total loans 3 954 277 (376 157) 3 578 120 9,5% * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. The following table presents the information on the impairment of the loans to customers as at 31 December 2017: Share of Loans less allowance for In thousands of Belarusian Rubles Gross Allowance allowance impairment in amount of for for the gross loans impairment* impairment amount of loans Loans individually assessed Undue 2 413 601 (246 164) 2 167 437 10,2% Overdue: 98 901 (35 075) 63 826 35,5% from 1 to 29 days 567 (284) 283 50,1% from 30 to 89 days 73 342 (11 262) 62 080 15,4% from 90 to 179 days 1 932 (1 543) 389 79,9% from 180 to 359 days 2 740 (2 466) 274 90,0% over 360 days 20 320 (19 520) 800 96,1% Total loans individually assessed 2 512 502 (281 239) 2 231 263 11,2% Share of Loans less allowance for In thousands of Belarusian Rubles Gross Allowance allowance impairment in amount of for for the gross loans impairment* impairment amount of loans Loans collectively assessed Undue 1 302 975 (19 020) 1 283 955 1,5% Overdue: 138 800 (75 898) 62 902 54,7% from 1 to 29 days 28 118 (3 824) 24 294 13,6% from 30 to 89 days 25 035 (1 719) 23 316 6,9% from 90 to 179 days 8 493 (1 625) 6 868 19,1% from 180 to 359 days 23 300 (14 876) 8 424 63,8% over 360 days 53 854 (53 854) - 100,0% Total loans collectively assessed 1 441 775 (94 918) 1 346 857 6,6% Total loans 3 954 277 (376 157) 3 578 120 9,5% * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. 58 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The table below provides information on the credit quality of loans to customers at 31 December 2018. Unless otherwise noted, the amounts of financial assets in the table reflect the gross carrying amount. Lifetime Lifetime expected Credit- In thousands of Belarusian 12-monts expected credit credit losses impared Rubles expected losses for not for credit- assets upon credit credit-impared impared initial losses assets assets recognition Total Loans to customers Low risk* 557 551 398 186 - - 955 737 Medium risk* 1 754 776 313 664 - 21 161 2 089 601 High risk* 2 600 611 916 - 2 037 616 553 Defoult* - - 178 035 96 205 274 240 Finance lease receivables for which rating* is undetermined Undue - 795 891 - - 795 891 from 1 to 89 days - 78 083 - - 78 083 over 90 days - - 27 980 - 27 980 Total loans to customers 2 314 927 2 197 740 206 015 119 403 4 838 085 Allowance for impairment (43 177) (197 600) (153 028) 26 985 (366 820) Total loans to customers net of allowance for impairment 2 271 750 2 000 140 52 987 146 388 4 471 265 * Description of internal sysmem of risk assessment for borrowers without international credit rating is in Note 23. As at 31 December 2018 loan portfolio included 38 loans with extended maturity in the gross carrying amount of 73 294 thousand of Rubles (as at 31 December 2017 – 32 loans in the amount of 71 617 thousand of Rubles). To the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the impairment allowance on loans as at 31 December 2018 would be 44 713 thousand of Rubles lower/higher (31 December 2017: 35 781 thousand of Rubles). Significant changes in the gross carrying amount of the loan portfolio are explained below: In thousands of Belarusian Rubles Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount under IAS 39 as at 31 December 2017 3 954 277 Effect of POCI assests changes (12 671) Gross carrying amount under IFRS 9 as at 1 January 2018 2 044 917 1 606 076 178 392 112 221 3 941 606 Transfer to Stage 2 (365 996) 407 266 (41 270) - - Transfer to Stage 3 (4 933) (133 031) 137 964 - - Originated or purchased financial assets 842 456 489 218 - 4 750 1 336 424 Write-offs - - (54 079) - (54 079) Unwinding of discount - - 5 965 - 5 965 Repayment and other changes (201 517) (171 789) (20 957) 2 432 (391 831) Gross carrying amount as at 31 December 2018 2 314 927 2 197 740 206 015 119 403 4 838 085 59 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements (b) Analysis of collateral The following table presents information on loans by types of collateral, data is based on the carrying amount of loans, but not on the fair value of collateral: In thousands of Belarusian Rubles 31 December 2018 31 December 2017 Penalty* 1 365 027 1 139 527 Pledge of vehicles, property and equipment 1 315 018 938 171 (excluding real estate) Pledge of real estate 1 171 791 920 456 Guarantees and suretyships 484 734 417 648 Pledge of property rights 191 906 265 062 Pledge of goods in turnover 23 201 21 992 Other types of collateral 142 812 105 648 Unsecured loans 143 596 145 773 Total loans to customers 4 838 085 3 954 277 Allowance for impairment** (366 820) (376 157) Total loans to customers net of allowance for 4 471 265 3 578 120 impairment *The source of fulfillment of obligations are funds of the republican or local budget. ** Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. The table above excludes the cost of overcollateralization. From 1 January 2018 the Group changed its approaches of the valuation of the collateral taken. Since the Group focuses on the creditworthiness of borrowers, the Group generally does not review the assessed value of collateral, except in cases where the credit risk of the loan has increased significantly and the loan is more closely monitored. Accordingly, the Group does not review on a regular basis the estimated value of collateral accepted for all loans to customers. For loans for which evidence of impairment has been identified, the Group reviews the estimated collateral value, as the present value of collateral may be used in assessment of ECL as a part of credit risk management. The possibility of non-impaired loans recovery depends more on the borrower's creditworthiness than on the collateral value, and the Group does not always assess the collateral value at each reporting date. Until 1 January 2018, when assessing the impairment of loans to individually significant customers, the Group determined the estimated value of collateral at the balance sheet date. As of 31 December 2017, the fair value of collateral for loans that are assessed on an individual basis is as follows: 31 December 2017 Fair value of In thousands of Belarusian Rubles Fair value of collateral is not Gross value of collateral assessed loans Pledge of real estate 572 092 - 572 092 Pledge of vehicles, property and equipment (excluding real estate) 290 700 - 290 700 Guarantees and suretyships - 287 768 287 768 Pledge of property rights 219 872 - 219 872 Other types of collateral 30 355 - 30 355 Pledge of goods in turnover 988 - 988 Penalty - - 1 047 893 Unsecured loans - - 62 834 1 114 007 287 768 2 512 502 60 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements (c) Disclosure by branches of economy 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Construction 1 044 095 1 067 020 Agriculture 1 001 477 718 787 Services 970 878 647 859 Manufacturing 735 771 535 133 Trade 451 216 296 591 Food industry 423 543 445 699 Light industry 105 540 85 203 Lease 93 422 146 346 Other industries 12 143 11 639 Total loans to customers 4 838 085 3 954 277 Allowance for impairment* (366 820) (376 157) Total loans to customers net of allowance for impairment 4 471 265 3 578 120 * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. (d) Credit risk concentration As at 31 December 2018 the Group had four borrowers, whose share was over 10% of equity per borrower. The total value of these balances amounted to 1 560 859 thousand of Rubles. As at 31 December 2017 the Group had four borrowers, whose share was over 10% of equity per borrower. The total value of these balances amounted to 1 270 903 thousand of Rubles. (e) Finance lease receivables The components of finance lease receivables are presented as follows: 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Up to one year 230 890 218 205 One to five years 769 237 543 036 More than five years 255 823 50 162 Minimum lease payments 1 255 950 811 403 Deferred income (353 996) (226 635) Net investment in finance lease, before allowance for impairment 901 954 584 768 Allowance for impairment* (18 889) (110 698) Total net investment in finance lease 883 065 474 070 Up to one year 166 311 162 001 One to five years 553 261 376 996 More than five years 182 382 45 771 Net investment in finance lease, before allowance for impairment 901 954 584 768 Allowance for impairment* (18 889) (110 698) Total net investment in finance lease 883 065 474 070 * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. As at 31 December 2017 finance lease receivables with carrying amount of 9 091 thousand of Rubles, were pledged as collateral for bank loans granted to the subsidiaries of the Group. 61 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements (f) Effect of initial recognition of financial instruments at fair value The effect of the initial recognition of financial instruments at fair value is represented by the difference between the nominal and fair value determined at the initial recognition, taking into account the Group's assessment of the probability of repayment of the borrowings granted, with respect to loans issued by the Group to woodworking companies. The fair value of loans issued by the Group to woodworking companies is calculated based on the expected future cash flows at a discount rate reflecting the current market assessment of the temporary value of cash and the risks of these loans. The difference between the nominal value and fair value of loans at initial recognition is recorded in the item “Effect of initial recognition of financial instruments at fair value” of the statement of comprehensive income. Untill 1 January 2018 such loans were designated as financial assets with indicators of impairment. Since 1 January 2018 these loans were designated as credit-impaired upon initial recognition. The total amount of undiscounted expected credit losses upon initial recognition on financial assets originally recognized during 2018 amounted to 10 640 thousand of Rubles. 14. Investment property Investment property is represented by real estate in the form of trade areas in large cities of the Republic of Belarus, which is provided for operating lease to third parties. Management believes that fair value of investment property is consistent with the carrying amount. The fair value of investment property is categorised within Level 3 of the fair value hierarchy. Information on movements of investment property is presented as follows: For the year ended For the year ended In thousands of Belarusian Rubles 31 December 2018 31 December 2017 Historical cost Opening balance 21 220 - Additions - 21 220 Sales (16 207) - Closing balance 5 013 21 220 Accumulated depreciation Opening balance (300) - Charge for the period (300) (300) Sales 427 - Closing balance (173) (300) Residual value 4 840 20 920 In August 2018, 2 investment property objects were sold for a total amount of 23 570 thousand of Rubles. For the year ended 31 December 2018 and the year ended 31 December 2017, total amount of all rental payments amounted to 2 186 thousand of Rubles and 2 621 thousand of Rubles, respectively. 62 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 15. Property and equipment and intangible assets Computer equipment, Investments in property In thousands of Belarusian Rubles Buildings and furniture and other and equipment and constructions equipment Vehicles intangible assets Intangible assets Total Historical cost As at 1 January 2017 55 965 12 127 1 776 6 646 3 422 79 936 Additions - - - 20 130 - 20 130 Disposals (194) (507) (85) - (11) (797) Commissioning and transfers 4 162 2 541 3 282 (12 672) 2 687 - As at 1 January 2018 59 933 14 161 4 973 14 104 6 098 99 269 Additions - - - 16 332 - 16 332 Disposals (6) (305) (66) (307) (8) (692) Commissioning and transfers 6 948 9 630 9 816 (27 738) 1 344 - At 31 December 2018 66 875 23 486 14 723 2 391 7 434 114 909 Accumulated depreciation As at 1 January 2017 (1 991) (3 592) (713) - (1 138) (7 434) Charge for the period (748) (1 578) (311) - (871) (3 508) Write-off on disposal 10 305 85 - 5 405 As at 1 January 2018 (2 729) (4 865) (939) - (2 004) (10 537) Charge for the period (784) (2 549) (2 134) - (1 536) (7 003) Write-off on disposal - 175 66 - 7 248 At 31 December 2018 (3 513) (7 239) (3 007) - (3 533) (17 292) Residual value As at 1 January 2017 53 974 8 535 1 063 6 646 2 284 72 502 As at 1 January 2018 57 204 9 296 4 034 14 104 4 094 88 732 At 31 December 2018 63 362 16 247 11 716 2 391 3 901 97 617 Intangible assets of the Group are mainly represented by the software and license rights to use it. 63 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 16. Other assets 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Financial assets less allowance for impairment 5 337 5 793 Accounts receivable 11 383 17 342 Other 301 1 307 Allowance for impairment* (6 347) (12 856) Non-financial assets 333 145 151 111 Prepayments to suppliers of subsidiaries of the Group 235 757 111 281 Tax receivable, other than income tax 92 130 34 760 Inventory 3 953 3 968 Deferred expenses 1 305 1 102 Total other assets 338 482 156 904 * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. 17. Due to banks 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Banks of the Republic of Belarus 997 497 699 800 Banks of the Russian Federation 750 837 524 243 Banks of the European Union 310 622 235 130 Other banks 214 178 36 457 Total due to banks 2 273 134 1 495 630 As at 31 December 2018 amounts under repurchase agreements are represented by short-term loans in the amount of 88 521 thousand of Rubles received from seven Belarusian banks with maturities no later than October 2019 that are collateralized by government long-term bonds with the fair value of 87 751 thousand of Rubles (Note 12). As at 31 December 2017 amounts under repurchase agreements are represented by short-term loans in the amount of 39 567 thousand of Rubles received from two Belarusian banks with maturities in January 2018 that are collateralized by debt securities in US dollars and Belarusian Rubles with the fair value of 30 529 thousand of Rubles and 9 531 thousand of Rubles, respectively (Note 12). The funds attracted from Belarusian banks are mainly represented by attracted funds within the framework of the family capital management program, the terms of which are determined by the state program under the Edict No. 572. As at 31 December 2018 and 31 December 2017 the amount of funds raised under the family capital management program is 862 748 thousand of Rubles and 556 771 thousand of Rubles, respectively. Nominal interest rate on attracted funds within the framework of family capital is 1Y Libor for US dollars. 64 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 18. Customer accounts 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Deposits of the republican state administration bodies 714 731 390 938 Family capital funds 119 778 58 875 Deposits of the regional state administration bodies 84 923 136 695 Customer accounts 45 632 43 929 Total customer accounts 965 064 630 437 Deposits of republican state administration bodies as at 31 December 2018 are presented also by deposits of the Ministry of Finance of the Republic of Belarus, including the amount of 40 052 thousand of Rubles (31 December 2017: 84 344 thousand of Rubles) denominated in Belarusian Rubles with fixed rates from 0,001% to 1,0% per annum, the amount of 198 891 thousand of Rubles (31 December 2017: 190 045 thousand of Rubles) denominated in Euro with fixed rate of 1,5% per annum. The maturity of these deposits is in 2019–2022. The deposits of the Ministry of Finance stated above were provided to the Development Bank for the acquisition of assets of the systemically important banks in 2012–2013 under the orders of the President of the Republic of Belarus and the Council of Ministers of the Republic of Belarus, and for the acquisition in 2014 of the bonds issued by the local authorities, the proceeds from the sale of which are used by the local authorities for the financing of the linen industry. Contractual interest rates for these loans and bonds are below average market interest rates. Due to the direct usage of the deposits for the acquisition of loans and bonds, the Management believes that contractual deposit rates are market rates for such deposits. The Group initially recognized deposits at fair value equal to the par value. Under the terms of the government program under the Edict No. 572 the Development Bank annually transfers a part of the profit to a special fund of the Development Bank for the accumulation of the part of income generated from managing the family capital funds, for subsequent transfer of these funds to the republican budget in the order and amounts determined by the Supervisory Board of the Development Bank in coordination with the Ministry of Finance. Transfer of funds to the republican budget is intended to be made at the end of each reporting period of family capital management. The order, the amount and timing of the return of the funds is determined by the Council of Ministers of the Republic of Belarus. The changes in the balance of funds to be transferred to the budget is presented below: For the year ended 31 For the year ended 31 In thousands of Belarusian Rubles December 2018 December 2017 Balance at the beginning of the period 58 875 22 438 Allocation of profit from family capital 55 318 36 275 management Revaluation of the balance of funds to be 5 585 162 transferred to the budget Balance at the end of the period 119 778 58 875 65 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 19. Debt securities issued Range of In thousands of Belarusian Rubles interest 31 December 31 December rates* Maturity 2018 2017 Bonds held by the National Bank RR 2023 - 2051 1 244 389 1 346 669 Debt securities with floating rate RR - RR+2% 2019 - 2025 474 225 438 986 Debt securities with fixed rate 2% - 6% 2019 - 2027 204 310 102 225 Total debt securities issued 1 922 924 1 887 880 * RR – refinancing rate, established by the National Bank As at 31 December 2018 bonds in the amount of 14 054 thousand of Rubles (as at 31 December 2017: 11 906 thousand of Rubles), nominated in Belarusian Rubles were issued by the Group at the interest rates lower than those prevailing in the securities market. Due to the specificity of the counterparties and the direction of use of the attracted amounts the benefit of low interest rate debt securities is treated as a government grant and determined as the difference between the fair value and the amount received (Note 20). 20. Government grants For the year ended For the year ended 31 In thousands of Belarusian Rubles 31 December 2018 December 2017 Balance at the beginning of the period 372 830 232 148 Amortization for the period (2 274) (2 651) Additions for the period 151 910 143 333 Balance at the end of the period 522 466 372 830 The Group recognized as a government grant the amount of benefits provided to the Group by low interest rates on deposits attracted from state-owned banks under the family capital management program, on placing of own debt securities to government bodies and legal entities to finance government programs. As at 31 December 2018 and 31 December 2017 the amount of government grant referred to the funds attracted under the family capital management program is 512 060 thousand of Rubles and 360 150 thousand of Rubles, respectively. At initial recognition these deposits and borrowings are recognized at fair value measured using appropriate market interest rates for instruments that are considered to be similar, if any. The difference between the fair value and the amount received is recognized as a government grant. Subsequent to initial recognition, the Group recognizes in profit or loss part of the state subsidy in the amount equal to the amortization charge of the relevant liability. 21. Other liabilities 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Financial liabilities 43 501 20 676 Due to suppliers 42 756 20 154 Other 745 522 Non-financial liabilities 15 018 11 365 Provision for contingent liabilities (Note 27) 10 802 6 435 Taxes payable, other than income tax 1 320 2 617 Other 2 896 2 313 Total other liabilities 58 519 32 041 66 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 22. Share capital (a) Issued capital The majority stake of the Development bank is owned by the Republic of Belarus. The State Property Committee of the Republic of Belarus acts as holder of the shares of the Council of Ministers of the Republic of Belarus. As at 31 December 2018 and 31 December 2017, declared, issued and fully paid share capital consisted of 150 058 610 and 125 558 610 ordinary shares. The par value of shares is 10 Rubles. As at 31 December 2018 the share capital was 1 696 694 thousands of Rubles, including in the hyperinflation effect of 230 134 thousands of Rubles and fair value adjustment of increase in share capital through investment of shares of JSC “Promagroleasing” in the amount of (34 026) thousand of Rubles. On 14 August 2018 the additional increase of the share capital of the Development Bank at the expense of republican budget amounted to 245 000 thousand of Rubles in accordance with the Decree of the President of the Republic of Belarus. All common (ordinary) shares are fully paid, give the right to one vote, as well as the right to receive dividends and participation in residual assets. (b) Dividends According to the Belarusian legislation, the Development Bank distributes profits in the following two ways: - as generation of and contributions to the funds; - as dividends. As at 31 December 2018 the Group’s dividends for 2017 in the amount of 33 531 thousand of Rubles were declared and paid, including 26 246 thousand of Rubles of the Development Bank. Total dividends per 1 share of the Development Bank amounted to 0,27 Rubles in 2017. As at 31 December 2017 the Group’s dividends for 2016 in the amount of 32 924 thousand of Rubles were declared and paid, including 29 147 thousand of Rubles of the Development Bank. Total dividends per 1 share of the Development Bank amounted to 0,26 Rubles in 2016. Payment of dividends is made on the basis of resolution of the General Meeting of Shareholders through the distribution of net profit recognized in the financial statements prepared in accordance with the Belarusian legislation. 23. Risk management The Group maintains and develops the risk management system in compliance with the requirements of international risk management standards, including the recommendations of the Basel Committee on Banking Supervision as well as the requirements and recommendations of the National Bank. The top-level document that defines standard requirements for the Development Bank and the members of the Group regarding the organization of the risk management system is the Risk Management Policy in the Group, according to which the main objectives of the risk management system in the Group are: 67 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - ensuring long-term financial reliability of the Group members while attaining its strategic objectives; - ensuring capital adequacy under international financial reporting standards to cover the risks of the Group. These objectives are achieved by completing the following tasks: - developing the adequate risk management organizational structure that complies with the nature, complexity and volumes of transactions performed; - making each Group’s employee understand the importance of procedures designed to identify risks and measures taken to reduce the Group’s exposure as well as ensure personal involvement and accountability for high performance within their roles and responsibilities; - formation of a risk management process, both at the level of deals (transactions) performed and at the portfolio level, which implies the aggregation of homogeneous deals (transactions); - creation of effective interaction within the framework of the information exchange system between the Group's participants, ensuring regular information about the risks in the Group at all levels of the organizational and functional structure of the risk management system. The organizational structure of the risk management system of the Group is represented at five levels: The first level is represented by the Supervisory Board, which provides for organizing risk management system, the elimination of conflicts of interest and the conditions of their occurrence in the risk management process, establishes the business strategy, monitors the effectiveness of the risk management system. Risk Management Committee, Audit Committee, Committee on Budget, Remunerations and Appointments, Strategic Development Committee are established and operate under the Supervisory Board. The second level is represented by the Management Board, which organizes the risk management system and ensures that the goals and objectives established by the Supervisory Board in this area are met. Within the frames of powers and responsibilities established by the Management Board of the Development Bank the Committees (such as Credit and Finance Committees, Committee on Toxic Assets Management) are functioning. The third level is represented by an officer responsible for risk management in the Development Bank and the risk management department. The functions of the Risk Officer in the Development Bank are: - regularly monitors the provision of independent risk management functions, as well as general control over the level of risks of the Development Bank, including risk tolerance approved by the Supervisory Board; - organizes the development of risk management strategies of the Development Bank as an integral part of its development strategy; - organizes planning of actions aimed at the development of strategic goals, including the development of risk management; - makes proposals for improving the activities related to the organization of the risk management system, eliminating the conflict of interests and the conditions for its occurrence in the risk management process; - performs other functions. 68 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Risk management department’s responsibilities include: - independent assessment, monitoring, risk limiting and control, stress testing of the Group's exposure to risk factors, with the elaboration of measures designed to limit and optimize risks; - ensuring the continuous informing of the Management bodies and the Risk Officer on risk management issues. The fourth level is represented by other units engaged in risk management within their competence. The fifth level is represented by the Internal Audit sector, which assesses the effectiveness of the risk management system as well as monitors its compliance with local regulatory legal acts regulating risk management issues. The Group risks are monitored using the consolidated risk-profile, management reporting to be considered by the Supervisory Board, Risk Management Committee of the Supervisory Board, Management Board, officer responsible for risk management in the Development Bank, executive directors supervising the activities of JSC “Promagroleasing” and UE “BR-Consult”. The Group identifies the following main types of risks that have or may have an impact on its activity: - market risk (interest risk and currency risk); - credit risk; - liquidity risk; - country risk; - operational risk; - other risks (reputation risk, strategic risk). (a) Market risk Market risk is the risk that the Group will incur losses or failure to receive the expected capital gains from the changes in the value of balance sheet and off-balance sheet items related to the trading portfolio as well as the value of items denominated in foreign currencies and commodities as a result of changes in market prices of financial instruments and commodities due to changes in foreign currency exchange rates, market interest rates and other factors. Market risk arises from open positions on interest rate, currency and equity financial instruments that are exposed to general and specific market movements and changes in the level of market prices volatility. (i) Interest rate risk Interest rate risk is the risk of losses and failure to receive the expected capital gains from changes in the value of balance sheet and off-balance sheet items due to fluctuations in interest rates. The interest rate policy is aimed at determining the optimal approaches to setting interest rates on raised/allocated funds and receiving interest income, which allows to cover maintenance expenses of the Group and to make specific allowance for potential losses on off-balance assets and operations. The total Group’s interest rate risk is most significantly affected by the interest rate risk of the Development Bank. The implementation of the Development Bank’s interest rate policy is carried out by structural units responsible for developing the rationale for the interest rates applied and funds raising/allocation decisions as well as by the Finance Committee of the Development Bank (except for the cases when the cost of income generating assets and paid liabilities is 69 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements determined in regulatory legal acts as well as by the Supervisory Board of the Development Bank and the Management Board of the Development Bank). In the interest rate risk management process the following basic tools (methods) are used: - establishment and control of interest rate risk tolerance indicators set up by the Supervisory Board of the Development Bank; - development and analysis (for consideration by the Finance Committee) of the Plan of Financing Government Programs and Activities by the Development Bank in conjunction with the resource provision of the planned lending operations, indicating the value of loans (including the reimbursement/compensation of losses of the Development Bank) and funding; - elaboration of the issues of the systemically important banks’ assets transfer to the balance sheet of the Development Bank in conjunction with the planned funding (its terms and cost); - development and analysis of the Forecast Balance sheet, the budget of the Development Bank, funding matrix; - exercising the Group’s rights under contractual relationships to terminate contracts early (in accordance with the law); - forming the system of key interest rate risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to interest rate risk factors; - conducting a comprehensive assessment of interest rate risk level through formation of risk assessment analysis card of the Development Bank and the Group; - planning of the profitability of operations (including, the target weighted average return depending on funding sources); - application of standard interest rates, inclusion in loan agreements of clauses providing the possibility for the Development Bank to revise interest rates in the event of occurrence of events specified in the contract; - development and analysis of the interest rate risk profile; - assessment of the impact of interest rate risk on interest income and the financial result of the Group; - analysis of the structure of income assets and paid obligations for the detection of concentration zones (in particular, the terms of the return obtained non-targeted resources, financing of target assets by non-targeted obtained resources); - formation and analysis of the revaluation schedule of assets and liabilities sensitive to changes of the interest rate; - analysis of drafts of local regulations of the Development Bank on the use of instruments to reduce various types of interest risk; - assessment of the negative impact of liquidity and credit risk factors on the Group’s interest rate risk; - monitoring and analysis of the macroeconomic parameters of the Republic of Belarus to determine a possible scenario for further dynamics of the basic indicators (in particular, inflation, exchange rate dynamics, current account balance) that can influence the further trend of interest rate changes. Cash flow sensitivity analysis to changes in interest rates The sensitivity analysis of profit or loss for the year to changes in market interest rates on financial instruments with floating rates is based on a simplified scenario of a parallel decrease or increase in yield curves by 100 basis points and positions on interest-bearing assets and liabilities in effect as at 31 December 2018 and 31 December 2017, and can be represented as follows: 70 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 31 December 2018 31 December 2017 In thousands of Belarusian Rubles Profit (or loss) Equity Profit (or loss) Equity Increase of interest rates by 100 basis points 17 673 13 268 25 572 19 186 Decrease of interest rates by 100 basis points (17 673) (13 268) (25 572) (19 186) Sensitivity analysis of fair value changes of investment securities to interest rate changes Equity sensitivity analysis to fair value changes of financial assets due to interest rate changes (prepared based on positions effective as at 31 December 2018 and 31 December 2017, and simplified scenario of parallel increase or decrease of interest rates in yield curves by 100 basis points) can be represented as follows. 31 December 2018 31 December 2017 Increase by Decrease by Increase by Decrease In thousands of Belarusian Rubles 100 b.p. 100 b.p. 100 b.p. by 100 b.p. Investment securities FVOCI (39 668) 52 962 (23 909) 32 973 Net effect on equity (39 668) 52 962 (23 909) 32 973 Influence on equity is determined taking into account the tax effect calculated with the use of the theoretical income tax rate applicable to the Development Bank and relevant entity of the Group. (ii) Currency risk Currency risk is the risk of losses and failure to receive expected capital gains from changes in the value of the Group’s balance sheet and off-balance sheet items denominated in foreign currencies due to changes in foreign currency exchange rates. The Group has assets and liabilities denominated in foreign currencies. Currency risk arises when the available or expected assets in any foreign currency are either above or below the available or expected liabilities denominated in the same currency. The Group applies the following instruments to manage currency risk: - ensuring compliance with the standard for limiting currency risk established for the Development Bank by the National Bank; - establishment and control of currency risk tolerance indicators; - implementation of the Credit Policy according to which loans in foreign currency are provided for the realization by borrowers of currency-repaid investment projects and (or) if the borrower has revenue in foreign currencies in the amount enough to fulfill its obligations to the Development Bank; - forming the system of key currency risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to currency risk factors; - conducting a comprehensive assessment of exchange risk level through formation of risk assessment analysis card of the Development Bank and the Group; - application of hedging instruments, particularly, performing currency transactions and transactions with financial instruments (forward transactions, swap transactions); - diversification of currency structure of assets and liabilities; - formation of proposals to eliminate currency risk. 71 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The following table shows the structure of financial assets and liabilities by currency as at 31 December 2018: In thousands of Belarusian Other Rubles BYN EUR USD RUB currencies Total Assets Cash and cash equivalents 3 042 8 847 20 260 10 564 421 43 134 Due from banks 387 245 94 411 58 392 17 856 - 557 904 Investment securities 861 144 458 456 1 031 279 - - 2 350 879 Loans to customers 2 421 056 831 971 962 492 253 194 2 552 4 471 265 Other financial assets 2 330 80 350 2 390 187 5 337 Total assets 3 674 817 1 393 765 2 072 773 284 004 3 160 7 428 519 Liabilities Due to banks 27 007 1 042 130 1 159 926 44 071 - 2 273 134 Customer accounts 472 933 235 271 119 897 136 963 - 965 064 Debt securities issued 1 752 668 65 383 104 873 - - 1 922 924 Other financial liabilities 31 327 321 513 11 334 6 43 501 Total liabilities 2 283 935 1 343 105 1 385 209 192 368 6 5 204 623 Net currency position 1 390 882 50 660 687 564 91 636 3 154 2 223 896 Fair value of derivative foreign-currency denominated financial instruments is included in this analysis by currencies. The analysis of currency risk of derivative financial instruments as at 31 December 2018 is presented in the following table: In thousands of Belarusian Other Rubles BYN EUR USD RUB currencies Total Claims under derivative financial instruments - 4 947 - 49 629 - 54 576 Liabilities under derivative financial instruments - (49 468) (4 948) - - (54 416) Net position on derivative financial instruments - (44 521) (4 948) 49 629 - 160 Total open currency position 1 390 882 6 139 682 616 141 265 3 154 2 224 056 The following table shows the structure of financial assets and liabilities by currency as at 31 December 2017: In thousands of Belarusian Other Rubles BYN EUR USD RUB currencies Total Assets Cash and cash equivalents 3 132 10 844 39 804 13 705 627 68 112 Due from banks 249 055 118 208 59 946 37 941 - 465 150 Investment securities 918 057 318 737 491 014 - - 1 727 808 Loans to customers 2 210 246 602 971 549 205 213 710 1 988 3 578 120 Other financial assets 1 307 391 338 3 500 257 5 793 Total assets 3 381 797 1 051 151 1 140 307 268 856 2 872 5 844 983 Liabilities Due to banks 50 359 788 186 627 929 29 156 - 1 495 630 Customer accounts 235 680 219 333 58 875 116 549 - 630 437 Debt securities issued 1 817 562 70 318 - - - 1 887 880 Other financial liabilities 15 381 99 52 5 119 25 20 676 Total liabilities 2 118 982 1 077 936 686 856 150 824 25 4 034 623 Net currency position 1 262 815 (26 785) 453 451 118 032 2 847 1 810 360 72 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Fair value of derivative foreign-currency denominated financial instruments is included in this analysis by currencies. The analysis of currency risk of derivative financial instruments as at 31 December 2017 is presented in the following table: In thousands of Belarusian Other Rubles BYN EUR USD RUB currencies Total Claims under derivative financial instruments - - - 11 392 - 11 392 Liabilities under derivative financial instruments - - (11 382) - - (11 382) Net position on derivative financial instruments - - (11 382) 11 392 - 10 Total open currency position 1 262 815 (26 785) 442 069 129 424 2 847 1 810 370 As at 31 December 2018 and 31 December 2017, 45.5% and 39.0% of loan portfolio respectively are represented by foreign currency loans. Depending on the borrowers’ cash flows, the increase of foreign currency exchange rates against the Belarusian Ruble (BYN), all other things being equal, may have negative impact on the ability of borrowers to repay loans, which in turn increases the likelihood of future loan losses. Sensitivity analysis of profit or loss for the period resulting from changes in exchange rates (based on the positions effective as at 31 December 2018 and 31 December 2017 and a simplified scenario of 30% appreciation and 10% depreciation of the foreign currencies presented in the balance sheet against the Belarusian Ruble) can be presented as follows: 31 December 2018 31 December 2017 In thousands of Belarusian Rubles Profit (or loss) Equity Profit (or loss) Equity Strengthening of EUR by 30% 1 842 1 857 (8 036) (5 745) Weakening of EUR by 10% (614) (619) 2 679 1 915 Strengthening of USD by 30% 204 785 157 113 132 621 101 756 Weakening of USD by 10% (68 262) (52 371) (44 207) (33 919) Strengthening of RUB by 30% 42 380 34 321 38 827 31 475 Weakening of RUB by 10% (14 127) (11 440) (12 942) (10 492) Influence on equity is determined taking into account the tax effect calculated with the use of the theoretical income tax rate applicable to the Development Bank and relevant entity of the Group. (b) Credit risk The Group is exposed to credit risk, which is the risk of the Group incurring loss or failing to receive the expected income due to non-fulfillment, untimely or incomplete fulfillment of financial or other property obligations to the Group by debtors under contract terms or the law. The main purpose of credit risk management is keeping the credit risk at an acceptable level to ensure the financial stability of the Group. This objective is achieved by performing the following tasks: - establishment and control of credit risk tolerance indicators; - organization of the lending process that ensures the proper separation of powers and responsibilities, eliminates conflicts of interest in decision making and performing transactions exposed to credit risk; 73 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - competitive selection of investment projects in cases determined by law; - identification and analysis of credit risk factors at the borrower (group of related borrowers) level/financed project level, as well as at the loan portfolio level; - keeping the methodological procedures on performance of transactions exposed to credit risk, organization of lending process and the credit risk management system up to date; - ensuring good operation of the credit risk monitoring system, which allows to identify negative trends in credit risk changes at the borrower (group of related borrowers) level, as well as at the loan portfolio level; - use of credit risk limits system and exercising control over compliance with those limits; - forming the system of key credit risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to credit risk factors; - conducting a comprehensive assessment of credit risk level through formation of risk assessment analysis card of the Development Bank and the Group; - use of modern information systems, software and hardware that enable the collection, processing and analysis of information in order to manage credit risk; - assessment of credit risk level (size) made by risk management department independently from business units; - continuous and timely preparation and submission of management reporting on credit risk to the Supervisory Board, the Risk Management Committee of the Supervisory Board, the Management Board, the Credit Committee, the Risk Officer in the Development Bank. In order to minimize credit risk the Group organizes the lending process according to the following principles: - collective decision-making; - separation of decision-making powers subject to risk exposure; - decision-making based on prudent risk assessment; - monitoring credit-related transactions until the client fulfills his obligations to the Group in full; - comprehensive assessment of risk exposure during consideration and decision-making. The credit risk management system operates at the borrower level/financed project level and the loan portfolio level. The credit risk management at the borrower level/financed project level aims at minimizing risks of each credit transaction and includes: - assigning credit rating to the client based on the relevant internal regulations; - classifying customers’ debt by credit risk level and forming of allowances for potential losses on transactions exposed to credit risk; - assessment of compliance with credit risk limits at the client level; - considering business plans of all investment projects by specialized structural unit; - making report on feasibility (non-feasibility) of the credit transaction by the lending service; - performing risk expertise of credit transactions by risk management, including the assessment of customer, project, collateral risks; - considering the credit transaction by the authorized body of the Group; - performance of credit monitoring until the client fulfills his obligations to the Group in full, including: - allocating a risk area to the project according to early warning signals; - developing a system of measures to address distressed projects including involving local authorities, ministries and state agencies. Credit risk management at the loan portfolio level is carried out by the following ways: - portfolio structuring based on segment analysis and monitoring indicators of credit risk concentration; 74 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - portfolio diversification by maturities, currencies, types of collateral, industries; - control of compliance with credit risk limits at the loan portfolio level set by the authorities, credit portfolio quality (with inclusion in the system of material incentives); - assessment of compliance of planned and actual indicators of the credit risk level (size); - monitoring trends in indicators of debt volume, structure (by maturities, industries, currencies etc.) and (potentially) bad debt share; - continuous keeping and analyzing customer and industry databases based on internal and external sources; - organization of work with bad debts. In assessing the expected credit loss, the Group assesses whether there has been a significant increase in the credit risk of a financial asset since its initial recognition. Significant increase in credit risk In making an assessment whether there has been a significant increase in the credit risk of a financial instrument since its initial recognition, the Group considers reasonable and verified information that is appropriate and available without undue expenses or effort. The evaluation includes both quantitative and qualitative information, as well as analysis, which is based on the Group's historical experience, expert evaluation of credit quality and predictive information. The criteria for determining a significant increase in credit risk are different depending on the portfolio and include both quantitative changes in the probability of default and qualitative factors, including the “limiter” indicator in terms of the delay. When assessing for a significant increase in credit risk, the expected credit loss for the remaining full term is corrected with due allowance for the amendment of repayment period. Based on an expert assessment of credit quality and, where is possible, relevant historical experience, the Group can conclude that there has been a significant increase in credit risk of a financial instrument if certain qualitative indicators indicate this which are indicators of a significant increase in the credit risk, the effect of which cannot be timely identified completely as part of quantitative analysis. Below is a list of qualitative characteristics, and the identification of them the Group recognizes a significant increase in the credit risk: - a reduction in the international credit rating of a counterparty bank or a sovereign securities issuer, or a decrease in the rating calculated on the basis of the Group's internal methodology, from the initial recognition by one step but not below the pre-default level (the “Ca” rating by the methodology of Moody's, “CC-”- according to S & P methodology, “CC”- according to Fitch methodology); - a decrease in the internal credit rating of the borrower to the level of “high” with the initial recognition of an asset with internal credit ratings “low” or “medium”; - the availability at the reporting date of information on major litigation, where the borrower acts as a defendant; - loss-making activities of the counterparty bank; - failure by the counterparty bank to comply with the standards of safe operation established by the regulator. As a characteristic of a “limiter” indicative a significant increase in the credit risk for a financial asset since its initial recognition, the Group considers the existence of a delay in this asset for more than 30 days, or for assets in banks and sovereign debts over 10 days. The number of days of arrears is determined by counting the number of days, starting from the earliest day, when full payment 75 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements was not received. Dates of payment are determined without taking into consideration the grace period that can be provided to the borrower. Forecast information Group includes forecast information both in the assessment for a significant increase in credit risk since the initial recognition of the financial instrument and in the assessment of expected credit losses. The group uses expert judgment to evaluate the forecast information. This assessment is also based on information obtained from external sources. External information may include economic data and forecasts published by government bodies, such as the National Bank of Belarus, the Ministry of Finance, and other official sources of information. Group has identified and documented a list of the main factors affecting the assessment of credit risk and credit losses for each portfolio of financial instruments and, using historical data analysis, assessed the relationship between macroeconomic variables, credit risk and credit losses. Forecasts of GDP are defined as a key factor. Economic scenarios used as at December 31, 2018, included the following key performance indicators for the Republic of Belarus and the selected regions for the years ended 31 December 2019 and 2020. 2019 2020 Growth of GDP of the Republic of Basic rate 2,89% Basic rate 2,32% Belarus Growth of GDP of the USA Basic rate 2,3% Basic rate 2,13% Growth of GDP of Eurozone Basic rate 1,5% Basic rate 1,7% Growth of GDP of Russian Basic rate 1,5% Basic rate 1,8% Federation Growth of GDP of Central America Basic rate 1,8% Basic rate 1,3% The projected ratios between the key indicator, the events of default and the level of losses for various portfolios of financial assets were developed on the basis of historical data analysis for the last 3-10 years. The use of internal classification by credit ratings Counterparty banks For banks, which have an international rating, the classification is carried out according to that rating. Ratings set by Moody's methodology, S&P and Fitch are taken into account. For banks, which do not have an international rating, quasi-rating is calculated. For quasi-rating calculation Group uses the combination of factors used by international rating agencies and compare key performance indicators with a set of similar banks which have an international rating. When determining the quasi-rating, the rating of the country in which the bank is a resident is used. The final rating calculated by internal methodology is divided into “Low” - corresponds to the investment-grade credit risk by the methodology of Moody's, S&P and Fitch, “Medium” is the level of credit risk defined between non-investment grade and highly speculative according to methodology of Moody's, S&P and Fitch, “High” - corresponds to a substantial and extremely speculative risk by the methodology of Moody's, S&P and Fitch and “Default” - corresponds to the default rating by the methodology of Moody's, S&P and Fitch. 76 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Government bodies For the government bodies rating corresponds to the long-term credit rating of the Republic of Belarus, which, as at December 31, 2018 is set by S&P and Fitch at B level and by Moody's at B3 level, which corresponds to the “Medium” risk level by the Group's internal methodology. Corporate clients The internal credit rating is determined in accordance with the Development Bank’s internal methods and is divided into “Low”, “Medium”, “High” and “Default”. “Low” risk is assigned to borrowers who have a stable and positive financial performance, without restructuring facts and without overdue debt over 30 days. “Medium” risk is assigned to borrowers who have a positive financial performance, without restructuring facts during the previous 12 months before the reporting date, rescheduling of maturity dates within 2 years preceding the reporting date as well as without overdue debt over 30 days, but for which for certain quantitative and qualitative performance indicators Group assigns a medium risk. These indicators include: assessments of financial condition, state of payments, growth dynamics, turnover estimates, debt burden, business risk and credit history. “High” risk is assigned to borrowers whose obligations to the Group have not been defaulted and for which at least one of the following conditions is met: - there is a rescheduling of intermediate maturities dates for the borrower’s financial assets within 2 years preceding the reporting date; - there is an overdue debt over 30 days and less than 90 days as at reporting date. “Default” is assigned to borrowers for which at least one of the following conditions is met: - significant weakening of financial standing of the company; - there is an overdue debt over 90 days; - forced restructuring due to financial difficulties of the debtor, within the previous 12 months before the reporting date. The Group also applies the concept of cure of credit debt. Cure of credit debt is a way out of the state of default due to improved credit quality of debt. The observation period for determining the cure of credit debt after a forced restructuring is 12 months, after the presence of overdue debt more than 90 days – the period of the debtor's full repayment of his debt, increased by 90 days. In the event of bankruptcy of the debtor or write-off of the financial asset, cure of the credit debt is impossible. The maximum exposure to credit risk is generally recorded in the Carrying amount of financial assets in the consolidated statement of financial position and in the amount of unrecognized contractual commitments. Possible netting of assets and liabilities is not significant for reduction of the potential credit risk. 77 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The maximum exposure to credit risk in respect of financial assets as at 31 December 2018 and 31 December 2017 may be presented as follows: 31 December In thousands of Belarusian Rubles 31 December 2017 2018 Assets Cash and cash equivalents 43 134 68 112 Due from banks 557 904 465 150 Investment securities 2 350 879 1 727 808 Loans to customers 4 471 265 3 578 120 Other financial assets 5 337 5 793 Total maximum exposure 7 428 519 5 844 983 (c) Liquidity risk Liquidity risk is a risk of the Group’s losses, failure to receive the expected income due to the inability to fulfill its obligations on time and in full. Liquidity risk arises as a result of imbalance of terms of the Group’s financial assets and financial liabilities (including untimely fulfillment of financial obligations by one or more counterparties) and (or) an unexpected need for immediate and simultaneous fulfillment of the Group’s financial obligations. The Group distinguishes the following types of liquidity risk: - funding liquidity risk is a risk of losses, failure to receive the expected income due to inability to efficiently satisfy its current or future needs (expected or unexpected) in cash and (or) property for collateral; - market liquidity risk is a risk of losses, failure to receive the expected income due to inability to easily sell or acquire assets (liabilities) at fair market value due to lack of market depth, which does not allow to increase the volume of transactions without a significant change in their prices or destabilization of the market. The Group applies the following basic tools to manage liquidity risk: - ensuring compliance with the standards established by the National Bank; - establishment and control of liquidity risk tolerance indicators; - forming the system of key liquidity risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to liquidity risk factors; - conducting a comprehensive assessment of liquidity risk level through formation of risk assessment analysis card of the Development Bank and the Group; - liquidity planning; - linking (primarily in terms of direct lending) of the Development Bank's active operations with resources for amounts, timing and cost (including at the planning stage), including: - development and analysis of the Development Bank's Forecast Balance sheet, including linking of the expected active operations with funding sources; - cash flow planning and analysis to determine the liquidity gap (deficit/surplus) and to identify the main liquidity risk factors within the preparation/performance analysis of the Development Bank's Forecast Balance sheet by currency; - a daily forecast of the Development Bank's cash flows by currency by the Treasury; - diversification of the Development Bank's resources and their investment directions (for financial instruments, counterparties, maturities, currencies); - creation and maintenance of liquidity reserves of the Development Bank; - purposeful maintenance at a minimum level of the amount of obtained funds subject to the risk of early withdrawal; 78 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - maintaining the amount of obtained resources with long maturity (family capital funds, deposits of the Ministry of Finance, funds raised through the issuance of bonds of the Development Bank, and interbank loans with long maturities); - control over the indicators of liquidity crisis; - development of the Financing Plan in situations of the liquidity crisis of the Development Bank, a list of key activities aimed at restoring liquidity and identifying responsible structural units for their implementation; - monitoring the environment making an impact on the Group's liquidity management process (developments in international financial markets, the liquidity of the banking system of the Republic of Belarus, the availability of refinancing instruments of the National Bank to commercial banks). 79 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The table below represents an analysis of financial assets and liabilities by contractual maturities (Carrying amount) as at 31 December 2018 (the analysis is made based on ultimate contractual maturities and may differ from the actual payments made, and the amount of overdue payments presented in the category "up to 1 month" while the non-overdue part of the debt based on contractual terms): 31 December 2018 In thousands of Belarusian Rubles 1 month 3 months More than Carrying Up to 1 month to 3 months to 1 year 1 year amount Financial assets Cash and cash equivalents 43 134 - - - 43 134 Due from banks 20 286 1 719 44 351 491 548 557 904 Investment securities 6 870 92 900 53 242 2 197 867 2 350 879 Loans to customers 151 878 184 172 923 298 3 211 917 4 471 265 Other financial assets 5 337 - - - 5 337 Total financial assets 227 505 278 791 1 020 891 5 901 332 7 428 519 Financial liabilities Due to banks 126 282 132 329 800 674 1 213 849 2 273 134 Customer accounts 49 231 104 020 46 684 765 129 965 064 Debt securities issued 137 402 83 631 148 233 1 553 658 1 922 924 Other financial liabilities 43 501 - - - 43 501 Total financial liabilities 356 416 319 980 995 591 3 532 636 5 204 623 Net position as at 31 December 2018 (128 911) (41 189) 25 300 2 368 696 2 223 896 80 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The table below represents an analysis of financial assets and liabilities by contractual maturities (Carrying amount) as at 31 December 2017: 31 December 2017 In thousands of Belarusian Rubles 1 month 3 months More than Carrying Up to 1 month to 3 months to 1 year 1 year amount Financial assets Cash and cash equivalents 68 112 - - - 68 112 Due from banks 3 721 23 373 94 213 343 843 465 150 Investment securities 21 428 1 916 46 087 1 658 377 1 727 808 Loans to customers 107 798 159 076 703 491 2 607 755 3 578 120 Other financial assets 5 793 - - - 5 793 Total financial assets 206 852 184 365 843 791 4 609 975 5 844 983 Financial liabilities Due to banks 314 116 3 723 193 723 984 068 1 495 630 Customer accounts 48 549 5 011 19 625 557 252 630 437 Debt securities issued 69 545 51 228 40 873 1 726 234 1 887 880 Other financial liabilities 20 676 - - - 20 676 Total financial liabilities 452 886 59 962 254 221 3 267 554 4 034 623 Net position as at 31 December 2017 (246 034) 124 403 589 570 1 342 421 1 810 360 Further analysis of the liquidity risk considers contractual amounts of future payments on financial liabilities that are payable in accordance with the payment terms. Such amounts include future interest payments and may differ from amounts stated in the financial statements. The maturities in the item “Debt securities issued”, in particular, are up to 2051 and its interest rate is equal to the refinancing rate of the National Bank. Consequently, contractual amounts are significantly higher than carrying amounts. 81 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements In thousands of Belarusian Rubles Total as at Up to 1 1 month 3 months More than 31 December Carrying amount as at Financial liabilities month to 3 months to 1 year 1 year 2018 31 December 2018 Due to banks 127 767 136 758 824 205 2 861 566 3 950 296 2 273 134 Customer accounts 53 585 112 519 75 859 793 288 1 035 251 965 064 Debt securities issued 144 523 126 306 320 590 2 812 801 3 404 220 1 922 924 Other financial liabilities 43 501 - - - 43 501 43 501 Total future payments on financial liabilities 369 376 375 583 1 220 654 6 467 655 8 433 268 5 204 623 Derivative financial liabilities, including: inflow (54 576) - - - (54 576) - outflow 54 416 - - - 54 416 - Total flows of derivative financial liabilities (160) - - - (160) - In thousands of Belarusian Rubles Total as at Up to 1 1 month 3 months More than 31 December Carrying amount as at Financial liabilities month to 3 months to 1 year 1 year 2017 31 December 2017 Due to banks 314 893 6 910 224 307 1 774 705 2 320 815 1 495 630 Customer accounts 50 370 8 543 34 949 590 599 684 461 630 437 Debt securities issued 86 187 83 601 182 542 6 372 755 6 725 085 1 887 880 Other financial liabilities 20 676 - - - 20 676 20 676 Total future payments on financial liabilities 472 126 99 054 441 798 8 738 059 9 751 037 4 034 623 Derivative financial liabilities, including: inflow (11 392) - - - (11 392) - outflow 11 382 - - - 11 382 - Total flows of derivative financial liabilities (10) - - - (10) - 82 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements (d) Country risk The country risk is a risk of the Group’s losses, failure to receive the expected income as a result of non-fulfilment of obligations by foreign counterparties due to economic, political, social changes and due to the fact that the currency of monetary obligation may not be available to the counterparty due to the nature of legislation (regardless of the financial position of the counterparty). Within the framework of country risk management, the Group uses the following basic methods or tools: - establishment and control of country risk tolerance indicators; - internal control of the Anti-Money Laundering/Combating the Financing of Terrorism and Spreading of Mass Destruction Weapons line based on data provided by clients in the questionnaires; - conducting a comprehensive assessment of country risk level through formation of risk assessment analysis card of the Development Bank and the Group; - monitoring of country risk through the formation and analysis of the country risk profile of the Development Bank; - establishment by the Development Bank of country limits for active operations exposed to country risk; - forming the system of key country risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to country risk factors. The information on the geographic concentration of financial assets and liabilities as at 31 December 2018 is presented below: Countries of Countries of the the Organization for In thousands of Belarusian Commonwealth Economic Rubles The Republic of Independent Cooperation and of Belarus States Development Other Total Cash and cash equivalents 30 037 10 784 2 313 - 43 134 Due from banks 505 464 - - 52 440 557 904 Investment securities 2 350 879 - - - 2 350 879 Loans to customers 4 018 205 278 419 87 224 87 417 4 471 265 Other financial assets 2 424 2 583 8 322 5 337 Total financial assets 6 907 009 291 786 89 545 140 179 7 428 519 Due to banks 997 497 776 060 312 093 187 484 2 273 134 Customer accounts 965 064 - - - 965 064 Debt securities issued 1 922 924 - - - 1 922 924 Other financial liabilities 31 595 11 716 145 45 43 501 Total financial liabilities 3 917 080 787 776 312 238 187 529 5 204 623 Open position 2 989 929 (495 990) (222 693) (47 350) 2 223 896 83 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The information on the geographic concentration of financial assets and liabilities as at 31 December 2017 is presented below: Countries of Countries of the the Organization for In thousands of Belarusian Rubles Commonwealth Economic The Republic of Independent Cooperation and of Belarus States Development Other Total Cash and cash equivalents 11 192 34 266 22 654 - 68 112 Due from banks 398 118 - - 67 032 465 150 Investment securities 1 727 808 - - - 1 727 808 Loans to customers 3 280 776 187 157 270 109 917 3 578 120 Other financial assets 2 390 2 815 336 252 5 793 Total financial assets 5 420 284 224 238 23 260 177 201 5 844 983 Due to banks 699 800 556 691 235 130 4 009 1 495 630 Customer accounts 630 437 - - - 630 437 Debt securities issued 1 887 880 - - - 1 887 880 Other financial liabilities 15 551 5 032 51 42 20 676 Total financial liabilities 3 233 668 561 723 235 181 4 051 4 034 623 Open position 2 186 616 (337 485) (211 921) 173 150 1 810 360 (e) Operational risk Operational risk is a risk of the Group’s losses and (or) additional expenses as a result of non- compliance of the rules and procedures of performing banking operations and other transactions established by the Group with the legislation or failure of the personnel to comply with them, their incompetence or errors made by personnel of the Group, inadequacy or failure of systems used by the Group, including information systems, as well as due to external factors. Operational risk management is carried out by: - establishment and control of operational risk tolerance indicators; - optimal distribution of authorities, responsibilities and the order of communication in the process of operational risk management; - formation of appropriate control environment; - elimination of conflicts of interest and the conditions for their occurrence; - optimization of current business processes; - development of system of limits and restrictions; - forming the system of key operational risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to operational risk factors; - conducting a comprehensive assessment of operational risk level through formation of risk assessment analysis card of the Development Bank and the Group; - identifying and analyzing the main operational risk factors, keeping an internal and external database on operational risk; - investigation of operational risk facts in order to optimize processes, systems, technologies; - development of systems designed for banking operations automatization and information security; - use of outsourcing; - identification of customers and financial monitoring of their operations; - hiring qualified personnel, development of employees’ motivation; - development of action plans in case of unexpected situations related to operational risk; - conducting a self-assessment of operational risk by means of questionnaire; 84 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - factor assessment of operational risk in respect of procurement of goods (works, services) including those related to information technologies and information security with indicative cost of procurement exceeding 196 thousand Rubles; - internal auditing. (f) Reputational risk Reputational risk is a risk of the Group’s losses, failure to receive the expected income as a result of reduction of customer base, decrease in other development indicators due to negative public opinion about the financial stability of the Group, the quality of services provided or the nature of activities as a whole. Reputational risk may arise due to shortcomings in the organization of activities, malfunctioning of electronic banking systems, non-compliance with the legislation, local regulations of the Group, failure to follow the business partnership practices, violations of public morality and ethical principles in banking industry, suspected involvement of the Group or its employees in illegal financial transactions as well as illegal activities. The following procedures are carried out as part of reputational risk management: - establishment and control of reputational risk tolerance indicators; - arranging for economic, internal, physical and information security, banking and business secrecy; - identifying and analyzing the main reputational risk factors, controlling the cases of damage to business reputation; - forming the system of key reputational risk indicators and their regular monitoring; - regular stress testing of the Development Bank's exposure to reputational risk factors; - conducting a comprehensive assessment of the level of reputational risk through the formation of a risk assessment analysis card of the Development Bank and the Group; - effective recruiting and staff placement; - cooperation with mass media, promotion of the web-site; - regular publication of financial statements and disclosures; - participation of the Group in promoting sustainable social and cultural development of the state, including regular support of socially significant projects, through the provision of sponsorship. (g) Strategic risk Strategic risk is a risk of the Group’s losses, failure to receive the expected income as a result of errors (shortcomings) in making decisions that determine the Group's business strategy and development, and which results in nonrecognition or incomplete recognition of possible dangers that may threaten the Group's operations, incorrect or insufficiently substantiated determination of perspective areas of activity where the Group can achieve advantages over competitors, lack or provision of incomplete volume of necessary resources (financial, logistical, human resources) and organizational measures that should ensure the achievement of the objectives of the Group's activities. The following procedures are carried out as part of strategic risk management: - strategic planning for the year (elaborating key performance indicators of the Development Bank, tolerance indicators for risks specific for the Development Bank, plan of actions for strategic development plan realization); - regular comprehensive stress testing of risks; - forming the system of key strategic risk indicators and their regular monitoring; 85 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements - conducting comprehensive assessment of strategic risk level through formation of risk assessment analysis card of the Development Bank and the Group; - monitoring of strategic risk events. In 2016 the Supervisory Board of the Development Bank approved the Strategic Development Plan for 2016-2020 and the plan of the main activities for the implementation of the Strategy. 24. Capital management As at 31 December 2018 and 31 December 2017 the capital adequacy ratio of the Group calculated in accordance with the requirements of the Basel Capital Accord, as set in the International Convergence of Capital Measurement and Capital Standards (adopted in July 1988, updated in November 2005) and the Amendment to the Basel Capital Accord, which incorporated market risks (updated in November 2005), was as follows: In thousands of Belarusian Rubles 31 December 31 December 2018 2017 Tier 1 Capital Share capital 1 696 694 1 451 694 Retained earnings 331 087 177 143 Total tier 1 Capital 2 027 781 1 628 837 Foreign currency translation reserve 26 784 Fair value reserve of investment securities 968 199 Total tier 2 Capital 994 983 Total capital 2 028 775 1 629 820 Risk weighted assets 7 163 099 5 293 180 Tier 1 adequacy ratio 28,31% 30,77% General capital adequacy ratio 28,32% 30,79% Since 2016 the Development Bank has been subject to the requirements for the adequacy of regulatory capital, calculated on the basis of current legal requirements. The minimum level of the adequacy of regulatory capital established for the Development Bank is at least 10%, the established adequacy ratio with regard to the conservation buffer as at 31 December 2018 is 11,875% (as at 31 December 2017 – 11,25%). The Development Bank fulfilled all the requirements for supervisory regulation established by the National Bank as at 31 December 2018. 25. Economic environment Tax legislation The current Belarusian tax legislation mainly examines tax consequences of transactions on the basis of their legal form and their accounting in accordance with the Belarusian accounting rules. Correspondingly, the Group can structure its operations in such a way so that to use the opportunities, provided by the Belarusian tax legislation for the purpose of reduction of the common effective tax rate. The results of such adjustments do not influence the amount of income before taxation and tax charges presented in these consolidated financial statements. If any transaction is disputed by tax authorities, additional amounts of taxes can be charged and significant fines and penalties are probable. 86 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements As at 31 December 2018 the Management believes that the Group adheres to the adequate interpretations of the current legislation and the Group’s position in relation to tax issues will be supported by the controlling authorities. Certain provisions of Belarusian business and tax legislation in particular may contain different treatments and may be applied inconsistently. In addition, interpretations made by the Management may be different from official interpretations and compliance established by law may be disputed by the controlling authorities. As a result, the Group may be subject to additional tax payments and fines and other preventive actions. The Management of the Group considers that it has made the required tax and other payments and no additional provisions are needed in the consolidated financial statements. The previous financial years remain open for consideration by the controlling authorities. Legal claims Periodically in the course of the Group’s activities, customers and counterparties claim against the Group. The Management believes that as a result of investigation of the cases, the Group will not incur significant losses and accordingly no provision was created in the consolidated financial statements. 26. Fair value of financial instruments Fair value definition Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of the fair value is the quotation of financial instrument in an active market. Hierarchy of fair value of financial instruments For the purpose of disclosure of fair value information, the Development Bank has determined classes of assets and liabilities based on the nature, characteristics and risks of the asset or liability, and the level of the hierarchy of sources of fair value. In thousands of Belarusian Rubles Total 31 December 2018 Level 1 Level 2 Level 3 Carrying amount Assets measured at fair value Investment securities - 1 172 222 - 1 172 222 - 1 172 222 - 1 172 222 Assets, for which fair value is disclosed Cash and cash equivalents 43 134 - - 43 134 Due from banks - - 557 904 557 904 Investment securities - 336 604 842 053 1 178 657 Loans to customers - - 4 471 265 4 471 265 Other financial assets - - 5 337 5 337 43 134 336 604 5 876 559 6 256 297 Liabilities, for which fair value is disclosed Due to banks - 1 410 386 862 748 2 273 134 Customer accounts - - 965 064 965 064 Debt securities issued - 358 433 1 564 491 1 922 924 Other financial liabilities - - 43 501 43 501 - 1 768 819 3 435 804 5 204 623 87 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements In thousands of Belarusian Rubles Total 31 December 2017 Level 1 Level 2 Level 3 Carrying amount Assets measured at fair value Investment securities - 823 020 904 788 1 727 808 - 823 020 904 788 1 727 808 Assets, for which fair value is disclosed Cash and cash equivalents 68 112 - - 68 112 Due from banks - - 465 150 465 150 Loans to customers - - 3 578 120 3 578 120 Other financial assets - - 5 793 5 793 68 112 - 4 049 063 4 117 175 Liabilities, for which fair value is disclosed Due to banks - 927 172 568 458 1 495 630 Customer accounts - - 630 437 630 437 Debt securities issued - 126 304 1 761 576 1 887 880 Other financial liabilities - - 20 676 20 676 - 1 053 476 2 981 147 4 034 623 Information on fair value of financial instruments recognized in the consolidated financial statements at fair value As at 31 December 2018 and 31 December 2017 the fair value of investment securities, which interest rates and terms of circulation are close to market conditions, corresponds to their carrying amount. Investment securities classified as Level 2 are measured at fair value using observable inputs: trade value of similar debt securities with similar levels of risk, maturity and currency, and using information on the quotations of identical securities, on markets that are not active. Recognition of securities acquired by the Group in accordance with government programs of support to sectors of the economy, contractual interest rates of which are lower than market rates, due to the specifics of government programs and categories of issuers is performed at nominal value (Note 2). As at 31 December 2018 and 31 December 2017 fair value of investment securities, interest rates of which are below market average rates, corresponds to their carrying amount. These securities are included in Level 3 of the fair value hierarchy. Information on fair value of financial instruments not recognized in the consolidated financial statements at fair value The carrying amount of cash, accounts with the National Bank, other financial assets and liabilities due to the short-term nature of these financial instruments approximates their fair value. The сarrying amount of due to banks, debt securities issued with interest rates, which were consistent with average market rates at the time of initial recognition, approximates their fair value as at the reporting date due to the fact that for the majority of these financial instruments variable interest rates corresponding to the current market rates are set. Part of due from banks and debt securities issued, which do not have similar financial instruments at the market and was provided under government programs, and because of their uniqueness as well as the specifics of Government loan program and the category of borrowers, form a separate market segment, the Management of the Group recognizes such instruments at fair value, which is equivalent to the book value. 88 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements For the borrowings with fixed rates, attracted from banks by the Group's subsidiaries, the fair value was determined via discounted future cash flows using current rates for debts with similar terms, credit risk and maturity. Loans received by the Group from other state-owned banks and granted by the Group do not have similar financial instruments at the market, they were provided under government programs, and because of their uniqueness as well as the specifics of Government loan program and the category of borrowers make a separate market segment. The Management of the Group recognizes such instruments at fair value, which is equivalent to the nominal value. Interest rates on the majority of deposit contracts are set lower than the market average, however, due to the fact that these deposits are attracted to form the corresponding low-interest assets, the Management of the Group recognizes such instruments at fair value, which is equivalent to the nominal value. Accordingly, as at the reporting date, it is assumed that the fair value of these financial instruments approximates their сarrying amount. The table below represents the information on the financial liabilities, fair value of which differs from the Carrying amount. The difference is observed in debt securities issued and amounts due to banks attracted without forming relevant interrelated assets, for which the interest rates at the time of initial recognition did not correspond to the market average. 31 December 2018 31 December 2017 Carrying Carrying In thousands of Belarusian Rubles Fair value amount Fair value amount Due to banks 2 273 134 2 273 134 1 495 645 1 495 630 Debt securities issued 1 928 127 1 922 924 1 893 221 1 887 880 The table below represents the valuation methods used for the assessment of financial instruments, which fair value significantly differs from the carrying amount, and for which significant unobservable inputs are used: Type Valuation method Significant unobservable data Loans from banks Discounting of future Future cash flows, denominated in the Belarusian Rubles cash flows (BYN), are discounted at the refinancing rate of the National Bank increased by a corresponding margin, denominated in the foreign currency – at the rate for similar instruments prevailing in the market as of reporting date Debt securities Discounting of future Future cash flows are discounted at the refinancing rate of the issued cash flows National Bank Movement of financial instruments that are measured at fair value and related to Level 3 of the fair value hierarchy As at 31 December 2017, financial assets recorded at fair value and related to Level 3 of the fair value hierarchy include bonds acquired by the Group in accordance with government programs of support to sectors of the economy, contractual interest rates of which are lower than market rates. Initial recognition due to the specifics of government programs and categories of issuers is performed at nominal value (Note 2). As at 31 December 2017 fair value of investment securities, interest rates of which are below market average rates, corresponds to their carrying amount. Upon transition to IFRS 9 these securities were reclassified to the category of measured at amortized cost (Note 5). 89 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Reconciliation of financial instruments that are measured at fair value and related to Level 3 of the fair value hierarchy is presented below: For the year ended For the year ended In thousands of Belarusian Rubles 31 December 2018 31 December 2017 Opening balance 904 788 933 224 Impact of IFRS 9 on classification (904 788) - Acquisition - 175 644 Settlement and sales - (290 728) Income recognized in the statement of comprehensive - 86 648 income Closing balance - 904 788 27. Contingent liabilities In the medium course of its business to meet the needs of customers, the Group uses instruments that do not qualify for recognition criteria in the consolidated statement of financial position. These instruments include commitments on loans and unutilized credit lines, letters of credit issued and similar commitments, which carry credit risks of varying degrees. The maximum Group’s exposure for contingent liabilities is equivalent to the contractual cost of those instruments in the event of default by the other party of its obligations under the transaction and the impairment of all counterclaims and security. In regard to the contingent liabilities, the Group applies the same credit policies as for financial instruments presented in the consolidated statement of financial position. As at 31 December 2018 and 31 December 2017, the provision for contingent liabilities recognized in “Other liabilities” amounted to 10 802 thousand of Rubles and 6 435 thousand of Rubles, respectively. As at 31 December 2018 and 31 December 2017, the Group had not any non-cancellable operational lease liabilities. As at 31 December 2018 and 31 December 2017, nominal amounts or amounts under the contracts amounted to as follows: 31 December 31 December In thousands of Belarusian Rubles 2018 2017 Issued letters of credit 82 398 49 511 - covered 40 512 40 770 - uncovered 41 886 8 741 90 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 28. Non-controlling interest The following table presents the information attributable to Group's subsidiaries with significant non-controlling interests before excluding intra-group balances. 31 December 31 December JSC “Promagroleasing” 2018 2017 The percentage of non-controlling interest 16,93% 27,07% Net investment in leases 883 065 474 070 Other assets 591 594 411 258 Liabilities (892 857) (606 259) Net assets 581 802 279 069 Non-controlling interest 98 499 75 544 For the year ended 31 For the year ended December 2018 31 December 2017 Average percentage of non-controlling interest 23,74% 27,07% Income 177 549 130 359 Comprehensive income 54 973 42 494 Comprehensive income attributable to non- controlling interests 9 307 11 503 Net changes in cash and cash equivalents 12 773 (1 475) 29. Transactions with related parties The majority stake of the Development Bank belongs to the Council of Ministers of the Republic of Belarus, which has ultimate control over the Group. The Council of Ministers of the Republic of Belarus does not prepare publicly available financial statements. Since the establishment the Development Bank has carried out its activities primarily within the performance of certain Edicts of the President of the Republic of Belarus and Resolutions of the Council of Ministers of the Republic of Belarus. Transactions with related parties are performed by the Development Bank at the conditions equivalent to market conditions, except for the transactions under government lending programs and raising tied funds (Note 2). Conditions of transactions with investment securities are represented in Note 12, loans to customers – Note 13, customer accounts – Note 18, debt securities issued – Note 19. Transactions of the Group with related parties are presented as follows. 91 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 31 December 2018 In thousands of Belarusian Rubles State-owned Banks (under Government The National Key management Total transactions Total organizations common bodies Bank personnel with related financial (under common control of the parties reporting item control of the state) state) Cash and cash equivalents - 29 042 - 9 - 29 051 43 134 Due from banks 100 283 167 - - - 283 267 557 904 Investment securities 239 698 637 719 1 388 445 23 285 - 2 289 147 2 350 879 Loans to customers, before allowance for impairment 3 112 777 - 581 429 - - 3 694 206 4 838 085 Allowance for impairment of loans to customers (180 424) - (14 878) - - (195 302) (366 820) Current income tax asset - - 3 442 - - 3 442 4 344 Deferred income tax asset - - 7 488 - - 7 488 7 980 Other assets 173 607 - 91 476 - - 265 083 338 482 Due to banks - 932 718 - - - 932 718 2 273 134 Customer accounts 45 379 - 919 432 - - 964 811 965 064 Debt securities issued 278 954 276 703 11 992 1 244 389 - 1 812 038 1 922 924 Government grants 3 706 512 060 6 700 - - 522 466 522 466 Current income tax liability - - 4 693 - - 4 693 4 693 Deferred income tax liability - - 2 204 - - 2 204 2 371 Other liabilities 37 506 542 2 751 - 106 40 905 58 519 For the year ended 31 December 2018 In thousands of Belarusian Rubles State-owned Banks (under Government The National Key management Total transactions Total organizations common bodies Bank personnel with related financial (under common control of the parties reporting item control of the state) state) Interest income calculated using effective interest rate method 151 906 63 155 199 233 2 645 - 416 939 475 221 Other interest income 22 099 - 211 - - 22 310 53 459 Interest expense (14 189) (38 599) (37 260) - - (90 048) (148 646) Fee and commission income 6 648 2 1 845 - - 8 495 9 093 Fee and commission expense (133) (262) (658) (8) - (1 061) (1 930) Net other income 13 004 - 45 - - 13 049 26 653 Net (loss)/gain on securities transactions (506) (160) - - - (666) (259) Net gain on derivative financial instruments - 36 - - - 36 372 Cost of wholesale trade of subsidiaries (51 929) - - - - (51 929) (91 412) General administrative expenses - - - - (1 171) (1 171) (78 188) Effect of initial recognition of financial instruments at fair value (11 144) - - (12 671) - (23 815) (23 815) Recovery of allowance for impairment of financial instruments 63 794 4 767 (10 348) 804 - 59 017 64 904 Income tax expenses - - (64 210) - - (64 210) (61 713) 92 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 31 December 2017 In thousands of Belarusian Rubles State-owned Banks Government The National Key management Total Total financial organizations (under bodies Bank personnel transactions with reporting item (under common common related parties control of the control of the state) state) Cash and cash equivalents - 8 824 - 1 717 - 10 541 68 112 Due from banks - 233 706 - - - 233 706 465 150 Investment securities 108 944 727 254 801 503 40 928 - 1 678 629 1 727 808 Loans to customers, before allowance for impairment 2 321 640 - 716 491 - - 3 038 131 3 954 277 Allowance for impairment of loans to customers* (205 881) - (21 253) - - (227 134) (376 157) Current income tax asset - - 3 111 - - 3 111 3 704 Deferred income tax asset - - 32 455 - - 32 455 35 520 Other assets 87 979 - 34 753 - - 122 732 156 904 Due to banks - 620 925 - - - 620 925 1 495 630 Customer accounts 43 875 - 586 508 - - 630 383 630 437 Debt securities issued 137 974 331 026 10 159 1 346 669 - 1 825 828 1 887 880 Government grants 4 021 360 276 8 533 - - 372 830 372 830 Current income tax liability - - 4 793 - - 4 793 4 795 Deferred income tax liability - - 15 839 - - 15 839 15 993 Other liabilities 14 323 378 1 770 - 46 16 517 32 041 * Comparative data as of 31 December 2017 represent the amount of the allowance for impairment and reflect the basis of measurement in accordance with IAS 39. For the year ended 31 December 2017 In thousands of Belarusian Rubles State-owned Banks Government The National Key management Total Total financial organizations (under bodies Bank personnel transactions with reporting item (under common common related parties control of the control of the state) state) Interest income calculated using effective interest rate method 128 803 89 955 148 420 7 445 - 374 623 418 450 Other interest income 13 016 - 340 - - 13 356 36 043 Interest expense (13 630) (23 257) (32 858) - - (69 745) (102 421) Fee and commission income 233 - 2 022 - - 2 255 3 076 Fee and commission expense (94) (3 852) (5) - - (3 951) (4 897) Net other income 2 964 - - - - 2 964 9 470 Net (loss)/gain on securities transactions 865 244 - - - 1 109 973 Net gain on derivative financial instruments - (110) - - - (110) (110) Cost of wholesale trade of subsidiaries (63 983) - - - - (63 983) (64 190) General administrative expenses - - - - (1 172) (1 172) (59 304) Effect of initial recognition of financial instruments at fair value (56 915) - - - - (56 915) (56 915) Recovery of allowance for impairment of financial instruments 20 087 - (503) - - 19 584 4 972 Income tax expenses - - (35 842) - - (35 842) (34 318) 93 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 30. Offset of financial assets and financial liabilities Disclosure of information in the table below includes information on financial assets and financial liabilities that are subject of a legally valid master netting agreement or similar agreements applicable to similar financial instruments, regardless of whether they are offset in the consolidated statement of financial position or not. Similar financial instruments include sale and repurchase transactions, reverse repurchase transactions, agreements of securities borrowing and lending. The table below represents financial assets and financial liabilities that are subject of a legally valid master netting agreement or similar agreements. In thousands of 31 December 2018 Belarusian Rubles Total sums of Net amount of recognized financial Cost of financial instruments financial instruments in that were not offset in the Full amounts instruments the Statement statement of financial position Types of financial of recognized Net liabilities financial which were set off of Financial Financial Received amount liabilities in the Statement Position instruments cash of Financial (including non- collateral Position cash collateral) Sale and repurchase transactions, lending of 88 521 - 88 521 (88 521) - - securities or similar agreements Total financial 88 521 - 88 521 (88 521) - - liabilities In thousands of 31 December 2017 Belarusian Rubles Total sums of Net amount of recognized financial Cost of financial instruments financial instruments in that were not offset in the Full amounts instruments the Statement statement of financial position Types of financial of recognized Net liabilities financial which were set off of Financial Financial Received amount liabilities in the Statement Position instruments cash of Financial (including non- collateral Position cash collateral) Sale and repurchase transactions, lending of 39 567 - 39 567 (39 567) - - securities or similar agreements Total financial 39 567 - 39 567 (39 567) - - liabilities 94 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 31. Reconciliation of changes in liabilities and cash flows from financing activities Reconciliation of balances in the consolidated Statement of Financial Position as at the beginning and end of the period for liabilities arising from financial activities is as follows: For the year ended 31 For the year ended 31 In thousands of Belarusian Rubles December 2018 December 2017 Balance of the issued debt securities at the beginning 1 887 880 1 827 577 of the year Cash flow Addition 535 829 303 833 Repayment (510 876) (246 283) Total changes due to cash flows from financing 24 953 57 550 activities Non-cash changes Effect of exchange rate fluctuations 5 638 878 Total non-cash changes 5 638 878 Other changes Interest paid (24 957) (27 043) Interest received 27 262 27 166 Amortization of government grants 2 148 1 752 Total other changes 4 453 1 875 Balance of the issued debt securities at the end of the 1 922 924 1 887 880 year 32. Earnings per Share Basic earnings per Group’s share are equal to diluted earnings per share. The table below represents the calculation of earnings per share. For the year ended For the year ended 31 December 2018 31 December 2017 Profit attributable to holders of ordinary shares, BYN 317 532 217 130 thousand Weighted average number of ordinary shares 134 351 761 125 558 610 Earnings per share, BYN 2,36 1,73 33. Segment Analysis The Group has the following reportable segments: - the segment for working with legal entities “Lending” - includes the provision of loans, financial leasing, purchase of securities and other transactions with legal entities, as well as transactions in its economic essence related to the servicing of legal entities and attraction of targeted funds for financing in the form of government deposits; - the segment for work in financial markets “Operations in financial markets” - includes operations in the interbank and financial markets related to the attraction and placement of funds, operations for the purchase / sale of foreign exchange and other financial instruments, the purchase of government securities of the Republic of Belarus, bonds issued by the banks of the Republic of Belarus, securities of the National Bank and securities of local executive and administrative bodies, as well as issue of own bonds by the Development Bank. To reflect the calculations that can not be attributed to the selected operating segments, an additional segment “Other segment” is introduced. This segment has an auxiliary character and serves only to reflect intermediate and additional calculations. 95 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements The accounting policies for the operating segments are consistent with the main accounting policies described in these consolidated financial statements. The financial results of operating segments are formed by reflecting: - direct income and expenses of the operating segment; - redistributed / allocated (indirect) revenues and expenses of the segment; - transfer revenues and segment costs. The information on the operating segments is given below: 96 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Operations in Total in Total amount of Total IFRS In thousands of Belarusian Rubles financial management adjustments for the year ended Lending markets Other segment accounting under IFRS 31 December 2018 Interest income calculated using effective interest rate method 314 890 149 181 - 464 071 11 150 475 221 Other interest income 59 160 - - 59 160 (5 701) 53 459 Interest expense (36 931) (111 715) - (148 646) - (148 646) Net interest income 337 119 37 466 - 374 585 5 449 380 034 Fee and commission income 9 093 - - 9 093 - 9 093 Fee and commission expense (31) (1 333) (566) (1 930) - (1 930) Net fee and commission income/(expense) 9 062 (1 333) (566) 7 163 - 7 163 Net gain/(loss) on derivative financial instruments - 372 - 372 - 372 Effect of initial recognition of financial instruments at fair value - - - - (23 815) (23 815) Net income from foreign exchange operations 7 557 4 254 698 12 509 (2 832) 9 677 Net (loss)/gain on securities transactions - (259) - (259) - (259) General administrative expenses (44 486) (16 926) (23 072) (84 484) 6 296 (78 188) Recovery of allowance for impairment of financial instruments (115 631) (4 953) - (120 584) 185 488 64 904 Net other income 1 122 - 23 435 24 557 2 096 26 653 Income from wholesale trade of subsidiaries 93 865 - - 93 865 (160) 93 705 Cost of wholesale trade of subsidiaries (91 412) - - (91 412) - (91 412) Profit before tax 197 196 18 621 495 216 312 172 522 388 834 Income tax expenses - - (25 634) (25 634) (36 079) (61 713) NET INCOME FOR THE YEAR 197 196 18 621 (25 139) 190 678 136 443 327 121 97 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Operations in Total in Total amount of Total IFRS In thousands of Belarusian Rubles financial management adjustments 31 December Lending markets Other segment accounting under IFRS 2018 Cash and cash equivalents - 43 134 - 43 134 - 43 134 Due from banks - 537 151 - 537 151 20 753 557 904 Investment securities 284 713 2 096 779 - 2 381 492 (30 613) 2 350 879 Loans to customers 4 471 793 - - 4 471 793 (528) 4 471 265 Investment property - - 4 840 4 840 - 4 840 Property and equipment and intangible assets - - 87 521 87 521 10 096 97 617 Current income tax asset - - 4 344 4 344 - 4 344 Deferred income tax asset - - 932 932 7 048 7 980 Other assets - - 342 221 342 221 (3 739) 338 482 Total assets 4 756 506 2 677 064 439 858 7 873 428 3 017 7 876 445 Due to banks - 2 785 194 - 2 785 194 (512 060) 2 273 134 Customer accounts 965 064 - - 965 064 - 965 064 Debt securities issued - 1 933 330 - 1 933 330 (10 406) 1 922 924 Government grants - - - - 522 466 522 466 Current income tax liability - - 4 693 4 693 - 4 693 Deferred income tax liability - - - - 2 371 2 371 Other liabilities - 684 52 843 53 527 4 992 58 519 Total liabilities 965 064 4 719 208 57 536 5 741 808 7 363 5 749 171 98 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Operations in Total in Total amount of Total IFRS In thousands of Belarusian Rubles financial management adjustments for the year ended Lending markets Other segment accounting under IFRS 31 December 2017 Interest income calculated using effective interest rate method 256 819 156 709 - 413 528 4 922 418 450 Other interest income 40 796 - - 40 796 (4 753) 36 043 Interest expense (33 374) (69 047) - (102 421) - (102 421) Net interest income 264 241 87 662 - 351 903 169 352 072 Fee and commission income 2 975 - 101 3 076 - 3 076 Fee and commission expense (35) (4 742) (120) (4 897) - (4 897) Net fee and commission income/(expense) 2 940 (4 742) (19) (1 821) - (1 821) Net gain/(loss) on derivative financial instruments - (110) - (110) - (110) Effect of initial recognition of financial instruments at fair value - - - - (56 915) (56 915) Net income from foreign exchange operations 8 800 4 746 675 14 221 (3 924) 10 297 Net (loss)/gain on securities transactions - 973 - 973 - 973 General administrative expenses (33 208) (11 917) (12 973) (58 098) (1 206) (59 304) Recovery of allowance for impairment of financial instruments (112 284) (24 583) - (136 867) 141 839 4 972 Net other income 4 285 - (1 897) 2 388 7 082 9 470 Income from wholesale trade of subsidiaries 75 124 - - 75 124 (7 906) 67 218 Cost of wholesale trade of subsidiaries (64 190) - - (64 190) - (64 190) Profit before tax 145 708 52 029 (14 214) 183 523 79 139 262 662 Income tax expenses - - (17 376) (17 376) (16 942) (34 318) NET INCOME FOR THE YEAR 145 708 52 029 (31 590) 166 147 62 197 228 344 99 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements Operations in Total in Total amount of Total IFRS In thousands of Belarusian Rubles financial management adjustments 31 December Lending markets Other segment accounting under IFRS 2017 Cash and cash equivalents - 92 790 - 92 790 (24 678) 68 112 Due from banks - 418 166 - 418 166 46 984 465 150 Investment securities 174 983 1 576 539 - 1 751 522 (23 714) 1 727 808 Loans to customers 3 695 442 - - 3 695 442 (117 322) 3 578 120 Investment property - - 20 920 20 920 - 20 920 Property and equipment and intangible assets - - 78 519 78 519 10 213 88 732 Current income tax asset - - 3 704 3 704 - 3 704 Deferred income tax asset - - 835 835 34 685 35 520 Other assets - - 193 083 193 083 (36 179) 156 904 Total assets 3 870 425 2 087 495 297 061 6 254 981 (110 011) 6 144 970 Due to banks - 1 855 906 - 1 855 906 (360 276) 1 495 630 Customer accounts 630 437 - - 630 437 - 630 437 Debt securities issued - 1 900 434 - 1 900 434 (12 554) 1 887 880 Government grants - - - - 372 830 372 830 Current income tax liability - - 4 795 4 795 - 4 795 Deferred income tax liability - - 83 83 15 910 15 993 Other liabilities - 432 37 441 37 873 (5 832) 32 041 Total liabilities 630 437 3 756 772 42 319 4 429 528 10 078 4 439 606 100 Joint-Stock Company “Development Bank of the Republic of Belarus” Consolidated Financial Statements for the year ended 31 December 2018 Notes to the Consolidated Financial Statements 34. Subsequent events According to the National Statistics Committee of the Republic of Belarus, the increase in consumer prices in January-February 2019 was 2,2%. 101