OPTIVA PANK

ANNOUNCEMENT

24.03.99

 

 

NOTE 1    ACCOUNTING POLICIES

 

AS Optiva Pank (reg. no. 10040839) is a limited liability credit institution registered in Tallinn (Estonia), which has

Eesti Pank (Bank of Estonia) as a majority shareholder. Optiva Bank had 311 employees as of December 31, 1998.

 

The principal accounting policies adopted in the preparation of these financial statements are set out below:

(1) Basis of preparation

The financial statements of the Optiva group (the Group) and the parent company Optiva Bank (the Bank) are prepared

in accordance with and comply with International Accounting Standards (IAS).

Revised IAS no. 1 has been applied in advance.

Revised IAS nr. 12 was, for the first time, implemented in 1998. Its application did not cause any

significant changes in the calculation of deferred income tax.

The financial statements are prepared under the historical cost convention as modified by the revaluation

of certain securities to fair value. The book value of remaining financial instruments does

not substantially differ from their fair value.

(2) Presentation and comparatives

Statements are presented in the published annual report in thousands of Estonian kroons.

Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.

(3) Merger

The merger of Estonian Forexbank and Estonian Investment Bank (EstIB) was effected in accounting on December 1,

1998 according to the Merger Agreement dd. September 30, 1998. Purchase method of accounting was

applied. The merger, the new name for the Bank, Optiva Bank, and other changes to the Statutes of the Bank

were registered by the Commercial Register on December 18, 1998.

Estonian Forexbank issued shares in the amount of EEK 236 377 ths. to purchase Estonian Investment Bank,

which replaced 100% of voting shares of EstIB in a non-cash transaction.

The lower balance sheet book value of the Estonian Investment Bank net assets (EEK 94 575 ths.), merger costs

(EEK 1 995 ths.) and the elimination of the inter-company transactions etc. (totalling EEK 10 337 ths.)

added goodwill to the balance sheet of the merged bank in its initial value

of EEK 138 688 ths., which is being amortised to the profit and loss account from December 1998.

Balance Sheet of Estonian Investment Bank as of 30.11.1998

Assets                                           EEK ths.

Claims to the Central Bank                         106,570

Claims to credit institutions                       10,401

Claims and loans to clients                      1,137,712

Uncollectible claims and loans                    -105,450

Securities                                         150,644

Tangible assets                                      2,537

Other assets                                       240,513

Prepayments and accrued income                     114,611

Total assets                                     1,657,539

Liabilities

Amounts owed to the Central Bank and credit inst   467,970

Amounts owed to clients                             69,228

Amounts owed to government                          39,323

Debts evidenced by certificates                    828,346

Other liabilities                                       11

Accruals and deferred income                        12,221

Provisions for liabilities                          18,001

Subordinated liabilities                           127,865

Total liabilities                                1,562,964

Owners' equity

Share capital                                      132,615

Share premium                                           35

General banking reserve                             51,018

Other reserves                                       3,229

Retained earnings                                  -92,321

Total owners' equity                                94,575

Total liabilities and owners' equity             1,657,539

(4) Consolidation

Subsidiary undertakings, which are those companies in which the Bank, directly or indirectly, has an

interest of more than one half of the voting rights or otherwise has power to exercise control over the

operations, have been fully consolidated. Subsidiary is excluded from consolidation when the control

is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its

subsequent disposal in the near future.

All intercompany transactions, balances and unrealised surpluses and deficits on the transactions between

group companies have been eliminated in the Group statements.

A listing of the Bank's subsidiaries is set out in Note 9.

Subsidiary undertakings are reflected in the financial statements of the Bank using the equity method.

(5) Investments in associates

Investments in associated undertakings are accounted for by the equity method of accounting. These are

undertakings over which the Group has between 20% and 50% of the voting rights. The listing of the Group's

associated undertakings is shown in Note 10. Equity accounting involves recognising in the income

statement the Group's share of the associates' profit or loss for the year.

(6) Foreign currencies

Assets and liabilities denominated in foreign currencies are translated at the official rate of exchange,

quoted by Eesti Pank (Bank of Estonia), applicable at the balance sheet date and translation differences

are taken to the income statement for the period under "Net profit or net loss on financial operations (+/-)".

Profit received from purchase and sale of currencies is also reflected in the income statement as "Net

profit or net loss on financial operations (+/-)".

Foreign currencies not quoted by Eesti Pank are shown in the balance sheet according to the exchange

rate of the central bank of the respective country on the basis of the exchange rate of German mark.

Since the monetary reform in 1992, Estonian kroon has been pegged to German mark at fixed

exchange rate of DEM 1 = EEK 8.

(7) Derivative financial instruments

The speculative off balance sheet financial instruments (e.g. forwards, swaps) are accounted for in fair value.

Instruments used for hedging purposes are accounted on an accruals basis in accordance with the

treatment of the underlying transaction.

(8) Offsetting

Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is

a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net

basis, or realise the asset and settle the liability simultaneously.

(9) Interest and discount income and expense

Interest income and expense are recognised in the income statement on an accruals basis. Interest income

is suspended when loans are overdue by more than 60 days and is excluded from interest income until

received. Interest income includes coupons earned on fixed income investment securities and accrued

discount as well as similar income on certain off balance sheet items. Penalty interests are recognised

in the income statement on cash basis.

(10) Dealing securities

Dealing securities are stated at fair value based on quoted market prices. Year-end closing prices are used

for securities quoted on the stock exchange. For the shares issued by Estonian companies, which are not

quoted on the Tallinn Stock Exchange, market price is considered to be the price of the last transaction

registered in the Estonian Central Depository for Securities.

(11) Investment securities

Investment securities include debt securities which the management intends  to hold long term

and are stated at cost adjusted by the linear amortisation of premiums or discounts on purchases over

the period to maturity. Shares acquired with an aim of long term (over one year) investment also qualify

as investments and are recorded in the balance sheet at the lower of cost or net realisable value.

A reduction in market value is taken into account if considered to be permanent and former

reductions can be written back. The value of the investment portfolio on the balance sheet, however,

can not exceed initial cost.

Interest earned on investment securities is reported as interest income. Dividends received are included

separately in dividend income.

(12) Loans and provisions

Loans are shown in the balance sheet at the actual amounts outstanding. Loans committed, but not yet

disbursed, are reported as off balance sheet commitments.

Loan provisioning methodology of the Bank uses two main criteria: debt servicing and company's risk

factor. Loans are divided into five different categories taking into account the financial situation of the

company, competitive position, overall macroeconomic situation and management quality.

Risk matrix is then used across the two criteria to determine the loan quality group.

Loan quality group          Provisioning rate

A   ("Good")                        1%

B   ("Stable")                      5%

C   ("Doubtful")                   20%

D   ("Poor")                       50%

E   ("Loss")                      100%

After weighing the outstanding loan amount with the provisioning rate, the collateral coefficient is applied.

Collateral coefficient depends on the nature and liquidity of collaterals, e.g. 0 is used for cash collateral and

0.5 for non-quoted securities. Provisions are updated monthly and submitted to the Credit Committee for

final approval. When a loan is deemed uncollectible, it is written off against the related provision and

recorded as off balance sheet claim. Subsequent recoveries are credited to the income statement if

previously written off.

The standard provision level on credit cards is 0.5% of the outstanding credit. Credit card credit, which is

more than 15 days overdue, is provisioned at a rate of 5%.

The unguaranteed part of portfolio investment loans is provisioned at a rate of 100%.

(13) Leasing loans and provisioning

Leasing loans include finance leases and consumer factoring.

Receivables from finance leasing contracts are shown at the present value of the leasing payment receivables,

reduced by advance payments of clients, payments of principal amounts and the amount of doubtful receivables.

Factoring receivables are also recorded at their acquisition cost, reduced by advance payments of

clients, payments of principal amounts and the amount of doubtful receivables.

The provisioning of leasing loans is based on their valuation on the balance sheet date. Provision is

calculated by multiplying total receivables of the respective product group of Optiva Leasing by the

provisioning rate depending on the characteristics of respective guaranteed assets. If the payment

is overdue for more than 30 days or the client's financial position is unstable, an additional provision is

calculated according to loan performance and the client's financial condition.

(14) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the

net assets of the acquired entity at the date of acquisition. Goodwill is reported in the balance sheet as an

intangible asset and is amortised using the straight-line method over its estimated useful life (maximum of

5 years).

(15) Tangible assets

All tangible assets are stated at historical cost less depreciation. Tangible assets with the purchase price

exceeding EEK 10 ths. and expected useful lifetime over one year qualify for taking into the balance sheet.

Depreciation on new tangible asset is calculated from the month of putting it into operation until full

depreciation of the asset. The straight-line depreciation method is used with the minimum rates being

established as follows:

Buildings                             2% p.a.

Equipment, computer technology, cars  30% p.a.

Other tangible assets                 20% p.a.

Depreciation rates may be increased, if the useful life of the tangible asset is shorter than expected.

No depreciation is calculated on assets under operating lease.

(16) Deferred income taxes

Deferred income tax is provided, using the liability method, for all temporary differences arising between

the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently

enacted tax rate of 26% is used to determine deferred income tax.

(17) Capitalisation of expenses

Renovation expenses of the bank's branches have been capitalised and are released to the income

statement proportionately over the period of five years.

Borrowing costs are capitalised and reflected in the income statement as interest expense over the period

to maturity.

(18) Vacation pay reserve

The amounts owed to the employees according to the employment contracts in the extent of accrued

vacations pay as of year-end were transferred to the vacation pay reserve.

(19) Treasury shares

Treasury shares of the Group held at the balance sheet date are treated as a deduction from the Group's equity.

(20) Reserves

General banking reserve, mandatory to the credit institutions, constitutes restricted equity and must

accumulate up to 5% of the gross loans outstanding, limited by the taxable profit available. The reserve

is tax-deductible up to 5% of gross loans outstanding. In addition to the general banking reserve,

appropriations to the mandatory restricted reserve have to be made (at least 5% of the net profit),

according to the Commercial Code, each year until the reserve reaches 10% of the share capital.