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AnnuAl RepoRt
2 0 1 4
Annual Report 2014 3
The Cradle of Development
TABLE OF CONTENTS
Page
Strategy Review 4
Board of Directors 5
Executive Team 6
Chairman’s Review 7
Managing Director’s Report 8
Corporate Governance Statement 9
Operational Review 13
Corporate Review 18
Financial Review 19
Financial Statements 23
4 Annual Report 2014
The Cradle of Development
STRATEGY REVIEW
The Development Bank of Zambia (DBZ) is currently implementing a three year plan (2013-2015) that is driven by seven strategic objectives namely:
• Seek rapid growth in business volume and, in that regard, assist in deepening the development impact of DBZ’s interventions.
• Be the market leader in the chosen segments/niches
• Broaden and diversify product range.
• Develop customer responsive pricing policies.
• Accept risk and align attitude to risk with the business environment.
• Seek alliances with other banks to enhance clients’ credit proposi-tions and provide term finance which other banks may be unable to provide.
• Modernize ICT Infrastructure
These have been operationalized through departmental objectives which are closely monitored to review performance towards the intended vision of being “The Premier Development Finance Partner”.
In 2014, the performance of the Bank was satisfactory, with most objectives being realized. It should be noted, however, that due to the market segments in which the Bank operates, especially with the focus being on Small and Medium Enterprises (SME’s) in 2014, it was susceptible to high credit risk exposure. In light of this, improvement in risk management remains a prime area of management’s focus.
As the current strategy comes to its conclusion in December 2015, a mid-term strategic review was conducted in the last quarter of 2014. This revealed achievements, efforts made, challenges faced, flaws perceived and suggested remedial action, resulting in the revision of various parameters within the plan for the last year of implementation i.e. 2015.
Annual Report 2014 5
The Cradle of Development
MR. RobERT CHoMbA CHAIRMAN
MR. JACob LuNdA LuSHINGA MANAGING DIRECTOR
MRS. NkANdu CHIkoNdE CHANSA BANK SECRETARY
MR. ASHok kuMAR VARTIA
DIRECTOR
MR. SuRENdER kuMAR ARoRA DIRECTOR
MR. MukuL SARkAR DIRECTOR
dR. GEoRGE CHAbWERA DIRECTOR
MRS. ELITA MWENdA MWAMbAZI DIRECTOR
MRS. SHERRINE PANToN-NTSHoNA DIRECTOR
BOARD OF DIRECTORS
6 Annual Report 2014
The Cradle of Development
MR. JACoB lunDA luSHInGAMANAGING DIRECTOR
MR.DARWIn SHInDeDIRECTOR FINANCE
MRS. nKAnDu CHIKonDe CHAnSABANK SECRETARY
MRS. MAVIS CHAIleDIRECTOR PROJECTS
EXECuTIVE TEAM
Annual Report 2014 7
The Cradle of Development
CHAIRMAN’S STATEMENT
It is an honour to present to you, on behalf of the Board, the report on the performance of the Development Bank of Zambia (DBZ) for the year ended 31 December 2014.
Global Overview
The Bank’s performance in the period under review was influenced by global economic developments during the year.
In 2014, the global economic growth rate remained unchanged at 3.3%1. This is because despite the advanced market economies registering a marginal growth from 1.3% in 2013 to 1.8% in 20142, the emerging markets and developing economies registered a decline in growth from 4.7% in 2013 to 4.4%3. Sub-Saharan Africa also registered a decline in output for the year from 5.2% in 2013 to 4.8%4. This was due to the continued adverse financing costs and a decline in commodity prices.
There was a decline in World Trade Volumes 3.4% in 2013 to 3.1% in 20145 which was as a result of a significant decline in activity among emerging markets and developing economies
The outlook for 2015 is expected to pick up with global growth being projected at 3.5%6. However, this growth is expected to be more gradual as it is anticipated that slow growth will continue in economies such as China, Japan, Russia, Sub-Saharan Africa and the Euro Zone.
Zambian Economy
Developments within the Zambian economy continue to present challenges, with the global economic trends negatively affecting economic growth by way of reduced capital and financial inflows. That notwithstanding, Zambia’s economic performance was satisfactory with real Gross Domestic Product (GDP) growth of 6.5% compared to 6.4% in 2013.
With the continued Government efforts to reduce the cost of doing business through availability of credit finance and fast tracking infrastructure development, a stable investment climate was maintained
Domestic debt at K21.9 million (2013: K19.7 million) represents an increase of 5.6 %. This was as a result of an increase of programme-financing for the 2014 budget.
Inflationary pressures increased during the year, with inflation closing at 7.9% compared to 7.1% in 2013 and the average lending rate closing at 20.44% compared to 16.39% in 2013.
Operations and Activities
I take cognisance of the commitment by Management and Staff to ensuring the achievement of yet another successful year of development growth.
It is worth noting that in its quest to improving efficiency levels, the Bank continued to prudently allocate resources toward investment in information technology and human capital.
8 Annual Report 2014
The Cradle of Development
Corporate Governance
The Bank continued to exhibit high levels of transparency and accountability in its operations.
During 2014, two directors, namely, Mr. Mukul Sarkar and Mr. Surender Kumar Arora resigned. I wish to take this opportunity to thank them for their invaluable services to the Bank and wish them well in their future endeavours.
Strategic Plan 2013 – 2015
In 2013, the Bank set its vision to becoming the “Premier Development Finance Partner”. It is pleasing to note that Management and Staff exerted every effort to ensure the successful implementation of the plan in 2014.
Conclusion
On behalf of the Board of Directors, I wish to congratulate Management and Staff of the Bank for their commitment to the successes recorded in 2014. I urge them to continue contributing to the growth of the Bank and the Zambian economy as a whole.
MR. ROBERT CHOMBABOARD CHAIRMAN
CHAIRMAN’S STATEMENT (CoNTd).
Annual Report 2014 9
The Cradle of Development
MANAGING dIRECToR’S REPoRT
In acknowledging the economic challenges that the global and domestic economies presented to the Bank in 2014, the Bank made investments that were aimed at greatly benefiting stakeholders. Following the Government’s economic programme for 2014, the
Bank’s focus was on investing in the Small and Medium Enterprises (SMEs) sector.
The direct lending portfolio grew from K241.25 million in 2013 to K399.92 million in 2014 with the construction, manufacturing and tourism sectors accounting for 30%, 19% and 14% respectively. This growth was mainly attributed to the re-capitalisation of the Bank by the Government, amounting to K63.2 million and the remainder of the Eurobond proceeds credit ine that were not utilized in 2013.
The number of projects funded increased to 65 (2013:33) resulting in the creation of 1001 additional jobs. The total number of jobs created from the funded projects stood at 6,237 at the close of 2014 (2013:5,236).
Profit Performance
The Bank recorded net profit after taxation of K22.90 million (2013: K4.56 million), representing an increase of 402%. The increase in profits is mainly attributed to a net foreign currency translation gain of K14.55 million (2013:K6.36 million) as well as institutional capacity building initiatives. The net foreign currency gain was due to the weakening of the Kwacha against the US Dollar which closed at K6.385/USD1 (2013:K5.52/USD1).
Expansion
During the year, the Bank successfully re-established the Northern Regional office in Ndola in order to make its operations more accessible to customers located in the North-western, Copperbelt, Northern, Luapula and Muchinga provinces.
Strategic Plan 2013 – 2015
The Bank continued on its quest to reposition itself as the “Premier Development Finance Institution (DFI)”. To this end, tremendous strides were made in the implementation of the strategic plan during 2014. This culminated in a mid-term review during the third quarter that brought to the fore the need to re-emphasise the critical role of risk management in our operations.
Corporate Social Responsibility
The Bank continued its Corporate Social Responsibility engagements and invested a total of K40, 000.00 towards the hosting of 3rd African Women’s Economic Summit targeted at women entrepreneurs.
10 Annual Report 2014
The Cradle of Development
Outlook for Year 2015
2015 is expected to be a challenging year as the Government puts in the necessary measures to ensure fi scal consolidation. We look forward to implementing key strategic interventions to enable the Bank continue to build upon the successes it has achieved so far.
Conclusion
I wish to express my appreciation to the Board and the shareholders for their continued support to the Bank during the past year. I also wish to thank our clients for accessing our services. I congratulate the hardworking staff of the Bank for their continued dedication and effort.
JACOB L. LUSHINGAMANAGING DIRECTOR
Annual Report 2014 11
CORPORATE GOVERNANCE STATEMENT
12 Annual Report 2014
The Cradle of Development
CORPORATE GOVERNANCE STATEMENT
The Bank remains committed to implementing the best practice standards of corporate governance as this is essential for the protection of the interests of our shareholders and other stakeholders. We fully recognize that strong corporate
governance is key to delivering shareholder value, hence our continued commitment in 2014 to conducting our business in line with the highest standards of business integrity and professionalism. We are committed to ensuring that our policies and practices reflect a high standard of governance. The Bank has continued to be committed to the development and implementation of effective systems and controls in furtherance of its core objective of developing an institutional culture of transparency, accountability and cooperation.
The Bank believes in responsible lending and places emphasis on sustainable management and use of natural resources. Therefore, the Bank complies with the requirements of the Zambia Environmental Management Agency (ZEMA) as set out in the Environmental Management Act No. 12 of 2011 for all projects whose operations may have an environmental impact. The Bank also ensures that members of staff are equipped with knowledge relating to sustainable development and environmental impact assessment.
The Bank remains committed to effective risk management whilst fulfilling its mandate of providing financing for the purpose of fostering economic development.
Board of Directors
The Board of Directors is established by virtue of Section 4 of the Development Bank of Zambia Act Chapter 363 of the Laws of Zambia and is responsible for the policy and general administration of the affairs and business of the Bank. In pursuance of this mandate, key decisions made by the Board during the year were the approval of the Bank’s revised Credit and Human Resource policies.
Composition of the Board
In 2014, the Board comprised of three (3) Class ‘A’ Directors appointed by the Government of the Republic of Zambia through the Minister of Finance, and four (4) Class ‘B’ Directors appointed by the Development Bank of Southern Africa and the Export and Import Bank of India.
The Board meets quarterly each year and is guided by its Charter which addresses among other issues, the Responsibilities of the Board, Independence of Members, Annual Performance and Evaluation of Board Committees.
Two Directors, Mr. Mukul Sarkar and Mr. Surender Kumar Arora resigned from the Board on 12th September 2014.
Annual Report 2014 13
The Cradle of Development
Board Membership
The full Board membership for 2014 is illustrated in the table below:
Names Nationality Nature of Membership
date of Resignation
Mr. Robert Mwaba Chomba Zambian Non –Executive
Dr. George Gerry Chabwera Zambian Non –Executive
Mrs. Elita Mwenda Mwambazi Zambian Non –Executive
Dr. Bane Maleke South African Non –Executive
Alternate to Dr. Bane Maleke: Mrs. Sherine Panton-Ntshona
American Non –Executive
Mr. Mukul Sarkar Indian Non –Executive 12/09/2014
Mr. Surender Kumar Arora Indian Non –Executive 12/09/2014
Mr. Ashok Kumar Vartia Indian Non –Executive
Mr. Jacob Lunda Lushinga Zambian Executive
Board Committees
The Board has delegated specific responsibilities to its Committees. There are three (3) Committees and these play a pivotal role in assisting the Board in the execution of its mandate. The objectives of the Committees are detailed below:
Credit Committee
The Credit Committee is tasked with the responsibility of overseeing the Bank’s credit management, lending practices and providing strategic guidance for the development and achievement of the Bank’s credit and lending goals.
There were seven (7) Credit Committee meetings held during the year under review.
Finance and Audit Committee
The primary role of this Committee is to provide oversight of the Bank’s financial affairs. The Committee also has oversight responsibility to the shareholders and stakeholders relating to the integrity of the Bank’s financial statements and the reporting process, the systems of internal accounting and financial controls, the internal audit function, the annual independent audit of the Bank’s financial statements, the Bank’s compliance with legal and regulatory requirements and its ethics. The Committee is also responsible for overseeing the Independent Auditor’s qualifications and independence.
There were four (4) Finance and Audit Committee meetings held in the year under review.
CORPORATE GOVERNANCE STATEMENT (contd.)
14 Annual Report 2014
The Cradle of Development
Staff Committee
The Committee is established to aid the Board in discharging its responsibilities relating to staff matters, including; reviewing the Bank’s compensation structure, recruitment, staff retention, succession planning, training and staff development policies.
The Staff Committee held five (5) meetings during the year under review.
Attendance at Board and Board Committee Meetings
The records of Directors’ attendances at meetings during the year under review are provided below:
Full Board
No. oF MEETINGS Special 154th 155th 156th 157th ToTAL
dATE oF MEETING 13th Feb 4th Mar 8th July 3rd Sep 15th dec 5/5
Mr. R .M. Chomba (Chairman) 5/5
Mrs. E. M. Mwambazi 5/5
Dr. G. G. Chabwera 5/5
Dr. B. Maleke/Mrs. S. Panton-Ntshona 3/5
Mr. A.K. Vartia 5/5
Mr. S. Arora* 3/5
Mr M. Sakar* 1/5
*Resigned on 12th September 2014
Finance and Audit Committee
No. oF MEETINGS 38th 39th 40th 41st ToTAL
dATE oF MEETING 30th Jan 13th May 14th Aug 21st Nov 4/4
Dr. G. G. Chabwera (Chairman) 4/4
Mr. R. M. Chomba 4/4
Mrs. E. M. Mwambazi 4/4
CORPORATE GOVERNANCE STATEMENT (contd.)
Annual Report 2014 15
The Cradle of Development
Credit Committee
No. oF MEETINGS 49th 50th 51st 52nd 53rd 54th 55th ToTAL
dATE oF MEETING 4th Mar 9th May 11th Aug 17th Sep 3rd oct 21st Nov 15th dec 7/7
Mr. R.M. Chomba (Chairman) 7/7
Mrs S. Panton-Ntshona 2/7
Mr. A.K. Vartia 3/7
Dr. G.G. Chabwera 7/7
Mrs. E. M. Mwambazi 7/7
Staff Committee
No. oF MEETINGS 35th Special 36th 37th 38th ToTAL
dATE oF MEETING 16th Jan 30th Jan 13th May 14th Aug 21st Nov 5/5
Dr. G. G. Chabwera (Chairman) 5/5
Mr. R.M. Chomba 5/5
Mrs. E. M. Mwambazi 5/5
Executive Committee
The Managing Director and the Executive Committee are responsible to the Board for the implementation of the Bank’s strategy and overall management and performance of the Bank. The Executive Committee is chaired by the Managing Director and meets every month. There were eleven (11) Executive Committee meetings held during the year under review.
CORPORATE GOVERNANCE STATEMENT (contd.)
16 Annual Report 2014
The Cradle of Development
OPERATIONS REVIEW
Annual Report 2014 17
The Cradle of Development
Portfolio Performance
Portfolio Type K (Millions) Percentage (%)
Direct Lending 399.92 80%
Wholesale Lending (Enterprise Development Fund) 22.65 4%
Equity Investments 66.69 13%
Sub-Total (On Balance Sheet) 489.26 97%
Rural Finance Programme - Credit Component 8.97 2%
Risk Replication Management Fund 4.56 1%
Sub-Total (Off Balance Sheet) 13.53 3%
Total Portfolio as at 31st December 2014 502.79 100%
During the period under review, the Development Bank of Zambia invested mainly in debt and equity fi nance and continued to manage funds on behalf of United Nations Industrial Development Organization (UNIDO) and International Fund for Agricultural Development (IFAD).
On and off-balance sheet investments amounted to K502.79 million as compared to K353.89 million in 2013. Of the total investments in 2014, 97% were on-balance sheet, while 3% comprised managed funds under the Risk Replication Management Fund (RRMF) and Rural Finance Programme (RFP). A summary of these investments is as shown in the table below.
On the overall, the Bank’s portfolio grew by K148.9 million during the period under review.
Direct Lending
The Bank’s portfolio under direct lending grew to K399.92 million in 2014 (2013: K241.25 million). This growth was funded mainly from the balance of the Eurobond Credit Line and through an additional recapitalisation of the Bank amounting to K63.2 million.
The Bank saw an increase in the number of projects funded to 65 in 2014 (2013: 33) as illustrated below:
18 Annual Report 2014
The Cradle of Development
Total Number of Projects Funded
During the period under review, the lending was to the Construction, Manufacturing and Tourism sectors as prioritised under the Sixth National Development Plan (SNDP). The chart below illustrates the distribution of the funding by sector.
Annual Report 2014 19
The Cradle of Development
The increase in the number of projects funded during the year resulted in the creation of 1,001 additional jobs in various sectors. The cumulative number of jobs created at the close of 2014 was 6,237 (2013: 5,236) as illustrated in the graph below:
Employment Creation as at 31st December 2014
Wholesale Lending
During the year under review, the wholesale lending portfolio continued to perform well with two (2) Participating Financial Institutions (PFIs)) managing to fully repay their loans reducing the outstanding amount on the portfolio to K22.65 million (2013: K40.50 million). The loan repayments from this portfolio are being utilized to fund projects under direct lending.
Equity Investment
During the period under review, the Bank made a new equity investment of K8.71million through a debt/equity swap, which brought the total fair value of investment held to K66.69 million, (2013, K57.98 million).
Rural Finance Programme
This managed fund came to an end in September 2013 and subsequently in the year under review, a subsidiary agreement was signed with the Government to convert this fund into a line of credit for continued lending to contracted smallholder production through PFI’s. The line of credit is worth USD4 Million with a tenure of 12 years.
20 Annual Report 2014
The Cradle of Development
Vipambi Viweme - Mechanised Feeding and Drinking
SAMPLE oF PRoJECTS FuNdEd by THE bANk
• Vipambi Viweme Limited
Vipambi Viweme is a Zambian owned Agribusiness located in Lusaka West, specialized in poultry farming. The Company was availed a facility to expand the stock from 10,000 to 30,000 layers and mechanise operations to enhance efficiency. The company currently has a workforce of 6 permanent employees.
Annual Report 2014 21
The Cradle of Development
• Nobutula Lodge
Nobutula Lodge is situated in Kitwe’s Parklands area. The Company has been in operation since 2009, with an initial 12 rooms. Following the injection of funds from DBZ, Nobutula embarked on an expansion project to increase the room capacity to 24, expand the restaurant facilities, and introduce conference facilities to accommodate up to 200 guests. In addition, a gymnasium and massage parlour will be set up. Nobutula currently has a work force of 26, and will create 8 more jobs once fully operational.
Nobutula Lodge - under construction
SAMPLE oF PRoJECTS FuNdEd by THE bANk
22 Annual Report 2014
The Cradle of Development
• Heinrich’s Hotel Limited (1957)
The Company owns one of the prominent hotels in Kitwe- Hotel Edinburgh, and has been in the hospitality business for over 50 years.
The Development Bank of Zambia availed the Company a facility to complete the construction of a new shopping mall in Chingola to be let out to the public. The mall has a capacity of 20 units, and several companies have expressed interest to occupy the premises once complete. The construction phase is expected to be completed by December 2015.
The company currently has a workforce of 50 employees and is expected to create over 500 new jobs once fully operational.
Chingola Shopping Mall - under construction.
Annual Report 2014 23
CORPORATE REVIEW
24 Annual Report 2014
The Cradle of Development
HuMAN RESouRCE
The department is responsible for providing specialized HR concepts, methods, and professional judgement and advice to Development Bank of Zambia (DBZ) management.
Staff Strength
During the year under review, the headcount increased to 55 (2013: 40) with the additional fifteen (15) employees joining the Bank at different time periods in response to the growing operational demands.
Capacity building for staff
The operational demands and on boarding of new staff was supported by a number of capacity building interventions. The Bank participated in a total of thirty five (35) training workshops in various disciplines with most of these aimed at up skilling staff in the Projects department. These were carried out in collaboration with the Southern African Development Community-Development Finance Resource Centre (SADC-DFRC) and the Association of African Development Finance Institutions (AADFI).
The Bank successfully collaborated with AADFI to co-host a workshop on Treasury, Asset & Liability Management in Lusaka Zambia which was attended by delegates from nine (9) African countries.
Notable also was the Computer Model for Feasibility Analysis and Reporting (COMFAR) training that was facilitated by UNIDO and attended by all staff in Projects and ICT departments. The program focussed on up-skilling relevant staff in using COMFAR as an appraisal tool for the Bank.
Other Milestones
• The revised HR policies were approved by the Board in July 2014.
• In order to enhance the monitoring and supervision of projects, the monitoring unit was transformed into a full department in the last quarter of the year.
• The Bank’s Regional Office in Ndola became operational in November 2014 in order to serve the Northern region of Zambia that includes North-western, Copper-belt, Northern, Luapula and Muchinga provinces. Six (6) employees were relocated to run this office.
Outlook
Building on the successes of 2014, the department will focus on the deliverables outlined in the strategic business plan.
Annual Report 2014 25
The Cradle of Development
CoRPoRATE PLANNING
The Corporate Planning Department’s primary responsibilities are to monitor the implementation of the Bank’s strategic plan, promote the Bank’s offering as well as enhance its image.
Areas of focus during 2014 were the mid-term strategic plan review, development of policies and image promotion.
Strategy
The highlight during 2014 was the mid-term review of the Strategic Business Plan which took place in the third quarter of the year. This offered all members of staff the opportunity to participate in the assessment of the Bank’s performance at both departmental and corporate level.
The review revealed achievements, efforts made, challenges faced, flaws perceived and suggested remedial action.
Policy
The department embarked on the development of various policies to enable the systematic and consistent execution of departmental strategy. Among the policy documents developed during the year were the Corporate Communications Manual, the Brand Manual, the Corporate Social Responsibility (CSR) Policy, the Marketing Strategy and the Customer Complaints Procedure.
These policies are awaiting approval by the Board.
Image Promotion
The Bank successfully participated in both the 50th Zambia International Trade Fair (ZITF), in July, 2014, and the 88th Zambia Agricultural and Commercial Show (ZACS) in August 2014. The ZITF was held under the theme “Showcasing 50 Years of Business Transformation and Development” while the ZACS was held under the theme “2014: Breaking New Ground”
With the country celebrating its 50th Independence Anniversary, it was an opportunity for the Bank to showcase its achievements from the time it was established in 1972.
Outlook - 2015
The department’s focus in 2015 shall be towards improved monitoring of the implementation of the Strategic Plan, enhanced visibility of the Bank and image promotion through the implementation of the Marketing Strategy.
26 Annual Report 2014
The Cradle of Development
INFoRMATIoN ANd CoMMuNICATIoN TECHNoLoGy (ICT)
The mandate of this department is to align the Banks departmental priorities with ICT investments which will improve the banks efficiency and effective-ness to further satisfy DBZ’s clients.
Data Center
The Bank successfully modernised an old server room into a data center with a new email server being installed.
Local Area Network (LAN)
Phase 1 (one) of the project was completed with both wired and wireless networks being installed to provide redundancy and seamless connectivity to network. The fiber backbone was installed on the network for faster speeds and in readiness for Voice over IP telephone system.
Phase 2 (two) will be completed in the 2nd quarter of 2015. The successful completion of the project will make the entire building connected with a robust network.
Front End, Back End and Storage Solution
The Bank embarked on a project to improve the front end, back end and storage solutions which would enable it have adequate software and hardware resources for various applications.
The project is ongoing and is expected to be completed in the first quarter of 2015. Once complete, it will also facilitate the implementation of an on-site disaster recovery system.
Ndola Office ICT works
The newly opened regional offices in Ndola were configured to access company email via online web access. The ICT department will in the year 2015 establish a Virtual Private Network between Head Office and Ndola in a quest to integrate the two sites. This will tremendously reduce the cost of communication between the stations and will provide a larger platform for ICT resource sharing.
Annual Report 2014 27
The Cradle of Development
This department is responsible for ensuring value for money in the acquisition of Goods, Works and Services for DBZ in line with the provisions of the Public
Procurement Act and Regulations as well as the provision of support to the Bank as a whole in terms of transport logistics, maintenance and repairs of assets, health and safety as well as ensuring that non-life Insurance policies are in place.
Major Contracts
Major contracts executed during the course of the year were the refurbishment to Development House in Ndola in readiness for the re-opening of the regional office and the installation of new elevators at Development House, Lusaka.
Outlook - 2015
In 2015, the department intends to review the current internal procurement procedures manual to compliment the ZPPA Act & Regulations. This will provide an updated guide on procurement procedures to all departments.
PRoCuREMENT ANd AdMINISTRATIoN
28 Annual Report 2014
The Cradle of Development
1Source: Central Stati sti cal Offi ce, Zambia2 Source: Citi bank Zambia Limited
Figure 1: 4 year Profi t TrendsFigure 1: 4 year Profi t Trends
The Finance department is responsible for fi nancial management; fi nancial reporting; loan bill-ings; fi nancial risk management; compliance reporting (to the fi nancial services regulator, Bank of Zambia); and Fund mobilization (through the Executive Offi ce), among other things. The de-partment continued to contribute to effective governance, risk management and compliance.
Macro-economic operating environment
The macro-economic environment remained stable with annual infl ation in 2014 closing at 7.9% (2013: 7.1%). The exchange rate for the Kwacha to the United States Dollar closed at K6.3850/1USD (2013: K5.5200/1USD).
The Bank of Zambia Policy Interest Rate closed at 12.5% (2013: 9.75%).
These macroeconomic indicators signify a stable business environment. This provided an im-petus to the private sector players ‘for doing business’ in Zambia and refl ected in the signifi cant project pipeline.
Financial performance
The Bank recorded profi ts after taxation for the year totaling K22.90 million (unaudited) (2013: K4.56 million) representing an increase of 402%. The Return on Assets (RoA) at 5% (2013: 3%) represents an increase of 68% on asset returns.
The contribution to profi ts is due to increased business volumes (loans and advances to cus-tomers) and exchange gains on foreign currency transactions and net open foreign currency positions. Interest income rose to K50.49 million (2013: K37.06 million).
Despite this increase in business volumes, the interest margins on the GRZ Eurobond Issue Proceeds credit line loan book of circa K104.50 million were not maximized. This is because the interest rate margin on this loan book was capped at 2% of the costs of borrowing.
Figure 1 and 2 below show four year trends in profi ts, interest income, interest expense and net interest income:
FINANCE
Annual Report 2014 29
The Cradle of Development
Figure 2: Interest income and expense; and net interest income trends
Financial Position: Total Assets, Loans to Customers, and Equity
The Bank’s loan book at K422.57 million (2013: K281.75 million) represents an increase of 45%. This is due to the aggressive business growth strategy to give impetus to developmental impact objectives (job creation for shared wealth and economic growth, and poverty reduction).
The Bank’s total assets K625.60 million (2013: K516.22 million) and equity at K441.93 million (2013: K355.82 million), represents increases of 21% and 24% respectively. This is attributable, to an equity injection of USD10 million by the Government and retained earnings for the year. The 4 year trends in Total Assets, Loans and Equity are shown in Figure 3 below:
Figure 3: Total assets, Loans to customers and Equity
FINANCE (CoNTd.)
30 Annual Report 2014
The Cradle of Development
Non-Performing Loan Loss ratio
The Non-Performing Loan Loss (NPL) ratio at 17% (2013: 5.3%) depicts a fall in the quality of the loan book as at December 2014. This deterioration in the quality of the loan book is mainly attributable to some Greenfi eld projects whose fi nancing arrangements have had to be restructured to take account of changes in project implementation timelines. However, this NPLR is within the AADFI PSGRS maximum prudential limit of 25%.
Financial risk management
The department champions the Financial Risk Management strategy program and processes, covering Credit risk; Liquidity risk; Currency risk and Interest rate risk. Financial risk management is achieved through, among other things, participation in the Loan appraisal process, corporate policies reviews, and Assets and Liabilities Management process - responsible for pricing of Bank products; identifi cation, measurement and treatment of risk as appropriate.
Capital adequacy
The Bank of Zambia announced a revision to the capital adequacy framework in January 2014. Development fi nance institutions are required to increase their paid-up capital from K7.5 million to K750 million. The Government of the Republic of Zambia has undertaken to recapitalize the Bank to meet the new minimum Tier 1 capital to K750 million by 31st December 2016. In November 2014, the Government of the Republic of Zambia injected K63.20 million (or USD10 million equivalent) into the Bank’s operations, as an equity injection.
Prudential reporting to the Financial Services Regulator
The Bank is regulated by the Bank of Zambia as a non-bank fi nancial institution. The Finance department is responsible for compiling monthly prudential returns to enable the fi nancial services regulator, to among other things, evaluate its fi nancial performance and position (profi ts, capital adequacy, asset quality, credit risk, interest rate and currency risk exposure profi les).
Treasury functions: Fund mobilization and Credit rating
The Finance department supports the Executive Offi ce in the Fund mobilization programs. The department engaged various multinational institutions and investment banks with a view to accessing credit lines for on-lending, primarily for enterprise development. In the medium term, the Treasury operations will be hived off to a stand-alone Treasury department.
The Bank participates in the Association of African Development Finance Institutions (AADFI) Prudential Standards & Guidelines Rating System (PSGRS) and is rated B+ as at November 2013.
In September 2014, the Bank received a credit line for Rural Financing of circa USD4 million. In November 2014, the Bank received a USD10 million equity injection from the Government of the Republic of Zambia to support Small and Medium Enterprises (SMEs) and contribution to recurring operating costs.
Outlook - 2015
The Bank has a great opportunity to contribute to sustainable economic development in Zambia through enhanced enterprise fi nancing of SMEs and social infrastructure development, among other things, to support the Governments economic development agenda.
The human capital development strategy has come full circle, with key positions having been resourced. The Bank can now effectively exploit the market opportunities.
FINANCIAL PERFoRMANCE REVIEW (CoNTd.)
Annual Report 2014 31
FInAnCIAlS
Development Bank of Zambia
Financial statements for the year ended 31 December 2014
Development Bank of Zambia Financial statements for the year ended 31 December 2014
Contents Page
Report of the directors 1 - 3 Directors’ responsibilities in respect of the preparation of financial statements 4 Independent auditor’s report 5 - 6 Financial Statements
Statement of profit or loss and other comprehensive income 7
Statement of financial position 8
Statement of changes in equity 9
Statement of cash flows 10
Notes to the financial statements 11 - 52
1
Development Bank of Zambia Directors’ report for the year ended 31 December 2014
Report of the directors
The directors present their report together with the financial statements for the year ended 31 December 2014, which disclose the state of affairs of Development Bank of Zambia (the “Bank”).
General information
Development Bank of Zambia is a statutory body incorporated under the Development Bank of Zambia Amendment Act, and is domiciled in the Republic of Zambia. The Bank was incorporated in 1972. The address of its registered office is as follows:
Development House Katondo Street P O Box 33955 Lusaka, Zambia
The Bank’s business activity is providing short term, medium term and long term finance, and provision of related business advisory services. In the opinion of the Directors, all the activities of the Bank fall within the financial services sector.
Results
Net interest income
2014 K’000
43,253
2013 K’000
30,532
Profit before tax 4,858 6,923
Profit for the year 2,895 4,560
Dividends
The directors do not recommend payment of dividends.
Share capital
The total authorised number of ordinary shares is700,000 (2013: 700,000) with a par value of US$1,000 per share. The issued share capital is7,096 shares (2013: 7,096) with a par value of US$1,000 per share. Details about the Bank’s share capital are included in note 26.
Directors
The directors who held office during the year were:
Mr Robert M Chomba Chairman Mr Jacob Lushinga Managing Director MrsElitaM Mwambazi Non Executive Director Dr George Chabwera Non Executive Director Dr Bane Maleke Non Executive Director Mrs Sherine Panton-Ntshona Non Executive Director (Alternative to Dr. Bane Maleke) Mr Ashok K Vartia Non Executive Director Mr Surender Arora Non Executive Director (Resigned 12.09.2014) MrMukulSarkar Non Executive Director (Resigned 12.09.2014)
2
Development Bank of Zambia Directors’ report for the year ended 31 December 2014 Report of the Directors (continued) Directors' interests and emoluments Except for the Managing Director, no other director had a service contract with the Bank. No director had an interest in any contract entered into by the Bank during the year. Director’s emoluments paid during the year wasK852,000 (2013: K716,000). Property and equipment The Bank purchased equipment amounting toK840,000during the year (2013: K1,931,000). There was no disposal of assets during 2014 (2013:K773,000). Intangible assets The Bank purchased computer software amounting to K72,000 during the year (2013: K53,000). Employees The average number of employees for each month during the period was 55 (2013: 40). The total amount spent on employees’ remuneration and welfare during the year wasK27,987,000(2013: K22,037,000). Health and safety of employees The directors are aware of their responsibilities regarding the safety and health of employees and have put appropriate measures in place to safeguard the safety and health of the Bank's employees. Risk management and control In its normal operations, the Bank is exposed to a number of risks, the most significant of which are credit, market, operational and liquidity risks. These are described and explained in greater detail under risk management in the notes to the financial statements. The directors have approved policies to mitigate the above risks by introducing controls that are designed to safeguard the Bank’s assets while allowing sufficient freedom for the normal conduct of business. The Assets and Liabilities and Loan Management Committees carry out periodic reviews to ensure compliance with financial and operational controls.
1
Development Bank of Zambia Directors’ report for the year ended 31 December 2014
Report of the directors
The directors present their report together with the financial statements for the year ended 31 December 2014, which disclose the state of affairs of Development Bank of Zambia (the “Bank”).
General information
Development Bank of Zambia is a statutory body incorporated under the Development Bank of Zambia Amendment Act, and is domiciled in the Republic of Zambia. The Bank was incorporated in 1972. The address of its registered office is as follows:
Development House Katondo Street P O Box 33955 Lusaka, Zambia
The Bank’s business activity is providing short term, medium term and long term finance, and provision of related business advisory services. In the opinion of the Directors, all the activities of the Bank fall within the financial services sector.
Results
Net interest income
2014 K’000
43,253
2013 K’000
30,532
Profit before tax 4,858 6,923
Profit for the year 2,895 4,560
Dividends
The directors do not recommend payment of dividends.
Share capital
The total authorised number of ordinary shares is700,000 (2013: 700,000) with a par value of US$1,000 per share. The issued share capital is7,096 shares (2013: 7,096) with a par value of US$1,000 per share. Details about the Bank’s share capital are included in note 26.
Directors
The directors who held office during the year were:
Mr Robert M Chomba Chairman Mr Jacob Lushinga Managing Director MrsElitaM Mwambazi Non Executive Director Dr George Chabwera Non Executive Director Dr Bane Maleke Non Executive Director Mrs Sherine Panton-Ntshona Non Executive Director (Alternative to Dr. Bane Maleke) Mr Ashok K Vartia Non Executive Director Mr Surender Arora Non Executive Director (Resigned 12.09.2014) MrMukulSarkar Non Executive Director (Resigned 12.09.2014)
2
Development Bank of Zambia Directors’ report for the year ended 31 December 2014 Report of the Directors (continued) Directors' interests and emoluments Except for the Managing Director, no other director had a service contract with the Bank. No director had an interest in any contract entered into by the Bank during the year. Director’s emoluments paid during the year wasK852,000 (2013: K716,000). Property and equipment The Bank purchased equipment amounting toK840,000during the year (2013: K1,931,000). There was no disposal of assets during 2014 (2013:K773,000). Intangible assets The Bank purchased computer software amounting to K72,000 during the year (2013: K53,000). Employees The average number of employees for each month during the period was 55 (2013: 40). The total amount spent on employees’ remuneration and welfare during the year wasK27,987,000(2013: K22,037,000). Health and safety of employees The directors are aware of their responsibilities regarding the safety and health of employees and have put appropriate measures in place to safeguard the safety and health of the Bank's employees. Risk management and control In its normal operations, the Bank is exposed to a number of risks, the most significant of which are credit, market, operational and liquidity risks. These are described and explained in greater detail under risk management in the notes to the financial statements. The directors have approved policies to mitigate the above risks by introducing controls that are designed to safeguard the Bank’s assets while allowing sufficient freedom for the normal conduct of business. The Assets and Liabilities and Loan Management Committees carry out periodic reviews to ensure compliance with financial and operational controls.
3
Development Bank of Zambia Directors’ report For the year ended 31 December 2014 Report of the Directors (continued) Gifts and donations The Bank made donations during the year amounting to K43,000(2013: K14,000) in order to support various socially responsible causes. There were no donations made to political parties (2013: nil). Prohibited borrowings or lending There were no prohibited borrowings or lending as defined under Sections 72 and 73 of the Banking and Financial Services Act. Auditors Messrs PricewaterhouseCoopersretire at the next Annual General Meeting. A resolution for appointing external auditors for the forthcoming year and authorizing the directors to determine their remuneration will be proposed at the Annual General Meeting. By order of the Board. Robert M Chomba Chairman
4
Development Bank of Zambia Statement of Directors Responsibilities The Development Bank of Zambia Act requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Bank as at the end of the financial year and of its profit or loss. It also requires the directors to ensure that the Bank keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the Bank. They are also responsible for safeguarding the assets of the Bank. The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable estimates, in conformity with International Financial Reporting Standards and the requirements of the Development Bank of Zambia Act and the Banking and Financial Services Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Bank and of its profit in accordance with International Financial Reporting Standards. The directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements, as well as designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Nothing has come to the attention of the directors to indicate that the Bank will not remain a going concern for at least twelve months from the date of this statement. Approval of the financial statements The financial statements for the year ended 31 December 2014 have been approved for issue by the Board of Directors. Neither the entity’s owners nor others have the power to amend the financial statements after issue. _______________________ _______________________ Chairman Managing Director
3
Development Bank of Zambia Directors’ report For the year ended 31 December 2014 Report of the Directors (continued) Gifts and donations The Bank made donations during the year amounting to K43,000(2013: K14,000) in order to support various socially responsible causes. There were no donations made to political parties (2013: nil). Prohibited borrowings or lending There were no prohibited borrowings or lending as defined under Sections 72 and 73 of the Banking and Financial Services Act. Auditors Messrs PricewaterhouseCoopersretire at the next Annual General Meeting. A resolution for appointing external auditors for the forthcoming year and authorizing the directors to determine their remuneration will be proposed at the Annual General Meeting. By order of the Board. Robert M Chomba Chairman
4
Development Bank of Zambia Statement of Directors Responsibilities The Development Bank of Zambia Act requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Bank as at the end of the financial year and of its profit or loss. It also requires the directors to ensure that the Bank keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the Bank. They are also responsible for safeguarding the assets of the Bank. The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable estimates, in conformity with International Financial Reporting Standards and the requirements of the Development Bank of Zambia Act and the Banking and Financial Services Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Bank and of its profit in accordance with International Financial Reporting Standards. The directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements, as well as designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Nothing has come to the attention of the directors to indicate that the Bank will not remain a going concern for at least twelve months from the date of this statement. Approval of the financial statements The financial statements for the year ended 31 December 2014 have been approved for issue by the Board of Directors. Neither the entity’s owners nor others have the power to amend the financial statements after issue. _______________________ _______________________ Chairman Managing Director
5
Report of the independent auditor’s to the members of Development Bank of Zambia
Report on the financial statements
We have audited the accompanying financial statements of Development Bank of Zambia (“the Bank”), which comprise the statement of financial position as at 31 December 2014, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes as set out on pages 11 to 52.
Directors’ responsibility for the financial statements
The Bank’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and the requirementsof the Banking and Financial Services Act of Zambia, the Development Bank of Zambia Act and the Companies Act of Zambia, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, these financial statements present fairly, in all material respects, the financial position of Development Bank of Zambia as at 31 December 2014 and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of Zambia, the Development Bank of Zambia Act and the Banking and Financial Services Act of Zambia.
6
Report on other legal and regulatory requirements
In accordance with Section 173 (3) of the Companies Act of Zambia, we report that, in our opinion, the accounting and other records and registers required by the Act have been properly kept in accordance with the Act.
In accordance with Section 64 (2) of the Banking and Financial Services Act of Zambia, we report that, in our opinion:
the Bank made available all necessary information to enable us to comply with the requirements of this Act;
the Bank has complied in all material respects with the provisions of this Act and the regulations, guidelines and prescriptions under this Act; and
in terms of section 64 (2) (d) (ii) of the Banking and Financial Services Act, we report that there were no non-performing or restructured loans owing to the Bank whose principal amount exceeded 5% of the regulatory capital of the Bank.
PricewaterhouseCoopers Lusaka, Zambia
Nasir Ali 2015 Partner
5
Report of the independent auditor’s to the members of Development Bank of Zambia
Report on the financial statements
We have audited the accompanying financial statements of Development Bank of Zambia (“the Bank”), which comprise the statement of financial position as at 31 December 2014, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes as set out on pages 11 to 52.
Directors’ responsibility for the financial statements
The Bank’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and the requirementsof the Banking and Financial Services Act of Zambia, the Development Bank of Zambia Act and the Companies Act of Zambia, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, these financial statements present fairly, in all material respects, the financial position of Development Bank of Zambia as at 31 December 2014 and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of Zambia, the Development Bank of Zambia Act and the Banking and Financial Services Act of Zambia.
6
Report on other legal and regulatory requirements
In accordance with Section 173 (3) of the Companies Act of Zambia, we report that, in our opinion, the accounting and other records and registers required by the Act have been properly kept in accordance with the Act.
In accordance with Section 64 (2) of the Banking and Financial Services Act of Zambia, we report that, in our opinion:
the Bank made available all necessary information to enable us to comply with the requirements of this Act;
the Bank has complied in all material respects with the provisions of this Act and the regulations, guidelines and prescriptions under this Act; and
in terms of section 64 (2) (d) (ii) of the Banking and Financial Services Act, we report that there were no non-performing or restructured loans owing to the Bank whose principal amount exceeded 5% of the regulatory capital of the Bank.
PricewaterhouseCoopers Lusaka, Zambia
Nasir Ali 2015 Partner
7
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Statement of profit or loss and other comprehensive income
Note 2014
2013
K’000 K,000 Interest income 5 51,809 37,056 Interest expense 6 (8,556) (6,524) Net interest income 43,253
30,532 Impairment loss 13 (20,788) (4,412) Fee and commission income 7 4,458 4,645 Fee and commission expense 7 (69) (94) Net fee and commission income/(expense) 4,389 4,551 Foreign exchange gain/(loss) 8 14,550 6,364 Investment income 9 2,359 2,286 Other income 10 602 1,027 2,961
3,313
Operating income 44,365 40,348 Personnel expenses 11 (27,987) (22,037) Other operating expenses 12 (10,000) (10,066) Depreciation and amortisation 20,21 (1,520) (1,322)
(39,507) (33,425)
Profit before tax
4,858
6,923
Tax expense 14 (1,963) (2,363)
Profit for the year 2,895 4,560 Other comprehensive income Items that will not be reclassified to profit or loss Gain on revaluation of land and buildings
5,248
-
Deferred tax on gain on revaluation of land and buildings Fair value loss on available for sale investment securities
18
(1,837) (1,750)
- 6,777
Deferred tax on fair value loss on available for sale investment securities
14
612
(2,372)
Total other comprehensive income 2,273 4,405
Total comprehensive income for the year 5,168 8,965
The notes on pages 11 to 52 are an integral part of these financial statements.
8
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Statement of financial position
Note
2014 K’000
2013 K’000
Assets Cash and cash equivalents 15 34,118 109,772 Loans and advances to other banks 16 17,810 40,499 Loans and advances to customers 17 442,760 241,250 Available-for-sale investment securities 18 64,942 57,983 Investment properties 19 15,341 14,166 Property and equipment 20 21,302 16,694 Intangible assets 21 249 217 Other assets 22 17,819 35,635
Total assets 614,341 516,216 Liabilities Trade and other payables 23 14,231 17,359 Loans and borrowings 24 153,897 126,222 Deferred tax liabilities 14 14,940 12,140 Current tax liabilities 14 1,610 1,900 Other liabilities 25 5,471 2,771
Total liabilities 190,149 160,392 Equity Share capital 26 33,471 33,471 Funds awaiting allotment of shares 26 330,715 267,515 Statutory reserves 5,895 5,048 Fair value reserve 18,990 20,128 Revaluation reserve 17,929 14,518 Retained earnings 17,192 15,144
Total equity 424,192 355,824
Total liabilities and equity 614,341 516,216 These financial statements were approved by the Board of Directors on ………………………..2015.
_______________________ _______________________ Chairman Managing Director The notes on pages 11 to 52are an integral part of these financial statements.
7
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Statement of profit or loss and other comprehensive income
Note 2014
2013
K’000 K,000 Interest income 5 51,809 37,056 Interest expense 6 (8,556) (6,524) Net interest income 43,253
30,532 Impairment loss 13 (20,788) (4,412) Fee and commission income 7 4,458 4,645 Fee and commission expense 7 (69) (94) Net fee and commission income/(expense) 4,389 4,551 Foreign exchange gain/(loss) 8 14,550 6,364 Investment income 9 2,359 2,286 Other income 10 602 1,027 2,961
3,313
Operating income 44,365 40,348 Personnel expenses 11 (27,987) (22,037) Other operating expenses 12 (10,000) (10,066) Depreciation and amortisation 20,21 (1,520) (1,322)
(39,507) (33,425)
Profit before tax
4,858
6,923
Tax expense 14 (1,963) (2,363)
Profit for the year 2,895 4,560 Other comprehensive income Items that will not be reclassified to profit or loss Gain on revaluation of land and buildings
5,248
-
Deferred tax on gain on revaluation of land and buildings Fair value loss on available for sale investment securities
18
(1,837) (1,750)
- 6,777
Deferred tax on fair value loss on available for sale investment securities
14
612
(2,372)
Total other comprehensive income 2,273 4,405
Total comprehensive income for the year 5,168 8,965
The notes on pages 11 to 52 are an integral part of these financial statements.
8
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Statement of financial position
Note
2014 K’000
2013 K’000
Assets Cash and cash equivalents 15 34,118 109,772 Loans and advances to other banks 16 17,810 40,499 Loans and advances to customers 17 442,760 241,250 Available-for-sale investment securities 18 64,942 57,983 Investment properties 19 15,341 14,166 Property and equipment 20 21,302 16,694 Intangible assets 21 249 217 Other assets 22 17,819 35,635
Total assets 614,341 516,216 Liabilities Trade and other payables 23 14,231 17,359 Loans and borrowings 24 153,897 126,222 Deferred tax liabilities 14 14,940 12,140 Current tax liabilities 14 1,610 1,900 Other liabilities 25 5,471 2,771
Total liabilities 190,149 160,392 Equity Share capital 26 33,471 33,471 Funds awaiting allotment of shares 26 330,715 267,515 Statutory reserves 5,895 5,048 Fair value reserve 18,990 20,128 Revaluation reserve 17,929 14,518 Retained earnings 17,192 15,144
Total equity 424,192 355,824
Total liabilities and equity 614,341 516,216 These financial statements were approved by the Board of Directors on ………………………..2015.
_______________________ _______________________ Chairman Managing Director The notes on pages 11 to 52are an integral part of these financial statements.
9
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10
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Statement of cash flows
2014 2013
Cash flow from operating activities K’000 K’000 Profit for the year 2,895 4,560 Adjustment for: Depreciation of property and equipment 1,480 1,303 Amortisation of intangible asset 40 19 Foreign currency translation gain (14,550) (6,364) Loss/(profit) on disposal of held for sale investment property 767 314 Change in fair value of investment property (1,175) (166) Tax expense 1,963 2,363
(8,580) 2,029 Change in loans and advances to non –group banks 22,688 10,268 Change in loans and advances to customers (203,474) (208,685) Change in trade and other payables (3,128) 13,626 Change in other assets 17,816 (18,478) Change in other liabilities 2,700 1,527
(171,978) (199,713)
Tax paid (678) (190)
Net cash from operating activities (172,656) (199,903)
Cash flows generated from investing activities Acquisition of property and equipment (840) (1,931) Acquisition of intangible assets (72) (53) Investment securities acquired - (12,500) Proceeds from sale of property and equipment - 160
Net cash generated from investing activities (912) (14,324)
Cash flows generated from financing activities
Proceeds from loans and borrowings 17,288 104,511 Increase in accrued interest on borrowings 7,678 - Repayment of loans and borrowings (4,802) (4,700) Prepaid capital contributions 63,200 -
Net cash generated from/(utilised in) financing activities 83,364 99,811
Net (decrease)/increase in cash and cash equivalents (90,204) (114,416) Cash and cash equivalents at beginning of year 109,772 217,824 Foreign currency translation gain 14,550 6,364
Cash and cash equivalents at end of year 34,118
109,772
The notes on pages 11 to 52 are an integral part of these financial statements
10
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Statement of cash flows
2014 2013
Cash flow from operating activities K’000 K’000 Profit for the year 2,895 4,560 Adjustment for: Depreciation of property and equipment 1,480 1,303 Amortisation of intangible asset 40 19 Foreign currency translation gain (14,550) (6,364) Loss/(profit) on disposal of held for sale investment property 767 314 Change in fair value of investment property (1,175) (166) Tax expense 1,963 2,363
(8,580) 2,029 Change in loans and advances to non –group banks 22,688 10,268 Change in loans and advances to customers (203,474) (208,685) Change in trade and other payables (3,128) 13,626 Change in other assets 17,816 (18,478) Change in other liabilities 2,700 1,527
(171,978) (199,713)
Tax paid (678) (190)
Net cash from operating activities (172,656) (199,903)
Cash flows generated from investing activities Acquisition of property and equipment (840) (1,931) Acquisition of intangible assets (72) (53) Investment securities acquired - (12,500) Proceeds from sale of property and equipment - 160
Net cash generated from investing activities (912) (14,324)
Cash flows generated from financing activities
Proceeds from loans and borrowings 17,288 104,511 Increase in accrued interest on borrowings 7,678 - Repayment of loans and borrowings (4,802) (4,700) Prepaid capital contributions 63,200 -
Net cash generated from/(utilised in) financing activities 83,364 99,811
Net (decrease)/increase in cash and cash equivalents (90,204) (114,416) Cash and cash equivalents at beginning of year 109,772 217,824 Foreign currency translation gain 14,550 6,364
Cash and cash equivalents at end of year 34,118
109,772
The notes on pages 11 to 52 are an integral part of these financial statements
11
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes
1 Reporting entity Development Bank of Zambia(“the Bank”) is a statutory body incorporated under the Development Bank of Zambia Act CAP 363 of the Laws of Zambia (as amended) and is domiciled in the Republic of Zambia. The Bank was incorporated in 1972. The Bank’s activities are the provision of corporate banking services, term development finance, funds management, credit enhancement and business advisory services. The registered office of the Bank is Development House, Katondo Street, Lusaka, Zambia.
2 Basis of preparation
The financial statements of Development Bank of Zambia have been prepared in accordance with the International Financial Reporting Standards (IFRSs) and the requirements of the Banking and Financial Services Act, and the Development Bank of Zambia Act CAP 363 of the Laws of Zambia (as amended).
The measurement basis applied is the historical cost basis, except where otherwise stated in the accounting policies below. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions. It also requires the directors to exercise judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.
3 Functional and presentation currency
These financial statements are presented in Zambian Kwacha (“Kwacha”), which is the Bank’s functional currency.
4 Use of estimates and judgements
In preparing these financial statements, management has made judgements, estimates and assumptions that affect the application of the Banks’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. (a) Judgements
Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the financial statements is set out in note 29.
(b) Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ended 31 December 2014 is set out below: • Note 31 – determination of fair value of financial instruments with unobservable inputs. • Note 14 – recognition of deferred tax assets: availability of future taxable profit against which carry
forward tax losses can be used. • Note 29(t) – recognition and measurement of provisions and contingencies: key assumptions about the
likelihood and magnitude of an outflow of resources. • Note 29(p) – impairment test: key assumptions underlying recoverable amounts.
12
Development Bank of Zambia
Financial Statements for the year ended 31 December 2014 Notes(continued)
4 Use of estimates and judgements (continued)
(c) Measurement of fair value
A number of the Bankaccounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.
The Bankhas an established control framework with respect to the measurement of fair value. This includes the finance team that has overall responsibility for overseeing all significant fair value measurement, including Level 3 fair values, and reports directly to the Finance Director. The finance team regularly reviews significant unobservable inputs and valuation adjustment. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to the BoardFinance and Audit Committee. Impairment of financial instruments
When measuring the fair value of an asset or a liability, the Bankuses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
• Level 1: quoted price (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable
inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Bankrecognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in the following notes: Note 29(g) – financial assets and liabilities Note 29(l)– Investment property
12
Development Bank of Zambia
Financial Statements for the year ended 31 December 2014 Notes(continued)
4 Use of estimates and judgements (continued)
(c) Measurement of fair value
A number of the Bankaccounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.
The Bankhas an established control framework with respect to the measurement of fair value. This includes the finance team that has overall responsibility for overseeing all significant fair value measurement, including Level 3 fair values, and reports directly to the Finance Director. The finance team regularly reviews significant unobservable inputs and valuation adjustment. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to the BoardFinance and Audit Committee. Impairment of financial instruments
When measuring the fair value of an asset or a liability, the Bankuses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
• Level 1: quoted price (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable
inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Bankrecognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in the following notes: Note 29(g) – financial assets and liabilities Note 29(l)– Investment property
13
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued) 5 Interest income
2014 2013 K’000
K’000
Fixed deposit and cash and cash equivalent interest income 5,355 16,307 Loans and advances to customers 44,689 20,205 Staff loans 1,765 544
51,809 37,056 6 Interest expense
Floating rate debt securities 8,556 6,524
8,556 6,524 7 Fee and commission income and expense
Fee and commission income Corporate banking credit related fees 4,458 3,690 Financial guarantee contract issues - 955
4,458 4,645
Fee and commission expense Inter-bank transaction fees 69 94
Net fee and commission income/(expense) 4,389 4,551
8 Foreign currency translation Net foreign currency translation gain 14,550 6,364
9 Investment income
Dividends on available for sale securities 1,171
1,515 Rental income 13
605
Fair value adjustment on investment property (note 19) 1,175
166
2,359
2,286
14
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued) 10 Other income
2014 2013
K’000 K’000 Other income 602
1,027
602
1,027
11 Personnel expenses
Salaries and wages 23,086
18,877 Employer’s Napsa contributions 442
374
Other employee costs 4,459
2,786
27,987
22,037
The average number of employees for each month during the period was 55 (2013: 40).
12 Other operating expenses
Advertising 194 219 Auditor's remuneration 305 221 Banking license expense 8 9 Board expenses 1,126 1,334 Investment property expenses 33 101 Donations 43 14 Entertainment 347 430 Insurance 310 401 Motor vehicle expenses 426 468 Office and security expenses 507 460 Other operating expenses 278 385 Penalties - 2 Postage and communication expense 407 417 Printing and stationery 576 224 Professional and legal fees 503 1,940 Repairs and maintenance 1,031 169 Software licensing IT costs 447 146 Training and development 677 698 Travel expense 1,857 1,857 Loss on disposal of property and equipment 767 314 Water, electricity and rates 158 257
10,000 10,066
15
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued) 13 Impairment loss
2014
K’000 2013
K’000
Increase/(decrease) in individually assessed Increase/(decrease) in collectively assessed
26,206 (5,418)
(1,223) 5,635
Total impairment loss (note 17) 20,788 4,412
14 Taxation
Recognised in statement of comprehensive income
Current tax Current year 388 482 Deferred tax expense 1,575 1,881
Total income tax expense 1,963 2,363 Movement in current tax liabilities
Opening balance 1,900 1,608 Charge for the year 388 482 Tax paid (678) (190)
Closing balance 1,610 1,900
The tax on the Bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate, as follows:
2014 2013 Profit before tax 4,858 6,923
Tax calculated at the statutory income tax rate 35% 1,700 35% 2,423 Tax effect of: Income taxed at a lower rate - dividends (5%) (237) (4%) (303) Expenses not deductible for tax purposes 9% 442 3% 227 Recognition of previously unrecognised deferred tax assets - Under provision in prior year 1% 58 0% 16
Income tax expense 40% 1,963 34% 2,363
The Bank has tax losses available for utilisation against future taxable income. Tax losses are available for carry forward for a maximum period of 5 years. The carried forward losses, which are in some cases subject to agreement with the Zambia Revenue Authority, are as follows:
Year of tax loss K’000
Expiry date
2011 5,717 2016 2010 7,499 2015
15
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued) 13 Impairment loss
2014
K’000 2013
K’000
Increase/(decrease) in individually assessed Increase/(decrease) in collectively assessed
26,206 (5,418)
(1,223) 5,635
Total impairment loss (note 17) 20,788 4,412
14 Taxation
Recognised in statement of comprehensive income
Current tax Current year 388 482 Deferred tax expense 1,575 1,881
Total income tax expense 1,963 2,363 Movement in current tax liabilities
Opening balance 1,900 1,608 Charge for the year 388 482 Tax paid (678) (190)
Closing balance 1,610 1,900
The tax on the Bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate, as follows:
2014 2013 Profit before tax 4,858 6,923
Tax calculated at the statutory income tax rate 35% 1,700 35% 2,423 Tax effect of: Income taxed at a lower rate - dividends (5%) (237) (4%) (303) Expenses not deductible for tax purposes 9% 442 3% 227 Recognition of previously unrecognised deferred tax assets - Under provision in prior year 1% 58 0% 16
Income tax expense 40% 1,963 34% 2,363
The Bank has tax losses available for utilisation against future taxable income. Tax losses are available for carry forward for a maximum period of 5 years. The carried forward losses, which are in some cases subject to agreement with the Zambia Revenue Authority, are as follows:
Year of tax loss K’000
Expiry date
2011 5,717 2016 2010 7,499 2015
16
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued)
14 Taxation
Recognised deferred tax assets and liabilities
Deferred tax asset has been recognised in respect of these items because it is probable that future taxable profits will be available against which the Bank can utilise the benefits there from. Assets Liabilities Net 2014 2013 2014 2013 2014 2013
K’000 K’000 K’000 K’000 K’000 K,000
Property and equipment - - 4,522 4,633 4,522 4,633
Available for sale investment securities
-
-
7,107
7,719
7,107
7,719
Revaluation of property - - 1,837 - 1,837 -
Tax losses carry - forwards (6,355) (4,626) - - (6,355) (4,626)
Unrealised exchange gain - - 7,180 3,250 7,180 3,250
Fair value gain on investment property
-
-
2,740
2,329
2,740
2,329
Unrealised exchange loss (2,091) (1,165) - - (2,091) (1,165)
Tax assets/(liabilities) (8,446) (5,791) 23,386 17,931 14,940 12,140
2014 Recognised deferred tax assets and liabilities
Balance at
Recognised in profit
or loss
Recognised in other
comprehensive income Balance at
1/1/2014
31/12/2014
K’000 K’000 K’000 K’000 Fair value change on available-for-sale 7,719 - (612) 7,107 Property and equipment 4,633 (111) - 4,522 Fair value gain on investment property 2,329 411 - 2,740 Revaluation of property - - 1,837 1,837 Tax losses carry - forwards (4,626) (1,729) - (6,355) Unrealised exchange gain 3,250 3,930 - 7,180 Unrealised exchange loss (1,165) (926) - (2,091)
12,140 1,575 1,225 14,940
2013
Balance at
Recognised in profit or
loss
Recognised in other
comprehensive income Balance at
1/1/ 2013 K’000
K’000
K’000
31/12/2013 K’000
Fair value change on available-for-sale 5,347
-
2,372 7,719 Property and equipment 4,779
(146)
- 4,633
Fair value gain on investment property 2,271
58
- 2,329 Tax losses carry - forwards (5,463)
837
- (4,626)
Unrealised exchange gain 1,258
1,992
- 3,250 Unrealised exchange loss (305)
(860)
- (1,165)
7,887
1,881
2,372 12,140
The Bank applies IAS 12 - Income Taxes, to temporary differences between the carrying amount of the assets and liabilities and their tax bases. Under IAS 12, a deferred tax asset should be recognised for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. Section 30 (1) of the Income Tax Act of 1996, as amended, permits the carry forward of tax losses for a period of 5 years.
17
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued)
15 Cash and cash equivalents 2014 2013 K’000 K’000 Cash in hand 16 96 Money market placements 34,102 109,676
34,118 109,772 16 Loans and advances to other banks
Loans and advances to other banks 18,775
39,562 Interest receivable 610
2,302
19,385
41,864 Impairment allowance (1,575)
(1,365)
17,810
40,499
(i) Allowance for impairment
Opening balance 1,365
1,281 Effect of foreign currency movements 210
84
At end 1,575
1,365
Individually assessed 1,575
1,365
1,575
1,365
17 Loans and advances to customers
Loans and advances to customers 398,086
215,429 Net investment in leases (ref to (ii)below) 9,760
2,920
Interest receivable 26,522
16,897 Staff loans (note (i) below) 42,711
17,813
Receivables-portfolio sundries 1,545
1,298
478,624
254,357
Impairment allowance (see note (iii) below) (35,864)
(13,107)
442,760
241,250
(i) Staff loans are repayable monthly over periods of between 6 months and 26 years and have interest rates between 5% and 8%.
(ii) Finance leases are analysed as shown below:
Gross investment in finance leases: K’000
K’000
Not later than 1 year 4,302 1,433 Later than 1 year and not later than 5 years 8,603 2,865 12,905
4,298 Unearned future finance income on finance leases (3,145) (1,378)
Net investment in finance leases 9,760
2,920
The net investment in finance leases may be analysed as follows:
Not later than 1 year 3,253 973 Later than 1 year and not later than 5 years 6,507 1,947
9,760
2,920
18
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
17 Loans and advances to customers (continued)
(iii) Allowance for impairment
2014
2013
K’000 K’000 At start
Individually assessed 2,876
5,380 Collectively assessed 10,231
4,596
13,107
9,976
Opening balance 13,107
9,976 Charge for the year 20,788
4,412
Impairment loss under/(over) in prior year 1,969
(1,281)
At end 35,864
13,107
Individually assessed 29,081
2,876 Collectively assessed 6,783
10,231
35,864
13,107
(iv) Maturity analysis of gross loans and advances to customers
The maturity analysis is based on the remaining periods to contractual maturity:
2014 2013
K’000
K’000
Maturity within one year 95,725 50,871 Maturity after 12 months 382,899 203,486
478,624 254,357
Included in loans and advances to customers under staff loans are amounts due from related parties amounting toK10,521,000 (2013: K11,178,000).
19
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 18 Available for sale investment securities
2014 2013 Equity securities-at fair value K’000 K’000 Unlisted: At start 57,983 38,706 Additions: Yalelo Limited - 12,500 : Kabwe Industrial Fabrics Company Ltd 8,709 - Fair value (loss)/gain (1,750) 6,777
Total securities-available for sale 64,942 57,983
(a) In the year, the Bank restructured the total loan due from Kabwe Industrial Fabrics Company
Limited (KIFCO) and converted half of the loan into equity, split into 50% ordinary shares and 50% preference shares. The shareholding of the bank in KIFCO is yet to be determined as the valuation of the company is being finalised. The equity investment has therefore been carried at cost pending allotment of shares.
(b) The fair value of financial assets that are not traded in an active market is determined by using valuation techniques. The Bank uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used, include the use of comparable recent arm’s length transactions where available, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs. The equity investments have been fair valued using the net worth method.
The fair value measurement for available-for-sale investments of K64,942,000 has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
(c) The Bank also has equity stakes in Supa Oils Limited and Zambia Knitting Mills Limited of 1.12% and 11% respectively. These investments are carried at cost of K280 and K141for Supa Oils Limited and Zambia Knitting Mills Limited respectively. These are equity investments in private companies that do not have a quoted market price in an active market and whose fair value cannot be reliably measured.
19 Investment properties
2014
2013
K’000
K’000
At 1 January 14,166
14,000
Change in fair value 1,175
166
At 31 December 15,341
14,166
Investment properties comprise a commercial property that is leased to third parties.
The fair value of investment property was determined by Pam Golding Properties, external independent valuers, having appropriate recognised professional qualifications and experience.
The fair value measurement for investment property of K15,341,000 has been categorised as a level 2 fair value based on the inputs to the valuation technique used.
20
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 20 Property and equipment
Buildings K’000
Motor
vehicles K’000
Fixtures, fittings
andequipment K’000
Computer equipment
K’000
Capital Work in Progress
K’000
Total K’000
Valuation At 1 January 2013 15,400 2,916 1,128 810 - 20,254 Additions - 1,121 683 127 - 1,931 Disposals - (773) - - - (773)
At 31 December 2013 15,400 3,264 1,811 937 - 21,412 At 1 January 2014
15,400 3,264 1,811 937 - 21,412 Additions - - 506 136 198 840 Revaluation 3,400 - - - - 3,400 Reclassification - - (97) - 97 -
At 31 December 2014 18,800 3,264 2,220 1,073 295 25,652 Depreciation
At 1 January 2013 1,232 937 891 654 - 3,714 Charge for the year 308 690 206 99 - 1,303 Disposals - (299) - - - (299)
At 31 December 2013 1,540 1,328 1,097 753 - 4,718
At 1 January 2014 1,540 1,328 1,097 753 - 4,718 Charge for the year 308 865 197 110 - 1,480 Revaluation (1,848) - - - (1,848)
At 31 December 2014 - 2,193 1,294 863 - 4,350 Carrying amounts 31 December 2014
18,800
1,071
926
210
295
21,302
31 December 2013 13,860 1,936 714 184 - 16,694
(a) The fair value measurement of the leasehold buildings as at 31 December 2014 were performed by
Sherwood Greene, independent registered valuers not related to the Bank. Sherwood Greenehave appropriate qualifications and recent experience in the fair value measurement of properties in the relevant locations. The valuation was based on the open market values.
The carrying amount of buildings amounting to K152,000 (2013: K152,000) would have been recognised had they been carried under the cost model. Included in property, plant and equipment are fully depreciated assets with a cost of K3.28 million(2013:K 2.72 million). In terms of the Development Bank of Zambia Act, the Bank maintains a register of its property at its registered office, which is available for inspection by its members.
21
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 21 Intangible assets
Computer software
K,000
Cost /valuation
At 1 January 2013 992 Additions 53
At 31 December 2013
1,045
At 1 January 2014 1,045 Additions 72
At 31 December 2014 1,117
Accumulated amortisation At 1 January 2013 809 Charge for the year 19
At 31 December 2013 828
At 1 January2014 828 Charge for the year 40
At 31 December 2014 868
249 Carrying amount 31 December 2014
31 December2013 217
Intangible assets relateto purchasedcomputer software.
22 Other assets
2014
2013
K’000 K’000 Accounts receivable 3,446
3,629
Receivables from sale of properties 763 7,619 Government of the Republic of Zambia receivable (note 27) 6,536
3,520
10,745
14,768
Prepayments 1,539
16,125 Withholding tax recoverable 5,592
5,415
Other 34
65 Impairment loss (91)
(738)
17,819
35,635
Receivables from sale of properties relates to investment properties that were previously held for sale. These properties were sold in October 2010. However, the proceeds have not been received in full from the buyers. Management has engaged lawyers to collect the balance on the Bank’s behalf.
21
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 21 Intangible assets
Computer software
K,000
Cost /valuation
At 1 January 2013 992 Additions 53
At 31 December 2013
1,045
At 1 January 2014 1,045 Additions 72
At 31 December 2014 1,117
Accumulated amortisation At 1 January 2013 809 Charge for the year 19
At 31 December 2013 828
At 1 January2014 828 Charge for the year 40
At 31 December 2014 868
249 Carrying amount 31 December 2014
31 December2013 217
Intangible assets relateto purchasedcomputer software.
22 Other assets
2014
2013
K’000 K’000 Accounts receivable 3,446
3,629
Receivables from sale of properties 763 7,619 Government of the Republic of Zambia receivable (note 27) 6,536
3,520
10,745
14,768
Prepayments 1,539
16,125 Withholding tax recoverable 5,592
5,415
Other 34
65 Impairment loss (91)
(738)
17,819
35,635
Receivables from sale of properties relates to investment properties that were previously held for sale. These properties were sold in October 2010. However, the proceeds have not been received in full from the buyers. Management has engaged lawyers to collect the balance on the Bank’s behalf.
22
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
23 Trade and other payables
2014
2013
K’000
K’000
Payables and accruals 10,392
13,393
Clients cash collateral 16
16 Deferred income 3,639 3,950 Other 184 -
14,231
17,359
24 Loans and borrowings Development Bank of Southern Africa (DBSA) (note 27) Government of the Republic of Zambia (note 27) Government of the Republic of Zambia (note 27)
10,732 118,365
24,800
15,884 110,338
-
153,897 126,222 Movement in loans and borrowings
Balance at 1 January 126,222
20,144 Drawdowns 24,800
104,511
Interest payable 7,677 6,267 Repayments (4,802)
(4,700)
Balance at 31 December 153,897
126,222 In 2005, the Bank signed a loan agreement with the Development Bank of Southern Africa (DBSA) for a USD10 million line of credit. Interest is charged at 6 months LIBOR plus 300 basis points and the loan term is ten years. The amount represents USD1.68million of principal and interest outstanding as at 31 December 2014. The loan is secured by: - Debenture charge to secure USD 10 million principal and interest outstanding thereon by
way of fixed and floating charges on all finance agreements entered into by the Bank with its clients on assets financed under the DBSA loan agreement.
- Deed of assignment of DBSA funded loan receivables. In 2013, the Bank signed a loan agreement with the Government of the Republic of Zambia for a USD20million (line of credit from the Eurobond proceeds. This line of credit is meant to support the small and medium enterprises and is repayable in 10 years effective 27 March 2013. Interest is charged at 7.3% per annum. The loan is unsecured. During the year, the Bank signed a subsidiary loan agreement to convert a Rural Finance Programme fund of USD 4 million, previously managed by the Bank, into a credit line for on-lending to private sector for financing contracted smallholder production through Participating Financial Institutions (PFIs). This credit line is repayable over 12 years, with a 2 year grace period, at the rate of 10% per annum.
25 Other liabilities
2014 2013
K’000 K’000 Payroll liabilities 5,046
2,410
Other liabilities 112
90 Government of the Republic of Zambia apex funds residue 313
271
5,471 2,771
23
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
26 Share capital
Number of authorised
Number of shares
Value of shares
shares issued K’000 Class A As at 31 December 2014 279,999 5,021 24,456
Class B Class B shares 420,000 2,074 9,011 Golden share 1 1 4 As at 31 December 2014 420,001 2,075 9,015
Total issued share capital 700,000 7,096 33,471
Funds awaiting allotment of shares 65,985 330,715
Class A As at 31 December 2013 279,999 5,021 24,456
Class B Class B shares 420,000 2,074 9,011 Golden share 1 1 4
As at 31 December 2013 420,001 2,075 9,015
Total issued share capital
700,000
7,096
33,471 Funds awaiting allotment of shares - 55,985 267,515
The Bank has authorised Class A shares of 279,999 of $1,000 each. Class A shareholders have a right to vote, appoint Class A directors, chairperson and receive a dividend.
The Bank has authorised Class B shares of 420,001 of $1,000 each. Class B shareholders have a right to vote, appoint Class B directors, and receive a dividend.
Funds awaiting allotment of shares
2014
K’000
2013 K’000
Government of the Republic of Zambia conversation of EDP Funds (i) 235,526
235,526
National treasury allocation (i) 78,200 15,000 313,726 250,526
Norsad investment transferred to the Bank (ii) 16,989 16,989 330,715 267,515
(i) In 2011, the Bank received an injection of capital from the Zambian Government through conversion of EDP funds under management assets valued at K235.5 million and budgetary allocations from the national treasury of K10million. In 2012 and 2014, the Bank received an additional K5 million and K63.2 million from the national treasury for budget support and part of the recapitalisation programme respectively.
(ii) In addition, the Bank also took over the Government of the Republic of Zambia’s shareholding in NORSAD Finance Limited valued at K16.9 million.In accordance with the agreement dated 15 December 2013, the NORSAD Finance Limited’s shares transferred to the Bank are considered as a capital contribution from the Government of the Republic of Zambia.
The above transactions have been reported as capital contributions awaiting allotment of shares.
24
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
27 Related party transactions
The Government of the Republic of Zambia is currently the majority shareholder in the Bank with 63.53% of the shares while the Export-Import Bank of India holds 19.73% and Development Bank of Southern Africa holds 9.44%. As a result, the above institutions are related to Development Bank of Zambia. Nature ofrelationship
Government of the Republic of Zambia Export-Import Bank of India
Majority shareholder Shareholder
Development Bank of Southern Africa Shareholder A number of bank transactions are entered into with related parties in the normal course of business. These include loan and portfolio expense transactions. These transactions, except for transactions with key senior management staff and GRZ, were carried out on commercial terms and at market rates. The outstanding balances at the period end are as follows:
Amounts due to related parties
2014 K’000
2013 K’000
Government of the Republic of Zambia (note 24) 118,365 110,338
Government of the Republic of Zambia (note 24) 24,800 - Development Bank of Southern Africa (note 24) 10,732 15,884
153,897
126,222
The amount due to the Government of the Republic of Zambia is on account of the credit line of K104.51 million extended by Government for onlending to small and medium enterprises and another credit lineof USD4 million for on lending to contracted smallholder production .
The amount due to Development Bank of Southern Africa is on account of outstanding obligations on a line of credit of US$10 million. Amounts due from related parties
Government of the Republic of Zambia (note 22) 6,536 3,520
The above receivable is interest free, unsecured and has no repayment terms and conditions.
Income and expense Interest income: Loans to key management personnel 1,110 490 Interest expense: Development Bank of Southern Africa 527 697
25
Development Bank of Zambia Financial Statements for the year ended 31 December 2014
Notes (continued) 27 Related party transactions (continued)
Transactions with directors and key management personnel
Key management and executive directors
Loans and advances outstanding at 31 December 2014 2013 Of which: K’000 K’000 House loans 24,190 20,016 Personal loans 357 446
24,547 20,462
Executive directors 10,521 11,178
Key management compensation 14,016 9,738
Loans to non-executive directors are made under commercial terms in the ordinary course of the Bank’s business. Loans to executive directors are made on the same concessional terms as those of other employees of the Bank. No impairment provisions have been recognised in respect of loans given to related parties (2013: nil).
Directors’ emoluments
Included in other operating expenses is an amount of K1,126,000(2013: K1,334,000) relating to directors’ emoluments and other board expenses. Directors’ sitting and quarterly allowances were K852,000 (2013: K716,000).
28 Financial risk management
Risk management is coordinated by the Finance Department under policies approved by the Board of Directors. Treasury identifies, evaluates and hedges financial risks in close co-operation with the Bank’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk. In addition, Internal Audit unit is responsible for conducting independent reviews of effectiveness of the governance, risk management, and compliance processes, and control environment. The most important types of risk are credit risk, liquidity risk, market risk and other operational risks.
Credit risk
Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk is the most important risk for the Bank’s business; management therefore carefully manages its exposure to credit risk. Credit exposures arise principally through the Bank’s lending activities that lead to loans and advances, and investment activities that bring about debt securities and other bills into the Bank’s asset portfolio. There is also credit risk arising from off-balance sheet financial instruments, such as loan commitments. The credit risk management and control is carried out by the management Assets and Liabilities Committee (ALCO) and reported to the Board of Directors and head of each department regularly.
i. Credit risk measurement
Loans and advances
26
In measuring credit risk of loans and advances to customers and to banks at a counterparty level, the Bank reflects three components (i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued) likely future development, from which the Bank derive the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’).
These credit risk measurements, which reflect expected losses (the ‘expected loss model’) are required by the Basel Committee on Banking regulations and the Supervisory Practices (the Basel Committee). These are embedded in the Bank’s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the reporting date (the ‘incurred loss model’) rather than expected losses.
i) Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur.
ii) Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as a percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation.
ii. Risk limit control and mitigation policies
The Bank manages, limits and control concentrations of credit risk wherever they are identified - in particular, to individual counterparties and groups, and to industries.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and by industry sector are approved quarterly by the Board of Directors.
The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.
Some specific control and mitigation measures are outlined below:
(a) Collateral
The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:
Mortgages over residential properties; charges over business assets such as premises, and other assets, such as inventory and accounts receivable; and
Charges over financial instruments, such as debt securities.
26
In measuring credit risk of loans and advances to customers and to banks at a counterparty level, the Bank reflects three components (i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued) likely future development, from which the Bank derive the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’).
These credit risk measurements, which reflect expected losses (the ‘expected loss model’) are required by the Basel Committee on Banking regulations and the Supervisory Practices (the Basel Committee). These are embedded in the Bank’s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the reporting date (the ‘incurred loss model’) rather than expected losses.
i) Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur.
ii) Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as a percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation.
ii. Risk limit control and mitigation policies
The Bank manages, limits and control concentrations of credit risk wherever they are identified - in particular, to individual counterparties and groups, and to industries.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and by industry sector are approved quarterly by the Board of Directors.
The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.
Some specific control and mitigation measures are outlined below:
(a) Collateral
The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:
Mortgages over residential properties; charges over business assets such as premises, and other assets, such as inventory and accounts receivable; and
Charges over financial instruments, such as debt securities.
27
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued) In addition, in order to minimize the credit loss, the Bank seeks additional collateral from the counter party as soon as impairment indicators are noticed for the relevant individual loans and advances.
Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset backed securities and similar instruments, which are secured by portfolios of financial instruments.
(b) Credit-related commitments
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipment of goods to which they relate and therefore carry less risk than a direct loan.
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the bank is potentially exposed to loss of an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer term commitments generally have a greater degree of credit risk than shorter-term commitments.
iii. Impairment and provisioning policies
The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.
The Bank writes off a loan balance (and any related allowances for impairment losses) when Credit Operations determines that the loans are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower’s financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balances and standardised loans, charge off decisions generally are based on a product specific past due status.
The Bank holds collateral against loans and advances to customers in the form of mortgage interest over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to Banks, except where securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at 31 December 2014.
The Bank’s policy requires the review of individual financial assets at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at reporting date on a case by case basis, and are
28
applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued)
Collectively assessed impairment allowances are provided for (i) portfolio of homogenous assets that are individually below materiality thresholds; and (ii) losses that have been incurred but have not yet been identified, by using the available historical experience, judgment and statistical techniques.
iv. Maximum exposure to credit risk before collateral or other credit enhancements
Credit risk exposure relating to on-balance sheet assets is as follows:
Notes Maximum exposure
2014 K’000
2013 K’000
Cash and cash equivalents-own funds (placements)
15 34,118
109,772 Loans and advances to non -group banks 16 17,810 40,499 Loans and advances to customers 17 442,760 241,250 Available for sale investment securities 18 64,942 57,983 Other assets 22 17,819 35,635
577,449 485,139
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2014, without taking account of any collateral held or other credit enhancements attached. Total forced sale value of collateral held by the Bank at 31 December 2014 was K617,427,000.
Management is confident of its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and investment securities based on strict adherence to the existing risk management policies and procedures.
v. Concentration of credit risk
The Bank monitors concentrations of credit risk by sector and an analysis of concentration of credit risk from loans and advances and investment securities at the balance sheet date is shown below:
vi. Loans and advances
Loans and advances to customers
Loans and advances
to banks
Available for sale investment securities
2014 2013 2014 2013 2014 2013 Agriculture, forestry, fishing and hunting 43,611 13,671
- - 33,261
30,539
Manufacturing and construction 226,610 90,671
- - 8,709 -
Restaurants and hotels 69,594 44,233 - - - - Transport, storage and communications 10,000 -
-
- - -
Financial services 31,810 33,077 17,810 40,499 22,972 27,444 Other sectors 61,135 59,598 - - - -
Total gross carrying amount 442,760 241,250
17,810
40,499 64,942 57,983
28
applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued)
Collectively assessed impairment allowances are provided for (i) portfolio of homogenous assets that are individually below materiality thresholds; and (ii) losses that have been incurred but have not yet been identified, by using the available historical experience, judgment and statistical techniques.
iv. Maximum exposure to credit risk before collateral or other credit enhancements
Credit risk exposure relating to on-balance sheet assets is as follows:
Notes Maximum exposure
2014 K’000
2013 K’000
Cash and cash equivalents-own funds (placements)
15 34,118
109,772 Loans and advances to non -group banks 16 17,810 40,499 Loans and advances to customers 17 442,760 241,250 Available for sale investment securities 18 64,942 57,983 Other assets 22 17,819 35,635
577,449 485,139
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2014, without taking account of any collateral held or other credit enhancements attached. Total forced sale value of collateral held by the Bank at 31 December 2014 was K617,427,000.
Management is confident of its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and investment securities based on strict adherence to the existing risk management policies and procedures.
v. Concentration of credit risk
The Bank monitors concentrations of credit risk by sector and an analysis of concentration of credit risk from loans and advances and investment securities at the balance sheet date is shown below:
vi. Loans and advances
Loans and advances to customers
Loans and advances
to banks
Available for sale investment securities
2014 2013 2014 2013 2014 2013 Agriculture, forestry, fishing and hunting 43,611 13,671
- - 33,261
30,539
Manufacturing and construction 226,610 90,671
- - 8,709 -
Restaurants and hotels 69,594 44,233 - - - - Transport, storage and communications 10,000 -
-
- - -
Financial services 31,810 33,077 17,810 40,499 22,972 27,444 Other sectors 61,135 59,598 - - - -
Total gross carrying amount 442,760 241,250
17,810
40,499 64,942 57,983
28
applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued)
Collectively assessed impairment allowances are provided for (i) portfolio of homogenous assets that are individually below materiality thresholds; and (ii) losses that have been incurred but have not yet been identified, by using the available historical experience, judgment and statistical techniques.
iv. Maximum exposure to credit risk before collateral or other credit enhancements
Credit risk exposure relating to on-balance sheet assets is as follows:
Notes Maximum exposure
2014 K’000
2013 K’000
Cash and cash equivalents-own funds (placements)
15 34,118
109,772 Loans and advances to non -group banks 16 17,810 40,499 Loans and advances to customers 17 442,760 241,250 Available for sale investment securities 18 64,942 57,983 Other assets 22 17,819 35,635
577,449 485,139
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2014, without taking account of any collateral held or other credit enhancements attached. Total forced sale value of collateral held by the Bank at 31 December 2014 was K617,427,000.
Management is confident of its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and investment securities based on strict adherence to the existing risk management policies and procedures.
v. Concentration of credit risk
The Bank monitors concentrations of credit risk by sector and an analysis of concentration of credit risk from loans and advances and investment securities at the balance sheet date is shown below:
vi. Loans and advances
Loans and advances to customers
Loans and advances
to banks
Available for sale investment securities
2014 2013 2014 2013 2014 2013 Agriculture, forestry, fishing and hunting 43,611 13,671
- - 33,261
30,539
Manufacturing and construction 226,610 90,671
- - 8,709 -
Restaurants and hotels 69,594 44,233 - - - - Transport, storage and communications 10,000 -
-
- - -
Financial services 31,810 33,077 17,810 40,499 22,972 27,444 Other sectors 61,135 59,598 - - - -
Total gross carrying amount 442,760 241,250
17,810
40,499 64,942 57,983
28
applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued)
Collectively assessed impairment allowances are provided for (i) portfolio of homogenous assets that are individually below materiality thresholds; and (ii) losses that have been incurred but have not yet been identified, by using the available historical experience, judgment and statistical techniques.
iv. Maximum exposure to credit risk before collateral or other credit enhancements
Credit risk exposure relating to on-balance sheet assets is as follows:
Notes Maximum exposure
2014 K’000
2013 K’000
Cash and cash equivalents-own funds (placements)
15 34,118
109,772 Loans and advances to non -group banks 16 17,810 40,499 Loans and advances to customers 17 442,760 241,250 Available for sale investment securities 18 64,942 57,983 Other assets 22 17,819 35,635
577,449 485,139
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2014, without taking account of any collateral held or other credit enhancements attached. Total forced sale value of collateral held by the Bank at 31 December 2014 was K617,427,000.
Management is confident of its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and investment securities based on strict adherence to the existing risk management policies and procedures.
v. Concentration of credit risk
The Bank monitors concentrations of credit risk by sector and an analysis of concentration of credit risk from loans and advances and investment securities at the balance sheet date is shown below:
vi. Loans and advances
Loans and advances to customers
Loans and advances
to banks
Available for sale investment securities
2014 2013 2014 2013 2014 2013 Agriculture, forestry, fishing and hunting 43,611 13,671
- - 33,261
30,539
Manufacturing and construction 226,610 90,671
- - 8,709 -
Restaurants and hotels 69,594 44,233 - - - - Transport, storage and communications 10,000 -
-
- - -
Financial services 31,810 33,077 17,810 40,499 22,972 27,444 Other sectors 61,135 59,598 - - - -
Total gross carrying amount 442,760 241,250
17,810
40,499 64,942 57,983
29
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk management (continued)
Credit risk (continued)
vii. Loans and advances (continued)
Loans and advances
to customers Loans and advances
to other banks Investment securities
2014 2013 2014 2013 2014 2013 Carrying amount Individually impaired:
Gross amount 112,148 2,876 1,575 1,365 - -
Carrying amount 81,491 - - - - -
Past due but not impaired:
Past due but not impaired comprises:
30 – 60 days - - - - - -
60 – 90 days 72,274 195,878 - - - -
Gross amount 72,274 198,754 - - -
Neither past due nor impaired
Gross amount 288,995 42,496 17,810 40,499 64,942 57,983
Total carrying amount 442,760 241,250 17,810 40,499 64,972 57,983 Loans and advances renegotiated
Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payment. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans, in particular customer finance loans.
30
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 28 Financial risk review (continued)
Liquidity risk
Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay lenders and fulfil commitments to lend. Liquidity is monitored on a daily basis by the Director-Finance, Director-Projects and the Managing Director, and controlled as far as possible by ensuring that mismatches between maturing deposit liabilities and investments of these funds are kept to a minimum. Any unforeseen mismatches that arise would result in the Bank borrowing on the inter-bank market either on a clean basis or with collateral for a short period.
Below is an analysis of financial assets and liabilities of the Bank into relevant contractual maturity groupings:
Carrying Contractual up to 1-3 3-12 1-5 Over
amount cashflows 1 month months months years 5 years
K’000 K’000 K’000 K’000 K’000 K’000 K’000
At 31 December 2014 Assets Cash and cash equivalents 34,118 34,118 23,873 10,245 - - -
Available for sale investment securities 64,942 64,942 - - - 64,942 -
Loans and advances to other banks 17,810 19,385 808 1,615 7,269 9,693 -
Loans and advances to customers 442,760 478,624 6,485 13,295 59,828 319,083 79,771
Other assets 17,819 17,910 299 597 2,687 14,328 -
Total assets 577,449 614,979 31,465 25,752 69,784 408,046 79,771
Liabilities
Trading and other payables 14,231 14,231 237 474 2,135 11,385 -
Loans and borrowings 153,897 153,897 - 3,544 7,088 73,520 69,745
Total liabilities 168,128 168,128 237 4,018 9,223 84,905 69,745
Net liquidity gap 409,321 446,851 31,228 21,734 60,561 323,141 10,026
At 31 December 2013 Assets Cash and cash equivalents 109,772 109,772 51,447 17,594 40,731 - -
Available for sale investment securities 57,983 57,983 - - - 57,983 -
Loans and advances to other banks 40,499 41,864 698 1,395 6,280 33,491 -
Loans and advances to customers 241,250 254,357 3,533 7,065 31,795 169,571 42,393
Other assets 14,768 14,768 1,479 2,956 5,911 4,422 -
Total assets 464,272 478,744 57,157 29,010 84,717 265,467 42,393
Liabilities Trading and other payables 17,359 17,359 289 579 2,604 13,887 -
Loans and borrowings 126,222 126,222 - 3,227 11,071 30,685 81,239
Total liabilities 143,581 143,581 289 3,806 13,675 44,572 81,239
Net liquidity gap 320,691 335,163 56,868 25,204 71,042 220,895 (38,846)
30
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 28 Financial risk review (continued)
Liquidity risk
Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay lenders and fulfil commitments to lend. Liquidity is monitored on a daily basis by the Director-Finance, Director-Projects and the Managing Director, and controlled as far as possible by ensuring that mismatches between maturing deposit liabilities and investments of these funds are kept to a minimum. Any unforeseen mismatches that arise would result in the Bank borrowing on the inter-bank market either on a clean basis or with collateral for a short period.
Below is an analysis of financial assets and liabilities of the Bank into relevant contractual maturity groupings:
Carrying Contractual up to 1-3 3-12 1-5 Over
amount cashflows 1 month months months years 5 years
K’000 K’000 K’000 K’000 K’000 K’000 K’000
At 31 December 2014 Assets Cash and cash equivalents 34,118 34,118 23,873 10,245 - - -
Available for sale investment securities 64,942 64,942 - - - 64,942 -
Loans and advances to other banks 17,810 19,385 808 1,615 7,269 9,693 -
Loans and advances to customers 442,760 478,624 6,485 13,295 59,828 319,083 79,771
Other assets 17,819 17,910 299 597 2,687 14,328 -
Total assets 577,449 614,979 31,465 25,752 69,784 408,046 79,771
Liabilities
Trading and other payables 14,231 14,231 237 474 2,135 11,385 -
Loans and borrowings 153,897 153,897 - 3,544 7,088 73,520 69,745
Total liabilities 168,128 168,128 237 4,018 9,223 84,905 69,745
Net liquidity gap 409,321 446,851 31,228 21,734 60,561 323,141 10,026
At 31 December 2013 Assets Cash and cash equivalents 109,772 109,772 51,447 17,594 40,731 - -
Available for sale investment securities 57,983 57,983 - - - 57,983 -
Loans and advances to other banks 40,499 41,864 698 1,395 6,280 33,491 -
Loans and advances to customers 241,250 254,357 3,533 7,065 31,795 169,571 42,393
Other assets 14,768 14,768 1,479 2,956 5,911 4,422 -
Total assets 464,272 478,744 57,157 29,010 84,717 265,467 42,393
Liabilities Trading and other payables 17,359 17,359 289 579 2,604 13,887 -
Loans and borrowings 126,222 126,222 - 3,227 11,071 30,685 81,239
Total liabilities 143,581 143,581 289 3,806 13,675 44,572 81,239
Net liquidity gap 320,691 335,163 56,868 25,204 71,042 220,895 (38,846)
31
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 28 Financial risk review (continued)
Market risk
Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fair value or future cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to general and specific market movements and changes in the level of volatility. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while optimising the return on risk. Overall responsibility for managing market risk rests with the Assets and Liabilities Committee (ALCO). The finance department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO). Each department is responsible for the day to day implementation of the relevant policies.
Market risk measurement techniques The major measurement techniques used to measure and control market risk are outlined below:
Currency risk
The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure which are monitored daily.
Maximum exposure to currency risk is as follows:
2014 USD kwacha
equivalent K’000
2013 USD kwacha
equivalent K’000
2014 Sensitivity
10% movement
K’000 Assets
Cash and cash equivalents
8,220 21,510 822 Available for sale investment securities
22,972 27,444 2,297
Loans and advances to customers
77,320 69,993 7,732 Loans and advances to other banks
17,810 40,499 1,781
Other assets
- 5,405
Total assets
126,322 164,851 12,632 Liabilities
Trade and other payables
90 1,502 9 Loans and borrowings
10,642 15,444 1,064
Total liabilities
10,732 16,946 1,073
Net on-balance sheet position
115,590 147,905 11,559
The Bank is exposed to currency risk through transactions denominated in foreign currencies. The Bank's transactional exposures give rise to foreign currency gains and losses recognised in statement of comprehensive income. These exposures comprise the monetary assets and monetary liabilities of the Bank.
In respect of monetary assets and liabilities in foreign currencies that are not economically hedged, the Bank ensures that its net exposure is kept to an acceptable level by buying and selling foreign currencies at spot rates when considered appropriate.
32
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk review (continued)
Interest rate risk
Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate re-pricing that may be undertaken, which is monitored daily by finance department.
The table below summarises the Bank's exposure to interest rate risks. Included in the table are the Bank's assets and liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates.
Fixed rate instruments
In ,000s of kwacha Total
Floating rate
instruments Zero rate
instruments Less than
three months
Between three
months and one year
Between one and
five years
Over 5 years
At 31 December 2014 Assets Cash and cash equivalents 34,118 - 16 34,102 - - -
Available for sale investment securities 64,942 - 64,942 - - - - Loans and advances to other banks 17,810 - - 17,810 - Loans and advances to customers 442,760 - - 442,760 - - -
Other receivables 17,819 - 17,819 - - - -
Total assets
577,449 - 82,777 494,672 - - -
Liabilities
Trade and other payables 14,231 153,897
- 10,732
14,231 -
- -
- -
- -
- 143,165 Loans and borrowings
Total liabilities
168,128 10,732 14,231 - - -
143,165
Interest sensitivity gap
409,321 (10,732) 68,546 494,672 - - (143,165)
At 31 December 2013
Assets
Cash and cash equivalents 109,772 - 95 68,946 40,731 - - Available for sale investment securities 57,983 - 57,983 - - - -
Loans and advances to other banks 40,499 - - 40,499 - - -
Loans and advances to customers 241,250 - - 241,250 - - -
Other receivables 14,768 - 14,768 - - - -
Total assets 464,272 - 72,846 350,695 40,731 - -
Liabilities Trade and other payables 17,359 - 17,359 - - - -
Loans and borrowings 126,222 15,884 - - - - 110,338
Total liabilities 143,581 15,884 17,359 - - - 110,338
Interest Sensitivity Gap 320,691 (15,884) 55,487 350,695 40,731 - (110,338
)
31
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 28 Financial risk review (continued)
Market risk
Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fair value or future cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to general and specific market movements and changes in the level of volatility. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while optimising the return on risk. Overall responsibility for managing market risk rests with the Assets and Liabilities Committee (ALCO). The finance department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO). Each department is responsible for the day to day implementation of the relevant policies.
Market risk measurement techniques The major measurement techniques used to measure and control market risk are outlined below:
Currency risk
The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure which are monitored daily.
Maximum exposure to currency risk is as follows:
2014 USD kwacha
equivalent K’000
2013 USD kwacha
equivalent K’000
2014 Sensitivity
10% movement
K’000 Assets
Cash and cash equivalents
8,220 21,510 822 Available for sale investment securities
22,972 27,444 2,297
Loans and advances to customers
77,320 69,993 7,732 Loans and advances to other banks
17,810 40,499 1,781
Other assets
- 5,405
Total assets
126,322 164,851 12,632 Liabilities
Trade and other payables
90 1,502 9 Loans and borrowings
10,642 15,444 1,064
Total liabilities
10,732 16,946 1,073
Net on-balance sheet position
115,590 147,905 11,559
The Bank is exposed to currency risk through transactions denominated in foreign currencies. The Bank's transactional exposures give rise to foreign currency gains and losses recognised in statement of comprehensive income. These exposures comprise the monetary assets and monetary liabilities of the Bank.
In respect of monetary assets and liabilities in foreign currencies that are not economically hedged, the Bank ensures that its net exposure is kept to an acceptable level by buying and selling foreign currencies at spot rates when considered appropriate.
32
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk review (continued)
Interest rate risk
Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate re-pricing that may be undertaken, which is monitored daily by finance department.
The table below summarises the Bank's exposure to interest rate risks. Included in the table are the Bank's assets and liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates.
Fixed rate instruments
In ,000s of kwacha Total
Floating rate
instruments Zero rate
instruments Less than
three months
Between three
months and one year
Between one and
five years
Over 5 years
At 31 December 2014 Assets Cash and cash equivalents 34,118 - 16 34,102 - - -
Available for sale investment securities 64,942 - 64,942 - - - - Loans and advances to other banks 17,810 - - 17,810 - Loans and advances to customers 442,760 - - 442,760 - - -
Other receivables 17,819 - 17,819 - - - -
Total assets
577,449 - 82,777 494,672 - - -
Liabilities
Trade and other payables 14,231 153,897
- 10,732
14,231 -
- -
- -
- -
- 143,165 Loans and borrowings
Total liabilities
168,128 10,732 14,231 - - -
143,165
Interest sensitivity gap
409,321 (10,732) 68,546 494,672 - - (143,165)
At 31 December 2013
Assets
Cash and cash equivalents 109,772 - 95 68,946 40,731 - - Available for sale investment securities 57,983 - 57,983 - - - -
Loans and advances to other banks 40,499 - - 40,499 - - -
Loans and advances to customers 241,250 - - 241,250 - - -
Other receivables 14,768 - 14,768 - - - -
Total assets 464,272 - 72,846 350,695 40,731 - -
Liabilities Trade and other payables 17,359 - 17,359 - - - -
Loans and borrowings 126,222 15,884 - - - - 110,338
Total liabilities 143,581 15,884 17,359 - - - 110,338
Interest Sensitivity Gap 320,691 (15,884) 55,487 350,695 40,731 - (110,338
)
33
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk review (continued)
Interest rate risk continued)
The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain terms and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates
Capital management
The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the statement of financial position, are:
To comply with the capital requirements set by the Bank of Zambia; To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide
returns for shareholders and benefits for other stakeholders; and To maintain a strong capital base to support the development of its business.
Capital adequacy and use of regulatory capital are monitored regularly by management, employing techniques based on the guidelines developed and maintained by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of Zambia on a monthly basis.
Regulatory capital The Bank complied with the minimal capital adequacy requirements during the period 1 January 2014 to 31 December 2014.
In implementing current capital requirements Bank of Zambia requires banks:
To maintain a minimum 10% ratio of total capital to total risk-weighted assets or hold a minimum K7.5 million, whichever is higher;
Maintain primary or Tier 1 capital of not less than 5% of total risk weighted assets; and Maintain total capital of not less than 10% of risk-weighted assets plus risk-weighted off-balance sheet
items.
The Bank’s regulatory capital is analysed into two tiers:
Primary (Tier 1) capital, which includes paid-up common shares, retained earnings, statutory reserves less adjustment of assets of little or no realizable value.
Secondary (Tier 2) capital, which includes qualifying subordinated term debt and revaluation reserves limited to a maximum of 40%. The maximum amount of total secondary capital is limited to 110% of primary capital.
34
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk review(continued) Capital management (continued)
Computation of capital position
2014 K’000
2013 K’000
Primary (Tier 1) Capital
(a) Paid-up common shares 33,471
33,471
(b) Fund awaiting allotment 330,715
267,515
(c) Retained earnings 17,192
15,144
(d) General reserves 18,990
20,128
(e) Statutory reserves 5,895
5,048
Sub-total A 406,263
341,306
Subtractions:
(f) Goodwill and other intangible assets 249
217
(g) Investments in unconsolidated subsidiaries and associates 64,942
57,983
Sub-total B 65,191
58,200
Total primary capital 341,072
283,106
Secondary (tier 2) capital
(a) Revaluation reserves. (Maximum is 40% of revaluation reserves) 7,172
5,807
Total secondary capital 7,172
5,807
Eligible secondary capital 7,172
5,807
(The maximum amount of secondary capital is limited to 110% of primary capital)
Eligible total capital (I(p) + III) (Regulatory capital) 348,244
288,913
Minimum total capital requirement (10% of total on and off balance sheet risk weighted assets) 58,704
43,694
Excess (IV minus V) 289,540
245,219
33
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk review (continued)
Interest rate risk continued)
The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain terms and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates
Capital management
The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the statement of financial position, are:
To comply with the capital requirements set by the Bank of Zambia; To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide
returns for shareholders and benefits for other stakeholders; and To maintain a strong capital base to support the development of its business.
Capital adequacy and use of regulatory capital are monitored regularly by management, employing techniques based on the guidelines developed and maintained by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of Zambia on a monthly basis.
Regulatory capital The Bank complied with the minimal capital adequacy requirements during the period 1 January 2014 to 31 December 2014.
In implementing current capital requirements Bank of Zambia requires banks:
To maintain a minimum 10% ratio of total capital to total risk-weighted assets or hold a minimum K7.5 million, whichever is higher;
Maintain primary or Tier 1 capital of not less than 5% of total risk weighted assets; and Maintain total capital of not less than 10% of risk-weighted assets plus risk-weighted off-balance sheet
items.
The Bank’s regulatory capital is analysed into two tiers:
Primary (Tier 1) capital, which includes paid-up common shares, retained earnings, statutory reserves less adjustment of assets of little or no realizable value.
Secondary (Tier 2) capital, which includes qualifying subordinated term debt and revaluation reserves limited to a maximum of 40%. The maximum amount of total secondary capital is limited to 110% of primary capital.
34
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
28 Financial risk review(continued) Capital management (continued)
Computation of capital position
2014 K’000
2013 K’000
Primary (Tier 1) Capital
(a) Paid-up common shares 33,471
33,471
(b) Fund awaiting allotment 330,715
267,515
(c) Retained earnings 17,192
15,144
(d) General reserves 18,990
20,128
(e) Statutory reserves 5,895
5,048
Sub-total A 406,263
341,306
Subtractions:
(f) Goodwill and other intangible assets 249
217
(g) Investments in unconsolidated subsidiaries and associates 64,942
57,983
Sub-total B 65,191
58,200
Total primary capital 341,072
283,106
Secondary (tier 2) capital
(a) Revaluation reserves. (Maximum is 40% of revaluation reserves) 7,172
5,807
Total secondary capital 7,172
5,807
Eligible secondary capital 7,172
5,807
(The maximum amount of secondary capital is limited to 110% of primary capital)
Eligible total capital (I(p) + III) (Regulatory capital) 348,244
288,913
Minimum total capital requirement (10% of total on and off balance sheet risk weighted assets) 58,704
43,694
Excess (IV minus V) 289,540
245,219
35
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
29 Significant accounting policies
Except for the changes explained in Note 30, the Bank has consistently applied the following accounting policies to all periods presented in these financial statements, unless otherwise stated.
Set out below is an index of the significant accounting policies, the details of which are available on the pages that follow:
Note number
Page
(a) Interest income and expense 35 (b) Fees and commission 36 (c) Foreign currency transactions 36 (d) Net trading income 36 (e) Tax expense 36 (f) Employee benefits 37 (g) Financial assets and financial liabilities 38 (h) Cash and cash equivalents 42 (i) Loans and advances 42 (j) Available for sale investments 42 (k) Borrowings 43 (l) Investment property 43 (m) Leases 43 (n) Property and equipment 44 (o) Intangible assets 45 (p) Impairment of non-financial assets 45 (q) Share capital 46 (r) Dividend income 46 (s) Rental income 47 (t) Provisions 47 (u) Financial guarantee contracts 47
a) Interest income and expense
Interest income and expense for all interest bearing instruments are recognised within 'interest income' and 'interest expense' in profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.
Interest income and expense presented in the statement of profit or loss and other comprehensive income include:
• interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis;
• interest on available-for-sale investment securities calculated on an effective interest basis.
When loans and advances measured at amortised cost become doubtful of collection, they are written down to their recoverable amounts and interest income is thereafter recognised through the unwinding of the discount based on the original effective interest rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount.
36
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
29 Significant accounting policies(continued) b) Fees and commission
Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.
Other fees and commission expense relate to transactions and service fees, which are expensed as the services are received.
c) Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated to Kwacha at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. Foreign differences arising on the retranslation of the following items are recognised in other comprehensive income:
- Available for sale equity investments (except on impairment in which case foreign currency differences that have been recognised in other comprehensive income are reclassified to profit or loss.
d) Foreign exchange gains This comprises gains less losses related to realised and unrealised foreign exchange differences.
e) Tax expense
Tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to the tax payable in respect of previous years. The tax rates are based on the applicable Zambian tax law.
Deferred tax is provided in full, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is not recognised for the following temporal differences: 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 differences relating to investments in subsidiaries and jointly controlled entities to the extent that they will not reverse in the foreseeable future. Deferred income tax is determined using the tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
35
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
29 Significant accounting policies
Except for the changes explained in Note 30, the Bank has consistently applied the following accounting policies to all periods presented in these financial statements, unless otherwise stated.
Set out below is an index of the significant accounting policies, the details of which are available on the pages that follow:
Note number
Page
(a) Interest income and expense 35 (b) Fees and commission 36 (c) Foreign currency transactions 36 (d) Net trading income 36 (e) Tax expense 36 (f) Employee benefits 37 (g) Financial assets and financial liabilities 38 (h) Cash and cash equivalents 42 (i) Loans and advances 42 (j) Available for sale investments 42 (k) Borrowings 43 (l) Investment property 43 (m) Leases 43 (n) Property and equipment 44 (o) Intangible assets 45 (p) Impairment of non-financial assets 45 (q) Share capital 46 (r) Dividend income 46 (s) Rental income 47 (t) Provisions 47 (u) Financial guarantee contracts 47
a) Interest income and expense
Interest income and expense for all interest bearing instruments are recognised within 'interest income' and 'interest expense' in profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.
Interest income and expense presented in the statement of profit or loss and other comprehensive income include:
• interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis;
• interest on available-for-sale investment securities calculated on an effective interest basis.
When loans and advances measured at amortised cost become doubtful of collection, they are written down to their recoverable amounts and interest income is thereafter recognised through the unwinding of the discount based on the original effective interest rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount.
36
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
29 Significant accounting policies(continued) b) Fees and commission
Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.
Other fees and commission expense relate to transactions and service fees, which are expensed as the services are received.
c) Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated to Kwacha at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. Foreign differences arising on the retranslation of the following items are recognised in other comprehensive income:
- Available for sale equity investments (except on impairment in which case foreign currency differences that have been recognised in other comprehensive income are reclassified to profit or loss.
d) Foreign exchange gains This comprises gains less losses related to realised and unrealised foreign exchange differences.
e) Tax expense
Tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to the tax payable in respect of previous years. The tax rates are based on the applicable Zambian tax law.
Deferred tax is provided in full, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is not recognised for the following temporal differences: 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 differences relating to investments in subsidiaries and jointly controlled entities to the extent that they will not reverse in the foreseeable future. Deferred income tax is determined using the tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
37
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
e) Tax expense (continued)
The principal temporary differences arise from the depreciation of property, plant and equipment, revaluation of certain financial assets and liabilities and tax losses carried forward; and in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. 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.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, and they relate to income taxes levied by the same tax authority and the Bank intends to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items credited or debited directly to other comprehensive income or equity, in which case the tax is also recognised directly in other comprehensive income or equity.
f) Employment benefits Defined contribution plans The Bank contributes to the National Pension Scheme Authority (NAPSA) which is a defined contribution scheme. Membership to NAPSA is compulsory and monthly contributions by both employer and employee are made. Obligations for the contributions to defined contribution plans are expensed as the related service is provided and recognised as personnel expenses in profit or loss. Short term benefits Short-term employee benefits, such as salaries, holiday pay, and other benefits, are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid as short-term bonus to the extent that the Bank has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee and the obligation can be estimated reliably. Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the reporting date.
38
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities Recognition
The Bank initially recognises loans and advances, debt securities and receivables on the date on which they are originated. Regular way purchases and sales of financial assets are recognised on the trade date at which the Bank commits to purchase or sell the asset. All other financial instruments are recognised initially on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.
A financial asset or liability is initially measured at fair value plus, for an item not at fair value through profit or loss transaction costs that are directly attributable to its acquisition or issue. Classification The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
The Bank classifies its financial liabilities as measured at amortised cost or fair value through profit or loss.
Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows fromthe financial asset expire, or it transfers the rights to receive the contractual cash flows in atransaction in which substantially all of the risks and rewards of ownership of the financial assetare transferred or in which the Bank neither transfers nor retains substantially all of the risks andrewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. In transactions in which the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.
37
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
e) Tax expense (continued)
The principal temporary differences arise from the depreciation of property, plant and equipment, revaluation of certain financial assets and liabilities and tax losses carried forward; and in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. 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.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, and they relate to income taxes levied by the same tax authority and the Bank intends to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items credited or debited directly to other comprehensive income or equity, in which case the tax is also recognised directly in other comprehensive income or equity.
f) Employment benefits Defined contribution plans The Bank contributes to the National Pension Scheme Authority (NAPSA) which is a defined contribution scheme. Membership to NAPSA is compulsory and monthly contributions by both employer and employee are made. Obligations for the contributions to defined contribution plans are expensed as the related service is provided and recognised as personnel expenses in profit or loss. Short term benefits Short-term employee benefits, such as salaries, holiday pay, and other benefits, are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid as short-term bonus to the extent that the Bank has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee and the obligation can be estimated reliably. Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the reporting date.
38
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities Recognition
The Bank initially recognises loans and advances, debt securities and receivables on the date on which they are originated. Regular way purchases and sales of financial assets are recognised on the trade date at which the Bank commits to purchase or sell the asset. All other financial instruments are recognised initially on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.
A financial asset or liability is initially measured at fair value plus, for an item not at fair value through profit or loss transaction costs that are directly attributable to its acquisition or issue. Classification The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
The Bank classifies its financial liabilities as measured at amortised cost or fair value through profit or loss.
Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows fromthe financial asset expire, or it transfers the rights to receive the contractual cash flows in atransaction in which substantially all of the risks and rewards of ownership of the financial assetare transferred or in which the Bank neither transfers nor retains substantially all of the risks andrewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. In transactions in which the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.
39
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity. Amortised cost measurement The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Fair value measurement ‘Fair value’ is 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 in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using the quoted price 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 available, the Bank measures the fair value of an instrument using the quoted price 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. 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 Bank determines that the 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, then 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 recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.
40
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Fair value measurement (continued)
If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio. The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Identification and measurement of impairment At each reporting date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired includes: • significant financial difficulty of the borrower or issuer; • default or delinquency by a borrower; • the restructuring of a loan or advance by the Banks on terms that the Bank would not
considerotherwise; • indications that a borrower or issuer will enter bankruptcy; • the disappearance of an active market for a security; or • observable data relating to a group of assets such as adverse changes in the payment status
ofborrowers or issuers in the group, or economic conditions that correlate with defaults in the group.
39
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity. Amortised cost measurement The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Fair value measurement ‘Fair value’ is 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 in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using the quoted price 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 available, the Bank measures the fair value of an instrument using the quoted price 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. 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 Bank determines that the 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, then 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 recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.
40
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Fair value measurement (continued)
If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio. The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Identification and measurement of impairment At each reporting date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired includes: • significant financial difficulty of the borrower or issuer; • default or delinquency by a borrower; • the restructuring of a loan or advance by the Banks on terms that the Bank would not
considerotherwise; • indications that a borrower or issuer will enter bankruptcy; • the disappearance of an active market for a security; or • observable data relating to a group of assets such as adverse changes in the payment status
ofborrowers or issuers in the group, or economic conditions that correlate with defaults in the group.
41
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Identification and measurement of impairment (continued) In addition, for an investment in an equity security, a significant or prolonged declinein its fair value below its cost is objective evidence of impairment. The Bank considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific asset and a collective level. All individually significant loans and advances and held-to-maturity investment securities are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances and held-to-maturity investment securities with similar risk characteristics. In assessing collective impairment, the Bank uses statistical modelling of historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If 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, then an assessment is made of whether the financial asset should be derecognised. If the cash flows of the renegotiated asset are substantially different, 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 derecognised and the new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows: • If the expected restructuring will not result in derecognition of the existing asset, then the estimated
cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original effective interest rate of the existing financial 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 discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.
Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired assets continues to be recognised through the unwinding of the discount. If an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through profit or loss.
42
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Identification and measurement of impairment (continued) If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through profit or loss; otherwise, any increase in fair value is recognised through OCI. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is always recognised in OCI. The Bank writes off a loan or an investment debt security, either partially or in full, and any related allowance for impairment losses, when Bank’s Credit determines that there is no realistic prospect of recovery.
h)Cash and cash equivalents
Cash and cash equivalents include notes, money market placement and highly liquid financial assets with original maturities of less than twelve months or less from the acquisition date that are subject to an insignificant risk of changes in fair value, and are used by the Bank in the management of its short term commitments.
i) Loans and advances ‘Loans and advances’ are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances to banks are classified as loans and receivables. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.
j) Available-for-sale investment securities Available-for-sale investments are non-derivative investments that are designated as available for sale or are not classified in any category of financial assets. Available for sale investments comprise equity securities and debt securities. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. All other available for sale investments are carried at fair value. Interest income is recognised in profit or loss using the effective interest method. Divided income is recognised in profit or loss when the Bank becomes entitled to dividend. Foreignexchange gains or losses on available for sale debt security investments are recognised in profit or loss. Impairment losses are recognised in profit or loss. Other fair value changes, other than impairment losses, are recognised in other comprehensive income and presented in the fair value reserve in equity. When the investment is sold, the gain or loss accumulated is reclassified to profit or loss. Other non-derivative financial assets may be reclassified from available for sale category to the loans and advances category if it otherwise would have met the definition of loans and receivable and if the Bank has the intention and ability to hold that financial assets for the foreseeable future or until maturity.
41
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Identification and measurement of impairment (continued) In addition, for an investment in an equity security, a significant or prolonged declinein its fair value below its cost is objective evidence of impairment. The Bank considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific asset and a collective level. All individually significant loans and advances and held-to-maturity investment securities are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances and held-to-maturity investment securities with similar risk characteristics. In assessing collective impairment, the Bank uses statistical modelling of historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If 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, then an assessment is made of whether the financial asset should be derecognised. If the cash flows of the renegotiated asset are substantially different, 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 derecognised and the new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows: • If the expected restructuring will not result in derecognition of the existing asset, then the estimated
cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original effective interest rate of the existing financial 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 discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.
Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired assets continues to be recognised through the unwinding of the discount. If an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through profit or loss.
42
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
g) Financial assets and financial liabilities(continued)
Identification and measurement of impairment (continued) If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through profit or loss; otherwise, any increase in fair value is recognised through OCI. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is always recognised in OCI. The Bank writes off a loan or an investment debt security, either partially or in full, and any related allowance for impairment losses, when Bank’s Credit determines that there is no realistic prospect of recovery.
h)Cash and cash equivalents
Cash and cash equivalents include notes, money market placement and highly liquid financial assets with original maturities of less than twelve months or less from the acquisition date that are subject to an insignificant risk of changes in fair value, and are used by the Bank in the management of its short term commitments.
i) Loans and advances ‘Loans and advances’ are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances to banks are classified as loans and receivables. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.
j) Available-for-sale investment securities Available-for-sale investments are non-derivative investments that are designated as available for sale or are not classified in any category of financial assets. Available for sale investments comprise equity securities and debt securities. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. All other available for sale investments are carried at fair value. Interest income is recognised in profit or loss using the effective interest method. Divided income is recognised in profit or loss when the Bank becomes entitled to dividend. Foreignexchange gains or losses on available for sale debt security investments are recognised in profit or loss. Impairment losses are recognised in profit or loss. Other fair value changes, other than impairment losses, are recognised in other comprehensive income and presented in the fair value reserve in equity. When the investment is sold, the gain or loss accumulated is reclassified to profit or loss. Other non-derivative financial assets may be reclassified from available for sale category to the loans and advances category if it otherwise would have met the definition of loans and receivable and if the Bank has the intention and ability to hold that financial assets for the foreseeable future or until maturity.
43
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
k) Borrowings
Borrowings are recognised initially at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.
l) Investment property
Investment property is property held to earn rental income or capital appreciation or for both, but not for sale in the ordinary course of business, use for the production or supply of goods or services or for administrative purposes. Investment property is initially measured at cost and subsequently at fair value with any change therein recognised in the profit or loss. Costs include expenditure that is directly attributable to the acquisition of the investment property. The cost of a self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalised borrowing costs. Any gain or loss on the disposal of investment property (calculated as the difference between the net proceeds and the carrying amount of the item) is recognised in profit or loss. When investment property that was previously classified as property, plant and equipment is sold, any related amount that is included in the revaluation reserve is transferred to retained earnings.
When the use of the property changes such that it is reclassified as property, plant and equipment, its fair value at the date of the reclassification becomes its cost for subsequent accounting.
m) Leases
Finance leases Leases in terms of which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. For lessors, assets subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the effective interest method, which reflects a constant periodic rate of return.
Operating leases
Leases that are not classified as finance leases are operating leases. In a case where the Bank is the lessee, the leased assets are not recognised in the Bank’s statement of financial position. The total payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the lease period.
43
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
k) Borrowings
Borrowings are recognised initially at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.
l) Investment property
Investment property is property held to earn rental income or capital appreciation or for both, but not for sale in the ordinary course of business, use for the production or supply of goods or services or for administrative purposes. Investment property is initially measured at cost and subsequently at fair value with any change therein recognised in the profit or loss. Costs include expenditure that is directly attributable to the acquisition of the investment property. The cost of a self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use and capitalised borrowing costs. Any gain or loss on the disposal of investment property (calculated as the difference between the net proceeds and the carrying amount of the item) is recognised in profit or loss. When investment property that was previously classified as property, plant and equipment is sold, any related amount that is included in the revaluation reserve is transferred to retained earnings.
When the use of the property changes such that it is reclassified as property, plant and equipment, its fair value at the date of the reclassification becomes its cost for subsequent accounting.
m) Leases
Finance leases Leases in terms of which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. For lessors, assets subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the effective interest method, which reflects a constant periodic rate of return.
Operating leases
Leases that are not classified as finance leases are operating leases. In a case where the Bank is the lessee, the leased assets are not recognised in the Bank’s statement of financial position. The total payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the lease period.
44
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
29 Significant accounting policies (continued)
n) Property and equipment Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The Bank’s policy is to revalue property every three years. The revaluation differences are credited to other comprehensive income and accumulated in equity under the heading "revaluation reserve" unless it represents the reversal of a revaluation decrease previously recognised as an expense, in which case it is recognised as income. A decrease arising as a result of a revaluation is recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.
Cost includes expenditure that is directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.
All property and equipment is measured at cost less accumulated depreciation and accumulated impairment losses.
Subsequentcosts
The cost of replacing a part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised as incurred.
Depreciation
Depreciation is recognised in the statement of comprehensive income using the straight-line method to allocate the cost of property and equipment down to their residual values over their estimated useful lives, as follows:
Leasehold buildings and improvements 2% Fixtures, furniture and fittings 20% Motor vehicles 25% Computer equipment 33 1/3%
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposal of assets are determined by comparing proceeds with carrying amounts. These are recognised in the statement of comprehensive income. Expenditure on property and equipment which are under construction is classified as work-in-progress. Capital work in progress is not depreciated.
45
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
o) Intangible assets - computer software
Acquired computer software licences are capitalised at cost less accumulated amortisation and impairment on the basis of the costs incurred to acquire and directly attributable costs. Computer software costs are amortised through the statement of comprehensive income on a straight line basis over the estimated useful lives of the software, from the date that it is available for use. The current estimated useful life of software is three years. Costs associated with maintaining software are recognised as an expense as incurred.
Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the statement of comprehensive income under other operating income.
Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
p) Impairment of non-financial assets
At each reporting date, the Bank reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
The ‘recoverable amount’ of an asset or CGU is the greater of its value in use and its fair value less costs to sell. ‘Value in use’ is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.
An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.
Impairment losses are recognised in profit or loss.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
46
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
q) Share capital and reserves
(a) Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributed to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank’s shareholders.
(c) Prepaid capital contributions
Amounts received from shareholders in respect of shares to be allotted in future and for which there is no possibility of the prepayment being refunded, and the Bank’s obligation is only to deliver a fixed number of shares, are credited to equity.
(d) Retained earnings Retained earnings are the carried forward recognised profits net of expenses, plus current year profit attributable to shareholders.
(e) Fair value reserve The fair value reserve arose from the fair value movement of financial assets classified as available-for-sale. Gains and losses are deferred to this reserve until such time as the underlying asset is sold or matures.
(f) Revaluation reserve The revaluation reserve arises from the periodic revaluation of property and represents the excess of the revalued amount over the carrying value of property and equipment at the date of valuation.
(g) General banking reserve General banking reserve comprise transfers out of net profits prior to dividends, of amounts prescribed under Statutory Instrument No. 21 of 1995: The Banking and Financial Services (Reserve Account) Regulations 1995.
(h) Funds awaiting allotment of shares This relates to prepaid capital contributions in respect of shares that are yet to be allotted by the Bank for funds already received.
r) Dividend income
Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividend on equity instruments designated at fair value through other comprehensive income are presented in investment income in profit or loss unless the dividend clearly presents a recovery of the past of the cost of the investment, in which case it is presented in other comprehensive income.
45
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
o) Intangible assets - computer software
Acquired computer software licences are capitalised at cost less accumulated amortisation and impairment on the basis of the costs incurred to acquire and directly attributable costs. Computer software costs are amortised through the statement of comprehensive income on a straight line basis over the estimated useful lives of the software, from the date that it is available for use. The current estimated useful life of software is three years. Costs associated with maintaining software are recognised as an expense as incurred.
Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the statement of comprehensive income under other operating income.
Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
p) Impairment of non-financial assets
At each reporting date, the Bank reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
The ‘recoverable amount’ of an asset or CGU is the greater of its value in use and its fair value less costs to sell. ‘Value in use’ is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.
An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.
Impairment losses are recognised in profit or loss.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
46
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
q) Share capital and reserves
(a) Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributed to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank’s shareholders.
(c) Prepaid capital contributions
Amounts received from shareholders in respect of shares to be allotted in future and for which there is no possibility of the prepayment being refunded, and the Bank’s obligation is only to deliver a fixed number of shares, are credited to equity.
(d) Retained earnings Retained earnings are the carried forward recognised profits net of expenses, plus current year profit attributable to shareholders.
(e) Fair value reserve The fair value reserve arose from the fair value movement of financial assets classified as available-for-sale. Gains and losses are deferred to this reserve until such time as the underlying asset is sold or matures.
(f) Revaluation reserve The revaluation reserve arises from the periodic revaluation of property and represents the excess of the revalued amount over the carrying value of property and equipment at the date of valuation.
(g) General banking reserve General banking reserve comprise transfers out of net profits prior to dividends, of amounts prescribed under Statutory Instrument No. 21 of 1995: The Banking and Financial Services (Reserve Account) Regulations 1995.
(h) Funds awaiting allotment of shares This relates to prepaid capital contributions in respect of shares that are yet to be allotted by the Bank for funds already received.
r) Dividend income
Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividend on equity instruments designated at fair value through other comprehensive income are presented in investment income in profit or loss unless the dividend clearly presents a recovery of the past of the cost of the investment, in which case it is presented in other comprehensive income.
47
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 29 Significant accounting policies (continued)
s) Rental income
Rental income from investment property leased out under operating leases is recognised in profit or loss on a straight - line basis over the term of the lease. Lease incentives granted are recognised in profit or loss as an integral part of the total rental income.
t) Provisions
A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date taking into account the risk and uncertainties surrounding the obligation. When settlement of the obligation is expected in future, the provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. When some or all of the economic benefits required to settle a provision are expected to be recorded from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivables can be measured reliably.
u) Financial guarantee contracts
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities.
Financial guarantee liabilities are initially recognized at fair value on the date the guarantee is given; and the initial fair value is amortised over the life of the guarantee. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of this amortised amount and the present value of any expected payment when a payment under the guarantee has become probable. Any increase in the liability relating to guarantees is taken to the statement of comprehensive income under other operating expenses.
48
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 30 Changes in accounting policies
The Bank has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2013.
• IFRS 10 Consolidated Financial Statements. • IFRS 13 Fair Value Measurement. • Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). • Presentation of Items of Other Comprehensive Income (Amendments to IAS 1).
The nature and the effects of the changes are explained below.
IFRS 10 Consolidated Financial Statements
As a result of IFRS 10 (2011), the Bank has changed its accounting policy for determining whether it has control over and consequently whether it consolidates other entities. IFRS 10 (2011) introduces a new control model that focuses on whether the Bank has power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns.
In accordance with the transitional provisions of IFRS 10 (2011), the Bank reassessed its control conclusions as of 1 January 2013. The change did not have a material impact on the Bank’s financial statements. Fair value measurements
In accordance with the transitional provisions of IFRS 13, the Bank has applied the new definition of fair value, as set out in Note 29(g), prospectively. The change had no significant impact on the measurements of the Bank’s assets and liabilities, but the Bank has included new disclosures in the financial statements, which are required under IFRS 13. These new disclosure requirements are not included in the comparative information. However, to the extent that disclosures were required by other standards before the effective date of IFRS 13, the Bank has provided the relevant comparative disclosures under those standards.
Disclosure - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS7)
As a result of the amendments to IFRS 7, the Bank has expanded disclosures about offsetting financial assets and financial liabilities. The change will not have a material impact on the Bank’s financial statements.
Presentation of Items of other Comprehensive Income (Amendments to IAS1)
As a result of the amendments to IAS 1, the Bank has modified the presentation of items of OCI in its statement of comprehensive income and OCI, to present items that would be reclassified to profit or loss in the future separately from those that would never be. Comparative information has been re-presented on the same basis.
49
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 31 Fair values of financial instruments
The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using other valuation techniques.
Valuation of financial instruments
The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using other valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.
(a) Valuation models
The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. • Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical
instruments.
• Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as 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 than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
• Level 3: inputs that are unobservable. This category includes all instruments for which 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 for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised:
50
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 31 Fair value of financial instruments(continued)
Note Level 1 Level 2 Level 3 Total 2014
K’000 K’000 K’000 K’000
Available for sale investment securities
18
64,942
64,942
2013
Available for sale investment securities
18
-
-
57,983
57,983
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurement in Level 3 of the fair value hierarchy: 2014 2013
At 1 January 57,983 38,706 Additions 8,709 12,500 Total gains or losses : In other comprehensive income (1,750) 6,777
At 31 December 64,942
57,983 Total gains or losses included in comprehensive income for the year in the above table are presented in the statement of comprehensive income as follows:
Investment properties
revaluation
Available for sale investment
securities
Total
2014 Total gains or losses included in statement of comprehensive income:
In profit or loss 1,175 - 1,175 In other comprehensive income - (1,750) (1,750)
1,175 (1,750) (575)
Investment properties
revaluation
Available for sale investment
securities
Total 2012 Total gains or losses included in statement of comprehensive income:
In profit or loss 166 - 166 In other comprehensive income - 6,777 6,777
166 6,777 6,943
49
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 31 Fair values of financial instruments
The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using other valuation techniques.
Valuation of financial instruments
The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using other valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.
(a) Valuation models
The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. • Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical
instruments.
• Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as 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 than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
• Level 3: inputs that are unobservable. This category includes all instruments for which 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 for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised:
50
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued) 31 Fair value of financial instruments(continued)
Note Level 1 Level 2 Level 3 Total 2014
K’000 K’000 K’000 K’000
Available for sale investment securities
18
64,942
64,942
2013
Available for sale investment securities
18
-
-
57,983
57,983
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurement in Level 3 of the fair value hierarchy: 2014 2013
At 1 January 57,983 38,706 Additions 8,709 12,500 Total gains or losses : In other comprehensive income (1,750) 6,777
At 31 December 64,942
57,983 Total gains or losses included in comprehensive income for the year in the above table are presented in the statement of comprehensive income as follows:
Investment properties
revaluation
Available for sale investment
securities
Total
2014 Total gains or losses included in statement of comprehensive income:
In profit or loss 1,175 - 1,175 In other comprehensive income - (1,750) (1,750)
1,175 (1,750) (575)
Investment properties
revaluation
Available for sale investment
securities
Total 2012 Total gains or losses included in statement of comprehensive income:
In profit or loss 166 - 166 In other comprehensive income - 6,777 6,777
166 6,777 6,943
51
Development Bank of Zambia Financial Statements for the year ended 31 December 2014 Notes (continued)
31 Fair value of financial instruments(continued)
Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist and other valuation models. Assumptions and inputs used in valuation techniques include risk-free interest rates, credit spreads and other premia used in estimating discount rates, bonds and equity prices. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The Bank uses widely recognised valuation models for determining the fair value of common and more simple financial instruments.
32 Contingent liabilities
A third party has laid a claim against the Bank alleging the latter's failure to meet certain contractual undertakings, which the Bank is convinced it fully discharged. The information usually required by IAS 37: Provisions, Contingent Liabilities and Contingent Assetsis not disclosed on the grounds that making full disclosure would seriously prejudice the outcome of the dispute against the Bank. The directors consider the claim to be without legal basis and that it can be successfully defended.
33 Commitments
2014 2013 K’000 K’000
Commitments to lend 241,577 218,429
Nature of commitments Commitments to lend are agreements to lend to a customer in future subject to certain conditions. Such commitments are normally made for a fixed period. The bank may withdraw from its contractual obligation for the undrawn portion of agreed overdraft limits by giving reasonable notice to the customer.
34 Off – balance sheet items
The Bank manages a number of funds at a fee on behalf of the Government of the Republic of Zambia. Below from time to time but only the Risk replication management fund for renewable energy based electricity generation for isolated mini grid(UNIDO) amounting to K3.92 million was managed by the Bank at 31 December 2014.
35 Subsequent events
There were no other material subsequent events which required adjustment of, or disclosure in, these financial statements.
52
Development Bank of Zambia Notes to the financial statements(continued) for the year ended 31 December 2014 36 New standards and interpretations not yet adopted
A number of new standards and interpretations are effective for annual periods beginning after 1 January 2015 and have not been applied in preparing these financial statements. Those that may be relevant to the Bank are set out below. The Bank does not plan to adopt these standards early.
Effective date Standard,
Amendment or Interpretation
Summary of Requirements
1 January 2014 IFRIC 21 Levies Levies have become more common in recent years, with governments in a number of jurisdictions introducing levies to raise additional income. Current practice on how to account for these levies is mixed. IFRIC 21 provides guidance on accounting for levies in accordance with IAS 37 Provisions, Contingent Liabilities and Assets. The Interpretation is effective for annual periods commencing on or after 1 January 2014 with retrospective application.
The impact of the adoption of the standard on the financial statements for the Bank has not yet been quantified.
1 January 2018 (IASB tentative date)
IFRS 9 ( 2012): Financial Instruments
IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. IFRS 9 (2010) introduces additions relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting.
The effective date of IFRS 9 has been tentatively set as 1 January 2018 by the IASB. The company will adopt the standard in the first annual period beginning on or after the mandatory effective date. The impact of the adoption of IFRS 9 has not yet been estimated as the standard is still being revised and impairment and macro-hedge accounting guidance is still outstanding.
The Bank will assess the impact once the standard has been finalised and the effective date is known.
The impact on the financial statements for the Bank has not yet been quantified.