Khan Bank LLC
International Financial Reporting Standards
Financial Statements and
Independent Auditor’s Report
31 December 2011
Khan Bank LLC
CONTENTS
INDEPENDENT AUDITOR’S REPORT
FINANCIAL STATEMENTS
Statement of Financial Position ..................................................................................................................... 1
Statement of Comprehensive Income ........................................................................................................... 2
Statement of Changes in Equity .................................................................................................................... 3
Statement of Cash Flows .............................................................................................................................. 4
Notes to the Financial Statements
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
Introduction.......................................................................................................................................... 6
Operating Environment of the Bank .................................................................................................... 6
Summary of Significant Accounting Policies ....................................................................................... 7
Critical Accounting Estimates, and Judgements in Applying Accounting Policies ............................ 18
Adoption of New or Revised Standards and Interpretations ............................................................. 20
New Accounting Pronouncements .................................................................................................... 21
Cash and Cash Equivalents .............................................................................................................. 23
Mandatory reserve with the Bank of Mongolia .................................................................................. 25
Due from Other Banks ...................................................................................................................... 25
Loans and Advances to Customers .................................................................................................. 25
Investments in Associates................................................................................................................. 31
Short term investments ..................................................................................................................... 32
Long term investments ...................................................................................................................... 33
Intangible Assets ............................................................................................................................... 33
Property and Equipment ................................................................................................................... 34
Other assets ...................................................................................................................................... 36
Due to Other Banks........................................................................................................................... 39
Customer accounts ........................................................................................................................... 39
Other borrowed funds ....................................................................................................................... 40
Other liabilities ................................................................................................................................... 44
Subordinated debt ............................................................................................................................. 45
Share Capital .................................................................................................................................... 46
Interest Income and Expense ........................................................................................................... 48
Fee and Commission Income and Expense ..................................................................................... 49
Administrative and Operating Expenses ........................................................................................... 50
Income Taxes .................................................................................................................................... 51
Dividends paid ................................................................................................................................... 51
Financial Risk Management .............................................................................................................. 52
Management of Capital ..................................................................................................................... 69
Contingencies and Commitments ..................................................................................................... 70
Fair Value of Financial Instruments .................................................................................................. 74
Presentation of Financial Instruments by Measurement Category ................................................... 76
Related Party Transactions ............................................................................................................... 77
Events after the End of Reporting Period ......................................................................................... 80
Audit Opinion
Khan Bank LLC
Statement of Financial Position
Note
31 December 2011
31 December 2010
(adjusted)
1 January 2010
(adjusted)
In thousands of Mongolian Tugriks
Assets
Cash and cash equivalents
Mandatory reserves with the Bank
of Mongolia
Due from other banks
Loans and advances to customers
Investments in associates
Short term investments
Long term investments
Intangible assets
Property and equipment
7
541,457,382
645,200,476
407,660,697
8
9
10
11
12
13
14
15
172,470,710
11,224,977
1,377,265,693
512,888
23,247,398
42,863,315
3,000,781
59,229,908
58,481,200
6,315,506
776,709,853
512,888
22,329,569
3,529,644
38,999,240
40,141,000
14,505,352
580,707,524
325,044
3,898,992
37,512,229
Other financial assets
Other non-financial assets
16
16
306,548
4,163,817
295,099
3,362,490
32,560
3,133,864
2,235,743,417
1,555,735,965
1,087,917,262
20
14,466,430
1,812,332,757
148,369,466
1,129,771
7,731,831
5,021,523
1,311,549,930
82,408,167
1,616,528
3,270,095
3,198,323
865,724,908
88,002,938
211,954
2,626,404
20
21
4,095,973
59,078,309
2,128,025
28,240,493
1,380,126
31,837,896
2,047,204,537
1,434,234,761
992,982,549
12,994,012
13,866,079
15,164,056
12,994,012
13,866,079
503,587
12,994,012
13,866,079
604,541
Share-based payment reserve
Retained earnings
121,096
146,393,637
121,096
94,016,430
121,096
67,348,985
Total equity
188,538,880
121,501,204
94,934,713
2,235,743,417
1,555,735,965
1,087,917,262
Total assets
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Current income tax liability
Other financial liabilities
Other non-financial liabilities
Subordinated debt
17
18
19
Total liabilities
EQUITY
Share capital
Share premium
Revaluation surplus
Total liabilities and equity
22
22
Approved for issue and signed on behalf of the Managing Board on 30 March 2012.
___________________________
___________________________
NORIHIKO KATO
Acting Chief Executive Officer
MUNKHBAYAR.G
Chief Financial Officer
The notes set out on pages 6 to 80 form an integral part of these financial statements.
1
Khan Bank LLC
Statement of Comprehensive Income
Note
2011
2010
(adjusted)
In thousands of Mongolian Tugriks
Interest income
Interest expense
23
23
219,385,632
(93,537,508)
165,779,084
(75,642,185)
Net interest income
Provision for loan impairment
10
125,848,124
(3,039,582)
90,136,899
(585,493)
122,808,542
89,551,406
25
13,052,633
(1,299,883)
22,527,686
(87,958)
(2,519,685)
57,621
1,143,816
(77,438,783)
7,060,123
(503,748)
9,860,414
816,576
(4,363,440)
(115,387)
607,118
(62,869,467)
26
78,243,989
(19,864,779)
40,043,595
(9,515,804)
58,379,210
30,527,791
14,706,271
-
Other comprehensive income for the year
14,706,271
-
Total comprehensive income for the year
73,085,481
30,527,791
Net interest income after provision for loan impairment
Fee and commission income
Fee and commission expense
Gains less losses from trading in foreign currencies
(Losses net of gains)/gains less losses from financial derivatives
Foreign exchange translation losses less gains
Decrease/(Increase) of provision for other assets
Other operating income
Administrative and other operating expenses
Profit before tax
Income tax expense
24
24
16
Profit for the period
Other comprehensive income
Revaluation of premises
15
The notes set out on pages 6 to 80 form an integral part of these financial statements.
2
Khan Bank LLC
Statement of Changes in Equity
Note
Share
capital
Share
premium
Revaluation
surplus
Sharebased
payment
Retained
earnings
Total equity
12,994,012
13,866,079
604,541
121,096
67,348,985
94,934,713
Profit for the year
-
-
-
-
30,527,791
30,527,791
Total comprehensive income for
2010
-
-
-
-
30,527,791
30,527,791
-
-
(100,954)
-
-
100,954
(3,961,300)
(3,961,300)
12,994,012
13,866,079
503,587
121,096
94,016,430
121,501,204
Profit for the year
Other comprehensive income
-
-
14,706,271
-
58,379,210
-
58,379,210
14,706,271
Total comprehensive income for
2011
-
-
14,706,271
-
58,379,210
73,085,481
-
-
(45,802)
-
-
45,802
(6,047,805)
(6,047,805)
12,994,012
13,866,079
15,164,056
121,096
146,393,637
188,538,880
In thousands of Mongolian
Tugriks
Balance at 1 January 2010
Realised revaluation reserve
Dividends paid
27
Balance at 31 December 2010
Realised revaluation reserve
Dividends paid
Balance at 31 December 2011
27
The notes set out on pages 6 to 80 form an integral part of these financial statements.
3
Khan Bank LLC
Statement of Cash Flows
Note
2011
2010
(adjusted)
78,243,989
40,043,595
3,039,582
7,257,671
24,123
39,298
280,702
2,519,685
108,118
251,282
(57,621)
(219,385,632)
93,537,508
585,493
8,386,528
34,201
28,689
183,944
4,363,440
138,598
115,387
(165,779,084)
75,642,185
(34,141,295)
(36,257,024)
Net increase in mandatory cash balances with the Bank of Mongolia
Net (increase)/decrease in due from other banks
Net increase in loans and advances to customers
Net (decrease)/increase in other financial assets
Net increase in other non-financial assets
Net increase in due to other banks
Net increase in customer accounts
Net increase in other financial liabilities
Net increase in other non-financial liabilities
(111,286,538)
(3,702,243)
(576,032,806)
45,172
(819,349)
8,386,515
456,541,756
4,325,632
1,665,132
(21,847,273)
3,573,210
(215,202,871)
(420,389)
(271,089)
2,225,773
478,355,300
612,228
538,636
Net cash (used in)/from operating activities before tax
(255,018,024)
211,306,501
(37,640)
(20,351,536)
219,381,049
(88,468,999)
(66,294)
(8,111,230)
163,144,330
(74,170,561)
(144,495,150)
292,102,746
(11,936,164)
122,537
(823,100)
(26,942,200)
3,000,000
(20,434,000)
-
(8,878,779)
90,361
(888,572)
(59,182,026)
59,182,026
(20,000,000)
(187,844)
(57,012,927)
(29,864,834)
In thousands of Mongolian Tugriks
Cash flows from operating activities
Profit before tax
Adjustments to:
Impairment provisions for loans and advances to customers
Amortization and depreciation
Loss on disposal of premises and equipment
Unwinding of discount on share appreciation rights
Share appreciation rights
Net foreign exchange loss
Property and equipment written off
Property and equipment revaluation loss
Provision for other assets
Interest income
Interest expense
10
25
25
16
23
23
Cash flows from operating activities before changes in
operating assets and liabilities
Payment of share appreciation rights
Income taxes paid
Interest received
Interest paid
Net cash (used in)/from operating activities
Cash flows from investing activities
Acquisition of premises and equipment
Proceeds from disposal of premises and equipment
Acquisition of intangible assets
Acquisition of short term investments
Proceeds from sale of short term investments
Acquisition of long term investments
Acquisition of associates
15
14
Net cash used in investing activities
The notes set out on pages 6 to 80 form an integral part of these financial statements.
4
Khan Bank LLC
Statement of Cash Flows
2011
2010 (adjusted)
86,398,697
(28,109,874)
24,993,300
(6,047,805)
24,855,705
(21,083,777)
(3,961,300)
Net cash from/(used in) financing activities
77,234,318
(189,372)
Effect of exchange rate changes on cash and cash
equivalents
20,530,665
(24,508,761)
In thousands of Mongolian Tugriks
Cash flows from financing activities
Proceeds from drawdown of other borrowed funds
Repayment of other borrowed funds
Proceeds from subordinated debt
Dividends paid
Note
21
27
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
7
(103,743,094)
645,200,476
237,539,779
407,660,697
Cash and cash equivalents at the end of the period
7
541,457,382
645,200,476
The notes set out on pages 6 to 80 form an integral part of these financial statements.
5
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
1
Introduction
These financial statements have been prepared in accordance with International Financial Reporting
Standards for the year ended 31 December 2011 for Khan Bank LLC (the “Bank”).
The Bank was incorporated and is domiciled in Mongolia. The Bank is a limited liability company and was
set up in accordance with Mongolian regulations. As of 31 December 2011 and 2010, the Bank’s
immediate and ultimate parent is Sawada Holdings Co. Ltd. (the “Parent” or “the parent company”), holding
company incorporated and domiciled in Japan, listed on the Osaka Stock Exchange. Sawada Holdings Co.
also represents ultimate controlling party of the Bank.
The Bank’s shareholders are disclosed in Note 22.
Principal activity. The Bank has operated under a full banking license No. 2 issued by the Bank of
Mongolia (“BOM”) since 22 November 2006. The Bank’s principal business activity is commercial and retail
banking operations and financial services within the Mongolia.
As at 31 December 2011 the Bank had 30 branches (including Head Office) within Mongolia (31 December
2010: 29 branches). Also, as at 31 December 2011 the Bank had 461 sub-branches (31 December 2010:
454 sub-branches).
The number of the Bank’s employees as at 31 December 2011 was 4,178 (31 December 2010: 4,066).
Registered address and place of business. The Bank’s registered address is: Seoul Street 25, P.O. Box192 Ulaanbaatar-210644, Mongolia.
Presentation currency. These financial statements are presented in Mongolian Tugriks (“MNT”), unless
otherwise stated.
2
Operating Environment of the Bank
Mongolia displays many characteristics of an emerging market including relatively high inflation and interest
rates. The recent global financial crisis had a severe effect on the Mongolian economy and the financial
situation in the Mongolian financial and corporate sectors significantly deteriorated during 2009. However
2010 saw a recovery in the domestic economy and the Mongolian currency and stock market has seen
high growth following the recovery in commodity prices, continuation in demand from China and an
increase in inbound investment. The growth of the Mongolian economy has continued in 2011.
The tax and customs legislation in Mongolia is subject to varying interpretations and frequent changes
(refer to Note 30). The future economic performance of Mongolia is tied to the continuing demand from
China and continuing high global prices for commodities as well as dependent upon the effectiveness of
economic, financial and monetary measures undertaken by the Government together with tax, legal
regulatory and political developments.
Management determined impairment provisions by considering the economic situation and outlook at the
end of the reporting period. Provisions for loans to customers and other financial assets are determined
using the ‘incurred loss’ model required by the applicable accounting standards. These standards require
recognition of impairment losses for receivables that arose from past events and prohibit recognition of
impairment losses that could arise from future events, no matter how likely those future events are. Refer to
Note 4.
Management is unable to predict all developments, which could have an impact on the Mongolian
economy, and consequently what effect, if any, they could have on the future financial position of the Bank.
Management believes it is taking all the necessary measures to support the sustainability and development
of the Bank’s business.
6
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies
Basis of preparation. These financial statements has been prepared in accordance with International
Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initial
recognition of financial instruments measured at fair value, and by the revaluation of premises, and
financial instruments categorised at fair value through profit or loss. The principal accounting policies
applied in the preparation of these financial statements are set out below. These policies have been
consistently applied to all the periods presented, unless otherwise stated (refer to Note 5).
Associates. Associates are entities over which the Bank has significant influence (directly or indirectly), but
not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights.
Investments in associates are accounted for using the equity method of accounting and are initially
recognised at cost. The carrying amount of associates includes goodwill identified on acquisition less
accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of
the investment in associates. Other post-acquisition changes in the Bank’s share of net assets of an
associate are recognised as follows: (i) the Bank’s share of profits or losses of associates is recorded in the
profit or loss for the year as share of result of associates, (ii) the Bank’s share of other comprehensive
income is recognised in other comprehensive income and presented separately, (iii); all other changes in
the Bank’s share of the carrying value of net assets of associates are recognised in profit or loss within the
share of result of associates. However, when the Bank’s share of losses in an associate equals or exceeds
its interest in the associate, including any other unsecured receivables, the Bank does not recognise further
losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Bank and its associates are eliminated to the extent of the
Bank’s interest in the associates; unrealised losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred.
Financial instruments - key measurement terms. Depending on their classification financial instruments
are carried at fair value or amortised cost as described below.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction. Fair value is the current bid price for financial
assets and current asking price for financial liabilities which are quoted in an active market. For assets and
liabilities with offsetting market risks, the Bank may use mid-market prices as a basis for establishing fair
values for the offsetting risk positions and apply the bid or asking price to the net open position as
appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily
and regularly available from an exchange or other institution and those prices represent actual and
regularly occurring market transactions on an arm’s length basis.
Valuation techniques such as discounted cash flows models or models based on recent arm’s length
transactions or consideration of financial data of the investees are used to fair value certain financial
instruments for which external market pricing information is not available. Valuation techniques may require
assumptions not supported by observable market data. Disclosures are made in these financial statements
if changing any such assumptions to a reasonably possible alternative would result in significantly different
profit, income, total assets or total liabilities.
7
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of
a financial instrument. An incremental cost is one that would not have been incurred if the transaction had
not taken place. Transaction costs include fees and commissions paid to agents (including employees
acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities
exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts,
financing costs or internal administrative or holding costs.
Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any
principal repayments, plus accrued interest, and for financial assets less any write-down for incurred
impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition
and of any premium or discount to maturity amount using the effective interest method. Accrued interest
income and accrued interest expense, including both accrued coupon and amortised discount or premium
(including fees deferred at origination, if any), are not presented separately and are included in the carrying
values of related items in the statement of financial position.
The effective interest method is a method of allocating interest income or interest expense over the
relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying
amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or
receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter
period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate
discounts cash flows of variable interest instruments to the next interest re-pricing date except for the
premium or discount which reflects the credit spread over the floating rate specified in the instrument, or
other variables that are not reset to market rates. Such premiums or discounts are amortised over the
whole expected life of the instrument. The present value calculation includes all fees paid or received
between parties to the contract that are an integral part of the effective interest rate.
Initial recognition of financial instruments. Derivatives are initially recorded at fair value. All financial
instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best
evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a
difference between fair value and transaction price which can be evidenced by other observable current
market transactions in the same instrument or by a valuation technique for which inputs include only data
from observable markets.
All purchases and sales of financial assets that require delivery within the time frame established by
regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is
the date that the Bank commits to deliver a financial asset. All other purchases are recognised when the
entity becomes a party to the contractual provisions of the instrument.
Derecognition of financial assets. The Bank derecognises financial assets when (a) the assets are
redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the
rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement
while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither
transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control
is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an
unrelated third party without needing to impose restrictions on the sale.
Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash
equivalents include deposits with the Central Bank (Bank of Mongolia), other than required mandatory
reserve, and all interbank placements with original maturities of less than three months. Funds restricted for
a period of more than three months on origination are excluded from cash and cash equivalents. Cash and
cash equivalents are carried at amortised cost.
Mandatory cash balances with the Bank of Mongolia. Mandatory cash balances with the Bank of
Mongolia are carried at amortised cost and represent non-interest bearing mandatory reserve deposits
which are not available to finance the Bank’s day to day operations and hence are not considered as part
of cash and cash equivalents for the purposes of the statement of cash flows.
8
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Due from other banks. Amounts due from other banks are recorded when the Bank advances money to
counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on
fixed or determinable dates. Amounts due from other banks are carried at amortised cost.
Short-term and long-term investments. Short-term and long-term investments represent government
bonds issued by the Ministry of Finance of Mongolia and treasury bills issued by the Bank of Mongolia
which are recorded when the Bank advances money to purchase or originate an unquoted non-derivative
receivable from an issuer due on fixed or determinable dates and has no intention of trading the receivable.
Government bonds and treasury bills issued by the Bank of Mongolia are carried at amortized cost.
Loans and advances to customers. Loans and advances to customers are recorded when the Bank
advances money to purchase or originate an unquoted non-derivative receivable from a customer due on
fixed or determinable dates and has no intention of trading the receivable. Loans and advances to
customers are carried at amortised cost.
Sale and repurchase agreements and lending of securities. Sale and repurchase agreements (“repo
agreements”) which effectively provide a lender’s return to the counterparty are treated as secured
financing transactions. Securities sold under such sale and repurchase agreements are not derecognised.
The securities are not reclassified in the statement of financial position unless the transferee has the right
by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase
receivables. The corresponding liability is presented separately in the statement of financial position as
‘repurchase agreements’ and is carried at amortized cost.
Securities purchased under agreements to resell (“reverse repo agreements”) which effectively provide a
lender’s return to the Bank are recorded as due from other banks or loans and advances to customers, as
appropriate. The difference between the sale and repurchase price is treated as interest income and
accrued over the life of repo agreements using the effective interest method.
Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or
loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the
initial recognition of the financial asset and which have an impact on the amount or timing of the estimated
future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the
Bank determines that no objective evidence exists that impairment was incurred for an individually
assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses them for impairment. The primary factors that
the Bank considers in determining whether a financial asset is impaired are its overdue status and
realisability of related collateral, if any.
The following other principal criteria are also used to determine whether there is objective evidence that an
impairment loss has occurred:
-
any instalment is overdue and the late payment cannot be attributed to a delay caused by the
settlement systems;
-
the borrower experiences a significant financial difficulty as evidenced by the borrower’s financial
information that the Bank obtains;
-
the borrower considers bankruptcy or a financial reorganisation;
-
there is an adverse change in the payment status of the borrower as a result of changes in the
national or local economic conditions that impact the borrower; or
-
the value of collateral significantly decreases as a result of deteriorating market conditions.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of
similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows
for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the
contractual terms of the assets being evaluated.
9
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated
on the basis of the contractual cash flows of the assets and the experience of management in respect of
the extent to which amounts will become overdue as a result of past loss events and the success of
recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect
the effects of current conditions that did not affect past periods and to remove the effects of past conditions
that do not exist currently.
If the terms of an impaired financial asset held at amortized cost are renegotiated or otherwise modified
because of financial difficulties of the borrower or issuer, impairment is measured using the original
effective interest rate before the modification of terms.
Impairment losses are always recognised through an allowance account to write down the asset’s carrying
amount to the present value of expected cash flows (which exclude future credit losses that have not been
incurred) discounted at the original effective interest rate of the asset. The calculation of the present value
of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result
from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognised, the previously recognised
impairment loss is reversed by adjusting the allowance account through profit or loss for the year.
Uncollectible assets are written off against the related impairment loss provision after all the necessary
procedures to recover the asset have been completed and the amount of the loss has been determined.
Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or
loss for the year.
The Bank performs impairment assessment in accordance with IFRS requirements on a quarterly basis.
The main considerations for the loan impairment assessment include whether any payments of principal or
interest are overdue by more than 90 days or there are any known difficulties in the cash flows of
counterparties, credit rating downgrades, or infringement of the original terms of the contract. Impairment
provision is determined through individual (specific) assessment and collective assessment. Specific
assessment includes individually significant exposures and exposures with identified impairment indicators.
Collective assessment includes exposures, which are not individually significant as well as individually
significant exposures without objective evidence of impairment.
The Bank determines the allowances appropriate for each individually significant loan or advance on an
individual basis. Items considered when determining allowance amounts include the sustainability of the
counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen,
projected receipts and the expected dividend payout should bankruptcy ensue, the availability of the other
financial support and the realisable value of collateral, and the timing of the expected cash flows. The
impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more
careful attention.
Allowances are assessed collectively for losses on loans and advances that are not individually significant
and for individually significant loans and advances where there is not yet objective evidence of individual
impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate
review by the management. The collective assessment takes account of impairment that is likely to be
present in the portfolio even though there is not yet objective evidence of impairment in an individual
assessment. Impairment losses are estimated by taking into consideration of the following information:
historical losses on the portfolio, current economic conditions, the approximate delay between the time a
loss is likely to have been incurred and the time it will be identified as requiring an individually assessed
impairment allowance, and expected receipts and recoveries once impaired.
Renegotiated loans. Where possible, the Bank seeks to restructure loans rather than to take possession
of collateral. This may involve extending the payment arrangements and the agreement of new loan
conditions. Once the terms have been renegotiated, the loan is no longer considered past due.
Management continuously reviews renegotiated loans to ensure that all criteria are met and that future
payments are likely to occur. The loans continue to be subject to an individual or collective impairment
assessment, calculated using the loan’s original effective interest rate.
10
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Credit related commitments. The Bank enters into credit related commitments, including letters of credit
and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the
event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans.
Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is
normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over
the life of the commitment, except for commitments to originate loans if it is probable that the Bank will
enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after
origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial
recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the
remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure
required to settle the commitment at the end of each reporting period. In cases where the fees are charged
periodically in respect of an outstanding commitment, they are recognised as revenue on a time proportion
basis over the respective commitment period.
Derivative financial instruments. Derivative financial instruments, primarily include foreign exchange
contracts such as forward rate agreements. Derivative financial instruments represent financial assets at
fair value through profit or loss and are carried at their fair value. All derivative instruments are carried as
assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of
derivative instruments are included in profit or loss for the year (gains less losses on derivatives). The Bank
does not apply hedge accounting. As of 31 December 2011 and 31 December 2010 the Bank had no
derivative financial instruments.
Operating leases. Where the Bank is a lessee in a lease which does not transfer substantially all the risks
and rewards incidental to ownership from the lessor to the Bank, the total lease payments are charged to
profit or loss for the year (rental expense) on a straight-line basis over the period of the lease.
When assets are leased out under an operating lease, the lease payments receivable are recognised as
rental income on a straight-line basis over the lease term.
Premises and equipment. Premises are stated at re-valued amounts, as described below, less
accumulated depreciation and provision for impairment, where required.
Premises owned by the Bank are initially measured at cost. Premises are subject to regular revaluations,
with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be
determined using fair value at the end of the reporting period. Increases in the carrying amount arising on
revaluation are credited to other comprehensive income and increase the revaluation surplus in equity.
Decreases that offset previous increases of the same asset are recognised in other comprehensive income
and decrease the previously recognised revaluation surplus in equity; all other decreases are charged to profit
or loss for the year. The revaluation reserve for premises and equipment included in equity is transferred
directly to accumulated deficit or retained earnings when the surplus is realised on the retirement or disposal
of the asset, or as the asset is used by the Bank; in the latter case, the amount of the surplus realised is the
difference between depreciation based on the revalued carrying amount of the asset and depreciation based
on the asset’s original cost.
Equipment owned by the Bank is stated at cost less depreciation and provision for impairment, where
required.
Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or
components of premises and equipment items are capitalised and the replaced part is retired.
At the end of each reporting period management assesses whether there is any indication of impairment of
premises and equipment. If any such indication exists, management estimates the recoverable amount,
which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The
carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or
loss for the year (to the extent it exceeds the previous revaluation surplus in equity, in case of premises).
An impairment loss recognised for an asset in prior years is reversed if there has been a change in the
estimates used to determine the asset’s value in use or fair value less costs to sell.
11
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in
profit or loss for the year (within other operating income or expenses).
Depreciation. Construction in progress is not depreciated. Depreciation on other items of premises and
equipment is calculated using the straight-line method to allocate their cost to their residual values over
their estimated useful lives:
Premises
Furniture, office equipment and vehicles
Computers and technical equipment
Useful lives in years
40 years
10 years
3-5 years
The residual value of an asset is the estimated amount that Bank would currently obtain from disposal of
the asset less the estimated costs of disposal, if the asset were already of the age and in the condition
expected at the end of its useful life. The assets’ residual values and useful lives are reviewed, and
adjusted if appropriate, at the end of each reporting period.
Intangible assets. The Bank’s intangible assets other than goodwill have definite useful lives and primarily
include capitalised computer software licenses.
Computer software licenses acquired are capitalised on the basis of the costs incurred to acquire and bring
them to use.
Intangible assets are amortised using the straight-line method over their useful lives:
Computer software (core banking software)
Useful lives in years
3-5 years
If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair
value less costs to sell.
Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced
to the Bank by counterparty banks. The non-derivative liability is carried at amortised cost. If the Bank
purchases its own debt, the liability is removed from the statement of financial position and the difference
between the carrying amount of the liability and the consideration paid is included in gains or losses arising
from retirement of debt.
Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate
customers and are carried at amortised cost.
Other borrowed funds. Other borrowed funds include loans obtained from international financial
institutions and Mongolian government organizations, and promissory notes issued. These financial
liabilities are carried at amortized cost using effective interest rate method.
Subordinated debts. Subordinated debts are carried at amortized cost using effective interest rate
method.
The debts are convertible at maturity to common shares of the Bank at a price to be negotiated between
the parties at the time of such conversion. Conversion into common shares is subject to approval of two
thirds of the Bank’s shareholders.
Income taxes. Income taxes have been provided for in the financial statements in accordance with
legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises
current tax and deferred tax and is recognised in the profit or loss unless it relates to transactions that are
recognised in the same or a different period in other comprehensive income or directly in equity.
12
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of
taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates
if financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are
recorded within operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and
temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. In accordance with the initial recognition exemption deferred taxes are not
recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than
a business combination if the transaction when initially recorded affects neither accounting nor taxable
profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance
sheet date which are expected to apply to the period when the temporary differences will reverse or the tax
loss carry forwards will be utilised. Deferred tax assets and liabilities are netted by the Company. Deferred
tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent
that it is probable that future taxable profit will be available against which the deductions can be utilised.
Uncertain tax positions. The Bank's uncertain tax positions are reassessed by management at the end of
each reporting period. Liabilities are recorded for income tax positions that are determined by management
as more likely than not to result in additional taxes being levied if the positions were to be challenged by the
tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or
substantively enacted by the end of the reporting period and any known court or other rulings on such
issues. Liabilities for penalties, interest and taxes other than on income are recognised based on
management’s best estimate of the expenditure required to settle the obligations at the end of the reporting
period.
Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of
uncertain timing or amount. They are accrued when the Bank has a present legal or constructive obligation
as a result of past events, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
Trade and other payables. Trade payables are accrued when the counterparty has performed its
obligations under the contract and are carried at amortised cost.
Income and expense recognition. Interest income and expense are recorded for all debt instruments on an
accruals basis using the effective interest method. This method defers, as part of interest income or expense, all
fees paid or received between the parties to the contract that are an integral part of the effective interest rate,
transaction costs and all other premiums or discounts.
Fees integral to the effective interest rate include origination fees received or paid by the entity relating to
the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for
evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the
instrument and for processing transaction documents. Commitment fees received by the Bank to originate
loans at market interest rates are integral to the effective interest rate if it is probable that the Bank will
enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after
origination. The Bank does not designate loan commitments as financial liabilities at fair value through
profit or loss.
When loans and other debt instruments become doubtful of collection, they are written down to the present
value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present
value discount based on the asset’s effective interest rate which was used to measure the impairment loss.
All other fees, commissions and other income and expense items are generally recorded on an accruals
basis by reference to completion of the specific transaction assessed on the basis of the actual service
provided as a proportion of the total services to be provided.
Share capital and premium. Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.
Any excess of the fair value of consideration received over the par value of shares issued is recorded as
share premium in equity.
13
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
Dividends. Dividends are recorded in equity in the period in which they are declared. Any dividends
declared after the end of the reporting period and before the financial statements are authorised for issue
are disclosed in the subsequent events note. The basis for distribution of dividends is statutory retained
earnings.
Foreign currency translation. The functional currency of the Bank is the currency of the primary economic
environment in which the entity operates. Thus, the Bank’s functional currency and presentation currency is
the national currency of Mongolia, Mongolian Tugrik (“MNT”).
Monetary assets and liabilities are translated into the Bank’s functional currency at the official exchange
rate of the Bank of Mongolia (“BOM”) at the respective end of the reporting period. Foreign exchange gains
and losses resulting from the settlement of the transactions and from the translation of monetary assets
and liabilities into the Bank’s functional currency at year-end official exchange rates of the BOM are
recognised in profit or loss. Translation at year-end rates does not apply to non-monetary items that are
measured at historical cost. Non-monetary items measured at fair value in a foreign currency including
equity investments are translated using the exchange rates at the date when the fair value was determined.
Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are
recorded as part of the fair value gain or loss.
At 31 December 2011 the principal rate of exchange used for translating foreign currency balances was
USD 1 = MNT 1,396.37 (31 December 2010: USD 1 = MNT 1,256.47).
Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of
financial position only when there is a legally enforceable right to offset the recognised amounts, and there
is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously.
Staff costs and related contributions. Wages, salaries and other salary related expenses are recognized
as an expense in the year in which the associated services are rendered by the Bank’s employees. Short
term accumulating compensated absences such as paid annual leave are recognized when services
rendered by employees that increase their entitlement to future compensated absences. Short term nonaccumulating compensated absences such as sick leave are recognized when absences occur.
As required by law, companies in Mongolia make contributions to the government pension scheme - Social
Security and Health Insurance Fund. Such contributions are recognized as an expense in the profit or loss
as incurred. The Bank has no legal or constructive obligation to make pension or similar benefit payments
beyond the payments to the statutory defined contribution scheme.
Share-based payments. The Bank recognises the services received or acquired in a share-based
payment transaction when the services are received. The Bank recognises a corresponding increase in
equity if the services were received in an equity-settled share-based payment transaction or a liability if the
services were acquired in a cash-settled share-based payment transaction.
For equity-settled share-based payment transactions with service providers, the Bank measures services
received, and the corresponding increase in equity indirectly, by reference to the fair value of the equity
instruments granted. For cash-settled share-based payment transactions, the Bank measures the services
acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Bank
remeasures the fair value of the liability at the end of each reporting period and at the date of settlement,
with any changes in fair value recognised in profit or loss for the period.
14
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
The information on Share Appreciation Rights (SAR) is given in Note 20. For information on equity settled
transactions with the corporate shareholder (DAI), refer to Note 22.
Changes in presentation. Where necessary corresponding figures have been adjusted to conform to the
presentation of the current year amounts. The following reclassification and adjustments have been made
in these financial statements:

Classification of current accounts and bank deposits with maturity of less than three months.
Current accounts and deposits with banks with original maturity of less than three months were
presented within the line cash and cash equivalents in these financial statements. These balances
were presented within the line due from other banks in the financial statements for the year ended
31 December 2010. The item due from other banks includes only bank deposits with original
maturities above three months.

Classification of cash on hand. Cash on hand, including cash in ATMs, which was presented as
cash and balances with the Central Bank in the financial statements for year ended
31 December 2010, is classified as cash and cash equivalents.

Presentation of mandatory reserve with Bank of Mongolia. Mandatory reserve with Bank of
Mongolia as of 31 December 2010 was presented within the line cash and balances with the
Central Bank in the financial statements for the year ended 31 December 2010. Mandatory reserve
is presented as a separate line on the face of statement of financial position.

Investments in associates. The Bank had the ability to significantly influence operational and
financial policies of its investees as of 31 December 2010 (Note 11). These investments were
presented within financial investments – available for sale in the financial statements for the year
ended 31 December 2010. These investments are presented as investments in associates on the
face of the statement of financial position in these financial statements. The remaining amounts of
financial investments – available for sale are reclassified to other assets.

Classification of financial investments. Treasury bills issued by the Bank of Mongolia and
repurchase agreements have original maturity less than three months and meet the definition of
cash and cash equivalents. Thus, they are included in cash and cash equivalents in these financial
statements and classified as loans and receivables for measurement purposes. Treasury bills and
repurchase agreements were included in financial investments – held to maturity in the financial
statements for the year ended 31 December 2010. Unquoted government bonds, which were
presented in line financial investments – held to maturity are reclassified to the item long-term
investments.

Intangible assets. Intangible assets are presented as a separate item. Intangible assets were
included in property and equipment in the financial statements for the year ended
31 December 2010.

Presentation of subordinated debt. Subordinated debt is presented separately on the face of the
statement of financial position, while it was included in other borrowed funds in the financial
statements for year ended 31 December 2010.
15
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)

Deferred grants. Certain amounts related to other borrowed funds obtained at low interest rates
(Note 4) were treated as deferred grants in the financial statements for the year ended
31 December 2010. Management reconsidered the accounting for these borrowings, which
resulted in their reclassification to other borrowed funds.

Other improvements in presentation on the face of statement of financial position. The main other
improvements include reclassification of certain borrowings previously classified as customer
accounts to other borrowed funds, as well as reclassification of accruals related to other borrowed
funds from other liabilities to other borrowed funds.

Presentation of loan origination fee income. Loan origination fee income represents an integral part
of effective interest rate and thus it is presented within interest income. Related income was
presented within fee and commission income in the financial statements for the year ended
31 December 2010.

Presentation of foreign exchange gains and losses. Translation foreign exchange gains and losses,
as well as gains and losses from trading in foreign currencies were presented on a net basis within
other operating income in the financial statements for the year ended 31 December 2010. These
items are presented as separate items on the face of the statement of comprehensive income.

Other improvements in presentation on the face of statement of comprehensive income. Gains less
losses from financial derivatives were presented within other operating income in the financial
statements for the year ended 31 December 2010. This item is presented as a separate item on
the face of the statement of comprehensive income in these financial statements. Impairment
provision charges on other assets, which were previously included in credit loss expenses, are
presented as a separate item.
The net impact of the above reclassifications on the Statement of Financial Position as of 31 December
2010 is presented below:
In thousands of Mongolian Tugriks
Assets
Cash and balances with central bank
Cash and cash equivalents
Mandatory reserves with the Bank of
Mongolia
Due from other banks
Investment securities held to maturity
Long term investments
Investment securities available for sale
Investment in associates
Intangible assets
Property and equipment
Other financial assets
Other assets
Liabilities
Customer accounts
Other borrowed funds
Other financial liabilities
Other liabilities
Deferred grants
Subordinated debt
Year ended Reclassifications
31 December
2010 (as
previously
reported)
Adjustments
Year ended
31 December
2010
(adjusted)
276,021,508
-
(276,021,508)
322,072,030
323,128,446
645,200,476
110,847,228
345,458,015
517,888
42,528,884
3,652,589
58,481,200
(104,531,722)
(517,888)
512,888
3,529,644
(3,529,644)
295,099
(290,099)
(345,458,015)
22,329,569
-
58,481,200
6,315,506
22,329,569
512,888
3,529,644
38,999,240
295,099
3,362,490
1,312,342,619
107,268,916
5,508,201
2,476,974
-
(792,689)
(24,860,749)
3,270,095
(3,380,176)
(2,476,974)
28,240,493
-
1,311,549,930
82,408,167
3,270,095
2,128,025
28,240,493
16
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
The effect of the reclassifications to the items of Statement of Comprehensive Income for the year ended
31 December 2010 is presented below:
Year ended
31 December 2010
(as previously
reported)
In thousands of Mongolian Tugriks
Interest income
Interest expense
Provision for loan impairment
Fee and commission income
Gains less losses from financial derivatives
Gains less losses from trading in foreign
currencies
Foreign exchange translation losses less gains
Provision for other assets
Other operating income
Administrative and other operating expenses
Reclassifications
Year ended
31 December
2010 (adjusted)
160,575,906
(76,238,980)
(700,880)
12,323,215
-
5,203,178
596,795
115,387
(5,263,092)
816,576
165,779,084
(75,642,185)
(585,493)
7,060,123
816,576
7,428,860
(62,840,778)
9,860,414
(4,363,440)
(115,387)
(6,821,742)
(28,689)
9,860,414
(4,363,440)
(115,387)
607,118
(62,869,467)
40,547,343
-
40,547,343
Profit before tax
The effect of reclassifications for presentation purposes was as follows on amounts at 1 January 2010:
In thousands of Mongolian Tugriks
Assets
Cash and balances with central bank
Cash and cash equivalents
Mandatory reserves with the Bank of
Mongolia
Due from other banks
Investment securities held to maturity
Investment securities available for sale
Investment in associates
Intangible assets
Property and equipment
Other financial assets
Other assets
Liabilities
Customer accounts
Other borrowed funds
Other financial liabilities
Other liabilities
Subordinated debt
Year ended
31 December
2009 (as
previously
reported)
Reclassifications
Adjustments
Year ended
31 December
2009
(adjusted)
204,851,916
-
(204,851,916)
229,499,490
178,161,207
407,660,697
79,293,926
178,161,207
330,044
41,411,221
3,161,424
40,141,000
(64,788,574)
(330,044)
325,044
3,898,992
(3,898,992)
32,560
(27,560)
(178,161,207)
-
40,141,000
14,505,352
325,044
3,898,992
37,512,229
32,560
3,133,864
866,591,696
119,009,457
3,971,119
-
(866,788)
(31,006,519)
2,626,404
(2,590,993)
31,837,896
-
865,724,908
88,002,938
2,626,404
1,380,126
31,837,896
The reclassifications in the statement of financial position and statement of comprehensive income had an
effect on information in Notes 7, 8, 9, 11, 13, 14, 15, 16, 18, 19, 20, 21, 23, 24, and 25 and had no effect on
any other captions in the statement of financial position, statement of comprehensive income and related
note disclosures.
17
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
3
Summary of Significant Accounting Policies (Continued)
The third statement of financial position as of 1 January 2010 is presented in these financial statements as
a result of the reclassifications described above and changes in presentation. This requirement to present
the additional opening statement of financial position, when the entity has made a restatement or
reclassification, extends to the information in the related notes. Management considered materiality from
the perspective of the users of financial statements, and concluded that it is sufficient for the Bank to
present such information on the face of the Statement of Financial Position and in extended disclosures
within this note. The omission of third balances in those notes that have been impacted by a
reclassification, as well as in those notes not impacted by a reclassification, is, in management’s view, not
material.
The abovementioned reclassifications were reflected in the Statement of Cash Flows in these financial
statements. Management also decided to make certain other improvements in the Statement of Cash
Flows in these financial statements. Management considered materiality from the perspective of the users
of financial statements, and concluded that detailed disclosures of effect of reclassifications or other
improvements on each financial statement line item of Statement of Cash Flows are not necessary, as
omission of this information could not materially affect the decisions of the users of financial statements.
Amendments of the financial statements after issue. The Bank’s shareholders and management have
the power to amend the financial statements after issue.
4
Critical Accounting Estimates, and Judgements in Applying Accounting Policies
The Bank makes estimates and assumptions that affect the amounts recognised in the financial statements
and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements
are continually evaluated and are based on management’s experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances. Management
also makes certain judgements, apart from those involving estimations, in the process of applying the
accounting policies. Judgements that have the most significant effect on the amounts recognised in the
financial statements and estimates that can cause a significant adjustment to the carrying amount of assets
and liabilities within the next financial year include:
Impairment losses on loans and advances to customers. The Bank regularly reviews its loan portfolios
to assess impairment. In determining whether an impairment loss should be recorded in profit or loss for
the year, the Bank makes judgements as to whether there is any observable data indicating that there is a
measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can
be identified with an individual loan in that portfolio. This evidence may include observable data indicating
that there has been an adverse change in the payment status of borrowers in a Bank, or national or local
economic conditions that correlate with defaults on assets in the bank. Management uses estimates based
on historical loss experience for assets with credit risk characteristics and objective evidence of impairment
similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions
used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience. A 10% increase or decrease in actual loss
experience compared to the loss estimates used would result in an increase or decrease in loan
impairment losses of MNT 2,813,061 thousand (2010: MNT 2,609,885 thousand), respectively. Impairment
losses for individually significant loans are based on estimates of discounted future cash flows of the
individual loans, taking into account repayments and realisation of any assets held as collateral against the
loans.
18
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
4
Critical Accounting Estimates, and Judgments in Applying Accounting Policies (Continued)
Borrowings from government organizations and international financial institutions. The Bank obtains
long term financing from Mongolian government organizations and international financial institutions at
interest rates at which they ordinarily lend and which may be lower than rates at which the Bank could
source the funds from other lenders. These funds are not available only to the Bank, but also to other
banks on the Mongolian market, which participate in such programs. As a result of such financing, the Bank
is able to advance funds to target customers as determined by its lenders, at advantageous rates.
Management has considered whether gains or losses should arise on initial recognition of such
instruments. As the transactions are with unrelated parties, management’s judgement is that these funds
and the related lending are at market rates and no initial recognition gains or losses should arise. In making
this judgement management also considered that these instruments are a separate market segment. The
borrowings from international financial institutions or governments organizations amounted to MNT
71,554,084 thousand as at 31 December 2011 (31 December 2010: MNT 27,174,672 thousand) and are
disclosed in Note 19.
Revaluation of premises. As disclosed in the Note 15, the Bank has performed valuation as of 31
December 2011 and the basis used for the appraisal was market value for premises located in the capital
Ulaanbaatar and other urban areas and replacement cost for premises located in rural areas, due to lack of
market-based evidence of fair value of these premises and lack of reliable input data for discounted cash
flow approach. As of 31 December 2011, total fair value of buildings located in Ulaanbaatar and other
urban areas, based on observable market prices in the active market, amounts to MNT 18,484,540
thousand, while total fair value of buildings located in rural areas, based on replacement cost method,
amounts to MNT 22,183,003 thousand.
If average prices of premises in urban areas would be 10% higher compared to the current carrying value,
carrying value of buildings and revaluation reserve would increase by approximately MNT 1,848,454
thousand as of 31 December 2011. If average prices of premises in urban areas would be 10% lower
compared to the current carrying value, carrying value of buildings and the Bank’s revaluation reserve
would be lower by approximately MNT 1,848,454 thousand as of 31 December 2011.
The principal assumption made for premises located in rural areas is remaining useful lives of buildings
determined by the engineer. If the average useful lives of premises in rural areas would be 10% longer
compared to the current useful lives, with all other variables held constant, carrying amount of the buildings
and revaluation reserve would increase by approximately MNT 4,399,210 thousand as of 31 December
2011. If the average useful lives of premises in rural areas would be 10% shorter compared to the current
useful lives, carrying amount of the buildings and revaluation reserve would decrease by approximately
MNT 4,041,665 thousand as of 31 December 2011. Management believes that engineer’s estimates of
useful lives are based on conservative assumptions and thus decrease in useful lives compared to
engineer’s estimates is considered unlikely.
The Bank has performed profitability testing of branches in rural areas in order to ensure that value in use
of buildings, based on replacement cost method, is not impaired. The Bank's calculations in profitability
(impairment) testing use cash flow projections based on financial budgets of each rural branches, which
were approved by management, covering a five-year period. In the calculations, the Bank uses estimated
cash flows of respective branches, which are based on conservative assumptions and are generally in line
with long-term average growth rates for the banking industry in Mongolia. Profitability (impairment) testing
carried out by management indicates that no adjustment to fair value of these buildings is considered
necessary for the reporting period.
The Bank has performed sensitivity analyses, which shows that sensitivities to discount rates used in
profitability (impairment testing) are insignificant. Further, significant downward change in cash flows would
be needed in order for impairment to have occurred for premises in rural areas as of 31 December 2011.
The management believes that such changes in cash flows are unlikely.
19
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
4
Critical Accounting Estimates, and Judgments in Applying Accounting Policies (Continued)
In accordance with the regulations effective in Mongolia, the Bank was obliged to perform revaluation of
buildings once in five year period. Thus, the previous valuation was performed as of 31 December 2006. If
average prices would be 20% higher compared to the recognised carrying value, the carrying value of
buildings and revaluation reserve would increase by approximately MNT 4,667,563 thousand as of 31
December 2010. If average prices would be 20% lower compared to the current carrying value, carrying
value of buildings and the Bank’s profit before taxation would decrease by approximately MNT 4,667,563
thousand as of 31 December 2010. Management believes that an overall decrease in value of the Bank’s
buildings is highly unlikely given the economic conditions during 2010, while any potential increase in value
of buildings (leading to increase in fixed assets and equity) would not have material impact on the financial
statements from the perspective of users of financial information. In management's view the increase in
value of buildings recognised as of 31 December 2011 is mostly attributable to increase in prices during
2011 due to rapid economic growth of Mongolia and inflow of foreign funds.
Tax legislation. Mongolian, tax, currency and customs legislation is subject to varying interpretations.
Refer to Note 30.
5
Adoption of New or Revised Standards and Interpretations
Certain new standards and interpretations became effective for the Bank from 1 January 2011:
Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective for annual
periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the
definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b)
providing a partial exemption from the disclosure requirements for government-related entities. The
amendment did not have an impact on these financial statements.
Improvements to International Financial Reporting Standards (issued in May 2010 and effective
from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in
the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value
to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item
was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as
deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the
first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting
policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial
statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement
basis is required by other IFRS standards) of non-controlling interests that are not present ownership
interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to
provide guidance on the acquiree’s share-based payment arrangements that were not replaced, or were
voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent
considerations from business combinations that occurred before the effective date of revised IFRS 3
(issued in January 2008) will be accounted for in accordance with the guidance in the previous version of
IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an
explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and
extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated
financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose
fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying
that an entity should disclose the amount of foreclosed collateral held at the reporting date, and not the
amount obtained during the reporting period; IAS 1 was amended to clarify the requirements for the
presentation and content of the statement of changes in equity; IAS 27 was amended by clarifying the
transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January
2008); IAS 34 was amended to add additional examples of significant events and transactions requiring
disclosure in a condensed interim financial report, including transfers between the levels of fair value
hierarchy, changes in classification of financial assets or changes in business or economic environment
that affect the fair values of the entity’s financial instruments; and IFRIC 13 was amended to clarify
measurement of fair value of award credits. The above amendments resulted in additional or revised
disclosures, but had no material impact on measurement or recognition of transactions and balances
reported in these financial statements.
20
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
5
Adoption of New or Revised Standards and Interpretations (Continued)
The financial effect of collateral required to be disclosed by the amendments to IFRS 7 is presented in
these financial statements by disclosing collateral values separately for (i) those financial assets where
collateral and other credit enhancements are equal to, or exceed, carrying value of the asset (“overcollateralised assets”) and (ii) those financial assets where collateral and other credit enhancements are
less than the carrying value of the asset (“under-collateralised assets”).
Other revised standards and interpretations effective for the current period. IFRIC 19 “Extinguishing
financial liabilities with equity instruments”, amendments to IAS 32 on classification of rights issues,
clarifications in IFRIC 14 “IAS 19 - The limit on a defined benefit asset, minimum funding requirements and
their interaction” relating to prepayments of minimum funding requirements and amendments to IFRS 1
“First-time adoption of IFRS”, did not have any impact on these financial statements
Unless otherwise described above, the new standards and interpretations did not significantly affect the
Bank’s financial reporting.
6
New Accounting Pronouncements
Certain new standards and interpretations have been issued that are mandatory for the annual periods
beginning on or after 1 January 2012 or later, and which the Bank has not early adopted.
IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9, issued in November
2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets.
IFRS 9 was further amended in October 2010 to address the classification and measurement of financial
liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after
1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows:

Financial assets are required to be classified into two measurement categories: those to be measured
subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is
to be made at initial recognition. The classification depends on the entity’s business model for
managing its financial instruments and the contractual cash flow characteristics of the instrument.

An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the
objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii)
the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only
“basic loan features”). All other debt instruments are to be measured at fair value through profit or loss.

All equity instruments are to be measured subsequently at fair value. Equity instruments that are held
for trading will be measured at fair value through profit or loss. For all other equity investments, an
irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value
gains and losses through other comprehensive income rather than profit or loss. There is to be no
recycling of fair value gains and losses to profit or loss. This election may be made on an instrumentby-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return
on investment.

Most of the requirements in IAS 39 for classification and measurement of financial liabilities were
carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the
effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss
in other comprehensive income.
While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. The Bank is
considering the implications of the standard, the impact on the Bank and the timing of its adoption by the
Bank.
IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective for annual periods
beginning on or after 1 January 2013), replaces all of the guidance on control and consolidation in IAS
27 “Consolidated and separate financial statements” and SIC-12 “Consolidation - special purpose entities”.
IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine
control. This definition is supported by extensive application guidance. The amendment is not expected to
have a material impact on the Bank's financial statements.
21
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
Error! Reference source not found.
New Accounting Pronouncements (Continued)
IFRS 11, Joint Arrangements, (issued in May 2011 and effective for annual periods beginning on or
after 1 January 2013), replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled
Entities—Non-Monetary Contributions by Venturers”. Changes in the definitions have reduced the number
of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of
proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is
mandatory for participants in joint ventures. Management is currently assessing the impact of the
amendments on the Bank’s financial statements.
IFRS 12, Disclosure of Interests in Other Entities, (issued in May 2011 and effective for annual
periods beginning on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a
joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure
requirements currently found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose
information that helps financial statement readers to evaluate the nature, risks and financial effects
associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated
structured entities. To meet these objectives, the new standard requires disclosures in a number of areas,
including significant judgements and assumptions made in determining whether an entity controls, jointly
controls, or significantly influences its interests in other entities, extended disclosures on share of noncontrolling interests in group activities and cash flows, summarised financial information of subsidiaries with
material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities.
Management is currently assessing the impact of the amendments on the Bank’s financial statements.
IFRS 13, Fair Value Measurement, (issued in May 2011 and effective for annual periods beginning
on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised
definition of fair value, and a single source of fair value measurement and disclosure requirements for use
across IFRSs. Management is currently assessing the impact of the amendments on the Bank’s financial
statements.
IAS 27, Separate Financial Statements, (revised in May 2011 and effective for annual periods
beginning on or after 1 January 2013), was changed and its objective is now to prescribe the
accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates
when an entity prepares separate financial statements. The guidance on control and consolidated financial
statements was replaced by IFRS 10, Consolidated Financial Statements. The Bank does not expect the
impact of the amended standard on its financial statements.
IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective for annual
periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the
Board’s project on joint ventures. When discussing that project, the Board decided to incorporate the
accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both
joint ventures and associates. With this exception, other guidance remained unchanged. The Bank does
not expect any impact of the amended standard on its financial statements.
Disclosures—Transfers of Financial Assets – Amendments to IFRS 7 (issued in October 2010 and
effective for annual periods beginning on or after 1 July 2011.). The amendment requires additional
disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes
a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and
rewards of financial assets that have been transferred to another party, yet remain on the entity's balance
sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities,
and the relationship between the financial assets and associated liabilities. Where financial assets have
been derecognised, but the entity is still exposed to certain risks and rewards associated with the
transferred asset, additional disclosure is required to enable the effects of those risks to be understood.
The amendment is not expected to have any impact on the Bank's financial statements.
Amendments to IAS 1, Presentation of Financial Statements (issued in June 2011, effective for
annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other
comprehensive income. The amendments require entities to separate items presented in other
comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss
in the future. The suggested title used by IAS 1 has changed to ‘statement of profit or loss and other
comprehensive income’. The Bank is currently assessing the impact of the amended standard on
disclosures in its financial statements.
22
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
Error! Reference source not found.
New Accounting Pronouncements (Continued)
Amended IAS 19, Employee Benefits (issued in June 2011, effective for periods beginning on or
after 1 January 2013), makes significant changes to the recognition and measurement of defined benefit
pension expense and termination benefits, and to the disclosures for all employee benefits. The standard
requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i)
service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The
Bank does not expect the amendments to have any material effect on its financial statements.
Disclosures—Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued
in December 2011 and effective for annual periods beginning on or after 1 January 2013). The
amendment requires disclosures that will enable users of an entity’s financial statements to evaluate the
effect or potential effect of netting arrangements, including rights of set-off. The Bank is currently assessing
the impact of the amended standard on disclosures in its financial statements.
Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December
2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added
application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting
criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that
some gross settlement systems may be considered equivalent to net settlement. The Bank is currently
assessing the impact of the amended standard on disclosures in its financial statements.
Other revised standards and interpretations: The amendments to IFRS 1 “First-time adoption of IFRS”,
relating to severe hyperinflation and eliminating references to fixed dates for certain exceptions and
exemptions, will not have any impact on these financial statements. The amendment to IAS 12 “Income
taxes”, which introduces a rebuttable presumption that an investment property carried at fair value is
recovered entirely through sale, will not have any impact on these financial statements. IFRIC 20, Stripping
Costs in the Production Phase of a Surface Mine, considers when and how to account for the benefits
arising from the stripping activity in mining industry.
Unless otherwise described above the new standards and interpretations are not expected to significantly
affect the Bank’s financial statements.
7
Cash and Cash Equivalents
31 December
2011
31 December
2010
(adjusted)
Cash on hand
Cash balances with the Bank of Mongolia (other than mandatory reserve
deposits)
Correspondent accounts with other banks:
- Mongolia
- Other countries
Bank of Mongolia treasury bills
Deposits with the Bank of Mongolia with original maturity less than three
months
Placements with other banks with original maturities of less than three
months
Reverse and repurchase agreements
103,952,130
65,162,602
33,655,221
89,554,206
9,481,247
181,839,968
183,702,710
1,343,072
77,837,357
318,131,498
-
62,823,500
28,826,106
-
25,351,293
4,996,948
Total cash and cash equivalents
541,457,382
645,200,476
In thousands of Mongolian Tugriks
Cash and cash equivalents are not collateralised. All amounts are classified as neither past due nor
impaired.
Correspondent accounts, overnight placements, Bank of Mongolia treasury bills, placements and deposits
with the Bank of Mongolia and other banks with original maturities of less than three months and deals with
securities purchased under “reverse-repo agreements” with original maturities of less than three months
represent balances with large and well-known foreign banks, top-rated Mongolian banks and the Bank of
Mongolia.
23
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
7
Cash and cash equivalents (Continued)
The credit quality of cash and cash equivalents balances may be summarised based on
Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 31
December 2011 was as follows.
Cash on
hand
Cash
balances with
the Bank of
Mongolia
(other than
mandatory
reserve
deposits)
Correspondent
accounts
with other
banks
Bank of
Mongolia
treasury
bills
Placements
with other
banks with
original
maturities of
less than
three months
Total
103,952,130
-
-
-
-
103,952,130
-
33,655,221
-
105,816,176
75,348,079
675,713
8,477,259
1,003,988
183,702,710
-
28,826,106
-
217,357,931
105,816,176
104,174,185
675,713
8,477,259
1,003,988
103,952,130
33,655,221
191,321,215
183,702,710
28,826,106
541,457,382
In thousands of Mongolian
Tugriks
Neither past due nor
impaired
- Cash on hand
- Central Bank of the
Mongolia
- AA- to AA+ rated
- A- to A+ rated
- BBB- o BBB+ rated
- BB- o BB+ rated
- B- o B+ rated
Total cash and cash
equivalents
The credit quality of cash and cash equivalents balances may be summarised based on Standard and
Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 31 December 2010 was
as follows.
Cash on
hand
In thousands of
Mongolian Tugriks
Neither past due
nor impaired
- Cash on hand
- Central Bank of
the Mongolia
- AA- to AA+ rated
- A- to A+ rated
- BBB- o BBB+
rated
- BB- o BB+ rated
- B- o B+ rated
- Unrated
Total cash and
cash equivalents
Cash Corresponbalances
dent
with the
accounts
Bank of with other
Mongolia
banks
(other than
mandatory
reserve
deposits)
Bank of
Mongolia
treasury
bills
Deposits
PlaceReverse
with the ments with and repurBank of
other
chase
Mongolia banks with
agreewith
original
ments
original maturities
maturity
of less
less than 3 than three
months
months
Total
65,162,602
-
-
-
-
-
-
65,162,602
-
89,554,206
-
47,826,769
29,386,062
318,131,498
-
62,823,500
-
22,835,211
-
470,509,204
47,826,769
52,221,273
-
-
624,525
475,701
867,372
-
-
-
2,516,082
4,996,948
624,525
475,701
867,372
7,513,030
65,162,602
89,554,206
79,180,429
318,131,498
62,823,500
25,351,293
4,996,948
645,200,476
Placements with unrated banks in the amount of MNT 7,513,030 thousand relate to Mongolian banks other
than top tier banks (i.e. medium or small sized banks). Management assesses the credit quality of
placements with these banks based on their general reputation on the Mongolian market and other
available information (such as publicly available financial statements).
Currency, interest rate and maturity analysis of cash and cash equivalents are disclosed in Note 28.
24
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
8
Mandatory reserve with the Bank of Mongolia
The Bank maintains mandatory reserves on current accounts with the Bank of Mongolia, in accordance
with the requirements of the Bank of Mongolia. The balances maintained with the Bank of Mongolia are set
at percentages based on a 14-day period. As of 31 December 2011, the mandatory reserve held with the
Bank of Mongolia was MNT 172,470,710 (31 December 2010: MNT 58,481,200 thousand).
Mandatory reserve with the Bank of Mongolia is neither past due nor impaired as of 31 December 2011
and 31 December 2010.
9
Due from Other Banks
In thousands of Mongolian Tugriks
Short-term placements with other banks with original maturities of more than
three months and less than one year
Long-term placements with other banks with original maturities of more than
one year
Total due from other banks
31 December
2011
31 December
2010 (adjusted)
4,221,251
-
7,003,726
6,315,506
11,224,977
6,315,506
Amounts due from other banks are not collateralised and are all considered neither past due nor impaired.
Analysis by credit quality of amounts due from other banks outstanding at 31 December 2011 and
31 December 2010 is as follows:
31 December
2011
31 December
2010 (adjusted)
Neither past due nor impaired
- AA- to AA+ rated
- A- to A+ rated
- BB- o BB+ rated
7,021,903
4,203,074
6,315,506
-
Total due from other banks
11,224,977
6,315,506
In thousands of Mongolian Tugriks
Refer to Note 31 for the estimated fair value of amounts due from other banks. Currency, interest rate and
maturity analysis of due from other banks are disclosed in Note 28.
10
Loans and Advances to Customers
In thousands of Mongolian Tugriks
Business lending
Consumer lending
Agricultural lending
Total gross loans and advances to customers
Less: Provision for loan impairment
Total loans and advances to customers
31 December
2011
31 December
2010
701,514,811
642,913,480
60,968,009
363,100,445
389,500,676
50,207,582
1,405,396,300
802,808,703
(28,130,607)
1,377,265,693
(26,098,850)
776,709,853
25
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
10
Loans and Advances to Customers (Continued)
The aggregate amount of loans to the 30 biggest customers amounted to MNT 295,531,037 thousand and
represents 21.0% of total loans and advances to customers at 31 December 2011. Similarly, the aggregate
amount of loans to the 30 biggest customers as of 31 December 2010 amounted to MNT 104,315,245
thousand and represented 13.0% of loan portfolio.
Movements in the provision for loan impairment during 2011 are as follows:
In thousands of Mongolian Tugriks
Provision for loan impairment at 1 January 2011
(Recovery of) / provision for impairment during the
period
Amounts written off during the period as
uncollectible
Provision for loan impairment at
31 December 2011
Business
lending
20,426,573
Consumer
lending
2,251,963
Agricultural
lending
3,420,314
Total
26,098,850
(1,252,204)
5,687,541
(1,395,755)
3,039,582
(267,005)
(125,237)
(615,583)
(1,007,825)
18,907,364
7,814,267
1,408,976
28,130,607
Total
Movement in the provision for loan impairment during 2010 are as follows.
In thousands of Mongolian Tugriks
Provision for loan impairment at 1 January 2010
(Recovery of) / provision for impairment during the
period
Amounts written off during the period as
uncollectible
Provision for loan impairment at
31 December 2010
Business
lending
18,833,975
Consumer
lending
2,706,146
Agricultural
lending
5,795,406
27,335,527
2,190,662
(183,245)
(1,421,924)
585,493
(598,064)
(270,938)
(953,168)
(1,822,170)
20,426,573
2,251,963
3,420,314
26,098,850
Economic sector risk concentrations within the customer loan portfolio are as follows:
2011
In thousands of Mongolian Tugriks
Individuals
Trade and commerce
Construction
Agriculture
Transportation
Real estate
Food industry
Mining
Paper production
Metal production
Chemical production
Health and social organizations
Other
Total loans and advances to
customers (before impairment)
2010
Amount
%
Amount
%
642,471,304
230,952,752
108,270,457
60,139,161
47,359,940
40,075,761
29,262,345
29,022,338
28,716,997
25,069,610
10,294,911
8,076,100
145,684,624
46%
16%
8%
4%
3%
3%
2%
2%
2%
2%
1%
1%
10%
386,811,739
113,159,383
41,974,614
43,419,571
12,868,177
32,169,242
24,777,614
9,998,815
15,220,395
10,948,438
5,831,182
6,392,072
99,237,461
48%
14%
5%
6%
2%
4%
3%
1%
2%
1%
1%
1%
12%
1,405,396,300
100%
802,808,703
100%
26
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
10
Loans and Advances to Customers (Continued)
Information about collateral at 31 December 2011 is as follows:
Business
Lending
Consumer
Lending
Agricultural
Lending
Total
Loans collateralised by:
- real estate properties
- vehicles
- equipment
- goods in turnover
- other
Unsecured loans
577,480,103
37,197,938
6,466,534
11,495,658
15,936,697
52,937,881
224,140,701
26,309,439
696,382
858,524
58,390,480
332,517,954
4,803,692
5,966,841
545,166
27,083
48,895,238
729,989
806,424,496
69,474,218
7,708,082
12,381,265
123,222,415
386,185,824
Total loans and advances to customers
(before impairment)
701,514,811
642,913,480
60,968,009
1,405,396,300
In thousands of Mongolian Tugriks
Information about collateral at 31 December 2010 is as follows.
Business
Lending
Consumer
Lending
Agricultural
Lending
Total
Loans collateralised by:
- real estate properties
- vehicles
- equipment
- goods in turnover
- other
Unsecured loans
259,261,372
7,928,447
3,412,405
4,893,747
9,800,999
77,803,475
143,931,558
11,260,140
541,408
633,257
31,592,683
201,541,630
5,768,139
5,353,265
536,006
38,997
36,374,513
2,136,662
408,961,069
24,541,852
4,489,819
5,566,001
77,768,195
281,481,767
Total loans and advances to customers
(before impairment)
363,100,445
389,500,676
50,207,582
802,808,703
In thousands of Mongolian Tugriks
The disclosure above represents the lower of the carrying value of the loan or collateral taken; the
remaining part is disclosed within the unsecured exposures.
Unsecured loans mostly consist of pension and salary loans. Even though for these loans the bank doesn’t
require separate collateral, the bank pledges and controls future pension and salary payments of the
borrowers. The main requirement or pre-requisite for getting pension or unsecured salary loan from
the Bank is to get pension payments from the Government or salary payroll through the Bank’s account.
27
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
10
Loans and Advances to Customers (Continued)
Analysis by credit quality of loans outstanding at 31 December 2011 is as follows:
Business
lending
Consumer
lending
Agricultural
lending
Total
Neither past due nor impaired 2011
- Excellent
- Good
- Loans renegotiated
335,769,943
329,851,083
12,478,753
321,466,028
316,412,009
2,269,030
10,908,352
48,603,007
30,486
668,144,323
694,866,099
14,778,269
Total neither past due nor impaired
678,099,779
640,147,067
59,541,845
1,377,788,691
Past due but not impaired
- less than 30 days overdue
- 30 to 90 days overdue
138,989
723,982
291,339
1,050,206
40,251
32,997
470,579
1,807,185
Total past due but not impaired
862,971
1,341,545
73,248
2,277,764
Individually determined to be Impaired
- not past due
- 91 to 180 days overdue
- 181 to 360 days overdue
- over 360 days overdue
15,434,269
117,367
1,320,804
5,679,621
369,388
221,210
834,270
7,242
28,487
1,317,187
15,434,269
493,997
1,570,501
7,831,078
Total individually impaired loans
22,552,061
1,424,868
1,352,916
25,329,845
Less impairment provisions
(18,907,364)
(7,814,267)
(1,408,976)
(28,130,607)
Total loans and advances to customers
682,607,447
635,099,213
59,559,033
1,377,265,693
In thousands of Mongolian Tugriks
28
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
10
Loans and Advances to Customers (Continued)
Analysis by credit quality of loans outstanding at 31 December 2010 is as follows:
Business
lending
Consumer
lending
Agricultural
lending
Total
Neither past due nor impaired 2010
- Excellent
- Good
- Loans renegotiated
145,714,110
155,211,970
8,432,213
155,571,371
230,087,026
2,011,726
9,222,988
37,136,867
538,159
310,508,469
422,435,863
10,982,098
Total neither past due nor impaired
309,358,293
387,670,123
46,898,014
743,926,430
Past due but not impaired
- less than 30 days overdue
- 30 to 90 days overdue
93,260
302,834
38,137
172,844
60,294
136,491
191,691
612,169
Total past due but not impaired
396,094
210,981
196,785
803,860
Individually determined to be Impaired
- not past due
- less than 30 days overdue
- 91 to 180 days overdue
- 181 to 360 days overdue
- over 360 days overdue
38,963,590
4,222,106
1,219,773
1,102,898
7,837,691
189,997
212,875
374,383
842,317
37,386
181,206
657,275
2,236,916
39,190,973
4,222,106
1,613,854
2,134,556
10,916,924
Total individually impaired loans
53,346,058
1,619,572
3,112,783
58,078,413
Less impairment provisions
(20,426,573)
(2,251,963)
(3,420,314)
(26,098,850)
Total loans and advances to customers
342,673,872
387,248,713
46,787,268
776,709,853
In thousands of Mongolian Tugriks
Credit quality analysis of neither past due nor impaired loans was based on internal rating system
described in Note 28. All loans neither past due nor impaired were classified as performing in accordance
with guidelines of the Bank of Mongolia.
29
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
10
Loans and Advances to Customers (Continued)
The Bank applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments:
Recognition and Measurement, and created portfolio provisions for impairment losses that were incurred
but have not been specifically identified with any individual loan by the end of the reporting period. The
Bank’s policy is to classify each loan as ‘neither past due nor impaired’ until specific objective evidence of
impairment of the loan is identified. The impairment provisions may exceed the total gross amount of
individually impaired loans as a result of this policy and the portfolio impairment methodology.
The primary factors that the Bank considers in determining whether a loan is impaired are its overdue
status and realisability of related collateral, if any. As a result, the Bank presents above an ageing analysis
of loans that are determined to be impaired.
Past due, but not impaired, loans primarily include collateralised loans where the fair value of collateral
covers the overdue interest and principal repayments. The amount reported as past due but not impaired is
the whole balance of such loans, not only the individual instalments that are past due.
The financial effect of collateral is presented by disclosing collateral values separately for (i) those assets
where collateral and other credit enhancements are equal to or exceed carrying value of the asset (“overcollateralised assets”) and (ii) those assets where collateral and other credit enhancements are less than
the carrying value of the asset (“under-collateralised assets”). The effect of collateral at 31 December 2011:
Over-collateralised assets
Carrying value
Fair value of
of the assets
collateral
In thousands of Mongolian Tugriks
Business lending
Consumer lending
Agricultural lending
592,494,423
278,033,335
58,279,474
2,274,982,391
717,201,168
766,747,345
Under-collateralised assets
Carrying
Fair value of
value of the
collateral
assets
90,113,024
357,065,878
1,279,559
39,671,159
28,941,267
579,841
The effect of collateral at 31 December 2010:
Over-collateralised assets
Carrying value
Fair value of
of the assets
collateral
In thousands of Mongolian Tugriks
Business lending
Consumer lending
Agricultural lending
249,823,222
176,200,508
44,401,124
1,237,242,346
883,117,060
1,243,618,676
Under-collateralised assets
Carrying
Fair value of
value of the
collateral
assets
92,850,650
211,048,205
2,386,144
21,650,420
11,387,307
438,760
Neither past due nor impaired, but renegotiated loans represent the carrying amount of loans that would
otherwise be past due or impaired whose terms have been renegotiated. Past due but not impaired loans
primarily include collateralised loans where the fair value of collateral covers the overdue interest and
principal repayments. The amount reported as past due but not impaired is the whole balance of such
loans, not only the individual instalments that are past due.
Management believes that the amount of repossessed collateral during 2011 and 2010 is not material.
Refer to Note 31 for the estimated fair value of each class of loans and advances to customers. Information
on related party balances is disclosed in Note 33. Currency, interest rate and maturity analysis of loans and
advances to customers are disclosed in Note 28.
30
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
11
Investments in Associates
The table below summarises the carrying amount of the Bank’s investment in associates.
31 December
2011
31 December
2010
(adjusted)
Credit Information Bureau
Mongolian Mortgage Corporation (MIK)
Mongolian Banking Association Property Management (MBAPM)
Banking Training Center
243,638
201,000
58,250
10,000
243,638
201,000
58,250
10,000
Total investment in associates
512,888
512,888
In thousands of Mongolian Tugriks
As of 31 December 2011 and 31 December 2010, the Bank has the ability to exercise significant influence
over Credit Information Bureau LLC, a company incorporated in Mongolia with the principal activity of
collecting and providing information about credit customers, which is further used for the assessment of
customers’ creditworthiness by the banks during the loan approval process. As of 31 December 2011, the
Bank owned 19% of the shares of Credit Information Bureau LLC, but was able to exercise significant
influence through representation on the Board of Directors from 2009. During 2011, the Bank did not make
any additional investment in Credit Information Bureau.
The Bank owns 3% of the share capital of Mongolian Mortgage Corporation LLC (MIK) as of 31
December 2011 (31 December 2010: 9%). In 2008, the Bank’s representative was appointed to the Board
of Directors of this investee and thus it is assessed that the Bank is able to significantly influence the
operational and financial decisions of this entity as of 31 December 2011. The Bank’s share in the share
capital of Mongolian Banking Association Property Management LLC (MBAPM LLC) was 15% as of 31
December 2011 and 31 December 2010. The Bank’s representative was appointed to the Board of
Directors of this investee in 2008 and thus the Bank is able to significantly influence the operational and
financial decisions of this entity. In 2011, the Bank did not make any additional investment in this company.
The Bank owns 15% of the share capital of Banking Training Center which belongs to MBAPM LLC. The
Bank’s representative was appointed to the Board of Directors of this entity in 2010. No additional
investments were made during the year ended 31 December 2011.
At 31 December 2011, the Bank’s interests in its principal associates and their summarised financial
information, including total assets, liabilities, revenues and profit or loss, were as follows:
Name
Total assets
Total
liabilities
Revenue
Profit
Credit Information Bureau LLC
Mongolian Mortgage Corporation LLC (MIK)
Mongolian Banking Association Property
Management (MBAPM)
1,477,252
11,582,366
143,612
4,389,081
860,477
62,877
125,841
457,033
210
30,061
14,044
Total
13,516,651
4,532,903
890,538
202,762
31
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
11
Investments in Associates (Continued)
At 31 December 2010 the Bank’s interests in its principal associates and their summarised financial
information, including total assets, liabilities, revenues and profit or loss, were as follows:
Name
Total assets
Total
liabilities
Revenue
Profit
Credit Information Bureau LLC
Mongolian Mortgage Corporation LLC (MIK)
Mongolian Banking Association Property
Management (MBAPM)
1,276,612
7,502,928
5,848
4,844,615
1,048,616
6,732
61,845
445,495
188
24,091
6,539
Total
9,225,035
4,850,651
1,072,707
75,116
Fair value of net assets and goodwill arising on the acquisition of associates have not been disclosed
separately in these financial statements, as management believes that carrying value of investments in
associates is not material.
Based on information available, management believes that investments in associates are not impaired as
of 31 December 2011 and 31 December 2010 and thus no provision for impairment is recognized in these
financial statements. Information on related party balances is disclosed in Note 33.
12
Short term investments
30 December
2011
31 December
2010
Government bonds
Bank of Mongolia treasury bills
13,939,684
9,307,714
-
Total short term investments
23,247,398
-
In thousands of Mongolian Tugriks
As of 31 December 2011 the Bank has invested in a number of government bonds of the Ministry of
Finance at par value of MNT 8,990,200 thousand and treasury bills issued by the Bank of Mongolia at par
value of MNT 14,952,000 thousand. The government bonds have coupon rates ranging from 7.3% to 8.0%
p.a. Treasury bills issued by the Bank of Mongolia were purchased with discounts and have effective rates
ranging from 15.8% to 16.3% p.a.
These investments are classified as loans and receivables and carried at amortized cost. They are neither
past due nor impaired as of 31 December 2011. These investments are not collateralised.
Refer to Note 31 for the estimated fair value of each class of loans and advances to customers. Currency,
interest rate and maturity analysis of short term investments are disclosed in Note 28.
32
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
13
Long term investments
31 December
2011
31 December
2010 (adjusted)
Government bonds
42,863,315
22,329,569
Total long term investments
42,863,315
22,329,569
In thousands of Mongolian Tugriks
As of 31 December 2011 the Bank has invested in a number of government bonds of the Ministry of
Finance at MNT 40,434,000 par value in total.
These investments are classified as loans and receivables and carried at amortized cost. They are neither
past due nor impaired as of 31 December 2011. These investments are not collateralised. Refer to Note 31
for the estimated fair value of long term investments. Currency, interest rate and maturity analysis of long
term investments are disclosed in Note 28.
14
Intangible Assets
In thousands of Mongolian Tugriks
Cost at 1 January 2009 (adjusted)
Accumulated amortization (adjusted)
Carrying amount at 1 January 2010
Additions (adjusted)
Amortization charge (adjusted), Note 25
Carrying amount at 31 December 2010
Cost at 31 December 2010 (adjusted)
Accumulated amortization (adjusted)
Carrying amount at 31 December 2010
Additions
Amortization charge (Note 25)
Carrying amount at 31 December 2011
Cost at 31 December 2011
Accumulated amortization
Carrying amount at 31 December 2011
Intangible
assets
5,983,294
(2,084,302)
3,898,992
888,572
(1,257,920)
3,529,644
6,871,866
(3,342,222)
3,529,644
823,100
(1,351,963)
3,000,781
7,694,966
(4,694,185)
3,000,781
Intangible assets mostly relate to the Bank’s core banking system and software licenses.
33
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
15
Property and Equipment
Note
Premises
Furniture,
office
equipment
and vehicles
Computers and
equipments
Const-ruction
in progress
and assets
under
development
Total
property and
equipment
(adjusted)
In thousands of Mongolian
Tugriks
Cost at 1 January 2010
(adjusted)
Accumulated depreciation
(adjusted)
25,485,120
9,744,919
18,940,228
1,127,956
55,298,223
(3,698,260)
(2,507,422)
(11,580,312)
-
(17,785,994)
Carrying amount at
1 January 2010
21,786,860
7,237,497
7,359,916
1,127,956
37,512,229
769,939
1,492,174
2,092,432
(33,908)
4,049,314
15,617
1,967,094
(1,473,883)
8,878,779
-
(4,698)
(75,909)
7,169
(181,175)
(2,471)
(10,864)
-
(267,948)
45,917
(23,577)
86,868
(243,757)
10,601
(861,464)
-
143,386
(1,128,798)
14,936
131,735
843,529
-
990,200
(667,827)
(1,170,415)
(5,290,366)
-
(7,128,608)
23,337,815
7,926,446
6,113,812
1,621,167
38,999,240
Additions (adjusted)
Transfers at cost
Transfers accumulated
depreciation
Disposals at cost
Disposals accumulated
depreciation
Write-offs at cost
Write-offs accumulated
depreciation
Depreciation charge
(adjusted)
25
Carrying amount at
31 December 2010
(adjusted)
Cost at 31 December 2010
(adjusted)
Accumulated depreciation
(adjusted)
27,647,747
11,378,511
22,132,831
1,621,167
62,780,256
(4,309,932)
(3,452,065)
(16,019,019)
-
(23,781,016)
Carrying amount at
31 December 2010
(adjusted)
23,337,815
7,926,446
6,113,812
1,621,167
38,999,240
1,566,821
2,042,722
(12,244)
3,232,544
34,169
(234,492)
5,206,683
48,533
(365)
1,930,116
(2,125,424)
-
11,936,164
(247,101)
5,665
(36,003)
94,733
(285,665)
43
(1,140,746)
-
100,441
(1,462,414)
22,561
(714,784)
9,458,500
205,063
(1,396,216)
-
1,126,672
(3,794,708)
-
-
1,354,296
(5,905,708)
9,458,500
4,996,490
-
-
-
4,996,490
Carrying amount at
31 December 2011
40,667,543
9,576,582
7,559,924
1,425,859
59,229,908
Cost at 31 December 2011
Accumulated depreciation
40,667,543
-
14,125,067
(4,548,485)
26,246,936
(18,687,012)
1,425,859
-
82,465,405
(23,235,497)
Carrying amount at
31 December 2011
40,667,543
9,576,582
7,559,924
1,425,859
59,229,908
Additions
Transfers at cost
Disposals at cost
Disposals accumulated
depreciation
Write-offs at cost
Write-offs accumulated
depreciation
Depreciation charge
Revaluation at cost
Reversal of accumulated
depreciation
25
34
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
15
Property and equipment (Continued)
Net increase in revaluation of MNT 14,454,990 is recognized through increase in revaluation surplus in the
amount of MNT 14,706,271, in other operating income in the amount of MNT 68,005 thousand and in
administrative and other operating expenses (Note 25) in the amount of MNT 319,286 thousand.
Premises have been revalued at fair value at 31 December 2011. The valuation was carried out by
independent appraisers, a consortium of nine companies led by Panteon LLC, Ulaanbaatar, Mongolia. The
consortium holds a recognised and relevant professional qualification and has recent experience in
valuation of assets of similar location and category. The basis used for the appraisal was market value for
premises located in the capital Ulaanbaatar and other urban areas and replacement cost for premises
located in rural areas. Replacement cost was considered appropriate for rural areas, due to lack of marketbased evidence of fair value of these premises and lack of reliable input data for discounted cash flow
approach. The assumptions used in estimated fair values are disclosed within Note 4.
At 31 December 2011 the carrying amount of premises would have been MNT 25,708,966 thousand (2010:
MNT 22,834,228 thousand) had the assets been carried at cost less depreciation. The amount reconciles
to the carrying value of the premises as follows:
In thousands of Mongolian Tugriks
Premises at revalued amount in the statement of financial position
Revaluation reserve presented in equity, gross
Realised revaluation reserve
Revaluation loss recognized directly in statement of comprehensive income
Premises at cost less accumulated depreciation
31 December
2011
31 December
2010
40,667,543
(15,164,056)
(45,802)
251,281
23,337,815
(503,587)
-
25,708,966
22,834,228
35
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
16 Other assets
31 December
2011
31 December
2010 (adjusted)
531,024
313,029
153,355
138,687
674,069
318,477
154,093
104,420
(829,547)
(955,960)
306,548
295,099
Other non-financial assets:
Office materials and supplies
Prepayments for maintenance of buildings
Prepayments for rent
Prepayments for services
Prepayments into intangible assets purchases
Prepayments for employees
Prepayments for fixed assets purchases
Prepayments for inventory purchases
Other prepayments
Other non-financial assets
2,881,924
428,629
327,095
226,588
168,143
21,995
10,669
76,256
22,518
1,859,785
425,507
127,959
79,779
153,302
1,779
370,707
135,475
122,053
86,144
Total other non-financial assets
4,163,817
3,362,490
In thousands of Mongolian Tugriks
Other financial assets:
Receivables from individuals
Receivables on cash and settlements services
Receivables from companies
Other financial assets
Less: provision for impairment
Total other financial assets
Movements in the provision for impairment of other financial assets during 2011 are as follows:
Receivables
from
individuals
Receivables
on cash and
settlements
services
Receivables
from
companies
Other
financial
assets
Total
Financial
Assets
673,070
27,318
151,405
104,167
955,960
(87,030)
(7,310)
2,300
34,419
(57,621)
(56,182)
-
(12,610)
-
(68,792)
529,858
20,008
141,095
138,586
829,547
In thousands of Mongolian Tugriks
Provision for impairment at 1 January
2011
(Recovery)/charge of provision for
impairment during the year
Amounts written off during the year as
uncollectible
Provision for impairment at
31 December 2011
36
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
16
Other assets (Continued)
Movements in the provision for impairment of other financial assets during 2010 are as follows. The
amounts presented below are adjusted for effect of reclassifications.
Receivables
from
individuals
Receivables
on cash and
settlements
services
Receivables
from
companies
Other
financial
assets
Total
Financial
Assets
630,023
24,965
148,102
90,736
893,826
In thousands of Mongolian Tugriks
Provision for impairment at
1 January 2010
Provision for impairment during the year
Amounts written off during the year as
uncollectible
92,851
5,802
3,303
13,431
115,387
(49,804)
(3,449)
-
-
(53,253)
Provision for impairment at
31 December 2010
673,070
27,318
151,405
104,167
955,960
Analysis by credit quality of other financial assets outstanding at 31 December 2011 is as follows.
Receivables
from
individuals
Receivables
on cash and
settlements
services
Receivables
from
companies
Other
financial
assets
Total
Financial
Assets
Neither past due nor impaired
- Standard
786
293,021
11,997
-
305,804
Total neither past due nor impaired
786
293,021
11,997
-
305,804
Past due but not impaired
- less than 30 days overdue
- 31 to 90 days overdue
1,940
387
170
54
552
52
101
-
2,763
493
Total past due but not impaired
2,327
224
604
101
3,256
Impaired
- 91 to 180 days overdue
- 181 to 360 days overdue
- over 360 days overdue
3,510
13,054
511,347
19,784
3,401
137,353
138,586
3,510
16,455
807,070
Total impaired
527,911
19,784
140,754
138,586
827,035
Less impairment provision
(529,858)
(20,008)
(141,095)
(138,586)
(829,547)
Total other financial assets
1,166
293,021
12,260
101
306,548
In thousands of Mongolian Tugriks
37
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
16
Other assets (Continued)
Analysis by credit quality of other financial assets outstanding at 31 December 2010 is as follows. The
amounts presented below are adjusted for effect of reclassifications.
Receivables
from
individuals
Receivables
on cash and
settlements
services
Receivables
from
companies
Other
financial
assets
Total
Financial
Assets
Neither past due nor impaired
- Standard
993
291,159
2,606
243
295,001
Total neither past due nor
impaired
993
291,159
2,606
243
295,001
Past due but not impaired
- less than 30 days overdue
- 31 to 90 days overdue
2,000
16,447
-
60
-
2,000
16,507
Total past due but not impaired
18,447
-
60
-
18,507
Impaired
- 91 to 180 days overdue
- 181 to 360 days overdue
- over 360 days overdue
18,926
82,468
552,865
18,580
8,738
42
1,422
149,963
151
9,510
94,516
37,699
93,400
806,082
Total impaired
654,629
27,318
151,427
104,177
937,551
Less impairment provision
(673,070)
(27,318)
(151,405)
(104,167)
(955,960)
Total other financial assets
999
291,159
2,688
253
295,099
In thousands of Mongolian Tugriks
All neither past due nor impaired other financial assets as of 31 December 2011 and 31 December 2010
are classified as standard in accordance with the provisioning guidelines of the Bank of Mongolia (Note 28).
Related customers are not rated. However, management believes that the quality of these receivables is
adequate, given that creditworthiness and reputation of potential customers is thoroughly assessed. The
Bank had no renegotiated (restructured) other financial assets as of 31 December 2011 and 31 December
2010.
The primary factors that the Bank considers in determining whether other financial assets are impaired are
their overdue status. As a result, the Bank presents above an ageing analysis of receivables that are
determined to be impaired.
Refer to Note 31 for the disclosure of the fair value of each class of other financial assets..
Most of financial assets are of short-term nature. For detailed analysis of maturity and currency refer to
Note 28. Most of non-financial assets (prepayments) are expected to be recovered less than twelve months
after year end.
38
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
17
Due to Other Banks
In thousands of Mongolian Tugriks
Correspondent accounts and overnight placements of other banks
Short-term placement of other banks
Long-term placement of other banks
Total due to other banks
31 December
2011
31 December
2010
2,023,036
4,537,439
7,905,955
2,495,223
2,526,300
-
14,466,430
5,021,523
At 31 December 2011 and 31 December 2010 due to other banks included correspondent accounts, shortterm and long-term placements with Mongolian and foreign banks.
At 31 December 2011 short-term placements relate to the loans from local banks Development Bank of
Mongolia and Capitron Bank with interest rates 9.4% p.a. and 10% p.a. and total maturity of 92 and 365
days accordingly. At 31 December 2011 long-term placement relates to the loan from ING Bank bearing
interest rate of 10% p.a., which is due on 9 May 2014. At 31 December 2010 short-term placement of other
banks relates to the loan from State Bank bearing interest rate 10%, which was due on 7 January 2011.
None of the placements are collateralized.
Refer to Note 31 for the disclosure of the fair value of each class of due to other banks. Information on
related party balances is disclosed in Note 33. Currency, interest rate and maturity analysis of due to other
banks are disclosed in Note 28.
18
Customer accounts
31 December 2011
31 December 2010
(adjusted)
98,035,104
5,068,349
11,126,719
136,991,003
43,556
5,742
Legal entities
- Current/settlement accounts
- Demand (savings) deposits
- Term deposits
376,729,449
2,067,739
228,816,866
308,807,429
2,680,103
15,369,872
Individuals
- Current/demand accounts
- Demand (savings) deposits
- Term deposits
128,306,440
435,577,664
526,604,427
76,514,166
379,129,365
392,008,694
1,812,332,757
1,311,549,930
In thousands of Mongolian Tugriks
State and public organisations
- Current/settlement accounts
- Demand (savings) deposits
- Term deposits
Total customer accounts
The management currently does not monitor concentration of customer accounts per economic sectors.
Thus, related information is not disclosed in these financial statements. At 31 December 2011 the
aggregate amount of the top 30 biggest customers is MNT 363,678,233 (31 December 2010: MNT
312,893,100 thousand) or 20% of total customer accounts (31 December 2010: 23.9 %).
At 31 December 2011 included in customer accounts are deposits of MNT 8,055,093 thousand
(31 December 2010: MNT 301,944 thousand) held as collateral for irrevocable commitments under import
letters of credit. Refer to Note 30.
39
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
18
Customer accounts (Continued)
Refer to Note 31 for the disclosure of fair value of customer accounts. Information on related party
balances is disclosed in Note 33. Currency, interest rate and maturity analysis of customer accounts are
disclosed in Note 28.
19
Other borrowed funds
31 December 2011
31 December 2010
(adjusted)
responsAbility SICAV (Lux)
Credit Suisse Microfinance Fund Management Company
Dexia Micro Credit Fund
11,246,026
9,807,231
3,529,698
6,318,737
8,846,231
6,323,363
Total promissory notes issued to foreign financial institutions
24,582,955
21,488,331
Netherland Development Finance Company (FMO)
BlueOrchard Pool
International Finance Corporation
Asian Development Bank
European Bank for Reconstruction and Development
21,055,889
7,021,611
6,986,390
6,477,190
6,347,929
2,246,685
10,457,837
8,669,415
8,566,275
Total borrowed funds from foreign financial institutions
47,889,009
29,940,212
SME Investment Fund
SME Development Fund
Japan Bank of International Cooperation project
Labour Support Fund
Agriculture and Rural Development Project
Microfinance Development Fund
Private Enterprise Development Fund
Rural Poverty Reduction Program
SME loan for LGO
Enterprise Mongolia program
Loan from BOM, Term loan III
37,063,973
14,424,904
9,224,913
5,264,000
3,728,735
3,121,759
1,339,968
839,441
593,183
168,337
128,289
2,470,856
2,827,939
5,822,965
10,219,965
4,407,991
2,402,861
1,402,091
475,780
659,733
168,337
121,106
Total borrowed funds from government organizations
75,897,502
30,979,624
148,369,466
82,408,167
In thousands of Mongolian Tugriks
Promissory notes issued to foreign financial institutions
Borrowed funds from foreign financial institutions
Borrowed funds from government organizations
Total borrowed funds
All government organizations’ borrowings stated above are related to the Government of Mongolia unless
otherwise stated.
40
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
19
Other Borrowed Funds (Continued)
The terms of the main borrowing agreements are provided below.
Promissory Notes
On 7 December 2007, the Bank issued three Promissory Notes to two parties: responsAbility SICAV (Lux)
and Credit Suisse Microfinance Fund Management Company. These three notes, totaling USD 6 million,
bear interest at a fixed rate of 8.89% payable semi-annually and are due on 7 December 2012. On
28 December 2010, the Bank issued an additional three promissory notes to the same two parties. These
three notes, totalling USD 6 million, bear interest at a rate of 6 months LIBOR plus 3.75% with effective
interest rate 4.56% p.a. and are due on 29 December 2013. The purpose of the notes is to increase the
Bank’s liquidity and working capital.
On 29 September 2011, the Bank issued a promissory note for USD 3 million to responsAbility SICAV
(Lux) to increase the Bank’s liquidity and working capital. The note bears interest at a rate of 6 months
LIBOR plus 3.75% payable semi-annually with effective interest rate of 4.56% p.a. at 31 December 2011.
The maturity date of the note is 29 September 2014.
On 12 May 2009, the Bank issued a promissory note for USD 5 million to Dexia Micro-Credit Fund (SubFund Blueorchard Debt) to increase the Bank’s liquidity and working capital. The note bears interest at a
fixed rate of 8.4% payable semi-annually. The amount of USD 2.5 million was paid in May 2011, while the
remaining USD 2.5 million is due on 14 May 2012.
Netherland Development Finance Company (FMO)
The Bank entered into a Term Facility Agreement with FMO on 15 December 2009 in an aggregate amount
not exceeding USD 15 million for a period of 94 months to finance ongoing business operations. Drawdown
is permitted until 15 January 2012. The loan bears interest at a margin over six-month LIBOR with effective
interest rate of 5.59% (31 December 2010: 5.46%) per annum at the end of the reporting period.
Repayment of the loan is in twelve equal semi-annual installments commencing 15 April 2012. The final
repayment date is 15 October 2017.
Microfinance Enhancement Facility SA, SICAV-SIF (BlueOrchard Pool)
The Bank entered into a Loan Agreement with BlueOrchard Pool on 15 September 2011 for an aggregate
amount not exceeding USD 5 million for a period of 36 months to finance ongoing business operations. The
loan bears interest at 4.5% per annum. Repayment of the loan is in six equal semi-annual installments
commencing 15 March 2012. The final repayment date is 15 September 2014.
International Finance Corporation (IFC)
The Bank entered into a Loan Agreement with the IFC on 19 December 2007 in an aggregate amount not
exceeding USD 15 million for a period of 66 months to finance ongoing business operations. The loan
bears interest at a margin over six-month LIBOR with effective interest rate of 4.27% (31 December 2010:
3.96%) per annum at the end of the reporting period. Repayment of the loan is in nine equal semi-annual
instalments commencing 15 June 2009. The final repayment date is 15 June 2013.
Asian Development Bank (ADB)
The Bank entered into a Loan Facility agreement with the ADB on 19 November 2007 for an aggregate
amount not exceeding USD 10 million for a period of 72 months to finance ongoing business operations.
The loan bears interest at a margin over six-month LIBOR which was converted in 2008 to a fixed rate of
6.39% for the remainder of the loan term for one part of the borrowing and 4.11% for another part.
Repayment of the loan is in nine equal semi-annual instalments commencing 16 November 2009. The final
repayment date is 16 November 2013.
European Bank for Reconstruction and Development (EBRD)
The Bank entered into a Loan Agreement with the EBRD on 30 October 2007 for an aggregate amount not
exceeding USD 10 million for 72 months to finance ongoing business operations. The loan bears interest at
a margin over six-month LIBOR which was converted in 2008 to a fixed rate of 7.13% per annum for the
remainder of the loan term. Repayment of the loan is in nine equal semi-annual instalments commencing
6 September 2009. The final repayment date is 6 September 2013.
41
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
19
Other Borrowed Funds (Continued)
Ministry of Food, Agriculture and Light Industry
The funds obtained from the Ministry of Food, Agriculture and Light Industry comprise the following:
(i) Small Medium Enterprise Investment Fund
The Ministry of Food, Agriculture and Light Industry provides this fund for the purpose of financing small
and medium sized factories by lending the necessary fund from the "Special Purpose Fund" which is
deposited by the Ministry of Food, Agriculture and Light Industry. The loan is repayable in three instalments
on 3 August 2013, 1 December 2014 and 1 December 2015. The loan bears a 0.1% monitoring fee, which
is payable every quarter.
(ii) Small Medium Enterprise Development Fund
The Ministry of Food, Agriculture and Light Industry provides this fund for the purpose of financing the small
and medium sized factories in 6 provinces. The 6 provinces are Gobisumber, Dornod, Sukhbaatar, Bulgan,
Khentii, and Khovd. The full loan is repayable on 9 March 2013. The loan bears 0.3% monitoring fee, which
is payable semi-annually.
Ministry of Finance and Japan Bank for International Cooperation (JBIC)
The Ministry of Finance, funded by JBIC for its Two-Step Loan Project for Small and Medium Scale
Enterprises Development and Environmental Protection project, provided this loan. In March 2006, JBIC
entered into an agreement with the Government of Mongolia to receive a loan in the amount up to
JPY 2.98 billion for this project. The Bank disbursed the proceeds of this loan to sub-borrowers. The Bank
will repay loan principal to the Ministry of Finance within six months of receiving repayment from subborrowers.
In 2007, the Bank received two loans from these funds: the first loan amounting to
MNT 4,561,368,600 bears interest at the average demand deposit rate for commercial banks with an
effective interest rate of 4.0% (31 December 2010: 4.8%) per annum at the end of the reporting period; the
second loan amounting to USD 1,830,000 bears interest at a margin of 1% over six-month LIBOR for
USD loans with an effective interest rate of 1.4% (31 December 2010: 1.73%) per annum.
Labour Support Fund
The Labour and Welfare Service Department provided this local currency denominated loan to support
employment. The Bank entered into four loan agreements with the Labour and Welfare Service
Department, two loan agreements in 2009, one loan agreement in 2010, and one loan agreement in the
second quarter of 2011. Each loan agreement is for a term of 18 months. Two of the loans which were due
on 29 June 2011 and 17 September 2011 were paid on time, and the maturity date of the remaining loan at
the end of the reporting period is 17 November 2012. The loans bear no interest or service fees. In case of
the remaining loans maturing on 17 November 2012, the Bank shall pay a commitment fee at 0.3% of the
amount of unused funds starting from 17 April 2011. The Bank disburses the proceeds to sub-borrowers at
its own credit risk for qualifying projects which generate new jobs. The loans bear reduced interest rates
and have a maximum maturity of 18 months.
Agriculture and Rural Development Project (ADB)
Agriculture and Rural Development project funded by Asian Development Bank provided this loan to
finance the value chain development (VCD) subprojects of the top nationwide companies manufacturing
products with export potential by using agricultural raw materials. The loan bears no interest. The Bank will
repay the loan principal to the Ministry of Finance within two days of receiving payments from subborrowers.
Microfinance Development Fund
The International Development Association (World Bank) provided this local currency loan since 2003 to
support the improvement of living standards in rural areas. The Bank currently disburses the proceeds of
the loan to sub-borrowers in eight (provinces): Tuv, Dornod, Uvs, Uvur-Khangai, Govisumber, Darkhan,
Sukhbaatar and Arkhangai, and one district (Bagakhangai). The Bank accepts the credit risk for these
loans. The loan bears a fixed rate of interest of 8.1% (2010: 8.1%) per annum payable on a monthly basis.
Principal payment commenced 9 months after date of disbursement.
42
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
19
Other Borrowed Funds (Continued)
Private Enterprise Development Fund (World Bank)
The Ministry of Finance, funded by the Private Enterprise Development Fund (World Bank), provided this
loan to promote private and financial sector development and to strengthen the institutional capacity of the
banking sector. The loan bears interest at a margin of 1% over six-month LIBOR for USD loan with
effective interest rate of 1.5% (31 December 2010: 1.6%). The loan bears interest at the average demand
deposit rate for commercial banks with an effective interest rate of 6.3% (31 December 2010: 7.4%) per
annum. The loan is payable within six months after repayment by sub-borrowers.
Rural Poverty Reduction Program (International Federations Agricultural Development)
The Ministry of Finance, funded by the Rural Poverty Fund (IFAD), provides this loan with the aim of
decreasing poverty in the rural areas. The loan bears interest at six month LIBOR rate. On disbursements
after 25 August 2010, the Bank shall pay a fixed interest rate of 1% per annum. Repayment of the loan is in
twenty-two equal semi-annual instalments on February and August of the year commencing
1 February 2011. The final repayment date is 1 August 2021.
SME loan for LGO
The Bank obtained loans from local government offices of three aimags (provincial centres) comprising the
following:
(i) A loan obtained from the Local Government Office of Orkhon aimag to support local small and middle
sized businesses amounts to MNT 200,000,000 and bears no interest. The loan was obtained in 2010 and
is due to be paid fully on 9 April 2013.
(ii) A loan obtained from the Local Government Office of Bulgan aimag to support local farmers amounts to
MNT 79,732,900 and bears no interest. The loan was obtained in 2009 and is due to be paid fully in
September 2012.
(iii) A loan obtained for the Local Government Office of Govi-Altai aimag to support local cooperatives
amounts to MNT 370,000,000 and bears no interest.The loan was obtained in 2009 (with original maturity
date of 2 May 2011) and was due on 1 October 2011. Big part of loan was repaid during the 2011 in
amount of MNT 166,550,000. Outstanding amount of the loan is payable upon the request from the lender.
(iv) A loan obtained from the Local Government Office of Bulgan aimag to support local small and middle
businesses amounts to MNT 10,000,000 and bears no interest. The loan was obtained in 2009 and is due
to be paid fully on 21 September 2012.
(v) A loan obtained from Oyu Tolgoi LLC to support small and medium enterprises amounts to
MNT 100,000,000 and bears no interest. The loan was obtained in 2011 and is due to be paid fully on
5 October 2014.
Enterprise Mongolia Program
On 23 August 2010, the Bank entered into a Grant Agreement with the United Nations Development
Program (UNDP). UNDP provided funds of MNT 168,336,720 as guarantee funds for loans issued under
Enterprise Mongolia Project (Phase 2). On expiration of the Agreement by 31 March 2012, the Bank shall
be entitled to the ownership of the provided funds if it will have fulfilled certain contractual criteria during the
period of the Agreement.
Loan from Bank of Mongolia, Term Loan III
The Bank entered into a loan agreement for USD 137,694 with the Bank of Mongolia in 2002 for the Bank’s
share of BANCs banking software purchased. No interest is due for the first five years; commencing 2007
the loan bears interest of 1% per annum. The loan is payable in thirty equal annual instalments,
commencing December 2002. The loan matures in December 2031.
The Bank bears credit risk on all of the loans issued to customers in the terms of each of the borrowing
from state and government organisation received.
Refer to Note 31 for the disclosure of fair value of other borrowed funds. Information on related party
balances is disclosed in Note 33. Currency, interest rate and maturity analysis of other borrowed funds are
disclosed in Note 28.
43
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
19
Other Borrowed Funds (Continued)
Most of the borrowing agreements stated above require compliance with certain debt covenants, which can
be grouped in the following categories:
-
capital related ratios (such as risk weighted capital adequacy ratio, solvency ratio, ratio between
tier 1 capital and total capital);
-
financial risks related ratios (such as maturity mismatches, currency mismatches, aggregate
foreign currency open position, single currency foreign exchange risk ratio, negative liquidity gap
ratio, aggregate interest rate risk ratio and interest rate risk ratio);
-
credit related ratios (such as portfolio at risk, open loan exposure ratio, write off ratio, single largest
borrowers to the equity ratio, related party lending ratio and aggregate large exposures ratio);
-
other ratios (deposits to loans ratio, interest coverage ratio, shareholding in single entity, fixed
assets to total assets, fixed assets plus equity investments ratio, overhead ratio etc.).
In case of non-compliance, the related borrowing would default i.e. the borrowing is immediately payable
on demand. For this reason, quarterly monitoring of debt covenants is carried out by relevant departments
and officers (Finance Control Division and Funding Division, including Chief Financial Officer, Credit Risk,
Policy and Regulation Division, including Credit Risk Officer etc.). In case of anticipated or noted noncompliance with certain covenants, appropriate action is taken by management, such as requesting a
waiver letter or negotiating new agreement with permanently changed limits (ratios).
As of 31 December 2011, the Bank complied with all covenants, apart from a covenant stated in the
agreement with EBRD (31 December 2010: with all covenants, apart from the covenant stated in
agreements with ADB, IFC and FMO). For more information refer to Note 30.
20
Other liabilities
31 December
2011
31 December
2010 (adjusted)
Other financial liabilities:
Liabilities for settlements of transactions
Payables to companies
Payables for services
Cultivation support fund
Payables to individuals
Other
6,222,164
564,090
465,636
385,716
19,785
74,440
1,673,933
268,124
674,604
557,516
13,873
82,045
Total other financial liabilities
7,731,831
3,270,095
Other non-financial liabilities:
Payables to employees
Taxes payable other than on income
Other
3,660,752
430,871
4,350
1,854,590
148,515
124,920
Total other non-financial liabilities
4,095,973
2,128,025
In thousands of Mongolian Tugriks
44
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
20
Other liabilities (Continued)
Cultivation support fund
The Bank entered into a Placement of Funds and Cooperation Agreement with the Ministry of Finance,
which provided the funds to support lending activities to small and middle sized businesses, on 24 April
2008. For certain qualified loans, the borrower shall pay the Bank 50% of the total interest and the Bank
shall receive the remaining 50% from these funds semi-annually in advance. The amount presented in
other liabilities represents loan interest received in advance from Ministry of Finance to subsidise part of
the interest charged on loans disbursed by the Bank to the borrowers.
Included in payables to employees is the carrying amount of the liability relating to Share Appreciation
Rights (“SARs”) at 31 December 2011 amounting to MNT 778,266 thousand (31 December 2010:
MNT 427,612 thousand). On 7 December 2006 and 12 March 2008, certain key management personnel of
the Bank were granted 30,000 SARs and 20,000 SARs respectively, which can only be settled in cash.
Issue price of the two batches of SARs is MNT 3,680 and MNT 9,222, respectively. The SAR exercise price
shall be the book value, diluted for any options issued, under IFRS of one ordinary share of the Bank in
Mongolian Tugrik as of the last day of the financial quarter preceding the exercise date. These SARs vest
over five years, with 20% of the SARs vesting at the end of each year from the date of grant. The
contractual life of the SARs is ten years expiring on 6 December 2016 and 12 March 2018 respectively.
The expected costs of this incentive are accrued over the vesting period. Until the liability is settled, the
liability is remeasured at each reporting date with changes, if any, recognised in profit and loss.
Most of the other financial liabilities are expected to be settled within twelve months after the year-end. All
non-financial liabilities are of short-term nature.
Refer to Note 31 for the disclosure of fair value of other financial liabilities. Information on related party
balances is disclosed in Note 33. Currency, interest rate and maturity analysis of other financial liabilities
are disclosed in Note 28.
21
Subordinated debt
31 December
2011
31 December
2010
(adjusted)
International Finance Corporation
H.I.S. Co. Ltd.
Netherland Development Finance Company (FMO)
Sawada Holdings Co Ltd.
27,787,647
14,303,286
14,147,963
2,839,413
12,870,263
12,815,293
2,554,937
Total subordinated debt
59,078,309
28,240,493
In thousands of Mongolian Tugriks
Subordinated loan from IFC
The Bank entered into a Subordinated Loan Agreement with International Finance Corporation on
15 June 2011 for an amount of USD 20 million to finance ongoing business operations and strengthen its
capital base. This was received in 2 tranches: the first tranche on 30 June 2011 amounted to MNT
12,586,400 thousand and second tranche on 23 August 2011 amounted to MNT 12,406,900 thousand. The
loan bears a variable interest rate of 7.3% plus six month LIBOR per annum with effective interest rate at
the end of the period of 8.07% per annum and can be converted to fixed rate upon prior request. Interest is
payable semi-annually beginning on 15 December 2011. The loan is convertible at maturity to common
shares of the Bank subject to approval of two thirds of the Bank’s shareholders. The loan is due to be
repaid in two equal parts on 15 June 2017 and 15 June 2018. The loan is classified as Tier 2 capital for
regulatory purposes.
45
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
21
Subordinated debt (Continued)
Subordinated loan H.I.S. Co., Ltd (“HIS”)
The Bank entered into a Subordinated Loan Agreement with HIS on 28 December 2009 for an amount of
USD 10 million to finance ongoing business operations and strengthen its capital base. The loan terms are
substantially the same as those of the subordinated loan from FMO stated below. The loan bears interest
at a fixed rate of 11.37% (31 December 2010: 11.37%) per annum. The final repayment date is
15 January 2015. The loan is convertible at maturity to common shares of the Bank subject to approval of
the Bank’s shareholders. The loan is classified as Tier 2 capital for regulatory purposes.
Subordinated loan from FMO
The Bank entered into a Subordinated Term Facility Agreement with FMO on 15 December 2009 for an
amount of USD 10 million to finance ongoing business operations and strengthen its capital base. The loan
bears interest at a margin over six-month LIBOR, payable semi-annually, with an effective interest rate of
9.34% (31 December 2010: 9.21%) per annum at the end of reporting date. The final repayment date is 15
January 2015. The loan is convertible at maturity to common shares of the Bank subject to approval of the
Bank’s shareholders. The loan is classified as Tier 2 capital for regulatory purposes.
Subordinated loan from Sawada Holdings Co Ltd.
The Bank entered into a Subordinated Loan Agreement with HS Investments Co. Ltd., the subsidiary of the
Parent, on 28 July 2003 for an amount of USD 2 million to finance ongoing business operations and
strengthen its capital base. As of the end of all reporting periods, the loan is due to the Parent, based on
the Amendment to the Subordinated Loan Agreement. The loan bears interest at 6.25% per annum to 31
July 2008 and 10% per annum thereafter until the loan is due and payable on 31 July 2013. Interest is
payable on a quarterly basis beginning 31 October 2003. The loan is convertible at maturity to common
shares of the Bank subject to approval of the Bank’s shareholders. The loan is classified as Tier 2 capital
for regulatory purposes.
Refer to Note 31 for the disclosure of fair value of subordinated debts. Information on related party
balances is disclosed in Note 33. Currency, interest rate and maturity analysis of subordinated debts are
disclosed in Note 28.
Some of subordinated loans agreements stated above require compliance with certain debt covenants,
which are described in Note 19.
As of 31 December 2011, the Bank complied with all covenants.
22
Share Capital
In thousands of Mongolian Tugriks except for
number of shares
Number of
outstanding
shares
Ordinary Share premium
shares
Total
At 1 January 2010
6,497,006
12,994,012
13,866,079
26,860,091
At 31 December 2010
6,497,006
12,994,012
13,866,079
26,860,091
At 31 December 2011
6,497,006
12,994,012
13,866,079
26,860,091
The nominal registered amount of the Bank’s issued share capital is MNT 12,994,012 thousand (2010:
MNT 12,994,012 thousand). Share premium represents the excess of contributions received over the
nominal value of shares issued.
46
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
22
Share Capital (Continued)
The shareholders of Bank as of 31 December 2011 and 31 December 2010 and percentages of ownership
are as follows:
In percentage
Sawada Holdings Co. Ltd.
Tavan Bogd Trade Co. Ltd.
H.S. International (Asia) Ltd.
Hulan D.
International Finance Corporation
Development Alternatives, Inc.
Other
Total ordinary shares
31 December
2011
31 December
2010
40%
22%
13%
13%
9%
2%
1%
40%
22%
13%
13%
9%
2%
1%
100%
100%
Other shareholders include Mongolia Holdings Limited Partnership and Morrow Family Revocable Trust.
As of 31 December 2011 and 31 December 2010, the Bank was controlled by Sawada Holdings Co. Ltd
directly through its shareholding and indirectly through shareholding of its subsidiary H.S. International
(Asia) Ltd. The following shareholders had the ability to significantly influence operating and financial
decisions of the Bank through their shareholding and rights to be represented on the Board of Directors as
of 31 December 2011 and 31 December 2010:



Tavan Bogd Trade Co. Ltd;
International Finance Corporation;
Development Alternatives, Inc. (DAI).
The transactions with related parties are disclosed in Note 30.
Share option scheme
The Bank granted 40,000 share options each in May 2005, April 2006 and March 2007 to DAI, which
provides management and consultation services to the Bank, under the renewed management contract
signed in 2004. The options were awarded based on meeting or exceeding performance targets approved
yearly by the Bank’s Board of Directors. The exercise price of the options are MNT 2,013, MNT 2,914 and
MNT 5,595 respectively, which are equal to the net assets per share on the last day of the financial year
with respect to which the options were granted. The options vest immediately on the date of grant and
expire on 1 May 2015, 10 April 2016 and 14 March 2017 respectively. The fair value of the options granted
is estimated as at the date of grant using a binominal model, taking into consideration the terms and
conditions upon which the options were granted. There have been no cancellations or modifications to any
of the plans during the current period. 102,000 options are outstanding as of 30 September 2011
(31 December 2010: 102,000 options).
47
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
23
Interest Income and Expense
In thousands of Mongolian Tugriks
2011
2010 (adjusted)
Interest income
Loans and advances to customers
Cash and cash equivalents
Long term investments
Short term investments
Due from other banks
186,138,885
30,313,898
2,117,007
735,609
80,233
136,299,772
26,288,633
211,297
1,875,615
1,103,767
Total interest income
219,385,632
165,779,084
Interest expense
Customer accounts
Other borrowed funds
Subordinated debt
Due to other banks
85,140,728
4,105,596
3,717,958
573,226
68,492,136
3,720,709
3,063,603
365,737
Total interest expense
93,537,508
75,642,185
125,848,124
90,136,899
Net interest income
48
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
24
Fee and Commission Income and Expense
2011
2010
(adjusted)
5,550,980
3,640,076
1,337,115
924,379
849,715
353,996
396,373
2,580,551
1,310,672
952,665
1,521,528
173,028
202,880
318,799
13,052,633
7,060,123
494,280
488,696
316,907
232,109
175,769
95,870
1,299,883
503,748
11,752,750
6,556,375
In thousands of Mongolian Tugriks
Fee and commission income
Commissions on settlement transactions
Commissions on operations with plastic cards
Commissions on cash operations
Commissions on transfer payments
Commissions on documentary business and guarantees
Commissions on mobile and internet-banking services provided
Other
Total fee and commission income
Fee and commission expense
Commissions on operations with plastic cards
Commission expense on foreign exchange operations
Commissions on settlement transactions
Total fee and commission expense
Net fee and commission income
49
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
25
Administrative and Operating Expenses
2011
2010
(adjusted)
Salary costs
Depreciation of property and equipment and amortization of intangible assets
(Notes14, 15)
Rent
Equipment repair and maintenance expenses
Premises repair and maintenance expenses
Social security contributions
Advertising and marketing services
Office materials and supplies
Transportation
Business trip expenses
Security services
Events
Information and telecommunication services
Training expenses
Professional services
Research expenses
Insurance
Taxes other than on income
Other
40,081,878
30,026,891
7,257,671
4,313,939
3,602,817
3,539,577
3,312,619
2,942,260
1,810,114
1,675,256
1,376,301
1,360,635
946,940
811,649
434,315
419,411
359,257
217,396
129,319
2,847,429
8,386,528
3,387,555
3,271,292
2,740,732
2,664,010
1,821,614
1,895,514
1,401,541
1,310,654
1,093,562
444,944
744,005
643,995
535,884
399,168
242,616
111,167
1,747,795
Total administrative and other operating expenses
77,438,783
62,869,467
In thousands of Mongolian Tugriks
Included in salary costs are the amounts related to Share Appreciation Rights (SARs) (payments to
employees) of MNT 280 702 thousand for the period ended 31 December 2011 (period ended
31 December 2010: MNT 183 944 thousand). For more information, refer to Note 20.
Included in social security contributions for the period ended 31 December 2011 are pension contributions
of MNT 2 108 030 thousand (period ended 31 December 2010: MNT 1 695 27 thousand).
Fees paid to a related party DAI for the period ended 31 December 2011 in the amount of
MNT 247,768 thousand (the period ended 31 December 2010: MNT 547,703 thousand) are included in
administrative and other operating expenses and are further disclosed in Note 33.
Fees paid to a Board of Directors for the nine month period ended 31 December 2011 in the amount of
MNT 538,869 thousand (the nine months period ended 31 December 2010: MNT 190,207 thousand) are
included in administrative and other expenses and are further disclosed in Note 33.
50
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
26
Income Taxes
Income tax expense recorded in profit or loss for the year comprises the following:
2011
2010
Current income tax charge
Deferred income tax (credit)/charge
19,864,779
-
9,515,804
-
Income tax expense for the year
19,864,779
9,515,804
In thousands of Mongolian Tugriks
The Bank provides for income taxes on the basis of income for financial reporting purposes, adjusted for
items which are not assessable or deductible for income tax purposes. The income tax rate for profits of the
Bank is 10% for the first MNT 3 billion (2010: MNT 3 billion) of taxable income, and 25% (2010: 25%) on
the excess of taxable income over MNT 3 billion (2010: MNT 3 billion) in accordance with Mongolian tax
legislation.
A reconciliation between the expected and the actual taxation charge is provided below.
2011
2010
Profit/(loss) before tax
78,243,989
40,043,595
Theoretical tax charge at statutory rate (2011: 25%; 2010: 25%)
19,560,997
10,010,899
(450,000)
(39,363)
1,401,775
(608,630)
-
(450,000)
(126,948)
496,103
(521,728)
107,478
19,864,779
9,515,804
In thousands of Mongolian Tugriks
Tax effect of items which are not deductible or assessable for taxation
purposes:
- Effect of income subject to lower rate
- Income which is exempt from taxation
- Non-deductible expenses
- Income on government securities taxed at different rates
Under/over provision of current tax in prior years
Income tax expense for the year
Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences
between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases.
The Bank did not recognize deferred tax in these financial statements, as the management assessed that
the related amount is not material.
27
Dividends paid
In thousands of Mongolian Tugriks
2011
2010
Dividends payable at 1 January
Dividends declared during the year
Dividends paid during the year
6,047,805
(6,047,805)
3,961,300
(3,961,300)
-
-
0.93
0.61
Dividends payable at 31 December
Dividends per share declared during the year
51
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management
The risk management function within the Bank is carried out in respect of financial risks, operational risk
and legal risk, as well as reputational risk. Financial risk comprises market risk (including currency risk,
interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of the financial
risk management function are to establish risk limits, and then ensure that exposure to risks stays within
these limits. The operational and legal risk management functions are intended to ensure proper
functioning of internal policies and procedures to minimise operational and legal risks.
Risk is inherent in the Bank’s activities and managed through risk limits and a continuing process of
analysis and review. This process of risk management is critical to the Bank’s continuing profitability and all
of the Bank executives are accountable for the management of risks relating to their responsibilities. The
day-to-day risk management process does not include business risks such as changes in the environment,
technology and industry. These are addressed through the Bank’s strategic and business planning
process.
The Board of Directors has ultimate responsibility for overall risk management of the Bank. It receives a
report on the performance of the Bank at monthly Board meetings, while the Board of Audit Committee is
specifically responsible for monitoring the activities of the Internal Audit Department. The Risk Management
Committee of the Board of Directors is responsible for assisting the Board in fulfilling its oversight
responsibilities related to the management of credit, market, liquidity, operational, compliance, reputational
and other risks of the Bank. Further, there are various committees and departments responsible for
managing and monitoring risks, which are briefly outlined below.
The Management Committee consists of the executive management of the Bank and holds weekly
meetings to discuss all aspects of the Bank’s operations and encourages enhanced communication.
Members of the committee are the directors of the Bank.
The Risk Committee is responsible for providing the Bank’s executive management with support and
assistance in implementation of risk management options, monitoring high level major risks throughout the
system, and developing necessary actions and strategies related to the risks. The Risk Committee is
chaired by the Chief Risk Officer.
The Bank’s Credit Committees (hereinafter referred as “CC”) and Credit Risk Division (hereinafter referred
as "CRD") are responsible for managing credit risk. The structure of Credit Committees and their
responsibilities, as well as responsibilities of CRD are described in detailed within the section ‘Credit risk’.
Assets and Liabilities Committee (hereinafter referred as “ALCO Committee”) is responsible for providing
centralized asset and liability management of the funding, liquidity, foreign currency, maturity and interest
rate risks to which the Bank is exposed. The purpose of ALCO Committee is to set up asset and liability
structure of the Bank’s balance sheet conducive for sustainable growth of the Bank, its profitability and
liquidity through comprehensive management of the Bank’s assets and liabilities and monitoring of the
foreign currency, interest rate and other market risks. ALCO Committee is chaired by the Chief Financial
Officer.
The IT Steering Committee was established to ensure that the Bank’s business and IT strategies and
business plans are aligned. The main responsibilities of the IT Steering Committee include approving and
monitoring implementation of the IT business strategy, reviewing major expenditures for IT prior to their
submission to the Board of Directors for approval, ensuring interaction between IT and business units to
identify needs and priorities for systems, MIS and new and existing product enhancements and
developments, and to identify and resolve problems in the business which relate to IT. The IT Steering
Committee is chaired by the Chief Information Officer.
Risk management processes throughout the Bank are audited annually by the Internal Audit function,
which examines both the adequacy of procedures and compliance with them. Internal Audit discusses the
results of all assessments with management, and reports its findings and recommendations to the Board of
Audit Committee.
52
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The Internal Audit Department consists of two divisions: Distant Monitoring Division and Auditing Division
and has 49 employees: 1 director, 2 division heads, 11 senior auditors, 31 auditors, 2 specialized IT
auditors, 1 director assistant and 1 translator. The Director directly reports to the Chairman of the Board
Audit Committee and has regular monthly meetings with the Chairman. Internal Audit performs a full scale
audit of each business and support unit, branch and sub-branch twice per year. Additional unannounced
audits are conducted 1-2 times per year. The department maintains a yearly schedule, adding additional
audits when needed.
All rural sub-branches report to an aimag (provincial centre) branch. Aimag branch staff responsible for
supervising the sub-branches, makes regular quarterly visits to the sub-branches under their control to
review compliance with the Bank’s policies and procedures and to assess the quality of their operations
and loans.
Apart from the above committees, departments and divisions, each business unit and head office support
unit participates in risk management process by managing its identified top risks and reporting on its
performance to the respective director at least once per month. The Operational and Market Risk Division
together with the corresponding respective director identifies the top risks that need to be managed,
measured and reported and monitors implementation on the risk management actions determined by the
Risk Committee. The branch Risk Committee carries out the risk management through various practices
such as identifying, monitoring, preventing and mitigating the operational and credit risks at the branch and
factors affecting those risks.
Monitoring and controlling risks is primarily performed based on limits established by the related
Management Committees of the Bank. These limits reflect the business strategy and market environment
of the Bank as well as level of risk that the Bank is willing to accept. In addition, the Bank monitors and
measures the overall risk bearing capacity in relation to the aggregate risk exposures across all risk types
and activities.
As part of its overall risk management, the Bank uses basic sensitivity analysis to manage exposures
resulting from possible changes in interest rates, foreign currencies and equity risks. Also, the individual
mitigation plans for each type of risk are developed and implemented by each business unit, and the
process is monitored by the Operational and Market Risk Division. The Bank's risk management team is
using Risk Dashboard as a key tool to monitor risks and implement risk management processes such as
defining, assessing, mitigating and controlling the main risks of the Bank. The Risk Dashboard is updated
and managed regularly on a monthly basis to see what kind of risks the Bank faces and the overall level of
such to assist decision making.
Credit risk. The Bank takes on exposure to credit risk, which is the risk that one party to a financial
instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to
credit risk arises as a result of the Bank’s lending and other transactions with counterparties giving rise to
financial assets.
The Bank’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets on the
consolidated statement of financial position. For guarantees and commitments to extend credit, the
maximum exposure to credit risk is the amount of the commitment. Refer to Note 30. The credit risk is
mitigated by collateral and other credit enhancements as disclosed in Note 10.
The Bank defines credit risk as a risk arising from incapability of a borrower to fulfil contractual obligations
in risk category. It monitors credit risk based on the following sub-categories: borrower, branch, portfolio,
single loan and pre-disbursement risks. The Bank’s Credit Committees and Credit Risk Division have a key
role in managing credit risk.
53
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28 Financial Risk Management (Continued)
The Credit Committee structure was established to manage the Bank’s credit risk at various levels. This
includes the Head Office Credit Committee, Head Office Sub Credit Committee, Branch Credit Committees
and Sub-Branch Credit Committees. The Head Office Credit Committee approves lending authorities for
each sub-committee and branch credit committees. Further, a Branch Credit Committee approves lending
authorities for respective Sub-Branch Credit Committees within its own lending authority limit. These
authorities are reviewed regularly and revised as necessary. Transactions exceeding the lending authority
of a committee are referred up through the committee structure for final decision by a committee with the
appropriate authority. All loans and aggregate exposures over MNT 300 million are approved by the Head
Office Credit Committee. The Head Office Credit Committee is chaired by the Chief Risk Officer.
Credit Risk Division (hereinafter referred as "CRD") is responsible for mitigating the credit risk by
monitoring and controlling the Bank's credit portfolio quality, as well as controlling implementation of credit
policy and procedures at the branches. The CRD consists of credit risk analysts, who are responsible for
preparation of credit risk opinions on loan proposals, which are presented to the Head Office Credit
Committee. Also, specialized assets appraisal officers perform valuation (i.e. estimation of market price) of
immovable collaterals for loan proposals presented to the Head Office Credit Committee and Sub-Credit
Committee. The environmental officer of this division prepares environmental opinions on the loan
proposals with high environmental impact.
ALCO determines total growth and target of the Bank’s loan portfolio, while business units are responsible
for execution of these targets. Credit Risk Division (CRD) and Credit, Risk Policy and Regulation
Department (CRPRD) controls and regulates the performance of business units.
The limits for monitoring exposure to credit risk include limits per single borrower and its related parties.
Credit Risk Division approves appropriate policies and procedures for each loan product including overall
business processes from loan disbursement until its full repayment in order to mitigate credit risk. Head
Office Credit Committee approves amendments to loan policy and procedures. Branch/sub-branches which
disbursed a loan are responsible for its quality and timely collection, while portfolio teams of Retail Banking
Division, Inspectors of Special Assets Department and Credit Risk Department conduct off-site and on-site
assessments of credit quality of loan portfolios of branches/sub-branches. The information on the Bank’s
exposure to credit risk is presented at the Board of Directors’ meeting on a monthly basis and to the Board
Risk Management Committee (BRMC) quarterly. During these meetings, reports on loan portfolio
concentration, defaulted or overdue loans, and restructured part of loan portfolio are analyzed and further
actions agreed.
The Bank has 4 types of Credit Committees for loan approval and monitoring:
1.
Head Office Credit Committee makes decisions on loan proposals with amounts of minimum MNT
300 million and approves amendments to the Bank’s loan policy and procedures. This committee is held
once every week and its members include the Chief Risk Officer, as committee chairman, and other
members such as directors of CRD, CRPRD, Retail Banking Division and Wholesale Banking Division.
Directors of Retail Banking and Wholesale Banking have no right to vote for any loan proposals submitted
by their branches/sub-branches. Also, a loan equal to or above 10% of the Bank’s equity needs to be
submitted to the Board of Directors for approval, after being approved by the Head Office Credit
Committee. Head Office Credit Committee sets and approves lending limits of the Branch Credit
Committees by taking into account factors such as market of the branch, work experience of Branch Credit
Committee members, their loan portfolio quality and final assessment of credit risk monitoring.
2.
Head Office Sub- Credit Committee approves loan proposals with amounts up to MNT 300 million,
which are above approval limits of branches, sub-branches and business centres.
3.
Branch Credit Committee approves loan proposals within their permitted approval limits. Also, it
determines approval limits of its sub-branches and provides management oversight for the loan approval
process.
4.
Credit Committees of other sub-branches and business centres are specialized in particular loan
products.
54
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28 Financial Risk Management (Continued)
As part of the loan analysis and decision making process, tellers and loan officers are responsible for
analysing loan proposals including pension, deposit-secured salary, leases and consumer loans up to
certain amounts. Also, they are authorized to disburse such loans after the Branch Manager has reviewed
relevant documentation and approved loan disbursement. Branch/sub-branch loan officers analyze and
develop loan proposals based on customers’ requests and Branch/sub-branch Credit Committees review
and approve developed loan proposals, except for the above mentioned loan products.
The loan officer, senior accountants (senior tellers) and the manager of such branches/sub-branches are
responsible for performing a final control on whether loan and relevant agreements were concluded
properly and confirmed by authorized organizations after a loan proposal is approved and, all required
documents were collected before disbursing a loan. Also, they shall fill out a checklist and give permission
for tellers to make transaction for a loan disbursement. Support unit, legal advisor and Wholesale Banking
director shall implement these controls for Wholesale Banking customers.
If a loan proposal amount is above approval limits of the related Branch/sub-branch Credit Committee,
such loan proposal shall be submitted to the senior-level Credit Committee for approval.
In case of submitting a loan proposal to the Head Office Credit Committee and Head Office SubCommittee, in order to mitigate risks of pre-disbursement, it is necessary to perform a risk assessment,
obtain a legal opinion, a mining assessment, an environmental assessment and collateral appraisal report
from related departments and, attach them to the loan file documentation before presenting loan proposals
to the relevant committee. Wholesale Banking Division and Business centres conduct various types of
surveys on borrowers’ general assessment including business experience and management skills, a credit
history, financial stability, marketability of collateral, credit rating, source of loan repayment, maturity of loan
etc.
Credit Risk Division and Internal Audit Department conduct off-site and on-site assessments on a
continuous basis in order to control quality of the loan portfolio by performing assessment procedures on it,
which are specified in the Bank’s policies and procedures. MIS report is developed in order to provide the
Bank’s management information on loan portfolio quality on a daily basis. MIS reports regularly used by the
Bank’s management include ageing analysis of outstanding loans. Management therefore considers it
appropriate to provide ageing and other information about credit risk as disclosed in Note 10.
Loan policy and procedures for defaulted loans specify stages and approaches for past due loans. Each
branch and sub-branch has a Credit Risk Committee. During the meeting of this committee, issues
including collection and recoveries of past due loans, loan portfolio concentration of such branch or subbranch, potential risks, loan proposals for transferring to Special Assets Division and loan proposals for
write-offs, are discussed. In case of necessity, overdue and defaulted loans are transferred to Special
Assets Division. Special Assets Division takes necessary measures according to the relevant law in order
to recover these loans.
The amount and type of collateral required depends on an assessment of the credit risk of the
counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation
parameters and are stated in the Bank's Credit policy and procedures.
The Bank accepts the following types of collateral in combination of immovable and movable assets.
Immovable assets include: production plant, building for service/commercial use, privatized apartment,
“khashaa baishin” (building with fence) and land with ownership title. Movable assets include: shipping
container, motor vehicle, equipment, assets for personal use (jewellery, electronic appliance etc.), business
inventory, bank deposits, livestock, mineral resources mining license, stocks, business income and other
assets owned by a borrower.
Market value of immovable collateral is determined by asset appraisal officers of CRD for loan proposals,
presented to the Head Office Credit Committee and Sub-Credit Committee, and for remaining loans by
referencing sales price of comparable property in the same local area as well as in consideration of
location, marketability, quality/condition of the collateral. The Bank calculates collateral value as Market
Price and Risk Assessed Price and bases its coverage requirement on Risk Assessed Price. Risk
Assessed Price (RAP) is calculated as Market Price multiplied by Risk Assessed percentage (RA%). Risk
Assessed Price of collateral shall not be lower than 100%. In November 2011 this coverage requirement
was increased to 120% due to tightening of credit risk procedures.
55
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28 Financial Risk Management (Continued)
Therefore the Bank works to ensure that loans are secured by sufficient collateral. If loan defaults and
collateral liquidation is required to recover the loan, the Bank negotiates and reconciles with the borrower
or files a court claim. Based on court judgment, the Bank liquidates the collateral in conjunction with the
Bailiff’s office (Executor of court order). It is the Bank's policy to dispose of repossessed properties in an
orderly fashion. The proceeds are used to reduce or repay the outstanding claim.
The credit quality of financial assets is managed by the Bank using the following internal credit ratings.
Credit rating
Grade Description
A
Excellent
B
Good
Excellent loans – high quality credit transactions, which never been past due and have minimum credit risk.
Good loans – standard quality loans, acceptable quality of cash flows of the borrower.
The information on credit quality of loans neither past due nor impaired is given in Note 10. Credit quality of
other financial assets is disclosed in Notes 7, 8, 9, 10 and 16.
As of 31 December 2011 (as well as at the end of the previous reporting periods), the Bank has monitored
credit quality of loans primarily based on classification of loans based on provisioning guidelines defined by
the Bank of Mongolia, which is used for impairment provision calculation in accordance with the
Regulations on Asset Classification and Provisioning, jointly approved by the Bank of Mongolia and
Ministry of Finance. These provisioning guidelines are based on an expected loss model. In accordance
with these regulations, the Bank is required to determine the quality of loans and advances based on their
qualitative factors and time characteristics (i.e. delays in repayment). Loans are classified into the following
five groups: performing, in arrears, substandard loans, doubtful loans, and loss. Specified provision rate is
applied to loans in each group for the purposes of determining impairment provision in accordance with the
provisioning guidelines of the Bank of Mongolia.
Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a
result of another party to a financial instrument failing to perform in accordance with the terms of the
contract. The Bank uses the same credit policies in assuming conditional obligations as it does for onbalance sheet financial instruments, through established credit approvals, risk control limits and monitoring
procedures. However, issuance of credit-related commitments is done through specialised department
Trading Finance in the Head Office i.e. no such activities are performed by the branches. Exposure to
credit risk as a result of credit related commitments is given in Note 30. The management believes that no
provision on credit related commitments (such as issued guarantees, letters of credit etc.) is necessary as
of 31 December 2011 and 31 December 2010 (refer to Note 30).
For more details on accounting policy and methods used for determining impairment provision refer to
Notes 3 and 4. Credit quality of loans and advances to customers and amounts of impairment provision are
disclosed in Note 10.
Market risk. The Bank takes on exposure to market risks. Market risks arise from open positions in
(a) currency, (b) interest rate and (c) equity products, all of which are exposed to general and specific
market movements. The Bank is currently not exposed to market risk arising from equity products, while
policies and procedures for monitoring and managing currency and interest rate risk are outlined below.
56
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28 Financial Risk Management (Continued)
Currency risk. Management sets limits on the level of exposure by currencies, which are monitored on a
frequent basis. The Bank monitors its currency risk primarily through ensuring compliance with the
prudential ratio for foreign currency risk established by the Central Bank (i.e. the Bank of Mongolia) and
through assessing the impact of foreign exchange movements on the Bank’s liquidity and profitability. In
addition, the Bank is in the process of obtaining approval from the Supervision Department of the Central
Bank for use of Value-at-Risk (“VaR”) simulation model to manage and measure foreign exchange risk.
Operational and Market Risk Division manages currency risk by having the ALCO Committee approval for
stop loss limit for each individual currency and overall currency positions on a quarterly basis.
The table below summarises the Bank’s exposure to foreign currency exchange rate risk at
31 December 2011:
In thousands of Mongolian
Tugriks
MNT
USD
CNY
Euro
Other
Total
251,225,470
198,950,606
86,377,018
718,943
4,185,345
541,457,382
Assets
Cash and cash equivalents
Mandatory reserves with the
Bank of Mongolia
Due from other banks
Loans and advances to
customers
Short term investments
Long term investments
Other financial assets
138,738,094
-
33,732,616
11,224,977
-
-
-
172,470,710
11,224,977
1,102,984,590
23,247,398
42,863,315
151,490
274,259,000
155,058
22,103
-
-
-
1,377,265,693
23,247,398
42,863,315
306,548
Total financial assets
1,559,210,357
518,322,257
86,399,121
718,943
4,185,345
2,168,836,023
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Other financial liabilities
Subordinated debt
12,754,927
1,379,169,140
72,836,731
7,442,624
-
1,668,136
373,253,117
75,532,735
273,599
59,078,309
1,342
55,360,821
15,608
-
40,005
2,676,734
-
2,020
1,872,945
-
14,466,430
1,812,332,757
148,369,466
7,731,831
59,078,309
Total financial liabilities
1,472,203,422
509,805,896
55,377,771
2,716,739
1,874,965
2,041,978,793
Net balance sheet position
87,006,935
8,516,361
31,021,350
(1,997,796)
2,310,380
126,857,230
Credit related commitments
27,440,466
48,783,861
-
1,184,827
339,459
77,748,613
Net balance sheet and
credit related commitments
59,566,469
(40,267,500)
31,021,350
(3,182,623)
1,970,921
49,108,617
57
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The table below summarises the Bank’s exposure to foreign currency exchange rate risk at
31 December 2010. The amounts presented below are adjusted for reclassifications (Note 3).
MNT
USD
CNY
Euro
Other
Total
370,342,816
225,946,396
44,285,887
1,541,649
3,083,728
645,200,476
42,022,433
-
16,458,767
6,315,506
-
-
-
58,481,200
6,315,506
671,912,095
22,329,569
138,634
104,785,250
156,465
12,508
-
-
-
776,709,853
22,329,569
295,099
1,106,745,548
353,662,383
44,298,395
1,541,649
3,083,728
1,509,331,703
2,562,983
983,214,593
24,161,148
2,776,256
-
1,083,640
281,888,919
58,247,019
487,434
28,240,493
1,221,442
42,371,482
6,405
-
148,574
1,390,216
-
4,884
2,684,720
-
5,021,523
1,311,549,930
82,408,167
3,270,095
28,240,493
Net balance sheet position
94,030,568
11,955,371
699,066
2,859
394,124
78,841,495
Credit related commitments
9,955,785
25,124,863
1,804,513
572,137
103,436
37,560,734
Net balance sheet and
credit related commitments
84,074,783
(13,169,492)
(1,105,447)
(569,278)
290,688
41,280,761
In thousands of Mongolian
Tugriks
Assets
Cash and cash equivalents
Mandatory reserves with the
Bank of Mongolia
Due from other banks
Loans and advances to
customers
Long term investments
Other financial assets
Total financial assets
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Other financial liabilities
Subordinated debt
The following table presents sensitivities of profit or loss and equity to reasonably possible changes in
exchange rates applied at the end of the reporting period relative to the functional currency of the Bank,
with all other variables held constant:
In thousands of Mongolian Tugriks
US Dollar strengthening by 15% (2010: strengthening by 15%)
US Dollar weakening by 15% (2010: weakening by 15%)
CNY strengthening by 5% (2010: strengthening by 5%)
CNY weakening by 5% (2010: weakening by 5%)
Euro strengthening by 20% (2010: strengthening by 20%)
Euro weakening by 20% (2010: weakening by 20%)
Other strengthening by 15% (2010: strengthening by 15%)
Other weakening by 15% (2010: weakening by 15%)
Total
At 31 December
2011
At 31 December
2010
1,277,454
(1,277,454)
1,551,068
(1,551,068)
(399,559)
399,559
346,557
(346,557)
1,793,306
(1,793,306)
34,953
(34,953)
572
(572)
59,119
(59,119)
-
-
58
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The exposure was calculated only for monetary balances denominated in currencies other than the
functional currency of the Bank. The Bank’s exposure to currency risk at the end of the reporting period is
not representative of the typical exposure during the year. The following table presents sensitivities of profit
and loss and equity to reasonably possible changes in exchange rates applied to the average exposure to
currency risk during the year, with all other variables held constant:
In thousands of Mongolian Tugriks
US Dollar strengthening by 15% (2010: strengthening by 15%)
US Dollar weakening by 15% (2010: weakening by 15%)
CNY strengthening by 5% (2010: strengthening by 5%)
CNY weakening by 5% (2010: weakening by 5%)
Euro strengthening by 20% (2010: strengthening by 20%)
Euro weakening by 20% (2010: weakening by 20%)
Other strengthening by 15% (2010: strengthening by 15%)
Other weakening by 15% (2010: weakening by 15%)
Total
Average
exposure
during 2011
Average
exposure
during 2010
(225,867)
225,867
124,677
(124,677)
(12,497)
12,497
162,714
(162,714)
(384,420)
384,420
289,199
(289,199)
(122,298)
122,298
81,509
(81,509)
-
-
Interest rate risk. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of
market interest rates on its financial position and cash flows. Interest margins may increase as a result of
such changes but may reduce or create losses in the event that unexpected movements arise.
Management monitors on a regular basis and sets limits on the level of mismatch of interest rate repricing
that may be undertaken.
The Bank uses several methods to analyze its interest rate risk, one of which is assets and liabilities gap
repricing model. This model analyses interest-sensitive assets and liabilities in maturity groups. In order to
be classified per maturity groups, fixed rate assets and liabilities are grouped by their maturities, while
floating rate assets and liabilities are grouped in accordance with the subsequent interest repricing period.
Further, the Bank performs ongoing monitoring of the interest correlations of loans, in case of assets, and
current and savings accounts, in case of liabilities. Moreover, analysis is performed with regard to the
impact of change of average interest rate on the overall assets and liabilities. Fair value of the assets and
liabilities are calculated by converting the cash flow of fixed-rate assets and liabilities maturing in more than
1-year into their current value. Although the fair value of assets and liabilities is not the actual loss
exposure to the Bank, it is regarded as a lost opportunity for the Bank where it reduces the potential future
profit of the Bank.
59
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The table below summarises the Bank’s exposure to interest rate risks. The table presents the aggregated
amounts of the Bank’s financial assets and liabilities at carrying amounts, categorised by the earlier of
contractual interest repricing or maturity dates.
Demand and less
than 1 month
From 1 to
6 months
From 6 to
12 months
31 December 2011
Total financial assets
Total financial liabilities
729,791,528
1,342,132,049
426,168,283
422,660,260
358,573,724
185,444,136
654,302,488 2,168,836,02
3
91,742,348 2,041,978,79
3
Net interest sensitivity gap at 31 December
2011
(612,340,521)
3,508,023
173,129,588
562,560,140
31 December 2010
Total financial assets
Total financial liabilities
661,505,619
1,010,308,082
286,672,991
258,684,111
163,255,579
116,678,110
397,897,514 1,509,331,70
3
44,819,905 1,430,490,20
8
Net interest sensitivity gap at 31 December
2010
(348,802,463)
27,988,880
46,577,469
In thousands of Mongolian Tugriks
More than
1 year
353,077,609
Total
126,857,230
78,841,495
Based on the sensitivity analysis performed as of 31 December 2011 and 31 December 2010, as well as
for average exposures during 2011 and 2010, and reasonable shifts in interest rates based on interest rate
movements during 2011 and 2010, management believes that the Bank’s profit for years ended 31
December 2011 and 31 December 2010 is not materially affected by changes in interest rates.
60
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28 Financial Risk Management (Continued)
The Bank monitors interest rates for its financial instruments. The table below summarises weighted
average interest rates at the respective reporting date based on reports reviewed by key management
personnel. For securities, the interest rates represent yields to maturity based on market quotations at the
reporting date:
2011
In % p.a.
Assets
Cash and cash equivalents
- Bank of Mongolia treasury bills
- Deposits with the Bank of Mongolia with original maturity less than
three months
- Placements with other banks with original maturities of less than three
months
- Reverse securities sale and repurchase agreements
Due from other banks
- Short-term placements with other banks with original maturities of
more than three months and less than one year
- Long-term placements with other banks with original maturities of
more than one year
Loans and advances to customers
- Business lending
- Consumer lending
- Agricultural lending
Short term investments
- BOM treasury bills
- Government bonds
Long term investments
- Government bonds
Liabilities
Due to other banks
- Short-term placements of other banks
- Long-term placements of other banks
Customer accounts
- current accounts
- demand deposits
- term deposits
Other borrowed funds
Subordinated debt
MNT
2010
USD
CNY
MNT
USD
CNY
13.7
-
-
10.9
-
-
-
-
-
-
0.1
-
-
-
5.1
-
11.0
5.0
-
2.8
-
-
6.0
-
-
-
-
-
0.6
-
-
1.0
-
15.7
16.6
25.8
11.0
11.3
-
14.4
2.7
-
18.7
19.0
28.1
12.3
12.6
-
2.7
-
16.1
7.8
-
-
-
-
-
9.3
-
-
10.0
-
-
9.8
10.0
-
-
10.0
-
-
-
1.6
6.1
11.7
1.5
-
1.2
1.8
3.3
5.8
9.0
0.1
0.6
1.2
-
2.3
5.7
12.4
2.5
-
1.1
1.8
3.1
5.8
10.3
0.6
1.2
-
The sign “-” in the table above means that the Bank does not have the respective assets or liabilities in the
corresponding currency.
Other price risk. The Bank has limited exposure to equity price risk, as the overall amount of equity
investments as of 31 December 2011 and 31 December 2010 was not significant (refer to Note 11).
61
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
Geographical risk concentrations. The Bank is exposed to geographical concentration risk, as almost all
of its financial assets are placed in Mongolia as of 31 December 2011 and 31 December 2010. Although a
major part of financial liabilities relates to Mongolia, the concentration is lower in case of financial liabilities,
as a major part of other borrowed funds and all subordinated debt is received from international financial
institutions.
The management believes that the Bank’s exposure to geographical concentration risk is mitigated due to
relatively high customer diversification and industry diversification.
Other risk concentrations. Concentrations arise when a number of counterparties are engaged in similar
business activities, or activities in the same geographic region or have similar economic features that would
cause their ability to meet contractual obligations to be similarly affected by changes in economic, political
or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to
developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific
guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are
controlled and managed accordingly. At the individual basis, the Bank of Mongolia (“Central Bank”) sets the
following limits:
i.
The maximum amount of the overall credit exposures issued and other credit-equivalent assets to
the individual and his/her related persons shall not exceed 20 percent of the capital of the Bank;
ii.
The maximum amount of the credit exposures issued and other credit-equivalent assets shall not
exceed the 5 percent of the capital for one related person to the Bank, and the aggregation of
overall lending to the related persons shall not exceed 20 percent of the capital of the Bank.
Management monitors and discloses concentrations of credit risk by obtaining reports listing exposures to
borrowers. The Bank’s exposure to concentration risk, including industry concentration risk, is disclosed in
Notes 10.
Liquidity risk. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities. The Bank is exposed to daily calls on its available cash resources from
overnight deposits, current accounts, maturing deposits, loan drawdowns, guarantees etc. The Bank does
not maintain cash resources to meet all of these needs as experience shows that a minimum level of
reinvestment of maturing funds can be predicted with relatively high level of certainty. Liquidity risk is
managed by ALCO Committee of the Bank.
The Bank seeks to maintain a stable funding base primarily consisting of amounts due to other banks,
corporate and retail customer deposits, other borrowed funds and subordinated debt. It is the Bank’s policy
to maintain a prudent mix of borrowed funds and core deposit base. The Bank invests the funds in
diversified portfolios of liquid assets, in order to be able to respond quickly and smoothly to unforeseen
liquidity requirements. In addition, the Bank maintains a statutory deposit with the Central Bank of Mongolia
equal to 11% of customer deposits (2010: 5%).
62
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The liquidity management of the Bank requires considering the level of liquid assets necessary to settle
obligations as they fall due; maintaining access to a range of funding sources; maintaining funding
contingency plans; and monitoring liquidity ratios against regulatory requirements. The Bank calculates
liquidity ratios on a daily basis in accordance with the requirement of the Bank of Mongolia. These ratios
include liquidity ratio (calculated as the ratio of liquid assets to total liabilities), local currency liquidity ratio,
(calculated as the ratio of local currency liquid assets to local currency liabilities) and foreign currency
liquidity ratio (calculated as the ratio of foreign currency assets to foreign currency liabilities). The Bank has
complied with these ratios as of 31 December 2011 and during 2011.
Apart from prudential ratios established by the Central Bank, the Bank also complies with internal ratios
and limits set by ALCO Committee for treasury activities. Further, liquidity risk is also managed through the
process of quarterly monitoring the Bank’s compliance with debt covenants, which include liquidity related
ratios (limits), refer to Note 19.
The Bank manages its liquidity risk through regular monitoring of the following reports: assets and liabilities
maturity gap report, cash flow report, along with monitoring liquidity ratios and limits. While assets and
liabilities gap report classifies assets and liabilities by their maturities, cash flow report uses projections of
the cash inflows and outflows of the assets and liabilities. Even though the Bank is rarely significantly
exposed to liquidity risk, the potential impact of liquidity risk is considered serious. Therefore, the Bank has
in place a contingency plan for liquidity risk. Furthermore, since the funds might not be sufficiently available
on the interbank market in the event of liquidity crisis, the Bank establishes limits for interbank market using
an internal scoring method on a quarterly basis.
The table below shows financial assets and liabilities at 31 December 2011 by their remaining contractual
maturity. The amounts disclosed in the maturity table are the contractual undiscounted cash flows,
including gross finance lease obligations (before deducting future finance charges), gross loan
commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in
the statement of financial position because the amount in the statement of financial position is based on
discounted cash flows.
The table below shows maturity analysis of non-derivative financial assets at their carrying amounts and
based on their contractual maturities except for assets that are readily saleable in case it would be
necessary to meet cash outflows on financial liabilities. Such financial assets are included in the maturity
analysis based on their expected date of disposal. Impaired loans are included at their carrying amounts
net of impairment provisions and based on the expected timing of cash inflows.
When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions
existing at the end of the reporting period. Foreign currency payments are translated using the spot
exchange rate at the end of the reporting period.
63
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28 Financial Risk Management (Continued)
The maturity analysis of financial instruments based on undiscounted contractual obligation at 31
December 2011 is as follows:
Demand and
less than
1 month
From 1 to
6 months
From 6 to
12 months
From
12 months
to 5 years
Over 5
years
Total
482,780,915
60,458,000
-
-
-
543,238,915
172,470,710
18,177
11,340,619
-
-
-
172,470,710
11,358,796
68,986,177
22,013,397
306,548
356,986,366
8,163,516
-
421,551,391
16,491,111
4,900,655
-
643,955,463
18,719,023
-
233,747,604
-
1,725,227,001
24,654,627
45,633,075
306,548
746,575,924
436,948,501
442,943,157
662,674,486
233,747,604
2,522,889,672
2,023,036
1,296,824,212
41,518,023
7,434,576
-
3,077,500
370,007,467
6,298,645
87,908
1,695,922
1,643,339
171,657,642
21,305,451
89,526
3,355,822
9,678,988
478,830
81,436,369
119,821
45,980,981
3,156,665
29,967,191
16,422,863
1,838,968,151
153,715,153
7,731,831
80,999,916
55,441,547
4,366,649
5,071,537
452,137
-
65,331,870
12,416,743
-
-
-
-
12,416,743
Total potential future
payments for financial
obligations
1,415,658,137
385,534,091
203,123,317
138,147,126
33,123,856
2,175,586,527
Net position
(669,082,213)
51,414,410
239,819,840
524,527,360
200,623,748
347,303,145
Aggregate position
(669,082,213)
(617,667,803)
(377,847,963)
146,679,397
347,303,145
-
In thousands of Mongolian
Tugriks
Assets
Cash and cash equivalents
Mandatory reserves with
the Bank of Mongolia
Due from other banks
Loans and advances to
customers
Short term investments
Long term investments
Other financial assets
Total financial assets
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Other financial liabilities
Subordinated debt
Financial guarantees and
letters of credit (Note 30)
Gross loan commitments
(Note 30)
64
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less
than the amount of the commitment disclosed in the above maturity analysis because the Bank does not
generally expect the third party to draw funds under the agreement. The total outstanding contractual
amount of commitments to extend credit as included in the above maturity table does not necessarily
represent future cash requirements, since many of these commitments will expire or terminate without
being funded.
The maturity analysis of financial instruments based on undiscounted contractual obligation at 31
December 2010 is as follows. The amounts below are adjusted for the effect of reclassifications.
Demand and
less than
1 month
From 1 to
6 months
From 6 to
12 months
From
12 months
to 5 years
Over 5
years
Total
550,134,118
97,200,000
-
-
-
647,334,118
58,481,200
-
6,349,963
-
-
-
58,481,200
6,349,963
64,124,110
2,100,000
295,099
234,889,941
156,404
-
205,737,803
194,674
-
440,738,279
21,554,592
-
87,796,941
-
1,033,287,074
24,005,670
295,099
675,134,527
338,596,308
205,932,477
462,292,871
87,796,941
1,769,753,124
5,025,724
972,801,300
30,085,284
2,737,167
-
233,027,789
10,641,263
114,801
1,299,862
122,846,332
7,173,389
124,479
1,547,469
541,473
36,363,753
293,648
36,496,787
1,668,148
-
5,025,724
1,329,216,894
85,931,837
3,270,095
39,344,118
16,942,658
2,491,523
2,276,047
811,654
-
22,521,882
15,038,852
-
-
-
-
15,038,852
Total financial liabilities
1,042,630,985
247,575,238
133,967,716
74,507,315
1,668,148
1,500,349,402
Net position
(367,496,458)
91,021,070
71,964,761
387,785,556
86,128,793
269,403,722
Aggregate position
(367,496,458)
(276,475,388)
(204,510,627)
183,274,929
269,403,722
-
In thousands of Mongolian
Tugriks
Assets
Cash and cash
equivalents
Mandatory reserves with
the Bank of Mongolia
Due from other banks
Loans and advances to
customers
Long term investments
Other financial assets
Total financial assets
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Other financial liabilities
Subordinated debt
Financial guarantees and
letters of credit (Note 30)
Gross loan commitments
(Note 30)
65
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The Bank does not use the above maturity analysis based on undiscounted contractual maturities of
liabilities to manage liquidity. Instead, the Bank monitors expected maturities and the resulting expected
liquidity gap.
The maturity analysis of financial instruments at 31 December 2011 is as follows:
Demand and
less than
1 month
From 1 to
6 months
From 6 to
12 months
From
12 months
to 5 years
Over 5
years
Total
482,603,982
58,853,400
-
-
-
541,457,382
172,470,710
18,177
11,206,800
-
-
-
172,470,710
11,224,977
95,179,552
21,952,286
306,548
251,118,573
7,814,298
-
341,071,686
15,433,100
4,586,784
-
500,020,441
16,324,245
-
189,875,441
-
1,377,265,693
23,247,398
42,863,315
306,548
Total financial assets
772,531,255
328,993,071
361,091,570
516,344,686
189,875,441
2,168,836,023
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Other financial liabilities
Subordinated debt
2,023,036
768,311,901
637,472
7,434,576
-
3,036,666
877,423,652
12,775,850
87,908
335,640
1,500,773
166,157,522
27,959,340
89,526
304,516
7,905,955
439,682
100,658,218
119,821
30,547,074
6,338,586
27,891,079
14,466,430
1,812,332,757
148,369,466
7,731,831
59,078,309
Total financial liabilities
778,406,985
893,659,716
196,011,677
139,670,750
34,229,665
2,041,978,793
Net position
(5,875,730)
(564,666,645)
165,079,893
376,673,936
155,645,776
126,857,230
Aggregate position
(5,875,730)
(570,542,375)
(405,462,482)
(28,788,546) 126,857,230
-
In thousands of Mongolian
Tugriks
Assets
Cash and cash equivalents
Mandatory reserves with
the Bank of Mongolia
Due from other banks
Loans and advances to
customers
Short term investments
Long term investments
Other financial assets
66
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The maturity analysis of financial instruments at 31 December 2010 is as follows. The amounts below are
adjusted for effect of restatements or reclassifications.
Demand and
less than
1 month
From 1 to
6 months
From 6 to
12 months
From
12 months
to 5 years
Over 5
years
Total
549,743,948
95,456,528
-
-
-
645,200,476
58,481,200
-
6,315,506
-
-
-
58,481,200
6,315,506
93,765,562
1,959,538
295,099
157,270,434
156,404
-
154,615,798
194,674
-
318,787,980
20,018,953
-
52,270,079
-
776,709,853
22,329,569
295,099
Total financial assets
704,245,347
259,198,872
154,810,472
338,806,933
52,270,079
1,509,331,703
Liabilities
Due to other banks
Customer accounts
Other borrowed funds
Other financial liabilities
Subordinated debt
5,021,523
520,711,889
126,221
2,737,167
-
678,391,275
15,293,459
114,801
556,156
111,976,918
11,666,899
124,479
41,997
469,621
53,668,687
293,648
27,642,340
227
1,652,901
-
5,021,523
1,311,549,930
82,408,167
3,270,095
28,240,493
Total potential future
payments for financial
obligations
528,596,800
694,355,691
123,810,293
82,074,296
1,653,128
1,430,490,208
Net position
175,648,547
(435,156,819)
31,000,179
256,732,637
50,616,951
78,841,495
Aggregate position
175,648,547
(259,508,272)
(228,508,093)
28,224,544
78,841,495
-
In thousands of Mongolian
Tugriks
Assets
Cash and cash equivalents
Mandatory reserves with
the Bank of Mongolia
Due from other banks
Loans and advances to
customers
Long term investments
Other financial assets
The matching and/or 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 an uncertain term 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 and exchange rates.
Management believes that in spite of a substantial portion of customer accounts being on demand,
diversification of these deposits by number and type of depositors, and the past experience of the Bank
would indicate that these customer accounts provide a long-term and stable source of funding for the Bank.
Bank does regular “deposit stickiness” analysis on movement of current accounts and demand deposit in
order to avoid sudden fund withdrawal and regularly does stress tests on liquidity with different scenarios.
The “deposit stickiness” analysis is based on historical analysis of movements of current accounts and
demand deposits. Bank see the possibility of allocating current accounts in time bands and adjusting
existing demand deposit allocation derived from analysis of historical stability. Based on historical
evidence, more that 30% of total current accounts and demand deposits has been stable since 2005.
Operational risk. The Bank defines operational risk as the risk of loss resulting from inadequate or
ineffective internal processes, persons, systems or external events. Operational risk includes: internal
fraud, external fraud, security of the workplace, customer risk, product and service risk, IT-Information
System risk, risk of internal process, external events, reputational risk, risks of legal and inadequate
external regulation, strategic risk, responsibility risk, capital risk and personnel risk. Furthermore these
were classified in sub-categories.
67
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
28
Financial Risk Management (Continued)
The Bank’s Operational Risk Management Implementing Units include: Risk Management Committee at
the level of the Board of Directors, Risk Committee at the level of Chief Executive Officer, Branch Credit
Committee and Operational and Market Risk Department.
The Bank’s Risk Committee is responsible for defining and controlling risks, taking measures for relevant
risks and developing and approving strategy. Also it defines risk levels by using a Risk Dashboard and a
Risk Assessment Matrix in its operations.
Each branch has an Operational Risk Committee to manage and control operational risks. This committee
is assigned to discuss risks of its sub-branches every month and take measures to control and mitigate
risks according to the procedure approved by the Risk Committee and report to the Director in charge or
Risk Committee in order to obtain decisions on risks with potential or actual large loss implications.
Operational and Market Risk Department conducts a fraud survey in order to observe operational risks
especially for internal fraud that leads to loss and seeks to ascertain any repetitive influencing factors.
Operational and Market Risk also conducts a criminal survey and provides relevant risk information to the
Management and Risk Committees.
Compliance risk. The Bank monitors its operation regularly in order to mitigate the Bank’s exposure to the
following risks: risk to incur penalties due to non-compliance with both financial and non-financial
requirements required by the stakeholders of the Bank, including the Bank of Mongolia (BoM), its
shareholders and foreign investors, risk of significant financial losses and reputational risk.
The Compliance Unit of the Bank was established in late 2010. The unit is primarily responsible for
ensuring that the Bank complies with relevant laws and regulations and maintains highest ethical and
compliance standards among industry peers, while working toward prevention of money laundering and
terrorism financing. The unit also conducts compliance and AML awareness trainings for employees in
accordance with the Bank’s staff training program.
The Compliance Policy of the Bank was approved by the Board of Directors in May 2011, whereas the AntiMoney Laundering and Counter Terrorism Financing Policy was approved in June 2009. Both the Bank’s
management and the Board of Directors consider compliance and AML/KYC risks as one of the major
concerns of the Bank, and puts special emphasis on enhancing its AML program and activities.
As part of the Bank’s risk-based approach, the Director of Legal and Compliance provides special
clearance for non-resident customers wishing to open an account with the Bank. In 2011 the Bank
established a daily internet banking limit at MNT 20 million for all customers. Businesses who present
legitimate reasons to increase their daily internet transaction limit should send their official requests to the
Compliance Unit through branches. This change was intended for taking precautionary measures to avoid
any AML/KYC related risks where significant amounts of funds could flow through internet banking without
monitoring.
In 2011, the Bank was not involved in any material legal proceedings or sanctions associated with noncompliance with legislation or regulations.
68
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
29
Management of Capital
The Bank’s objectives when managing capital are (i) to comply with the capital requirements set by the
Bank of Mongolia, including capital adequacy ratio, (ii) to safeguard the Bank’s ability to continue as a
going concern, (iii) to ensure that Bank maintains strong credit ratings and healthy capital ratios in order to
support its business and to maximize shareholders’ value, (iv) to ensure the Bank’s compliance with debt
covenants specified in the borrowing agreements with international financial institutions.
The Bank manages its capital structure and makes adjustments to it in the light of changes in economic
conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the
Bank may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new
shares, obtained new debt and/or customer deposits or sell assets to reduce debt.
The amount of capital that the Bank managed as at 31 December 2011 was MNT 188 538 880 thousand
(31 December 2010: MNT 121 501 204 thousand). Compliance with capital adequacy ratios set by the
Bank of the Mongolia is monitored monthly with reports outlining their calculation reviewed and signed by
the Chief Financial Officer. Compliance with debt covenants specified in the borrowing agreements with
international financial institutions is also monitored on a quarterly basis.
During 2011 and 2010 the Bank has complied with all capital requirements imposed by the Bank of
Mongolia.
The Bank of Mongolia requires commercial banks to maintain a minimum core capital adequacy ratio
(which is defined as the ratio between tier I capital and risk weighted assets) of 6% (2010: 6%) and risk
weighted capital ratio (which represents the ratio between total regulatory capital and risk weighted assets)
of at least 12% (2010: 12%). These ratios are calculated on the basis of total capital and total assets as
adjusted for their intrinsic risk characteristics (i.e. risk weighted assets), as disclosed below. The capital
adequacy ratios of the Bank as at 31 December 2011 and 31 December 2010 are as follows:
In thousands of Mongolian Tugriks
Tier I capital
Share capital
Share premium
Share-based payment reserve
Retained earnings
Total tier I capital
Tier II capital
Revaluation surplus
Subordinated debt
Total tier II capital
Total regulatory capital / capital base
Core capital adequacy ratio
Risk weighted capital ratio
31 December
2011
31 December
2010
12,994,012
13,866,079
121,096
146,393,637
173,374,824
12,994,012
13,866,079
121,096
94,016,430
120,997,617
15,164,056
59,078,309
74,242,365
503,587
28,240,493
28,744,080
247,617,189
149,741,697
10.8%
15.4%
13.5%
16.7%
Breakdown of risk weighted assets is given below.
Risk weight factor
31 December 2011
Assets
Risk weighted
assets
31 December 2010
Assets
Risk weighted
assets
0%
20%
50%
100%
150%
557,163,608
224,834,604
24,657,951
1,543,760,339
1,958,469
44,966,921
12,328,976
1,543,760,339
2,937,704
594,153,757
111,870,467
13,023,105
865,569,611
1,971,120
22,374,093
6,511,553
865,569,611
2,956,680
Total
2,352,374,971
1,603,993,940
1,586,588,060
897,411,937
69
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
30
Contingencies and Commitments
Legal proceedings. From time to time and in the normal course of business, claims against the Bank may
be received. On the basis of its own estimates and internal professional advice management is of the
opinion that no material losses will be incurred in respect of current claims and accordingly no provision
has been made in these financial statements in respect of such claims.
Tax legislation. Mongolian tax, currency and customs legislation is subject to varying interpretations, and
changes, which can occur frequently. Management’s interpretation of such legislation as applied to the
transactions and activity of the Bank may be challenged by the relevant authorities.
The Mongolian tax authorities may be taking a more assertive position in their interpretation of the
legislation and assessments, and it is possible that transactions and activities that have not been
challenged in the past may be challenged by tax authorities. As a result, significant additional taxes,
penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect
of taxes for five calendar years preceding the year of review. Under certain circumstances reviews may
cover longer periods.
The Mongolian tax legislation does not provide definitive guidance in certain areas, specifically in areas
such as VAT, withholding tax, corporate income tax, personal income tax, transfer pricing and other areas.
From time to time, the Bank adopts interpretations of such uncertain areas that reduce the overall tax rate
of the Bank. As noted above, such tax positions may come under heightened scrutiny as a result of recent
developments in administrative and court practices. The impact of any challenge by the tax authorities
cannot be reliably estimated; however, it may be significant to the financial position and/or the overall
operations of the entity.
Management believes that its interpretation of the relevant legislation is appropriate and the Bank’s
positions related to tax and other legislation will be sustained. Management believes that tax and legal risks
are remote at present. The management performs regular re-assessment of tax risk and its position may
change in the future as a result of the change in conditions that cannot be anticipated with sufficient
certainty at present.
As of 31 December 2011 and 2010, management has assessed that recognition of a provision for uncertain
tax position is not necessary.
Operating lease commitments. The Bank has no long-term non-cancellable operating leases, but annual
operating leases and long term land leases (Note 4), which can be cancelled under relatively short notice.
Thus, management believes that the amount of the future minimum lease payments under non-cancellable
operating leases is not material.
Compliance with covenants. The Bank is subject to certain covenants related primarily to its other
borrowed funds. Non-compliance with such covenants may result in negative consequences for the Bank
including growth in the cost of borrowings and declaration of default.
Management believes that the Bank was in compliance with covenants as at 31 December 2011, apart
from borrowings from EBRD, stated in Note 19 The Bank breached a covenant (negative liquidity ratio) and
sent a Certificate of Compliance, accompanied by request for waiver and amendment of the agreement on
17 October 2011 and notified all other lenders about it. The Bank has obtained a waiver letter in February
2012. Whilst the related borrowing is considered to be payable on demand as of 31 December 2011 in
accordance with IFRS requirements, management believes that the breach of related covenant does not
have any adverse consequences on the Bank’s operations and that the Bank’s liquidity position as of 31
December 2011 is not significantly affected. Borrowing agreements with IFC, FMO and ADB have crossdefault clause and are considered to be payable on demand as of 31 December 2011.
70
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
30
Contingencies and Commitments (Continued)
Management believes that the Bank was in compliance with covenants as at 31 December 2010, apart
from borrowings from ADB, IFC and FMO. The Bank breached a covenant (negative pledge) and sent a
Certificate of Compliance, accompanied by request for waiver and amendment of the agreements on
10 October 2010 and notified all other lenders about it. The Bank has obtained a waiver letters from ADB
on 15 February 2011, from IFC on 25 March 2011, from FMO 25 January 2011. Whilst the related
borrowing is considered to be payable on demand as of 31 December 2010 in accordance with IFRS
requirements, management believes that the breach of related covenant does not have any adverse
consequences on the Bank’s operations and that the Bank’s liquidity position as of 31 December 2010 is
not significantly affected. Borrowing agreement with EBRD have cross-default clause and is considered to
be payable on demand as of 31 December 2010.
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, which represent irrevocable
assurances that the Bank will make payments in the event that a customer cannot meet its obligations to
third parties, 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 authorising a third party to draw drafts on the
Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying
shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct
borrowing.
Commitments to extend credit represent unused portions of authorisations 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 in an amount equal to the total unused commitments. However, the likely
amount of loss is less than the total unused commitments since most commitments to extend credit are
contingent upon customers maintaining specific credit standards.
Outstanding credit related commitments are as follows:
31 December
2011
31 December
2010 (adjusted)
Guarantees issued
Approved limits for guarantees
Irrevocable undrawn credit lines
Import letters of credit
Export letters of credit
36,382,541
15,022,432
12,416,743
7,460,309
6,466,588
4,818,239
9,228,169
15,038,852
4,190,343
4,285,131
Total credit related commitments
77,748,613
37,560,734
In thousands of Mongolian Tugriks
The Bank’s management believes that fair value of guarantees, letters of credit, and loan and credit line
commitments is not material as of 31 December 2011 and 31 December 2010.
71
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
30
Contingencies and Commitments (Continued)
The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not
necessarily represent future cash requirements, as these financial instruments may expire or terminate
without being funded.
31 December
2011
31 December
2010 (adjusted)
US Dollars
Mongolian Tugriks
Euro
CNY
Other
48,783,861
27,440,466
1,184,827
339,459
25,124,863
9,955,785
572,137
1,804,513
103,436
Total credit related commitments
77,748,613
37,560,734
In thousands of Mongolian Tugriks
The Bank has not recognized provision on credit related commitments, as the management is not aware of
any losses incurred due to the deterioration of the financial conditions of the customers. As of
31 December 2011 and 31 December 2010 losses on credit related commitments are not considered
probable and cannot be reliably measured.
Commitment for investing in the Mongolia Opportunities Fund I L.P.
Mongolia Opportunities Fund I L.P. (the Fund) is an eight-year closed-end Mongolia-focused private equity
fund. The Fund will make equity investments in small and medium enterprises (SMEs) along the mining
supply chain, in infrastructure, and in agribusiness. The Fund could also opportunistically invest in
telecommunications, financial services, and wholesale/retail trade. Khan Bank irrevocably agreed to
subscribe to the Fund USD 1,000,000, which represents a commitment of the Bank at 31 December 2011
(31 December 2010: nil).
Loans managed by the Bank for third parties
31 December
2011
31 December
2010
EBRD project (i)
Mongolia Mortgage Corporation Loans (ii)
Solar Energy Loan from Ministry of Energy (iii)
Other
2,736,906
405,099
70,866
119,004
826,009
71,778
664,495
Total
3,331,875
1,562,282
In thousands of Mongolian Tugriks
(i) EBRD project
On 29 July 2010, the Bank entered into a risk sharing Medium Term Co-financing Facility with the EBRD
and concluded a participation loan agreement. The facility is to co-finance Mongolian SME and corporate
customers with the EBRD’s participation of up to 50% and USD 10 million in aggregate. The Bank receives
funds related to the EBRD’s participation once a decision for loan is made and a sub-loan agreement with a
borrower is concluded. All interest and fee income from a sub-loans should be shared in line with each
banks’ participation percentage.
The Bank earns an administration fee of 2.5% per annum on EBRD’s share of each loan for managing
loan.
The Bank’s share in disbursed loans to customers, on which the Bank bears credit risk, is recognized within
loans and advances to customers.
72
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
30
Contingencies and Commitments (Continued)
(ii) Mongolian Mortgage Corporation Loans
On 15 September 2010, the Bank entered into an agreement with the Mongolian Mortgage Corporation
(MIK) to transfer some of the Bank's mortgage loans to Mongolia Mortgage Corporation ('MIK') to improve
liquidity. Under this agreement, 78 mortgage loans have been transferred to MIK. The Bank has transferred
substantially all of the risks and rewards of ownership of the mortgage portfolio to MIK. The Bank has no
responsibility to MIK in case of credit default, interest rate risk and prepayment risk. The Bank received an
amount equivalent to the total outstanding balance plus interest receivables as of 31 December 2011. At
the same time the Bank and MIK executed a service agreement, under which, the Bank will collect loan
repayment and interest on behalf of MIK from the borrowers.
The Bank earns a service fee of 1% per annum on the outstanding principal balance of the mortgage
portfolio. The service fee earned for the year amounted to MNT 5.9 million.
(iii) Solar Energy Loan
On 21 October 2003, the Bank entered into a Solar Energy Loan Agreement with the Ministry of Energy
(formerly known as Ministry of Infrastructure). Under this agreement, the Bank is responsible for the
distribution of the loans to the borrowers selected by the Bank, for the monitoring of the borrowers'
compliance with loan agreements and providing the Ministry of Energy with timely information on the status
of these loans. The Bank, acting on behalf of the Ministry of Energy, has outstanding solar energy loans to
herders and farmers amounting to MNT 71 million (2010: MNT 72 million).
The Bank earns an application fee of MNT 4,000 per loan disbursed for the administrative service of this
loan. No new loan was extended to borrowers during 2011.
Assets pledged and restricted. Mandatory cash balances with the Bank of Mongolia in the amount of
MNT 172,470,710 thousand (31 December 2010: MNT 58,481,200 thousand) represent mandatory reserve
deposits, which are not available to finance the Bank’s day-to-day operations.
73
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
31
Fair Value of Financial Instruments
Fair values of financial instruments carried at amortised cost.
Fair values of financial instruments carried at amortised cost are as follows:
2010
2011
In thousands of Mongolian Tugriks
FINANCIAL Assets
Cash and cash equivalents
- Cash on hand
- Cash balances with the Bank of Mongolia (other
than mandatory reserve deposits)
- Correspondent accounts with other banks
- Mongolia
- Other countries
- Bank of Mongolia treasury bills
- Deposits with the Bank of Mongolia with original
maturity less than three months
- Placements with other banks with original
maturities of less than three months
- Reverse securities sale and repurchase
agreements with other banks with original maturities
of less than three months
Mandatory reserves in BOM
Due from other banks
- Short-term placements with other banks with
original maturities of more than three months
- Long-term placements with other banks with
original maturities of more than one year
Loans and advances to customers
- Business lending
- Consumer lending
- Agricultural lending
Short term investments
- Bank of Mongolia treasury bills
- Government bonds
Long term investments
Other financial assets
Total financial assets carried at amortised cost
Carrying
amount
Fair value
Carrying
amount
Fair value
103,952,130
103,952,130
65,162,602
65,162,602
33,655,221
33,655,221
89,554,206
89,554,206
9,481,247
181,839,968
183,702,710
9,481,247
181,839,968
183,702,710
1,343,072
77,837,357
318,131,498
1,343,072
77,837,357
318,131,498
-
-
62,823,500
62,823,500
28,826,106
28,826,106
25,351,293
25,351,293
172,470,710
172,470,710
4,996,948
58,481,200
4,996,948
58,481,200
4,221,251
4,221,251
-
-
7,003,726
6,944,390
6,315,506
6,387,442
682,607,447
635,099,213
59,559,033
680,475,111
633,741,093
59,341,869
342,673,872
387,248,713
46,787,268
339,886,580
388,462,898
47,014,715
13,939,684
9,307,714
42,863,315
306,548
13,939,684
9,307,714
42,922,443
306,548
22,329,569
295,099
22,338,679
295,099
2,168,836,023
2,165,128,195
1,509,331,703
1,508,067,089
74
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
31 Fair Value of Financial Instruments (Continued)
2010
2011
In thousands of Mongolian Tugriks
Carrying
amount
Fair value
Carrying
amount
Fair value
FINANCIAL liabilities
Due to other banks
- Correspondent accounts and overnight placements
of other banks
- Short-term placements of other banks
- Long-term placements of other banks
Customer accounts
- Current accounts of state and public organizations
- Demand deposits of state and public organizations
- Term deposits of state and public organizations
- Current accounts of legal entities
- Demand deposits of other legal entities
- Term deposits of other legal entities
- Current accounts of individuals
- Demand deposits of individuals
- Term deposits of individuals
Other borrowed funds
Other financial liabilities
Subordinated debt
2,023,036
4,537,439
7,905,955
2,023,036
4,537,439
7,864,623
2,495,223
2,526,300
-
2,495,223
2,526,300
-
98,035,104
5,068,349
11,126,719
376,729,449
2,067,739
228,816,866
128,306,440
435,577,664
526,604,427
148,369,466
7,731,831
59,078,309
98,035,104
5,068,349
11,061,752
376,729,449
2,067,739
228,810,817
128,306,440
435,577,664
525,792,868
148,320,796
7,731,831
59,145,661
136,991,003
43,556
5,742
308,807,429
2,680,103
15,369,872
76,514,166
379,129,365
392,008,694
82,408,167
3,270,095
28,240,493
136,991,003
43,556
5,704
308,807,429
2,680,103
15,369,437
76,514,166
379,129,365
390,570,581
82,442,702
3,270,095
28,194,627
Total financial liabilities carried at amortised cost
2,041,978,793
2,041,073,568
1,430,490,208
1,429,040,291
The methods and assumptions applied in determining fair values.
Fair value is the amount at which a financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted
market price. Where quoted market prices are not available, the Bank used valuation techniques. The fair
value of floating rate instruments that are not quoted in an active market was estimated to be equal to their
carrying amount. The fair value of unquoted fixed interest rate instruments was estimated based on
estimated future cash flows expected to be received discounted at current interest rates for new
instruments with similar credit risk and remaining maturity.
Discount rates used depend on currency, maturity of the instrument and credit risk of the counterparty and
were as follows:
Due from other banks
- Long-term placements with other banks with original maturities
of more than one year
Loans and advances to customers
- Business lending
- Consumer lending
- Agricultural lending
Long term investments
Due to other banks
- Long-term placements of other banks
Customer accounts
- Term deposits of state and public organizations
- Term deposits of other legal entities
- Term deposits of individuals
Other borrowed funds
Subordinated debt
2011
2010
0.75 % p.a.
0.8 % p.a.
13.2 % to 22.0 % p.a.
5.2 % to 25.0 % p.a.
24.6 % to 27.0 % p.a.
8.0 % p.a.
13.6 % to 23.9 % p.a.
5.5 % to 21.7 % p.a.
26.1 % to 27.9 % p.a.
7.5 % p.a.
11.4 % p.a.
-
11.7 % p.a.
5.2 % to 13.8 % p.a.
2.0 % to 13.8 % p.a.
1.0 % to 6.4 % p.a.
8.1 % to 9.5 % p.a.
14.2 % p.a.
3.5 % to 14.2 % p.a.
1.9 % to 14.2 % p.a.
1.0 % to 7.2 % p.a.
9.2 % to 12.5 % p.a.
75
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
32
Presentation of Financial Instruments by Measurement Category
For the purposes of measurement, IAS 39, Financial Instruments: Recognition and Measurement, classifies
financial assets into the following categories: (a) loans and receivables; (b) available-for-sale financial
assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss
(“FVTPL”). Financial assets at fair value through profit or loss have two subcategories: (i) assets
designated as such upon initial recognition, and (ii) those classified as held for trading. In addition, finance
lease receivables form a separate category. The following table provides a reconciliation of financial assets
with these measurement categories as of 31 December 2011:
In thousands of Mongolian Tugriks
Financial assets
Cash and cash equivalents
- Cash on hand
- Cash balances with the Bank of Mongolia (other than mandatory reserve deposits)
- Correspondent accounts with other banks
- Mongolia
- Other countries
- Bank of Mongolia treasury bills
- Placements with other banks with original maturities of less than three months
Mandatory reserves with the Bank of Mongolia
Due from other banks
- Short-term placements with other banks with original maturities of more than three months
and less than one year
- Long-term placements with other banks with original maturities of more than one year
Loans and advances to customers
- Business lending
- Consumer lending
- Agricultural lending
Short term investments
- BOM treasury bills
- Government bonds
Long term investments
Other financial assets
- Receivables from individuals
- Receivables on cash and settlements services
- Receivables from companies
- Other financial assets
Total financial assets
Loans and
receivables
103,952,130
33,655,221
9,481,247
181,839,968
183,702,710
28,826,106
172,470,710
4,221,251
7,003,726
682,607,447
635,099,213
59,559,033
13,939,684
9,307,714
42,863,315
1,166
293,021
12,260
101
2,168,836,023
76
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
32 Presentation of Financial Instruments by Measurement Category (Continued)
The following table provides a reconciliation of financial assets with the measurement categories at
31 December 2010:
In thousands of Mongolian Tugriks
Financial assets
Cash and cash equivalents
- Cash on hand
- Cash balances with the Bank of Mongolia (other than mandatory reserve deposits)
- Correspondent accounts with other banks
- Mongolia
- Other countries
- Bank of Mongolia treasury bills
- Deposits with the Bank of Mongolia with original maturity less than three months
- Placements with other banks with original maturities of less than three months
- Reverse securities sale and repurchase agreements with other banks with original maturities of
less than three months
Mandatory reserves with the Bank of Mongolia
Due from other banks
- Long-term placements with other banks with original maturities of more than one year
Loans and advances to customers
- Business lending
- Consumer lending
- Agricultural lending
Long term investments
Other financial assets
- Receivables from individuals
- Receivables on cash and settlements services
- Receivables from companies
- Other financial assets
Total financial assets
Loans and
receivables
65,162,602
89,554,206
1,343,072
77,837,357
318,131,498
62,823,500
25,351,293
4,996,948
58,481,200
6,315,506
342,673,872
387,248,713
46,787,268
22,329,569
999
291,159
2,688
253
1,509,331,703
As of 31 December 2011 and 31 December 2010 all of the Bank’s financial liabilities were carried at
amortised cost.
33
Related Party Transactions
Parties are generally considered to be related if the parties are under common control or one party has the
ability to control the other party or can exercise significant influence over the other party in making financial
or operational decisions. In considering each possible related party relationship, attention is directed to the
substance of the relationship, not merely the legal form.
The Bank’s Parent, Sawada Holdings Co. Ltd., its subsidiaries, and shareholders exercising significant
influence over the Bank are disclosed in Note 22. Balances and transactions with the Parent, its
subsidiaries, shareholders exercising significant influence over the Bank’s operations, and the Bank’s
associates, are disclosed below.
77
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
33
Related Party Transactions (Continued)
At 31 December 2011, the outstanding balances with related parties were as follows:
Parent
company
Other
significant
shareholders
Subsidiaries of
parent
company
Key
management
personnel
Associates
-
8,546,754
-
-
159,933
-
512,888
13,101,438
744,734
92,533,427
3,661,036
-
-
6,986,390
-
-
778,266
-
2,839,413
27,787,647
-
-
-
In thousands of Mongolian Tugriks
Gross amount of loans and advances to
customers (contractual interest rate: 2.4
- 14.4 %)
Investment in associates
Customer accounts (contractual interest
rate: 0 - 13.4 %)
Other borrowed funds (contractual
interest rate: 3.9 %)
Other liabilities
Subordinated debt (contractual interest
rate: 7.7 - 10.0 %)
The Bank has not recognized any provision for impairment on loans issued to its related parties as of
31 December 2011 and 31 December 2010, as management believes that such provision is not necessary.
The income and expense items with related parties for the year ended 31 December 2011 were as follows:
Parent
company
Other
significant
shareholders
Subsidiaries of
parent
company
Key
management
personnel
Associates
(528,582)
783,867
(1,202,815)
(60,315)
4,789
(115,622)
-
-
12,463
-
-
(1,217,777)
(3,544,829)
(1,394,417
)
(52,248)
-
-
(247,768)
-
(3,327,186)
-
In thousands of Mongolian Tugriks
Interest income
Interest expense
Foreign exchange translation gains less
losses
Fee and commission income
Administrative and other operating
expenses
Aggregate amounts lent to and repaid by related parties for year ended 31 December 2011 were:
Parent
company
Other
significant
shareholders
Amounts lent to related parties during the
period
-
8,690,953
Amounts repaid by related parties during
the period
-
(4,133,632)
In thousands of Mongolian Tugriks
Subsidiaries of
parent
company
Key
management
personnel
Associates
-
-
-
-
(19,614)
-
78
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
33
Related Party Transactions (Continued)
At 31 December 2010, the outstanding balances with related parties were as follows:
Parent
company
Other
significant
shareholders
Subsidiaries of
parent
company
Key
management
personnel
Associates
-
3,989,433
-
-
179,547
-
512,888
7,429,524
1,155,094
1,375,104
626,765
49,947
-
10,457,837
459,790
-
427,612
-
2,554,937
-
-
-
-
In thousands of Mongolian Tugriks
Gross amount of loans and advances to
customers (contractual interest rate: 2.4 12 %)
Investment in associates
Customer accounts (contractual interest
rate: 0 - 14 %)
Other borrowed funds (contractual interest
rate: 4 %)
Other liabilities
Subordinated debt (contractual interest
rate: 10%)
The income and expense items with related parties for the year ended 31 December 2010 were as follows:
Parent
company
Other
significant
shareholders
Subsidiaries of
parent
company
Key
management
personnel
Associates
(334,349)
522,361
(591,886)
(51,279)
6,534
(59,872)
-
1,305,040
27,347
803,292
203,190
22,669
-
-
(574,703)
-
(1,410,755)
-
In thousands of Mongolian Tugriks
Interest income
Interest expense
Foreign exchange translation gains less
losses
Fee and commission income
Administrative and other operating
expenses
Aggregate amounts lent to and repaid by related parties for the year ended 31 December 2010 were:
Parent
company
Other
significant
shareholders
Subsidiaries of
parent
company
Key
management
personnel
Associates
Amounts lent to related parties during the
period
-
3,161,899
-
218,500
-
Amounts repaid by related parties during
the period
-
(934,423)
-
(85,608)
-
In thousands of Mongolian Tugriks
79
Khan Bank LLC
Notes to the Financial Statements – 31 December 2011
33
Related Party Transactions (Continued)
The outstanding credit related commitments balances represented only by the balances of other significant
shareholders were as follows:
31 December
2011
31 December
2010
Approved limits for guarantees
Irrevocable undrawn credit lines
Guarantees issued
Import letters of credit
5,603,381
626,448
463,397
-
2,514,833
324,118
247,097
Total
6,693,226
3,086,048
In thousands of Mongolian Tugriks
Key management compensation is presented below:
For the year ended
31 December
2011
For the year rnded
31 December
2010
Short-term benefits:
- Salaries
- Fees paid to Board of Directors
- Social security contributions
- Fees paid to DAI
- Share appreciation rights
2,542,161
538,869
338,913
247,768
72,752
1,169,302
190,207
149,546
574,703
47,674
Total
3,740,463
2,131,432
In thousands of Mongolian Tugriks
Short-term bonuses fall due within twelve months after the end of the period in which management
rendered the related services and are presented within the salaries line in the table above.
34
Events after the End of Reporting Period
Management is not aware of any events that occurred after the end of reporting period until 30 March 2012,
which would have impact on these financial statements.
80