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RNS Number:0283F Magyar Fejlesztesi Bank 22 June 2006 Hungarian Development Bank Ltd. Unconsolidated Financial Statements and Independent Auditor's Report For the year ended 31 December 2005 Contents Independent Auditor's Report Unconsolidated Financial Statements Unconsolidated Balance Sheet as at 31 December 2005 Unconsolidated Income Statement for the year ended 31 December 2005 Unconsolidated Statement of Changes in Shareholder's equity for the year ended 31 December 2005 Unconsolidated Cash Flow Statement for the year ended 31 December 2005 Notes to the Unconsolidated Financial Statements Independent Auditor's Report To the Shareholder of Hungarian Development Bank Ltd. We have audited the accompanying unconsolidated balance sheet of Hungarian Development Bank Ltd. (the "Bank") as at 31 December 2005 and the related unconsolidated statements of income, shareholders' equity and cash flows for the year then ended (the "unconsolidated financial statements"). The unconsolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these unconsolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the unconsolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the unconsolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The Bank is required to prepare consolidated financial statements under International Accounting Standard 27. As explained in Note 2(a), the bank will prepare consolidated financial statements which are expected to be published in September 2006. In our opinion, except for the effect on the unconsolidated financial statements of the matter referred to in the preceding paragraph, the unconsolidated financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2005 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 17 March 2006 KPMG Hungaria Kft. Istvan Henye Partner Hungarian Development Bank Ltd. Unconsolidated Balance Sheet as at 31 December 2005 (in millions of HUF) Note 31 December 31 December 2005 2004 Cash and balances with the National Bank of Hungary 5 7,964 2,346 Placements with other banks 6 152,054 135,336 Loans and advances to customers, net of allowance for impairment losses 7 456,696 275,251 Available for sale securities 8 78,093 133,009 Investments in subsidiaries and associates 9 53,382 44,730 Other assets 10 28,127 9,719 Fixed assets 11 5,714 5,884 --------- --------- TOTAL ASSETS 782,030 606,275 ========= ========= Deposits from other banks and other borrowed funds 12 444,036 319,683 Deposits from customers 13 62,257 21,058 Issued securities 14 131,576 127,461 Financial liabilities at fair value through 15 98 876 profit and loss Other liabilities 16 17,403 20,232 --------- --------- Total liabilities 655,370 489,310 --------- --------- Subordinated debt 17 9,500 9,500 --------- --------- Share capital 18 87,570 87,570 Share premium 18 - 52,036 Capital reserve 18 18,082 106,011 Statutory reserves 19 4,310 1,812 Retained earnings 7,198 (139,964) --------- --------- Total shareholder's equity 117,160 107,465 --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 782,030 606,275 ========= ========= Commitments and contingencies 20 145,955 132,175 The accompanying notes to unconsolidated financial statements form an integral part of these unconsolidated financial statements. Hungarian Development Bank Ltd. Unconsolidated Income Statement for the year ended 31 December 2005 (in millions of HUF) Note 2005 2004 Interest and similar income 38,670 42,267 Interest expense and similar charges (20,244) (19,133) --------- --------- Net interest income 22 18,426 23,134 Allowance release/(charge) for impairment losses 21 4,633 (8,167) Fee and commission income 956 1,047 Fee and commission expenses (860) (949) --------- --------- Net fee and commission income 96 98 Gain from sale of investments 712 116 Allowance for impairment losses of investments in subsidiaries and associates 21 (4,608) (3,916) Dividend income 313 15 Net gains on foreign currency - 70 Other provision (charges)/releases 21 (2,265) 1,099 Other operating income 23 15,363 12,933 --------- --------- Other operating income 13,411 14,117 General and administrative expenses 24 (10,362) (9,365) Net loss on foreign currency (510) - Other operating expenses 23 (868) (1,667) --------- --------- Other operating expenses (11,740) (11,032) Profit before income tax 20,930 14,351 --------- --------- Income tax 25 (6,047) (1,564) --------- --------- Dividend paid - - --------- --------- Net profit for the year 14,883 12,787 ========= ========= The accompanying notes to unconsolidated financial statements form an integral part of these unconsolidated financial statements Hungarian Development Bank Ltd. Statement of changes in Shareholder's equity For the year ended 31 December 2005 (in millions of HUF) Share Capital Share Premium Capital Reserve Statutory Reserves Retained Earnings Total Note 18 18 18 19 Balance at 1 January 2004 87,570 52,036 106,011 678 (145,617) 100,678 ========= ========= ========== ===== =========== ========== General Reserve - - - 1,134 (1,134) - Dividend - - - (6,000) (6,000) Net profit for the year - - - - 12,787 12,787 ------ ------ ------ ------ ------ ------ Balance at 1 January 2005 87,570 52,036 106,011 1,812 (139,964) 107,465 ========= ========= ========== ======= =========== ========== Reclassificati on of the equity - (52,036) (87,928) - 139,964 0 Revaluation of financial instruments - - - - 5,812 5,812 Dividend - - - - (11,000) (11,000) Statutory reserves - - - 2,498 (2,498) - Net profit for the year - - - - 14,883 14,883 ------ ------ ------ ------ ------ ------ Balance at 31 December 2005 87,570 0 18,082 4,310 7,198 117,160 ========= ==== ========= ======= ======= ========== The accompanying notes to unconsolidated financial statements form an integral part of these unconsolidated financial statements. Hungarian Development Bank Ltd. Unconsolidated Cash Flow Statement for the year ended 31 December 2005 (in millions of HUF) Note 2005 2004 Cash flows from operating activities Net profit/(loss) for the year before taxes 20,930 14,351 Adjustments to reconcile net profit/(loss) to cash provided by operating activities Depreciation and amortization 1,149 976 Allowance for impairment losses of loans 21 (6,117) (3,426) Allowance (release)/charge for impairment losses of investments in subsidiaries and associates 21 (1,017) 3,858 Allowance (release)/charge for impairment losses of other assets 21 (232) 13 (Release) in other risk provision 21 (11,243) (10,136) (Loss) / Profit on sale of fixed assets (24) 411 Changes in operating assets and liabilities Increase in placements with other banks 124,352 87,752 (Decrease) in deposits from other banks and borrowed funds (16,719) (97,148) (Increase)/decrease in loans and advances to customers, before allowances (175,329) 21,273 Increase/(decrease) in deposits from customers 41,199 (1,934) (Increase) in accrued interest receivable and other accruals (8,230) (1,116) Decrease/(increase) in accrued interest payable and other accruals 721 (584) (Increase)/decrease in other assets, before (9,945) 25,488 allowances Increase in other liabilities 7,694 119 Income tax paid and deferred tax 25 (6,047) (1,564) (Decrease) in financial instruments held for hedging (778) (1,605) -------- --------- Net cash provided by/(used in) operating activities (39,636) 36,728 Cash flows from investing activities Decrease in securities 54,916 12,146 Increase in investments in subsidiaries and associates, before allowance (7,635) (36,414) Proceeds from sale of fixed assets 80 161 Acquisition of fixed assets (1,033) (1,662) -------- --------- Net cash provided by/(used in) investing activities 46,328 (25,769) Cash flows from financing activities Proceeds from bond issue 4,114 (5,713) Revaluation of financial instruments 5,812 - Dividend not paid during the year (8,000) - Dividend paid during the year (3,000) (6,000) -------- --------- Net cash provided by/(used in) financing activities (1,074) (11,713) Net increase/(decrease) in cash and cash equivalents 5,618 (754) ======== ========= Cash and cash equivalents as at 1 January 5 2,346 3,100 Cash and cash equivalents as at 31 December 5 7,964 2,346 The accompanying notes to unconsolidated financial statements form an integral part of these unconsolidated financial statements. Hungarian Development Bank Ltd. Notes to Unconsolidated Financial Statements For the year ended 31 December 2005 (In millions of HUF) 1. PRINCIPAL ACTIVITIES The Hungarian Development Bank Ltd. (the "Bank" or "HDB") is registered as a joint-stock company under Hungarian law and is licensed to conduct commercial banking activities in Hungarian Forint and in foreign currency. The Bank is primarily engaged in long-term lending and investment management activities. The legal status and the activities of the Bank are regulated by Act XX of 2001 which came into force on 15 June 2001. The Bank's registered office is located at Nador u. 31, Budapest, Hungary. The Bank is 100% owned by the Hungarian State. In 2005, the rights of ownership were exercised by the Ministry of Economy and Transport. The average number of employees was 355 in 2005 (2004: 314). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted by the Bank in preparation of these unconsolidated financial statements are as follows: (a) Basis of presentation These unconsolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") adopted by the International Financial Reporting Interpretations Committee ("IFRIC") and interpretations issued by the Standing Interpretations Committee, except for IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries. Under IAS 27, the Bank is required to prepare consolidated financial statements. Consolidated financial statements are in the process of being prepared and will be published in September 2006. These unconsolidated financial statements have been prepared for information purposes. The Bank maintains its accounting records and prepares its statutory financial statements in accordance with the relevant accounting, banking and fiscal regulations prevailing in Hungary. In order to present these unconsolidated financial statements in accordance with IFRS, certain adjustments have been made to the Hungarian statutory financial statements. The effect of these adjustments on net income for the year and shareholders' equity is detailed in Note 32. Foreign exchange rates were as follows as at 31 December 2005: 213.58 HUF/USD and 252.73 HUF/EUR. These unconsolidated financial statements are presented in Hungarian Forints ("HUF"), rounded to the nearest million ("MHUF"). (b) Adoption of new and revised International Financial Reporting Standards In the current period, the Bank has adopted all of the new and revised IFRS and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January 2005. (c) Foreign currency translation Transactions in foreign currencies are translated to HUF at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to HUF at the foreign exchange rates quoted by the National Bank of Hungary at that date. Foreign exchange differences arising on translation are recognised in the income statement. (d) Derivative financial instruments The Bank uses derivative financial instruments, interest rate swaps and forward exchange contracts to manage its exposure to foreign exchange and interest rate risks arising from business activities. The Bank does not hold or issue derivative financial instruments for trading purposes. The recognition of income/expenses relating to derivative transactions is on a mark-to-market basis. Value changes are immediately recognised in the income statement. (e) Financial assets and liabilities i. Classification Financial asset or liability at fair value through profit and loss are those that the Bank principally holds for the purpose of short term profit taking. These include investments, bonds, certain purchased loans, fair value hedges and derivative contracts that are not designated and effective hedging instruments, and liabilities from short sales of financial transactions. Originated loans and receivables are loans and receivables created by the Bank other than those created with the intention of short term profit taking. Originated loans and receivables comprise loans and advances to banks and customers, and advances except purchased loans. Held to maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Bank has the intent and ability to hold to maturity. Available for sale assets are financial assets that are not held for trading purposes, originated by the bank or held to maturity. Available for sale instruments include money market placements and certain debt and equity investments. ii. Recognition Financial assets and liabilities are entered into the Bank's books on the trade day, except for derivative assets, which are entered on the settlement day. Financial instruments are measured initially at cost, including transaction costs. iii. Measurement Subsequent to initial recognition, all fair value through profit and loss instruments and all available for sale assets are measured at fair value. When no quoted market price exists in an active market and fair value cannot be reliably measured, these instruments and assets are stated at cost including transaction costs. The effect of the valuation of the profit and loss instruments is recognised directly in the income statement and the effect of the valuation of the available of the sale assets is recognised in the equity. All held to maturity financial instruments and originated loans and receivables are measured at amortised cost less impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. iv. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash-flow techniques. Where discounted cash-flow techniques are used, estimated future cash-flows are based on the management's best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. The fair value of derivatives that are not exchange-traded are estimated at the amount that the Bank would receive upon normal business conditions to terminate the contract at the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties. (f) Investments in subsidiaries and associates Equity investments classified as controlling interest comprise those investments where the Bank through direct ownership interest, has the power to govern the financial and operating policies of the investee. Equity investments classified as significant interest comprise those investments where the Bank through direct ownership interest, has the power to participate in the financial and operating policies of the investee, but not to control those activities. Other equity investments comprise other share holdings, which do not meet the preceding criteria. The investment portfolio includes investments that the Bank has the intent to hold long term in its portfolio. Long term investments are determined as follows: 1. Act XX of 2001 determines the allowable fully controlled equity investments. 2. The Bank classifies investments in associates held in its portfolio from equity-debt conversions as long term investments. 3. The investment portfolio includes investments managed under the Equity Investment Program. Based on this Program the ownership in these investments cannot exceed 49% and the Bank is obliged to disinvest at the end of the 5th-12 th year after making the investment. All investments are shown at cost less impairment. (g) Fixed assets Fixed assets are stated at cost less accumulated depreciation. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment. Freehold land, works of art, asset under construction, tangibles out of operating are not depreciated. The depreciation rates based on the estimated useful lives are as follows: Property and plant 2-6% Rights on property 1-50% Investment on rented property 17% Office and other machinery and equipment 14.5-20% Mobiles 50% Motor vehicles 20% Computer equipment 17-33% Software 12.5-33% Other intangible assets 17-33% (h) Impairment of financial assets The Bank reviews its loan portfolios to assess impairment on a quarterly basis. Impairment losses are charged against the carrying amount of loans and advances that are identified as being impaired based on these reviews of outstanding balances and reduce these loans and advances to their recoverable amounts calculated on the basis of discounted future cash flows. Impairment losses are charged against income for the period. If in a subsequent period, the amount of impairment loss decreases, changes in recoverable amounts are recognised through the income statement. (i) Issued securities The issued bonds are stated in the books at purchase price, modified by the amortisation of the issuance cost and premium or discount. (j) Statutory reserves i. General reserve In accordance with Section 75 of Hungarian Act No. CXII of 1996, a general reserve equal to 10% of the net post tax income is required to be made in the Hungarian statutory accounts. The general reserve, as calculated under Hungarian Accounting and Banking Rules in the International Financial Statements, is treated as appropriations against retained earnings, and is not charged against income. ii. General risk reserve Under Section 87 of Hungarian Act No. CXII of 1996, a general risk reserve of 1.25% of the risk weighted assets may be made. The general risk reserve, as calculated under Hungarian Accounting and Banking Rules in the International Financial Statements, is treated as appropriations against retained earnings, and is not charged against income. (k) Interest and fee income and expense Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that a borrower may be unable to meet payments as they come due. In these unconsolidated financial statements, all unpaid interest is reversed upon such discontinuance and maintained in an off-balance sheet suspense account. (l) Dividend income Dividends are recognised in the current income statement, if the dividends are declared before the balance sheet preparation date. (m) Transactions in foreign currency The accounting records of the Bank are maintained in Hungarian Forints (HUF). Transactions denominated in other currencies are translated at exchange rates ruling at the date of the transaction. Assets and liabilities denominated in other currencies are translated at rates ruling at the balance sheet date. Gains and losses on exchange are recognised in the statement of income for the year. (n) Income taxes Income tax on the profit or loss for the year is comprised of current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Income taxes contain the extra tax for financial instutions, which was introduced from 2005. The base of the tax is the profit before taxation and the rate of the extra tax is 8 %. Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Under Hungarian tax legislation, banks cannot carry forward tax losses. (o) Statement of cash flows For the purposes of reporting cash flows, cash and cash equivalents include cash, balances and placements with the National Bank of Hungary except those with more than three months maturity. (p) Reclassification Certain items previously reported in the prior year financial statements have been reclassified to conform with the current year presentation. (q) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. The Bank does not identify any business or geographic segments, therefore no segment reporting is prepared on the non-consolidated level. 3. SUMMARY OF SIGNIFICANT RISK MANAGEMENT POLICIES The most significant business risks to which the Bank is exposed are credit, interest rate, liquidity and foreign exchange risks. Risk management policies are set by the Board of Directors of the Bank within the rules established by the National Bank of Hungary and the Hungarian Financial Institutions Supervision. The Board implements these policies. The Bank has established reporting systems, which permit monitoring of risk exposures. The Bank contracts transactions in the ordinary course of business in various currencies and uses the various financial instruments at its disposal. On and off-balance sheet financial assets and liabilities are denominated in these various currencies and, unless otherwise stated, are stated at year end FX rates, unless accounted for as a hedge. Banking transactions, unless otherwise stated, are effected at market rate. (a) Credit risk Credit risk is the risk that a customer or counterparty of the Bank will be unable or unwilling to meet a commitment that it has entered into with the Bank. It arises from lending, investment and other activities undertaken by the Bank. Credit risk is managed by the Board of Directors which establishes credit regulations including the approval process, discretionary credit limits, portfolio concentration guidelines, standards for the measurement of credit exposures, risk ratings of clients and assessments of management quality and financial performances. Each outstanding loan and investment is reviewed quarterly. Loans are classified based on a point rating system, which incorporates qualitative and quantitative factors. (b) Interest rate risk Interest rate risk is measured by the extent to which changes in market interest rates impact on margins and net interest income. Gaps in the value of assets, liabilities and off-balance sheet instruments that mature or reprice during a given period generate interest rate risk. The Bank reduces this risk by matching the repricing of assets and liabilities using pricing/maturity techniques, including the use of derivative products. Interest rate risk is managed by the Board of Directors through the mandate given to the Asset-Liability Committee, which establishes and delegates position limits, and monitors such limits to restrict the effect of movements in interest rates on current earnings and on the value of interest sensitive assets and liabilities. (c) Liquidity risk The Bank's policy is to manage the structure of its assets and liabilities and commitments in ways which create opportunities to maximize income while ensuring that funds will be available to honour all cash outflow obligations as these become due. Expected cash flows and daily liquidity reports are provided to management to enable timely liquidity monitoring. (d) Foreign exchange risk The Bank has assets and liabilities, both on and off-balance sheet, denominated in various foreign currencies. Foreign exchange risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank manages the currency structure of assets and liabilities on and off-balance sheet, utilising forward foreign exchange transactions and other hedging instruments. It is the policy of the Bank that it should not speculate in currencies and should only take currency positions within strict limits. The Board of Directors establishes and monitors specific regulations based on statutory and internal limits, and approves the overall strategy. Adherence to these limits, including intra day limits, is monitored continuously. The Foreign Exchange Guarantee Agreement between the Bank and the Hungarian Ministry of Finance was signed on 27 January 2004 with retroactive effect. This agreement manages foreign exchange risks of the Bank's foreign currency borrowings (Euro). Based on this agreement, State compensates any foreign exchange loss of the Bank arising from the placements denominated in other than Euro. However, the Bank is required to pay to the State the amount of realised foreign exchange gains on these transactions at the final maturity of the borrowings or upon introduction of the Euro as the official currency of Hungary. The state guarantee maximum underlying amount is declared by law and was HUF 900 billion in 2005. (2004.: HUF 530 billion) 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, 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 group, or national or local economic conditions that correlate with defaults on assets in the group. 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. 5. CASH AND BALANCES WITH THE NATIONAL BANK OF HUNGARY 2005 2004 Cash 199 305 Balances with the National Bank of Hungary: Obligatory reserve in HUF 2,906 127 Other 4,859 1,914 -------- -------- 7,964 2,346 ======== ======== According to the National Bank's regulation, the Bank is required to place 5 % of certain customer deposit as a statutory reserve. The rate of this reserve in 2004 was 5%. 6. PLACEMENTS WITH OTHER BANKS 2005 2004 Maturity within one year 47,880 69,523 Maturity between one and five years 70,023 48,747 Maturity over five years 34,151 17,066 -------- -------- 152,054 135,336 ======== ======== Placements with maturity over one year include placements with the National Bank of Hungary totaling MHUF 330 (2004: MHUF 962). Placements with other banks as at 31 December 2005 and 2004 can be broken down by weighted average rates as follows: 2005 2004 Placements in HUF 3.55 % 4.72% Placements in foreign currency 2.15 % 2.24% The main part of the placements with other banks in 2005 belongs to the long term refinancing loans which is the source of the customer loans of commercial banks. 7. LOANS AND ADVANCES TO CUSTOMERS, NET OF ALLOWANCE FOR IMPAIRMENT LOSSES 2005 2004 Maturity within one year 298,156 85,099 Maturity between one and five years 107,350 157,409 Maturity over five years 99,014 86,686 -------- -------- 504,520 329,194 Allowance for impairment losses (see Note 21) (47,824) (53,943) -------- -------- 456,696 275,251 ======== ======== Loans as at 31 December 2005 and 2004 can be broken down by weighted average rates as follows: 2005 2004 Loans in HUF 8.19 % 10.73 % Loans in foreign currency 3.71 % 2.99 % 8. AVAILABLE FOR SALE SECURITIES 31 December 2005 31 December 2004 Purchase price Unrecognized Gain/(Loss) Book Value Purchase price Unrecognized Gain/(Loss) Book Value ---------- ------------- ------------ ------------ ------------- ---------- Government Bonds 69,706 2,800 72,506 126,271 1,421 127,692 Other 3,440 0 3,440 3,440 0 3,440 Bonds MNB 2,129 18 2,147 1,797 80 1,877 Bonds Total 75,275 2,818 78,093 131,508 1,501 133,009 -------- ------- -------- --------- ------- --------- During 2004, the Bank reclassified its held to maturity financial assets to available for sale assets. Accordingly, all held to maturity assets must be classified as available for sale asset for the next financial year. Investments in debt securities as at 31 December 2005 and 2004 can be broken down by currency and actual interest rates as follows: 2005 2004 Hungarian Government within one year in HUF 6.5% 9.25-11.09% Hungarian Government between one and five years in 6.25-9.25% 6.25-9.25% HUF Other banks between one and five years in HUF 7.9% 12% Hungarian Government between one and 5 years in Foreign Currency 6.5% 6.5% Corporate bonds between one and five years in HUF 8.74-9.8% 8.74-9.8% 9. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES 2005 2004 Controlling interest 45,873 39,543 Significant interest 15,977 14,092 Other 982 1,562 -------- -------- 62,832 55,197 Allowance for impairment (see Note 21) (9,450) (10,467) -------- -------- 53,382 44,730 ======== ======== The Bank's controlling interest as at 31 December 2005 and 2004 were as follows: Name of the company HDB Direct Ownership 2005 HDB Direct Ownership 2004 Controlling interest Corvinus Nemzetkozi Befektetesi zRt. 100% 77.79% Defend Security Kft. "V.a." 60% 60% Magyar Exporthitel Biztosito zRt. 74.95% 74.95% Magyar Export-Import Bank zRt. 74.95% 74.95% Magyar Koveteleskezelo zRt. 100% 100% Magyar Kozmu zRt. 100% 100% MFB Uzemeltetesi Kft. - 100% Nemzeti Ingatlanfejleszto es Lakasberuhazo zRt. 100% 100% Toketars Kft. "V.a." - 99.99% Vecsei 2005 Kft. 100% - The Bank's significant interest as at 31 December 2005 and 2004 were as follows: Significant interest HDB Direct Ownership 2005 HDB Direct Ownership 2004 ---------------------- --------------- ---------------- --- Aranykapu zRt. 48.94% 49% Budai Egeszsegkozpont Kft. 49% 49% Civil Biztonsagi Szolgalat zRt. 48.72% 48.72% Csepany es Tarsai Kft. 48.62% - Debreceni Hus Rt. 49% 48.99% Ganz Transelektro Villamossagi zRt 41.98% 41.98% Grafika Press Rt. 48.98% - Intergas Hungaria zRt. 48.78% 48.78% Kenguru Gold Kft. 48.99% - Kenguru Kid Kft. 48.98% - Kiskunhalasi Baromfifeldolgozo Rt. 47.85% 47.85% Lamba Rt. "F.A." 48.84% 48.84% Laurel Kft. 48.73% - Monofix zRt. 48.89% - Organica zRt. 48.97% - Polus Palace zRt. 48.99% 48.99% Print-X Nyomdaipari zRt. 47.99% 47.99% Skublics es Tarsai Kft. 48.89% - Studio 96. zrt. 49% - Szalok Holding zRt. 48.93% 48.93% Viktoria Gem Kft. 48.78% 48.78% All of the above investee companies are incorporated in Hungary. 10. OTHER ASSETS 2005 2004 Accrued interest receivables and other accruals 13,997 5,767 Receivables from the State (exchange rate risk guarantee) 11,038 1,421 Advances 20 18 Other 2,502 2,346 Trade receivables 5 110 Taxation recoverable 584 308 -------- -------- 28,146 9,970 Allowance for other assets (see Note 21) (19) (251) 28,127 9,719 ======== ======== 11. FIXED ASSETS Intangible assets Land and buildings Equipment Assets under construction Total Gross value At the beginning of the year 3,177 2,638 2,446 362 8,623 Additions 610 114 269 993 1,986 Disposals - 36 208 952 1,196 ------- ------- ------- -------- ------ At the end of the year 3,787 2,716 2,507 403 9,413 ------- ------- ------- -------- ------ Depreciation At the beginning of the year 1,130 371 1,238 - 2,739 Additions 626 64 461 - 1,151 Disposals 15 14 162 - 191 ------- ------- ------- -------- ------ At the end of the year 1,741 421 1,537 - 3,699 ------- ------- ------- -------- ------ Net book value At December 31 2004 2,047 2,267 1,208 362 5,884 ======= ======= ======= ======== ====== At December 31 2005 2,046 2,295 970 403 5,714 ======= ======= ======= ======== ====== 12. DEPOSITS FROM OTHER BANKS AND OTHER BORROWED FUNDS 2005 2004 Payable within one year: National Bank of Hungary in HUF 606 1,291 Other banks in HUF 26,002 39,693 Other banks in foreign currency 10,608 3,593 --- --- Payable over one year: National Bank of Hungary in HUF 303 909 Other banks in HUF 18,737 18,737 Other banks in foreign currency 387,780 255,460 -------- --------- 444,036 319,683 ======== ========= Deposits from the National Bank of Hungary and other banks as at 31 December 2005 and 2004 can be broken down by weigthted average interest rates as follows: 2005 2004 Deposit from other banks and other borrowed funds in HUF 7.5 % 11.37 % Deposit from other banks and other borrowed funds in foreign currency 3.69 % 2.17 % 13. DEPOSITS FROM CUSTOMERS 2005 2004 Payable within one year: HUF 55,351 14,893 Payable over one year: HUF 331 166 foreign currency 6,575 5,999 -------- -------- 62,257 21,058 ======== ======== Deposits from customers as at 31 December 2005 and 2004 can be broken down by weighted average interest rates as follows: 2005 2004 Deposit from customers in HUF 7.5 % 11.58 % Deposit from customers in foreign currency 2.39 % 2.37 % 14. ISSUED SECURITIES Issued securities include the following bonds: a) EURO Bond The Bank issued bonds with a nominal value of EUR 450 million on 12 June 2001. The purpose of the issuance was to provide a general source of funds for the Bank's activities. The bonds were issued with a maturity date of 12 June 2006, and a fixed interest rate of 5.25%. The issuance was made at a 99.375% quotation rate. The Bonds were initially recognised at issuance price but were subsequently adjusted by the amortisation of the discount and issuance costs. b) HUF Bond In the framework of its HUF 100,000 million bond issuance program, the Bank issued bonds in the amount of HUF 12,000 million with a value date of 25 November 2002. The amount of the same series of bonds was increased by HUF 6,422 million by an issue made with a value date of 7 March 2003. The bonds were issued with a maturity date of 25 November 2007, and a fixed interest rate of 6.25%. The Bank swapped the fixed rate for a variable rate (see Note 15). 15. FINANCIAL INSTRUMENTS FOR HEDGING a) Foreign currency IRS deals The Bank concluded SWAP deals for the purpose of hedging the interest risk of foreign currency fixed interest rate bonds issued by the Hungarian National Bank. The amount at MHUF 10 included in the balance sheet reflects these deals' positive market value (2004: -119 MHUF). b) HUF IRS deals The financial instrument for hedging balance also includes the negative market value of the SWAP deals concluded to hedge the interest risk of issued HUF bonds by the Bank of MHUF 108 (2004: - 757 MHUF). 16. OTHER LIABILITIES 2005 2004 Accrued interest payable and other accruals 6,353 5,632 Other reserves (see Note 21) 2,167 13,410 Dividend payable liabilities 8,000 - Tax settlement 465 286 Payables 318 715 Amounts payable to subsidiaries 18 8 Other 82 181 ------- -------- 17,403 20,232 ======= ======== 17. SUBORDINATED DEBT In May 1998, the State Lottery and Gambling Plc. (Szerencsejatek Rt.), a company wholly owned by the Hungarian State, purchased subordinated bonds from the Bank for MHUF 9,500. The bonds mature after 10 years and bear 0% interest. According to an agreement on 29 December 1998, the Ministry of Finance became the owner of the bonds. The maturity date of the bonds is 30 April 2008. 18. SHARE CAPITAL, SHARE PREMIUM AND CAPITAL RESERVES 100% of the shares are owned by the Hungarian State. The rights of ownership are exercised by the Minister of Economy and Transport. a) Subscribed capital 2005 2004 87,570 ordinary shares with a nominal value of HUF 1 million each 87,570 87,570 ------- ------- b) Share premium 2005 2004 Share premium 0 52,036 ------- ------- c) Capital reserves In 2005 the Bank reclassified its negative retainded earnings into the share premium and capital reserve. 19. STATUTORY RESERVES 2005 2004 General reserve 3,710 1,812 General risk reserve 600 - -------- -------- 4,310 1,812 ======== ======== 20. COMMITMENTS AND CONTINGENT LIABILITIES 2005 2004 Commitments to extend credit 124,616 85,716 Guarantees 14,647 36,552 Law cases 1,729 1,527 Capital increase liability 3,614 620 Other commitments 1,349 7,760 -------- -------- --- --- 145,955 132,175 ======== ======== 21. ALLOWANCE FOR IMPAIRMENT AND PROVISIONS Net movement in the risk-reserves are as follows in 2005: a) Changes in the allowance for impairment of originated loans, investments and other assets : Loans Other assets Investment Total ------- ------------- ------------ ------- Closing balance at 31 December 2004 53,943 251 10,467 64,661 New impairment charges 16,967 - 4,608 21,575 Release of impairment (21,368) (232) (2,818) (24,418) Write off during year (15,225) - (2,807) (18,032) Reclassification from 13,509 - - 13,509 provision -------- --- --- -------- Closing balance at 31 December 2005 47,826 19 9,450 57,295 ======== ==== ======= ======== Net movement (6,117) (232) (1,017) (7,366) Write off during year (15,225) - (2,807) (18,032) ---------- --- --------- ---------- === Charged to income statement (4,401) (232) 4,608 (25) ========= ======= ======= ====== b) Changes in other provisions: Off-balance sheet items --------------- Closing balance at 31 December 2004 13,410 ======== New provision charges 3,445 Release of provision (1,179) Reclassification (13,509) ---------- Closing balance at 31 December 2005 2,167 ======= Net movement (11,243) Charged to income statement 2,265 ======= Net movement in the risk-reserves are as follows in 2004: c) Changes in the allowance for impairment of originated loans, investments and other assets: Loans Other assets Investment Total -------- ------------ ------------ ------- Opening balance at 31 December 2003 57,369 238 6,608 64,215 Transfers 7,100 - 1,937 9,037 New impairment charges 8,865 234 4,207 13,306 Release of impairment (712) (220) (291) (1,223) Write off during year (18,679) (1) (1,994) (16,684) Closing balance at 31 December 2004 53,943 251 10,467 64,661 ======== ===== ======== ======== Net movement (3,426) 13 3,858 445 Write off during year (18,679) (1) (1,994) (16,684) ---------- ----- --------- ---------- Charged to income statement 8,153 14 3,916 12,083 ======= ==== ======= ======== d) Changes in other provisions : Off-balance sheet items --------------- Opening balance at 31 December 2003 23,546 Transfers (9,037) New provision charges 5,164 Release of provision (6,263) Write off during year - ------------ Closing balance at 31 December 2004 13,410 ======== Net movement (10,136) Write off during year - ------------ Charged to income statement (1,099) ========= 22. NET INTEREST INCOME 2005 2004 Interest and similar income Customers 26,893 27,581 National Bank of Hungary 249 231 Other banks 3,410 2,788 Securities 8,118 11,391 Others - 276 --------- --------- 38,670 42,267 --------- --------- Interest expense and similar charges Customers (2,172) (730) National Bank of Hungary (111) (408) Other banks (10,813) (9,411) Securities (7,148) (6,934) Others - (1,650) --------- --------- (20,244) (19,133) --------- --------- Net interest income 18,426 23,134 ========= ========= 23. OTHER OPERATING INCOME/EXPENSES Other operating income 2005 2004 Recovered amounts of doubtful receivables, net 15,243 7,701 Gain on sale of receivables, net 32 4,660 Profit on sale of fixed assets, net - 410 Other income 88 162 ------ ------ 15,363 12,933 ====== ====== Other operating expenses 2005 2004 Unrealised FX losses from trading and available for sale securities, net - 644 Amortization of the issued bonds 326 328 Charitable donations 355 562 Loss on sale of fixed assets, net 27 - Other expenses relating to loans 15 14 Other 145 119 ------ ------ 868 1,667 ====== ====== 24. GENERAL AND ADMINISTRATIVE EXPENSES 2005 2004 Salaries and employee benefits 5,308 4,681 Depreciation and amortisation 1,149 976 Other expense 3,905 3,708 -------- -------- 10,362 9,365 ======== ======== The average number of the employees in 2005 was 355 (2004: 314). 25. INCOME TAXES The tax charge for the year is based on the profit for the year according to the statutory accounts of the Bank as adjusted for the relevant taxation regulation. The tax rate in Hungary for the year ended 31 December 2005 was 16% (2004: 16%). In 2005 and 2006 the Bank is subject to a surcharge of 8 % for financial institutions. 2005 2004 Corporate income tax 6,047 1,438 Deferred payment - temporary difference: - Revaluation of financial instruments - 126 -------- -------- - 126 Tax liability in the income statement 6,047 1,564 Balance of deferred tax liability - Revaluation of financial instruments - - -------- -------- - - ======== ======== Effective tax rate 2005 2005 2004 2004 Income/(loss) before income taxes 20,930 14,351 Taxes by law 16.0% 3,349 16.0% 2,296 Surcharge 8.0% 1,674 Non deductable expenses 0.2% 42 -4.23% (607) General risk reserve -0.69% (144) - - Effect of the release of impairment on investments 3.23% 676 - - Valuation of financial instruments 2.15% 450 -1.75% (251) Deferred tax effect Revaluation of financial instruments - - 0.88% 126 Effective tax liability 28.89% 6,047 10.90% 1,564 26. RELATED PARTIES Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. The list of related parties of the Bank (subsidiaries and associates) can be found in Note 9. Other related parties represent the state and other state-controlled entities. The balances arising from transactions with related parties were as follows in 2004: Subsidiaries and associates Other related parties Assets Cash and balances with the National Bank of Hungary - 2,041 Loans and advances to customers, net of allowance for impairment losses 3,473 171,292 Securities - 129,569 Investments in subsidiaries and associates 43,722 510 Other assets 14 7,735 Liabilities Deposit from other banks and other borrowed funds - 2,202 Deposit from customers 2,302 5,999 Other liabilities 7 286 Income Statement Interest and similar income 103 30,725 Interest expense and similar charges 235 476 The balances arising from transactions with related parties were as follows in 2005 : Subsidiaries and associates Other related parties Assets Cash and balances with the National Bank of Hungary - 7,765 Loans and advances to customers, net of allowance for impairment losses 3,997 326,025 Securities - 74,653 Investments in subsidiaries and associates 52,490 510 Other assets 34 25,899 Liabilities Deposit from other banks and other borrowed funds 1,138 912 Deposit from customers 10,057 6,252 Other liabilities 105 7,465 Income Statement Interest and similar income 257 24,800 Interest expense and similar charges 338 219 27. KEY MANAGEMENT PERSONNEL COMPENSATION The key management personnel compensation in 2005 were as follows : Members of the Board of Directors 33.7 Members of the Supervisory Board 22.0 CEO-s and deputy CEO-s 344.5 ------------------- --------- Total: 400.2 28. FOREIGN CURRENCY BALANCE SHEET AND CURRENCY RISK ANALYSIS The foreign currency balance sheet was as follows as at 31 December 2005: HUF EURO Other foreign currency Total ------ ------ ------ ------ Assets Cash and balances with the 7,302 662 - 7,964 National Bank of Hungary Placements with other 125,859 26,195 - 152,054 banks Loans and advances to customers, net of allowance for 355,395 97,911 3,390 456,696 impairment losses Securities 75,947 - 2,146 78,093 Investments in subsidiaries and 53,005 377 - 53,382 associaties Other assets 27,467 627 33 28,127 Fixed assets 5,714 - - 5,714 ------ ------ ------ ------ Total assets (1) 650,689 125,772 5,569 782,030 ====== ====== ====== ====== Liabilities Deposits from other banks and 45,650 391,173 7,213 444,036 other borrowed funds Deposits from customers 55,681 6,571 5 62,257 Issued securities 17,847 113,729 - 131,576 Financial instruments for - 98 98 hedging Other liabilities 11,892 5,478 33 17,403 ------ ------ ------ ------ Total liabilities 131,070 516,951 7,349 655,370 ------ ------ ------ ------ Subordinated liabilities 9,500 - - 9,500 ------ ------ ------ ------ Shareholder's equity 117,160 - - 117,160 ------ ------ ------ ------ Total liabilities and shareholder's equity (2) 257,730 516,951 7,349 782,030 ====== ====== ====== ====== Net Exposure (1) - (2) 392,959 (391,179) (1,780) - Commitments and Contingent 127,147 18,739 - 145,886 Liabilities ====== ====== ====== ====== Net foreign currency position at 520,106 (372,440) (1,780) - 31 December 2005 ====== ====== ====== ====== The main lines of foreign currency balance sheet was as follows as at 31 December 2004 : HUF EURO Other foreign currency Total Total assets (1) 510,090 88,281 7,904 606,275 ====== ======= ====== ====== Total liabilities and shareholder's equity (2) 219,897 385,057 1,321 606,275 ====== ======= ====== ====== Net Exposure (1) - (2) 290,193 (296,776) 6,583 - Commitments and Contingent 115,005 17,170 - 132,175 Liabilities ====== ======= ====== ====== Net foreign currency position 405,198 (279,606) 6,583 - at 31 December 2004 ====== ======= ====== ====== Foreign exchange rates applied in the above table were as follows as at 31 December 2005: 213.58 HUF/USD (2004: 180.29 HUF/USD) and 252.73 HUF/EUR (2004: 245.93 HUF/EUR). 29. MATURITY STRUCTURE OF ASSETS AND LIABILITIES The maturity structure of assets and liabilities were as follows as at 31 December 2005: ------ ------ ------ ------ ------ ------ ------- Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Over 5 Without maturity Total Years Years ------ ------ ------ ------ ------ ------ ------- Assets Cash and balances with the National Bank of Hungary 3,089 - - - - 4,875 7,964 Placements with other banks 28,888 3,666 15,575 67,439 36,486 - 152,054 Loans and advances to customers, net of allowance for 21,436 70,401 195,852 87,505 81,502 - 456,696 impairment losses Securities - 500 14,090 44,247 19,256 - 78,093 Investments in subsidiaries and - - - - - 53,382 53,382 associaties Other - - 28,127 - - - 28,127 assets Fixed - - - - - 5,714 5,714 assets ------ ------ ------ ------ ------ ------ ------- Total assets (1) 53,413 74,567 253,644 199,191 137,244 63,971 782,030 ====== ====== ====== ====== ====== ====== ======= Liabilities Deposits from other banks and other borrowed 21,224 12,656 3,344 311,135 95,677 - 444,036 funds Deposits from customers 25,567 13,863 15,921 6,318 588 - 62,257 Issued securities - - 113,729 17,847 - - 131,576 Financial instruments for hedging - - - 98 - - 98 Other liabilities - - 17,403 - - - 17,403 ------ ------ ------ ------ ------ ------ ------- Total liabilities 46,791 26,519 150,397 335,398 96,265 - 655,370 ------ ------ ------ ------ ------ ------ ------- Subordinated liabilities - - - 9,500 - - 9,500 ------ ------ ------ ------ ------ ------ ------- Shareholder's equity - - - - - 117,160 117,160 ------ ------ ------ ------ ------ ------ ------- Total liabilities and shareholder's equity (2) 46,791 26,519 150,397 344,898 96,265 117,160 782,030 ====== ====== ====== ====== ====== ====== ======= MISMATCH (1) - 6,622 48,048 103,247 (145,707) 40,979 (53,189) - (2) ====== ====== ====== ====== ====== ====== ======= The maturity structure of assets and liabilities were as follows as at 31 December 2004 : Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Over 5 Without maturity Total Years Years Total assets (1) 63,930 42,838 61,677 276,929 110,286 50,615 606,275 ====== ====== ====== ====== ====== ====== ======= Total liabilities andshareholder's equity (2) 54,545 1,566 23,754 370,274 48,671 107,465 606,275 ====== ====== ====== ====== ====== ====== ======= MISMATCH (1) -(2) 9,385 41,272 37,923 (93,345) 61,615 (56,850) - ====== ====== ====== ====== ====== ====== ======= 30. Interest Risk - REpricing analysis The repricing of assets and liabilities were as follows as at 31 December 2005 : ------ ------ ------- ------ ------ ------ ------- Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Over 5 Not interest bearing Total Years Years ------ ------ ------- ------ ------ ------ ------- Assets Cash and balances with the National Bank of Hungary 7,964 - - - - - 7,964 Placements with other banks 146,652 1,108 40 4,143 111 - 152,054 Loans and advances to customers, net of allowance for impairment losses 24,402 177,280 186,230 46,995 21,789 - 456,696 Securities - 500 14,090 44,247 19,256 - 78,093 Investments in subsidiaries and associaties - - - - - 53,382 53,382 Other assets - - 28,127 - - - 28,127 Fixed assets - - - - - 5,714 5,714 ------ ------ ------- ------ ------ ------ ------- Total assets (1) 179,018 178,888 228,487 95,385 41,156 59,096 782,030 ====== ====== ======= ====== ====== ====== ======= Liabilities Deposits from other banks and other borrowed funds 199,800 224,071 18,777 1,388 - - 444,036 Deposits from customers 26,029 14,073 15,930 6,225 - - 62,257 Issued securities - - 113,729 17,847 - - 131,576 Financial instruments for hedging - - - 98 - 98 Other liabilities - - 17,403 - - - 17,403 ------ ------ ------- ------ ------ ------ ------- Total liabilities 225,829 238,144 165,839 25,558 - - 655,370 ------ ------ ------- ------ ------ ------ ------- Subordinated liabilities - - - 9,500 - - 9,500 ------ ------ ------- ------ ------ ------ ------- Shareholder's equity - - - - - 117,160 117,1605 ------ ------ ------- ------ ------ ------ ------- Total liabilities andshareholder 's equity (2) 225,829 238,144 165,839 35,058 - 117,160 782,030 ====== ====== ======= ====== ====== ====== ======= MISMATCH (1) -(2) (46,811) (59,256) 62,648 60,327 41,156 (58,064) - ====== ====== ======= ====== ====== ====== ======= The repricing of assets and liabilities were as follows as at 31 December 2004 : Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Over 5 Not interest bearing Total Years Years Total assets (1) 137,206 156,829 77,991 139,180 44,455 50,614 606,275 ====== ====== ======= ====== ====== ====== ======= Total liabilities andshareholder 's equity (2) 170,610 135,615 21,356 141,167 10,374 107,465 606,275 ====== ====== ======= ====== ====== ====== ======= MISMATCH (1) -(2) (33,404) 21,214 56,635 (1,987) 34,081 (56,851) - ====== ====== ======= ====== ====== ====== ======= 31. TABLE OF FAIR VALUE Carrying amount Fair value --------- --------- Assets Cash and balances with the National Bank of Hungary 7,964 7,964 Placements with other banks 152,054 152,054 Loans and advances to customers, net of allowance for impairment losses 456,696 456,918 Securities 78,093 78,093 Investments in subsidiaries and associates 53,382 53,382 Other assets 28,127 28,127 Fixed assets 5,714 5,714 --------- --------- Total assets (1) 782,030 782,252 ========= ========= Liabilities Deposits from other banks and other borrowed funds 444,036 444,036 Deposits from customers 62,257 62,257 Issued securities 131,576 131,576 Financial instruments for hedging 98 98 Other liabilities 17,403 17,403 --------- --------- Total liabilities 655,370 655,370 --------- --------- Subordinated liabilities 9,500 8,290 Shareholder's equity 117,160 118,592 --------- --------- Total liabilities and shareholder's equity (2) 782,030 782,252 ========= ========= 32. RECONCILIATION OF OWNERS EQUITY DIFFERENCES BETWEEN HUNGARIAN ACCOUNTING REGULATIONS AND IFRS Equity 31 December 2004 Net income for 2005 Statutory Reserves Retained Equity 31 December 2005 ------- ------- ------- earnings ------- ------- Hungarian financial statements ("HFS") 105,492 6,077 1,898 - 113,467 Reclassificati on of general risk reserve - - 600 - 600 General risk reserve - 600 - (600) - General reserve - 1,898 - (1,898) - Valuation of financial instruments 1,973 (4,692) - 5,812 3,093 Dividend for the year 2005 - 11,000 - (11,000) - Deferred tax - - - - - ------- ------- ------- ------- ------- International financial statements 107,465 14,883 2,498 (7,686) 117,160 ======= ======= ======= ======= ======= 33. RECONCILIATION OF THE OWNERS' EQUITY AND PROFIT BEFORE TAXATION IN THE HUNGARIAN AND IFRS FINANCIAL STATEMENTS Profit before tax Equity Hungarian financial statement 25.022 113.467 1. Reclassification and charge of general risk reserve into equity 600 600 2. Reclassification of the releases of impairment on investments into equity -2.818 - 3. Reclassification of the releases of impairment on available for sale securities into equity -1.423 - 4. Reclassification of the amortization of available for sale securities -368 - 5. Opening balance of the revaluation of available for sale securities from 2004 - +1.973 6. Adjustment on available for sale securities revaluation in 2005 - +1.040 7. Effect of the revaluation of the Hungarian National Bank bonds and the related interest rate swap - 28 8. Adjustment on other financial instruments -83 52 International financial statements 20.930 117.160 The main part of the difference of the equity and the profit before tax between the Hungarian and the International Financial Statements is explained with the fact, that certain items mentioned in the above table shall be accounted in the financial statements prepared in accordance with IFRS directly to the equity and these do not appear in the Profit and Loss Statement. 34. EVENTS AFTER THE REPORTING DATE Decision on expanding the tasks of the Hungarian Development Bank In collaboration with the Hungarian Government, the Bank elaborated its concept for the further centralization of state-owned aid intermediation organisations, under which the goal is to create a "one-stop shop" framework for businesses on a regional level. The aim of this centralization is for EU funding to be received and channelled on through one institution. The operation of Hitelgarancia Rt., an institution which represents one of the main elements of the guarantee system stimulating financing and reducing risks, will be integrated more into the MFB Group. One of the objectives of the programme is to combine the individual public institutions that deal with investments in order to create a more transparent and cost-efficient organisation. Agreement on bond issue There are some major tasks to be completed within the framework of the Bank's funding activity in 2006. The Bank has to raise the highest level of funding in its history, totalling EUR 1.6 billion. The Bank commenced negotiations aimed at replacing the foreign currency bond issued in 2001 with a nominal value of EUR 450 million and which matures this year on 12 June, and after the tendering procedure selected the entities to organise the new bond issue of EUR 500 million. In agreement with other public issuers, the MFB is expected to enter the market during late March, while the conditions of the bond are likely to be more favourable than the issue in 2001. Merger of subsidiaries The Bank, as the owner, decided that two of its subsidiaries were to be merged into other companies. Vecsey 2005 Kft. was merged into the Bank as of 31 December 2005, while Magyar Kozmu Rt. will be merged into NIL Rt. as of 30 April 2006. 35. EFFECTS OF NEW IFRS PRONOUNCEMENTS Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Bank's accounting periods beginning on or after 1 January 2006 or later periods, but which the Bank has not early adopted, as follows: (a) IAS 19 (Amendment), Employee Benefits (effective from 1 January 2006) As the Bank does not have any defined benefit plans, this amendment is not relevant to the Bank's operations. (b) IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from 1 January 2006) This amendment is not relevant to the Bank's operations, as the Bank does not have any intragroup transactions that would qualify as a hedged item in the non-consolidated financial statements as of 31 December 2005 and 2004. (c) IAS 39 (Amendment), The Fair Value Option (effective from 1 January 2006) This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Bank believes that this amendment should not have a significant impact on the classification of financial instruments, as the Bank should be able to comply with the amended criteria for the designation of financial instruments at fair value through profit and loss. (d) IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts (effective from 1 January 2006) This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognised at their fair value and subsequently measured at the higher of: (a) the unamortised balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date. Management is currently assessing the impact of this amendment on the Bank's operations. (e) IFRS 1(Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006) These amendments are not relevant to the Bank's operations as the Bank is not a first-time adopter of IFRS and does not carry out exploration for and evaluation of mineral resources. (f) IFRS 6, Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006) IFRS 6 is not relevant to the Bank's operations. (g) IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007) IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity's capital and how it manages capital. Management is currently assessing the impact of this amendment on the Bank's operations and the disclosures of financial statements. (h) IFRIC 4, Determining whether an Arrangement contains a Lease (effective from 1 January 2006) IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. Management is currently assessing the impact of IFRIC 4 on the Bank's operations. (i) IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (effective from 1 January 2006) IFRIC 5 is not relevant to the Bank's operations. (j) Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates - Net Investment in a Foreign Operation (effective from 1 January 2006) The Bank currently has no items comprising net investments in foreign operations that will be affected by the amendment. (k) IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. (effective from 1 March 2006) IFRIC 7 is not relevant to the Bank's operations. (l) IFRIC 8 Scope of IFRS 2 (effective from 1 May 2006) IFRIC 8 is not relevant to the Bank's operations. (m) IFRIC 9 Reassessment of Embedded Derivatives (effective from 1 June 2006) The Bank has not yet completed its analysis of the impact of the new Interpretation. This information is provided by RNS The company news service from the London Stock Exchange END FR PUUCWQUPQGCP
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