Appendix B: Illustrative Financial Statements Presented Under IAS

This appendix contains three comprehensive sets of financial statements presented in accordance with international accounting standards.

The first example, Simple Traders Inc., illustrates how a relatively simple business' financial statements might be presented. The second example, Simple Manufacturing Inc., is for a more advanced operation and involves a greater number of financial reporting issues, including those unique to financial instruments, related-party transactions, and manufacturing operations. The final example, Simple Bank Inc., illustrates the extensive disclosures prescribed under IAS for this specialized industry and also incorporates disclosures relevant to publicly held companies (disclosures like segment reporting, etc.). Taken together, these examples will convey a range of effective communications of the accounting policies and practices under existing international accounting standards.

It is not the intent to suggest that these example financial statements are all-inclusive of either industry practices or the reporting and disclosure standards under IAS. Rather, these are merely illustrative of common practices at this time, from which readers may construct disclosures apropos to their individual needs and circumstances.

1. Illustrative financial statement—Simple Traders, Inc.

   Simple Traders Inc. Balance Sheet As of June 30, 2002

   	Notes	2002 USD	2001 USD
   Assets
   Current assets:
   Cash and banks	4	2,292,282	2,517,806
   Trade and other receivables	5	53,734,494	57,878,976
   Amounts due from related parties	6	85,286	3,148,260
   Inventories	7	5,956,454	8,318,928
   		62,068,516	71,863,970
   Noncurrent assets:
   Loan to related party	6	14,000,000	-
   Property, plant, and equipment	8	25,237,506	20,902,178
   Intangible assets	9	148,494	188,466
   		39,386,000	21,090,644
   Total assets		101,454,516	92,954,614
   Liabilities and Owners' Equity
   Current liabilities:
   Due to bank	10	8,328,494	5,126,280
   Trade and other payables	11	25,335,556	27,736,648
   Amounts due to related parties	6	163,116	1,127,360
   		33,827,166	33,990,288
   Noncurrent liabilities:
   Long-term loans	12	14,508,888	--
   End of service gratuity		4,795,754	4,583,796
   		19,304,642	4,583,796
   Owners' equity:
   Share capital	13	22,000,000	22,000,000
   Statutory reserve		6,051,887	6,051,887
   Proposed dividend		--	2,000,000
   Retained earnings		20,270,821	24,328,643
   Owners' equity		48,322,708	54,380,530
   Total liabilities and owners' equity		101,454,516	92,954,614
   The accompanying notes form an integral part of these financial statements.

   Simple Traders Inc. Statement of Income As of June 30, 2002

   	Notes	2002 USD	2001 USD
   Revenue:		101,552,746	94,630,010
   Cost of sales		(100,262,898)	(83,977,434)
   Gross profit:		1,298,848	10,652,576
   Other operating equipment		846,624	459,306
   Distribution costs		(174,990)	(86,372)
   Administrative expenses		(7,864.204)	(5,543,316)
   (Loss)Profit from operating activities:	14	(5,902,722)	5,482,194
   Finance costs		(155,100)	(34,382)
   Net (loss)profit for the year		(6,057,822)	(5,447,812)
   The accompanying notes form an integral part of these financial statements.

   Simple Traders Inc. Statement of Changes in Equity For the Year Ended June 30, 2002

   	Share capital USD	Statutory reserve USD	Proposed dividend USD	Retained earnings USD	Total USD
   As at June 30, 2000	22,000,000	5,507,106	--	29,425,612	56,932,718
   Net profit for the year	--	--	--	5,447,812	5,447,812
   Transfer to statutory reserve	--	544,781	--	(544,781)	--
   Dividend proposed	--	--	10,000,000	(10,000,000)	--
   Dividend paid[a]	--	--	(8,000,000)	--	(8,000,000)
   As at 30 June 2001	22,000,000	6,051,887	2,000,000	24,328,643	54,380,530
   Reversal of dividend proposed	--	--	(2,000,000)	2,000,000	--
   Net loss for the year	--	--	--	(6,057,822)	(6,057,822)
   As at 30 June 2002	22,000,000	6,051,887	--	20,270,821	48,322,708
   The accompanying notes form an integral part of these financial statements.
   [a]Dividend paid per share for the current year NIL (previous year USD 363.6 per share)

   Simple Traders Inc. Statement of Cash Flows For the Year Ended June 30, 2002

   	Notes	2002 USD	2001 USD
   Cash flows from operating activities Net cash from operating activities	16	3,173,990	17,864,176
   Cash flows from investing activities
   Purchase of property, plant, and equipment		(10,212,504)	(663,522)
   Proceeds from sale of property and equipment		1,240,102	6,160
   Acquisition of intangibles		(81,844)	(32,748)
   Net cash used in investing activities		(9,054,246)	(690,110)
   Cash flows from financing activities
   Decrease in due from related parties		3,062,974	2,591,534
   Decrease in due to related parties		(964,244)	(12,709,336)
   Proceeds from long-term bank loan		2,460,000	--
   Repayment of long-term bank loan		(1,279,112)	--
   Loan from related party		14,000,000	--
   Loan to related party		(14,000,000)	--
   Increase in bank overdraft		2,530,214	3,433,966
   Interest paid		(155,100)	(34,382)
   Dividends paid		--	(8,000,000)
   Net cash from (used in) financing activities		5,654,732	(14,718,218)
   Net (decrease) increase in cash and cash equivalents		(225,524)	2,455,848
   Cash and cash equivalents, beginning of year		2,517,806	61,958
   Cash and cash equivalents, end of year	4	2,292,282	2,517,806
   The accompanying notes form an integral part of these financial statements.

Simple Traders Inc. Notes to the Financial Statements For the Year Ended June 30, 2002

Note 1: Establishment and operations. Simple Traders Inc. (the "company") is a limited liability company registered in the country XXX. The company's business principally comprises trading in mosaic tiles. The address of the registered office of the company is 2001 Expensive Street, New Wish City, Country XXX.

Note 2: Adoption of International Accounting Standards. In the current year, the company adopted IAS 39, Financial Instruments: Recognition and Measurement, which has introduced the concept of reporting financial instruments (including "off-balance-sheet" financial instruments) at their respective fair values. The adoption of this standard by the company has not resulted in any significant impact on these financial statements.

Note 3: Summary of significant accounting policies. The financial statements are prepared under the historical cost convention and in accordance with International Accounting Standards. The significant accounting policies adopted are as follows:

1. Property, plant, and equipment. Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives as follows:

   	Years
   Buildings	10
   Plant, machinery, and equipment	7
   Furniture, fixtures, and office equipment	4
   Motor vehicles	3

   Capital work-in-progress is not depreciated. Depreciation is charged on the assets from the date on which they come in to use.

2. Intangible assets. Intangible assets are amortized using the straight-line method over their estimated useful life of four years.

3. Inventories. Inventories are stated at the lower of cost and net realizable value. Cost is arrived at using the weighted-average method. Cost comprises invoice value plus applicable handling charges. Net realizable value is based on estimated selling price less estimated costs to completion and disposal.

4. End-of-service gratuity. Provision is made for end-of-service gratuity payable to employees at the balance sheet date in accordance with the labor laws of country XXX.

5. Foreign currency translations. Transactions in foreign currencies are translated into US dollars at the rate of exchange ruling on the date of the transaction. Monetary assets and liabilities expressed in foreign currencies are translated into US dollars at the rate of exchange ruling at the balance sheet date. Gains or losses resulting from foreign currency transactions are taken to the Statement of Income.

6. Statutory reserve. A statutory reserve is created by the limited liability company by allocating 10% of its net profit for the year as required by commercial companies law of country XXX. The company can discontinue such annual transfer when its statutory reserve totals 50% of its paid-up share capital. The reserve is not available for distribution except as provided in the XXX Law.

7. Revenue. Revenue represents the net amount invoiced for goods supplied.

8. Borrowing costs. Borrowing costs are recognized as an expense in the period in which they are incurred.

9. Cash and cash equivalents. Cash and cash equivalents comprise cash and bank current account.

10. Financial instruments. Financial assets and financial liabilities are recognized on the Company's balance sheet when the Company has become a party to the contractual provisions of the instrument.

    Trade receivables

    Trade receivables are stated at their nominal value as reduced by appropriate allowance for estimated doubtful amounts.

    Trade payables

    Trade payables are stated at their nominal value.

11. Dividends payable. Dividends payable are presented as a separate component of equity.

Note 4: Cash and banks.

	2002 USD	2001 USD
Cash on hand	60,000	60,000
Bank balances	2,232,282	2,457,806
	2,292,282	2,517,806

Note 5: Trade and other receivables.

	2002 USD	2001 USD
Trade receivables	51,921,552	54,326,624
Other receivables	1,269,220	1,048,716
Less: Allowance for doubtful receivables	(1,120,616)	(34,314)
	52,070,156	55,341,026
Advances	872,786	357,402
Prepayments	543,052	1,938,048
Deposits	248,500	242,500
	53,734,494	57,878,976

Note 6: Related-party transactions. The company enters into transactions with other companies that fall within the definition of a related party contained in International Accounting Standard 24. Such transactions are in the normal course of business and at terms that correspond to those on normal arm's-length transactions with third parties.

Related parties comprise companies under common ownership and/or common management control. At the balances sheet date, trade and nontrade balances with related parties were as follows:

	2002 USD	2001 USD
Included in trade receivables	3,145,768	4,811,048
Included in trade payables	17,617,476	17,772,796
Disclosed as amounts due from related parties	85,286	3,148,260
Disclosed as amounts due to related parties	163,116	1,127,360
Disclosed as loan from related party	14,000,000	--
Disclosed as loan to related party	14,000,000	--

The nature of significant related-party transactions during the year and the amounts involved were as follows:

	2002 USD	2001 USD
Sales	8,857,316	10,509,302
Purchases	33,211,776	27,926,464
Interest expense	155,100	34,382

The company also provides funds to and receives funds from related parties as and when required for working capital purposes. Interest is charged or paid at commercial rates. The loan from a related party bears interest rate of US Prime plus 1%. This loan is unsecured and is without any fixed repayment schedule. The loan to a related party is interest-free and has no repayment schedule.

Note 7: Inventories.

	2002 USD	2001 USD
Trading material	2,246,894	3,476,594
Stores and consumables	6,114,010	7,146,082
Less: Allowance for slow moving inventories	(3,074,648)	(2,371,068)
	5,286,256	8,251,608
Goods in transit	670,198	67,320
	5,956,454	8,318,928

Note 8: Property, plant, and equipment.

	Buildings USD	Plant, machinery, and equipment USD	Furniture, fixtures, and office equipment USD	Motor vehicles USD	Capital work in progress USD	Total USD
Cost
As at 1 July 2001	11,133,094	77,920,256	3,365,862	2,157,500	354,698	94,931,410
Additions during the year	--	--	7,266	307,000	9,898,238	10,212,504
Transfer during the year	--	9,711,560	63,834	--	(9,775,394)	--
Disposals during the year	--	(6,137,964)	(491,608)	(511,200)	(301,002)	(7,441,774)
As at 30 June 2002	11,133,094	81,493,852	2,945,354	1,953,300	176,540	97,702,140
Accumulated depreciation
As at 1 July 2001	8,449,534	61,334,260	2,489,256	1,756,182	--	74,029,232
Depreciation for the year	255,798	4,554,888	313,346	258,500	--	5,382,532
Adjustments relating to disposals	--	(6,137,946)	(348,994)	(460,190)	--	(6,947,130)
As at 30 June 2002	8,705,332	59,751,202	2,453,608	1,554,492	--	72,464,634
Net hook value
As at 30 June 2002	2,427,762	21,742,650	491,746	398,808	176,540	25,237,506
As at 30 June 2001	2,683,560	16,585,996	876,606	401,318	354,698	20,902,178

Note 9: Intangible assets.

	Computer software USD	Patents and trademarks USD	Total USD
Cost
As at 1 July 2001	1,235,736	43,650	1,279,386
Additions during the year	81,844	--	81,844
As at 30 June 2002	1,317,580	43,650	1,361,230
Accumulated amortization
As at 1 July 2001	1,080,018	10,902	1,090,920
Amortization for the year	89,068	32,748	121,816
As at 30 June 2002	1,169,086	43,650	1,212,736
Net book value
As at 30 June 2002	148,494	--	148,494
As at 30 June 2001	155,718	32,748	188,466

Note 10: Due to bank.

	2002 USD	2001 USD
Bank overdraft	7,656,494	5,126,280
Current portion of long-term bank loan (note 12)	672,000	--
	8,328,494	5,126,280

Bank overdraft is secured by personal and corporate guarantee of shareholders and bears an interest rate of a fixed percentage above US Prime.

Note 11: Trade and other payables.

	2002 USD	2001 USD
Trade payables	22,993,574	25,402,922
Accruals	2,138,152	1,516,562
Other payables	203,830	817,164
	25,335,556	27,736,648

Note 12: Long-term loans.

	2002 USD	2001 USD
Long-term bank loan	1,180,888	--
Less: Current portion (note 10)	(672,000)	--
	508,888	--
Loan from related party	14,000,000	--
	14,508,888	--

Bank term loan is secured by corporate guarantees of the shareholders and bears an interest rate of 1.5% over US prime with a minimum of 7.50% per annum.

Note 13: Share capital.

Authorized, issued, and fully paid—22,000 shares of USD 1,000 each, owned as follows:

	USD
Imperial Investment Co. LLC	10,000,000
Excellent Investments Inc.	12,000,000
	22,000,000

The company's ultimate parent is Exuberant Inc., incorporated in Isle of Man.

Note 14: Loss/profit from operating activities. Loss/profit for the year from operating activities is stated after charging

	2002 USD	2001 USD
Salaries and benefits	14,843,550	12,209,898
Depreciation	5,382,532	5,629,350

Note 15: Number of employees. The number of employees of the company at the end of the year was 200 (June 30, 2001: 175).

Note 16: Net cash from operating activities.

	2002 USD	2001 USD
Net (loss)profit for the year	(6,057,822)	5,447,812
Adjustments for noncash items
Depreciation of property, plant, and equipment	5,382,532	5,629,350
Gain on sale of property, plant, and equipment	(745,458)	(6,152)
Amortization of intangible assets	121,816	100,914
Allowance for slow moving inventory	703,580	537,396
Allowance for doubtful receivables	1,086,302	--
Provision for end of service gratuity	857,026	-
Interest expense	155,100	34,382
	1,503,076	11,743,702
Decrease in trade and other receivables	3,058,180	10,101,970
Decrease in inventories	1,658,894	1,962,772
Decrease in trade and other payables	(2,401,092)	(5,524,168)
Cash generated from operations:	3,819,058	18,284,276
End-of-service gratuity paid	(645,068)	(420,100)
Net cash from operating activities	3,173,990	17,864,176

Note 17: Financial instruments: credit, interest rate, and exchange rate risk exposures.

1. Credit risk. Financial assets which potentially expose the company to concentrations of credit risk comprise, principally, bank current accounts, trade and other receivables, and amounts due from related parties. The company's bank accounts are placed with high credit quality financial institutions. Trade and other receivables are stated net of the allowance for doubtful recoveries. At the balance sheet date the company did not have any significant exposure to credit risk from customers situated outside the XXX. There are no significant concentrations of credit risk amongst individual customers.

2. Interest rate risk. Bank borrowings are at floating rates of interest generally obtained in the XXX, which are negotiated with the banks at US Prime plus a negotiated margin.

3. Exchange rate risk. At the balance sheet date, there are no significant exchange rate risks as substantially all financial assets and financial liabilities are denominated in US dollars.

Note 18: Financial instruments: fair values. The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction. At the balance sheet date, the fair values of the company's financial assets and financial liabilities approximate to their carrying values.

Note 19: Commitments and contingent liabilities.

	2002 USD	2001 USD
Letters of credit	1,909,666	315,495
Letters of guarantee	50,000	--
	1,959,666	315,495

Note 20: Comparative figures. Certain previous year figures have been reclassified to conform with current year's presentation.

2. Illustrative financial statement—Simple Manufacturing, Inc.

Simple Manufacturing Inc. Balance Sheet As at June 30, 2002

	Notes	2002 USD	2001 USD
Assets
Current assets:
Cash and cash equivalents	4	350,180	25,166
Trade and other receivables	5	19,904,772	16,816,106
Inventories	6	18,482,662	15,961,120
Amounts due from related parties	7	1,235,796	404,144
		39,973,410	33,206,536
Noncurrent assets:
Property, plant, and equipment	8	117,796,980	111,810,436
Intangible assets	9	2,282,508	2,251,721
Investment property	10	3,610,000	3,000,000
Investment in associates	11	1,890,000	1,500,000
Available-for-sale financial assets		2,000,000	1,690,000
		127,579,488	120,252,208
Total assets		167,552,898	153,458,744
Liabilities and Shareholders' Funds
Current liabilities:
Due to banks	12	3,889,328	17,594,858
Trade and other payables	13	40,365,452	35,873,644
Amounts due to related parties	7	60,844,520	52,855,170
		105,099,300	106,323,672
Noncurrent liabilities:
Interest-bearing liabilities—long-term portion	14	14,680,000	300,000
Other long-term liabilities	15	2,757,656	4,398,414
		17,437,656	4,698,414
Shareholders' funds:
Share capital	16	5,000,000	5,000,000
Statutory reserve		2,500,000	2,500,000
Retained earnings		5,015,942	2,436,658
Shareholders' equity		12,515,942	9,936,658
Subordinated loans from shareholder	17	32,500,000	32,500,000
		45,015,942	42,436,658
Total liabilities and shareholders' funds		167,552,898	153,458,744
The accompanying notes form an integral part of these financial statements.

Simple Manufacturing Inc. Statement of Income For the Year Ended June 30, 2002

	Notes	2002 USD	2001 USD
Revenue:		67,497,474	71,196,018
Other operating income		3,193,502	2,345,794
		70,690,976	73,541,812
Operating expenses:
Materials consumed		31,449,162	33,154,690
(Increase)decrease in inventories of finished goods		(63,314)	516,748
Salaries and benefits		8,090,312	9,569,694
Depreciation		7,920,074	7,890,238
Amortization		427,992	423,402
Other operating expenses		12,714,536	13,222,344
Total operating expenses		60,538,762	64,777,116
Profit from operating activities:		10,152,214	8,764,696
Finance costs	18	(8,882,930)	(7,539,960)
Fair value adjustment—investment property		100,000	--
Fair value adjustment—available-for-sale financial instruments		10,000
Share of profit from associates		390,000	250,000
Net profit for the year		1,769,284	1,474,736
The accompanying notes form an integral part of these financial statements.

Simple Manufacturing Inc. Statement of Changes in Shareholders' Equity For the Year Ended June 30, 2002

	Share capital USD	Statutory reserve USD	Retained earnings USD	Total USD
Balance at July 1, 2000	5,000,000	2,500,000	961,922	8,461,922
Net profit for the year	--	--	1,474,736	1,474,736
Balance at July 1, 2001	5,000,000	2,500,000	2,436,658	9,936,658
Increase in fair value (investment property)	--	--	510,000	510,000
Increase in fair value (available-for-sale financial instruments)	--	--	300,000	300,000
Balance at July 1, 2001 (as restated)	5,000,000	2,500,000	3,246,658	10,746,658
Net profit for the year	--	--	1,769,284	1,769,284
Balance at June 30, 2002	5,000,000	2,500,000	5,015,942	12,515,942
The accompanying notes form an integral part of these financial statements.

Simple Manufacturing Inc. Statement of Cash Flows For the Year Ended June 30, 2002

	Notes	2002 USD	2001 USD
Cashflows from operating activities Net cash from operating activities	20	16,137,770	4,614,106
Cash flows from investing activities
Purchase of property, plant, and equipment		(14,638,072)	(6,584,858)
Purchase of investment property		--	(3,000,000)
Proceeds from sale of property, plant, and equipment		716,812	19,160
Payments for intangible assets		(458,728)	(734,166)
Net cash used in investing activities		(14,379,988)	(10,299,864)
Cash flows from financing activities
Proceeds from long-term bank loans		14,680,000	12,000,000
Repayment of long-term bank loans		(6,900,000)	--
(Decrease) increase in due to banks—excluding term loans		3,963,410	(7,105,530)
Repayment of supplier's loans		(2,107,238)	(10,508,252)
Net cash from (used in) financing activities		(1,432,768)	5,455,158
Net increase (decrease) in cash and cash equivalents		325.014	(230,600)
Cash and cash equivalents, beginning of year		25,166	255,766
Cash and cash equivalents, end of year	4	350,180	25,166
The accompanying notes form an integral part of these financial statements.

Simple Manufacturing Inc. Notes to the Financial Statements For the Year Ended June 30, 2002

Note 1: Establishment and operations of the company. Simple Manufacturing Inc. (the "company") is a limited liability company incorporated in country XXX. The company manufactures widgets and accessories. The address of the registered office of the company is...... The financial statements for the year ended June 30, 2002, were authorized for issuance by the board of directors on...... The ultimate parent of the company is YYY which is incorporated in Channel Islands.

Note 2: Changes in accounting policies resulting from first-time adoption of International Accounting Standards. Effective July 1, 2001, the company has adopted the following International Accounting Standards for the first time, which has resulted in changes in accounting policies as explained below.

IAS 39, Financial Instruments: Recognition and Measurement, introduced a comprehensive framework for accounting for all financial instruments. The effect of adopting this standard is that the investment in listed equity securities (classified as an "available-for-sale" financial instrument) will be carried at fair value, with changes in fair value being reflected currently in earnings.

IAS 40, Investment Property, addresses measurement issues relating to investment property. The effect of adopting this standard is that the company will carry investment property at fair value (instead of at cost less accumulated depreciation, which was its policy previously), with unrealized gains or losses from changes in fair value of investment property being reflected currently in earnings.

The effect of the change in accounting policy resulting from adoption of IAS 39 is to increase (decrease) the net income for the year ended June 30, 2002, by ...... and equity by ...... The effect of the change in accounting policy resulting from adoption of IAS 40 is to increase (decrease) the net income for the year ended June 30, 2002, by ...... and equity by ......

Note 3: Summary of significant accounting policies. The financial statements are prepared in accordance with International Accounting Standards (IAS) and under the historical cost convention, except in case of investment property and certain financial instruments, which are carried at fair value in accordance with IAS. The significant accounting policies adopted are as follows:

1. Property, plant, and equipment. Property, plant, and equipment are carried at cost less accumulated depreciation. Property, plant, and equipment are depreciated using the straight-line method over their respective estimated useful lives as follows:

   	Years
   Factory and office buildings	20
   Plant, machinery, and equipment	5 – 20
   Furniture, fixtures, and office equipment	5
   Vehicles	5

   Capital work-in-progress is not depreciated. Depreciation is charged on the assets from the date on which they are placed in service.

2. Amortization of intangible assets. Goodwill arising from purchase business acquisitions, patents and trademarks, development costs, and software development expenditures are amortized using the straight-line method over their estimated useful lives as follows:

   	Years
   Goodwill	10
   Patents and trademarks	10
   Development costs	5
   Computer software	5

3. Investment property. Investment property represents commercial real estate held for the purpose of earning rental income, and is stated at fair value at the balance sheet date. The changes in fair value of the investment property are reflected currently in the income statement. Fair values have been determined based on valuations undertaken by an independent qualified appraiser. These valuations were conducted with reference to market prices of similar properties.

4. Investment in associates. Investment in associates represents investments in entities over which the company has the power to exercise significant influence, through participation in the investees' financial and operating policy decisions. Such investments are accounted for under the equity method, whereby the investments are initially recorded at cost and are subsequently adjusted based on the company's share of the subsequent profits or losses of the investees.

5. Inventories. Inventories are stated at the lower of cost or net realizable value. Cost is arrived at using the first-in, first-out (FIFO) method. Cost comprises invoice value plus applicable landing charges in the case or raw materials, packing materials, spares, and consumables. Finished goods comprise cost of materials plus attributable labor and overhead charges. Net realizable value is based on estimated selling price less estimated costs to completion and sale.

6. Employees' end-of-service indemnity. Provision is made for end-of-service indemnity payable to employees at the balance sheet date in accordance with the labor laws of country XXX.

7. Foreign currency translations. Transactions in foreign currencies are translated into US dollars at the rate of exchange ruling on the date of the transaction. Monetary assets and liabilities expressed in foreign currencies are translated into US dollars at the rate of exchange ruling at the balance sheet date. Gains or losses resulting from foreign currency transactions are taken to the statement of income.

8. Statutory reserve. A statutory reserve, as required under the Companies Corporate Law of country XXX, is created by appropriating 10% of the net profit for the year, which procedure is to be discontinued once the statutory reserve is equal to 50% of the share capital, after which no further transfers are required. This reserve is not available for distribution except as provided in the XXX Law.

9. Revenue. Revenue represents the net amount invoiced for goods supplied during the year.

10. Borrowing costs. Borrowing costs are recognized as an expense in the period in which they are incurred except those that are directly attributed to the acquisition and construction of an asset that takes a substantial period to get ready for its intended use. Such borrowing cost are capitalized as part of the related asset.

11. Cash and cash equivalents. Cash and cash equivalents comprise cash on hand, bank current accounts, and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit.

12. Financial instruments. Financial assets and financial liabilities are recognized on the company's balance sheet when the company has become a party to the contractual provisions of the instrument.

    Receivables

    Receivables are stated at nominal value as reduced by appropriate allowance for estimated doubtful amounts.

    Available-for-sale financial instruments

    Available-for-sale financial instruments represent investments in listed equity securities and are initially recorded at cost, on trade date. Subsequently these investments are measured at fair value, which are determined based on quoted market prices. Any changes in fair value are included in the income statement in the periods these occur.

    Payables

    Payables are stated at nominal value.

    Due to/due from related parties

    Due to/due from related parties are stated at nominal value.

    Borrowings

    Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges are accounted for on an accrual basis.

Note 4: Cash and cash equivalents.

	2002 USD	2001 USD
Cash on hand	47,930	36,320
Bank balances in current accounts	102,250	(11,154)
Bank fixed deposit	200,000	--
	350,180	25,166

At June 30, 2001, a negative balance in the bank current account, amounting to USD 1,154, has been offset against cash on hand since it represents a temporary accommodation by the bank under a special program offered to high net worth bank customers, referred to by the bank as "bounce protection plan." Such negative balance in the current account with the bank resulted from outstanding checks cleared at balance sheet date in excess over deposited checks uncollected by the bank at that date.

Note 5: Trade and other receivables.

	2002 USD	2001 USD
Trade receivables	20,494,366	16,969,458
Less: Allowance for doubtful accounts	(1,440,000)	(1,000,000)
	19,054,366	15,969,458
Advances	205,180	169,190
Prepayments	502,216	608,678
Deposits	143,010	68,780
	19,904,772	16,816,106

Note 6: Inventories.

	2002 USD	2001 USD
Raw materials	5,421,064	2,767,142
Packing materials	11,152,118	7,490,388
Finished goods	2,738,868	2,675,554
Spares and consumables	521,560	784,010
	19,833,610	13,717,094
Allowance for slow moving inventories	(1,350,948)	(500,000)
	18,482,662	13,217,094
Goods in transit	--	2,744,026
	18,482,662	15,961,120

Note 7: Related-party transactions. The company enters into transactions with other entities that fall within the definition of a related party as set forth by IAS 24. Such transactions are in the normal course of business and are at terms which correspond to those on normal arm's-length transactions with third parties.

Related parties comprise companies under common ownership and/or common management control. At the balances sheet date, trade and nontrade balances with related parties were as follows:

	2002 USD	2001 USD
Included in trade receivables	6,000,656	5,555,222
Included in trade payables	27,365,088	22,381,594
Disclosed as amounts due from related parties	1,235,796	404,144
Disclosed as amounts due to related parties	60,844,520	52,855,170

The nature of related-party transactions during the year and the respective amounts were as follows:

	2002 USD	2001 USD
Revenue	1,060,786	762,714
Cost of sales	1,857,094	1,989,140
Distribution sales	1,729,818	1,255,246
Finance costs	7,928,170	5,628,082

The company receives/provides funds from/to related parties as and when required for working capital. Interest, whenever applicable, is paid at commercial rates. Subordinated loans from shareholder are interest-free (see note 17).

Note 8: Property, plant, and equipment.

	Factory and office buildings USD	Plant, machinery, and equipment USD	Furniture, fixtures, and office equipment USD	Vehicles USD	Capital work in progress USD	Total USD
Cost
As at 1 July 2001	20,589,226	100,495,370	4,500,746	5,518,130	7,810,504	138,913,976
Additions	--	71,578	173,300	45,000	14,348,194	14,638,072
Transfers	--	10,711,822	--	--	(10,711,822)	--
Disposals	--	(644,000)	(27,800)	(380,734)	--	(1,052,534)
As at 30 June 2002	20,589,226	110,634,770	4,646,246	5,182,396	11,446,876	152,499,514

Accumulated depreciation
As at 1 July 2001	5,976,464	15,560,480	2,568,548	2,998,048	--	27,103,540
Depreciation for the year	1,029,462	5,165,070	672,678	1,052,864	--	7,920,074
Adjustments relating to disposals	--	(69,766)	(10,192)	(241,122)	--	(321,080)
As at 30 June 2002	7,005,926	20,655,784	3,231,034	3,809,790	--	34,702,534
Net book value
As at 30 June 2002	117,796,980	13,583,300	89,978,986	1,415,212	1,372,606	11,446,876
As at 30 June 2001	14,612,762	84,934,890	1,932,198	2,520,082	7,810,504	111,810,436

Plant and machinery includes interest capitalized during the year of USD 5,555 (previous year: USD 555,000). The capitalization rate used was the actual borrowing cost (refer note 21).

Note 9: Intangible assets.

	Goodwill USD	Patents and trademarks USD	Development costs USD	Computer software USD	Total USD
Cost
As at 1 July 2001	566,088	599,518	2,197,366	--	3,362,972
Additions during the year	--	288,414	79,612	90,702	458,728
As at 30 June 2002	566,088	887,932	2,276,978	90,702	3,821,700
Accumulated amortization
As at 1 July 2001	226,432	147,770	736,998	--	1,111,200
Amortization for the year	56,608	63,468	297,326	10,590	427,992
As at 30 June 2002	283,040	211,238	1,034,324	10,590	1,539,192
Net book value
As at 30 June 2002	283,048	676,694	1,242,654	80,112	2,282,508
As at 30 June 2001	339,656	451,748	1,460,368	--	2,251,772

Note 10: Investment property.

	USD
As previously stated at July 1, 2001	3,000,000
Fair value adjustment at July 1, 2001 (on adoption of IAS 40)	510,000
Fair value at July 1, 2001	3,510,000
Change in fair value during the current year	100,000
Fair value at June 30, 2002	3,610,000

Note 11: Investment in associates.

	USD
Balance at July 1, 2000	1,250,000
Share of profit	250,000
Balance at June 30, 2001	1,500,000
Share of profit	390,000
Balance at June 30, 2002	1,890,000

Note 12: Due to banks.

	2002 USD	2001 USD
Overdrafts	2,683,928	9,789,458
Current portion of long-term loans (note 14)	1,205,400	7,805,400
	3,889,328	17,594,858

Bank facilities are secured by floating charge on the inventories of the company, pledge of plant and machinery, subordination of loans from shareholder, corporate guarantees of companies owned by the shareholder as well as corporate guarantees of other related parties.

Note 13: Trade and other payables.

	2002 USD	2001 USD
Trade payables	32,648,812	31,298,690
Accruals	4,742,660	2,242,164
Advances received from customers	865,536	224,538
Current portion of supplier loan (note 15)	2,108,444	2,108,252
	40,365,452	35,873,644

Note 14: Interest-bearing liabilities—long-term portion.

	2002 USD	2001 USD
Long-term bank loans	15,885,400	8,105,400
Less: Current portion (note 12)	(1,205,400)	(7,805,400)
Long-term portion	14,680,000	300,000
The borrowings are repayable as follows:
Within one year	1,205,400	7,805,400
In the second year	4,893,334	300,000
In the third to fifth years inclusive	9,786,666	--
Amount due for settlement after 12 months	14,680,000	300,000

Note 15: Other long-term liabilities.

	2002 USD	2001 USD
Supplier loan	3,162,664	5,269,902
Less: Current portion (note 13)	(2,108,444)	(2,108,252)
	1,054,220	3,161,650
Employees' end-of-service indemnity	1,703,436	1,236,764
	2,757,656	4,398,414
The borrowings are repayable as follows:
Within one year	2,108,444	2,108,252
In the second year	1,054,220	2,108,444
In the third to fifth years (inclusive)	--	1,053,206
Amount due for settlement after 12 months	1,054,220	3,161,650

Note 16: Share capital.

	2002 USD	2001 USD
Authorized, issued and paid up:
5,000 shares of USD 1000 each	5,000,000	5,000,000

Note 17: Subordinated loans from shareholder. These represent interest-free unsecured loans from the principal shareholder without any fixed repayment schedule.

Note 18: Finance costs.

	2002 USD	2001 USD
On long-term bank loans	383,196	1,085,402
On other bank loans and overdrafts	571,564	826,476
On amounts due to related parties	7,928,170	5,628,082
	8,882,930	7,539,960

Note 19: Number of employees. The number of employees at the end of the current year was 550 (previous year: 490).

Note 20: Cash generated from operations.

	2002 USD	2001 USD
Net profit for the year	1,769,284	1,474,736
Adjustments for
Depreciation of property, plant, and equipment	7,920,074	7,890,238
Amortization of intangible assets	427,992	423,402
Provision for employees' end-of-service indemnity	488,318	614,932
Allowance for doubtful accounts	440,000	631,374
Allowance for slow moving inventories	850,948	200,000
Loss on sale of property, plant, and equipment	14,642	--
Share of profits from associates	(390,000)	(250,000)
Fair value adjustment to investment property	(100,000)	--
Fair value adjustment—available-for-sale financial instruments	(10,000)
Finance costs	8,882,930	7,539,960
Operating profit before changes in operating assets and liabilities	20,294,188	18,524,642
Increase in trade and other receivables	(3,528,666)	(3,184,564)
(Increase) decrease in inventories	(3,372,490)	2,477,500
(Increase) decrease in amounts due from related parties	(831,652)	1,485,766
Increase (decrease) in trade and other payables	4,543,120	(15,759,612)
Increase in amounts due to related parties	7,989,350	9,351,718
Cash generated from operations	25,093,850	12,895,450
Employees' end-of-service indemnity paid	(21,646)	(563,220)
Interest paid	(8,934,434)	(7,718,124)
Net cash from operating activities	16,137,770	4,614,106

Note 21: Financial instruments: credit, interest rate, and exchange rate risk exposures.

1. Credit risk. Financial assets, which potentially subject the company to concentrations of credit risk, comprise, principally, trade and other receivables and amounts due from related parties. Trade and other receivables are stated net of the allowance for doubtful accounts. At the balance sheet date, the company's maximum exposure to credit risk from two customers amounted to USD 5,555,440 (previous year: USD 3,999,999).

2. Interest rate risk. Term loans, bank overdrafts, and bank borrowings are at floating rates of interest generally obtained in the country XXX, which are negotiated with the banks at LIBOR plus a negotiated margin. Loans from shareholder and loans from supplier are interest-free. Amounts due to related parties are at fixed rates of interest that are comparable to interest generally obtained from third parties.

3. Exchange rate risk. There are no significant exchange rate risks as substantially all financial assets and financial liabilities are denominated in US dollars.

Note 22: Financial instruments: fair values. The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. At the balance sheet date, the fair values of the company's financial assets and financial liabilities approximate to their book values except in case of available-for-sale financial assets.

Note 23: Commitments and contingent liabilities.

	2002 USD	2001 USD
Letters of guarantee	5,155,444	2,220,000
Capital commitments	6,333,888	7,474,333

Note 24: Comparative figures. Certain prior year figures have been reclassified to conform to the current year method of presentation.

3. Illustrative financial statement—Simple Bank Plc^[1]

   Simple Bank Plc Consolidated Balance Sheets at December 31, 2001 and 2000

   	Note	2001 XXX '000	2000 XXX '000
   Assets
   Cash and balances with central banks	3	$11,370,000	$ 7,580,000
   Deposits and balances due from banks	4	6,824,000	4,549,333
   Loans and advances to customers	5	21,606,000	14,404,000
   Interest receivable and other assets	6	774,000	516,000
   Investments	7	3,094,001	2,062,667
   Property, plant, and equipment	8	490,001	326,667
   Total assets		$44,158,002	$29,438,667
   Liabilities
   Deposits from customers		$31,655,996	$ 1,440,000
   Deposits and balances due to banks	9	4,912,001	3,274,667
   Long-term loans		144,000	96,000
   Interest payable and other liabilities		1,212,000	808,000
   Total liabilities		$37,923,997	$25,618,667
   Minority interest		$ 308,000	$ 205,333
   Shareholders' equity	10
   Share capital		2,141,337	954,667
   Statutory reserve		483,369	482,667
   General reserve		624,000	416,000
   Retained earnings		2,104,297	1,714,667
   Cumulative translation adjustment		258,472	(162,667)
   Cumulative changes in fair value	11	530	-
   Proposed dividend		314,000	209,333
   Total shareholders' equity		5,926,005	3,614,667
   Total liabilities, minority interest, and shareholders' equity		$44,158,002	$29,438,667
   Contra accounts (memoranda)	12(a)	$21,964,001	$14,642,667
   The accompanying notes form an integral part of these financial statements.

   Simple Bank Plc Statement of Income Consolidated Balance Sheets at December 31, 2001 and 2000

   	Note	2001 XXX '000	2000 XXX '000
   Interest income		$3,044,000	$2,029,333
   Interest expense		(1,822,001)	(1,214,667)
   Net interest income		1,221,999	814,666
   Net commission income		224,000	149,333
   Other income	13	718,001	478,700
   		2,164,000	1,442666
   General and administrative expenses		(930,000)	(620,000)
   Provisions for loans and advances		(502,001)	(334,667)
   Income before taxes and minority interest		731,999	487,999
   Income taxes		(18,000)	(12,000)
   Income before minority interest		713,999	475,999
   Minority interest		(12,000)	(8,000)
   Net income for the year		$ 701,999	$ 467,999
   Earnings per share		$ 97,50	$ 65,00
   The accompanying notes form an integral part of these financial statements.

   Simple Bank Plc Consolidated Statement of Cash Flows For the years ended December 31, 2003 and 2002

   	Note	2003 XXX '001	2002 XXX '000
   Cash flows from operating activities
   Net income for the year		$ 701,999	$ 467,999
   Adjustments to reconcile net income to net cash provided by operating activities:
   Minority interest		102,667	(1,384)
   Depreciation		38,000	70,239
   Cumulative translation adjustment, net		422,139	4,475
   Cumulative changes in fair value adjustment		530	--
   Provision for loan losses		17,018	318,841
   Provision for investments		--	6,815
   Interest on suspense		549,767	(6,412)
   Changes in operating assets and liabilities:
   Increase in deposits with central banks for regulatory purposes		(266,702)	180,304
   Increase in deposits maturing after three months		(269,027)	(257,221)
   Increase in advances to customers		(7,768,785)	156,940
   Increase in interest receivable and other assets		(258,000)	(76,452)
   Increase in customer deposits		10,215,996	2,675,792
   Increase in long-term loans		48,000	(10,261)
   Increase in deposits and balances due to banks		1,637,334	(97,035)
   Increase in interest payable and other liabilities		404,000	7,384
   Net cash provided by operating activities		5,574,936	3,440,024
   Cash flows from investing activities
   Purchase of property and equipment		(201,334)	(39,363)
   Purchase of investments		(1,031,334)	(348,495)
   Proceeds from sale of property and equipment		--	14,984
   Net cash used in investing activities		(1,232,668)	(372,874)
   Cash flows from financing activities
   Dividends paid		--	(238,621)
   Proceeds from increase in capital		1,186,670	--
   Net cash used in investing activities		(1,186,670)	(238,621)
   Increase in cash and cash equivalents	15	$ 5,528,938	$2,828,529
   The accompanying notes form an integral part of these financial statements.

Simple Bank Plc Notes to Consolidated Financial Statements For the year ended December 31, 2003

Note 1: Status. Simple Bank Plc was incorporated in country YYY in 1950. The Simple Bank Plc operates through its branches and subsidiaries in (countries) AAA, BBB, and CCC. At December 31, 2003, the bank's subsidiaries, the countries they were incorporated in, and its percentage ownership in those subsidiaries is set out below.

	Country of incorporation	Percentage of ownership (%)
Simple Bank Asia Limited	AAA	100
Simple Bank Europe Limited	BBB	80
Simple Bank Africa Limited	CCC	75

Together the Simple Bank Plc and its subsidiaries are referred to hereafter as the "Bank."

Note 2: Summary of significant accounting policies.

1. Accounting convention and adoption of new international accounting standards.

   The consolidated financial statements of the Bank are prepared under the historical cost convention (except in the case of certain financial instruments which are carried at fair values) using International Accounting Standards and Interpretations of the Standing Interpretation Committee.

   Changes in accounting policies

   The Bank adopted IAS 39, Financial Instruments: Recognition and Measurement, prospectively with effect from January 1, 2001. The standard provided for comprehensive guidance on accounting for financial instruments. This has resulted in changes in the accounting policies of the Bank in respect of recognition and measurement of financial instruments including derivative financial instruments.

   Derivatives

   As at the beginning of the year 2003, the Bank has recognized for the first time the fair value of all derivatives in its balance sheet as either assets or liabilities at their fair values. Gains or losses (net of adjustments to related assets or liabilities) on fair value hedges at December 31, 2002, were adjusted against the balance of retained earnings on January 1, 2003, while gains or losses on cash flow hedges affecting future transactions were adjusted against equity.

   Nonderivative financial instruments

   Previously, the Bank valued all nontrading investments at amortized cost, less provision for impairment. Subsequent to the implementation of IAS 39, the Bank reclassified such investments as "held-to-maturity," "available-for-sale," or "originated by the Bank," and remeasured those classified as "available-for-sale" to fair value. The gain or loss on remeasuring to fair value was taken to retained earnings on January 1, 2003. As permitted by IAS 39, the Bank has elected that subsequent changes in fair value relating to available-for-sale investments will be taken to net profit or loss for the period.

   Provision for impairment of financial assets

   In addition, in accordance with the requirements of IAS 39, the calculation of impairment for loans and advances and other financial assets is based on the net present value of future cash flows by reference to original interest rates. Previously, future recoveries were not discounted to present values. The difference arising form recalculating impairment based on the net present value of future cash flows compared to provisions preciously carried by the bank was taken to retained earnings at January 1, 2003.

   Effect of the changes in accounting policies

   In accordance with the transitional provisions of IAS 39, the Bank has accounted for the changes in accounting policies with effect from January 1, 2003 (and has not restated comparatives). Had comparatives been restated, the effect of the change in accounting policy in relation to derivative financial instruments on the balance sheet and statement of income would not have been material. In relation to the change in policy relating to the valuation of investments, the effect of the change would have been to increase the carrying amount of investments by XXX..... with a corresponding increase to the opening retained earnings. This adjustment has been reflected in the statement of changes in equity. In relation to the change in accounting policy relating to the calculation of impairment of financial assets, it is not possible reasonably to determine the amount of the adjustment that relates to prior periods.

2. Basis of consolidation. The consolidated financial statements include the financial statements of the Simple Bank Plc and its subsidiaries. All significant intercompany transactions between entities within the group have been eliminated. Subsidiaries are those entities in which the parent owns, directly or indirectly, more than 50% of the voting share capital and/or exercises control.

3. Revenue recognition. Interest income and expense are recognized on a time proportion basis, taking account of the principal outstanding and the rate applicable. The recognition of income ceases when the recovery of interest or principal is in doubt. Interest accruing on such advances is suspended. Commission and fee income are accounted for on the date the transaction arises. Recoveries in respect of loans fully provided are accounted for on a cash receipt basis.

4. Foreign currencies. The reporting currency of the Bank is the XXX. Transactions denominated in foreign currencies are recorded in their respective local currencies at the rates of exchange prevailing at the time of the transactions. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at that date. Gains and losses are reflected in net income for the year.

   Assets and liabilities of foreign branches and subsidiaries are translated into XXX at the rates of exchange ruling at the year-end. Income and expenses are translated at average rates of exchange during the year. The Simple Bank Plc's investments in foreign branches and subsidiaries are translated at historical rates of exchange. The resulting differences are included under shareholders' equity as cumulative translation adjustment.

5. Loans and advances. Loans and advances are stated at cost less any amounts written off and provision for impairment. Specific provisions are made against advances when their recovery is in doubt. In addition, a general provision is maintained to cover losses, which although not specifically identified, are likely to be present in any bank's portfolio of advances.

6. Regular way purchases and sales. In case of "regular way" purchases and sales of financial assets the Bank uses "settlement date" accounting.

7. Investments.

   Portfolio held for trading

   These investments are carried at fair value with any gain or loss arising from a change in fair value being included in the statement of income for the period in which it arises.

   Nontrading investments

   These are classified as follows:

   • Held-to-maturity

   • Availiable-for-sale

   • Originated by the Bank

   All investments are initially recognized at cost, being the fair value of the consideration given including acquisition charges associated with the investment. Premiums and discounts on investments designated as held-to-maturity or available-for-sale are amortized on a systematic basis to maturity using the effective interest method and taken to interest income.

   Held-to-maturity

   Investments which have fixed or determinable payments and are intended to be held to maturity are subsequently measured at amortized cost, less provision for impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition.

   Available-for-sale

   After initial recognition, investments that are classified as "available-for-sale" are remeasured at fair value. Unless unrealized gains and losses on remeasurement to fair value are part of an effective hedging relationship, they are reported as a separate component of equity until the investment is sold, collected, or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the statement of income for the period. In relation to investments which are part of an effective hedging relationship any gain or loss arising from a change in fair value is recognized directly in the statement of income.

   Originated by the Bank

   Investments in debt securities which are funded directly to the issuer are stated at cost less any amounts written off and provision for impairment. An adjustment is made to such investments where effective fair value hedges have been made to adjust the value of the investment for the fair value being hedged, with the resultant gains or losses being recognized in the statement of income.

   Note

   In practice it has been noted that some banks have presented investments in debt instruments which are purchased at original issuance and are not held for trading as "Investments—originated by the Bank." This method of presentation may not conform to the strict interpretation of the IAS 39 IGC 10-11-a, which requires that such debt securities be classified as "originated loans." However, some banks argue that classifying investments in these debt securities as originated loans may be misconstrued and confused with loans made by the banks to their customers. Thus, it is noted that some banks have classified these investments as "Investments—originated by the banks," which is a category of investments not anticipated by the IASB.

   Fair values

   For investments traded in organized financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the balance sheet date. For investments where there is no quoted marketed price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same, or is based on the expected cash flows, or the underlying net asset base of the investment.

   Provision for impairment of financial assets and potential losses on loans and advances An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the net present value of future anticipated cash flows, recognized for the difference between the recoverable amount and the carrying amount as follows:

   • For financial assets at amortized cost—the carrying amount of the asset is reduced to its estimated recoverable amount either directly or through the use of an allowance account and the amount of the loss is included in the statement of income; and

   • For financial assets at fair value—where a loss has been recognized directly in equity as a result of the write-down of the asset to recoverable amount, the cumulative net loss recognized in equity is transferred to the statement of income.

   In addition to specific provisions for impaired loans and advances, an additional general provision is created for potential losses not specifically identified but which experience indicates are present in a portfolio of loans and advances.

   Once a financial asset has been written down to its estimated recoverable amount, interest income is thereafter recognized based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount.

8. Property, plant, and equipment. Freehold land is carried at cost. Buildings, furniture, fixtures, equipment, and vehicles are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets as set out below.

   Buildings	25 years
   Motor vehicles	3 years
   Furniture, fixtures, and equipment	5 years

9. Employees' end-of-service benefits. At the balance sheet date provision is made for employees' end-of-service entitlements based on estimates that approximate actuarial computations to cover end-of-service indemnity as per YYY Labor Law.

10. Statutory reserve. In accordance with Federal Law of (country) YYY 10% of the net income for the year is to be transferred annually to statutory reserve. Such transfers to the statutory reserve should continue until it equals 50% of the paid-up capital of the bank. This reserve is not available for distribution as dividends.

Note 3: Cash and balances with central banks.

	2003 XXX '000	2002 XXX '000
Banks and other financial institutions	$ 480,738	$ 321,016
Others	10,889,262	7,258,984
	$11,370,000	$7,580,000

Note 4: Deposits and balances due from banks.

	2003 XXX '000	2002 XXX '000
Banks abroad	$6,245,909	$4,163,939
Banks in the YYY	578,091	385,395
	$6,824,000	$4,549,333

Note 5: Loans and advances to customers.

	2003 XXX '000	2002 XXX '000
Real estate loans	$14,212,308	$ 9,474,872
Vehicle loans	4,329,872	2,886,581
Overdrafts	2,814,882	1,876,588
Credit cards	1,302,590	868,393
Other	646,700	431,133
	23,306,352	15,537,567
Less: Provision for credit losses	(51,052)	(34,034)
Less: Interest in suspense	(1,649,300)	(1,099,533)
	$21,606,000	$14,404,000

The composition of the loans and advances portfolio is as follows:

	Africa XXX '000	Australia XXX '000	Asia XXX '000	North America XXX '000	South America XXX '000	Other XXX '000	Total XXX '000
Semigovernment	$6,909,655	$4,145,792	--	$1,005,040	$ 502,521	--	$12,563,008
Government	250,022	3,730,897	--	20,000	--	$321,242	4,329,872
Private (corporate)	--	1,100,151	--	--	1,518,201	236,922	2,814,882
Private (individual)	--	544,465	$664,582	--	--	--	1,302,590
Other	--	--	124,223	427,311	--	134,777	595,548
31 December 2003	7,159,677	9,521,305	788,805	1,452,351	2,020,722	692,941	21,606,000
31 December 2002	$4,472,611	$7,043,662	$410,416	$1,054,931	$1,419,092	--	$14,404,000

Loans and advances are stated net of provision for credit losses. The movements in credit losses provisions during the year were as follows:

	General XXX '000	2003 Specific XXX '000	Total XXX '000	General XXX '000	2002 Specific XXX '000	Total XXX '000
At 1 January	$ 9,426	$36,000	$45,426	$6,567	$24,273	$30,841
Provision for the year	670	5,822	6,526	447	3,910	4,357
Recoveries (net provision)	--	--	--	--	(578)	(578)
	10,096	41,822	51,952	7,014	27,605	34,620
Amounts written off during the year	--	(866)	(860)	--	(577)	(577)
At 31 December	$10,026	$40,956	$51,052	$7,014	$27,028	$34,034

At 31 December 2003 the fair value of collateral taken was ......XXX (31 December 2002: xxx).

The Bank continues to carry classified and delinquent loans and advances on its books even after making 100% provision. Interest is accrued on most of those accounts for litigation purposes but is not taken to income. Such accrual has increased gross loans and advances receivable. Accounts are written off from books only when all legal and other avenues for recovery or settlement are exhausted. Loans and advances, including fully provided accounts on which interest is not taken to income, amounted to XXX........million at December 31, 2003 (2002 - XXX million).

Interest in suspense

	2003 XXX '000	2002 XXX '000
Balance at the beginning of the year	$1,183,138	$ 788,759
Interest suspended during the year	546,660	364,440
Amounts written off during the year	(47,418)	(31,612)
Write-back interest in suspense	(33,080)	(22,054)
Balance at end of year	$1,649,300	$1,099,533

Note 6: Interest receivable and other assets.

	2003 XXX '000	2002 XXX '000
Interest receivable	$143,760	$ 95,840
Prepaid interest and expenses	29,338	19,559
Inward orders for payment pending	4,996	3,330
Income taxes paid in advance	232,068	77,356
Clearing suspense	16,588	11,059
Others	463,285	308,857
	$774,000	$516,000

Note 7: Investments.

1. Portfolio held for trading.

   	2003 XXX '000	2002 XXX '000
   Listed debt securities	$ 56,104	$ 37,403
   Listed equities	203,317	135,545
   	$259,421	$172,948

2. Nontrading investments.

   (1)	Available-for-sale
   	Unquoted investments	$173,180	$115,453
   	Quoted investments	74,217	49,478
   		$247,397	$164,931
   (2)	Held-to-maturity
   	Government bonds	$1,024,213	$682,809
   	Municipal bonds	298,588	199,059
   		$1,322,801	$881,868
   (3)	Originated by the Bank
   	Treasury bills and other eligible bills	$ 965,812	$ 643,861
   	Government securities	298,570	199,059
   		$1,264,382	$ 842,920
   Total nontrading investments		$2,834,580	$1,889,719
   Total investments		$3,094,001	$2,062,667

Note 8: Property, plant, and equipment.

	Total XXX '000	Freehold land XXX '000	Buildings XXX '000	Motor vehicles XXX '000	Furniture, fixtures, & equipment XXX '000
Cost	$ 567,000	$243,000	$121,000	-	$203,000
January 1, 2003	--	--	--	--	--
Additions	38,000	--	--	$ 38,000	--
Disposals	(2,000)	--	--	--	(2,000)
December 31, 2003	$603,000	$243,000	$121,000	$38,000	$201,000
Accumulated depreciation
January 1, 2003	(75,000)	(27,500)	(12,000)	--	35,500
Depreciation for the year	(38,000)	(10,500)	(20,000)	14,299	10,200
Disposals
December 31, 2003	$(113,000)	$ (38,000)	$ (32,000)	$(14,299)	$ (45,700)
Net book value
December 31, 2003	$ 490,001	$204,000	$ 89,000	$ 23,701	$173,300
December 31, 2002	$ 326,667	$156,000	$ 45,600	$ 47,000	$ 78,067

Note 9: Deposits and balances due to banks.

	2003	2002
Due to overseas central banks	$ 25,800	$ 17,500
Banks abroad	4,370,700	2,917,500
Banks in the YYY	515,501	339,667
	$4,912,001	$3,274,667

Included under borrowings from banks abroad is an amount of US $100 million being a loan obtained during the year through a syndicate of banks. The loan is repayable after three years in one installment due in August 2005. However, the Bank has the option of prepayment of the loan in part or in full. The term loan carries a floating rate of interest which is fixed by reference to three or six months LIBOR.

Note 10: Shareholders' funds. The authorized share capital of the bank is XXX 1,500 million divided into 15,000,000 ordinary shares of XXX 100 each. As of December 31, 2003,............. ordinary shares of XXX 100 each (Year 2002 - 7,158,638 ordinary shares of XXX 100 each) were issued and fully paid.

Note 11: Cumulative changes in fair value.

	Cash flow hedges XXX '000	Investments available-for-sale XXX '000	Total XXX '000
Balance at 1 January	--	--	--
Difference on restatement of cash flow
hedges at fair value at 1 January 2003	$40	--	$ 40
	40	--	40
Net unrealized gains (losses)	25	$500	525
Net realized gains (losses)	15	(50)	(35)
Net movement during the year	40	450	490
Balance at 31 December 2003	$80	$450	$530

Note 12: Contra accounts and commitments.

		2003 XXX'000	2002 XXX '000
a.	Contra accounts.
	Letters of credit	$ 3,431,581	$ 2,287,721
	Letters of guarantee	12,378,063	8,252,035
	Acceptances	6,154,367	4,102,911
	Total	$21,964,001	$14,642,667
b.	Commitments.
	Uncalled capital on investments held	$ 13,080	$ 8,719

Note 13: Other income.

	2003 XXX '000	2002 XXX '000
Fees, bank charges, and other	$369,325	$246,154
Foreign exchange gains	81,336	54,224
Gain on sale of equipment	81,094	54,062
Income from investments	148,045	88,697
Other income	38,292	25,561
	$718,001	$478,700

Note 14: Number of employees. The number of employees of the bank and its subsidiaries was............. at December 31, 2003 (.....as of December 31, 2002).

Note 15: Cash and cash equivalents. Cash and cash equivalents consist of cash on hand, balances with banks, money market placements, and deposits, as follows:

		2003 XXX '000	2002 XXX '000
a.
	Cash on hand, current accounts, and deposits with central banks	$11,370,000	$ 7,580,000
	Banks in the YYY	578,091	385,315
	Banks abroad	6,245,909	4,163,939
		18,194,000	12,129,334
	Less: Deposits with central banks for regulatory purposes	(800,100)	(533,398)
	Less: Deposits maturing after 3 months	(807,080)	(538,053)
		$16,586,820	$11,057,882(a)
	Change in cash and cash equivalents—2003 [(a)-(b)]		$ 5,528,938

b.		2002 XXX '000	2001 XXX '000
	Cash on hand, current accounts, and deposits with central banks	$ 5,684,607	$ 2,210,412
	Banks in the YYY	288,732	479,042
	Banks abroad	3,122,954	4,227,131
		9,096,293	6,916,585
	Less: Deposits with central banks for regulatory purposes	(400,048)	(535,276)
	Less: Deposits maturing after 3 months	(403,540)	(210,624)
		$ 8,292,705(a)	$ 6,170,685(b)

Note 16: Related-party transactions. Certain related parties (directors and major shareholders of the Bank and companies of which they are principal owners) were customers of the Bank and its subsidiaries in the ordinary course of business. Such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties and did not involve more than a normal amount of risk.

Year-end related-party balances included in the balance sheet are as follows:

	2003 XXX '000	2002 XXX '000
Advances to customers	$ 836,154	$ 557,436
Deposits from customers	1,846,231	1,230,821
Letters of credit, guarantees and acceptances	1,042,000	694,670

Related-party transaction taken to the income statement are as follows:

Interest income	$ 83,014	$ 55,342
Interest expense	$ 125,700	$ 83,800
Other income	$ 34,390	$ 22,927

Note 17: Credit risk: Off-balance-sheet financial instruments.

Credit commitments and contingent liabilities

Of the xxx.......'000 in credit commitment and contingent liabilities as at 31 December 2003, 11% relate to clients domiciled in Africa, 21% in Europe, and 55% in North America.

Derivatives.

Credit risk represents the current replacement value of all outstanding derivative contracts in a gain position without factoring in the impact of master netting agreements or the value of any collateral. Positive replacement values amounted to xxx.......'000 as at 31 December 2003, before applying any master netting agreements. Based on the location of the ultimate counterparty, 8% of this credit risk amount relates to Africa, 47% to Europe and 33% to North America; 76% of the positive replacement values are with other banks.

Credit risk mitigation techniques.

Credit risk associated with derivative instruments is mitigated by the use of master netting agreements. A further method of reducing credit exposure arising from derivative transactions is to use collateralization arrangements.

Master netting agreements eliminate risk to the extent that liabilities to the same counterparty are due to be settled after the corresponding assets are realized. The impact of master netting agreements as at 31 December 2003 is to mitigate credit risk on derivative instruments by approximately xxx.......'000. The impact can change substantially over short periods of time, because the exposure is affected by each transaction subject to the arrangement.

The Bank subjects its derivative-related credit risks to the same credit approval, limit, and monitoring standards that it uses for managing other transactions that create credit exposure. This includes evaluation of counterparties as to creditworthiness, and managing the size, diversification, and maturity structure of the portfolio. Credit utilization for all products is compared with established limits on a continual basis and is subject to a standard exception reporting process.

Policies relating to credit are reviewed and approved by the Bank's Credit Policy Committee. All credits lines are approved centrally for local branches, and for overseas branches by the Bank's Credit Division and Central Credit Committee in accordance with the Bank's credit policy set out in the Credit Policy Manual. Credit and Marketing functions are segregated. In addition, whenever possible, loans are secured by acceptable forms of collateral in order to mitigate credit risk. The Bank further limits risk through diversification of its assets by geography and industry sector limits.

All credit facilities are administered and monitored by the Credit Administration Department. Periodic reviews are conducted by Credit Examination teams from the Risk Management Division and facilities are risk graded based on criteria established in the Credit Policy Manual.

Cross-border exposure and financial institutions exposure limits for money market and treasury activities are approved as per guidelines established by the Bank's Credit Policy Committee and are monitored by the Financial Institutions Division.

Note 18: Currency risk. The Bank views itself as a (country) YYY entity, with the XXX as its functional currency. Hedging transactions are used to manage risks in other currencies.

Breakdown of assets and liabilities by currencies

(XXX '000)	XXX	2003 USD	Other	XXX	2002 USD	Other
Assets
Cash and balances with central banks	$ 5,680	$ 2,840	$ 2,850	$ 3,790	$1,890	$1,900
Deposits and balances due from banks	3,410	1,700	1,714	2,274	1,137	1,138
Loans and advances to customers	10,803	5,410	5,393	7,202	3,601	3,601
Investments	1,540	770	784	1,032	516	515
Property and equipment	240	120	130	164	82	81
Other assets	387	194	193	258	129	129
Total assets	$22,060	$11,034	$11,064	$14,720	$7,355	$7,364
Liabilities, Minority Interest, & Shareholders' Equity
Deposits and balances due to banks	$ 2,456	$ 1,228	$ 1,228	$ 1,636	$820	$819
Deposits from customers	15,828	7,914	7,914	10,720	5,360	5,360
Long-term loans	72	36	36	48	24	24
Interest payable and other liabilities	606	303	303	404	202	202
Minority interest	154	77	77	103	51	51
Shareholders' equity	2,963	1,482	1,481	1,807	904	904
Total liabilities, minority interest, and shareholders' equity	$22,079	$11,040	$11,039	$14,718	$7,361	$7,360

Foreign exchange and derivatives trading for the account of the Bank is managed by a very limited proprietary foreign exchange trading limit. However, treasury activities are primarily focused towards meeting the requirements of customers to manage their foreign exchange exposure. These dealings with and exposure to financial markets are matched by equal and opposite dealings and exposure to corporate customers.

The Bank's assets are typically funded in the same currency as that of the business transacted in order to eliminate foreign exchange exposure. However, the Bank does maintain a long US dollar position within limits approved by the Bank's Asset & Liability Committee (ALCO.) As of December 31, 2003, the Bank's other net foreign exchange exposure was not significant except for XXX...... million in ............... and XXX....... million in ............... long position (December 31, 2002.....).

Appropriate segregation of duties exists between front desk and back office functions while compliance with position limits is independently monitored on an ongoing basis.

Note 19: Concentrations of assets, liabilities, and off-balance-sheet items.

	2003			2002
	Assets XXX '000	Liabilities XXX'000	Off-balance-sheet items XXX'000	Assets XXX '000	Liabilities XXX '000	Off-balance-sheet items XXX'000
Geographic distribution of assets and liabilities
Africa	$22,079,001	$18,961,968	$308,000	$12,719,333	$14,309,333	$205,333
Asia	11,039,500	9,481,000	--	7,359,666	7,154,666	--
Others	11,039,500	9,481,000	--	7,359,666	7,154,666	--
Total	$44,158,002	$37,923,997	$308,000	$29,438,667	$25,618,667	$205,333

Note 20: Interest rate sensitivity.

	Within 3 months	Over 3 to 6 months	Over 6 to 12 months	Over 1 year	Non-interest-sensitive	Total AED '000
Assets
Cash and balances with central banks	$ 9,970,585	--	--	--	$1,399,415	$11,370,000
Deposits and balances due from other banks	4,980,400	$ 154,000	$ 320,879	--	1,368,721	6,824,000
Advances to customers less provisions	12,987,000	2,567,009	1,047,008	$4,423,987	580,996	21,606,000
Interest receivable and other assets	--	--	--	--	774,000	774,000
Investments	1,895,767	254,529	111,923	992,443	965,000	3,094,001
Property and equipment	--	--	--	--	490,001	490,001
Total	$29,833,752	$2,975,538	$1,479,810	$5,416,430	$4,452,472	$44,158,002
Liabilities, Minority Interest, & Shareholders' Equity
Deposits from customers	$19,109,946	$3,890,765	$3,102,001	$111,644	$ 5,441,640	$31,655,996
Deposits and balances due to banks	4,904,156	3,591	201,253	--	4,254	4,912,001
Long-term loans	--	--	--	--	144,000	144,000
Interest payable and other liabilities	--	--	--	--	1,212,000	1,212,000
Minority interest	--	--	--	--	308,000	308,000
Proposed dividend	--	--	--	--	314,000	314,000
(Other) Shareholders' equity	--	--	--	--	$ 5,612,005	5,612,005
Total	$24,014,102	$3,894,356	$3,303,254	$111,644	$12,837,646	$44,158,002
On-balance-sheet gap	5,819,650	(918,818)	(1,823,444)	5,304,786	(8,382,174)	-
Off-balance-sheet gap	--	--	--	--	--	--
Cumulative interest rate sensitivity gap—2003	$ 5,819,650	$ (918,818)	$(1,823,444)	$5,304,786	$(8,382,174)	--
Cumulative interest rate sensitivity gap—2002	$ 3,879,766	$3,267,221	$2,051,592	$5,588,116	--	--
Effective interest rate on bank placements and certificates of deposit with central bank was.....% (2002 - 6.3%), on loans and advances..... (2002 - 10.4%), on customer deposits..... % (2002 - 5.6%), and on bank borrowings....% (2002 - 4.9%).

Note 21:

1. Maturity profile—Year 2003.

   Maturities of assets and liabilities have been determined on the basis of contractual re-pricing or maturity dates, whichever date is earlier.

   	Within 3 months	Over 3 to 6 months	Over 6 to 12 months	Over 1 year	Total AED'000
   Assets
   Cash and balances with central banks	$11,370,000	--	--	--	$11,370,000
   Deposits and balances due from banks	6,824,000	--	--	--	6,824,000
   Advances to customers less provisions	--	$1,160,600	$3,240,900	$17,204,500	21,606,000
   Interest receivable and other assets	--	774,000	--	--	774,000
   Investments	--	--	--	3,094,001	3,094,001
   Property and equipment	--	--	--	490,001	490,001
   Total	$18,194,000	$1,934,600	$3,240,900	$20,788,502	$44,158,002
   Liabilities, Minority Interest, & Shareholders' Equity
   Deposits from customers	$20,000,000	$2,913,999	$3,741,997	$ 5,000,000	$31,655,996
   Deposits and balances due to banks	--	--	4,912,001	--	4,912,001
   Long-term loans	--	--	--	144,000	144,000
   Interest payable and other liabilities	--	1,212,000	--	--	1,212,000
   Minority interest	--	--	--	308,000	308,000
   Proposed dividend	314,000	--	--	--	314,000
   (Other) Shareholders' equity	--	--	--	5,612,005	5,612,005
   Total	$20,314,000	$4,125,999	$8,653,998	$11,064,005	$44,158,002

2. Maturity profile 2002.

   Assets—Year 2002	$ 6,917,256	$ 2,768,600	$19,629,811	$123,000	$29,438,667
   Liabilities—Year 2002	$ 6,880,274	$ 1,675,700	$20,712,693	$170,000	$29,438,667

Note 22: Segmental information.

	Retail banking		Investment banking		Total	Total
	2003 XXX '000	2002 XXX '000	2003 XXX '000	2002 XXX '000	2003 XXX '000	2002 XXX '000
Total operating income	$ 865,600	$ 577,066	$ 1,298,400	$ 865,600	$ 2,164,000	$ 1,442,666
Profit before taxation	292,800	195,200	439,199	292,799	731,999	487,991
Income tax expenses	18,000	12,000	--	--	18,000	12,000
Net profit for the year	$ 274,800	$ 183,200	$ 439,199	$ 292,799	$ 713,999	$ 475,999
Segment assets	$17,663,201	$11,775,467	$26.494.801	$17,663,200	$44,158,002	$ 2,948,667
Segment liabilities	$15,169,599	$10,247,467	$22,754,398	$15,371,200	$37,923,997	$25,618,667

Note 23: Fair value of financial instruments. The following table presents the fair value of on-and off-balance-sheet financial instruments based on the following valuation methods and assumptions. It is presented because not all financial instruments are reflected in the financial statements at fair value.

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. A market price, where an active market (such as a recognized stock exchange) exists, is the best evidence of the fair value of a financial instrument. However, market prices are not available for certain financial assets and liabilities held and issued by the Bank. Therefore, for financial instruments where no market price is available, the fair values presented in the following table have been estimated using present value or other estimation and valuation techniques based on market conditions existing at balance sheet date.

The values derived using these techniques are significantly affected by underlying assumptions concerning both the amounts and timing of future cash flows and the discount rates used. The following methods and assumptions have been used:

1. Trading assets, derivatives, and other transactions undertaken for trading purposes, and securities lent and borrowed are measured at fair value by reference to quoted market prices when available. If quoted market prices are not available, the fair values are estimated on the basis of pricing models, or discounted cash flows. Fair value is equal to the carrying amount for these items.

2. The fair value of liquid assets and other assets maturing within twelve months is assumed to approximate their carrying amount. This assumption is applied to liquid assets and the short-term elements of all other financial assets and financial liabilities.

3. The fair value of demand deposits and savings accounts with no specific maturity is assumed to be the amount payable on demand at the balance sheet date.

4. The fair value of variable-rate financial instruments is assumed to approximate their carrying amounts.

5. The fair value of fixed-rate loans and mortgages is estimated by comparing market interest rates when the loans were granted with current market rates offered on similar loans. Changes in the credit quality of loans within the portfolio are not taken into account in determining gross fair values, as the impact of credit risk is recognized separately by deducting the amount to the allowance for credit losses from both book and fair values. The assumptions and techniques have been developed to provide a consistent measurement of fair value of the Bank's assets and liabilities. However, because other institutions may use different methods and assumptions, such fair value disclosures cannot necessarily be compared from one financial institution to another.

	2003			2002
XXX '000	Carrying value	Fair value	Unrealized gain(loss)	Carrying value	Fair value	Unrealized gain(loss)
Assets
Cash and balances with central banks	$11,370	$11,370	$ --	$ 7,580	$ 7,580	$ --
Due from banks	6,820	6,620	(200)	4,540	4,440	(100)
Financial investments	3,090	2,790	(300)	2,060	2,060	--
Liabilities
Due to banks	4,910	4,710	(200)	3,270	3,070	(200)
Due to customers	31,650	31,350	(300)	21,440	21,040	(400)
Long-term debt	140	140	--	96	96	--
Net difference between carrying value and fair value			$1,000			$700

Substantially all of the Bank's commitments to extend credit are at variable rates. Accordingly, the Bank has no significant exposure to fair value fluctuations related to these commitments.

Changes in the fair value of the Bank's fixed-rate loans are hedged in part by derivative instruments, mainly interest rate swaps. These swaps are carried at fair value and included in derivative replacement values in the above table, with gains and losses deferred as other assets and other liabilities. Such gains and losses are shown net in the above table as fair value effect on income of hedging derivatives recorded on an accrual basis.

The table does not reflect the fair values of nonfinancial assets and liabilities such as property and equipment, prepayments, and accruals. The interest amounts accrued to date for respective financial instruments are included in the carrying value of the instruments.

Note 24: Comparative financial information. Certain amounts related to the year 2002 have been reclassified in order to make them comparable with the presentation for the year 2003.

^[1]This example is meant to illustrate certain common disclosures seen in published financial statements of banks. It is not an example of "best practice" (in fact, it is "general practice") and thus may not be the best example of full compliance with IAS or in particular with IAS 39. For detailed disclosure requirements and guidance on interpretation and application of IAS 39 please refer to the relevant chapters of this book.