Challenges To The Successful Implementation Of International Accounting Auditing Standards Accounting Essay

The aim of this research paper is to place, buttocks and pull off the interlingual rendition and transfering procedure from current accounting model of banking system with the International Financial Reporting Standards ( IFRS ) .Our focal point sing IFRS in Bankss is restricted in the context of the hazard of incurred but non reported in a loan portfolio, which may falsify the coverage of fiscal place and public presentation by put on the lining the readers to set about incorrect determinations.The IAS 36 ‘Impairment of Assets ‘ and IAS 39 are of the more complicated criterions. This makes acquiring the accounting and revelations right more of a challenge.So far, through this paper we suggest some accounting updates to extenuate the hazard of asymmetric information and moral jeopardy in a commercial bank loan portfolio. It is arguably the instance that, these issues are regarded as unique to emerging/developing markets, because of accounting information non in conformity with international criterions.

The accounting standards and policies used in commercial Bankss within Albania may compromise Bankss fiscal statements, and may incorporate find hazard sing the loan portfolio quality, capital adequateness, etc.It is an imperative end for all the Bankss and supervisors, to avoid that loans be quoted as being higher than their accomplishable value. In this regard, the needed input parametric quantities are defined systematically and to the full compliant with international accounting criterions functioning to compulsory bank hazard designation, measuring and extenuation, by happening out in clip the marks of damage.The survey has been implemented in BIS Banca Albania and being extended in four phases:Phase 1, is based on diagnostic development of the current position through designation of beginnings for loan damage.

Phase 2, involves a elaborate appraisals on all ingredients of loans portfolio, by know aparting instances with incurred but non identified and incurred but non reported losingss.Phase 3, trades with the acknowledgment of impairment loss, recoverable sum and/or plus ‘s cash-generating units, interrelating the ‘impairment and uncollectibility fiscal assets ‘ with the designation of differences of estimated recoverable sum, just value of collateral up to transporting sum of the loan.Phase 4, concludes with issues on evaluation graduated tables harmonizing to hazard designation per each plus portfolio ingredient. The chief findings respect with passage matrix, Migration Rates, Categorization as per Private Individuals, Micro SME ‘s, Corporations, and as per category, subclass, analytic, etc.

Keywords

IFRS/IAS Accounting Framework, Fair Value, Discounting/DCF, Effective Interest rate Method, Impairment Identification/Measurement & A ; Test, Loan Loss Provisioning/Risk Rating Scale, PostingIntroductory IssuesThis paper addresses challenges to the successful execution of international accounting criterions in commercial Bankss, by covering with plus quality issues focused on impairment loans presence.It describes and outlines the methodological attack followed, diagnoses the identified jobs and makes suggestions for enterprises that could heighten the execution of international accounting criterions.The International Financial Reporting Standards are the confidence model to bring forth and supply relevant information to a broader set of interested parties interrelated with a commercial bank activity. The rules of full information and periodic net income computation are governed by the basic rules of lucidity, relevancy, comparison and dependability [ accurate, nonsubjective, prudent and complete ] to give true international comparison.

Valuing the loan portfolio of a commercial bank is an progressively of import endeavor for a figure of grounds. Actually all the Bankss in Albania are largely structured with foreign capital. The amalgamation moving ridge during the last 5 old ages was an inviolable force within the banking industry of Albania. Both geting and aim Bankss needed an overall loan portfolio appraisal harmonizing to market value in order to negociate sensible footings of the concern combination. Our banking system experienced an intensive run of acquisitions motivated by a perceptual experience of a positive capital base, market chances and sustainable profitableness.The commercial Bankss in Albania are required by Ministry of Finance ( MoF ) to interpret bing accounting harmonizing to the International Financial Reporting Standards [ IFRS ] . This implies to analyze the entire plus portfolio quality for the presence of Loan Impairment.Commercial Bankss are alone, compared to other fiscal establishments and corporates, because they play a polar function in the payments system, enjoy enormous purchase in balance sheet construction, and by the recent crisis development should be supervised more intensely.

Further, fiscal and regulative accounting criterions now require a revelation of the just value of fiscal assets and liabilities. It is a practical response to a latent call for greater transparence coming out from stockholders, depositors/creditor and other stakeholders, and regulative governments [ Bank of Albania ] .In contrast to Bank of Albania Manual of Accounting, the thought of creditor protection is served through transparent and economically relevant information instead than through conservative accounting, which tends to understate assets, and consents the formation of unrevealed militias.

So far, the capable affair of the work was ‘the designation, measuring and posting into histories of the impaired loans ‘ by executing a full scope impairment trial on loans portfolio of BIS Banca [ Veneto Group ] ‘ . It covered a clip section by the terminal of 2008 and the first semester of 2009 ‘ .It assembled a tutorial profile, designed to decide the complexnesss of impairment loans assessment in general and the application of IFRS eligible theoretical accounts in peculiar.What worked out do non intends to do the reader an expert in the field but at least equip with the working tools and applications used and awarded to be really factual.Nosologies PrerogativesIt is really of import to happen out that market forces are deviating all banking construction to be extremely antiphonal in full conformity with high criterions of international accounting, but our experience advises that there are some offseting deterrences operate to deter such conformity.

More accent should be placed on effectual accounting and scrutinizing interlingual rendition procedure into IFRS to underpin such institutionalised ordinance.Any reader of this prose must maintain in head that international accounting and auditing criterions themselves do non put out demands as to how such effectual ordinance should be exercised. Guidance is non provided on how to “ import ” international criterions into national legislative and regulative systems, on the design and operation of appropriate regulative models, or on the interfaces with other regulative instruments and establishments ( such as those for banking and securities ordinance ) which could lend to the monitoring and enforcement of international criterions.As presently drafted, international accounting and auditing criterions implicitly assume the being of legal, institutional and policy conditions ( “ stipulations ” ) which are frequently undeveloped or still absent in Albania.The IFRS concerns should be prioritized towards bank assets quality, and to this point we have to back the proactive function of high-quality external fiscal coverage, and motivate the attempts to advance the execution of most outstanding operational class.

There is an pressing demand the BoA and MoA, we propose to stipulate by scaling up the fortunes in which the usage of “ full ” IAS/IFRS is appropriate, and to develop different criterions that would run into the demands applicable to the users of fiscal statements of other entities, peculiarly on loans quality.Many of us continue to hold misinterpretations with regard to the really nature of international criterions, which complicates attempts to be after, specify and mensurate advancement towards successful execution.Lack of homo and fiscal resources is a important hindrance to theexecution of international criterions. Mobilizing the necessary resources on a sustainable, long-run footing is a major challenge.The theoretical account introduced in BIS Banca may be applicable in all commercial Bankss portfolios within Albania, where the comparative compatibility of the ingredients converges, and where exists an leaning to easy entree to emerging international best pattern and consensus. Such dogmas should explicitly see these built-in restrictions.Taking into history this clime we started up by planing and seting into operation an scrutiny procedure, which involved:( a ) Designation Approaches ;( B ) Measurement Techniques ;( degree Celsius ) Specifying the Loan Loss Provisions [ LLP ] ;( vitamin D ) Correct Posting into Accounting ;( vitamin E ) Checking and mensurating the Effects on Loans Portfolio ;( degree Fahrenheit ) Re-examination of the Bank ‘s Equity Position ;( g ) Unwraping in full conformity with IFRS ;Impairment Identification ApproachesThe International Financial Reporting Standards ( IFRS ) require a periodic audit of the possible indexs for a sustained damage.

The polygonal end of this demand includes the following most important concerns:To avoid that loans be quoted higher than their come-at-able value ;To find the Mandatory Risk Identification & A ; Loan Loss Provision magnitude ;To custom-make the Procedures on Risk Measurement, and Risk Audit on loans portfolio ;To happen out consistently the Signs of Impairment on Every Balance Sheet Date ;The widespread statements that emerged from the survey findings shed visible radiation on the most common classs of obstructions encountered. Cardinal to the designation of the impairment loans was a clear apprehension of what an damage is, what approaches and benchmarks requires, and what it means to follow them. Failing this, the Bankss are unable to put concrete execution marks or to mensurate advancement in making those marks.The paper suggests that lucidity of understanding aid to explicate the important spreads between anterior self-assessments of conformity and those required by IFRS.The First Step was dedicated to the designation of beginnings for loan damage on qualitative and quantitative premises, taking into history the appraisal of BIS Banca ‘s fiscal standing, history of minutess, and legal/contractual hazard [ stockholders, CB, Depositors, Borrowers ] .The Second Step, was centered on Data Base Configuration for all the undermentioned constituents:( a ) Degree of the Loans Portfolio at Risk,( B ) Inventory of Loss-Incurring Events,( degree Celsius ) Inventory/Segmentation of Loans per Debtor/Risk Category [ breach of agreement/contract, bankruptcy, dormant, error correction code. ] ;( vitamin D ) Reconfiguration and Checking with Bank of Albania commissariats criterions [ Past Due, Special Attention, Sub-standards, Doubtful, and Default ] .

The Third Step, was the building of a guideline for the Detailed Appraisals by know aparting instances With No Objective Evidence Of Impairment ( in line with IFRS 39 ) .During these phase of the undertaking we faced with confounding reading of the damage construct because the IFRS 36 screens impairment in physical/material assets and IFRS 39 trades with damage in fiscal assets, which was our instance.Another concern is that the non standard manner of IFRS reading may halter strict and unvarying application of them. From our contacts with other Bankss hazard directors we deduced that some of them have adopted merely selected criterions or selected paragraphs of a criterion, by recommending the thesis that adopted IFRS should come in in force as of a peculiar day of the month in the yesteryear, with no history taken of alterations since so.

These misinterpretations provide high hazard of a false apprehension of the existent criterions spread and the true execution challenges they face.Besides cardinal to the designation of damage harmonizing to IFRS and Basel II should be an univocal relationship between the Prospective Risk [ outlooks ] and existent hazard nowadays in the loan portfolio. This forwards a particular attending to measurement techniques.

Measurement Technique Selection: The AlgorithmThe optimum determination sing which is the proper measuring technique on impairment loans led to a elaborate design of the Algorithm.The drafted protocol included these ingredients:1-The hazard sensing per single loan contract made up the passage from initial hazard perceptual experience to a existent one.2-Objective Evidence of Impairment was developed in conformity with A§59 IAS 39 ] , by happening out each single recognition exposure.3-The reappraisal of the optimum determination and switching up to a rational determination by seting as the most emergent objective the Asset Impairment Test for each recognition file in elaborate mention and conformity with IFRS 36, IAS 39, IAS 38, etc.4-The impairment loss acknowledgment and computation procedure has included:( a ) the ‘impairment and uncollectibility fiscal assets ‘ ,( B ) the estimated recoverable sum plus just value of collateral with the transporting sum of the loan.( degree Celsius ) the posting protocol and the show of the difference in the Balance Sheet [ Acc. , ‘Provision for Possible Losingss On Loans and Advances ‘ ( i.e.

the consequence of impairment trial ] .( vitamin D ) the gap and triping the history ‘Allowance for loan losingss ‘ and supplying the protocol how to reexamine sporadically the consequence of damage in loan loss proviso.5-The Measurement/Calculation of the damage was correlated with the waies based on the undermentioned path:( a ) The determination to implement ‘The Accrual Interest Measurement/Calculation Approach ‘ in full conformity with IAS 18 ;( B ) The application of Appropriate Valuation Model as described in IAS 28.23 in connexion with impairment trial.( degree Celsius ) The classification of Loan Loss Provisions,( vitamin D ) The Alternate Evaluation of Individual Asset,( vitamin E ) The Reversal of Impairment Loss,( degree Fahrenheit ) The Non- Recognition of Impairment Losses,( g ) The Allotment of Individual Loan Loss Provisions,( H ) The Allocation of Portfolio Based Loan Loss Provisions, and( I ) The Back Testing.6-Preparing the conclusive phase, by redesigning and/or restructuring:( a ) The Data Flow [ Input, Processing and Information Output ] between Risk Department and Accounting Department ;( B ) A Sustainable Standard/Systematic Procedure on damage provingThere are some disagreements amongst company jurisprudence, accounting jurisprudence and IFRS.

The company jurisprudence does non authorise a company to account for the sum of the rectification of an mistake retrospectively. IAS/IFRS require retrospective accounting so that the rectification of an mistake is excluded from the finding of net income or loss for the period in which the mistake is discovered. Such incompatibilities generate troubles to deviate on IFRS, even more it risk to go unable to follow with both domestic jurisprudence and international criterions.

Despite this, there is besides another concern, because it is non clear that the company jurisprudence may authorise a statutory hearer to disclaim his or her sentiment. This would conflict with ISA, which requires an hearer to disclaim an sentiment when the possible consequence of a restriction on range is so material and permeant that the hearer will non been able to obtain sufficient appropriate audit grounds.We must systematically take into consideration that IAS/IFRS are criterions for the readying of all-purpose fiscal statements, aimed at run intoing the demands of a broad scope of users, but predicated on the premise that puting primary accent on the demands of stockholders will ensue in measuring, acknowledgment and revelation demands that besides meet the demands of other users.The banking industry in Albania is more than 70 % owned by foreign stockholders and about from EU states with accounting criterions meeting increasingly with IFRS. Lack of appropriate linkages between all-purpose fiscal coverage and regulative coverage [ Bank of Albania describing ] in banking system within Albania creates an incompatibility, because BoA has the power and authorization to enforce different special-purpose fiscal coverage duties designed to run into its specific demands on the ether of prudential and supervisory intents describing.

The Approach for Loan Loss Provisions & A ; Risk Index

What emerged from the choice of measuring technique was the apprehensiveness how to pull off the interface between all-purpose and regulative coverage.It is customary to meet instances where regulations designed by BoA for regulative describing on loan loss provisioning in the banking sector, or on the timing of income acknowledgment, have an impact on the general intent accounting information, peculiarly when a individual set of fiscal statements is intended or required to run into both aims.

Hence, the demands of regulative coverage we expect to conflict with those of IFRS, thereby preventing suppressing execution.A impermanent solution may be the convention that the Bankss should hold the option of fixing extra fiscal statements in which full conformity with IFRS. This may menace for high cost deductions, may engender important uncertainnesss among users as to which are the “ existent ” figures.In add-on, fiscal statements prepared and audited on a calculated footing typically fall outside the range of BoA regulative governments, thereby frequently cut downing the trust users can put on them.

The promotion is assuring when, alternatively of infixing special-purpose demands in the regulations regulating general intent coverage, the regulative governments [ BoA and MoF ] acknowledge the being of parallel systems, and seek to minimise differences between them. To this point, it was extremely likely to confront a spread between portfolio at hazard harmonizing to BoA standards, which is rather similar with Basel II and comparatively far off from IFRS point of view. Bank of Albania uses 5 classs on hazard cleavage of loans portfolio [ 1-Past Due, 2-Special Attention, 3-Sub-standards, 4-Doubtful, and 5-Default ] .Alternatively, we proposed 10 classs Risk Rating Scales harmonizing to hazard designation & A ; measurement per each plus portfolio ingredient.0.5 Minimal Hazard: Externally top rated corporate ( AAA ) ( e.g.

authorities linked companies in externally AAA-rated OECD states )1.0 Excellent recognition standing: Best evaluation that can be achieved from a client. The company has a really strong equity base and a healthy funding construction.1.5 Very good recognition standing: All payments – capital and involvement – can be fulfilled besides in the long tally is really high. The company has a strong equity base and healthy funding construction.2.0 Good recognition standing: All fiscal duties can be expected to be fulfilled in the average term.

Good equity base and healthy substance.2.5 Average recognition standing: No breaks of the service of chief and involvement payments. Reasonable funding construction with satisfactory equity base.3.0 Mediocre recognition standing: No breaks of chief and involvement payments, nevertheless increased sensitivity to economic environment. Limited funding flexibleness.

3.5 Weak recognition standing: Weak profitableness and has merely Limited Financial Flexibility, which could negatively impact seasonably serving of chief and involvement payments.4.0 Very weak recognition standing: ( resp. no information ) : Company with really weak profitableness and unequal funding construction. Can forestall full and timely service of fiscal duties.

4.5 High chance of default: Company with really weak profitableness and debatable funding construction. Partial loss of chief or involvement has to be factored in. Work out instance.5.0 Default ( definition based on Basel II ( EU Paper, Annex VII, Part 4, A§ 44 ) ) : Fiscal duties could non be wholly fulfilled in clip.UNRATEDa?’Loans which are non rated yetPassage Matrix, Migration Rate and PostingThe above suggested hazard evaluation graduated tables are the guideline for the Transition Matrix and Migration Rates. It is besides co-dependent with several category agreement as per Private Individuals, Micro/ SME ‘s, Corporations traveling farther as per category history, subclass history, analytic history, etc.

Checking all loan contracts files to analyze the hazard evaluation scale category interpolation was correlated with the position of collateral presence, its quality and market value recent history. Consequently, a reappraisal of collateral on all inventorized Collateral Dependent Loans [ urging TeGOVA criterions ] enriched the incorporation of loan loss commissariats for contingent liabilities and committednesss. All loan inception contract hosted a indirect sub-contractual constituent.Finally a Hazard Index was calculated based on the undermentioned expression:

RI = [ E ( ROA ) + CAP ] / I?ROA

whereRI = degree Fahrenheit ( recognition hazard, interest-rate hazard, liquidness hazard, aˆ¦.. )Before traveling beyond to posting operations were disclosed all accounting definitions dependent to the IFRS interlingual rendition point of view.

The important accounting constructs referred to damage are:

Impaired Assetss

An plus is considered an Impaired Asset when its Carrying Amount [ 1 ] & gt ; its Recoverable Amount [ 2 ] .[ 1 ] .CARRYING AMOUNT =the sum at which an plus is recognized in the balance sheet after subtracting accrued depreciaA­tion and accumulated impairment losingss.[ 2 ] RECOVERABLE AMOUNT=The higher of an Asset ‘s Fair Value lupus erythematosus costs to sell ( sometimes called net merchandising monetary value ) and its value in usage.a-¬The Fair Value =the sum gettable from the sale of an plus in a bargained dealing between knowing, willing parties.

a-¬Value in Use=the discounted present value of estimated future hard currency flows expected to originate from the go oning usage of an plus, and/or from its disposal at the terminal of its utile life.Recoverable Sum: IAS 36 -19,20,21 A?Fair Value Less Cost to Sell: IAS 36 -25, 26, 27 A? Value in Use: Iowa 36 -30 A?Cash Flow: IAS 36-33,34,44, 50 A?Discount Rate: IAS 36 -55,56,57 A?The Contractual Cash Flows & A ; Historical Loss Experience claim the difference between Basel II and IFRS-reporting, because Basel II encourages the use of ‘probabilities of default ‘ in order to quantify ‘expected losingss ‘ whereas IFRS petitions that merely ‘incurred losingss ‘ may be reported ( IAS 39.BC1 09 ) .The IAS/IFRS cardinal mention for touchable assets damage is the IAS 36 ‘Impairment of Assets ‘ , which states that the damage has to be identified at each balance sheet day of the month. The proposed/accepted expression:Transporting Amount & gt ; Net Selling Price and its Value In UseThe impairment scrutiny attack was based harmonizing to external beginnings and internal 1s.In the plus damage from External Sources we included the undermentioned indices:The market value declines [ non available in Albania ] ;The negative alterations in engineering, markets, economic system, or Torahs [ not mensurable ] ;The additions in market involvement rates [ questionable ]The bank stock monetary value is below book value [ [ not available because there is non a Stock Market in Albania ] ; ]Meanwhile in In the plus damage from Internal Sources the undermentioned indices were included:The obsolescence or physical harm ;The plus point is portion of a restructuring or held for disposal ;The presence of worse economic public presentation than expected ;Appraisal and Recognition NormsHarmonizing to IAS 39 the Bank should measure at each balance sheet day of the month any indicant that an plus may be impaired. If Yes, IAS 39.63 ( for fiscal assets CARRIED AT AMORTIZED COST ) , IAS 39.

66 ( for fiscal assets carried at cost ) or IAS 39.67 ( for available-for-sale fiscal assets ) .Impairment Loss should be recognized as an disbursal in the income statement!The appraisal is done for Assetss Held to Maturity or Loans Receivable carried at amortized cost and the expression applied is:Effective Interest Method minus Use of Allowance history.The Amount of the Loss here is the difference between the plus ‘s carrying sum and the present value of estimated future hard currency flows ( excepting hereafter recognition losingss that have non been incurred ) discounted at the fiscal plus ‘s original effectual involvement rate! [ ( see IAS 39.46 ( degree Celsius ) and IAS 39.AG80 and AG81 ) ] .It is really of import to stress that Assets available for sale were excluded from impairment trial.Taking into consideration that there is no active market for fiscal instruments, we suggested just value appraisal by utilizing a Evaluation Technique ( VT ) .

The rating technique we selected was configured one which contains parametric quantities of recent arm ‘s length market minutess, the current just value of similar instrument, DISCOUNTED CASH FLOW and OPTION PRICING MODELS [ Our Suggestion ] .The Objective for this choice is To set up what the dealing monetary value would hold been on the measuring day of the month in an arm ‘s length exchange on normal concern considerations.From impairment loss scrutiny were exempted Short term loans ( & lt ; 1 twelvemonth ) /fair value = transporting sum [ including accrued involvement ] . A comprehensive attack was devoted to Floating Interest Rate Loans & A ; Advances ( IAS 39.

AG6-8 ) and Fixed Interest Rate Loans & A ; Advances ( IAS 39.AG6-8 ) .The Decision Tree Scheme for Loans and Advances to Bank and/or to CustomersIAS 39, 58 is as following:

Imperative Dogmas:

Impairment loss is recognized merely when it has been incurred ( IAS39.IN20 ) . Loan Loss commissariats are categorized as:Individual loan loss commissariats ( single value accommodations ) for claims in the balance sheet ( IAS 39.63 ) and for off-balance sheet points andPortfolio based loan loss commissariats for groups of fiscal assets with similar recognition hazard features ( IAS 39.64 ) .Commissariats for contingent liabilities and loan committednesssThe Carrying Amount of the plus shall be reduced either straight or through usage of an allowance history ( IAS 39.

63 ) .The sum of the loss shall be recognized in net income or loss [ Acc. Posting ] .The Collateral is non recognised in the IFRS-balance-sheet as an plus offprint from the impaired fiscal plus before foreclosure.

IFRIC 10: ‘Interim Financial Reporting and Impairment ‘

On 20 July 2006, the International Financial Reporting Interpretations Committee ( IFRIC ) issued IFRIC 10 Interim Financial Reporting and Impairment. The Interpretation addresses the interaction between the demands of IAS 34 ‘Interim Financial Reporting ‘ and the acknowledgment of impairment losingss on good will under IAS 36 ‘Impairment of Assets ‘ and certain fiscal assets under IAS 39 ‘Financial Instruments: Recognition and Measurement ‘ .

IAS 34.28 requires an entity to use the same accounting rules in its interim fiscal statements as are applied in its one-year fiscal statements but besides states that “ the frequence of an entity ‘s coverage ( one-year, semiannual, or quarterly ) shall non impact the measuring of its one-year consequences. To accomplish that aim, measurings for interim coverage intents shall be made on a year-to-date footing. ” IAS 36, paragraph 124, states that “ An impairment loss recognised for good will shall non be reversed in a subsequent period. ”IAS 36.124, provinces that ‘an impairment loss recognised for good will shall non be reversed in a subsequent period. ‘IAS 39.

69, states that “ Impairment losingss recognised in net income or loss for an investing in an equity instrument classified as available-for-sale shall non be reversed through net income or loss. ”IAS 39.66, requires that impairment losingss for fiscal assets carried at cost ( such as an impairment loss on an unquoted equity instrument that is non carried at just value because its just value can non be faithfully measured ) should non be reversed.So far the chief issue is:Should an entity contrary damage losingss recognized in an interim period on good will and investings in equity instruments and in fiscal assets carried at cost if a loss would non hold been recognized, or a smaller loss would hold been recognized, had an impairment appraisal been made merely at a subsequent balance sheet day of the month?This Interpretation states that:

where an entity has recognized an impairment loss in an interim period in regard of good will or an investing in either an equity instrument or a fiscal plus carried at cost, that damage should non be reversed in subsequent interim fiscal statements nor in one-year fiscal statements.

The IFRIC concluded that:a-¬An entity shall non change by reversal an impairment loss recognized in a old interim period in regard of good will or an investing in either an equity instrument or a fiscal plus carried at cost.

a-¬An entity shall non widen this consensus by analogy to other countries of possible struggle between IAS 34 and other criterions.

The Interpretation should be applied to goodwill prospectively from the day of the month at which the entity foremost applied IAS 36, and to investings in equity instruments or in fiscal assets carried at cost, prospectively from the day of the month at which the entity foremost applied the measurement standards of IAS 39.

Therefore, the prohibitions on reversals of recognized damage losingss on good will in IAS 36 and on investings in equity instruments and in fiscal assets carried at cost in IAS 39 should take precedency over the more general statement in IAS 34 sing the frequence of an entity ‘s coverage non impacting the measuring of its one-year consequences.IAS/IFRS and Calculation Procedure and Impairment Test ResultsThe common computation process remains unchanged and is every bit follows [ IAS 39.

63 ] :1-Full Exposure of Asset ‘s Carrying Amount = All Sums Due [ principal, involvement, price reductions ]

Minus ( a?’ )

2-Present value of expected future hard currency flows [ discounted at the fiscal instrument ‘s original effectual involvement rate ] = Estimated Recoverable Amount = Market Value ( in instance of Secondary Market monetary value citations )Minus ( a?’ ) Fair value of the collateral ( if any ; Note: just value less costs for obtaining the collateral )Equal= Valuation Adjustment Requirement ( If & gt ; 0 )The computation is based on the yearss past due ( dpd ) .The exchange rates at the year-end used by the BIS Banca in the readying of the amalgamate fiscal statements are as follows:

31 June 2009

Lek/1 US Dollar 94.5462Lek/1 Euro 131.9332IFRSLek=Reported Currency 1a‚¬=130,76 ALL

31 June 2009

Past Due Days

[ pdd ]

Collateral

Coverage

Expected

Entire Loss

[ Write OFF ]

Entire Loans Portfolio a†’

3,381,888,556.63

100,000 %

Entire Impairment Loss IFRS

90,249,263,86

2,669 %

Av.Pdd=262

Rating Scale 5 [ Default ] a†’

L 81,780,932.87

2,418 %

& gt ; 130 %

0

L 8,468,330.99

0,2504 %

Rating Scale 4,5

[ High Probability of Default ] [ Maˆ¦ ][ Daˆ¦ ][ Daˆ¦ ][ Xaˆ¦.

. ]

L 267,278.09

L 1,013,108.34

L 1,018,651.

91

L 1,307,957.54

0.007 %

0.003 %

0.0031 %

0.000125 %

176123123100

& gt ; 130 %

& gt ; 100 %

& gt ; 100 %

& gt ; 130 %

0

0

0

0

3,606,995.

89

0.1067 %

Rating Scale 4

[ Very Weak Credit Standing ]

[ Z… ][ H..

. ][ S..

. ][ V…

][ Eaˆ¦ ]

L 4,194.98

L 1,358,705.58

L 2,027,589.45

L 448,343.

52

L 677,623.49

0 %

0.0402 %

0.0002 %

0.00004 %

0.

00200 %

9085636161

& gt ; 130 %

& gt ; 100 %

& gt ; 130 %

& gt ; 130 %

& gt ; 130 %

0

0

0

0

0

4,516,457.02

0.1335 %

Rating Scale 3,5

[ Weak Credit Standing ]

[ Zhaˆ¦ ][ Eaˆ¦ ][ B — – ]

L 8,050.54

L 129,524.74

L 207,302.80

0.0000002 %

0.

000003 %

0.00004 %

604547

& gt ; 100 %

& gt ; 130 %

& gt ; 130 %

0

0

0

344,878.07

0.0102 %

Rating Scale 3

[ Mediocre Credit Standing ]

0

n/a

n/a

n/a

n/a

Rating Scale 2,5

[ Average Credit Standing ]

0

n/a

n/a

n/a

n/a

Rating Scale 2

[ Good Credit Standing ]

0

n/a

n/a

n/a

n/a

Detailed Information per Rating Scale 5

Rating Scale 5 [ Default ] Impairment Loans

Baˆ¦

5,241,573.44

Baˆ¦

3,941,183.55

Aaˆ¦

2,740,338.59

ACaˆ¦

3,458,988.

72

aˆ¦ .

7,194,713.33

aˆ¦

aˆ¦

TOTALI

81,780,932.87

IFRS/Bank of Albania Comparative Table on Loan Loss Provisioning 31/06/2009

1

IFRS -Loan Loss/Impairment Allowance

90,249,263,86

2.669 %

2

BoA -Loan Loss/Impairment Allowance

84,702,067,93

2,505 %

3

The difference between IFRS and BoA [ 1-2 ]

+5,547,195.93

2.669 % -2.

505 % =+0,164 %

4

Interest Rate Risk Premium to be applied in Lending Rate

2,669 %

Note: No stuff diference [ 0,164 % ]

Accounting Entries [ posting category ]

Bis Ref. Nr

31 June 2009

Debit

Recognition

“ Bad Loans ”

— —

81,780,932.87

“ Impaired Loans ”

— —

8,449,892.22

Allowance for Loan Loss

90,249,263,86

Responsibility Scheme

Responsible Depart.

Input signal

Processing

End product

Recognition Departmenta†’Loan Applicationa•‘Economic/Financial Data Basea•‘File Preparationa•‘Legal Standards ConformityMerchandise Standards ConformityBasic Financial RatiosField/Site ConfirmationInformationa•‘Financial Indicatorsa•‘Opinionaˆ¦[ Send the file for blessing to RD ] a†’a””a-?Risk Departmenta†’Output of Credit DepartmentHazard Identification/AssessmentConcluding Opinion on Approval/Denial a†’a””a-?Risk Departmenta†’Datas from:Credit DepartmentCollection/TreasuryLegal DepartmentInternal AuditCentral BankPerceiversMarket Supervisors

aˆ¦

Hazard Monitoring [ Operative ]Collateral Evaluations…

Impairment Trial

Provisioning -BoA [ monthly ]Provisioning -IFRS[ Each Balance Sheet Date ]

Hazard Premium Adjustment

[ Nominal Interest Rate ]In subsequent loaning contracts

Acronym

BoA=Bank of Albaniai‚?MoF=Ministry of Financei‚?IFRS=International Financiar Reporting Standardsi‚?VIU=Value In Usei‚?IAS=International Accounting Standardsi‚?RD=Research and Developmenti‚?PD=Probability of Default