bdif_finstatement_2012 by Bulgarian Deposit Insurance Fund (BDIF)

Bulgarian Deposit Insurance Fund 2011 Annual Financial Statements

ANNUAL FINANCIAL STATEMENTS 2012

BULGARIAN DEPOSIT INSURANCE FUND

Management Board: Chairman:

Rossen Nikolov

Vice-Chairman

Nelly Kordovska

Members:

Bisser Manolov Borislav Stratev Svetla Kostova

Chief Accountant:

Svetla Suvandjieva

Head office:

27 Vladayska Street, 1606 Sofia

Auditor:

PricewaterhouseCoopers Audit OOD 9-11 Maria Luiza Blvd., 1000 Sofia

Bulgarian Deposit Insurance Fund 2012 Annual Financial Statements

TABLE OF CONTENTS Independent auditorâ&#x20AC;&#x2122;s report Statement of Operations

Statement of Financial Position

Statement of Cash Flows

Statement of Changes in Net Assets

NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR 2012

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 1. GENERAL INFORMATION Information on BDIF The Bulgarian Deposit Insurance Fund (BDIF) was established under the Law on Bank Deposit Guarantee in 1999. BDIF was established to protect depositors' savings with banks, participating in the scheme and repay the insured deposit amounts in case of bank license revocation. According to the Law on Bank Deposit Guarantee, BDIF’s core activity involves determining and collecting annual and entry contributions from banks licensed by the Bulgarian National Bank and investing the accumulated funds. Upon the revocation of a bank’s license BDIF disburses up to BGN 196 thousand of deposits to individuals and legal entities — amount in force as of 31 December 2010. Along with these functions, BDIF also performs the functions set out in the Law on Bank Bankruptcy. In accordance with the Law on Credit Institutions, in force as of 1 January 2007, the BNB may order а bank subject to special supervision to increase its capital, provided that the new shares will be acquired by BDIF. In such a case, the Management Board of BDIF shall take a decision for the acquisition of a bank’s shares as well as for their transfer. BDIF address and headquarters: 27 Vladayska Street, 1606 Sofia The personnel as at 31 December 2012 comprised 19 employees (31 December 2011: 22). Regulatory framework of BDIF operations BDIF operations are regulated by the Law on Bank Deposit Guarantee. This Law requires that cash accumulated from banks shall be invested solely into securities issued or guaranteed by the government, or into deposits with the BNB and short-term deposits with banks. BDIF is governed by a Management Board consisting of five members designated as follows: -

the Chairman of the Management Board — by the Council of Ministers of the Republic of Bulgaria;

the Vice-Chairman of the Management Board — by the BNB Governing Council;

one member — by the Association of Banks in Bulgaria;

Two members — jointly by the Chairman and the Vice-Chairman of the Management Board of BDIF.

The Chairman of the Management Board organizes and manages the daily operations of BDIF and the administrative personnel and represents BDIF at home and abroad. The term of office of the Management Board of BDIF is four years. As at 31 December 2012 the members of Management Board of BDIF were as follows: -

Rossen Nikolov — Chairman of the Management Board of the Bulgarian Deposit Insurance Fund, assigned by Decision No 153 of the Council of Ministers dated 17 March 2011;

Nelly Kordovska — Vice-Chairman of the MB of the BDIF, assigned by Decision No 1 of the BNB Governing Council dated 13 January 2011;

Bisser Manolov — member, assigned by Decision dated 23 March 2011 of the MB of the Association of Banks in Bulgaria;

Borislav Stratev — member, assigned by Decision No 92-0005 of the Chairman and the ViceChairman of the MB of BDIF dated 24 March 2011;

Svetla Kostova — member, assigned by Decision No 92-0005 of the Chairman and the ViceChairman of the MB of BDIF dated 24 March 2011.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012

2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF BDIF Accounting policies The financial statements were drawn up following the accounting policies listed below. The adopted accounting policies are consistent with those applied in the previous reporting period, unless noted otherwise. Basis for the preparation of the financial statements The financial statements of the Bulgarian Deposit Insurance Fund have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements have been prepared on a historical cost basis, modified to include derivative financial instruments and financial assets and liabilities, reported at fair value through profit or loss. The financial statements are presented in Bulgarian levs (BGN) and all items are rounded to the nearest thousand (BGN'000), unless specified otherwise. The preparation of financial statements in compliance with IFRS requires the use of estimates and assumptions. Hence, the management has to make its own assumptions on BDIF accounting policy. A separate disclosure is required for items in the financial statements presuming a higher level of subjective assessment and complexity or where the assumptions and accounting estimates have a material effect on the financial statements. New and amended standards and interpretations to the reporting periods ending on 31 December 2012 а) New and amended standards approved by BDIF. There are no new and amended accounting standards approved by BDIF to be applied for the financial year starting on 1 January 2012. b) New and amended standards and IFRS improvements mandatorily applied for the fist time for the financial year starting on or after 1 January 2012, but currently not applicable to BDIF (although they may affect the reporting of transactions and events in the future). ‘Disclosures — Transfers of financial assets’: Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011). The amendment requires additional disclosures with a view to risk exposures related to transfers of financial assets. The amendment requires disclosures by class of assets of the nature, carrying amount and descriptions of risks and rewards of financial assets transferred to the other side, but still in the entity's balance sheet. It also requires that information disclosed enables the interested party to find out what is the quantity of all related liabilities and the relation between financial assets and related liabilities. Where financial assets have been written off, but the entity is still exposed to certain risks and rewards related to the transferred asset, additional disclosure is required to understand the effects from these risks. The said changes did not result in additional or changed disclosures and had no material impact on the assessment or the recognition of transactions and balances herein.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 c) New standards and interpretations effective for annual periods beginning on or after 1 January 2013 or later which have not been adopted by BDIF prior this date. Amendments to IAS 1 ‘Presentation of Financial Statements’ (issued in June 2011 effective for annual periods beginning on or after 1 July 2012) change the disclosure of items presented in other comprehensive income (OCI) in the statement of comprehensive income. The amendment requires entities to separate items presented in OCI into two groups, based on whether or not they may be reclassified (recycled) to profit or loss in the future. The proposed title used by IAS 1 has changed to ‘statement of profit or loss and other comprehensive income’. The amended IAS 19 ‘Employee Benefits’ (issued in June 2011 and effective for annual periods commencing on or after 1 January 2013) requires significant changes in the presentation and measurement of certain pension income and termination benefits, as well as in the disclosures of all employee benefits. According to the standard where changes in the net defined benefit liability (asset) occur, they shall be recognised as follows: а) past-service cost and net interest cost recognised in profit or loss; and b) remeasurements in other comprehensive income. ‘Offsetting of Financial Assets and Financial Liabilities’ — Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added guidance on the application of IAS 32 to address the inconsistencies identified with certain offsetting requirements. This includes clarification of the meaning of 'currently has a legally enforceable right to offset' and states clearly that gross settlement mechanisms are effectively equivalent to net settlement. ‘Disclosures — Offsetting of Financial Assets and Financial Liabilities’ — Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 July 2013). The amendment requires offsetting disclosures to allow users of the entity's financial statements to assess better the effect or potential effect of netting arrangements, including rights of set-off. The amendment addresses disclosures, but will not affect measurement and recognition of financial instruments. Improvements in the International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning on or after 1 January 2013). IFRS 13 ‘Fair Value Measurement’ (issued in May 2011 and effective for annual periods commencing on or after 1 January 2013) aims to improve consistency and make the process less complex by giving a precise definition of fair value and a single measurement source of the fair value and disclosure requirements applicable to IFRS. The requirements which, to a large extent, have reached consistency between the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (US-GAAP), do not expand the fair value reporting, but give guidance on how to use it when needed or allowed under other IFRS or GAAP standards. BDIF Management considers the impact that the above stated amendments to the standards could have on BDIF's financial result, as well as when it will approve them. Other new and amended standards and interpretations, which are not likely to have any impact on these financial statements: The amendment to IAS 12 ‘Income Tax’ — Return on Investment Assets (issued in December 2010 and effective for annual periods commencing on or after 1 January 2013) expresses a rebuttable presumption that investment property measured at fair value will be recovered through sale.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 The amendment to IFRS 1 'First-time Adoption of International Financial Reporting Standards' regarding hyperinflation and removal of references to fixed dates of some exceptions and releases (issued in December 2010 and effective for annual periods commencing on or after 1 January 2013). IFRS 10 ‘Consolidated Financial Statements’ issued in May 2011 and effective for annual periods beginning on or after 1 January 2014). IFRS 11 ‘Joint Agreements’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013). IFRS 12 ‘Disclosing of Interest in Other Entities’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013). IAS 27 ‘Consolidated and Separate Financial Statements’ (revised in May 2011 and effective for annual periods beginning on or after 1 January 2014) was amended to give accounting disclosure requirements related to investments in subsidiaries, jointly controlled entities, and associates when the entity prepares its separate financial statements. IFRS 10 ‘Consolidated Financial Statements’ replaced those parts in IAS 27 giving guidance on control and consolidated financial statements. The amended IAS 28 'Investments in Associates and Joint Ventures' (revised in May 2011 and effective for annual periods beginning on or after 1 January 2014) applies the equity method in the assessment of investments in associates and joint ventures. IFRIC 20 'Stripping Costs in the Production Phase of a Surface Mine' (issued in October 2011 and effective for annual periods beginning on or after 1 January 2013). d) New or amended standards and interpretations not yet endorsed by the European Union. IFRS 9 ‘Financial Instruments: Classification and Measurement’. IFRS 9 issued in November 2009 and replacing IAS 39 in the part related to the classification and measurement of financial assets. Consequently, IFRS 9 was amended again in October 2010 in relation to the classification and measurement of financial liabilities. In December 2011 the standard was amended to: a) change the effective date for annual periods beginning on or after 1 January 2015 and b) add transitional disclosures. The main characteristics of the standard are: 

It requires that financial assets are classified in two measurement categories: those that shall be subsequently measured at fair value and those that shall be subsequently measured at amortized cost. That determination is made at initial recognition. The classification depends on the business model used by the entity to manage financial instruments and on the contractual cash flows of the instrument.



Most of the IAS 39 requirements regarding the classification and measurement of financial liabilities were not changed in IFRS 9. The main change is that the entity shall be required to present the changes in the fair value of financial liabilities attributable to changes in credit risk in other comprehensive income. BDIF Management considers the impact that the above stated amendments to the standards could have on BDIF's financial result, as well as when it will approve them. Other amendments to the standards and interpretations not likely to have any impact on these financial statements: Amendment to IFRS 1 ‘First First-time Adoption of IFRS — Government Loans’ (issued in December 2010 and effective for annual periods beginning on or after 1 January 2013) focuses on below-market rate

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 government loans and provides relief to entity's adopting the IFRS for the first time to apply IFRS retrospectively when reporting such loans. The transition guidance amendments for IFRS 10, IFRS 11 and IFRS 12 (issued on 28 June 2012 and effective for annual periods beginning on or after 1 January 2013) set forth the guidance for transition to IFRS 10 'Consolidated financial statements' and limit the requirement to provide adjusted comparative information to the immediately preceding period only. Amendments to IFRS 10, IFRS 12 and IAS 27 – ‘Investment entities’ (issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014) define 'investment entity' and require that these entities measure their investments in those subsidiaries at fair value through profit or loss, as well as consolidate only subsidiaries providing services that relate to the investment entity’s investment activities. The financial statements have been prepared on historical cost basis except for available-for-sale financial instruments, which are measured at fair value. BDIF maintains its accounting books in Bulgarian lev (BGN), which is accepted as being its presentation currency. The data in the financial statements and the notes thereto are presented in thousands of Bulgarian levs (BGN’000) except where it is explicitly stated otherwise. The presentation of the financial statements in accordance with International Financial Reporting Standards requires the management to make best estimates, accruals and reasonable assumptions that affect the reported values of assets and liabilities, income and expenses and the disclosure of contingent receivables and payables at the date of the financial statements. These estimates, accruals and assumptions are based on the information, which is available at the date of the financial statements, and therefore, the future actual results might be different from them (in the conditions of financial crisis the uncertainties are more significant). The items presuming a higher level of subjective assessment or complexity or where the assumptions and accounting estimates are material for the financial statements, are disclosed in Note 2.11. 2.2 Comparatives In these financial statements BDIF presents comparative information for one prior year. Where necessary, comparative data is reclassified (restated) in order to achieve compatibility in view of the current year presentation changes. 2.3. Functional currency and recognition of exchange differences The functional and presentation currency of BDIF is the Bulgarian lev. As of 1 July 1997 the Bulgarian lev was fixed under the Law on the Bulgarian National Bank to the German mark at the ratio of BGN 1 : DEM 1, and with the introduction of the euro as the official currency of the European Union, it was fixed to the euro at a ratio of BGN 1.95583 : EUR 1. Upon its initial recognition, a foreign currency transaction is recorded in the functional currency whereas the exchange rate at the date of the transaction or operation is applied to the foreign currency amount. Cash, receivables and payables, as monetary reporting items, denominated in foreign currency, are recorded in the functional currency by applying the exchange rate as quoted by the Bulgarian National Bank for the last working day of the respective month. At 31 December, these amounts are presented in Bulgarian levs at the closing exchange rate of the BNB.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 The non-monetary items in the statement of financial position, which are initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the date of the transaction and are not subsequently revalued at the closing exchange rate. Foreign exchange gains or losses arising on the settlement or recording of foreign currency transactions at rates different from those at which they were converted on initial recognition, are recognised in the statement of operations (within the result for the year) in the period in which they arise and are treated as â&#x20AC;&#x2DC;other income/(losses)â&#x20AC;&#x2122; and presented net. 2.4. Premium contributions income Premium contributions income represents the entry and annual contributions to BDIF from banks having a license granted by the BNB. The payment deadline for the entry contribution is thirty days after a bank is entered in the Commercial Register while for the annual contributions of licensed banks, it is 31 March of the current year (Articles 15 and 16, paragraph 5 of the Law on Bank Deposit Guarantee). Premium contributions income is recognised in the statement of operations (within the result for the year) on the date when the contributions become due under law. After this date, penalty interest for delay is charged and presented as 'other income/(losses), net' on the face of the statement of operations. It is calculated on a statutory interest basis. 2.5. Investment income Investment income includes interest on deposits of BDIF with the BNB and on government securities held, realised gains and losses from sales and revaluation of financial instruments carried at fair value through profit and the accumulated effects from revaluation of sold or written-off financial assets classified as available-for-sale. The effects from net change in the fair value of available-for-sale financial assets (change in available-for-sale financial assets revaluation reserve) are reported as a change in other component of BDIFâ&#x20AC;&#x2122;s net assets in the statement of operations. Interest income is recognised in the statement of operations (within the result for the year) for all financial instruments and is accrued currently on a time basis by applying the effective interest method. They also include premium/discount amortisation and any other difference between the original cost and the settlement value (repayment or disposal) of the financial instrument. 2.6. Financial instruments Classification BDIF classifies its financial instruments depending on the nature and purpose (designation) of the financial assets and liabilities at the date of their acquisition. The management determines the classification of the financial assets of BDIF at the time of their initial recognition in the statement of financial position. BDIF usually classifies its financial assets in two basic categories: 'loans and receivables' (including cash and cash equivalents) and 'available-for-sale securities'. Financial liabilities arise mostly in relation with the obligations assumed by BDIF to depositors in connection with the guaranteed amounts on their deposits with banks with revoked licenses. The common liabilities to counterparts arising in the course of the ordinary activities of BDIF are classified as other financial liabilities. Initial recognition

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 Financial instruments are recognised in the statement of financial position at the time when BDIF becomes a party to a financial instrument related contract, on ‘the date of settlement’. Under this approach, the instrument is recognised on the date when it is transferred to BDIF. Initial measurement Upon initial acquisition or origination, financial assets and liabilities are measured at their fair value equal to the acquisition cost. With regard to the available-for-sale financial assets it represents the fair value and all directly attributable transaction costs. Subsequent measurement Following the initial recognition, financial assets held by BDIF are measured at fair value or amortised cost depending on their classification while financial liabilities — at amortised cost determined under the effective interest rate method. The effects of revaluation of available-for-sale financial assets are recognised as other component of net assets in the statement of operations of BDIF and are included in the ‘comprehensive result’ item for the respective period (Note 2.5). In case of a sale and/or write-off of financial assets, the accumulated effects are recognised currently in the statement of operations (within the result for the year) as 'investment income'. Gains and losses on revaluation to fair value Gains or losses arising from a change in the fair value of a financial asset classified as available-for-sale are components of the net assets of BDIF and are initially recognised in the statement of operations under other components of net assets in the item ‘net change in fair value of available-for-sale financial assets’, while in case of a sale and/or write-off the accumulated effects are recognised within the current result for the year under ‘investment income’. Gains and losses from a revaluation of a financial asset measured at fair value are included currently in the statement of operations (within the result for the year) for the period when they arise. Impairment At the end of each reporting period, BDIF assesses whether objective circumstances exist representing indicators for permanent impairment of each individual financial asset, which is not measured at fair value through the statement of operations (within the result for the year). Where a significant and/or permanent decrease in the fair value of a certain asset exists compared to its acquisition cost it is assumed that impairment has occurred. The impairment amount is equal to the difference between the carrying value of the asset and its recoverable value, which represents its current fair value. Derecognition Financial assets or parts of them are derecognised from the statement of financial position where BDIF: -

receives economic benefits from its contractual rights; or

loses control over the right to receive economic benefits from its contractual rights; or

the term of such a right has expired; or

waives such a right.

Financial liabilities are derecognised from the statement of financial position where: -

the liability is settled; or

the liability is dropped off; or

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 -

the term for settlement has expired.

Types of financial instruments a. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and at current accounts, bank time deposits with original maturity of up to three months in Bulgarian levs and in foreign currency. Cash in hand and at current accounts is presented at nominal value. Cash on time deposits is presented on the statement of financial position at amortised cost determined by applying the effective interest method, i.e. together with the accrued interest due. For the purposes of the statement of cash flows, special purpose blocked deposits and accrued interest on non-matured time deposits are not treated as cash and cash equivalents. b. Available-for-sale investments Available-for-sale securities are recognised in and derecognised from the statement of financial position on the date of settlement when the purchase or sale is performed by virtue of a contract providing submission (transfer) of securities within definite time determined by the capital market and laws regulating transactions in securities. They are initially valued at cost, comprising their purchase price and all directly attributable transaction costs. Available-for-sale investments are subsequently measured at fair value. The fair value of securities quoted in active markets is determined on the basis of bid price published quotations in the active market or those of actively trading Bulgarian banks and/or Bulgarian and foreign banks for the issues of Bulgarian securities traded in international markets. Where the market of particular securities is not active or these assets are not quoted, BDIF establishes their fair value through other valuation methods. They include: ‘reference prices’ by comparison with the market price of another similar financial instrument in recently realised arm’s length transactions; discounted cash flow calculations and analysis of such instrument; fair value determination on the basis of options of expected yield from the asset and other valuation techniques usually used by capital market participants. c. Receivables from counterparts Receivables from counterparts are presented at cost less the allowance for bad debts. An estimate of allowances for doubtful and bad debts is made when significant uncertainty exists as to the collection of the full amount or a part of it. Bad debts are written-off when the legal grounds for this are available. d. Payables to counterparts Payables to counterparts are presented at the original invoice amount (cost) which is assumed to be the fair value of the transaction, which will be paid in the future against the goods and services received. e. Payables to depositors of banks with revoked licenses under guaranteed deposit amounts Payables to depositors of banks with revoked licenses under guaranteed deposit amounts are presented as fair estimates on statutory payable amount at the date of license revocation of the respective bank for each individual entity regardless of the number and deposit amounts thereof. The specified amount includes also the interest accrued at the date of the BNB decision for revoking the bank’s license (Article 4 of the Law on Bank Deposit Guarantee). The amounts due are determined on the basis of lists,

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 assessments and data, provided by the conservator, liquidator or trustee of the respective bank with revoked license, regarding its depositors and deposit accounts. The management assumes that these payables represent financial liabilities because the underlying initial obligation is resultant from the contractual relation and its settlement is connected with cash payment. 2.7. Property and equipment Property and equipment (tangible fixed assets) are presented in the financial statements at historical cost of acquisition (cost) less the accumulated depreciation and any impairment losses in value. Initial measurement Upon their initial acquisition, property and equipment are valued at acquisition cost (cost), which comprises the purchase price, including customs charges and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, professional fees for people involved in the project, non-refundable taxes etc. BDIF has determined a value threshold of BGN 700 under which the acquired assets regardless of their non-current asset character are written out as a current expense at the moment of their acquisition. Subsequent measurement The approach chosen by BDIF for subsequent measurement of property and equipment is the cost model under IAS 16, i.e. the acquisition cost (cost) less any accumulated depreciation and any accumulated impairment losses in value. Depreciation methods BDIF applies the straight-line depreciation method for tangible fixed assets. Land is not depreciated. The useful life by group of assets has been determined considering: the physical wear, the characteristic features of the equipment, the intentions for future use and the expected obsolescence, and is as follows: Useful life (years) Buildings Machinery and equipment (computers) Motor vehicles Fixtures and fittings Other tangible fixed assets

25 4 4 7 3

The useful life, set for any tangible fixed asset, is reviewed at each year-end and in case of any material deviation from the future expectations of their period of use, the latter is adjusted prospectively. Subsequent expenditure Repair and maintenance costs are recognised as current expenses as incurred. Subsequent expenses incurred in relation to property and equipment having the nature of replacement of certain components, significant parts and aggregates or improvements and restructuring, are capitalised in the carrying amount of the respective asset whereas the residual useful life is reviewed at the capitalisation date. At the same time, the non-depreciated part of the replaced components is derecognised from the carrying amount of the assets and is recognised in the current expenses for the period of restructuring.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012

Impairment of assets BDIF performs a review for impairment of property and equipment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. If any such indications exist that the estimated recoverable amount of an asset is lower than its carrying value, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of assets within the ‘property and equipment’ group is higher than the fair value less costs to sell or the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market conditions and assessments of the time value of money and the risks specific to the particular asset. Impairment losses are reported in the statement of operations (within the result for the year). Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or are sold. The gains or losses arising from the sale of an item from the 'property and equipment' group are determined as the difference between the consideration received and the carrying amount of the asset at the date of sale. They are stated net under ‘other income/(losses)’ on the face of the statement of operations. 2.8. Intangible assets Intangible assets are stated in the financial statements at acquisition cost (cost) less accumulated amortisation and any impairment losses in value. These include software licenses. BDIF has adopted the straight-line amortisation method for the intangible assets at set useful life of two to four years. The carrying value of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying value might exceed their recoverable amount. Impairment losses are then included in the statement of operations (within the result for the year). 2.9. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with the employees of the Bulgarian Deposit Insurance Fund are based on the provisions of the Labour Code and the effective social security legislation in Bulgaria. The major duty of BDIF in its capacity as employer is to make the mandatory social security contributions for the hired employees to the Pensions Fund, the Supplementary Mandatory Pension Security, the General Diseases and Maternity Fund, the Unemployment Fund, the Labour Accident and Professional Diseases Fund, and for health insurance. The rates of the social security and health insurance contributions are defined under the Law on the Budget of State Social Security and the Law on the Budget of National Health Insurance Fund for the respective year. The contributions are split between the employer and employee in line with rules of the Social Security Code. The social security and pension plans, applied by BDIF in its capacity as employer, are based on the Bulgarian legislation and are defined contributions plans. Under these plans, the employer pays defined monthly contributions to the government funds as follows: Pensions Fund, General Diseases and Maternity Fund, Unemployment Fund, Labour Accident and Professional Diseases Fund as well as to universal and professional pension funds, on the basis of rates fixed by law, and has no legal obligation to pay any additional amounts to the funds in cases where the latter do not hold sufficient assets to pay the

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 respective individuals the benefits they have worked-out over the period of their service. The obligations referring to health insurance are analogous. There is no established and functioning private voluntary social security scheme at BDIF. Short-term benefits Short-term employee benefits in the form of remuneration, bonuses and social payments and benefits (payable within 12 months after the end of the period when the employees have rendered the service or has met the required terms and conditions) are recognised as an expense in the statement of operations (within the result for the year) in the period when the service thereon has been rendered or the requirements for their receipt have been met and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. BDIF payables for social security and health insurance are recognised as a current expense and liability at their undiscounted amount together with the respective benefits they relate to and within the period of their accrual. At each financial statements date BDIF measures and recognises the expected costs on the accumulating compensated absences, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the estimated expenses on the employee’s remuneration and the statutory social security and health insurance contributions due by the employer thereon. Long-term retirement benefits In accordance with the requirements of the Labour Code the employer is obliged to pay to its personnel upon retirement an indemnity, which depending on the length of service with the entity varies between two and six gross monthly salaries at the termination date of the employment. In their nature these are defined benefit schemes. The calculation of the amount of these liabilities necessitates the participation of qualified actuaries to determine their present value at the date of the financial statements, at which they are included in the statement of financial position, adjusted for the amount of the unrecognised actuarial gains and losses, and respectively, the change in their value including the recognised actuarial gains and losses — in the statement of operations (within the result for the year). Past service costs are recognised immediately in the statement of operations (within the result for the year). At each financial statements date, BDIF assigns certified actuaries who provide their report with calculations regarding the long-term retirement benefit obligations. For this purpose, they apply the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows, which are expected to be paid within the maturity of this obligation, and using the interest rates of long-term government bonds denominated in Bulgarian levs. Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. Those exceeding the 10-percentage corridor of the present value of the defined benefit obligations at the end of the year are recognised immediately in the statement of operations (within the result for the year) for the period in which they arise. The changes in the amount of BDIF’s liabilities to the personnel for indemnities upon retirement, including the interest from unwinding of the present value and the recognised actuarial gains or losses, are recognised as ‘expenses on personnel’ in the statement of operations (within the result for the year). Termination benefits

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 In accordance with the provisions of the Labour Code, BDIF in its capacity as employer is obliged, upon termination of the employment contracts prior to retirement, to pay certain types of indemnities. BDIF recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, based on an announced plan, to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents for voluntary redundancy. Termination benefits due more than 12 months are discounted and presented in the statement of financial position at their present value.

2.10. Income taxes BDIF is exempt from income tax and local taxes, as well as charges on deposit guarantee transactions under the Law on Bank Deposit Guarantee. 2.11. Critical accounting judgments on applying BDIFâ&#x20AC;&#x2122;s accounting policies. Key estimates and assumptions of high uncertainty. Measurement of available-for-sale financial instruments The government securities, held by BDIF, acquired for the purpose of additional income from cash accumulated on the basis of guaranteed banks contributions and for maintenance of the needed high liquidity, are classified as available-for-sale financial assets because the management is of the opinion that its intentions towards these assets, as well as their functionality are best reflected in this way. Domestic government securities are measured at the average bid price calculated based on the quotations of actively trading banks for the purposes of BDIF revaluation of domestic government securities on a monthly basis (Level 1), with the quotations outside the 95 per cent confidence interval eliminated, while foreign government securities are revalued at the average bid price calculated based on the quotations of actively trading banks for the purposes of BDIF revaluation of foreign government securities on a monthly basis (Note 2.6). The negative changes in the prices of government securities held by BDIF are treated as temporary and presented in the changes of other components of net assets of BDIF. Provisions Since as of the Report date there are no banks with a revoked license, there is no need for provisions to be allocated in the balance sheet (statement of financial position) of BDIF.

3. PREMIUM CONTRIBUTIONS In 2012 BDIF accrued contributions from 26 banks at the amount of BGN 218,713 thousand (2011: BGN 195,448 thousand from 26 banks). The total amount of eligible deposits (of year 2011) used for defining the contributions for 2012 amounted to BGN 43,739 million (2011: BGN 39,090 million â&#x20AC;&#x201D; calculated on the basis of eligible deposits of 2010). The amount of BGN 218,713 thousand was the result of the annual premium contributions of 26 banks for 2012.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 The amount of BGN 195,448 thousand was generated from the annual premium contributions of 26 banks for 2011 amounting to BGN 195,109 thousand and the additional payments to the annual premium contributions at BGN 339 thousand.

4. INVESTMENT INCOME

Interest income from government securities Interest income from deposits Net gains/(losses) from sale/maturity of government securities

2012 BGN’000

2011 BGN’000

27,032 3

26,796 2,857

196

1,410

27,231

31,063

12,400

(176)

(108)

(963)

12,292

(1,139)

Other components of BDIF net assets — income recycling Change in the fair value of available-for-sale financial assets: (Losses)/gains from revaluation during the year Less: Adjustment from reclassification of (gains)/losses included in the result for the current year

5. OTHER INCOME AND LOSSES, NET

Net gains/(losses) from transactions Penalty interest for delay

revaluation

and

foreign

2012 BGN’000

2011 BGN’000

(1,141) 7

339 27

(1,134)

366

currency

6. GENERAL ADMINISTRATIVE COSTS

Salaries and social security contributions for personnel Remuneration and social security contributions management contracts Remuneration for temporarily hired personnel Office maintenance Subscription to information publications and networks Depreciation and amortisation Business trips Hospitality expenses Telecommunication and postal services

2012 BGN’000

2011 BGN’000

654

674

253 4 143 106 76 56 20 12

213 12 157 115 61 46 29 15

under

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 Training and qualification Rentals Other

8 1 126

12 6 61

1,459

1,401

Salaries and social security contributions of the personnel amounting to BGN 654 thousand (2011: BGN 674 thousand) include remuneration and social security contributions for the personnel under employment contracts amounting to BGN 525 thousand (2011: BGN 525 thousand) and social benefits and social security contributions at the amount of BGN 129 thousand (2011: BGN 149 thousand). Remunerations under management contracts include the remunerations and related social security payments for the members of the Management Board of BDIF. Expenses on office maintenance include mainly expenses on local taxes and charges, insurance, energy costs (electricity and heating), security services, water, stationery and sanitary and hygienic materials, etc. Expenses on subscription to information publications and networks include mainly subscriptions for database access to the main rating agencies: Reuters, Bloomberg. Other costs include consulting services, bank and other charges. 7. CASH AND CASH EQUIVALENTS 31 December 2012 BGNâ&#x20AC;&#x2122;000

31 December 2011 BGNâ&#x20AC;&#x2122;000

1 2,073 2,188 598,000 246,434

2 1,884 1,369 310,000 245,102

848,696

558,357

Cash in hand Current accounts in BGN Current accounts in foreign currency One-week term deposits in BGN One-week term deposits in foreign currency

The existing cash as at 31 December 2012 and 31 December 2011 was on current accounts and term deposits with the Bulgarian National Bank. Interest rates on current and deposit accounts are as follows:

Interest rates on deposit accounts in original currency BGN EUR USD

2012

2011

0% 0% from 0% to 0.15%

from 0% to 1.09% from 0% to 1.09% from 0% to 0.17%

8. RECEIVABLES FROM BANKS As at 31 December 2012 no receivables from banks were reported.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 As at 31 December 2011 receivables from banks amounting to BGN 366 thousand included additionally accrued annual premium contributions from a bank as a result of a supervisory inspection performed by the Bulgarian National Bank, including penalty interest for delay at the amount of BGN 27 thousand. According to the statement of cash flows, premium contributions income differs from that reported in the 2012 statement of operations by BGN 366 thousand. This sum was received in 2012 in the form of additional annual premium contributions paid by a bank after a BNB supervisory inspection for 2011.

9. AVAILABLE-FOR-SALE SECURITIES А) Classification of securities based on original maturity EFFECTIVE INTEREST INTEREST RATE RATE (COUPON) % %

NOMINAL VALUE BGN’000

FAIR VALUE BGN’000

Medium-term interestbearing government securities

303,820

320,222

2.25-4.45

0.51-6.81

2013-2017

Long-term interest-bearing government securities

383,961

411,173

0.06-8.25

0.77-8.81

2013-2019

687,781

731,395 Maturity

31 DECEMBER 2012

MATURITY

31 DECEMBER 2011

Nominal value

Fair value

Interest rate (coupon)

Effective interest rate

Medium-term interestbearing government securities

417,305

424,593

2.00-4.45

2.40-6.81

2012-2016

Long-term interest-bearing government securities

322,709

341,144

0.19-7.50

0.46-8.81

2012-2019

740,014

765,737

Effective interest rate

Maturity

B) Classification of securities based on residual maturity

31 DECEMBER 2012 Short-term interest-bearing government securities Medium-term interestbearing government securities Long-term interest-bearing government securities

Nominal value BGN’000

Fair value BGN’000

Interest rate (coupon) %

187,715

199,519

4.25-7.50

1.74-8.81

2013-2013

410,809

440,231

0.06-8.25

0.51-6.81

2014-2017

89,257

91,645

0.13-6.00

0.77-6.71

2018-2019

687,781

731,395

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012

31 DECEMBER 2011 Short-term interest-bearing government securities Medium-term interestbearing government securities Long-term interest-bearing government securities

Nominal value

Fair value

Interest rate (coupon)

Effective interest rate

187,654

189,931

2.00-7.50

2.16-6.50

2012

452,030

474,650

3.45-7.50

2.40-8.81

2013-2016

100,330

101,156

0.19-6.00

0.46-6.71

2017-2019

740,014

765,737

Maturity

BDIF has opened securities registers with the following primary dealers, sub-depositories of securities: DSK Bank EAD, Corporate Commercial Bank AD, United Bulgarian Bank AD, First Investment Bank AD, Raiffeisenbank (Bulgaria) EAD, Societe Generale Expressbank AD, UniCredit Bulbank AD, Eurobank Bulgaria AD and Citibank N.A., Sofia Branch. As at 31 December 2012 and 31 December 2011 BDIF had open exposures only to Bulgarian sovereign debt (Bulgarian government bonds).

10. PROPERTY AND EQUIPMENT Land and buildings

Office equipment and furniture

Motor vehicles

Total

BGN’000

1,005 1,005 1,005

314 26 340 42 382

51 51 51

1,370 26 1,396 42 1,438

201 34

278 16

29 10

508 60

235 34

294 24

39 10

568 68

269

318

636

Carrying amount as at 31 December 2011

770

828

Carrying amount as at 31 December 2012

736

802

Book value as at 1 January 2011 Additions Book value as at 31 December 2011 Additions Book value as at 31 December 2012 Accumulated depreciation as at 1 January 2011 Depreciation charge for the year Accumulated depreciation as at 31 December 2011 Depreciation charge for the year Accumulated depreciation as at 31 December 2012

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 As at 31 December 2012 BDIF owned land at the amount of BGN 163 thousand (31 December 2011: BGN 163 thousand) and a building with a carrying amount of BGN 573 thousand (31 December 2011: BGN 607 thousand). As at 31 December 2012 and 31 December 2011 there were no established encumbrances (mortgages and pledges) on BDIF’s property and equipment. 11. INTANGIBLE AND OTHER ASSETS A) Intangible assets Software BGN’000 99 24 123 30 153

Book value as at 1 January 2011 Additions Book value as at 31 December 2011 Additions Book value as at 31 December 2012 Accumulated amortisation as at 1 January 2011 Depreciation charge for the year Accumulated amortisation as at 31 December 2011 Depreciation charge for the year Accumulated amortisation as at 31 December 2012

88 1 89 8 97

Carrying amount as at 31 December 2011

Carrying amount as at 31 December 2012

B) Other assets Other assets include:

Prepayments Advances granted

31 December 2012 BGN’000

31 December 2011 BGN’000

9 11

7 11

31 December 2012 BGN’000

31 December 2011 BGN’000

38 11

51 12

12. OTHER LIABILITIES

Payables to personnel Payables to suppliers

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 Payables to personnel represent current obligations on unused paid annual leave of BDIF employees at the amount of BGN 27 thousand (31 December 2011: BGN 41 thousand) and long-term payables as indemnities on retirement amounting to BGN 11 thousand (31 December 2011: BGN 10 thousand). Payables to suppliers amounted to BGN 11 thousand (31 December 2011: BGN 12 thousand) and include all expenses incurred in December 2012 but actually paid in January 2013 on receipt of the respective invoices. 13. FINANCIAL RISK MANAGEMENT In the ordinary course of its business activities, BDIF is exposed to a variety of financial risks, the most important of which are market risk (including currency risk, risk of a change in the fair value and price risk), credit risk, liquidity risk and risk of interest-bearing cash flows. General risk management is focused on the difficulty to forecast financial markets and to achieve minimisation of the potential negative effects that might affect the financial results and position of BDIF. Financial risks are currently identified, measured and monitored through various control mechanisms introduced to assess adequately the market circumstances of its investments and the ways for maintenance of free liquid funds through preventing undue risk concentration. The management strives to improve the methods for assessment and management of risks related to the investment portfolio: credit, liquidity, interest and currency risks, while performing one of its major functions: the secure investment of funds and payment of the guaranteed deposits with banks. With the objective of minimising risks, BDIF maintains modified portfolio duration of no longer than 2.5 and determines limits for deposits and securities dealings with a repurchase clause (repo agreements) with banks. The investment policy approved by BDIF Management Board includes a Currency Risk Management Methodology for payment of guaranteed deposits denominated in currencies other than BGN and EUR. With the aim of limiting currency risks, while covering guaranteed deposits in foreign currency, it has been decided a currency exposure in USD to be maintained. Investments in instruments denominated in USD should not exceed the maximum amount which is determined periodically in accordance with the Currency Risk Management Methodology. BDIF's management considers the investment strategy on a regular basis and monitors the structure of financial assets and liabilities on the basis of information provided regularly by the Risk Assessment and Analysis Department, Treasury Department and Bank Bankruptcy and Early Intervention Department. The structure of BDIF’s financial assets and liabilities as at 31 December by category is presented in the table below:

31 December 2012

31 December 2011

BGN’000

Financial assets 'Loans and receivables' category Cash and cash equivalents Receivables from banks

848,696

558,357

366

731,395

765,737

1,580,091

1,324,460

'Available-for-sale financial assets' category Available-for-sale government securities Financial liabilities 'Other financial liabilities' category Other liabilities

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 BDIF had no outstanding contingent financial commitments as at 31 December 2012 and 31 December 2011.

Market risk а. Currency risk The currency risk is related to the adverse movements of exchange rates of other currencies towards the reporting currency, the Bulgarian lev, in future business transactions on foreign currency assets and liabilities recognised in the statement of financial position. BDIF is exposed to currency risk of changes in the exchange rate of the US dollar to the Bulgarian lev with a view of its open exposures denominated in US dollars. As far as the existing exposures are short-term ones and there is a set maximum limit for the exposure in US dollars according to the investment policy, the management is of the opinion that the risk is under control. BDIF has no other outstanding currency risks because the remaining operations and deals are denominated in BGN and/or in EUR, while the Bulgarian lev is pegged to the euro by law. The tables below represent a summary of BDIF’s exposure to currency risk: Currency structure analysis As at 31 December 2012 Financial assets Cash and cash equivalents Available-for-sale securities

Financial liabilities Other liabilities

As at 31 December 2011 Financial assets Cash and cash equivalents Available-for-sale securities Receivables from banks

Financial liabilities Other liabilities

USD

EUR

BGN

Total

BGN’000

252

248,371

600,073

848,696

34,660 34,912

326,477 574,848

370,258 970,331

731,395 1,580,091

11 11

USD

EUR

BGN

Total

BGN’000

5,285 8,516 13,801

241,186 393,810 634,996

311,886 363,411 366 675,663

558,357 765,737 366 1,324,460

12 12

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012

Foreign currency sensitivity analysis The table below demonstrates the sensitivity to a 10 per cent increase/decrease in the current exchange rate of BGN against USD based on the structure of foreign currency denominated assets and liabilities of BDIF as at 31 December with an assumption that the influence of all other variables is ignored. The effect is measured and presented as an impact on the result and directly on the net assets with all other conditions held constant. USD 2012

2011

BGN’000

Financial result (profit or loss) — increase

3,491

1,380

Net assets (through the financial result) — increase

3,491

1,380

Financial result (profit or loss) — decrease

(3,491)

(1,380)

Net assets (through the financial result) — decrease

(3,491)

(1,380)

On a 10 per cent increase in the rate of USD against BGN, the final effect on the financial result of BDIF for a one-year period would be an increase by BGN 3491 thousand (31 December 2011: BGN 1,380 thousand) mostly due to the impact of the exposure of securities denominated in USD. Respectively, the impact on net assets would be the same. On a 10 per cent decrease in the exchange rate of USD against BGN, the final effect on the result of BDIF would be equal and reciprocal to the increase described above. In management’s opinion, the above currency sensitivity analysis based on the structure of foreign currency denominated assets and liabilities in the statement of financial position is representative for the currency sensitivity of BDIF for the reporting year. b. Price risk BDIF is exposed to a price risk related to the securities held thereby and classified as ‘available-for-sale’. As mentioned above, in order to minimise this risk, BDIF invests liquid funds in Bulgarian government securities. The management has established procedures for ongoing monitoring of price changes, yields and maturity structure of government securities and respectively for undertaking timely measures and actions when indicators exist for more lasting adverse trends, especially at present, in the context of the global economic crisis. The analysis of BDIF’s sensitivity to the price of debt securities held thereby is based on the state and structure of investments as at 31 December. If these prices were changed by a 3 per cent increase/decrease, the effect as at this date would impact directly the net assets as far as debt securities are classified as available-for-sale and their revaluation is carried directly to a component thereof. This effect would be as follows:

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 2012

2011

BGN’000

21,942

22,972

(21,942)

(22,972)

Net assets (through another component of the other comprehensive result – financial assets revaluation reserve) increase Net assets (through another component of the other comprehensive result – financial assets revaluation reserve) decrease c. Interest rate risk

Interest risk arises from the possibility that changes in interest rates might result in changes in the future cash flows or in the fair value of financial instruments. BDIF has a significant portion of interest-bearing assets. Nevertheless, income and operating cash flows are largely independent from market interest rate fluctuations because the assets are mainly with fixed interest rate. The profitability of BDIF’s deposits with the BNB follows the respective quotations of the Bank for International Settlements, Basel. In addition, BDIF is not exposed to interest risk related to its liabilities because they are usually interest-free. The table below presents the structure of financial instruments depending on the type of contractual interest rates.

31 December 2012 Financial assets Cash and cash equivalents Available-for-sale securities Financial liabilities Other liabilities

31 December 2011 Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities

Financial liabilities Other liabilities

With floating interest % BGN’000

With fixed interest %

Interest-free

Total

BGN’000

68,065 68,065

844,435 663,330 1,507,765

4,261 4,261

848,696 731,395 1,580,091

11 11

With floating interest % BGN’000

With fixed interest %

Interest-free

Total

BGN’000

78,838 78,838

555,102 339 686,899 1,242,340

3,255 27 3,282

558,357 366 765,737 1,324,460

12 12

The table below summarises interest risk. It includes BDIF’s financial instruments presented at carrying amount, categorised by the earlier of a contractual interest change or maturity dates.

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 up to 1 1-3 month months BGN’000 BGN’000

31 December 2012 Financial assets Cash and cash equivalents Available-for-sale securities

3-6 months BGN’000

6-12 months BGN’000

over 1 year BGN’000

interestfree BGN’000

Total BGN’000

844,435

4,261

848,696

215,739 1,060,174

30,421 30,421

21,425 21,425

463,810 463,810

4,261

731,395 1,580,091

11 11

up to 1 1-3 month months BGN’000 BGN’000

3-6 months BGN’000

6-12 months BGN’000

over 1 year BGN’000

interestfree BGN’000

BGN’000

Financial liabilities Other liabilities

31 December 2011 Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities

Financial liabilities Other liabilities

Total

555,102

3,255

558,357

339

366

136,209 691,650

9,342 9,342

123,218 123,218

496,968 496,968

3,282

765,737 1,324,460

12 12

Sensitivity to interest risk The table below demonstrates BDIF’s sensitivity to possible changes in interest rates based on the structure of assets and liabilities at the end of the reporting period and with the assumption that the influence of all other variables is ignored. Since BDIF has mainly financial instruments with fixed yields — debt securities and term deposits, while deposits are with original maturity of up to seven days, the change in interest rates would affect mainly the yield of securities classified as available-for-sale, i.e. the statement of operations and respectively, directly net assets. The effect of sensitivity to interest risk on net assets is calculated by revaluing fixedcoupon interest rate securities as at the end of the reporting period as a result of a possible change in interest rates, with the assumption that this change would lead to a relevant change in the yield of these instruments.

Currency

Increase/(decrease ) in percentage points 2012

Sensitivity of net assets 2012 BGN’000

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012 BGN EUR USD

+1 +1 +1

(5,875) (4,520) (507)

BGN EUR USD

-1 -1 -1

5,875 4,520 507

Increase/(decrease ) in percentage points 2011

BGN EUR USD

+1 +1 +1

Sensitivity of net assets 2011 BGNâ&#x20AC;&#x2122;000 (6,654) (5,126) -

BGN EUR USD

-1 -1 -1

6,654 5,126 -

Currency

Credit risk Credit risk is mainly the risk that BDIF might be unable to collect its receivables within the ordinary envisaged terms. The management of BDIF purposefully aims at distributing the credit risk within the frames of existing legal opportunities for investment of accumulated funds: part of the investments is in government securities and another part â&#x20AC;&#x201D; in deposit accounts with the Bulgarian National Bank. The ratio of investments in government securities and in deposit accounts with BNB, recognised in the structure of assets in the statement of financial position as at 31 December, is as follows: 31 December 2012 Cash and cash equivalents

31 December 2011 42%

54% 46%

Available-for-sale government securities

58%

The credit risk stemming from concentration in Bulgarian government securities, classified as availablefor-sale, is assessed as minimum and manageable as far as these are government securities issued and guaranteed by the Bulgarian state, which serves regularly its debt liabilities. The credit rating of an issuer is an assessment of its ability to meet the obligations upon maturity and is prepared by a specialised rating agency based on a profound financial analysis. The table below displays the credit rating of Bulgaria's long-term obligations, as defined by two internationally recognised rating agencies. 31 December 2012

In foreign currency

In local currency

Rating

Outlook

Rating

Outlook

Standard & Poor's

BBB

Stable

BBB

Stable

Moody's

Baa2

Stable

Baa2

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012

31 December 2011

In foreign currency

In local currency

Rating

Outlook

Rating

Outlook

Standard & Poor's

BBB

Stable

BBB

Stable

Moody's

Baa2

Stable

Baa2

BDIF management monitors and assesses the exposure to credit risk on a regular basis. Liquidity risk Liquidity risk is the adverse situation where BDIF encounters difficulty in meeting unconditionally all its obligations within their maturity. The liquidity management policy of BDIF is conservative, maintaining a constant optimal liquid cash reserve to secure a good capability for funding its activities. In addition, according to the Law on Bank Deposit Guarantee, BDIF has the right to request an advance payment of the annual fees from guaranteed banks, an increase of the annual premium contribution and use of loans under the terms and according to a procedure specified by BDIF Management Board. (Article 18 of the Law on Bank Deposit Guarantee) The table below includes BDIF's financial instruments classified by their residual term to maturity on the basis of undiscounted contractual cash flows. Maturity analysis

31 December 2012 Financial assets Cash and cash equivalents Available-for-sale securities Financial liabilities Other liabilities

31 December 2011 Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities Financial liabilities Other liabilities

up to 1 month BGN’000

1-3 months BGN’000

3-12 months BGN’000

848,696

221,010 1,069,706

34,595 34,595

33,071 33,071

11 11

up to 1 month BGN’000

1-5 years

over 5 years BGN’000

BGN’000

848,696

614,645 614,645

61,936 61,936

965,257 1,813,953

11 11

1-3 months BGN’000

3-12 months BGN’000

1-5 years

Total

BGN’000

over 5 years BGN’000

BGN’000

558,357 366

147,769 706,492

5,242 5,242

143,073 143,073

714,134 714,134

82,843 82,843

1,093,061 1,651,784

12 12

BGN’000

Total

Bulgarian Deposit Insurance Fund NOTES TO THE FINANCIAL STATEMENTS for 2012

Fair values Fair value is generally the amount for which an asset could be exchanged, or a liability settled in an armâ&#x20AC;&#x2122;s length transaction between independent, willing and knowledgeable parties. The policy of BDIF is to disclose in its financial statements the fair value of these financial assets and liabilities, mostly those for which market quotations are available. The fair value of financial instruments traded in active markets is based on the prices quoted at the end of the reporting period. The quoted market prices are the current bid prices (purchase prices). The fair value of financial instruments, which are not traded in active markets, is determined through valuation methods based on various valuation techniques and management assumptions made in accordance with the market circumstances as at the end of the reporting period. Financial assets and liabilities are either current in their nature (deposits placed, receivables from banks, other current liabilities) and their fair value approximates their carrying amount, or are presented in the statement of financial position at market value (investments in securities). The management of BDIF believes that the estimates of financial assets and liabilities presented in the statement of financial position are as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances. 14. RELATIONS AND TRANSACTIONS WITH GOVERNMENT INSTITUTIONS, BODIES AND ENTERPRISES The Ministry of Finance and the Bulgarian National Bank are the government institutions with which BDIF has established regular relations in accordance with its special status and functions, as well as in line with the legal requirements. BDIF is governed by a Management Board designated in accordance with the Law on Bank Deposit Guarantee (Note 1). The funds accumulated by BDIF from bank contributions in accordance with the legal requirements are invested in securities issued or guaranteed by the Bulgarian state and in short-term deposits with the Bulgarian National Bank (Notes 7 and 9). Securities in which BDIF invests are acquired in both the primary market (by participating in auctions organised and carried out by the Bulgarian National Bank) and the secondary market.