Notes to the Financial Statements
1- Accounting Convention
Financial statements of the Bank have been prepared under historical cost conven-
tion and current values have also been applied when necessary.
2- Basis for determining Depositors Profit Share from Joint Income
By virtue of the usury-free banking Act and its executive directives, and with due
regard to the directives number 1799 dated 08.01.2004 of the Central Bank of the
Islamic Republic of Iran, the profits derived from granting facilities, investment in stock,
participation bonds and inter-bank profit that is recognized according to the prevailing
accounting convention, is considered as joint income and the depositors profit share
will be determined in proportion to investing their net resources in granted facilities.
3- Summary of Significant Accounting Policies
3-1- Investments
3-1-1 Evaluation Method
Long-lived assets are evaluated based on cost price less the provisioning for impair-
ment loss of each.
Liquid current assets are evaluated at the least cost price and net market of all
assets, and other current assets are evaluated at their least cost price and net market
of each asset.
3-1-2 Income Recognition Method
Profit from investment in the subsidiaries and affiliated companies are recognized at
the date of approval of their financial statements by the general meeting of sharehold-
ers (till the date of approval of the financial statements of the bank)
Profit from investment in the other companies, current or long term, are
Recognized at the date of approval of their financial statements by the general meeting
of shareholders (till the balance sheet date)
3-2- Tangible Fixed Assets
3-2-1 Tangible Fixed Assets, except the one indicated in 4-2-2 below, are posted based
on cost price. The repairs andimprovementsleading to considerableincreasein the capacity
or estimated useful life of the fixed assets or essentially improve their utility are charged as
capital expenses and depreciated during the remaining useful life of the underlying asset.
Maintenance expenses incurred in partial repairing and retaining economic interests of the
business unit as per initially evaluated performance standards, are considered as current
expenses and carried to the profit (loss) of the period under report.
3-2-2 By virtue of article 62 of the third five-year development plan, the premises
of the bank were revaluated and registered in the books for the amount of 11,543
billion Rial and the resulted surplus, i.e. 10,637 billion Rial, has been added to the
capital increase account of the government in the bank.
57
Notes to the Financial Statements
3-2-3- According to the resolution adopted in 1077th session of the Money & Credit
Council on 17.02.2007, depreciation of fixed assets are recorded as per depreciation
chart of article 151 of direct taxes law based on the following rates and depreciation
methods:
Depreciation rate Depreciation Method
Assets
Premises 7% Declining
Automobiles 25% Declining
Equipment & computer
10 years Direct line
hardware systems
PC hardware 10 years Direct line
According to the note 10 of the code of conduct for depreciation, based on article
151 of direct taxes law, depreciation rate for the buildings revaluated at the end of
1383(2004/05)has been charged at 3.5% using declining method.
3-3- Good Will
By virtue of article 62 of the third five-year development plan, good will of the
business units of the bank were registered in the books based on the revaluated prices
in 1383(2004/05). According to the resolution adopted in 1077th session of the Money
& Credit Council depreciation of fixed assets are recorded as per depreciation chart of
article 151 of direct taxes law. So, no depreciation has been calculated for the good will
since beginning of 1385(2006/07).
3-4- Income Recognition
All incomes of the Bank are recognized based on accrual assumption basis and
reflected in the financial statements.
3-5- Foreign Currency Translation
3-5-1- domestic Accounts
Foreign currency monetary items are translated in the market rate (in accordance
with the daily inter-bank reference rate announced by the Central Bank) and foreign
currency non-monetary items are translated in the market rate on translation date.
3-5-2- Foreign branches and subsidiaries
All foreign currency monetary and non-monetary items (except shareholders
equity) of the foreign branches and subsidiaries are translated in the market rate at
the balance sheet date and shareholders equity is translated in the market rate at the
creation date (historical rates). Profit and loss items are translated in the market at
the transaction date. The difference arisen from translation of the balance sheets of
foreign branches and subsidiaries is posted in the shareholders equity.
58
3-6- Provisions for Doubtful Debts
According to the resolution adopted in 1074th on 30.12.2006 and 1077th dated
17.02.2007 session of the Money & Credit Council, provisions for doubtful debts are
calculated and posted in the books as follows:
3-6-1- General provisions are calculated equal to 1.5% of the balance of total loans,
except those for which specific provisions have been made.
3-6-2- Specific provisions: are calculated and charged to the accountspro-
portionate to the category of the over due loans and thereafter that they lose
collateral coverage as follows:
Category Provisions
Overdue loans 10 %
Non performing loans 20 %
Doubtful loans, given assessing customer s solvency 50-100 %
Loans that 5 years or more has passed from their maturity 100 %
3-7- Severance Pay Reserve
The reserve for the staffs severance pay is calculated as one- month of their last
salary and benefits for each year of service and considered in the accounts.
3-8- Assets classification
According to the resolution adopted in 1074th and 1077th session of the Money &
Credit Council, loans granted by the bank are classified based on the delay period,
customer s solvency, and the situation of the customer s industry as follows:
1- Outstanding
2- Overdue
3- Non performing
4- Doubtful
3-9- Severance Pay Liabilities
The present value of the staffs severance pay liabilities with respect to their years
of service (including, working, retired and pensioner staff) are calculated based on
actuary assumptions.
3-10- Dues from the Government
The mandatory facilities granted under former Management & Planning Organization
of the state, are regarded as dues from the government under following conditions:
a- Non performing loans due to customer s insolvency, inadequate collaterals, or
failure of the bank in collecting the debt;
b- The overdue loans relating to performing acquiring capital assets;
c- Loans granted to ministries and government organizations.
59
Notes to the Financial Statements
7) Dues from the Central Bank
1387 (2008/09) 1386 (2007/08)
Deposit with the Central Bank 41,499,478 37,747,491
Prepayment for purchasing foreign currency 2,205 2,205
Total 41,501,683 37,749,696
8) Dues from Banks & Credit Institutes
1387 (2008/09) 1386 (2007/08)
Up to 6 months 17,593,867 10,671,561
Up to one year 12,610,716 7,649,031
One to 5 years 14,095,473 8,549,610
Over 5 years 4,221,363 2,560,468
Total 48,521,419 29,430,670
Deduction:
Provisions for doubtful debts (44,345) (19,086)
Profit of the following years (13,267) (18,548)
Total 48,463,807 29,393,036
10) Loans & Advances to the Public Sector
1387 (2008/09) 1386 (2007/08)
Governmental Sector
1 to 3 years 4,646,043 6,539,082
3 to 5 years 1,334,012 1,875,632
5 to 10 years 3,340,393 4,696,620
Over 10 years 1,403,125 1,966,097
Total 10,723,573 15,077,431
Deduction:
Provisions for over due & doubtful debts
General provisions (18,431) (162,298)
Profit for the following years (144,918) (319,258)
Differed profit (16,961) (15,043)
Total 10,447,263 14,580,832
60
11&12) Loans & Advances to other parties
1387 (2008/09) 1386 (2007/08)
1 to 3 years 166,657,096 150,934,852
3 to 5 years 67,833,796 61,434,431
5 to 10 years 20,505,359 18,570,906
Over 10 years 16,129,144 14,607,539
Total 271,125,395 245,547,728
Deduction:
Reserve for doubtful & differed loans
general reserve (3,087,310) (3,566,900)
general reserve (17,440,169) (11,863,918)
Contingent profit for the following years (21,149,316) (21,085,028)
Differed profit (2,452,775) (452,230)
Total 226,995,825 208,579,652
14) Participation Bonds & the Like
1387 (2008/09) 1386 (2007/08)
Participation Bonds(1 year) 1,917,673 1,857,019
Foreign currency Bonds 476,831 526,985
Total 2,394,504 2,384,004
15) Investments & Partnerships
1387 (2008/09) 1386 (2007/08)
Domestic investments 2,231,966 1,933,790
foreign Investments 2,143,165 1,466,734
Total 4,375,131 3,400,524
Deduction:
provisions for impairment of stock (79,721) (34,721)
2% general provisions
----------- -----------
Total
4,295,410 3,365,803
17) Other Assets
1387 (2008/09) 1386 (2007/08)
Accounts & receivable shares profit 57,294 32,118
Banks internal accounts 2,334,142 1,913,146
Tax prepayment 316,130 209,225
Prepayments to companies & institutions 1,208,087 549,853
Total 3,915,653 2,704,342
61
Notes to the Financial Statements
19) Dues to the Central Bank
1387 (2008/09) 1386 (2007/08)
Imprest governmental funds (Central Bank) 0 3,004,067
Facilities received from Central Bank 21,596,912 1,332,240
Other dues 1,127,404 3,635,554
Deduction:
Dues from the Central Bank (131,926) (154,211)
Total 22,592,390 7,817,650
20) Dues to Banks & Credit Institutions
1387 (2008/09) 1386 (2007/08)
Banks vostro non-interest bearing current account 170,109 168,465
Non-banks non-interest bearing current account 1,923,162 1,285,533
Sight foreign currency deposits of Iranian &foreign banks 2,830,485 865,424
Refinance facilities received 1,435,164 3,534,803
Facilities received under oil stabilization fund 11,947,072 12,016,312
Other 10,973,676 11,410,362
Total 29,279,668 29,280,899
25&26) Provisions & Other Liabilities
1387 (2008/09) 1386 (2007/08)
Tax provition 2,549,094 433,457
Deficit in profit paid to depositors 10,161 9,445
Other provitions and liabilities 6,702,129 5,006,022
Total 9,261,384 5,448,924
34&35&38&39) Profit & Commissions Received
1387 (2008/09) 1386 (2007/08)
Profit of legal reserves held with the Central Bank 316,877 296,090
Profit of participation bonds and the like 593,742 385,007
Profit received from banks --- 276,873
Profit received from customers 29,688,113 23,749,631
Commissions received 2,441,222 2,127,831
Total 33,130,905 26,835,432
36&41&43) Profit & Commissions Paid
1387 (2008/09) 1386 (2007/08)
Profit paid to banks 1,612,346 952,444
Profit paid to time deposits 17,525,365 12,442,367
Commissions paid 266,484 153,989
Total 19,404,195 13,548,800
62
Balance sheet Analysis as at March 20th 2009
Assets:
Comparing year-end balance of assets in 2007/08 versus 2007/08
Having experienced an increase of 38,087 billion Rials over 1386(2007/08),
the balance of the assets amounted to 422,678 billion (9.9 % growth) at the
end of 1387(2008/09), compared to 384,591 billion Rials of 1386(2007/08).
The major increase and decrease was respectively due to increase in items
such as dues from other Banks and financial institutions amounting to 19,071
billion Rials and loans and advances to other parties amounting to 18,416 billion
and decrease in chapters such as granted facilities and loans & advances to the
public sector amounting to 4,134 billion Rials.
Noteable items in the assets:
" Growth in the balance of the time deposits held with the central bank of the
I.R. of Iran from 2,213 to 7,222 billion Rials;
" 82 % Growth in foreign currency time deposits held with Iranian and foreign
banks;
" 47 % decrease in the balance of the granted facilities and loans & advances
to the public sector mostly related to installment purchase contracts (mandatory
or else) from 3,282 to 1,649 billion Rials and civil partnership contracts from
2,755 to 728 billion Rials;
" New investment in Mehr-Iran Gharz-ol-hasaneh Bank s shares.
Liabilities and shareholders equity:
Having enjoyed a growth by 9.9 %, the balance of Liabilities and
shareholders equity amounted to 422,678 billionat the end of 1387(2008/09),
compared to 384,591 billion Rials of 1386(2007/08). The major increase and
decrease was respectively because of 27,312 billion Rials increase in time
investment deposits and 16,299 billion Rials decrease in the sight deposits.
Noteable items in the Liabilities and shareholders equity:
" Increase in facilities received from the CBI by 20,265 billion Rials (for the
credit lines received from the CBI);
" 49.5% growth in the balance of non-interest bearing current account of
non-bank credit institutions;
" 267.9% growth in the balance of foreign currency sight deposits of the
Iranian banks;
" 55.5% growth in the balance of long term investment deposits;
" 73.4% growth in the balance of special short term investment deposits;
" 31% growth in the capital adequacy ratio of the bank from 7.24% in
1386(2007/08) to 9.48 % in 1387(2008/09).
63
Profit and Loss Analysis
A) Rate of Return on Facilities
Bank joint incomes comprising figures out of Islamic-based contracts, Investments, Legal
Participation, Participation Bonds, and the incomes yielded from legal reserves, amounted to 25,525
Billion Rials at the end of 1387(2008/09), representing a growth by 29% over the previous year.
What has been observed, however, is that there was a 15 % growth in facilities volume in 1387
(2008/09) over 1386(2007/08) resulting in 12 % growth in rate of return at the end of 1387(2008/09)
compared to that of 1386(2007/08); part of which can be attributable to the increase in the profit
rate of granted facilities across economic sectors as well as a change in the bank's vision in granting
more joint-venture facilities, which leaves banks hands more open in setting the profit rate, rather
than commercial loans.
Rate of return on facilities, investments & Participation Bonds (In billion Rials)
March 20th 2009 March 20th 2008
25,525 19,777
Joint income
Average income of the facilities,
173,194 150,609
Investments & Participation Bonds
Rate of return
14.7 % 13.1 %
B) Profit paid to the depositors
Profit paid to the depositors on an on account basis at the end of 1387(2008/09) amounted to
15,873 billion Rials, representing a growth by 44 % compared to that of 1386(2007/08). The Reason
for such increase can be sought in increasing deposits and the facilities rate of returns. As shown in
below table, the growth rate for Investment deposits in 1387(2008/09) compared to the previous
year has been more than 25%. Rate of return on facilities has also experienced an acceptable growth
in 1387(2008/09) compared to 1386(2007/08).
Total investment deposits (In Billion Rials)
March 20th 2009 March 20th 2008 change
Total investment deposits 126,681 100,944 25.5 %
C) Deficit(surplus) in payment to the investors
At the end of 1387(2008/09) the bank faced with payments deficit amounting to 166 billion
Rials which was due to the high rate of return on facilities compared to 1386(2007/08); while it
faced with payments surplus amounting to 159 billion Rials at the end of 1386(2007/08) which could
64
be because of the low rate of return on facilities. It is noteworthy that the low rate of return on
facilities in 1386(2007/08) was due to the low rate of return on facilities in Banks in that year which
was modified by the banks shifting vision in granting facilities under joint-venture contract rather
than commercial ones.
D) Income derived from the bank s own resources
This income was mainly derived from commissions, foreign operations, stocks, foreign bonds,
delayed payment charges received out of letters of credit delayed settlement, letters of guarantees,
and translation of foreign currency-based assets and liabilities. The aforesaid income amounted to
10,930 billion Rials at the end of 1387(2008/09) which has experienced a growth by 46.7 % over
1386(2007/08) that was 7,449 billion Rials. The consequences of the changes are as follows:
" Income gained from translation of the foreign currency-based assets and liabilities in 1387(2008/09)
amounted to 2,424 billion Rials, having resulted from translation of foreign currency accounts that
caused s considerable increase in the income derived from the bank s own resources.
" The bank s Policy in rendering various types of services to the customers has resulted in gaining
a considerable income as services commissions. So that, received commission experienced a growth
by 15% in 1387(2008/09) over 1386(2007/08).
E) Non-operational expenses
At the end of 1387(2008/09) the bank faced with payments deficit amounting to 166 billion
Rials which was due to the high rate of return on facilities compared to 1386(2007/08); while it
faced with payments surplus amounting to 159 billion Rials at the end of 1386(2007/08) which could
be because of the low rate of return on facilities. It is noteworthy that the low rate of return on
facilities in 1386(2007/08) was due to the low rate of return on facilities in Banks in that year which
was modified by the banks shifting vision in granting facilities under joint-venture contract rather
than commercial ones.
F) Cash profit before tax deduction
Having experienced an increase of 1,067 billion Rials, cash profit of the bank before tax deduction
amounted to 3,586 billion Rials in 1387(2008/09), showing a growth by 42% over 1386(2007/08).
This increase in the bank s profit compared to the previous year can mainly be contributed to
increase in the facilities profit in joint-venture contracts, rendering more qualitative and diversified
services, receiving more commissions and also incorporating translation of foreign currency based
assets and liabilities in the bank s income.
Total revenues versus total expenses (In Billion Rials)
March 20th 2009 March 20th 2008 change
Total Revenues 36,454 27,226 33.9 %
Total Expenses 32,868 24,707 33 %
65