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Ahli United Bank Kuwait: Consolidated Financial Statements 31-December-2018

IM Insights
By IM Insights
6 days ago
Ahli United Bank Kuwait: Consolidated Financial Statements 31-December-2018

Fatwa, Ijara, Mudaraba, Qard hassan, Sukuk, Zakat, Credit Risk, Net Assets, Provision, Receivables, Reserves, Sales, Specific Provision

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  1. AHLI UNITED BANK K .S.C.P. KUWAIT CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2018
  2. Ahli United Bank K .S.C.P. Kuwait Contents Page Independent Auditors’ Report 1-5 Consolidated Statement of Profit or Loss 6 Consolidated Statement of Other Comprehensive Income 7 Consolidated Statement of Financial Position 8 Consolidated Statement of Changes in Equity 9-10 Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 11 12 –61
  3. Ahli United Bank K .S.C.P. CONSOLIDATED STATEMENT OF PROFIT OR LOSS For the year ended 31 December 2018 Notes Financing income Distribution to depositors Net financing income 4 Net fees and commission income Foreign exchange gains Net gain from investment securities Net gain (loss) on sale of investment properties Share of results from associate Other income Total operating income 5 13 6 Provision and impairment losses Operating income after provisions and impairment losses 7 Staff costs Depreciation Other operating expenses Total operating expenses PROFIT FROM OPERATIONS Taxation Directors’ remuneration 8 PROFIT FOR THE YEAR 9 Basic and diluted earnings per share (fils) The attached notes 1 to 29 form part of these consolidated financial statements. 6 2018 KD 000 2017 KD 000 156,811 (56,409) 100,402 148,112 (43,980) 104,132 9,878 3,622 4,479 174 1,491 1,528 121,574 10,522 2,612 2,589 (74) (687) 979 120,073 (30,513) 91,061 (34,907) 85,166 (22,159) (2,979) (12,055) (37,193) (24,468) (2,586) (11,332) (38,386) 53,868 (2,375) (238) 51,255 46,780 (2,149) (168) 44,463 27.1 23.3
  4. Ahli United Bank K .S.C.P. CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME For the year ended 31 December 2018 Note Profit for the year 2018 KD 000 51,255 2017 KD 000 44,463 Other comprehensive (loss) income: Other comprehensive (loss) income to be reclassified to consolidated statement of profit or loss in subsequent periods: Net movement in cumulative changes in fair values of investment securities Exchange differences on translation of foreign operations (41) (446) 11 Net other comprehensive loss to be reclassified to consolidated statement of profit or loss in subsequent periods (41) (435) (624) - (138) (74) (762) (803) (74) (509) Other comprehensive income not to be reclassified to consolidated statement of profit or loss in subsequent periods: Net movement in cumulative changes in fair values of investment Securities Revaluation of freehold land 15 Net other comprehensive income not to be reclassified to consolidated statement of profit or loss in subsequent periods Other comprehensive loss for the year Total comprehensive income for the year 50,452 The attached notes 1 to 29 form part of these consolidated financial statements. 7 43,954
  5. Ahli United Bank K .S.C.P. CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2018 2018 KD 000 Notes 2017 KD 000 ASSETS Cash and balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investment securities Investment in associate Investment properties Premises and equipment Other assets 10 11 12 13 14 15 16 TOTAL ASSETS 76,937 346,097 334,801 2,799,906 264,185 8,823 36,539 34,279 12,086 42,329 415,626 222,631 2,672,832 217,358 9,318 38,026 33,273 14,186 3,913,653 3,665,579 918,651 2,424,516 79,084 708,867 2,426,281 62,843 3,422,251 3,197,991 LIABILITIES AND EQUITY LIABILITIES Deposits from banks and other financial institutions Deposits from customers Other liabilities 17 18 EQUITY Share capital 19 196,451 187,096 Reserves 19 278,268 263,809 474,719 450,905 (43,957) 430,762 60,640 (43,957) 406,948 60,640 491,402 467,588 3,913,653 3,665,579 Treasury shares Attributable to Bank’s equity shareholders Perpetual Tier 1 Sukuk 20 21 TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Dr. Anwar Ali Al-Mudhaf Chairman Tareq Muhmood Acting Chief Executive Officer The attached notes 1 to 29 form part of these consolidated financial statements. 8
  6. Ahli United Bank K .S.C.P. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Attributable to Bank’s equity shareholders Reserves Share capital KD 000 Balance as at 31 December 2017 Transition adjustment on adoption of IFRS 9 at 1 January 2018 (Note 3) Balance as at 1 January 2018 (restated) Profit for the year Other comprehensive loss for the year Total comprehensive income (loss) for the year Dividend – 2017 (Note 19) Bonus shares issued – 2017 (Note 19) Transfer to reserves (Note 19) Derecoginition of equity instrument carried at fair value through other comprehensive income Profit payment on Tier 1 Sukuk (Note 21) Balance as at 31 December 2018 Share Statutory premium reserve KD 000 KD 000 General reserve KD 000 Retained earnings KD 000 Cumulative changes in fair values KD 000 Property revaluation reserve KD 000 Treasury shares reserve KD 000 Foreign currency translation reserve KD 000 Treasury shares KD 000 Perpetual Tier 1 Sukuk KD 000 263,809 (43,957) 60,640 467,588 (1,410) - - (1,410) Total Equity KD 000 187,096 12,883 78,877 22,660 134,920 3,478 9,976 974 - - - - (1,959) 549 - - 187,096 12,883 78,877 22,660 132,961 4,027 9,976 974 262,399 (43,957) 60,640 466,178 - - - - 51,255 - - - - 51,255 - - 51,255 - - - - - (624) (138) - (41) (803) - - (803) - - - - 51,255 (624) (138) - (41) 50,452 - - 50,452 - - - - (21,899) - - - - (21,899) - - (21,899) 9,355 - - - (9,355) - - - - (9,355) - - - - - 5,387 - (5,387) - - - - - - - - - - - - (369) 369 - - - - - - - - - - - (3,329) - - - - (3,329) - - (3,329) 196,451 12,883 84,264 22,660 143,877 3,772 9,838 974 - 278,268 60,640 491,402 The attached notes 1 to 29 form part of these consolidated financial statements. 9 41 Total reserves KD 000 41 (43,957)
  7. Ahli United Bank K .S.C.P. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED) For the year ended 31 December 2018 Attributable to Bank’s equity shareholders Reserves Balance as at 1 January 2017 Profit for the year Other comprehensive (loss) income for the year Total comprehensive income (loss) for the year Dividend – 2016 (Note 19) Bonus shares issued – 2016 (Note 19) Transfer to reserves (Note 19) Profit payment on Tier 1 Sukuk (Note 21) Balance as at 31 December 2017 Cumulative changes in fair values KD 000 Property Treasury revaluation shares reserve reserve KD 000 KD 000 Foreign currency translation reserve KD 000 Treasury shares KD 000 Perpetual Tier 1 Sukuk KD 000 255,768 (43,957) 60,640 - 44,463 - - 44,463 - 11 (509) - - (509) (74) - 11 43,954 - - 43,954 - - - - (18,717) - - (18,717) (13,859) - - - - (13,859) - - - - (4,678) - - - - - - - - - (3,337) - - - - (3,337) 78,877 22,660 134,920 3,478 9,976 974 41 263,809 Share Share Statutory General capital premium reserve reserve KD 000 KD 000 KD 000 KD 000 Retained earnings KD 000 173,237 12,883 74,199 22,660 131,048 3,924 10,050 974 30 - - - - 44,463 - - - - - - - - (446) (74) - - - - 44,463 (446) - - - - (18,717) 13,859 - - - - - 4,678 - - 187,096 12,883 The attached notes 1 to 29 form part of these consolidated financial statements. 10 Total reserves KD 000 - (43,957) Total Equity KD 000 445,688 - (3,337) 60,640 467,588
  8. Ahli United Bank K .S.C.P. CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018 2018 KD 000 2017 KD 000 OPERATING ACTIVITIES Profit for the year 51,255 44,463 Adjustments for: Net (gain) loss on sale of investment properties Net gain from investment securities Share of results from associate Dividend income Net income from investment properties Depreciation Provision and impairment losses Amortisation of sukuk premium Operating profit before changes in operating assets and liabilities (174) (4,479) (1,491) (1,013) (447) 2,979 30,513 537 77,680 74 (2,589) 687 (688) (105) 2,586 34,907 595 79,930 Changes in operating assets / liabilities: Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Other assets Deposits from banks and other financial institutions Deposits from customers Other liabilities Net cash from operating activities 69,529 (133,190) (148,964) 2,502 209,743 (1,765) 7,095 82,630 11,221 17,016 6,567 5,489 6,852 (65,590) 4,935 66,420 INVESTING ACTIVITIES Purchase of investment securities Sale and redemption of investment securities Purchase of investment properties Proceeds from sale of investment properties Purchase of premises and equipment Net income from investment properties Dividend income received Net cash used in investing activities (312,164) 269,564 (30) 1,500 (4,123) 447 1,013 (43,793) (358,069) 344,895 (21,409) 4,517 (4,540) 105 688 (33,813) (3,329) (21,899) (25,228) (3,337) (18,717) (22,054) 13,609 87,601 101,210 10,553 77,048 87,601 Notes 13 6 6 7 6 6 FINANCING ACTIVITIES Profit payment on Tier 1 Sukuk Dividend paid to shareholders Net cash used in financing activities 19 NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at 1 January CASH AND CASH EQUIVALENTS AT 31 DECEMBER 10 Financing income received amounted to KD 157,384 thousand (2017: KD 149,972 thousand) and distribution to depositors paid amounted to KD 52,486 thousand (2017: KD 45,735 thousand). The attached notes 1 to 29 form part of these consolidated financial statements. 11
  9. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 1. INCORPORATION AND ACTIVITIES Ahli United Bank K.S.C.P. (“the Bank”) is a public shareholding company incorporated in Kuwait in 1971 and is listed on the Kuwait Stock Exchange. It is engaged in carrying out banking activities in accordance with Islamic Sharia'a and is regulated by the Central Bank of Kuwait (“ the CBK”). Its registered office is at Darwazat Al-Abdul Razzak, P.O. Box 71, Safat 12168, Kuwait. The Bank commenced operations as an Islamic bank from 1 April 2010. From that date, all activities are conducted in accordance with Islamic Sharia’a, as approved by the Bank’s Fatwa and Sharia’a Supervisory Board. The Bank is a subsidiary of Ahli United Bank B.S.C., a Bahraini bank (the “Parent”), listed on the Bahrain and Kuwait Stock Exchanges. As at 31 December 2018, the Bank holds 50.41% (2017: 50.12%) effective interest in its subsidiary, Kuwait and Middle East Financial Investment Company K.S.C.P. (“KMEFIC”), a company incorporated in the State of Kuwait. KMEFIC is listed on the Kuwait Stock Exchange and is engaged in investment and portfolio management activities for its own account and for its clients. The consolidated financial statements comprising the financial statements of the Bank and its subsidiary (together the “Group”) were authorised for issue in accordance with a resolution of the Board of Directors of the Bank on 10 January 2019 and are subject to the approval of the Ordinary General Assembly of the shareholders’ of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements are prepared under the historical cost convention except for the re-measurement at fair value of investment securities, freehold land and derivative financial instruments. The consolidated financial statements are presented in Kuwaiti Dinars ("KD"), which is also the functional currency of the Bank, rounded to the nearest thousand except when otherwise indicated. 2.2 Statement of compliance The consolidated financial statements have been prepared in accordance with the regulations for financial services institutions as issued by the Central Bank of Kuwait (“CBK”) in the State of Kuwait. These regulations require expected credit loss (“ECL”) to be measured at the higher of the ECL on credit facilities computed under IFRS 9 according to the CBK guidelines or the provisions as required by CBK instructions; the consequent impact on related disclosures; and the adoption of all other requirements of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (“IASB”). 2.3 Changes in accounting policies The accounting policies applied are consistent with those used in the previous year except for the changes arising from the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with customers, effective from 1 January 2018. 12
  10. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.3 Changes in accounting policies (continued) IFRS 9 : Financial Instruments The Group has adopted IFRS 9 Financial Instruments issued in July 2014 with a date of initial application of 1 January 2018, with the exception of requirements of the expected credit losses on financing facilities as noted above in Note 2.2. The requirements of IFRS 9 represent a significant change from IAS 39 Financial Instruments: Recognition and Measurement. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. The Group has not restated comparative information for 2017 as permitted by the transitional provisions of the standard. Therefore the information presented for 2017 does not reflect the requirements of IFRS 9 and is not comparable to the information presented for 2018. Differences in the carrying amount of financial assets resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018 and are disclosed in Note 3. The key changes to the Group’s accounting policies resulting from the adoption of IFRS 9 are summarised below: Classification and measurement of financial assets and financial liabilities: The new standard requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow characteristics. The IAS 39 measurement categories of financial instruments have been replaced by new classification of financial instruments as : At amortised cost, At Fair Value through Other Comprehensive Income (FVOCI) and At Fair Value Through Profit or Loss (FVTPL). The accounting policies for financial liabilities will largely be the same as the requirements of IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVTPL. Such movements will be presented in Other Comprehensive Income (OCI) with no subsequent reclassification to the statement of profit or loss, unless an accounting mismatch in profit or loss would arise. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification. The Group’s accounting policies for classification and measurement of financial assets under IFRS 9 is explained in Note 2.6. 13
  11. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.3 Changes in accounting policies (continued) IFRS 9 : Financial Instruments (continued) Impairment of financial assets: IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘Expected Credit Loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. The credit losses are based on ECLs associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination. If the financial asset meets the definition of Purchased or Originated Credit Impaired (POCI), the credit loss is based on the change in ECLs over the life of the asset. The Group is also required to calculate provision for credit losses on financing receivables in accordance with the instructions issued by the CBK. Impairment of financing receivables shall be recognised at the higher of ECL computed based on CBK guidelines for measurement of ECL under IFRS 9, and the provision required by the CBK instructions. The Group’s accounting policies for impairment of financial assets is explained in Note 2.6. The quantitative impact of adoption of IFRS 9 as at 1 January 2018 is disclosed in Note 3. Hedge accounting: The general hedge accounting requirements of IFRS 9 retain the three types of hedge accounting mechanisms in IAS 39. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify as hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is no longer required. The Group has elected to apply the hedge accounting requirements of IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 does not have a significant impact on Group’s consolidated financial statements. IFRS 15: Revenue from Contracts with customers IFRS 15 was issued in May 2014 and is effective for annual periods commencing on or after 1 January 2018. IFRS 15 outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes current revenue guidance, which is found currently across several Standards and Interpretations within IFRS. It established a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The Group adopted IFRS 15 ‘Revenue from Contracts with Customers’ resulting in no change in the revenue recognition policy of the Group in relation to its contracts with customers. Further, adoption of IFRS 15 had no impact on this consolidated financial statements of the Group. Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2018 did not have any material impact on the accounting policies, financial position or performance of the Group. 14
  12. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 New and revised IASB Standards, but not yet effective Standards issued but not yet effective are listed below. The Group intends to adopt those standards when they become effective. IFRS 16: Leases In January 2016, the IASB issued IFRS 16 Leases with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the Standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 Leases. Lessees will recognise a ‘right of use’ asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as in IAS 17. The Group does not expect any significant effect on adoption of this Standard. 2.5 Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank as at 31 December 2018 and its subsidiary. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:    Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure or rights to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:    The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to the elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control, until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the noncontrolling interests having a deficit balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. 15
  13. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.5 Basis of consolidation (continued) If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in consolidated statement of profit or loss. Any investment retained is recognised at fair value. 2.6 Financial instruments a) Recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All “regular way” purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Changes in fair value between the trade date and settlement date are recognised in the consolidated statement of profit or loss or in the consolidated statement of other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. b) Classification and measurement The Bank offers Sharia'a compliant products and services such as Murabaha, Musawamah, Wakala and Ijara. Murabaha is the sale of commodities, real estate and certain other assets at cost plus an agreed profit mark-up whereby the seller informs the purchaser of the cost of the product purchased and the amount of profit to be recognised Musawamah is an agreement under which negotiations between a buyer and a seller preclude the disclosure of sellers cost. Wakala is an agreement whereby the Group provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. The agent is obliged to return the amount in case of default, negligence or violation of any terms and conditions of the Wakala. Ijara is an agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for a specific period and against certain rent instalments. Ijara could end by transferring the ownership of the asset to the lessee. Policy applicable from 1 January 2018 From 1 January 2018, the Group classifies all of its financial assets except for equity instruments and derivatives, based on the business model for managing the assets and the asset’s contractual cashflow characteristics. Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVTPL when they are held for trading and derivative instruments or the fair value designation is applied. 16
  14. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) b) Classification and measurement (continued) Policy applicable from 1 January 2018 (continued) Business model assessment The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. That is, whether the Group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. The Group’s business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as: - How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel; The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed; How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected) The expected frequency, value and timing of sales are also important aspects of the Group’s assessment. The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. The Contractual Cash flows assessment – Solely Payment of Principal and Profit (SPPP) test The Group assesses whether the financial instruments’ cash flows represent Solely Payments of Principal and Profit (the ‘SPPP test’). ‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition that may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount). The most significant elements of profit within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPP assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the profit rate is set. In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and profit on the amount outstanding. In such cases, the financial asset is required to be measured at FVTPL. The Group reclassifies when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent. 17
  15. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) b) Classification and measurement (continued) The Group classifies its financial assets upon initial recognition into the following categories :  Debt instruments at amortised cost  Debt instruments at Fair Value through Other Comprehensive Income (FVOCI)  Equity instruments at FVOCI, with no recycling of gains or losses to consolidated statement of profit or loss on derecognition  Financial assets at FVTPL i) Debt instruments at amortised cost A financial asset which is a debt instrument, is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: - The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and - The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and profit (SPPP) on the principal amount outstanding. Deposits with CBK, deposits with other banks, financing receivables, certain investments securities mainly representing Group’s investment in Sukuks and other assets are classified as debt instruments at amortised cost. Debt instruments catogorised at amortised cost are subsequently measured at amortised cost using the effective yield method adjusted for effective fair value hedges and impairment losses, if any. Profit income, foreign exchange gains and losses and impairment are recognised in the consolidated statement of profit or loss. Any gain or loss on derecognition is recognised in the consolidated statement of profit or loss. ii) Debt instruments at FVOCI A debt instrument is carried at FVOCI if it meets both of the following conditions: - The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; and - The contractual terms of the financial asset meet the SPPP test Debt instruments at FVOCI are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in other comprehensive income. Profit income and foreign exchange gains and losses are recognised in the consolidated statement of income. Fair value changes which are not part of an effective hedging relationship are recognised in other comprehensive income and presented in the cumulative changes in fair values as part of equity until the asset is derecognised or reclassified. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to the consolidated statement of profit or loss. iii) Equity instruments at FVOCI Upon initial recognition, the Group may elect to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of Equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by- instrument basis. 18
  16. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) b) Classification and measurement (continued) Equity instruments at FVOCI are subsequently measured at fair value. Changes in fair values including foreign exchange component are recognised in other comprehensive income and presented in the cumulative changes in fair values as part of equity. Gains and losses on these equity instruments are never recycled to consolidated statement of profit or loss. Dividends are recognised in consolidated statement of profit or loss when the right of the payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in the consolidated statement of other comprehensive income. Equity instruments at FVOCI are not subject to an impairment assessment. Upon disposal, cumulative gains or losses are reclassified from fair value reserve to retained earnings in the consolidated statement of changes in equity. Equity instruments at FVOCI are included in investment securities in the consolidated statement of financial position. iv) Financial asset carried at FVTPL The Group classifies financial assets as carried at fair value through profit and loss when the business model of the class of financial assets is neither to solely collect the contractual cash flows from the assets nor to collect both the contractual cash flows and cash flows arising from the sale of assets. Financial assets that do not satisfy the SPPP test are mandatory classified under this category. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL, if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Included in this classification are certain debt securities, equities and derivatives that are not designated as hedging instruments in a hedge relationship, that have been acquired principally for the purpose of selling or repurchasing in the near term. FVTPL assets are subsequently measured at fair value. Changes in fair values, financing income and dividends are recorded in the consolidated statement of profit or loss according to the terms of the contract, or when the right to payment has been established. Policy applicable before 1 January 2018 The Group classifies its financial instruments as “investments at fair value through profit or loss”, “loans and receivables”, “investments available for sale” or “financial liability other than at fair value through profit or loss”. Management determines the appropriate classification of each instrument at the time of acquisition. i) Investments at fair value through profit or loss These are financial assets that are either financial assets held for trading or those designated as investments at fair value through profit or loss upon initial recognition. A financial asset is classified in this category only if they are acquired principally for the purpose of generating profit from shortterm fluctuation in price or if so designated by the management in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. This includes all derivative financial instruments, other than those designated as effective hedging instruments. 19
  17. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) b) Classification and measurement (continued) Policy applicable before 1 January 2018 (continued) ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cash and balances with banks, deposits with Central Bank of Kuwait, deposits with other banks, financing receivables, and certain other assets are classified as “loans and receivables. iii) Investments available for sale These are financial assets either designated as “available for sale” or are not classified as fair value through profit or loss, loans and receivables, and held to maturity. iv) Financial liabilities other than at fair value through profit or loss Financial liabilities which are not held for trading are classified as “other than at fair value through profit or loss”. Deposits from banks and other financial institutions, deposits from customers and certain other liabilities are classified as “financial liabilities other than at fair value through profit or loss”. All financial assets and liabilities are initially measured at fair value of the consideration given plus transaction costs except for financial assets classified as investments at fair value through profit or loss. Transaction costs on financial assets classified as investments at fair value through profit or loss are recognised in the consolidated statement of profit or loss. On subsequent measurement, financial assets classified as “investments at fair value through profit or loss” are measured and carried at fair value. Realised and unrealised gains / losses arising from changes in fair value are included in the consolidated statement of profit or loss. “Loans and receivables” are carried at amortised cost using effective yield method, less any provision for impairment. Those classified as “investments available for sale” are subsequently measured at fair value until the investment is sold or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in other comprehensive income is included in the consolidated statement of profit or loss for the year. “Financial liabilities other than at fair value through profit or loss” are subsequently measured at amortised cost. c) Impairment of financial assets Policy applicable after 1 January 2018 The Group recognises ECL on financing receivables, non-cash credit facilities in the form of bank guarantees, letters of guarantee, documentary letters of credit, bank acceptances, undrawn cash and non-cash credit facilities (revocable and irrevocable) and investment in debt securities measured at amortised cost or FVOCI. Balances with the CBK and Sukuks issued by the CBK and the Government of Kuwait, are low risk and fully recoverable and hence no ECL is measured. Equity investments are not subject to ECL. Impairment of financing receivables shall be recognised at the higher of ECL computed based on CBK guidelines for measurement of ECL under IFRS 9, and the provision required by the CBK instructions. 20
  18. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) c) Impairment of financial assets (continued) Policy applicable after 1 January 2018 (continued) Expected credit losses The Group has established a policy to perform an assessment at the end of each reporting period, whether credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instrument. To calculate ECL, the Group will estimate the risk of a default occurring on the financial instrument during its expected life. ECLs are estimated based on the present value of all cash shortfalls over the remaining expected life of the financial asset, i.e., the difference between: the contractual cash flows that are due to the Group under the contract, and the cash flows that the Group expects to receive, discounted at the effective profit rate of the loan. The Group applies three-stage approach to measure ECL. Assets migrate through the following three stages based on the change in credit quality since initial recognition. Stage 1: 12 months ECL The Group measures loss allowances at an amount equal to 12-month ECL on financial assets where there has not been significant increase in credit risk since their initial recognition or on exposures that are determined to have a low credit risk at the reporting date. The Group considers a financial asset to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment grade’. Stage 2: Lifetime ECL – not credit impaired The Group measures loss allowances at an amount equal to lifetime ECL on financial assets where there has been a significant increase in credit risk since initial recognition but are not credit impaired. Stage 3: Lifetime ECL – credit impaired. The Group measures loss allowances at an amount equal to 100% of net exposure i.e. after deduction from the amount of exposure the value of collaterals determined in accordance with the CBK guidelines. Life time ECL is ECL that result from all possible default events over the expected life of a financial instrument. The 12 month ECL is the portion of life time expected credit loss that result from default events that are possible within the 12 months after the reporting date. Both life time ECLs and 12 month ECLs are calculated on either an individual basis or a collective basis depending on the nature of the underlying portfolio of financial instruments. For financial assets for which the Group has no reasonable expectations of recovering either the entire outstanding amount, or a portion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the asset. When estimating lifetime ECL for undrawn financing commitments, the Group estimates the expected portion of the financing commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the financing facility is drawn down. The expected cash shortfalls are discounted at an approximation to the expected effective profit rate on the financing. The Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in statement of profit or loss, and the ECL provision. For this purposes, the Group estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk-adjusted profit rate relevant to the exposure. 21
  19. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) c) Impairment of financial assets (continued) Policy applicable after 1 January 2018 (continued) Expected credit losses (continued) Determining the stage of impairment The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12-month ECL or Lifetime ECL, the Group assesses whether there has been a significant increase in credit risk since initial recognition and back stop indicators and analysis based on the Group’s historical experience and expert credit risk assessment, including forward-looking information. The Group considers an exposure to have significantly increased in credit risk when there is significant deterioration in customer rating compared to rating at origination, restructured due to financial difficulties of the borrowers and other conditions mentioned below. The Group also applies a secondary qualitative method for triggering a significant increase in credit risk for financial assets, such as moving a customer/facility to the watch list, or the account becoming forborne. In certain cases, the Group may also consider that events explained below (and not restricted to) are indicators of significant increase in credit risk as opposed to a default. • Internal rating of the borrower indicating default or near-default; • The borrower requesting emergency funding from the Group; • The borrower having past due liabilities to public creditors or employees; • The borrower is deceased; • A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral; • A material decrease in the borrower’s turnover, loss of major customers or deterioration of customer financial position; • A covenant breach not waived by the Group; • The obligor (or any legal entity within the obligor’s group) filing for bankruptcy application / protection or liquidation; • Obligor’s listed debt or equity suspended at the primary exchange because of rumours or facts about financial difficulties; • Legal measures and action against customer by other creditors; • Clear evidence that the customer is unable to repayment financing receivable on maturity dates; • Financial assets are classified under Stage 2 when there has been a downgrade in the facility’s credit rating by 2 grades for the facilities with Investment Grade and by 1 grade for those with Non-Investment Grade; All rescheduled financial assets are classified under the Stage 2 unless it qualifies for Stage 3 classification. The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute thresholds. All financial assets that are more than 30 days past due are deemed to have significant increase in credit risk since initial recognition and migrated to stage 2 even if other criteria do not indicate a significant increase in credit risk. 22
  20. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) c) Impairment of financial assets (continued) Policy applicable after 1 January 2018 (continued) Expected Credit losses (continued) Determining the stage of impairment (continued) Purchased or originated credit-impaired financial assets are those financial assets that are creditimpaired on initial recognition and are taken to Stage 3. Objective evidence that debt instrument is impaired includes whether any payment of principal or profit is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral, etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant. Except for consumer and instalment financing, transfer of credit facility from Stage 2 to Stage 1 is made after a period of 12 months from the satisfaction of all conditions that triggered classification of the credit facility to Stage 2. Transfer of credit facility from Stage 3 to Stage 2 or Stage 1 is subject to approval of CBK. Measurement of ECLs ECLs are probability weighted estimates of credit losses and are measured as the present value of all cash shortfalls discounted at the effective profit rate of the financial instrument. Cash shortfall represent the difference between cashflows due to the Group in accordance with the contract and the cashflows that the Group expects to receive. The key elements in the measurement of ECL include probability of default, loss given default and exposure at default. The Probability of Default (“PD”) is an estimate of the likelihood of default over a given time horizon.  A default may only happen at a certain time over the assessed period, if the financial asset has not been previously derecognized and is still in the portfolio. The Group uses Point In Time PD (PIT PD) for each rating to calculate the ECL. The minimum PD is 0.75% for Investment Grade credit facilities and 1% for Non-Investment Grade credit facilities except for credit facilities granted to Government and Banks rated as Investment Grade by an external rating agency and financing transactions related to consumer and housing loans (except for credit cards).  The Exposure at Default (“EAD”) is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and profit, whether scheduled by contract or otherwise, expected drawdowns on committed facilities. As per CBK requirements, the Group applies 100% Credit Conversion Factor (CCF) on utilised cash and non-cash facilities. For unutilised facilities, CCF is applied based on the CBK requirements for leverage ratio issued on 21 October 2014.  The Loss Given Default (“LGD”) is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of the EAD. 23
  21. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) c) Impairment of financial assets Policy applicable after 1 January 2018 (continued) Expected Credit losses (continued) Measurement of ECLs (continued) The maximum period for which the credit losses are determined is the contractual life of a financial asset, including credit cards and other revolving facilities unless the Group has the legal right to call it earlier. However, for financial assets in Stage 2, the Group considers a minimum maturity of 7 years for all credit facilities (excluding consumer financing, credit cards and housing financing) unless credit facilities have non-extendable contractual maturity and final payment is less than 50% of the total facility extended. For consumer financings and credit cards and housing financings in Stage 2, the Group considers minimum maturity of 5 years and 15 years respectively. Incorporation of forward looking information The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses for each portfolio. Relevant macro-economic adjustments are applied to capture variations from economic scenarios. These reflect reasonable and supportable forecasts of future macro-economic conditions that are not captured within the base ECL calculations. Macro-economic factors taken into consideration include, but are not limited to, gross domestic product, consumer price index and government expenditure, and require an evaluation of both the current and forecast direction of the macro-economic cycle. Incorporating forward-looking information increases the degree of judgement required as to how changes in these macro-economic factors will affect ECLs. The methodologies and assumptions including any forecasts of future economic conditions are reviewed regularly. Renegotiated financing receivables In the event of a default, the Group seeks to restructure financing to customers rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new financing conditions. When the financing to customers has been renegotiated or modified but not derecognised, any impairment is measured using the original effective yield method as calculated before the modification of terms. Management continually reviews renegotiated financing to ensure that all criteria are met and that future payments are likely to occur. Management also assesses whether there has been significant increase in credit risk or the facility should be classified in stage 3. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented as a deduction from the gross carrying amount of the financial assets for financial assets carried at amortised cost. In the case of debt instruments measured at FVOCI, the Group recognises the ECL charge in the consolidated statement of profit or loss and a corresponding amount is recognised in other comprehensive income with no reduction in the carrying amount of the financial asset in the consolidated statement of financial position. Write-offs The Group’s accounting policy under IFRS 9 remains the same as it was under IAS 39. Financial assets are written off either partially or in their entirety only when the Group has stopped pursuing the recovery. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to credit loss expense. 24
  22. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) c) Impairment of financial assets Policy applicable before 1 January 2018 At each reporting date, the Group assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired, if and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the asset or group of financial assets is written down to its recoverable amount. The recoverable amount of a profit-bearing instrument is estimated based on the net present value of future cash flows discounted at original profit rates, and of equity instrument is determined with reference to market rates or appropriate valuation models. For variable profit rate bearing instruments, the net present value of future cash flows is discounted at the current effective profit rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of impairment loss is recognised in the consolidated statement of profit or loss. The Group assesses whether objective evidence of impairment exists on an individual basis for each individually significant financing and collectively for others. The main criteria that the Group uses to determine that there is objective evidence of impairment includes whether any payment of principal or profit are overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral, bankruptcy, other financial reorganisation, and economical or legal reasons. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. Financial guarantees and letter of credit are assessed and provisions are made in a similar manner as for financing receivables. Financing receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the “Provision for impairment” in the consolidated statement of profit or loss. For equity instruments classified as investments available for sale, impairment losses are not reversed through the consolidated statement of profit or loss; any increase in the fair value subsequent to the recognition of impairment loss, is recognised in the consolidated statement of other comprehensive income. For Sukuks classified as investments available for sale, if in a subsequent year, the fair value of the Sukuks increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated statement of profit or loss; the impairment loss is reversed through the consolidated statement of profit or loss. General provision The Bank’s policy for minimum general provision before 1 January 2018 was same as that stated below under “Provisions for credit losses in accordance with CBK instructions”. 25
  23. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (continued) c) Impairment of financial assets Policy applicable before 1 January 2018 (continued) Provisions for credit losses in accordance with CBK instructions The Group is required to calculate provisions for credit losses on financing receivables in accordance with the instructions of CBK on the classification of financing recievables and calculation of provisions. Financing receivables are classified as past due when a payment has not been received on its contractual payment date or if the facility is in excess of pre-approved limits. A financing receivable is classified as past due and impaired when the profit or a principal instalment is past due for more than 90 days and if the carrying amount of the facility is greater than its estimated recoverable value. Past due and past due and impaired financing receivables are managed and monitored as irregular facilities and are classified into the following four categories which are then used to determine the provisions. Category Watch list Substandard Doubtful Bad Criteria Specific provision Irregular for a period up to 90 days Irregular for a period of 91- 180 days Irregular for a period of 181- 365 days Irregular for a period exceeding 365 days 20% 50% 100% The Group may also include a credit facility in one of the above categories based on management’s judgement of a customer’s financial and/or non-financial circumstances. In addition to specific provisions, minimum general provisions of 1% on cash facilities and 0.5% on non-cash facilities are made on all applicable credit facilities (net of certain restricted categories of collateral) which are not subject to specific provisioning. d) Derecognition A financial asset (in whole or in part) is derecognised either when: (i) the contractual rights to receive the cash flows from the asset have expired or (ii) the Group has retained its right to receive cash flows from the assets but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or (iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same counterparty on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit or loss. e) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and the Group intends to settle on a net basis. 26
  24. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Fair values measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:  In the principal market for the asset or liability, or  In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:  Level 1:- Quoted (unadjusted) market prices in active markets for identical assets or liabilities  Level 2 :- Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable  Level 3 :- Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value. For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes. For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 27
  25. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8 Derivative financial instruments and Hedging The Group deals in Islamic derivative instruments to manage exposures to profit rate, foreign currency and credit risks. Derivative financial instruments are initially recognised in the consolidated statement of financial position at cost (including transaction costs) and subsequently measured at their fair value. Islamic Forward Agreements In the ordinary course of business, the Bank enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Sharia’a. The notional amount, disclosed gross, is the amount of a Waad’s underlying asset/ liability and is the basis upon which changes in the value are measured. The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk. For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated statement of profit or loss. Profit rate swaps Profit rate swaps are contractual agreements between two parties and may involve exchange of profit or exchange of both principal and profit for a fixed period of time based on contractual terms. The notional amounts indicate the volume of transactions outstanding at the period-end and are neither indicative of the market risk nor credit risk. Most of the Group’s profit rate swaps are held for hedging. Hedge accounting In order to manage particular risks, the Group applies hedge accounting for transactions, which meet the specified criteria. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; and (b) cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or a foreign currency risk in an unrecognised firm commitment. 28
  26. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8 Derivative financial instruments and Hedging (continued) Hedge accounting (continued) The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated statement of profit or loss, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the consolidated statement of profit or loss over the period to maturity of the previously designated hedge relationship using the effective profit rate. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated statement of profit or loss. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in consolidated statement of profit or loss. For those contracts classified as cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the consolidated statement of profit or loss. Amounts recognised as other comprehensive income are transferred to the consolidated statement of profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in fair value reserve are transferred to the consolidated statement of profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss. The Group discontinues hedge accounting when the following criteria are met: a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge; b) the hedging instrument expires, or is sold, terminated, or exercised; c) the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable. 2.9 Financial guarantees In the ordinary course of business, the Group provides financial guarantees, consisting of letter of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is amortised in the consolidated statement of profit or loss on a straight line basis over the life of the guarantee. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised premium received and the best estimate of net cash flow required to settle any financial obligation arising as a result of the guarantee. A provision for credit losses based on the higher of ECL under IFRS 9 according to the CBK guidelines and the provisions required by the CBK instructions is also accounted. 29
  27. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.10 Investment in associate The Group’s investment in its associate is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated statement of profit or loss reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the other comprehensive income of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of other comprehensive income. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The Group’s share of profit attributable to equity holders of an associate is shown on the face of the consolidated statement of profit or loss. The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the consolidated statement of profit or loss. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in consolidated statement of profit or loss. 2.11 Investment properties Land and buildings held for the purpose of capital appreciation or for long term rental yields and not occupied by the Group are classified as investment properties. Investment properties are measured at cost less accumulated depreciation (based on an estimated useful life of forty years using the straight line method) and accumulated impairment. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of profit or loss in the period of retirement or when sale is completed. Fair values of investment properties are determined by appraisers having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. The fair value measurement takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. 30
  28. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.12 Premises and equipment Freehold land is initially recognised at cost and not depreciated. After initial recognition freehold land is carried at the revalued amount, which is the fair value at the date of revaluation. The revaluation is carried out periodically by professional property evaluators. The resultant revaluation surplus or deficit is recognised in the consolidated statement of profit or loss and other comprehensive income to the extent the deficit does not exceed the previously recognised surplus. The portion of the revaluation deficit that exceeds a previously recognised revaluation surplus is recognised in the consolidated statement of profit or loss. To the extent that a revaluation surplus reverses a revaluation decrease previously recognised in the consolidated statement of profit or loss, the increase is recognised in the consolidated statement of profit or loss. Upon disposal, the revaluation reserve relating to the freehold land sold is transferred to retained earnings. Buildings, other premises and equipment are stated at cost, less accumulated depreciation and impairment losses if any. Depreciation of buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings Other premises and equipment 40 to 45 years 2 to 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated statement of profit or loss. Expenditure incurred to replace a component of an item of premises and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of premises and equipment. All other expenditure is recognised in the consolidated statement of profit or loss as the expense is incurred. 2.13 Perpetual Tier 1 Sukuk Perpetual Tier 1 Sukuk are recognised under equity in the consolidated statement of financial position and corresponding distributable profits on those Sukuk are accounted as a debit to the retained earnings. 2.14 Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and then its recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by available fair value indicators. 31
  29. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.15 End of service indemnity Provision is made for employees’ end of service indemnity in accordance with the local laws based on employees’ salaries and accumulated periods of service or on the basis of employment contracts, where such contracts provide extra benefits. The provision, which is unfunded, is determined as the liability that would arise as a result of involuntary termination of staff at the reporting date. This basis is considered to be a reliable approximation of the present value of the final obligation. 2.16 Treasury shares Treasury shares consist of the Bank’s own issued shares that have been reacquired by the Group and not yet reissued or cancelled. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in equity. When the treasury shares are reissued, gains are credited to a separate account in equity, (the “treasury shares reserve”), which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the general reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, treasury shares reserve account and retained earnings. No cash dividends are paid on these shares. The issue of stock dividend shares increases the number of treasury shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. 2.17 Cash and cash equivalents Cash and cash equivalents include cash and balances with Central Bank of Kuwait, deposits with banks with original maturity not exceeding seven days. 2.18 Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised (i) Financing income For all financial instruments measured at amortised cost, profit bearing financial assets classified as available for-sale, financing income is recorded using the effective profit rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective profit rate, but not future credit losses. Once a financial instrument categorised as “financing receivables” is written down to its estimated recoverable amount, related income is thereafter recognised on the unimpaired portion based on the original effective profit rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount. (ii) Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:   (iii) (iv) Fee income earned from services that are provided over a certain period of time are accrued over that period Fee income arising from negotiating or participating in the negotiation of a transaction for a third party, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. Dividend income is recognised when right to receive payment is established. Rental income is recognised on an accrual basis. 32
  30. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.19 Taxation National Labour Support Tax (NLST) The Bank calculates NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year. Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007. 2.20 Provisions Provisions are recognised when, as a result of past events, it is probable that an outflow of economic resources will be required to settle a present, legal or constructive obligation and the amount can be reliably estimated. 2.21 Foreign currency Foreign currency transactions are recorded at the rate of exchange prevailing at the date of transactions. Monetary assets and liabilities denominated in foreign currencies outstanding at the yearend are translated into Kuwaiti Dinars at the rates of exchange prevailing at reporting date. Any resultant gains or losses are taken to the consolidated statement of profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Translation differences on nonmonetary investments at fair value through profit or loss are reported as part of the fair value gain or loss in the consolidated statement of profit or loss, whilst those for available for sale non-monetary assets are included in the consolidated statement of other comprehensive income, unless it is part of an effective hedging strategy, using exchange rates when the fair value was determined. Translation differences arising on net investments in foreign operations are taken to the consolidated statement of other comprehensive income. 2.22 Segment information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. 2.23 Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable. Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Provisions for contingent liabilities are recognised when the outflow of resources is probable. 2.24 Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly are not included in these consolidated financial statements. 33
  31. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.25 Significant accounting judgement, estimates and assumptions The preparation of consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of financial assets and liabilities and disclosure of contingent liabilities. These judgements and estimates also affect the revenues and expenses and the resultant provisions as well as the fair value changes reported in other comprehensive income. Accounting Judgements Classification of financial assets - applicable from 1 January 2018 The Group determines the classification of financial assets based on the assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and profit on the principal amount outstanding. Classification of financial assets – applicable before 1 January 2018 Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition. Impairment of available for sale equity investments - applicable before 1 January 2018 The Group treats equity financial assets available for sale as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is "significant" or "prolonged" requires considerable judgment. Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Impairment of financial instruments - applicable from 1 January 2018 The measurement of impairment losses both under IFRS 9 and IAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Group’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their dependencies. Elements of the ECL models that are considered accounting judgements and estimates include:  The Group’s internal credit rating model, which assigns PDs to the individual grades  The Group’s criteria for assessing if there has been a significant increase in credit risk so allowances for financial assets should be measured on a lifetime ECL basis and qualitative assessment  The segmentation of financial assets when their ECL is assessed on a collective basis  Development of ECL models, including various formulas and choice of inputs  Determination of associations between macroeconomic scenarios and, economic inputs, and the effect on PDs, EADs and LGDs  Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models The Group has the policy to regularly review its models in the context of actual loss experience and adjust when necessary. 34
  32. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.25 Significant accounting judgement, estimates and assumptions (continued) Estimation uncertainty and assumptions (continued) Provision for credit losses – applicable before 1 January 2018 The Group reviews its financing receivables on a quarterly basis to assess whether a provision for credit losses should be recorded in the consolidated statement of profit or loss. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. Impairment of investment in associates The Group calculates the amount of impairment as the difference between the recoverable amount and its carrying value if there is any objective evidence that the investment in associates are impaired. The estimation of recoverable amount requires the Group to make an estimate of the expected future cashflows and selection of appropriate inputs for valuation. Fair values of assets and liabilities including intangibles Considerable judgment by management is required in the estimation of the fair value of the assets including intangibles with definite and indefinite useful life, liabilities and contingent liabilities acquired as a result of business combination. Valuation of unquoted financial assets Fair value of unquoted financial assets is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The determination of the cash flows and discount factors requires significant estimation. 3. TRANSITION DISCLOSURES The impact of the change in accounting policy as at 1 January 2018 is as follows: Retained earnings KD 000’s Closing balance under IAS 39 (31 December 2017) Impact on reclassification and re-measurements: Fair value adjustments on sukuks Fair value adjustment on hedged investments Movement in investment in associate Opening balance under IFRS 9 on date of initial application of 1 January 2018 35 Fair value reserve KD 000’s 134,920 3,478 (1,959) ─────── (1,959) 794 (245) ────── 549 ─────────── ────────── 132,961 4,027 ═════════ ═════════
  33. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 3. TRANSITION DISCLOSURES (CONTINUED) Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 The following table shows reconciliation of original measurement categories and carrying value in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets as at 1 January 2018. Original carrying amount under IAS 39 KD 000’s Transition adjustments KD 000’s New carrying amount under IFRS 9 KD 000’s Original classification under IAS 39 New classification under IFRS 9 Cash and balances with banks Loans and receivables Amortised cost 42,329 - 42,329 Deposits with Central Bank of Kuwait Loans and receivables Amortised cost 415,626 - 415,626 Deposits with other banks Loans and receivables Amortised cost 222,631 - 222,631 Financing receivables Loans and receivables Amortised cost 2,672,832 - 2,672,832 Investment securities – sukuks Investments available for sale Amortised cost 210,002 794 210,796 Investment securities – equity and funds Investments available for sale Equity instruments at FVOCI 6,974 - 6,974 Investment securities – equity and funds Investments available for sale Financial asset at FVTPL 382 - 382 Profit receivable and other assets Loans and receivables Amortised cost 7,105 ───────── 3,577,881 ═════════ ─────── 794 ═══════ 7,105 ─────── 3,578,675 ═══════ Financial assets Total financial assets Adoption of IFRS 9 did not result in any change in classification or measurement of financial liabilities. 36
  34. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 3. TRANSITION DISCLOSURES (CONTINUED) ECL and staging of financial instruments Credit loss expense All deposits with other banks and Investments securities measured at amortised cost are classified in stage1. The table below shows the ECL charges on financial instruments for the year recorded in the consolidated statement of profit or loss: KD 000 Deposits with other banks Investment securities measured at amortised cost 21 134 ───── 155 ═════ Movement of ECL KD 000 ECL charge for the year 155 ──────── 155 ──────── At 31 December 2018 4. DISTRIBUTION TO DEPOSITORS The Board of Directors of the Bank determines and distributes the depositors’ share of profit based on the Bank’s results at the end of each quarter. 5. NET FEES AND COMMISSION INCOME Investment management fees Credit related fees and commission Brokerage fees Total fees and commission income Fees and commission expense Net fees and commission income 6. 2018 KD 000 2017 KD 000 1,520 9,493 861 11,874 (1,996) 9,878 1,217 9,818 1,112 12,147 (1,625) 10,522 OTHER INCOME Dividend income Net income from investment properties Other income 37 2018 KD 000 2017 KD 000 1,013 447 68 1,528 688 105 186 979
  35. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 7. PROVISION AND IMPAIRMENT LOSSES Impairment of financing receivables (Note 11) Recoveries from written off financing receivables Impairment of non-cash credit facilities (Note 11) Impairment losses on investments available for sale Impairment of investment properties (Note 14) Other provisions Expected credit losses for investment in sukuks (Note 12) Expected credit losses for other financial assets 8. 2017 KD 000 24,158 (2,267) (55) 30 8,492 134 21 30,513 32,293 (5,641) 1,867 691 1,685 4,012 34,907 TAXATION Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) National Labour Support Tax (NLST) Zakat 9. 2018 KD 000 2018 KD 000 2017 KD 000 485 1,354 536 2,375 419 1,240 490 2,149 BASIC AND DILUTED EARNINGS PER SHARE Net profit for the year attributable to the Bank’s equity shareholders (KD 000) Less: Profit payments on Tier 1 Sukuks (KD 000) Net profit for the year attributable to equity holders of the Bank after profit payment on Tier 1 Sukuks Weighted average number of shares outstanding during the year Basic and diluted earnings per share attributable to the Bank’s equity shareholders (fils) 2018 2017 51,255 (3,329) 44,463 (3,337) 47,926 1,768,735,977 41,126 1,768,735,977 27.1 23.3 The weighted average number of shares outstanding during the year is calculated after adjusting for treasury shares as follows: Weighted average number of Bank’s issued and paid up shares Less: Weighted average number of treasury shares 2018 2017 1,964,505,903 (195,769,926) 1,768,735,977 1,964,505,903 (195,769,926) 1,768,735,977 Earnings per share for the year ended 31 December 2017 was 24.4 fils, before retroactive adjustment to the number of shares following the bonus issue (Note 19). As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical. 38
  36. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 10. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows consists of the following: 2017 2018 KD 000 KD 000 Cash and balances with banks Deposits with other banks with an original maturity of seven days or less 11. 76,937 42,329 24,273 101,210 45,272 87,601 FINANCING RECEIVABLES The movement in provision for impairment of financing receivables by class of financial assets is as follows: Retail Commercial financing financing Total KD 000 KD 000 KD 000 At 1 January 2018 Charge for the year (Note 7) Amounts written off At 31 December 2018 At 1 January 2017 Charge for the year (Note 7) Amounts written off At 31 December 2017 10,700 3,988 (166) 14,522 102,384 20,170 (12,947) 109,607 113,084 24,158 (13,113) 124,129 Retail financing KD 000 Commercial financing KD 000 Total KD 000 10,742 3,949 (3,991) 10,700 110,163 28,344 (36,123) 102,384 120,905 32,293 (40,114) 113,084 The ECL determined under IFRS 9 guidelines by CBK for financing receivables as of 31 December 2018 is KD 101,349 thousand, which is lower than provision for credit losses calculated in accordance with CBK instructions. As at 31 December 2018, non-performing financing receivables on which income has been suspended from recognition amounted to KD 37,191 thousand (2017: KD 38,624 thousand). The available specific provision on cash facilities is KD 8,464 thousand (2017: KD 5,433 thousand). The provision recovery for the year on non-cash facilities is KD 55 thousand (2017: provision charge of KD 1,867 thousand). The available provision on non-cash facilities of KD 7,736 thousand (2017: KD 7,790 thousand) is included in other liabilities (Note 18). The policy of the Group for calculation of the impairment provision for financing receivables complies in all material respects with the provision requirements of Central Bank of Kuwait. 39
  37. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 11. FINANCING RECEIVABLES (CONTINUED) According to the CBK instructions, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities has been made on all applicable credit facilities (net of certain categories of collateral), that are not provided for specifically. 12. INVESTMENT SECURITIES 2018 KD 000 Measured at amortised cost: Sukuks 241,730 Measured at FVTPL: Equity securities and funds - Quoted 16,068 Measured at FVOCI: Equity securities and funds - Quoted - Unquoted 658 5,729 6,387 264,185 2017 KD 000 Available for sale: Sukuks 210,002 Equity securities and funds - Quoted - Unquoted 724 6,632 217,358 An analysis of changes in the gross carrying amount and the corresponding expected credit losses in relation to investment in sukuks are as follows: 2018 Gross carrying amount as at 1 January 2018 (restated) New assets purchased net of redemptions during the year Exchange rate movements At 31 December 2018 40 KD 000 210,796 30,023 1,045 ─────── 241,864 ═══════
  38. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 12. INVESTMENT SECURITIES (CONTINUED) KD 000 134 ─────── 134 ═══════ ECL allowance as at 1 January 2018 Charge during the year (Stage 1) At 31 December 2018 As at 31 December 2017, investments available for sale included unquoted equity instruments carried at cost of KD 140 thousand. 13. INVESTMENT IN ASSOCIATE The share in assets, liabilities and results of the associate for the year ended is as follows: Share of associate’s statement of financial position: Current assets Non-current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of associate’s results: Operating income Profit (loss) for the year 14. 2018 KD 000 2017 KD 000 2,121 10,416 (1,193) (2,521) 8,823 2,464 7,215 (274) (87) 9,318 3,533 1,491 788 (687) INVESTMENT PROPERTIES These represents properties acquired by the Group and is recognised at cost less accumulated depreciation and impairment. Investment properties were revalued by independent valuers using market comparable approach that reflects recent transaction prices for similar properties and is therefore classified under level 2 of the fair value hierarchy. In estimating the fair value of investment properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. The fair value of the investment properties at the reporting date is KD 38,867 thousand (2017: KD 40,448 thousand). 41
  39. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 14. INVESTMENT PROPERTIES (CONTINUED) Movement for the year is as follows: At 1 January Additions Disposals Impairment (Note 7) Depreciation charged for the year At 31 December 15. 2018 KD 000 2017 KD 000 38,026 30 (1,325) (30) (162) 36,539 23,055 21,409 (4,591) (1,685) (162) 38,026 PREMISES AND EQUIPMENT Premises and equipment includes a revaluation decrease of KD 138 thousand (2017: decrease of KD 74 thousand) in the value of freehold land based on valuations determined by independent valuation experts. Freehold land was revalued by independent valuers using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy. 16. OTHER ASSETS Profit receivable Positive fair value of derivative financial instruments (Note 24) Others 17. 2018 KD 000 2017 KD 000 6,525 1,245 4,316 12,086 7,098 528 6,560 14,186 DEPOSITS FROM CUSTOMERS Depositors' accounts are deposits received from customers under current account, saving investment accounts, and fixed term investments accounts. The depositors’ accounts of the Bank comprise the following: i) Non-investment deposits in the form of current accounts. These deposits are not entitled to any profits nor do they bear any risk of loss as the Bank guarantees to pay the related balances on demand. Accordingly, these deposits are considered Qard Hassan from depositors to the Bank under Islamic Sharia'a. Investing such Qard Hassan is made at the discretion of the Board of Directors of the Bank, the results of which are attributable to the equity shareholders of the Bank. ii) Investment deposit accounts include savings accounts, fixed term deposit accounts, and open term deposit accounts. Saving Investment Accounts These are open-term deposits and the client is entitled to withdraw the balances of these accounts or portions thereof at any time. Fixed-Term Deposit Investment Accounts These are fixed-term deposits based on the deposit contract executed between the Bank and the depositor. These deposits mature monthly, quarterly, semi-annually, or annually. 42
  40. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 17. DEPOSITS FROM CUSTOMERS (CONTINUED) Open –Term Deposit Investment Accounts These are open-term deposits and are treated as annual deposits renewed automatically for a similar period, unless the depositor notifies the Bank in writing of his/her desire not to renew the deposit. Funds utilised in investments for each investment deposit are computed using ratios identified in the contracts for opening of these accounts with clients. The Bank guarantees to pay the remaining un-invested portion of these investment deposits. Accordingly, this portion is considered Qard Hassan from depositors to the Bank, in accordance with Islamic Sharia'a. The fair values of deposits from customers do not differ significantly from their carrying values. 18. OTHER LIABILITIES Depositors' profit share payable Provision for staff indemnity and passage Provision for non-cash credit facilities (Note 11) Negative fair value of derivative financial instruments (Note 24) Account payables, accruals and others 19. 2018 KD 000 2017 KD 000 16,782 6,635 7,736 1,485 46,446 79,084 12,859 6,310 7,790 217 35,667 62,843 EQUITY i) The authorised share capital as at 31 December 2018 comprises of 2,500,000,000 ordinary shares (31 December 2017: 2,500,000,000 shares) of 100 fils each and the issued and fully paid share capital as at 31 December 2018 comprises of 1,964,505,903 ordinary shares (31 December 2017: 1,870,958,003 shares) of 100 fils each. ii) The Board of Directors of the Bank has proposed cash dividend of 15% (2017: 13%) amounting to15 fils per share (2017: 13 fils) and bonus shares of 5% (2017: 5%). The proposed dividends are subject to the approval of the shareholders at the Bank’s Annual General Assembly. The shareholders’ Annual General Assembly held on 1 April 2018 approved the distribution of cash dividend of 13 fils per share (2016: 12 fils per share) to the Bank’s equity shareholders registered in the Bank’s records as of the date of Annual General Assembly Meeting and issuance of bonus shares of 5% (2016: 8%) to the Bank’s equity shareholders on record at the date of regulatory approval. iii) The Bank is required by the Companies’ Law and the Bank’s Articles of Association to transfer 10% of the profit for the year attributable to the Bank’s equity shareholders before KFAS, NLST, Zakat and Directors’ remuneration to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the statutory reserve equals 50% of the paid up share capital. Accordingly the Bank has transferred KD 5,387 thousand (2017: KD 4,678 thousand) to statutory reserve. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of up to 5% of share capital in years when retained earnings are not sufficient for the payment of such dividend. 43
  41. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 19. EQUITY (CONTINUED) iv) The Articles of Association of the Bank requires that an amount of not less than 10% of the profit for the year attributable to the Bank’s equity shareholders before KFAS, NLST, Zakat and Directors’ remuneration should be transferred annually to a general reserve account. The Board of Directors have resolved to discontinue such transfer from the year ended 31 December 2007 onwards, which was approved by the shareholders at the Bank’s Annual General Assembly on 6 March 2008. General reserve is available to be distributed to shareholders at the discretion of the general assembly, in ways that may be deemed beneficial to the Bank. v) The balances of share premium and treasury shares reserve are not available for distribution. The balance in the property revaluation reserve is not available for distribution unless the relevant assets are derecognised. The cost of the Bank’s own shares purchased, including directly attributable costs, is recognised in equity. In accordance with the instructions of the Central Bank of Kuwait and Annual General Assembly, the Bank may purchase treasury shares up to 10% of its paid up share capital. 20. TREASURY SHARES There was no purchase or sale of treasury shares during the current year. Number of treasury shares Treasury shares as a percentage of total shares issued Cost of treasury shares (KD 000) Market value of treasury shares (KD 000) Weighted average market value per treasury share (fils) 2018 2017 195,769,926 9.97% 43,957 58,144 301 186,447,549 9.97% 43,957 65,070 409 Amount equivalent to cost of treasury shares are retained out of reserves as non-distributable throughout the holding period of the treasury shares. 21. PERPETUAL TIER 1 SUKUK In October 2016, the Bank through a Sharia's compliant Sukuk arrangement issued Tier 1 Sukuk amounting to USD 200 million. Tier 1 Sukuk is a perpetual security in respect of which there is no fixed redemption date and constitutes direct, unsecured, deeply subordinated obligations (senior only to share capital) of the Bank subject to the terms and conditions of the Mudaraba Agreement. The Tier I Sukuk is listed on the Irish Stock Exchange and NASDAQ Dubai and callable by the Bank after five-year period ending October 2021 (the "First Call Date") or any profit payment date thereafter subject to certain redemption conditions including prior CBK approval. The net proceeds of Tier 1 Sukuk are invested by way of Mudaraba with the Bank (as Mudareb) on an unrestricted basis, by the Bank in its general business activities carried out through the general Mudaraba pool. Tier I Sukuk bears profit rate of 5.5% per annum to be paid semi-annually in arrears until the First Call Date subject to terms of the issue. After that, the expected profit rate will be reset based on then prevailing 5 years U.S Mid Swap Rate plus initial margin of 4.226 % per annum. At the issuer's sole discretion, it may elect not to make any Mudaraba distributions expected and in such event, the Mudaraba profit will not be accumulated and the event is not considered an event of default. Semi-annual profits were paid during the year ended 31 December 2018. 44
  42. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 22. TRANSACTIONS WITH RELATED PARTIES The Group enters into transactions with the parent, associate, major shareholders, directors and key management, close members of their families and entities controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business. The terms of these transactions are approved by the Group’s management. The year-end balances and transactions included in the consolidated financial statements are as follows: Number of Board members or executive officers As at 31 December 2018 Financing receivables Deposits with other banks Deposits from banks and financial institutions Deposits from customers Commitments and contingent liabilities Islamic Forward Agreements Profit Rate Swaps As at 31 December 2017 Financing receivables Deposits with other banks Deposits from banks and financial institutions Deposits from customers Commitments and contingent liabilities Islamic Forward Agreements Profit Rate Swaps Number of related parties Parent KD’000 Others KD’000 Total KD’000 7 - 6 4 72,100 42,319 314 42,319 72,414 13 - 7 26 6 1 1 36,712 12,258 10,498 104,866 503,180 27,917 41,087 - 539,892 27,917 53,345 10,498 104,866 Number of Board members or executive officers Number of related parties Parent KD’000 Others KD’000 Total KD’000 10 - 9 4 93,174 40,354 175 40,354 93,349 14 - 7 27 7 1 1 16,891 8,486 9,651 44,659 398,532 13,492 45,008 - 415,423 13,492 53,494 9,651 44,659 Parent KD’000 Others KD’000 Total KD’000 Transactions For the year ended 31 December 2018 Financing income Distribution to depositors 2,779 844 1,977 11,680 4,756 12,524 For the year ended 31 December 2017 Financing income Distribution to depositors 1,257 320 1,574 9,593 2,831 9,913 Directors: Board of Directors' remuneration Key management compensation: Salaries and other short term benefits Post-employment benefits 45 2018 KD 000 2017 KD 000 238 168 1,874 232 2,344 2,106 204 2,478
  43. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 22. TRANSACTIONS WITH RELATED PARTIES (CONTINUED) Board of Directors' remuneration is subject to approval of shareholders in the Annual General Assembly. 23. COMMITMENTS AND CONTINGENT LIABILITIES a) Credit- related commitments Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances, which are designed to meet the requirements of the Group’s customers. Letters of credit (including standby letters of credit), guarantees and acceptances commit the Group to make payments on behalf of customers upon failure of the customers to perform under the terms of the contract. Commitment to extend credit represents contractual commitments to financing and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. The Group has the following credit related commitments: Acceptances Letters of credit Guarantees 2018 KD 000 2017 KD 000 23,895 69,443 449,301 542,639 42,040 74,072 436,367 552,479 Irrevocable credit commitments to extend credit at the reporting date amounted to KD 919 thousand (2017: KD 2,894 thousand). b) Capital commitment The capital commitment for purchase of assets as at 31 December 2018 is KD 1,495 thousand (2017: KD 1,827 thousand). 24. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING Islamic forward agreements (Waad) In the ordinary course of business, the Bank enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Sharia’a. The notional amount, disclosed gross, is the amount of a Waad’s underlying asset/ liability and is the basis upon which changes in the value are measured. The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk. Most of the Group’s islamic forward agreements relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties. 46
  44. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 24. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING (CONTINUED) Islamic forward agreements (Waad) (continued) The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk. Most of the Group’s islamic forward agreements relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties. Profit rate swaps Profit rate swaps are contractual agreements between two parties and may involve exchange of profit or exchange of both principal and profit for a fixed period of time based on contractual terms. The notional amounts indicate the volume of transactions outstanding at the period-end and are neither indicative of the market risk nor credit risk. Most of the Group’s profit rate swaps are held for hedging. The fair value of derivative financial instruments included in the financial records, together with their notional amounts is summarised as follows: 31 December 2018 Waad Profit Rate Swaps (held as fair value hedge) Profit Rate Swaps (others) 31 December 2017 Waad Profit Rate Swaps (held as fair value hedge) Profit Rate Swaps (others) Assets (Positive) KD 000 Liabilities (Negative) Less than 1 month KD 000 KD 000 422 444 10,758 508 726 - 315 315 ────────── ────────── 1,245 1,485 ────────── ────────── Notional amount 3 to 12 More than months 12 months 1 to 3 months KD 000 KD 000 8,984 5,931 - 19,715 - - ───────── ───────── ────────── KD 000 10,758 8,984 ────────── ────────── 25,646 ───────── 25,673 54,821 60,660 ───────── 160,869 ────────── Less than 1 month 1 to 3 months Notional amount 3 to 12 More than months 12 months KD 000 KD 000 KD 000 KD 000 KD 000 8,838 3,597 246 - - - - 14,484 Total KD 000 24,561 14,484 175 175 - - 60,350 60,350 ────────── ────────── ────────── ───────── ───────── ───────── ────────── ────────── ────────── ────────── ────────── 528 217 - KD 000 12,126 60,660 ────────── 115,481 Liabilities (Negative) 42 74,536 ────────── Assets (Positive) 107 Total KD 000 8,838 47 3,597 12,126 ───────── 74,834 ────────── 99,395 ──────────
  45. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 25. FAIR VALUES MEASUREMENT The following table provides the fair value measurement hierarchy of the Group’s financial instruments: Fair value measurement hierarchy for assets and liabilities as at 31 December 2018 is as follows: 2018 Assets measured at fair value Financial assets Investments securities Derivative financial instruments Waad Profit Rate Swap Level: 1 KD 000 Level: 2 KD 000 Level: 3 KD 000 Total KD 000 16,726 1,166 4,563 22,455 422 823 1,245 2,411 4,563 422 823 1,245 23,700 444 1,041 1,485 - 444 1,041 1,485 Level: 1 KD 000 Level: 2 KD 000 Level: 3 KD 000 Total KD 000 210,726 2,167 4,325 217,218 210,726 107 421 528 2,695 4,325 107 421 528 217,746 42 175 217 - 42 175 217 - 16,726 Liability measured at fair value Derivative financial instruments Waad Profit Rate Swap - 2017 Assets measured at fair value Financial assets Investments available for sale Derivative financial instruments Waad Profit Rate Swap Liability measured at fair value Derivative financial instruments Waad Profit Rate Swap - Investments classified under level 1 are valued based on the quoted bid price. Equity securities and funds classified under level 2 are valued based on market multiples and declared NAV’s. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. The movement in level 3 is mainly on account of change in fair value of financial assets during the year. The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. 48
  46. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 25. FAIR VALUES MEASUREMENT (CONTINUED) The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year. Other financial assets and liabilities are carried at amortised cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in interest rates. Fair values of remaining financial assets and liabilities carried at amortised cost are estimated mainly using based on discounted cash flows, with most significant inputs being the discount rate that reflects the credit risk of counterparties. 26. MATURITY ANALYSIS OF ASSETS AND LIABILITIES The table below summarises the maturity profile of the Group’s assets and liabilities analysed according to remaining contractual maturity: Up to 3 months KD 000 3 to 12 months KD 000 Over 1 year KD 000 Total KD 000 ASSETS Cash and balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investment securities Investment in associate Investment properties Premises and equipment Other assets Total assets 76,937 123,853 334,801 1,897,241 105,888 9,381 2,548,101 222,244 399,060 31,845 1,999 655,148 503,605 126,452 8,823 36,539 34,279 706 710,404 76,937 346,097 334,801 2,799,906 264,185 8,823 36,539 34,279 12,086 3,913,653 LIABILITIES Deposits from banks and other financial Institutions Deposits from customers Other liabilities Total liabilities Net liquidity gap 547,488 371,163 1,997,719 380,621 19,390 17,246 2,564,597 769,030 (16,496) (113,882) 46,176 42,448 88,624 621,780 918,651 2,424,516 79,084 3,422,251 491,402 2018 49
  47. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 26. MATURITY ANALYSIS OF ASSETS AND LIABILITIES (CONTINUED) Up to 3 months KD 000 3 to 12 months KD 000 Over 1 year KD 000 Total KD 000 ASSETS Cash and balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investments available for sale Investment in associate Investment properties Premises and equipment Other assets Total assets 42,329 140,911 222,631 1,889,998 102,787 11,137 2,409,793 274,715 273,189 16,061 1,814 565,779 509,645 98,510 9,318 38,026 33,273 1,235 690,007 42,329 415,626 222,631 2,672,832 217,358 9,318 38,026 33,273 14,186 3,665,579 LIABILITIES Deposits from banks and other financial Institutions Deposits from customers Other liabilities Total liabilities Net liquidity gap 370,202 290,807 1,940,032 447,218 22,439 16,383 2,332,673 754,408 77,120 (188,629) 47,858 39,031 24,021 110,910 579,097 708,867 2,426,281 62,843 3,197,991 467,588 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Strategy in using financial instruments As an Islamic commercial bank, the Bank’s activities are principally related to the sourcing of funds through Sharia'a compliant financial instruments, within the guidelines prescribed by the Central Bank of Kuwait (CBK) and deploying these funds in Sharia'a compliant financing and investment activities, to earn a profit. The profit is shared between the shareholders and profit sharing deposit account holders, as per the Bank's policies approved by the Board of Directors and Fatwa and Sharia'a Supervisory Board. The funds raised vary in maturity between short and long term and are mainly in Kuwaiti Dinars, apart from major foreign currencies and GCC currencies. While deploying the funds, the Bank focuses on the safety of the funds and maintaining sufficient liquidity to meet all claims that may fall due. Safety of shareholder and depositor funds is further enhanced by diversification of financing activities across economic and geographic sectors, and types of financed parties. RISK MANAGEMENT The use of financial instruments also brings with it associated inherent risks. The Group recognises the relationship between returns and risks associated with the use of financial instruments and the management of risks forms an integral part of the Group’s strategic objectives. The strategy of the Group is to maintain a strong risk management culture and manage the risk/reward relationship within and across each of the Group’s major risk-based lines of business. The Group continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility. 50
  48. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (CONTINUED) Group’s objectives, policies and process for managing its risk are explained in detail in the Pillar 3 disclosures of the Annual Report. The following sections describe the several risks inherent in the banking process, their nature, techniques used to minimise the risks, their significance and impact on profit and loss and equity due to future expected changes in market conditions. A. CREDIT RISK Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group attempts to control risk by monitoring credit exposures, limiting transactions with reputable counterparties, and continually assessing the creditworthiness of counterparties. Concentration of credit risk arises when a number of counterparties are engaged in similar business activities or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentration of credit risk indicates the relative sensitivity of the Group’s performance to developments, affecting a particular industry or geographic location. The Group seeks to manage its credit risk exposure through diversification of financing activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or businesses. It also obtains collateral, when appropriate. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained include charges over bank deposits and balances, listed securities acceptable to the Group, real estate, plant and equipment, inventory and trade receivables. Management monitors the market value of collateral on a daily basis for quoted shares and periodically for others, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. Assessment of expected credit losses (policy applicable from 1 January 2018) Definition of default The Group considers a financial asset to be in default and therefore Stage 3 (credit impaired) for ECL calculations when for those facilities where any payment of principal or profit is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. In such cases, the Group recognises a loss allowance for the life time ECL. Any credit impaired or stressed facility that has been restructured during the year would also be considered as in default. The Group considers externally-rated exposures with ratings ‘D’ for S&P and Fitch, and ‘C’ for Moody’s as defaulted. The Group considers a variety of indicators that may indicate unlikeliness to pay as part of a qualitative assessment of whether a customer is in default. Such indicators include:  breaches of covenants  borrower having past due liabilities to public creditors or employees  borrower is deceased 51
  49. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. A. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (CONTINUED) CREDIT RISK (CONTINUED) Assessment of expected credit losses (policy applicable from 1 January 2018) (continued) Significant increase in credit risk The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12 months ECL or life time ECL, the Group assess whether there has been a significant increase in credit risk since initial recognition. The Group applies a consistent quantitative criterion for internally and externally rated portfolio to assess significant increase in credit risk. Internal rating and PD estimation process Group’s internal grading system uses various qualitative assessments. Other than the staging rules mentioned in Note 2.6, the Group also complies with the guidelines mentioned in the CBK Instructions, as follows:  Credit facilities are classified under Stage 2 where there has been a default in principal or profit payment for more than 30 days;  Credit facilities are classified under Stage 2 when there has been a downgrade in the facility’s credit rating by 2 grades for the facilities with Investment Grade and by 1 grade for those with Non-Investment Grade; The standard requires the use of separate PD for a 12-month duration and lifetime duration depending on the stage allocation of the obligor. A PD used for IFRS 9 should reflect the Group’s estimate of the future asset quality. The Group uses Point In Time PD (PIT PD) for each rating to calculate the ECL. The minimum PD is 0.75% for Investment Grade credit facilities and 1% for Non-Investment Grade credit facilities except for credit facilities granted to Government and Banks rated as Investment Grade by an external rating agency and financing transactions related to consumer and housing loans (except for credit cards). Measurement of ECLs ECLs are probability weighted estimates of credit losses and are measured as the present value of all cash shortfalls discounted at the effective interest rate of the financial instrument. Cash shortfalls represent the difference between cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive. The key elements in the measurement of ECL include probability of default (PD), loss given default (LGD) and exposure at default (EAD). The Group estimates these elements using appropriate credit risk models taking into consideration the internal and external credit ratings of the assets, forward looking macro-economic scenarios etc. Incorporation of forward-looking information The Group considers key economic variables that are expected to have an impact on the credit risk and the ECL inorder to incorporate forward looking information into the ECL models. These primarily reflect reasonable and supportable forecasts of the future macro-economic conditions. The consideration of such factors increases the degree of judgment in determination of ECL. The Group employs statistical models (GCorr macro model) to incorporate macro-economic factors on historical default rates.The Group considers 3 scenarios (base case, upside case, and a downside case) of forecasts of macro-economic data separately for each geographical segments and appropriate probability weights are applied to these scenarios to derive a probability weighted outcome of expected credit loss. The management reviews the methodologies and assumptions including any forecasts of future economic conditions on a regular basis. 52
  50. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. A. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (CONTINUED) CREDIT RISK (CONTINUED) Maximum exposure to credit risk The table below shows the maximum exposure net of provision to credit risk for the components of the statement of financial position and off-balance sheet items without taking account of any collateral and other credit enhancements. Credit risk exposures relating to consolidated statement of financial position items: Balances with banks Deposits with the Central Bank of Kuwait Deposits with other banks Financing receivables Investment securities Other assets Credit risk exposures relating to off - balance sheet items: (Note 23a) Acceptances, letters of credit, and guarantees Irrevocable credit commitments Maximum exposure 2018 KD 000 Maximum exposure 2017 KD 000 59,949 346,097 334,801 2,799,906 241,730 10,903 3,793,386 20,029 415,626 222,631 2,672,832 210,002 13,183 3,554,303 542,639 919 543,558 552,479 2,894 555,373 The gross maximum credit exposure to a single client or counterparty as of 31 December 2018 is KD 76,516 thousand (2017: KD 62,004 thousand) before taking account of any collaterals. Geographical and industry-wise concentration of assets and off balance sheet items are as follows: 2018 Geographic region: Kuwait Other GCC Europe North America Other countries 53 Assets representing credit risk KD 000 Contingencies & Commitments representing credit risk KD 000 3,355,808 285,816 34,847 18,718 98,197 3,793,386 417,918 68,015 39,145 3,473 15,007 543,558
  51. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 86 27. A. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (CONTINUED) CREDIT RISK (CONTINUED) Maximum exposure to credit risk (continued) 2018 Industry sector: Trading and manufacturing Banks and financial institutions Construction and real estate Other Assets representing credit risk KD 000 Contingencies & Commitments representing credit risk KD 000 613,848 1,001,199 1,190,244 988,095 3,793,386 189,783 109,499 170,831 73,445 543,558 Assets representing credit risk KD 000 Contingencies & Commitments representing credit risk KD 000 3,195,888 240,105 12,382 14,535 91,393 3,554,303 427,460 69,127 39,107 1,423 18,256 555,373 Assets representing credit risk KD 000 Contingencies & Commitments representing credit risk KD 000 514,267 861,294 1,204,466 974,276 3,554,303 211,175 105,645 166,494 72,059 555,373 2017 Geographic region: Kuwait Other GCC Europe North America Other countries 2017 Industry sector: Trading and manufacturing Banks and financial institutions Construction and real estate Other 54
  52. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. A. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (CONTINUED) CREDIT RISK (CONTINUED) Maximum exposure to credit risk (continued) Credit quality of the financial assets is managed by the Group with a combination of external and internal ratings mechanisms. It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates management to focus on the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. The credit quality of class of assets with underlying credit risks are as follows: Neither past due nor impaired High grade 2018 Balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investment securities Other assets 59,949 346,097 334,801 2,495,675 241,730 10,903 3,489,155 High grade 2017 Balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investments available for sale Other assets 20,029 415,626 222,631 2,362,878 210,002 13,183 3,244,349 55 (KD 000) Standard Closely grade monitored 205,833 205,833 Total 48,728 48,728 59,949 346,097 334,801 2,750,236 241,730 10,903 3,743,716 (KD 000) Standard Closely grade monitored Total 163,647 163,647 62,433 62,433 20,029 415,626 222,631 2,588,958 210,002 13,183 3,470,429
  53. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. A. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (continued) CREDIT RISK (continued) Maximum exposure to credit risk (continued) Financial assets by class that are past due but not impaired: Past due Past due up to 30 31 to 60 2018 days days KD 000 KD 000 Financing receivables 7,059 -Retail financing 2,723 2,127 -Commercial financing 2,831 9,186 5,554 Past due 61 to 90 days KD 000 Total KD 000 1,463 4,740 6,203 11,245 9,698 20,943 Fair value of collateral 8,350 2017 Financing receivables -Retail financing -Commercial financing Past due up to 30 days KD 000 Past due 31 to 60 days KD 000 Past due 61 to 90 days KD 000 Total KD 000 8,233 28,446 36,679 3,019 7,355 10,374 927 2,703 3,630 12,179 38,504 50,683 Fair value of collateral 37,732 Financial assets by class that are impaired: 2018 Financing receivables -Retail financing -Commercial financing 2017 Financing receivables -Retail financing -Commercial financing Gross exposure KD 000 Impairment provision KD 000 Fair value of collateral KD 000 8,655 28,536 37,191 5,774 2,690 8,464 26,081 26,081 Gross exposure KD 000 Impairment provision KD 000 Fair value of collateral KD 000 10,938 27,686 38,624 1,551 3,882 5,433 29,816 29,816 The factors the Group considered in determining impairment are disclosed in Note 2 – Summary of Significant accounting policies. 56
  54. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. B. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (continued) LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its net funding requirements. Liquidity risk can also be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an adequate balance of cash, cash equivalents, and readily marketable securities. Analysis of financial liabilities by remaining contractual maturities The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations including profit share. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment earlier than the contractual date and the table also does not reflect the expected cash flows indicated by the Group’s deposit retention history. 2018 Deposits from banks and other financial institutions Deposits from customers Other liabilities 2017 Deposits from banks and other financial institutions Deposits from customers Other liabilities Less than 1 month KD 000 1 to 3 months KD 000 3 to 12 months KD 000 1 to 5 years KD 000 Over 5 years KD 000 298,505 1,564,687 9,958 1,873,150 250,002 436,135 9,432 695,569 377,305 385,987 17,246 780,538 47,966 42,448 90,414 - 925,812 2,434,775 79,084 3,439,671 Less than 1 month KD 000 1 to 3 months KD 000 3 to 12 months KD 000 1 to 5 years KD 000 Over 5 years KD 000 Total KD 000 295,872 1,431,291 19,028 1,746,191 74,582 510,879 3,411 588,872 294,296 451,802 16,383 762,481 49,085 39,031 24,021 112,137 - Total KD 000 713,835 2,433,003 62,843 3,209,681 The table below shows the contractual expiry by maturity of the Group’s credit related contingent liabilities and commitments as disclosed in Note 23: Less than 1 to 3 1 month months KD 000 KD 000 2018 Credit related contingent liabilities Irrevocable credit commitments 2017 Credit related contingent liabilities Irrevocable credit commitments 3 to 12 months KD 000 1 to 5 Over years 5 years KD 000 KD 000 Total KD 000 21,104 873 21,977 542,639 919 543,558 32,144 2,736 34,880 552,479 2,894 555,373 32,472 58,818 224,286 32,472 58,818 224,286 205,959 46 206,005 22,289 22,289 62,162 62,162 250,368 250,368 185,516 158 185,674 57
  55. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) C. RISK MANAGEMENT (continued) MARKET RISK The Group defines market risk as the uncertainty in future earnings on the Group’s on and off balance sheet positions resulting from changes in market variables such as profit rate risk, currency risk and equity price risk. C.1 PROFIT RATE RISK Profit rate risk arises from the possibility that changes in profit rates will affect the value of the underlying financial instruments. The Group is not exposed to profit rate risk since in accordance with Islamic Sharia'a the Bank does not charge variable profit. C.2 CURRENCY RISK Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits. The Group had the following net exposures denominated in foreign currencies. The effect on profit before tax, as a result of change in currency rate, with all other variables held constant is shown below: Currency Change in currency rate in % US Dollars +5 % Effect on profit before tax 2017 2018 KD 000 KD 000 3 54 A 5 percent decrease of the above currency against the Kuwaiti Dinar would have had equal, but opposite, effect of the amount shown above, on the basis that all other variables remain constant. Sensitivity to currency rate movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant. There is no significant impact on the equity. C.3 EQUITY PRICE RISK Equity price risk is the risk that the fair values of equity investments decrease as a result of the changes in the level of equity indices and the value of the individual stocks. The non-trading equity price risk exposure arises from the Group’s investment portfolio. The effect on equity as a result of a change in the fair value of the equity instruments at 31 December due to a reasonable possible change in the equity indices, with all other variables held as constant is as follows: Effect on equity Changes in 2017 equity price 2018 KD 000 Market indices % KD 000 Kuwait Index +5 % 58 33 5
  56. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 27. C. C.3 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (continued) MARKET RISK (continued) EQUITY PRICE RISK (continued) Effect on statement of profit or loss Changes in equity price % Market indices Saudi Arabia +5 % 2018 KD 000 530 2017 KD 000 - An equal change in the opposite direction would have had equal, but opposite effect to the amount shown above, on the basis that all other variables remain constant. Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant. C.4 PREPAYMENT RISK Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when profit rates fall. Due to the contractual terms of its Islamic products, the Bank is not significantly exposed to prepayment risk. D OPERATIONAL RISK The Group has a set of policies and procedures approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risk relating to the banking and financial activities of the Group. Operational risk is managed by the Risk Management Division. This Division ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global Risk Management. The Group manages operational risks in line with the Central Bank of Kuwait instructions dated 14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding “Sound Practices for the Management and Control of Operational Risks”. 28. SEGMENT REPORTING The Group’s operating segments are determined based on the reports reviewed by the Chief Operating decision maker that are used for strategic decisions. These segments are strategic business units having similar economic characteristics that offer different products and services. These operating segments are monitored separately by the Group for the purpose of making decisions about resource allocation and performance assessment. 59
  57. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 28. SEGMENT REPORTING (CONTINUED) These operating segments meet the criteria for reportable segments and are as follows:  Retail and Commercial Banking – comprising a full range of banking operations covering credit and deposit services provided to customers and correspondent banking. The Bank uses a common marketing and distribution strategy for its commercial banking operations.  Treasury and Investment Management – comprising clearing, money market, foreign exchange, sukuk, other treasury and miscellaneous operations, proprietary investment, securities trading activities and fiduciary fund management activities. Segment results include revenue and expenses directly attributable to a segment and an allocation of overhead cost. The Group measures the performance of operating segments through measure of segment profit or loss net of taxes in management and reporting systems. Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment. Retail and Commercial Banking 2017 2018 KD 000 KD 000 Net financing income Fees, commissions and others Total operating income Provision and impairment losses Operating expenses and taxation Segment result Profit for the year Treasury and Investment Management 2017 2018 KD 000 KD 000 Total 2018 KD 000 2017 KD 000 81,966 10,572 92,538 85,500 11,544 97,044 18,436 10,600 29,036 18,632 4,397 23,029 100,402 21,172 121,574 104,132 15,941 120,073 (30,235) (34,178) (278) (729) (30,513) (34,907) (33,233) (31,334) 31,532 (6,573) 22,185 (9,369) 12,931 (39,806) 51,255 51,255 (40,703) 44,463 44,463 29,070 Retail and Commercial Banking 2017 2018 KD 000 KD 000 Treasury and Investment Management 2017 2018 KD 000 KD 000 Total 2018 KD 000 2017 KD 000 Segment assets 3,188,710 3,043,808 724,943 621,771 3,913,653 3,665,579 Segment liabilities 1,935,459 1,789,133 1,486,792 1,408,858 3,422,251 3,197,991 The Group primarily operates in Kuwait. 60
  58. Ahli United Bank K .S.C.P. Notes to the Consolidated Financial Statements As at 31 December 2018 29. CAPITAL MANAGEMENT The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong and healthy capital ratios in order to support its business and to maximise shareholders’ value. The Group actively manages its capital base in order to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the Central Bank of Kuwait in supervising the Group. The Group’s regulatory capital and capital adequacy ratios (Basel III) for the year ended 31 December 2018 are calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below: 2018 KD’000 2017 KD’000 Risk weighted assets 3,196,336 2,778,966 Total capital required 415,524 375,160 2018 KD’000 2017 KD’000 Capital available Tier 1 capital Tier 2 capital Total capital 490,772 38,324 529,096 466,961 33,184 500,145 Tier 1 capital adequacy ratio Total capital adequacy ratio 15.35% 16.55% 16.8% 18.0% The Group’s financial leverage ratio for the year ended 31 December 2018 is calculated in accordance with CBK circular number 2/IBS/ 343/2014 dated 21 October 2014 is shown below: 2018 KD’000 Tier 1 capital Total exposure Financial leverage ratio 61 2017 KD’000 490,772 466,961 5,451,278 5,161,609 9.0% 9.05%