Regulatory Alerts2024-09-26
National Bank of Ethiopia Audited Financial Statements for the Year Ended 30 June 2022
The Audit Service Corporation issued an independent auditor's report on the National Bank of Ethiopia's financial statements for the year ended 30 June 2022, prepared in accordance with International Financial Reporting Standards. The audit opinion is unmodified despite a material uncertainty related to going concern arising from a net operating loss and a negative general reserve balance. Key audit matters included the verification of revenue and expense recognition, while the financial statements disclose total assets of approximately 662.9 billion Ethiopian Birr and total equity of 1.5 billion Birr.
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AUDIT SERVICES CORPORATION
NATIONAL BANK OF ETHIOPIA
INDEPENDENT AUDITOR’S REPORT
AND
FINANCIAL STATEMENTS
30 JUNE 2022
National Bank of Ethiopia
Financial Statements
For the year ended 30 June 2022
| Contents | Page |
|---|---|
| Statement of Director’s Responsibility | 1 |
| Independent Auditor’s Report | 2 – 4 |
| Statement of Profit or Loss and Other Comprehensive Income | 5 |
| Statement of Financial Position | 6 |
| Statement of Changes in Equity | 7 |
| Statement of Cash Flows | 8 |
| Notes to the Financial Statements | 9 – 104 |
National Bank of Ethiopia Annual Financial Statements For the year ended 30 June 2022
Statement of Director’s Responsibility
The Directors are responsible for the preparation and fair presentation of the financial statements of National Bank of Ethiopia (“The Bank”), comprising the statement of financial position as at 30 June 2022; statements of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards.
To enable the Directors, meet those responsibilities, the Board of Directors (the "Board") and management sets standards and management implements systems of internal control, accounting and information systems aimed at providing reasonable assurance that assets are safeguarded, and the risk of error, fraud or loss is reduced in a cost-effective manner. These controls, contained in established policies and procedures, include the proper delegation of responsibilities and authorities within a clearly defined framework, effective accounting procedures and adequate segregation of duties.
To their best knowledge and belief, based on the above, the Directors are satisfied that no material breakdown in the operation of the systems of internal control and procedures has occurred during the year under review. The Directors have reviewed the performance and financial position of the Bank to the date of signing of these financial statements and its prospects based on prepared budgets and are satisfied that the Bank is a going concern and, therefore, have adopted the going concern assumption in the preparation of these financial statements.
Approval of the annual financial statements
The financial statements on pages 5 to 104 were approved by the Governor on behalf of the Board of Directors on 12 September 2024.
Signed on behalf of the Directors
H.E. Mamo Esmelealem Mihretu Mamo Esmelealem Mihretu Governor Date: 12 September 2024
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Office of the Federal Auditor General Audit Service Corporation
INDEPENDENT AUDITOR’S REPORT TO THE SUPERVISING AUTHORITY OF NATIONAL BANK OF ETHIOPIA
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of National Bank of Ethiopia (the Bank) which comprise the statement of financial position as at 30 June 2022, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 30 June 2022, its financial performances and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Ethiopia, and we have fulfilled our other ethical responsibilities in accordance with those requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material Uncertainty Related to Going Concern
The accompanying financial statements for the year ended 30 June 2022 have been prepared assuming that the Bank will continue as a going concern. As discussed in Note 2(a) to the financial statements, the Bank has suffered losses from operation and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2(a) to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified in respect of this matter.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters
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INDEPENDENT AUDITOR’S REPORT TO THE SUPERVISING AUTHORITY OF NATIONAL BANK OF ETHIOPIA
Report on the Audit of the Financial Statements (continued)
Key Audit Matters (continued)
Revenue and expense
There are risks that interest income and expenses may not be properly calculated and recorded. We compared the current year's income and expenditure with the prior year to analyse the variation. We enquired and documented the reasons for variations. We selected samples of recorded interest income and expense and checked their computation and examined supporting documentation to verify the correctness of the amounts recoded. Based on our assessment we found no concerns regarding revenue and expense recognition.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the management is responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank's financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also
- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
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INDEPENDENT AUDITOR’S REPORT TO THE SUPERVISING AUTHORITY OF NATIONAL BANK OF ETHIOPIA
Auditor’s Responsibilities for the Audit of the Financial Statements (continued)
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank's internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Management.
- Conclude on the appropriateness of the Board's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor's report is Woizero Azeb Tekleselassie.
12 September 2024
4
National Bank of Ethiopia Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2022 (In Ethiopian Birr)
| Note | 30 June 2022 | 30 June 2021 | |
|---|---|---|---|
| Interest income | 4 | 18,189,401,617 | 15,192,248,676 |
| Interest expense | 4 | (6,602,487,476) | (7,112,968,066) |
| Net interest income | 11,586,914,141 | 8,079,280,610 | |
| Fee and commissions income | 5 | 9,437,413,463 | 5,275,779,907 |
| Revenue from sale of gold | 6 | 22,412,404,942 | 23,521,232,945 |
| Other income | 7 | 456,715,700 | 387,782,238 |
| Net non-interest income | 32,306,534,105 | 29,184,795,090 | |
| Net operating income | 43,893,448,246 | 37,264,075,700 | |
| Currency costs | 8 (a) | (2,456,268,620) | (3,484,411,693) |
| General and administration costs | 8 (b) | (14,895,446,641) | (8,134,257,531) |
| Salaries and related benefits | 8 (c) | (421,966,198) | (351,934,756) |
| Gold purchase, refinery, and other related costs | 8 (d) | (26,921,025,765) | (25,475,596,714) |
| Impairment losses on financial assets | 8(e),9,15 | (1,054,226,975) | (1,259,549,635) |
| Operating surplus/Loss before (un) realised gains / (losses) | (1,855,485,953) | (1,441,674,629) | |
| Other comprehensive income: | |||
| Items that will not be reclassified to profit or loss: | |||
| Remeasurement of defined benefit obligation | 24 (b) | 958,658 | (2,807,931) |
| Fair value gains/(losses) on monetary gold | - | 2,480,191 | |
| Fair value gains / (losses) on financial assets | 10 & 28 | 38,259,168 | (24,812,828) |
| Other comprehensive income | 39,217,826 | (25,140,568) | |
| Total comprehensive income | (1,816,268,127) | (1,466,815,197) |
The notes on pages 9 to 104 are an integral part of these financial statements.
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National Bank of Ethiopia Statement of Financial Position As at 30 June 2022 (In Ethiopian Birr)
| Assets | Note | 30 June 2022 | 30 June 2021 |
|---|---|---|---|
| Balances due from foreign entities - Commercial banks | 9 (c) | 34,377,378,326 | 28,144,049,258 |
| Balances due from foreign entities – Central banks | 9 (d) | 41,188,035,227 | 94,285,262,858 |
| Cash - foreign currencies | 9 (e) | 1,019,977,052 | 1,527,579,239 |
| Funds held with IMF | 9 (f) | 322,687,964 | 527,514,382 |
| Gold commodity | 11 | 3,019,331,864 | 3,631,590,539 |
| Loans to government banks | 9 (b) | 158,362,399,494 | 170,649,011,900 |
| Loans to private commercial banks | 9 (h) | 1,368,705,247 | 1,695,719,093 |
| Investment securities | 10 | 30,309,732,340 | 24,195,070,571 |
| Property and equipment | 13 | 1,327,277,937 | 1,322,476,445 |
| Other assets | 15 | 20,585,719,791 | 17,680,945,135 |
| Intangible asset | 14 | 2,563,105 | 5,109,046 |
| Due from Government of Ethiopia | 9 (a) | 370,965,586,883 | 294,146,968,065 |
| Right of use asset | 16 | 1,839,882 | 1,993,206 |
| Total assets | 662,851,235,112 | 637,813,289,737 | |
| Liabilities | |||
| Currency in circulation | 20 | 209,691,236,124 | 163,709,691,732 |
| Deposits due to local financial institutions, government, and government institutions | 17 | 252,869,157,723 | 317,517,568,532 |
| Funds due to international financial institutions | 18 | 85,773,515,216 | 57,665,508,321 |
| Due to other institutions | 19 | 105,008,898,212 | 88,038,683,383 |
| Due to the Ministry of Finance | 23 | 5,374,906,270 | 5,374,906,270 |
| Deferred revenue | 22 (d) | 12,039,039 | 1,135,555 |
| Lease liability | 16 | 2,116,398 | 2,235,951 |
| Provisions | 21 | 36,061,905 | 17,148,151 |
| Employee benefits | 24 | 196,314,922 | 174,632,863 |
| Other liabilities | 25 | 2,339,251,055 | 1,947,772,604 |
| Total Liabilities | 661,303,496,864 | 634,449,283,362 | |
| Equity | |||
| Capital | 26 (a) | 500,000,000 | 500,000,000 |
| General reserve | 26 (b) | (2,797,160,582) | (941,674,629) |
| Retained earnings | 26 (b) | - | - |
| Fair value reserve | 26 (e) | 286,290,754 | 248,031,586 |
| Defined benefit reserve | 24/26(f) | 53,035,572 | 52,076,914 |
| International reserve valuation | 26 (c) | 3,849,198,654 | 3,849,198,654 |
| Other reserve | 26 (g) | (343,626,150) | (343,626,150) |
| Total equity | 1,547,738,248 | 3,364,006,375 | |
| Total liabilities and equity | 662,851,235,112 | 637,813,289,737 |
The notes on pages 9 to 104 are an integral part of these financial statements.
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National Bank of Ethiopia Statement of Changes in Equity For the year ended 30 June 2022 (In Ethiopian Birr)
| Note | Capital | General reserve | Other Reserve | International reserve valuation | Retained earnings | Defined benefit reserve | Fair value reserve | Total Equity | |
|---|---|---|---|---|---|---|---|---|---|
| Balance as at 1 July 2020 | 500,000,000 | 500,000,000 | (343,626,150) | 3,849,198,654 | - | 54,884,845 | 270,364,223 | 4,830,821,572 | |
| Total comprehensive income: | |||||||||
| Profit/Loss for the year | 26 (d) | - | - | - | - | (1,441,674,629) | - | - | (1,441,674,629) |
| Other comprehensive income | 26 (f) | - | - | - | - | - | (2,807,931) | (22,332,637) | (25,140,568) |
| Total comprehensive income | - | - | - | - | (1,441,674,629) | (2,807,931) | (22,332,637) | (1,466,815,197) | |
| Transactions with owners of the Bank: | |||||||||
| Transfer to / (from) General reserve | 26 (b) | - | (1,441,674,629) | - | - | 1,441,674,629 | - | - | - |
| Transfer to MOF | 23/26 (d) | - | - | - | - | - | - | - | - |
| Balance as at 30 June 2021 | 500,000,000 | (941,674,629) | (343,626,150) | 3,849,198,654 | - | 52,076,914 | 248,031,586 | 3,364,006,375 | |
| Total comprehensive income: | |||||||||
| Profit/Loss for the year | 26 (d) | - | - | - | - | (1,855,485,953) | - | - | (1,855,485,953) |
| Other comprehensive income | 26 (f) | - | - | - | - | - | 958,658 | 38,259,168 | 39,217,826 |
| Total comprehensive income | - | - | - | - | (1,855,485,953) | 958,658 | 38,259,168 | (1,816,268,127) | |
| Transactions with owners of the Bank: | |||||||||
| Transfer to / (from) Other reserve | 26 (b) | - | (1,855,485,953) | - | - | 1,855,485,953 | - | - | - |
| -Transfer to/(from) MOF | 23/26 (d) | - | - | - | - | - | - | - | - |
| Balance as at 30 June 2022 | 500,000,000 | (2,797,160,582) | (343,626,150) | 3,849,198,654 | - | 53,035,572 | 286,290,754 | 1,547,738,248 |
The notes on pages 9 to 104 are an integral part of these financial statements.
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National Bank of Ethiopia Statement of Cash Flows For the year ended 30 June 2022 (In Ethiopian Birr)
| Cash flows from operating activities: | Note | 30 June 2022 | 30 June 2021 |
|---|---|---|---|
| Operating surplus/Loss for the year | (1,855,485,953) | (1,441,674,629) | |
| Impairment of loans and advances | 8(e),9, 15 | 1,054,226,975 | 1,259,549,635 |
| Depreciation and amortization | 13, 14 | 96,737,619 | 116,864,906 |
| Net interest income | 4 | (11,586,914,141) | (8,079,280,610) |
| Dividend income | 7 | (13,629,225) | (30,867,477) |
| Interest paid on lease obligation | 16 | 127,467 | 134,234 |
| Loss/ (Gain) on disposal of property, plant, and equipment | 13 | (19,615) | 15,460 |
| Loss on inventory write down | 11 | 833,898,065 | - |
| Losses on currency notes in custody | 20 | 1,479,315,632 | - |
| (9,991,743,176) | (8,175,258,481) | ||
| Changes in working capital: | |||
| Loans to government banks and commercial banks | 9 (b, c, h) | 12,358,195,628 | 828,979,555 |
| Other assets | 15 | (2,904,525,314) | (11,113,552,552) |
| Deposits due from foreign entities – central banks (IBRD investment) | 9(g) | (1,225,476,528) | (1,260,108,752) |
| Currency in circulation | 20 | 44,502,228,760 | 23,188,564,423 |
| Due to International financial institutions | 18 | 21,934,051,899 | 3,502,975,598 |
| Due to other institutions | 19 | 16,699,571,714 | 17,557,981,811 |
| Deposits due to local financial institutions, government, and government institutions | 17 | (63,058,237,638) | 50,075,002,056 |
| Monetary gold | 11 | (221,639,390) | 498,431,229 |
| Gold commodity | 11 | (75,792,535,445) | (350,956,310) |
| Due from Government of Ethiopia | 9 (a) | 18,913,754 | (51,802,488,135) |
| Provisions | 21 | 10,903,484 | (13,305,410) |
| Deferred revenue | 22 (d) | 22,640,717 | (189,090) |
| Employee benefits | 24 | 391,478,451 | 16,942,529 |
| Other liabilities | 25 | 16,368,701,007 | (705,621,040) |
| Interest income received | (7,814,950,242) | 10,889,904,792 | |
| Interest expense paid | (48,702,422,319) | (7,102,609,112) | |
| Net cash provided by operating activities | 26,034,693,111 | ||
| Cash flows from investing activities: | |||
| Disposal of property, plant and equipment | 1,081,230 | - | |
| Dividends received | 13,629,225 | 30,867,477 | |
| Increase in investment securities | 10 | (9,514,896) | (27,314,300) |
| Acquisition of properties and equipment | 13 | (99,901,460) | (57,387,030) |
| Net cash used in investing activities | (94,705,901) | (53,833,853) | |
| Cash flows from financing activities: | |||
| Payments on finance lease obligations | 16 | (247,020) | (247,020) |
| Remittance of annual profits to the Ministry of Finance | 23 | - | (10,320,871,214) |
| Net cash from financing activities | (247,020) | (10,321,118,234) | |
| Increase (decrease) in cash and cash equivalents | (48,797,375,240) | 15,659,741,024 | |
| Cash and cash equivalents at beginning of period | 9 (g) | 118,115,462,097 | 102,455,721,073 |
| Cash and cash equivalents at end of period | 9 (g) | 69,318,086,857 | 118,115,462,097 |
Fair value related adjustments of investment securities measured through OCI and quota share of IMF are excluded from the cash flow statement (as per IAS-7 p.43). For detail refer (note 10).
The notes on pages 9 to 104 are an integral part of these financial statements.
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National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
1. Reporting entity
National Bank of Ethiopia (“the Bank”) is the Central Bank of Ethiopia. It was established by Order No. 30/1963 as an autonomous institution. It is governed by the National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008 and is wholly owned by the Government of the Federal Democratic Republic of Ethiopia.
Its principal place of business is Addis Ababa.
It operates as the Central Bank of Ethiopia and acts as the banker, fiscal agent and financing advisor of the Government of Ethiopia and is domiciled in Ethiopia.
2. Basis of preparation
(a) Going concern
The National Bank of Ethiopia was recorded a net operating loss of Birr 1.8 billion, which resulted in a negative General Reserve balance of Birr 2.8 billion at the end of 30 June 2022. This was largely due to: (1) an impairment loss on government and government bank related securities plus loans and advances, 2) gold commodity inventory write down to the NRV and (3) a depreciation of the local currency which resulted in exchange losses.
The Board and Management of the Bank have assessed the implications arising out of the negative General Reserve position. In their view, the Bank will continue to operate on a going basis as a recapitalization plan, in coordination with the Ministry of Finance, is expected to be in place to improve NBE’s balance sheet and since more favourable macroeconomic conditions are envisaged in line with on-going and wide-ranging policy reforms. The Directors also view there to be minimal risk regarding the Bank’s ability to generate enough income to cover its monetary policy operations and other operational costs. Based on the above, the Directors have a reasonable expectation that the Bank has adequate resources to continue in operational existence for the foreseeable future. Thus, the Bank continues to adopt the going concern basis of accounting in preparing its annual financial statements.
(b) Statement of compliance
The accompanying financial statements of the Bank have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
On 12 September 2024, the Governor authorized the issuance of the accompanying financial statements.
9
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
2. Basis of preparation (Continued)
(c) Basis of accounting
The financial statements have been prepared on the historical cost basis, except for the following significant items:
- Financial instruments measured at amortised cost and at fair value;
- Monetary gold measured at fair value; and
- Measurement of defined benefits obligations: key actuarial assumptions.
(d) Functional and presentation currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates (the “Functional currency”).
The financial statements are presented in Ethiopian Birr (ETB), which is the Bank’s functional currency, and all values are rounded to the nearest Birr, except when otherwise indicated.
(e) Use of judgments and estimates
In preparing these financial statements, management has made judgments, estimates and assumptions that affect the application of the Bank’s accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates.
Judgments
Information about judgement made in applying accounting policies that have the most significant effects on the amounts recognized in the financial statements is included in the following notes:
Note 3 (b (ii)) - Classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial assets are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding;
Note 3 (b (viii)) - Establishing the criteria for determining whether credit risk on the financial asset has increased significantly since initial recognition, determining methodology for incorporating forward-looking information into measurement of Expected Credit Losses (ECL) and selection and approval of models used to measure ECL; and
Note 3 (e) - Leases; whether a contract contains a lease.
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National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
2. Basis of preparation (Continued)
(e) Use of judgments and estimates (Continued)
Estimates on uncertainties and assumptions
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively in the financial statements.
Information on assumptions and uncertainty of estimates posing a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the year ending 30 June 2022 is included in the following notes as set out below:
Note 3 (b (i; ii)) – identification and measurement of financial instruments; Note 3 (c) and (d) – useful lives and salvage value of tangible and intangible assets; Note 3 (k) – measurement of employee benefits liability: key actuarial assumptions; Note 3 (b (viii)) - impairment of financial instruments: key assumptions used in estimating recoverable cash flows; and Note 3 (j) and (t) – recognition and measurement of provisions and contingencies.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements.
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National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies
(a) Foreign currency transactions
Transactions in foreign currencies on a day to day basis are recorded at the respective buying and selling rate. The closing balances on these foreign currency accounts at the close of business are translated using the mid-exchange rate.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the mid-exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in the foreign currency translated at the mid-exchange rate at the end of the year.
Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the spot exchange rate at the date on which the fair value is determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction.
Foreign currency differences arising on translation are generally recognised in profit or loss.
(b) Financial instruments
(i) Recognition and initial measurement
The Bank initially recognizes cash, loans and advances, deposits, and debt securities on the date on which they are originated. All other financial instruments (including assets designated at fair value through profit or loss) are initially recognized on the trade date on which the Bank becomes a party to the contractual provisions of the instrument.
A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value plus, for an item not at fair value through profit or loss (FVTPL), transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price.
(ii) Classification and subsequent measurement
a. Financial assets:
On initial recognition, financial assets are classified into one of the following measurement categories:
- Amortised cost;
- Fair value through other comprehensive income (FVOCI);
- Fair value through profit or loss (FVTPL);
- Elected at fair value through other comprehensive income (equities only); or
- Designated at FVTPL
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National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
a. Financial assets (continued)
Financial assets include both debt and equity instruments. Financial assets are not reclassified subsequent to their initial recognition unless the Bank changes its Business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the Business model.
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:
- it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
- its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
A debt instrument is measured at FVOCI only 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 achieved by both collecting contractual cash flows and selling financial assets; and
- the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
On initial recognition of an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis.
All other financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. On initial recognition, the Bank 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.
Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:
- Amortised cost;
- Fair value through other comprehensive income (FVOCI);
- Fair value through profit or loss (FVTPL); or
- Designated at FVTPL
13 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
(a.) Financial assets (continued)
Classification of debt instruments is determined based on: (i) The business model under which the asset is held; and (ii) The contractual cash flow characteristics of the instrument.
Business model assessment
Business model assessment involves determining how financial assets are managed in order to generate cash flows. The Bank’s business model assessment is based on the following-categories:
- Held to collect: The objective of the business model is to hold assets and collect contractual cash flows. Any sales of the asset are incidental to the objective of the model.
- Held to collect and for sale: Both collecting contractual cash flows and sales are integral to achieving the objectives of the business model.
- Other business model: The business model is neither held-to-collect nor held-to-collect and for sale.
The Bank makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:
- the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;
- how the performance of the portfolio is evaluated and reported to the Bank’s management;
- the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;
- how managers of the business are compensated - e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and
- the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realised.
14 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
a. Financial assets (continued):
Business model assessment (continued)
Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Bank’s continuing recognition of the assets.
Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
Assessments whether contractual cash flows are solely payments of principal and interest
The contractual cash flow characteristics assessment involves assessing the contractual features of an instrument to determine if they give rise to cash flows that are consistent with a basic lending arrangement. Contractual cash flows are consistent with a basic lending arrangement if they represent cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g., liquidity risk and administrative costs), as well as profit margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Bank considers:
- contingent events that would change the amount and timing of cash flows;
- leverage features;
- prepayment and extension terms;
- terms that limit the Bank’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and
- features that modify consideration of the time value of money – e.g., periodical reset of interest rates.
15 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
a. Financial assets (continued):
Assessment whether contractual cash flows are solely payments of principal and interest (continued)
Debt instruments measured at amortized cost
Debt instruments are measured at amortized cost if they are held within a business model whose objective is to hold for collection of contractual cash flows where those cash flows represent solely payments of principal and interest. After initial measurement, debt instruments in this category are carried at amortized cost. Interest income on these instruments is recognized in interest income using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial asset to the gross carrying amount of a financial asset. Amortized cost is calculated by taking into account any discount or premium on acquisition, transaction costs and fees that are an integral part of the effective interest rate.
Impairment on debt instruments measured at amortized cost is calculated using the expected credit loss approach. Loans and debt securities measured at amortized cost are presented net of the allowance for credit losses (ACL) in the statement of financial position.
Debt instruments are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual cash flows and for selling financial assets, where the assets’ cash flows represent payments that are solely payments of principal and interest. Subsequent to initial recognition, unrealized gains and losses on debt instruments measured at FVOCI are recorded in other comprehensive income (OCI). Upon derecognition, realized gains and losses are reclassified from OCI and recorded in non-interest income in the Statement of Profit or Loss and Other Comprehensive Income on an average cost basis. Foreign exchange gains and losses that relate to the amortized cost of the debt instrument are recognized in the Statement of Profit or Loss and Other Comprehensive Income.
Premiums, discounts, and related transaction costs are amortized over the expected life of the instrument to Interest income in the Statement of Profit or Loss and Other Comprehensive Income using the effective interest rate method.
16 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
a. Financial assets (continued):
Debt instruments measured at FVOCI (Continued)
Impairment on debt instruments measured at FVOCI is calculated using the expected credit loss approach. The allowance for credit losses (ACL) on debt instruments measured at FVOCI does not reduce the carrying amount of the asset in the Statement of Financial Position, which remains at its fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI with a corresponding charge to provision for credit losses in the Statement of Profit or Loss and Other Comprehensive Income. The accumulated allowance recognised in OCI is recycled to the Statement of Profit or Loss and Other Comprehensive Income upon derecognition of the debt instrument.
Debt instruments measured at FVTPL
Debt instruments are measured at FVTPL if assets: i) Are held for trading purposes; ii) Are held as part of a portfolio managed on a fair value basis; or iii) Whose cash flows do not represent payments that are solely payments of principal and interest.
These instruments are measured at fair value in the Statement of Financial Position, with transaction costs recognized immediately in the Statement of Profit or Loss and Other Comprehensive Income as part of non-interest income. Realized and unrealized gains and losses are recognized as part of non-interest income in the Statement of Profit or Loss and Other Comprehensive Income.
Debt instruments designated at FVTPL
Financial assets classified in this category are those that have been designated by the Bank upon initial recognition, and once designated, the designation is irrevocable. The FVTPL designation is available only for those financial assets for which a reliable estimate of fair value can be obtained.
Financial assets are designated at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. The decision to designate relates to assets that otherwise meet requirements to be measured at amortised cost or as at FVOCI but are designated as at FVTPL to reduce account mismatch.
17 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
a. Financial assets (continued):
Debt instruments designated at FVTPL (Continued)
Financial assets designated at FVTPL are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognized in non-interest income in the Statement of Profit or Loss and Other Comprehensive Income.
Equity instruments
Equity instruments are classified into one of the following measurement categories:
- Fair value through profit or loss (FVTPL); or
- Elected at fair value through other comprehensive income (FVOCI).
Equity instruments measured at FVTPL
Equity instruments are measured at FVTPL, unless an election is made to designate them at FVOCI upon purchase, with transaction costs recognized immediately in the Statement of Profit or Loss as part of non-interest income. Subsequent to initial recognition the changes in fair value are recognized as part of non-interest income in the Statement of Profit or Loss and Other Comprehensive Income.
Equity instruments measured at FVOCI
At initial recognition, there is an irrevocable option for the Bank to classify non-trading equity instruments at FVOCI. This election is used for certain equity investments for strategic or longer-term investment purposes. This election is made on an instrument-by-instrument basis and is not available to equity instruments that are held for trading purposes.
Gains and losses on these instruments including when derecognized/sold are recorded in OCI and are not subsequently reclassified to the Statement of Profit or Loss and Other Comprehensive Income. As such, there is no specific impairment requirement.
Dividends received are recorded in Interest income in the Statement of Profit or Loss and Other Comprehensive Income. Any transaction costs incurred upon purchase of the security are added to the cost basis of the security and are not reclassified to the Statement of Profit or Loss and Other Comprehensive Income on sale of the security.
18 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(ii) Classification and subsequent measurement (continued)
a. Financial assets (continued):
Reclassifications
Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets.
b. Financial liabilities
The Bank classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost.
The financial instruments at NBE have been classified into one of the following categories and their measurement criteria defined as follows based on their nature and business purpose:
| Financial assets | Measurement criteria |
|---|---|
| Due from Government of Ethiopia (Note 9(a)) | Amortised cost |
| Loans to government banks (Note 9(b)) | Amortised cost |
| Due from foreign institutions – commercial banks (Note 9 (c)) | Amortised cost |
| Due from foreign institutions – central banks (Note 9(d)) | Amortised cost |
| Cash - foreign currencies (Note 9 (e)) | Amortised cost |
| Funds held with IMF (Note 9 (f)) | Amortised cost |
| Loans to private commercial banks (Note 9 (h)) | Amortised cost |
| Loans to employees (Note 15 (a)) | Amortised cost |
| Investment securities (Note 10) | Fair value through OCI |
| Financial liabilities | Measurement criteria |
|---|---|
| Deposits from banks and government (Note 17) | Amortised cost |
| Due to international financial institutions (Note 18) | Amortised cost |
| Due to other institutions (Note 19) | Amortised cost |
| Currency in circulation (Note 20) | Fair value |
19 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(iii) Derecognition
Financial assets
The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.
On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognized) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in OCI is recognized in profit or loss.
Any cumulative gain/loss recognized in OCI in respect of equity investment securities designated as at FVOCI is not recognized in profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability.
In transactions in which the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
Financial liabilities:
The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. The Bank also derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value.
On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.
20 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(iv) Modifications of financial assets and financial liabilities
Financial assets:
If the terms of a financial asset are modified, the Bank evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognized and a new financial asset is recognized at fair value.
If the terms of a financial asset were modified because of financial difficulties of the borrower and the asset was not derecognized, then impairment of the asset was measured using the pre-modification interest rate.
Financial liabilities:
The Bank derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognized at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognized in profit or loss.
(v) Offsetting
Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Bank has a legally enforceable right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity.
(vi) Amortized cost measurement
The ‘amortized cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.
21 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(vii) Fair value 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 in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk.
When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
If there is no quoted price in an active market, then the Bank uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.
There is no active market or observable prices to measure the Bank’s financial assets or financial liabilities at fair value. Fair value of financial assets and financial liabilities is determined at each reporting date for disclosure in the financial statements purposes only.
(viii) Impairment of financial assets
The Bank recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL:
- financial assets that are debt instruments;
- lease receivables;
- financial guarantee contracts issued; and
- loan commitments issued.
No impairment loss is recognised on equity investments.
The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL:
- debt investment securities that are determined to have low credit risk at the reporting date; and
- other financial instruments (other than lease receivables) on which credit risk has not increased significantly since their initial recognition.
Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL.
22 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(viii) Impairment of financial assets (continued)
At each reporting date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset is ‘impaired’ when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably.
The Bank considers a debt security to have low credit risk when their credit risk rating is equivalent to the globally understood definition of ‘investment grade’.
12-month ECL is the portion of ECL that result from default events on a financial asset that are possible within the 12 months after the reporting date.
Measurement of Expected Credit Losses (ECL)
Expected Credit Losses (ECL) is a probability-weighted estimate of credit losses. They are measured as follows:
- financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Bank expects to receive);
- financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;
- undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and
- financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Bank expects to recover.
23 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(viii) Impairment of financial assets (continued)
Restructured financial assets
If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows:
- If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset.
- If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing asset when one or more events that have a detrimental impact on the estimated cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.
Credit-impaired financial assets
At each reporting date, the Bank assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Evidence that a financial asset is credit-impaired includes the following observable data:
- significant financial difficulty of the borrower or issuer;
- a breach of contract such as a default or past due event;
- the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise;
- it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
- the disappearance of an active market for a security because of financial difficulties.
A loan that has been renegotiated due to deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment.
In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors:
24 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(b) Financial instruments (continued)
(viii) Impairment of financial assets (continued)
Credit-impaired financial assets (continued)
- The market’s assessment of creditworthiness as reflected in the bond yields.
- The rating agencies’ assessments of creditworthiness.
- The country’s ability to access the capital markets for new debt issuance.
- The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness.
There are also international support mechanisms in place to provide the necessary support to NBE as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.
Presentation of loss allowance in the statement of financial position
Loss allowances for Expected Credit Losses (ECL) are presented in the statement of financial position as follows:
- financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
- loan commitments and financial guarantee contracts: generally, as a provision;
- where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision; and
- debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve.
Write-off
Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due.
25 (continue)
National Bank of Ethiopia Notes to the Financial Statements For the year ended 30 June 2022
3. Significant accounting policies (continued)
(c) Property and equipment
(i) Recognition and measurement
Items of property and equipment are measured at cost, which includes capitalized borrowing costs, less accumulated depreciation, cumulative impairment losses and residual value.
Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
If significant parts of an item of property or equipment have different useful lives, then they are accounted for as separate items (major components) of property and equipment.
Any gain or loss on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating and administrative expenses in profit or loss.
(ii) Subsequent costs
Subsequent expenditure is capitalized only when it is probable that the future economic benefits of the expenditure will flow to the Bank and the cost of the item can be measured reliably. Ongoing repairs and maintenance are expensed as incurred.
(iii) Depreciation
Depreciation is calculated to write off the cost of items of property and equipment less their estimated residual values using the straight-line method over their estimated useful lives and is generally recognized in profit or loss. Land is not depreciated.
The estimate useful lives and residual values of significant items of property and equipment are as follows:
| Asset classification | Useful life | Depreciation rate | Residual value |
|---|---|---|---|
| Buildings | 20 years | 5% | 25% |
| Furniture and fittings | 5 years | 20% | 1% |
| Office and other equipment | 5 years | 20% | 1% |
| Motor vehicles | 5 years | 20% | 25% |
Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted prospectively, if appropriate.
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National Bank of Ethiopia Notes to the Financial Statements