AUDIT SERVICES CORPORATION

NATIONAL BANK OF ETHIOPIA

INDEPENDENT AUDITOR’S REPORT

AND

FINANCIAL STATEMENTS

30 JUNE 2021

National Bank of Ethiopia

Financial Statements

For the year ended 30 June 2021

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 – 106

National Bank of Ethiopia

Annual Financial Statements

For the year ended 30 June 2021

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 2021, 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 106 were approved by the Governor on behalf of the Board of Directors on 15 March 2024.

Signed on behalf of the Directors

H.E. Mamo Esmelealem Mihretu........................................... Date: 15 March 2024 Mamo Esmelealem Mihretu Governor

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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 2021, 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 2021, its financial performances and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Opinion

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 2021 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 raises 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.

ASC
251-011-5515222
251-011-5535012
251-011-5535015
251-011-5535016
Fax 251-011-5513083
E-mail: asc@ascethiopia.com website WWW.ascethiopia.com

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INDEPENDENT AUDITOR’S REPORT

TO THE SUPERVISING AUTHORITY OF

DEVELOPMENT 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 for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

ASC

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INDEPENDENT AUDITOR’S REPORT

TO THE SUPERVISING AUTHORITY OF

DEVELOPMENT 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.

AUDIT SERVICES CORPORATION
15 March 2024

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National Bank of Ethiopia

Statement of Profit or Loss and Other Comprehensive Income

For the year ended 30 June 2021

(In Ethiopian Birr)

	Note	30 June 2021	30 June 2020
Interest income	4	15,192,248,676	11,231,830,101
Interest expense	4	(7,112,968,066)	(5,140,190,224)
Net interest income		8,079,280,610	6,091,639,877
Fee and commissions income	5	5,275,779,907	4,409,152,231
Revenue from sale of gold	6	23,521,232,945	1,042,029,013
Other income	7	387,782,238	451,864,278
Net non-interest income		29,184,795,090	5,903,045,522
Net operating income		37,264,075,700	11,994,685,399
Currency costs	8 (a)	(3,484,411,693)	(292,769,194)
General and administration costs	8 (b)	(8,134,257,531)	(2,212,269,456)
Salaries and related benefits	8 (c)	(351,934,756)	(260,472,516)
Gold purchase, refinery, and other related costs	8 (d)	(25,475,596,714)	(821,703,463)
Impairment losses on financial assets	8(e),9,15	(1,259,549,635)	(563,991,800)
Operating surplus/Loss before (un) realised gains / (losses)		(1,441,674,629)	7,843,478,970
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Remeasurement of defined benefit obligation	24 (b)	(2,807,931)	(78,407,024)
Fair value gains/(losses) on monetary gold	11 (a)	2,480,191	(855,887)
Fair value gains / (losses) on financial assets	10 & 28	(24,812,828)	1,366,957,792
Other comprehensive income		(25,140,568)	1,287,694,881
Total comprehensive income		(1,466,815,197)	9,131,173,851

The notes on pages 9 to 106 are an integral part of these financial statements.

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National Bank of Ethiopia

Statement of Financial Position

As at 30 June 2021

(In Ethiopian Birr)

	Note	30 June 2021	30 June 2020
Assets
Balances due from foreign entities - Commercial banks	9 (c)	28,144,049,258	20,653,052,148
Balances due from foreign entities – Central banks	9 (d)	94,285,262,858	81,958,441,772
Cash - foreign currencies	9 (e)	1,527,579,239	4,381,892,903
Funds held with IMF	9 (f)	527,514,382	567,343,715
Monetary gold	11 (a)	-	495,951,038
Gold commodity	11 (b)	3,631,590,539	3,280,634,229
Loans to government banks	9 (b)	170,649,011,900	169,258,817,952
Loans to private commercial banks	9 (h)	1,695,719,093	34,413,090
Investment securities	10	24,195,070,571	14,335,890,889
Property and equipment	13	1,322,476,445	1,375,915,699
Other assets	15	17,680,945,135	6,567,645,243
Intangible asset	14	5,109,046	11,009,804
Due from Government of Ethiopia	9 (a)	294,146,968,065	243,185,737,950
Right of use asset	16	1,993,206	2,146,530
Total assets		637,813,289,737	546,108,892,962
Liabilities
Currency in circulation	20	163,709,691,732	140,521,127,309
Deposits due to local financial institutions, government, and government institutions	17	317,517,568,532	267,432,190,177
Funds due to international financial institutions	18	57,665,508,321	44,305,871,855
Due to other institutions	19	88,038,683,383	70,480,701,572
Due to the Ministry of Finance	23	5,374,906,270	15,695,777,487
Deferred revenue	22 (d)	1,135,555	1,324,645
Lease liability	16	2,235,951	2,348,737
Provisions	21	17,148,151	30,453,561
Employee benefits	24	174,632,863	154,882,403
Other liabilities	25	1,947,772,604	2,653,393,644
Total Liabilities		634,449,283,362	541,278,071,390
Equity
Capital	26 (a)	500,000,000	500,000,000
General reserve	26 (b)	(941,674,629)	500,000,000
Retained earnings	26 (b)	-	-
Fair value reserve	26 (e)	248,031,586	270,364,223
Defined benefit reserve	24/26(f)	52,076,914	54,884,845
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		3,364,006,375	4,830,821,572
Total liabilities and equity		637,813,289,737	546,108,892,962

The notes on pages 9 to 106 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 2021

(In Ethiopian Birr)

	Note	Capital	General reserve	International reserve valuation	Other Reserve	Defined benefit reserve	Fair value reserve	Total Equity
Balance as at 1 July 2019		500,000,000	500,000,000	3,849,198,654	(343,626,150)	133,291,869	(1,095,757,683)	3,543,126,690
Total comprehensive income:
Profit for the year	26 (d)	-	-	-	-	-	-	7,843,478,970
Other comprehensive income	26 (f)	-	-	-	-	-	-	1,287,694,882
Total comprehensive income								9,131,173,852
Transactions with owners of the Bank:
Transfer to / (from) General reserve	26 (b)	-	7,843,478,970	-	-	-	-	7,843,478,970
Transfer to MOF	23/26 (d)	-	(7,843,478,970)	-	-	-	-	(7,843,478,970)
Balance as at 30 June 2020		500,000,000	500,000,000	3,849,198,654	(343,626,150)	133,291,869	(1,095,757,683)	4,830,821,572
Total comprehensive income:
Profit for the year	26 (d)	-	-	-	-	-	-	(1,441,674,629)
Other comprehensive income	26 (f)	-	-	-	-	-	-	(25,140,568)
Total comprehensive income								(1,466,815,197)
Transactions with owners of the Bank:
Transfer to / (from) Other reserve	26 (b)	-	-	-	1,441,674,629	-	-	1,441,674,629
Transfer to/(from) MOF	23/26 (d)	-	-	-	(343,626,150)	-	-	(343,626,150)
Balance as at 30 June 2021		500,000,000	500,000,000	3,849,198,654	(343,626,150)	133,291,869	(1,095,757,683)	3,364,006,375

The notes on pages 9 to 106 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 2021

(In Ethiopian Birr)

	Note	30 June 2021	30 June 2020* Re-arranged
Cash flows from operating activities:
Operating surplus for the year		(1,441,674,629)	7,843,478,970
Impairment of loans and advances	8(e),9,15	1,259,549,635	563,991,800
Depreciation and amortization	13,14	116,864,906	111,801,627
Net interest income	4	(8,079,280,610)	(6,091,639,877)
Dividend income	7	(30,867,477)	(2,242,599)
Interest paid on lease obligation	16	134,234	140,987
Fair value gains on financial assets		-	1,308,456,128
Loss/(Gain) on disposal of property, plant, and equipment	13	15,460	(2,262,598)
		(8,175,258,481)	3,731,724,438
Changes in working capital:
Loans to government banks and commercial banks	9 (b, c, h)	828,979,555	(71,799,943,263)
Other assets	15	(11,113,552,552)	969,237,237
Deposits due from foreign entities – central banks (IBRD investment)	9(g)	(1,260,108,752)	(863,786,359)
Currency in circulation	20	23,188,564,423	18,721,108,185
Due to International financial institutions	18	3,502,975,598	24,077,227,003
Due to other institutions	19	17,557,981,811	10,415,104,947
Deposits due to local financial institutions, government, and government institutions	17	50,075,002,056	78,479,828,739
Monetary gold	11(a)	498,431,229	(171,946,025)
Gold commodity	11 (b)	(350,956,310)	(2,475,756,225)
Due from Government of Ethiopia	9 (a)	(51,802,488,135)	(49,516,213,219)
Provisions	21	(13,305,410)	16,577,169
Deferred revenue	22 (d)	(189,090)	969,008
Employee benefits	24	16,942,529	5,520,768
Other liabilities	25	(705,621,040)	2,036,954,327
Interest income received		10,889,904,792	8,156,538,866
Interest expense paid		(7,102,609,112)	(5,119,136,697)
Net cash provided by operating activities		26,034,693,111	16,664,008,899
Cash flows from investing activities:
Disposal of property, plant and equipment		-	3,073,823
Dividends received		30,867,477	2,242,599
Increase in investment securities	10	(27,314,300)	-
Acquisition of properties and equipment	13	(57,387,030)	(141,209,188)
Acquisition of intangibles	14	-	(4,034,351)
Net cash used in investing activities		(53,833,853)	(139,927,117)
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)	(6,766,300,000)
Net cash from financing activities		(10,321,118,234)	(6,766,547,020)
Increase (decrease) in cash and cash equivalents		15,659,741,024	9,757,534,762
Cash and cash equivalents at beginning of period	9 (g)	102,455,721,073	92,698,186,311
Cash and cash equivalents at end of period	9 (g)	118,115,462,097	102,455,721,073

Fair value related adjustments of investment securities and quota share of IMF are excluded from the cashflow statement (as per IAS-7 p.43). For detail refer note (no.10) In order to improve comparability some of the comparative balances have been re-arranged

The notes on pages 9 to 106 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 2021

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 recorded a net operating loss of Birr 1.4 billion, which resulted in a negative General Reserve balance of Birr 0.9 billion at the end of 30 June 2021. This was largely due to: (1) an impairment owing to a sovereign credit downgrade of government and government bank related securities plus loans and advances; and (2) 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 15 March 2024, the Governor authorized the issuance of the accompanying financial statements.

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National Bank of Ethiopia

Notes to the Financial Statements

For the year ended 30 June 2021

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 2021

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 2021 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 2021

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 2021

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

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National Bank of Ethiopia

Notes to the Financial Statements

For the year ended 30 June 2021

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.

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National Bank of Ethiopia

Notes to the Financial Statements

For the year ended 30 June 2021

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.

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National Bank of Ethiopia

Notes to the Financial Statements

For the year ended 30 June 2021

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.

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National Bank of Ethiopia

Notes to the Financial Statements

For the year ended 30 June 2021

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 which 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.

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National Bank of Ethiopia

Notes to the Financial Statements

For the year ended 30 June 2021

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 Income 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.

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