24th Mar 2006 14:56
Bank Pekao SA23 March 2006 BANK POLSKA KASA OPIEKI SPOLKA AKCYJNA Annual Consolidated Financial Statements of Bank Pekao S.A. Group for the year ended 31st December 2005 Warsaw, March 2006 TABLE OF CONTENTSConsolidated Income Statement 3Consolidated Balance Sheet 4Consolidated Statement of Changes in Equity. 5Consolidated Statement of Cash Flow.. 6Notes to the consolidated financial statements. 81. General Information. 82. Accounting Policies. 113. Purposes and rules of financial risk management. 284. Information about segments of activity. 435. Interest income and expense. 456. Fee and commission income and expense. 457. Dividend income. 468. Result on financial instruments at fair value. 469. Result on investment securities. 4710. Changes in fair value - hedge accounting. 4711. Other operating income and expenses. 4712. Overhead costs. 4813. Net impairment losses on financial assets and net provisions for guarantees and commitments. 4914. Impairment 5015. Discontinued operations. 5216. Share of profit (loss) of associates and joint venture entities valued at the equity method. 5217. Income tax. 5218. Earnings per share. 5419. Dividends paid and proposed for payment 5520. Cash and amounts due from Central Bank. 5521. Amounts due from banks. 5622. Financial assets held for trading. 5623. Derivative financial instruments. 6024. Other financial instruments at fair value through profit and loss. 6725. Loans and advances to customers. 6926. Net investments in financial leases and other lease transactions. 7027. Investment securities. 7128. Assets held for sale and liabilities associated with assets held for sale. 7829. Investments in subordinated undertakings. 7930. Intangible assets. 8231. Tangible fixed assets. 8332. Investment property. 8633. Other assets. 8734. Assets used to pledge liabilities. 8735. Amounts due to the Central Bank. 8736. Amounts due to other banks. 8837. Financial liabilities held for trading. 8838. Amounts due to customers. 8939. Debt securities in issue. 9040. Provisions. 9041. Other liabilities. 9142. Employee benefits. 9143. Contingent liabilities. 9344. Share capital 9545. Reserves, prior and current year profit 9646. Additional information for the cash flow statement 9647. Transactions with related entities. 9748. Mergers. 10149. Repo and reverse repo transactions. 10150. Company's Social Benefits Fund ("ZFSS") 10251. Acquisition of HVB shares by UniCredito Italiano S.p.A. 10252. First time adoption of International Financial Reporting Standards. 10353. Events after the balance sheet date. 112 Consolidated Income Statement as year ended as at 31 December 2005 (*)Notes 2005 2004 Interest income 5 3 871 774 3 765 843 Interest expense 5 (1 521 350) (1 550 999) Net interest income 2 350 424 2 214 844 Fee and commission income 6 1 770 087 1 719 637 Fee and commission expense 6 (183 103) (163 115) Net fee and commission income 1 586 984 1 556 522 Dividend income 7 348 9 Result on financial instruments at fair 8 64 961 55 662 value Result on investment securities 9 74 153 14 076 Foreign exchange result 265 398 289 018 Other operating income 11 284 976 307 495 Other operating expenses 11 (213 941) (258 814) Net other operating income 71 035 48 681 Net impairment losses on financial assets 13 (237 477) (354 069) and net provisions for guarantees and commitments Overhead costs 12 (2 346 404) (2 333 437) Operating profit 1 829 422 1 491 306 Share of profit (loss) of associates and 16 44 177 36 157 joint venture entities valued at the equity method Profit before income tax 1 873 599 1 527 463 Income tax expense 17 (338 747) (213 005) Net profit for the period 1 534 852 1 314 458 1. Attributable to equity holders of the 1 537 712 1 317 991 Company 2. Attributable to minority interest (2 860) (3 533) Earnings per share (in PLN per share) - basic for the period 18 9,24 7,93 - diluted for the period 18 9,23 7,93 (*)Consolidated Income Statement for 2005 and the comparative data 2004 wereprepared applying the accounting policies consistently in both the periods. Thetwo areas of IAS 39 are exemptions from this rule: estimation of impairment offinancial assets and valuation of loans and advances at amortized cost using theeffective interest method. Consolidated Balance Sheetas at 31 December 2005 year (*) as at as at Notes 31 Dec 2005 31 Dec 2004 Assets Cash and amounts due from Central Bank 20 3 574 791 3 939 275 Debt securities eligible for rediscounting at the 6 106 8 768 Central Bank Amounts due from banks 21 6 966 026 5 961 477 Financial assets held for trading 22 2 502 366 3 195 771 Derivative financial instruments 23 499 290 503 482 Other financial instruments at fair value through 24 1 781 317 1 336 721 profit or loss Loans and advances to customers 25 28 223 730 26 219 531 Net investments in financial leases 26 745 891 547 324 Investment securities 27 14 490 772 15 036 457 1. Available for sale 11 902 898 10 106 484 2. Held to maturity 2 587 874 4 929 973 Assets held for sale 28 167 366 - Investments in subordinated undertakings 29 167 814 124 662 Intangible assets 30 645 457 631 925 Tangible fixed assets 31 1 441 141 1 541 828 Investment property 32 61 259 102 869 Income taxes 17 182 180 97 769 1. Current tax assets 886 13 131 2. Deferred income tax assets 17 181 294 84 638 Other assets 33 516 450 729 488 Total assets 61 971 956 59 977 347 Liabilities Amounts due to the Central Bank 35 1 950 710 2 151 743 Amounts due to other banks 36 1 997 043 1 332 557 Financial liabilities held for trading 37 558 973 590 119 Derivative financial instruments 23 607 689 623 683 Amounts due to customers 38 46 847 877 45 821 645 Debt securities in issue 39 4 23 205 Liabilities associated with assets held for sale 28 39 663 - Current income tax liabilities 17 5 621 256 Provisions for deferred income tax 17 1 1 222 Provisions 40 108 727 349 066 Other liabilities 41 1 432 922 1 060 370 Total liabilities 53 549 230 51 953 866 Capital and reserves attributable to the Company's equity holders Share capital 44 166 482 166 482 Reserves 45 6 718 913 6 325 958 Prior and current year profits 45 1 521 895 1 512 265 Total capital and reserves attributable to the 8 407 290 8 004 705 Company's equity holders Minority interest 15 436 18 776 T o t a l e q u i t y 8 422 726 8 023 481 Total equity and liabilities 61 971 956 59 977 347 (*)Consolidated Balance Sheet as of 31st December 2005 and the comparative datawere prepared applying the accounting policies consistently in all periods. Thetwo areas of IAS 39 are exemptions from this rule: estimation of impairment offinancial assets and valuation of loans and advances at amortized cost using theeffective interest method Consolidated Statement of Changes in Equity as at 31 December 2005 year Equity attributable to equity holders of the Bank Share Reserves - of which - of which Prior and Total Minority Total capital revaluation foreign current equity interest equity reserves exchange year differences profit from translation of foreign entitiesEquity as at 1 166 122 6 206 201 (137 850) 5 091 914 221 7 286 544 21 378 7 307 922January 2004Share issues 360 23 137 - - - 23 497 - 23 497Dividend payments - - - - (747 548) (747 548) - (747 548)Profit distribution - 281 859 - - (281 859) - - -Current year net - - - - 1 317 991 1 317 991 (3 533) 1 314 458profitMerger of leasing - (309 460) - - 309 460 - - -companiesRevaluation of - 126 839 126 839 - - 126 839 - 126 839available-for-saleinvestments net ofdeferred taxRevaluation of - 4 800 - - - 4 800 - 4 800management optionsForeign exchange - (6 465) - (6 465) - (6 465) - (6 465)differences fromtranslation offoreign entitiesOther - (953) - - - (953) 931 (22)Equity as at 31 166 482 6 325 958 (11 011) (1 374) 1 512 265 8 004 705 18 776 8 023 481December 2004Adjustments related - - - - (192 460) (192 460) - (192 460)to IAS 39 adoptionEquity as at 1 166 482 6 325 958 (11 011) (1 374) 1 319 805 7 812 245 18 776 7 831 021January 2005Dividend payments - - - - (1 065 483)(1 065 483) - (1 065 483)Profit distribution - 271 900 - - (271 900) - - -Current year net - - - - 1 537 712 1 537 712 (2 860) 1 534 852profitRevaluation of - 107 867 107 867 - - 107 867 - 107 867available-for-saleinvestments net ofdeferred taxRevaluation of - 11 893 - - - 11 893 - 11 893management optionsForeign exchange - (736) (736) - (736) - (736)differences fromtranslation offoreign entitiesOther - 2 031 - - 1 761 3 792 (480) 3 312 Equity as at 31 166 482 6 718 913 96 856 (2 110) 1 521 895 8 407 290 15 436 8 422 726December 2005 Consolidated Statement of Cash Flow as at 31 December 2005 year (*) CONSOLIDATED STATEMENT OF CASH FLOW 2005 2004 Cash flow from operating activities - indirect method Net profit (loss) 1 537 712 1 317 991 Adjustments: (1 553 001) (4 213 877) Deprecition 322 891 322 761 Share of profit of associates (44 177) (36 157) Foreign exchange differences (125 405) 570 960 (Profit) loss on investing activities (81 769) (34 233) Impariment (972) 27 287 Interest and dividend (867 149) (951 797) Change in loans and advances to banks (249 270) 293 255 Change in financial assets as held for trading 248 809 (1 763 530) and other financial instruments at fair value through profit or loss Change in derivative financial instruments 4 192 (245 658) Change in loans and advances to customers (2 472 020) (1 200 904) Change in net investment in the finance lease (198 567) 33 754 Change in investment securities available for (2 608) - sale Change in tax assets (78 266) (77 007) Change in other assets 107 713 398 070 Change in amounts due to banks 463 453 (685 020) Change in liabilities as held for trading (31 146) 590 119 Change in derivative financial instruments and (15 994) 184 451 other financial liabilitiy at fair value through profit or loss Change in amounts due to customers 1 026 232 (1 470 024) Change in provisions 8 114 (43 919) Change in other liabilities 415 287 (176 140) Income tax paid (408 634) (224 374) Carrent tax 426 285 274 229 Net cash from operating activities (15 289) (2 895 886) Cash flows from investing activities Investing activity inflows 51 059 881 23 885 365 Sale of shares in subsidiaries and associates 3 400 61 540 Sale of investment securities 50 464 495 23 208 507 Proceeds from sale of intangible assets and 11 723 - tangible fixed assets Other investing inflows 580 263 615 318 Investing activity outflows (49 565 113) (20 546 601) Purchase of subsidiaries and associates (25 002) (126) Purchase of investment securities (49 278 226) (20 291 524) Purchase of intangible assets and tangible (261 885) (253 003) fixed assets Other investing outflows - (1 948) Net cash used in investing activities 1 494 768 3 338 764 Cash flows from financing activities Financing activity inflows 4 165 776 Issue of debt securities 4 142 279 Issue of normal shares - 23 497 Financing activity outflows (1 088 688) (1 380 130) Redemption of debt securities (22 479) (630 312) Dividends and other payments to shareholders (1 065 483) (747 548) Other financing outflows (726) (2 270) Net cash from financing activities (1 088 684) (1 214 354) Total net cash flow 390 795 (771 476) Net change in cash and cash equivalents 390 795 (771 476) Cash and casch equivalents at the beginning of 7 276 426 8 047 902 the period Cash and casch equivalents at the end of the 7 667 221 7 276 426 period Notes to the consolidated financial statements 1. General Information Consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union,and with respect to matters that are not regulated by the above standards, inaccordance with the requirements of the Accounting Act dated 29 September 1994(Official Journal from 2002, No. 76, item 694 with amendments) and respectivebylaws and regulations, as well as the requirements for issuers of securitiesadmitted or sought to be admitted to trading on an official stock-exchangelisting market. The consolidated financial statements of the Capital Group of Bank Pekao S.A.("Group") cover the 12 month period from 1 January 2005 to 31 December 2005 andinclude the comparatives for the period from 1 January 2004 to 31 December 2004,for the balance sheet and statement of changes in equity the previous year'sresults was also presented. Bank Pekao S.A. ("Parent entity", "Parent company""the Bank") head quartered inWarsaw, 00-950 Grzybowska Street 53/57 was entered into Commercial Register on29 October 1929 on the basis of the Regional Court in Warsaw and since then hasbeen continuously operating. The Parent entity is entered into the entrepreneurs National Court Registermanaged by the 19th Commercial Department of the Regional Court in Warsaw underthe reference number KRS 0000014843. The Parent entity statistic number is REGON 000010205. The live time of the Parent entity and other group entities are unlimited. Bank Pekao S.A. is a part of the Bank UniCredito Italiano S.p.A capital groupwith its seat in Genoa, Italy. Shares of the Bank are quoted on the Warsaw Stock Exchange. Bank Pekao S.A. is a universal commercial bank offering a wide range of bankingservices to both individual and corporate clients. Its operations aredenominated in both PLN and foreign currencies, actively participates in bothdomestic and foreign financial markets. Moreover the Group by the subsidiariesrun financial service, leasing, factoring and other investment activity. Group constituts The Group consists of The Bank Pekao SA and the following subsidiaries: Name of company Location Core activity % of Shareholder's share capital 31.12.2005 31.12.2004Bank Pekao (Ukraina) Luck, banking 100,00 100,00 Ltd. Ukraina Centralny Dom Warszawa brokerage 100,00 100,00 Maklerski Pekao S.A. Pekao Fundusz Warszawa financial 100,00 100,00 Kapitalowy Sp. z o.o. Pekao Leasing Sp. z Warszawa leasing 100,00 100,00 o.o. Pekao Faktoring Sp. z Lublin financial 100,00 100,00 o.o. Pekao Pioneer Warszawa financial 65,00 65,00 Powszechne Towarzystwo Emerytalne S.A. Drukbank Sp. z o.o. Zamosc not operating 100,00 100,00 Centrum Kart S.A. Warszawa financial support 100,00 100,00 Pekao Financial Warszawa financial services 100,00 100,00 Services Sp. z o.o. Pekao Development Sp. Warszawa real estate 100,00 100,00 z o.o. management Pekao Access Sp. z Warszawa economic advisory 55,26 55,26 o.o. services BDK Consulting Sp. z Luck, consulting, hotel and 99,99 99,99 o.o. Ukraina transport services Fabryka Maszyn Sp. z Janow Machinery and 86,68 86,68 o.o. Lubelski equipment manufacturing Pekao Immobililier Paryz, real estate 100,00 100,00 s.a.r.l. Francja Nowe Ogrody Sp. z o.o. Gdansk real estate 98,00 98,00 management and sale The Group of the Bank Pekao SA owns the following affiliated entities andjoint-ventures: Name of company Location Core activity %of votes on the Shareholder's equity* 31.12.2005 31.12.2004 Associates Central Poland Fund LLC Wilmington, Financial brokerage 53,19 53,19 Dalawere, USA Xelion. Doradcy Warszawa Supporting, financial 50,00 50,00 Finansowi Sp. z o.o. and insurance Pioneer Pekao Warszawa Financial brokerage 49,00 49,00 Investment Management S.A. Krajowa Izba Warszawa Clearing house 22,96 22,96 Rozliczeniowa S.A. Hotel Jan III Sobieski Warszawa Hotels 37,50 37,50 Sp. z o.o. Fabryka Sprzetu Czarnkow Ship equipment 23,81 23,81 Okretowego manufacturing "Meblomor" S.A. CPF Management Tortola, Financial brokerage 40,00 40,00 British Virgin Islands Pracownicze Towarzystwo Warszawa PTE management 39,56 39,56 Emerytalne "Nowy Swiat" S.A. Joint - Ventures Anica System S.A. Lublin IT 33,84 / 33,84 / 13,49 13,49 * presented in case when votes on shareholder equity are unequal with votes onshare capital As of 31st December 2005 The Group controls over 50% of votes/potential voting rights in the CentralPoland Fund LLC. In Group's opinion, it does not control the entity due to theprovisions in this company's articles of association. The Group controls over 50% of votes in Xelion Doradcy Finansowi Sp. z o.o.entity. Due to the provisions in this company's articles of association thisentity constitutes Group's investment - an associate entity. As of 31 December 2004 year Group was in possession of 24. 60% of shares atGrupa Inwestycyjna Nywig S.A. Shares were sold in December 2005 year. Members of the Management Board of Bank Pekao S.A. 31.12.2005 31.12.2004 1. Jan Krzysztof Bielecki 1. Jan Krzysztof Bielecki President, CEO President, CEO 2. Luigi Lovaglio 2. Luigi Lovaglio Deputy President , COO Deputy President, COO 3. Sabina Olton 3. Sabina Olton Deputy President Deputy President Chief Accountant Chief Accountant 4. Przemyslaw Figarski 4. Przemyslaw Figarski Member of the Management Member of the Management Board Board 5. Irene Grzybowski 5. Irene Grzybowski Member of the Management Member of the Management Board Board 6. Paolo Iannone 6. Paolo Iannone Member of the Management Member of the Management Board Board 7. Christopher Kosmider 7. Christopher Kosmider Member of the Management Member of the Management Board Board 8. Marian Wazynski 8. Marian Wazynski Member of the Management Member of the Management Board Board During the period covered by the financial statements there were no changes inthe Management Board of the Bank Members of the Supervisory Board of Bank Pekao S.A. 31.12.2005 31.12.2004 1. Jerzy Woznicki 1. Alessandro Profumo Chairman Chairman 2. Paolo Fiorentino 2. Paolo Fiorentino Deputy Chairman, Secretary Deputy Chairman, Secretary 3. Andrea Moneta 3. Jerzy Woznicki Deputy Chairman Deputy Chairman 4. Pawel Dangel 4. Pawel Dangel 5. Fausto Galmarini 5. Fausto Galmarini 6. Oliver Greene 6. Oliver Greene 7. Enrico Pavoni 7. Enrico Pavoni 8. Leszek Pawlowicz 8. Leszek Pawlowicz 9. Jerzy Starak 9. Jerzy Starak During the period from 01.01 2005 till the day of publication there were changesin the Management Board of the Bank: • on 19.01.2004 Alessandro Profumo submitted his resignation as Chairmanof the Supervisory Board effective, • as of 20.01.2005 r. Jerzy Woznicki vice Chairman of the SupervisoryBoard was appointed to the post of Chairman of the Supervisory Board of Bank, • as of 20.01.2005 r. Andrea Moneta was appointed as a Member and ViceChairman of the Supervisory Board.. Continuity of activities (going concern) The financial statements for the year 2005 were prepared on the basis of theassumption that the Group will continue its business operations, in a scope thatwill not be substantially limited, during a period not shorter than one yearfrom the balance sheet date. As at the date of signing the financial statements,the Management Board of the Bank is not aware of any facts or circumstances thatwould indicate a threat to the Bank's continued activity in at least the twelvemonths following the balance sheet date due to an intended or compulsorywithdrawal from or limitation in its activities. Approval of the financial report This financial report was approved by the Board of the Bank for publishing in 21march 2006 year. 2. Accounting Policies 2.1. Statement of Compliance Consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union,and in respect to matters that are not regulated by the above standards, inaccordance with the requirements of the Accounting Act dated 29 September 1994(Official Journal from 2002, No. 76, item 694 with amendments) and respectivebylaws and regulations, as well as the requirements for issuers of securitiesadmitted or sought to be admitted to trading on an official stock-exchangelisting market. 2.2. Basis of preparation of consolidated financial statement 31.12.2005 is the close of the first full accounting period in which the CapitalGroup of the Bank is obliged to present its annual financial report incompliance with International Financial Reporting Standards as adopted by theEuropean Union. The date of adoption of IFRS is the date of the opening balance sheet of theearliest of the periods presented, i.e. January 1st, 2004. Previously publishedfinancial statements of the Bank and Group, along with statements for 2004, wereprepared in accordance with the Polish Accounting Standards (PAS).Reconciliations of equity as at 1st January 2004, 31st December 2004 and 1stJanuary 2005 as well as net profit ended 31st December 2004 prepared inaccordance with PAS and IFRS, are presented in Note 52. The Group applied the same accounting policies in preparing the opening balancesheet according to IFRS for January 1st, 2004, and throughout all presentedperiods. Accounting policies applied are compliant with provisions of each IFRSin force as of December 31st, 2005, i.e. on the reporting date, apart from theexemptions allowed by IFRS. • Combining business units (IFRS 1.15, Appendix B). The Group has taken advantage of the exemption related to combining of businessunits. Therefore, the Group did not apply IFRS 3 in relation to business unitscombinations implemented before the date of moving to IFRS, i.e. by January 1st,2004 • Fair value or re-valuation as deemed cost (IFRS 1.16-19). Taking advantage of the exemption allowed by IFRS 1, the Group has measuredselected items of tangible fixed assets at the fair value as of the date ofadopting the IFRS, and used that fair value as deemed cost at that date. • Cumulated differences due to foreign currency recalculation (IFRS1.21-22). Taking advantage of the exemption allowed by IFRS 1, the Group assumed thataccumulated differences due to foreign currency translation for units operatingabroad have zero value for the day of adopting IFRS. • Designation of previously recognized financial instruments (IFRS1.25A). The Group performed the designation of financial instruments as assets orfinancial liabilities reported at fair value through profit and loss account oras available for sale for the date of adoption of IFRS, i.e. in the case of IAS39 - for January 1, 2005. • Share-based payment transactions (IFRS 1.25B). The Group applied the standard of IFRS 2 with reference to the equityinstruments that were granted after 7 November, 2002, if such equity instrumentswere not vested before 1 January, 2005. Additionally, the Group used the exemption from the requirement of restatingcomparatives regarding IAS 32, IAS 39. For these standards, the date ofmigration to IFRS is January 1st, 2005. Comparatives pertaining to thosestandards are prepared using previously applied accounting policies. The Group financial statements include all International Accounting Standards,International Financial Reporting Standards and related Interpretations, exceptfor the Standards and Interpretations described below, having influence onBank's financial statements which will be subject to the approval of theEuropean Union, as well as Standards and Interpretations which have beenapproved by the European Union, but are not in force. The Group has not elected to early adopt any new Standards and Interpretations,which have been published and approved by the European Union, and which will beeffective after the balance sheet date. Moreover, as of the balance sheet datethe Group has not completed the assessment of the possible impact of theStandards and Interpretations, which will be effective after the balance sheetdate, on the Group consolidated financial statements for the period of initialapplication.Awaiting EU endorsement Issued / Revised / Amended (effective date) Amendment to IAS 1 Capital Disclosures August 2005 (Effective 1January 2007) Amendments to IAS 39 and IFRS 4: Financial August 2005 (Effective 1 January Guarantee Contracts 2006) IFRS 7 Financial Instruments: Disclosures August 2005 (Effective 1 January 2007) IFRIC 6 Liabilities arising from Participating September 2005 (Effective 1 in a Specific Market-Waste Electrical and December 2005) Electronic Equipment Endorsed but not yet effective Amendments to IAS 19 Employee Benefits - December 2004 (Mandatory Actuarial Gains and Losses, Group Plans and requirements effective 1 January Disclosures (including consequential amendments 2006) to IAS 1, IAS 24 and IFRS 1) Financial Instruments: Recognition and April 2005 (Effective 1 January Measurement - Cash Flow Hedge Accounting of 2006) Forecast Intragroup Transactions Amendments to IAS 39 June 2005 (Effective 1 January 2006) Financial Instruments: Recognition and Measurement - The Fair Value Option (including consequential amendments to IAS 32 and IFRS 1 IFRIC 4 Determining whether an Arrangement December 2004 (Effective 1 JanuaryContains a Lease (including consequential 2006) amendments to IFRS 1) IFRIC 5 Rights to Interests arising from December 2004 (Effective 1 JanuaryDecommissioning, Restoration and Environmental 2006) Rehabilitation Funds (including consequential amendments to IAS 39) The consolidated financial statements are prepared in accordance with thehistorical cost method, except for derivative financial instruments, financialassets available for sale, and financial assets at fair value through profit orloss, which are measured at fair value. The consolidated financial statements are presented in Polish Zloty, and allamounts, unless indicated otherwise, are stated in thousands (PLN thousand). 2.3. Consolidation policies The consolidated financial statements include the financial statements of BankPekao S.A. and financial statements of its subsidiaries, prepared for December31st, 2005. Financial statements of subsidiaries are prepared for the samereporting date as the statements of the parent company. All balances and transactions between entities in the Group, includingunrealized profits resulting from transactions within the Group, have been fullyeliminated. Unrealized losses are also eliminated, unless they provide proof ofpermanent impairment, which should be taken into account in the consolidatedfinancial statements Subsidiaries are consolidated in the period from the date of the Group's takingcontrol, until that control ceases . Subsidiaries investment Subsidiaries are entities in which the Bank directly and indirectly has a suchcontrol. The control is ability to manage financial and operating policies inorder to gain economic profits. Control basically is involved with larger numberof votes in governing bodies. The subsidiaries are consolidated in period fromthe date of the Group's taking control, until the date that control ceases. For the date of taking control subsidiaries, assets and liabilities are measuredin fair value. Surplus deemed cost over fair value purchased net assets isindicate as goodwill. If deemed cost is lower than fair value net assets ofsubsidiaries the different recognized in profit and loss account. Associates Associated entities are entities in which the Group has significant influenceand are not subsidiaries or joint venture entities. The Group usually determinessignificant influence by possession of 20 to 50 % of the total number of votesin governing bodies. Financial statements of an associate entity are the basis for the valuation ofshares held by the group using the equity method. Balance sheet dates of theassociates and of the Group are identical, and both entities apply coherentaccounting policies. An investment in an associate entity is presented in the balance sheet at costplus subsequent changes in the Group's share in the net assets of the entity,minus any impairment write-offs. The profit and loss account reflects the sharein the results of activities of the associate entity. In the case of a changerecognized directly in the equity of the associate entity, the Group recognizesits share in each change and discloses it, if appropriate, in the statement ofchanges in equity. Any distributions by an associate are deducted from thecarrying value of the investment in associate. When the share of the Group in the losses of the associate becomes equal orlarger than the share of the Group in such associate entity, the Groupdiscontinues recognition of further losses, unless it incurred an obligation ormade a payment on behalf of the associate. Unrealized profits and losses on transactions between the Group and itsassociate entities are eliminated in proportion with the Group's shares inassociates. Participation in joint ventures The Group's participation in joint ventures is recognized using the equitymethod, in accordance with the principles described for investments in associateentities. 2.4. Accounting estimates and judgement applying accounting polices Preparing financial statements in accordance with IFRS requires the ManagementBoard of the Bank to make certain estimates and to adopt certain assumptions,which affect the amounts presented in the financial statements and inexplanatory notes. The estimates which were made as of the date of migration to IFRS, i.e. forJanuary 1st, 2004, and for each balance sheet date, reflect the conditions whichexisted at those dates (e.g. market prices, interest rates, foreign exchangerates). While the estimates are based on the best knowledge regarding currentconditions and activities which the Group will undertake, the actual results maydiffer from such estimates. Principal assumptions/subjective judgments adopted in making estimates by theGroup pertain, primarily, to: • Impairment of financial assets The assumptions presented herein, regarding measurement of impairment of creditand loans are described in this note, in the part titled "Impairment offinancial assets". • Impairment of other non-current assets For each balance sheet date, the Group reviews its assets for indications ofimpairment. Where such indications exist, the Group makes a formal estimation ofthe recoverable value. In the event of the carrying value of a given asset beingin excess of its recoverable value, its impairment is stated, and a write-off ismade to adjust its value to the level of recoverable value. Recoverable value is the lower of the following two values: fair value of thegiven asset or cash generating unit less costs of disposal, or the value in use,determined for each asset separately. If there are indications of impairment of common property, i.e. assets which donot generate cash independently from other assets or groups of assets, and therecoverable value of the individual asset included among common property cannotbe determined, the Group determines the recoverable value at the level of thecash generating unit, to which the given asset belongs. Estimation of value-in-use of a non-current asset (or cash generating unit)requires assumptions to be adopted, regarding, among others, future cash flows,which the Group may obtain from the given non-current asset (or cash generatingunit), any changes of amounts or times of occurrence of these cash flows, andother factors such as lack of liquidity. Adoption of different measurementassumption could affect the carrying value of some of the investments. • Measurement of derivatives and debentures available for sale that donot have a quoted market price The fair value of non-optional derivatives and debentures available for salethat do not have a quoted market price on an active market are measured usingvaluation models based on discounted cash flows. Options are valued using optionvaluation models. Variables used for the valuation include, where possible, datafrom observable markets. However, the Group also adopts assumptions which affectthe valuation of instruments. Adoption of a different measurement assumptioncould affect the carrying value of financial instruments. • Measurements of management options The assumptions adopted, regarding measurement of management options, aredescribed in position of "employment benefits". • Calculation of retirement and sick pension severance paymentsprovision The severance payments provision is determined on an individual basis,separately for each employee. The reserve is valuated on the basis of thecurrent value of future, long-term liabilities of the Bank for retirement andsick pension severance payments. The basis for the calculation of a provision for an employee is the expectedamount of retirement or pension severance pay which the Bank undertakes to payunder the Group Bargaining Agreement (GBA). The expected severance pay amount iscalculated as the product of the following factors: • expected amount of the basis of calculation of severance pay, inaccordance with provisions of the GBA, • expected increase of the calculation basis until the retirement age, • percentage factor depending on the amount of years of employment, inaccordance with the GBA. The amount calculated as above is discounted using an actuarial technique. Thediscounted amount is reduced by amounts of annual reserve write-offs actuariallydiscounted for the same date, which the Bank effects in order to increase theemployee's provision. Amounts of annual write-offs are calculated using the projected unit creditmethod. Actuarial discount is the product of the financial discount and of theprobability of the given person's reaching retirement age as an employee of theBank. The probability mentioned above has been determined using the competing risksmethod, with the following risks taken into account: • possibility of abandoning employment, • risk of complete disability for work, • risk of death. 2.5. Valuation of the foreign currency items • The functional currency and the presentation's currency The items contained in presentations of particular units of the Group, includingthe Bank's branch in Paris, are priced in the functional currency, i.e. in thecurrency of the basic economic environment in which a given entity operates. The consolidated financial report is presented in Polish Zloty. The Zloty is thefunctional currency and the presentation currency of the parent business entity. As the closing exchange rate, the Group adopted the average NBP exchange rate asof the balance sheet date. • Transactions and balances Transactions expressed in foreign currency are translated into the functionalcurrency by applying the exchange rate at the date of the transaction. Exchangerate profits and losses due to settlements of these transactions and to thebalance sheet valuation of assets and monetary commitments expressed in foreigncurrency are accounted for in the profit and loss account. Exchange rate differences due to non-monetary items, such as equity instrumentsclassified to financial assets designated for fair value valuation through theprofit and loss account, are accounted for together with changes in the fairvalue of the profit and loss account. Exchange rate differences due to non-monetary items, such as equity instrumentsclassified to financial assets available for sale, are included in therevaluation reserve update. • Companies of the Group At consolidation, assets and liabilities of foreign business entities aretranslated into the Polish currency, i.e. to the presentation currency, as perthe closing exchange rate for the balance sheet date. Revenues and costs in theprofit and loss account are recalculated as per average exchange ratescalculated on the basis of the exchange rates from particular days of thereporting period, except for the situations when exchange rates fluctuatesignificantly and the average exchange rate is not an acceptable approximationof the exchange rate from the transaction date. In such a situation, income andcosts are translated on the basis of the exchange rate from the date oftransaction. The data recognized in financial statements of: the Bank's Paris branch, and ofthe Bank Pekao (Ukraine) subsidiary are converted into PLN from the functionalcurrencies of these entities, using the following exchange rates: • for conversion of balance sheet items, average exchange ratesannounced by the National Bank of Poland which were:+-----------------+--------------+-----------------+| | 31.12.2005 | 31.12.2004 |+-----------------+--------------+-----------------+|PLN for 1 UAH | 0,6465| 0,5642|+-----------------+--------------+-----------------+|PLN for 1 EUR | 3,8598| 4,0790|+-----------------+--------------+-----------------+ • for conversion of profit and loss account items, arithmetic meanswere used of average exchange rates on the last day of each ended month for 12months of 2005 and 2004, which were:+-----------------+--------------+-----------------+| | 2005 | 2004 |+-----------------+--------------+-----------------+|PLN for 1 UAH | 0,6386| 0,6835|+-----------------+--------------+-----------------+|PLN for 1 EUR | 4,0233| 4,5182|+-----------------+--------------+-----------------+ The foreign exchange differences from the valuation of foreign entities areaccounted for as a separate component of equity. During the sale of a business entity conducting operations abroad, such exchangerate differences are recognized in the profit and loss account as part of profitor loss on sales. The goodwill arising on acquisition of the entity operating abroad, as well asany adjustments of the balance sheet value of assets and liabilities to fairvalue, arising on acquisition of the entity operating abroad, are treated asassets and liabilities of an overseas entity, i.e. they are expressed in thefunctional currency of the overseas entity and translated at the closingexchange rate, as described above. 2.6. Valuation of the net income Interest income and expense The Group recognizes interest income and expense related to financialinstruments measured at amortized cost using the effective interest rate method.Also, interest income on financial assets available for sale is recognized usingthe effective interest method. The effective interest rate is the rate which exactly discounts the estimatedfuture cash inflows and payments made in the expected period until expiry of thefinancial instrument, and in a shorter period where justified, to the netcarrying value of the financial asset or liability. The calculation of theeffective interest rate includes all commissions paid and received by parties tothe agreement, points which are an integral part of the effective interest rate,transaction costs, and all other premiums and discounts. The interest income contains interest itself, as well as commissions received ordue for credits, inter-bank deposits, and securities held-to-maturity andavailable for sale, recorded in calculation of the effective interest rate. Upon finding an impairment of a financial asset measured at amortized cost andfinancial assets available for sale, interest income is still recognized in theprofit and loss account, but is calculated from the newly determined fair valueof the financial instrument (from the new, lower value of the instrument, (i.e.value decreased by the revaluation write-off). For the calculation of interestincome on the newly determined fair value, that interest rate is used, accordingto which future cash flows were discounted for the purpose of impairmentmeasurement. Costs of the reporting period applicable to payables due to interest on customeraccounts and to commitments for issuing the Group's securities are accounted forin the profit and loss account using the effective interest rate Fee and commissions income Commission income and costs received from banking operations on client accounts,from operations on payment cards, as well as from brokerage, factoring andselling operations are recognized as revenue at the time the service isrendered, other fees and commissions are deferred and recognized as revenue overtime. The Group recognizes two basic types of commissions related to creditoperations: - preparing fees and commissions; - commitment fees. Commitment fees are recognized on the accrual basis throughout the life of thefacility they relate to. In case of loans and advances without a defined repayment schedule and withoutan interest rate changes schedule (e.g. overdraft facilities and credit cardproducts commissions) are recorded over time throughout the life of thefacility, using the straight line method. Foreign exchange result Foreign exchange result is calculated taking into account foreign exchange gainsand losses, both realised and unrealised, arising from daily valuation of assetsand liabilities denominated in foreign currencies and recorded under foreignexchange income and cost. The exchange rate used for valuation of a givenforeign currency used for valuation is the average exchange rate set by thePresident of NBP on the balance sheet day. The foreign exchange result also includes the exchange differences resultingfrom valuation of net investments in foreign entities on the date of sale of thegiven investment. Until the date of sale, foreign exchange differences arisingfrom valuation of net assets in a foreign entity are recognised as a separatecomponent of equity. Other operating income and expenses Other operating income include mainly gains realized on sale/liquidation ofitems of fixed assets and assets repossessed for debt, amounts of uncollectibledebts recovered, amounts of received damages, penalties, fines, income on rentalof real estate, write backs of provisions for court litigations and repossessedassets. Other operating costs comprise primarily: the costs of sold orliquidated tangible fixed assets and assets seized for debts; debt collectioncosts; provisions for receivables under dispute and assets seized for debts anddonations. 2.7. Valuation of the assets and financial liabilities, derivatives contracts Financial assets Financial assets are classified in the following categories: • financial assets valued at fair value through the profit and loss This category comprises two sub-categories: financial assets held for tradingand financial assets designated at initial recognition for fair value valuationthrough the profit and loss. Financial assets held for trading include in particular: debt and equitysecurities, loans, and receivables purchased or classified here with the aim ofselling in the short term. The Group also classifies derivative instrumentshere. • held-to-maturity. These are financial assets of identified or identifiable payment terms and duedates, that were purchased with the aim of holding them until their due date andthe Group intends and has the ability to hold them until that date. The financial assets of that category are valued at amortized cost using theeffective interest rate. Recognition of amortized cost, taking into account theeffective interest rate, is recorded in interest income. • loans and receivables Loans and receivables are financial assets not quoted on the active market,characterized by payments that are constant or identifiable, other thanderivative instruments. This category contains both the debt securities boughtfrom the issuer, for which there is no active market, credits, loans and otherreceivables received and granted. Loans and receivables are measured atamortized cost, using effective interest rate and considering impairment. • available for sale These are the financial assets with a non-defined holding period. The portfoliois composed of debt and equity securities, as well as loans and receivables notaccounted for in other categories. Interest on assets available for sale iscalculated using the effective interest rate method and accounted for in theprofit and loss account. Financial assets available for sale are measured at fair value, and profits andlosses resulting from a change of fair value in relation to amortized cost arecharged to the revaluation reserve. The revaluation reserve item is carried tothe profit and loss account upon sale of asset or its impairment. In the eventof impairment of the asset, previously recognized surpluses from fair valuemeasurement decrease the "Revaluation reserve". If the amount of previouslyrecognized increases is insufficient to cover permanent impairment, thedifference is charged to the profit and loss account, under the heading "Reservewrite-offs and revaluation". Dividends due to equity instruments are accounted for in the profit and lossaccount at the moment of establishing the entity's right to receive payments. Standardized purchase and sale transactions of financial assets valued at fairvalue through the profit and loss statement, held for trading (with theexclusion of derivative instruments), held to maturity and available for saleare recognized and excluded from the books by the Group on the day of thetransaction settlement, i.e. the day of the receipt or delivery of the asset. Changes in the fair value of the asset to be received between the date of thetransaction and the date of the settlement are recognized in the same way, asfor the possessed asset. Loans are recognized at the time of disbursement to the debtor. Derivative instruments are recognized or excluded from the books at the date ofthe transaction. Impairment of financial assets For each balance sheet date, the Group assesses, whether there is objectiveevidence of impairment of a given financial asset or of a group of such assets.Impairment of a financial asset or of a group of financial assets was incurredonly if there is objective evidence for the impairment due to events thatfollowed the initial recording of the specific asset ("the loss event"), andwhen the events affect the expected cash flows regarding these assets, and theflows may be estimated in a reliable way. The objective evidence for impairment of financial assets includes - as per theGroup's principles - information on the following loss events: • substantial financial problems of the issuer or debtor; • failure to keep to the contract terms, e.g. failing to repay or delayin repayment interest or part of capital; • the Group's granting concessions or privileges to the debtor, foreconomic and legal reasons following financial problems of the debtor, which inother circumstances would not be taken into account; • high probability of bankruptcy or of another financial reorganizationof the debtor; • disappearance of the active market for the particular financial assetsdue to financial difficulties. • observable data indicating a measurable decrease in the estimatedfuture cash flows from a group of financial assets since the initial recognitionof those assets, although the decrease cannot yet be identified with theindividual financial assets in the group, including: - adverse changes in the payment status of borrowers in the group or - national or local economic conditions that correlate with defaults on theassets in the group. The Group classifies credit receivables by size of engagement, into theindividual and group portfolios. In the individual portfolio, each particular credit exposure is subjected to animpairment test. If there is objective evidence of impairment, the carryingamount of the receivable is reduced. If for a given exposure no objectiveevidence of impairment exists, the exposure is included in the credit portfoliosubject to group assessment. In a group portfolio, groups of similar credit risk characteristics areidentified, which are then assessed collectively for the impairment. If there is any objective evidence of impairment of financial assets classifiedas loans and receivables, or as investments held-to-maturity, then the amount ofthe impairment is the difference between the carrying amount of an asset and thecurrent value of estimated future cash flows (excluding future credit lossesthat were not incurred), discounted using an original effective interest rateestablished with the initial recognition of a given financial asset. Thecarrying amount of the asset is then reduced through use of the allowanceaccount, and the amount of loss is recognized in the profit and loss account. Calculation of the present value of estimated cash flows related to the impairedcollateralized financial asset also takes into consideration the cash flowsresulting from the liquidation of the collateral reduced by the costs ofrepossession and disposal. Expected future cash flows related to the group of financial assets forimpairment on a group basis are estimated on the basis of the historical cashrecoveries recorded for assets of similar risk characteristics. Historical parameters of recoveries are adjusted on the basis of the data comingfrom current observations, so as to take into consideration the influence ofcurrent conditions and to exclude the influencing factors in the historicalperiod, that are not presently valid. If in the next period the amount of impairment is lower due to an event takingplace after the impairment (e.g. an improvement in the debtor's credit rating),then the reduction of impairment is reversed through an appropriate adjustmentof an amount on the allowance account. The amount of the reversal is recognizedin the profit and loss account. Sale and re-purchase agreements Repo and reverse-repo transactions, as well as sell-buy back and buy-sell backtransactions, are security sale or purchase operations with promise ofrepurchase or resale at an agreed date and price. Sales transactions with the repurchase promise granted (repo and sell-buy back)are recorded, at the transaction date, in payables to other banks or in payablesto customers due to deposits, depending on the transaction's contractor. Thepurchased securities with the resale promise granted (reverse-repo andbuy-sell back) are recorded as receivables from banks or as credits and loansgranted to customers, depending on the transaction's contractor. The difference between the selling and buying price is treated as interestexpense/income, respectively, and accounted for over the duration of thecontract, using the effective interest rate. Borrowed securities by Bank are not included in financial statements and lentsecurities to other entities are included in financial statements. Derivative instruments The Group conducts operations in derivative financial instruments: currencytransactions (spot, forward, currency swap, and currency options), exchange ratetransactions (FRA, IRS), derivative transactions based on securities prices,exchange rates and stocks indices. Companies of the Group do not apply hedgeaccounting, therefore, all the above mentioned instruments are classified to thetrading portfolio. Derivative financial instruments are initially recorded atfair value as of the transaction date, and subsequently valued to the fairvalue. The fair value is established on the basis of quotations of theinstruments in active markets, including prices of recent transactions, as wellas on the basis of valuation techniques, including the models based ondiscounted cash flows and options valuation models, depending on which of thevaluation models is appropriate. Positive valuation of derivative financialinstruments is presented in the balance sheet in the item of "Derivativefinancial instruments" on assets side, and on the liabilities side, if the fairvalue is negative. Changes in the financial instruments valuation to fair valueare reflected in the profit and loss account. In case of purchasing a financial instrument which has embedded derivativecomponent, the whole or part of cash flows related to such a financialinstrument changes in the way similar to what would be the case with theembedded derivative instrument on its own. The embedded derivative instrument isreported separately from the basic contract. This happens when the followingconditions are met jointly: • the financial instrument is not included in assets for trading or inassets designated for fair value valuation through the profit and loss account,whose revaluation results are reflected in financial income or cost of thereporting period, • the nature of the embedded instrument and the related risks are notclosely tied to the nature of the basic contract and to the risks resulting fromthere, • a separate instrument, whose characteristics correspond to thefeatures of the embedded derivative instrument, would meet the definition of thederivative instrument, • it is possible to reliably establish the fair value of the embeddedderivative instrument. In case of contracts that are not financial instruments with a component of aninstrument meeting the above conditions, the built-in derivative instrument isclassified in accordance with assets or liabilities of derivatives financialinstruments with respect to profit and loss account in harmony of derivativefinancial instruments valuation. Financial Liabilities The Groups's financial liabilities are classified to the followings category: • financial liabilities at fair value through profit and loss carried atfair value • financial liabilities not at fair value through profit and loss arecarried at amortised cost using the effective interest rate. Financial liabilities not at fair value throught profit and loss consist ofamounts due to banks and customers, loans from other banks own debts securitiesissued. Derecognition of financial instruments A financial instrument is derecognized when the law agreements of cash flowsexpires or the Bank transfers all the advantages and risk of particularfinancial instrument to other entity. Most often, the Bank derecognizes loans in the event of: - discontinuation of execution proceeding, - death of borrower, - conclusion of bankruptcy procedures, - unconditional cancellation of a part of the loan. 2.8. Valuation of other balance sheet position Intangible assets Intangible assets are deemed to include assets which fulfil the followingrequirements: - they can be separated from an economic entity and sold, transferred, licensedor granted for use for a fee to third parties, both separately, and togetherwith their accompanying contracts, assets or liabilities, or - arise from contractual titles or other legal titles, irrespective of whetherthose are transferable or separable from the business entity or other rights andobligations. Goodwill Goodwill on acquisition of a business entity is initially recognized at cost,which is the surplus of the costs of merger of business entities over the shareof the acquiring entity in the net fair value of identifiable assets,liabilities, and contingent liabilities. After the initial recognition, goodwillis presented at cost less all accumulated impairment write-offs. The test forimpairment is conducted annually. The carrying value of goodwill in the openingbalance sheet according to IFRS, i.e. for January 1st, 2004 was established atthe value recognized using previously applied principles, taking into accountIFRS 1 requirements, which included its subjection to the impairment review. Goodwill on acquisition of subsidiaries is presented among intangible assets,and goodwill on acquisition of associates is presented under the heading"Investments in associates". As of the date of acquisition, the acquired goodwill is allocated to each of thecash generating units, which may benefit from the synergies of merger.Impairment is determined by estimating the recoverable value of the cashgenerating unit to which the given goodwill pertains. In the event of therecoverable value of the cash generating unit being less than the carryingvalue, an impairment write-off is made. If the goodwill is a part of the cashgenerating unit, and a part of activity of that unit is sold, then in measuringthe profit or loss on selling such activity, goodwill related to the activitysold is included in the carrying value of the sold part of activity. Goodwillsold in such circumstances is measured on the basis of the relative value of theactivity sold, and the value of the remaining part of the cash generating unit. Other intangible assets Intangible assets are assets controlled by the Group, which do not have aphysical form, which are identifiable and represent future economic benefits forthe Group, directly attributable to such assets. These are mainly: • computer software licenses, • copyrights, • costs of completed development work. Intangibles acquired in a separate transaction are recognized at cost.Intangibles acquired in transactions of acquisition of a business entity arerecognized at fair value as of the date of acquisition. After initialrecognition, this category of intangibles is treated using the historic costmodel. The useful life of intangible assets is assessed and considered to belimited or indefinite. In the case of amortization being calculated from assetswith limited useful life, such costs are indicated in the profit and lossaccount under the heading "Overheads". Amortization write-offs are not made forintangible assets with indefinite useful life. With the exception of development costs, intangible assets generated by theGroup on its own resources are not recognized in assets, and outlays incurredfor their generation are recognized in the profit and loss account for the yearin which they were incurred. As regards intangible assets with limited useful life, the Group makes ajudgment as to whether there are indications of their impairment. Where it isfound that such indications exist, the Group estimates the recoverable value ofsuch intangible assets and make impairment. Useful lives are also subject toreview annually, and where necessary, adjusted starting from the next financialyear. In the case of intangible assets of an indefinite useful life and investments ontangible assets, the Group performs, on an annual basis, a test for impairment,irrespective of whether there are indications of impairment. The research costs are charged to the profit and loss account at the time whenthey are incurred. Outlays for development work performed within the givenproject are carried forward to the next period, if it can be acknowledged thatthey will be recovered in the future. After the initial recognition of outlaysfor development work, the historic cost model is applied, which requires thatassets be recognized at cost less accumulated amortization and accumulatedimpairment write-offs. All outlays carried forward to the next period areamortized throughout the expected period of obtaining profits from selling thegiven project. Costs of development work are reviewed for any impairment on an annual basis -if an asset has not yet been commissioned, or more often - when during areporting period indications of impairment appear, indicating that theircarrying value may not be recoverable. Loss or profit due to derecognition of intangible assets are measured as thedifference between the net sales income and carrying value of the given asset,and are recognized in the profit and loss account upon derecognition of theasset. Tangible fixed assets Tangible fixed assets are the controlled fixed assets and outlays made to buildsuch assets. Tangible fixed assets include fixed assets with an expected periodof use above one year, maintained to be used to serve the Group's needs or to betransferred to other entities, based on the lease contract or for administrativepurposes. Tangible fixed assets are recorded at historical costs reduced by depreciation/amortization and impairment write-downs. The historical costs are made up of thepurchase price/cost of creation, and costs directly related to the purchase ofassets. Each component part of property, plant and equipment items, whose purchasingprice or generation cost is material in comparison with the purchasing price orgeneration cost of the entire item, is depreciated separately. The Groupallocates the initial value of the property, plant and equipment items into itssignificant parts. Costs of modernization of property, plant and equipment increase their carryingvalue or are recognized as a separate item of property, plant and equipment onlywhen it is probable that such expenditures will ensue with an inflow of economicbenefits to the Group, and the cost of such expenses can be reliably measured. The cost of external financing for the purchase or construction of fixed assetsis recognized as a cost in the period in which it is incurred. Depreciation and amortization charge Depreciation charge of tangible fixed assets and amortization charge ofintangible fixed assets is applied using the straight line method, using defineddepreciation rates throughout the period of their useful lives. Depreciationrates defined for balance sheet purposes are periodically verified, with resultsof verification effective starting from the year following the year ofverification. Fixed assets and intangible assets for tax purposes aredepreciated in compliance with tax regulations. Balance sheet depreciation and amortization rates applied to the basic groups offixed assets, and to intangible assets, are as follows: a/ depreciation rates used for fixed assetsBuildings; cooperative ownership right to an 1,5 % - 10,0% apartment, cooperative right to non-residential property Technical equipment and machines 2,5% - 30,0 % Means of transport 12,5% - 20,0% b/ amortization rates for intangible assetsSoftware licenses, copyrights 14,0% - 50,0% Costs of completed development works 33,3 % Know-how and other intangible assets 20,0% c/ depreciation rates for investment propertiesBuildings 1,5% - 10% Assets that are not depreciated include land, fixed assets and intangibles underconstruction and certain intangible assets. Depreciation and amortization value increases the overhead costs of the Group'soperations, while the write-off for impairment is included in other operatingcosts. Investment properties Initially, investment property assets are recognized at cost, including thetransaction costs. After the initial entry, investment property assets aremeasured in accordance with requirements of the purchasing price model. Investment property assets are derecognized when disposed of, or in the case ofpermanent decommissioning of a property, when no further benefits from its saleare expected. Any profits or losses due to derecognition of an investmentproperty are charged to the profit and loss account in the period in which suchderecognition occurred. Non-current assets held for sale Non-current assets held for sale include assets whose carrying value is to berecovered by way of their resale, and not in their continued use. Only thoseassets are classified as held for sale that are available for immediate sale intheir present condition, whose sale is highly probable, i.e. the decision hasbeen made to fulfil the plan of selling the given asset, an active programme hasbeen launched to find a buyer and to complete the selling plan. Also, such anasset is offered for sale at a price which is rational in reference to itspresent fair value, and it is expected that the sale will be treated as salecompleted within one year from the date of the asset's classification in thiscategory. Non-current assets held for sale are recognized at the lower of carrying valueand fair value less the costs of selling such assets. For assets classified inthis category, depreciation is not applied. Leases The Group is a party to lease contracts, on the basis of which it grants forpaid use non-current assets or intangible assets for an agreed period of time. The Group is also a party to lease contracts, under which it takes for paid useor drawing benefits another party's non-current assets or intangible assets foran agreed period. Operating lease In the case of lease contracts, which result in transferring substantially allthe risks and rewards incident to ownership of the asset under lease, thesubject of lease is derecognized. A receivable amount is recognized, however, inthe amount equal to the present value of minimum lease payments. Lease paymentsare divided into financial income and reduction of the balance of receivables insuch way as to enable reaching a fixed rate of return from the outstandingreceivables. Lease payments for contracts which do not fulfill qualifications of financelease are recognized as income in the profit and loss account, using thestraight-line method, throughout the period of the lease. Financial lease In the case of lease contracts, under which essentially all risks and rewardsincident to ownership of the lease are transferred, the subject of lease isrecognized in assets as a non-current asset, and a liability is recognized inthe amount equal to the present value of minimum lease payments as of the dateof commencement of the lease. Lease payments are divided into financial costsand reduction of the balance of the liability in such way as to enable obtaininga fixed rate of interest on the outstanding liability. Financial costs arerecognized directly in the profit and loss account. Fixed assets which are the basis of the finance lease contract are depreciatedin the manner defined for the Group's non-current assets. However, if it isuncertain whether the ownership of the subject of the contract has beentransferred, then non-current assets used pursuant to finance lease contractsare depreciated over the shorter of: the expected useful life or the period oflease. Lease payments for contracts which do not fulfill qualifications of a financelease agreement are recognized as costs in the profit and loss account in astraight-line method throughout the period of the lease. Prepayments Prepayments refer to particular expenditure types that will be recognized in theprofit and loss proportionally to time elapsed in the future reporting periods.Prepayments are presented in the balance sheet as "Other assets". Provisions Provisions are established when the Group has an obligation (legal orconstructive) resulting from past events, and where it is probable that thefulfilment of such obligation will cause a necessity of transfer of assetsrepresenting economic benefits, and it is possible to reliably estimate theamount of such liability. In the event that the time value of the money-in-timeis significant, the amount of provisions is established by discountingforecasted future cash flows to the present value, using a rate of discountreflecting current market evaluations of money-in-time, and any risk related tothe given obligation. Also, this item includes provisions related to actuarial long-term employeebenefits. All provisions are charged to the profit and loss account. Employee benefits provisions The amount of provision for retirement payment is established on the basis of anactuarial valuation performed by an independent actuary at least every twoyears. The provision for restructuring costs is established when general criteria forrecognition of provisions are met, as well as detailed criteria for theobligation to establish restructuring provisions as per IAS 37. The amount of employment restructuring provision is established by the Group onthe basis of the best available estimates of direct outlays, which necessarilyresult from restructuring and are not connected with the Group's currentactivities. Provisions established are recognized on the liabilities side under the"Provisions" heading, and accordingly in the profit and loss account, asremuneration costs. Deferred income and Accrued expenses This item mainly covers the income of commissions settled using the straightline method, and other income charged in advance; types that will be recognizedin the profit and loss in the future reporting periods Costs accounted for over time include reserves for material costs resulting fromthe services provided for the Group by contractors, which will be settled in thefollowing periods, as well as reserves for payables to employees (incl. annualbonus and holiday bonus, extra payments, awards, and unused holiday allowance). Deferred income & accrued expenses are presented in the balance sheet in theitem of "other payables". Equity of the Capital Group Equity is comprised of the capital and funds created by the companies of theCapital Group in accordance with the binding legal regulations i.e. theappropriate laws, Articles of Association. Equity also includes retained profit(loss). The items comprising the equity of subordinated entities, other thanstatutory capital, are added to the appropriate positions of the parent entity'sequity to the extent in which the Parent entity owns the subsidiaries. The equity of the Capital Group includes only those parts of the subsidiaries'equity which were created after the date of purchase of shares or stocks by theparent entity. In particular this applies to the change in equity resulting from the achievednet profit or incurred loss or revaluation. a) Statutory capital relates only to the capital of the Bank as the Parententity and is presented at nominal value specified in the Statute and in theentry in the Enterprises Registry, b) Reserve capital is created from appropriations of profits and premiumsarising on the issue of shares, in accordance with the Statutes of thecompanies, c) Revaluation reserve includes: the effects of revaluation of financial assetsavailable for sale, foreign exchange differences arising from revaluation offoreign branch's result at the average weighted exchange rate established as ofthe balance sheet date in relation to the average NBP exchange rate; and thevalue of deferred tax for items that comprise temporary differences. Revaluationreserve is presented net in the balance sheet d) Other reserve capital utilized in accordance with the purposes defined in theStatute is created from appropriations of profits, e) Exchange rate differences include differences arising from recalculation ofthe result of a foreign branch at the weighted average exchange rate for thebalance sheet date, in relation to the average National Bank of Poland exchangerate, and from valuation of net assets in foreign entities, f) B bonds convertible into equity includes the equity fair value of financialinstruments issued as part of transactions settled in equity instruments inaccordance with IFRS 2, g) General banking risk provision represents accumulated appropriations of netprofit in accordance with the terms of the Banking Law of 29 August 1997, h) Retained earnings comprises the total retained profits and uncovered lossesof the companies consolidated under the full method, i) Net profit/loss which constitute profit/loss presented in profit and lossstatement for period which concerns. Net profit includes income tax. Minority interest Minority interest equity is the share in the equity of the subsidiary entityconsolidated under the full method, and belonging to entities other than thosecomprising the Capital Group. Share-based Payments The Group conducts an employee participation program, under which senior andlower management staff crucial to realization of the Capital Group Banks'strategy are granted pre-emptive rights to buy shares of the Bank (see Note 42). The Group used transitional provisions of IFRS 2 in respect to share-basedpayments, and applied IFRS 2 only to share-based payments granted after November7th, 2002, the rights to which were not vested until December 31st, 2004,inclusively. Transactions settled in equity instruments The cost of transactions settled with employees in equity instruments ismeasured by reference to the fair value as of the granting date. The fair valueis established on the basis of the Black-Scholes model for appraisal ofdividend-yielding stock options, according to expectations of the ManagementBoard concerning the number of rights to be exercised. The amount of theemployee share program is adjusted as of every balance sheet date ifexpectations of the Management Board change concerning the number of rights tobe exercised. No efficiency/results data except those related to the price ofshares ("market conditions") are taken into account in the assessment oftransactions settled in capital instruments. The cost of share-based payments is recognized together with the accompanyingincrease of the value of equity in the period in which effectiveness/performanceconditions were fulfilled, ending on the date when certain employees acquirefull rights to the benefits ("vesting date"). The accumulated cost recognizedfor transactions settled in equity instruments for each balance sheet date untilthe vesting date reflects the extent of elapse of the vesting period and thenumber of rights to shares, the rights to which - in the opinion of the Bank'sManagement Board for that date, based on best available estimates of the numberof equity instruments - will be eventually vested. In the event of modifications of conditions for granting remuneration settled inequities, as part of fulfilment of the minimum requirement, costs are recognizedif such conditions have not changed. Also, costs are recognized resulting fromeach increase in the value of the transaction, resulting from modifications,measured for the date of change. In the event a right is cancelled, it is treated in such way as if the rightswere acquired on the date of cancellation, and any unrecognized costsresulting from such rights are immediately recognized. In the case, however,where the cancelled share right is replaced by a new share right, the cancelledright and the new right are treated as if they are a modification of theoriginal right. The diluting effect of options issued is taken into account when establishingthe amount of earnings per share, as additional dilution of shares (see Note18). 2.9. Income tax and other taxes Income Tax For purposes of financial reporting, the income tax provision is establishedusing the balance-sheet liabilities method in reference to all temporarydifferences as at the balance sheet date between the taxable amount of assetsand liabilities, and their carrying value as presented in the financialstatements. The deferred tax provision is recognized in reference to all positive temporarydifferences: (S) except for situations where the deferred income tax provision arisesfrom amortization of goodwill or from the initial recognition of an asset orliability in a transaction other than merger of entities, and at the point ofthe transaction they have no influence on the gross financial result, nor forthe taxable income or deductible loss, and (S) in the case of positive temporary differences resulting frominvestments in subsidiaries or associates and participation in joint ventures -except for situations where the dates of reversal of temporary differences aresubject to control and where it is probable that in the foreseeable future thetemporary differences will not be reversed. The carrying value of a deferred tax asset is reviewed at each balance sheetdate, and is reduced accordingly to the extent that it is no longer probablethat the taxable income will be achieved sufficient for partial or fullrealization of a deferred income tax asset. (S) except for situations where deferred tax assets concerning negativetemporary differences originate from initial recognition of an asset orliability in a transaction other than merger, and at the point the transactionhas no influence on the gross financial result, nor for the taxable income ordeductible loss, and (S) in the case of positive temporary differences resulting frominvestments in subsidiaries or associates and participation in joint ventures,the deferred tax asset is recognized in the balance sheet only in such anamount, in which it is probable that the above temporary differences will bereversed and taxable income will be achieved which will allow the negativetemporary differences to be deducted. The carrying value of a deferred tax asset is reviewed at each balance sheetdate, and is reduced accordingly to the extent that it is no longer probablethat the taxable income will be achieved sufficient for partial or fullrealization of a deferred income tax asset. Deferred tax assets and deferred tax provisions are measured at tax rates whichare predicted to be in force in the period in which an asset is realized or aprovision is dissolved, assuming as the basis the tax rates (and taxregulations) which are legally or actually in place as of the balance sheetdate. The income tax regarding items directly recognized in equity is recognized inequity. The Group offsets deferred tax assets and deferred tax provisions, where it haslegal title to effect such offsetting, and the deferred assets and provisionspertain to the same taxpayer. Current income tax is assessed at the tax rate in force and is calculated on thebasis of the gross profit determined on the basis of relevant accountingregulations, adjusted by non-taxable income and non-deductible expenses. Other taxes Incomes, costs, and assets are recognized and reduced by the amount of VAT, taxon civil law acts, and other taxes on sales, except where: (S) the tax on sale, paid upon purchase of goods and services, is notrecoverable from the tax authorities; in that case, the sales tax is recognizedaccordingly as a part of the cost of acquisition of an asset, or as part of acost item, and (S) receivables and payables are presented with the amount of sales taxtaken into account. The net amount of sales tax recoverable from or payable to the tax authoritiesis recognized on the face of the balance sheet as a part of receivables orliabilities. 2.10. Other positions Contingent liabilities and promises The Group enters into transactions which are not recognized in the balance sheetas assets or liabilities upon signing, but they cause contingent liabilities andpromises. Contingent liabilities are characterized as being: (S) a potential obligation, whose existence will be confirmed uponoccurrence or non-occurrence of uncertain future events that are beyond controlof the Group (e.g. disputes in progress); (S) a current obligation, which arises as a result of past events, butis not recognized in the balance sheet, as it is improbable that it will benecessary to make expenses to fulfil the obligation, or the obligation amountcannot be reliably measured (mostly: unused credit lines and guarantees andletters of credit issued). Cash and cash equivalents Cash and cash equivalents in the Cash Flow Statement include "Cash-in-hand, duefrom the Central Bank" (except for the NBP bonds) and amounts current amountsdue from banks with maturity up to three moths. 3. Purposes and rules of financial risk management. The policy risk management of the Group has a goal of optimizing the structureof the balance sheet and off-balance sheet positions under the consideration ofall risks in relation to income and complex inflow of all kinds of risksincluding (interest rate risk, liquidity risk, foreign exchange rate risks),which Group encounters in conducting its daily activity. Risks are monitored andcontrolled with reference to profitability and equity coverage are regularlyreported in accordance with rules briefly presented below. The Bank's Management Board is responsible for achieving the strategic goals setwithin the risk management policy. The Asset and Liability Management Committee controls the capital adequacy ofthe Group, as well as the liquidity risk and the market risk (interest rate andforeign exchange rate risks) related to the external banking supervision limitsand to the internal limits of the Group. The accounting policy for derivative instruments were presented at Note 2 Credit risk Credit risk is one of the basic risks associated with the activities of theGroup. The percentage share of loans in the Group's balance sheet leads to thesignificance of maintaining this risk at a safe level for the result of theactivities carried out by the Group. The credit risk is minimized due to the Group's procedures, in particular thoserelating to the rules of transaction risk evaluation, establishing collateral,setting authorization limits for granting loans, and limiting of exposure tosome areas of business activity. To increase security the Group's lendingactivity is limited by the restrictions of the Banking Law as well as internalsafety norms set by the Group, including in particular concentration limits forspecific sectors of the economy, share of large exposures in the loan portfolioof the Group, and exposure limits for particular foreign countries, banks, anddomestic financial institutions. Protection of the quality of the Group's loan portfolio is also ensured byperiodical reviews and on-going monitoring of loan repayments and the financialcondition of the borrowers. The Banking Law establishes maximum exposure limits for banks. The Group, in cooperation with UniCredito Italiano, has undertaken activities tostable rationalizing credit process to improve effectiveness and security.Improved are especially procedures and measurement tools and risk monitoring. Concentration of credit risk According to article 71.1 of the Law the total balance sheet and off-balancesheet exposure of a bank to the risks associated with a single borrower or agroup of related borrowers may not exceed 20% of the bank's equity when at leastone of those entities is related to the Bank or 25% when no relation betweenthose entities and the bank exists. Moreover, article 71.2 of the Law specifies a maximum total exposure limit withentities whose individual exposure exceeds 10% of the bank's equity, at a levelof 800% of this equity. As of 31 December 2005 year no exposures exceeded the limit set forth by article71.2, whereas one exposure of the Bank exceeded the limits specified in article71.1 in the case of one group of related entities. This exposure resulted mainlyfrom the financing of central state investment. Loans granted for the centralstate investment are guaranteed by the surety of State Treasury. According toarticle 71.3.3. such exposure is excluded from calculations of exposure limitsand as a consequence the maximum exposure limits set forth in the Banking Lawwere not exceeded. a) Concentration by entity: as of 31.12. 2005 Exposure to 10 largest clients of the Group % of portfolio Client 1 4,9 Client 2 1,7 Client 3 1,6 Client 4 1,4 Client 5 1,4 Client 6 1,4 Client 7 1,2 Client 8 1,2 Client 9 0,9 Client 10 0,8 Total 16,5 In the table above 47,3% is a credit exposure, with the risk on the level of theState Treasury. Other exposure is due to transactions with local governments7,1%, banks 5,6% and large corporate customers 40,0%. None of the exposuresmentioned above were classified as irregular. b) Concentration by capital group: as of 31.12. 2005 Exposure to 5 largest capital groups % of portfolio which are the Group's clients Group 1 5,7 Group 2 2,2 Group 3 1,8 Group 4 1,7 Group 5 1,6 Total 13,0 c) Concentration by industrial sector: In order to minimize credit risk associated with industrial sectorconcentration, the Group employs a system monitoring the sector structure of itscredit exposure. The system involves setting concentration limits for particularsectors, monitoring the loan portfolio and gathering appropriate information.The system is based on the lending exposure in particular types of businessactivity according to the classification applied by the Polish Classification ofEconomic Activities (Polska Klasyfikacja Dzialalnosci-PKD). Concentration limitsare determined on the basis of investment risk, quality of the Group's lendingexposure, current economic trends in particular sectors, the Group's equity, andthe total exposure to particular sectors. A monthly comparison of the Group'sexposure to particular sectors with the current limits allows timelyidentification of the sectors in which the concentration of sector risk maybecome excessive. If such a situation arises, an analysis of the economicsituation of that sector is performed considering the current and predictedtrends and the quality of the current exposure to that sector. These measuresenable the Group to develop policies that reduce sector risk and allow for atimely reaction to a changing environment. The table below presents the structure of the exposure by industrial sectors. % of portfolio Sector description 31.12.2005 31.12.2004Wholesale and retail trade, repair of motor 15,8% 15,4%vehicles and motorbikes, articles for personal use and household goods Production and supply of utilities (electricity, 14,4% 12,3%gas, water) Public administration and national defence, 11,0% 11,8%guaranteed social insurance Financial services 11,0% 10,0%Other manufacturing activities and waste management 7,5% 5,6%Construction and real estate management 5,8% 6,5%Production of food, beverages and tobacco products 5,4% 6,0%Transport, storage and communication 5,2% 5,5%Production of metals and processed metal products 3,9% 3,0%Production of celluloid pulp, paper and paper 3,4% 3,1%products, publishing and printing Production of electrical and optical equipment 3,3% 3,7%Rental and other business, IT services, education 2,4% 2,4%Production of transport equipment 2,3% 3,3%Production of chemicals 2,0% 2,2%Other sectors 6,6% 9,2% Total 100,0% 100,0% Market risk In its trading, retail, corporate and investment activities the Group is exposedto market risk, i.e. the interest rate, foreign exchange rate, and equity pricerisks of the securities held by the Group, as well as other risks resulting fromchanges in market conditions. Interest rate risk The table below presents the classification of assets and liabilities accordingto their exposure to interest rate risk: 1. Assets and financial liabilities exposed to fair value risk related tointerest rate - debt securities with fixed interest rate - Loans with fixed interest rate - Client deposits with fixed interest rate - Liabilities due to the issue of securities 2. Assets and liabilities exposed to Cash flow risk related to interest rate - Debt securities with variable interest rate - Loans with variable interest rate - Client deposits with variable interest rate 3. Assets and financial liabilities not directly exposed to the interest raterisk - Equity securities The Group is also exposed to the interest rate risk due to sheet transactions,which notional amounts are recognized off-balance and which fair values arerecognized as assets or liabilities of the balance sheet. These transactionsinclude derivative transactions, Forward Rate Agreements (FRA), Interest RateSwaps (IRS), currency swaps, and foreign currency forward contracts. While managing interest rate risk, the Group is aiming at maximizing theeconomic value of the capital employed and achieving the planned interestresult, within the accepted limits. The financial position of the Group inrelation to the changing interest rates is monitored through the interest rategap (revaluation gap), duration analysis simulation analysis, and stresstesting. The sensitivity of the interest result to the interest rate changes andsensitivity of the economic value of the equity of the Group was within theinternally accepted limits. The table below presents the assets, liabilities and off-balance sheet exposuresof the Group classified as of 31 December 2005 by interest rate risk criterion up to1 month from 1 month to 3 from 3 months to 1 from 1 year to 5 years inclusive months inclusive year inclusive inclusive Book value % Book value % Book value % Book value % Balance sheet items Assets: 25 748 359 6,73 7 767 112 6,17 9 314 871 5,43 7 373 314 7,10 Cash and amounts - - - - - - - - due from Central Bank Debt securities 2 483 8,66 3 623 8,66 - - - - eligible for rediscounting in the Central Bank Amounts due from 5 585 480 3,98 361 730 4,34 1 018 765 4,25 - - banks Loans and 18 959 636 7,63 4 367 214 6,84 1 323 527 9,78 1 192 858 16,71 advances to customers Net investments 454 192 10,29 90 829 9,80 85 685 10,71 111 651 9,79 in financial leases Debt securities* 746 568 2,15 2 943 716 5,31 6 886 894 4,70 6 068 805 5,16 Others - - - - - - - - Liabilities: 39 963 071 1,63 5 128 546 3,07 3 623 268 2,59 1 723 340 11,05 Amounts due to 1 798 190 3,64 142 864 9,90 322 717 2,74 1 122 654 15,56 banks Amounts due to 38 164 881 1,53 4 985 682 2,87 3 300 547 2,58 376 159 1,33 customers Liabilities - - - - 4 - - - arising from securities issued Other - - - - - - 224 527 4,80 Gap (14 214 712) 2 638 566 5 691 603 5 649 974 Off-balance sheet exposures Assets 8 773 323 11 298 531 21 851 370 5 970 617 Liabilities 7 008 306 11 726 890 21 191 197 6 825 488 Gap 1 765 017 (428 359) 660 173 (854 871) Total Gap (12 449 695) 2 210 207 6 351 776 4 795 103 above 5 years Non interest bearings Total assets/ liabilities Book value % Book value Book value % Balance sheet items Assets: 4 178 893 6,78 7 589 407 61 971 956 5,63 Cash and amounts due from - - 2 193 661 2 193 661 Central Bank Debt securities eligible - - - 6 106 8,66 for rediscounting in the Central Bank Amounts due from banks - - - 6 965 975 4,04 Loans and advances to 580 399 17,2 1 711 574 28 135 208 8,23 customers Net investments in 3 534 5,63 - 745 891 11,04 financial leases Debt securities* 3 594 960 5,10 - 20 240 943 4,00 Others - - 3 684 172 3 684 172 Liabilities: 768 336 12,52 10 765 395 61 971 956 1,92 Amounts due to banks 561 328 15,56 - 3 947 753 8,88 Amounts due to customers 20 608 - - 46 847 877 1,75 Liabilities arising from - - - 4 - securities issued Other 186 400 4,76 10 765 395 11 176 322 0,18 Gap 3 410 557 (3 175 988) - Off-balance sheet exposures Assets 929 495 - 48 823 336 Liabilities 2 073 364 - 48 825 245 Gap (1 143 869) - (1 909) Total Gap 2 266 688 (3 175 988) (1 909) */ This item contains unquoted debt instruments presented in the balance sheetunder Cash-in-hand, amounts due from the Central Bank, Due from banks, Loans andadvances to customers The table below presents the assets, liabilities and off-balance sheet exposuresof the Group classified as of 31 December 2004 by interest rate risk criterion up to1 month from 1 month to 3 from 3 months to 1 from 1 year to 5 inclusive months inclusive year inclusive years inclusive Book value % Book value % Book value % Book value % Balance sheet items Assets: 19 984 687 7,98 6 788 147 6,99 12 574 874 6,42 8 734 816 8,05 Cash and amounts - - - - - - - - due from Central Bank Debt securities 1 933 8,66 6 835 8,66 - - - - eligible for rediscounting in the Central Bank Amounts due from 4 232 705 4,86 646 116 5,42 1 082 211 3,71 190 - banks Loans and 14 619 527 9,15 2 860 983 7,61 3 755 503 8,24 1 256 533 16,28 advances to customers Net investments 196 700 15,12 59 028 13,03 93 759 12,02 188 722 10,80 in financial leases Debt securities* 933 822 5,40 3 215 185 6,89 7 643 401 5,99 7 289 371 6,82 Others - - - - - - - - Liabilities: 39 295 317 2,26 5 333 506 4,20 3 529 203 4,16 1 151 920 10,28 Amounts due to 1 572 444 5,03 121 566 9,89 567 147 10,51 698 939 15,56 banks Amounts due to 37 722 873 2,17 5 211 940 4,08 2 783 851 2,77 102 981 0,68 customers Liabilities - - - - 23 205 6,40 - - arising from securities issued Other - - - - 155 000 - 350 000 - Gap (19 310 630) 1 454 641 9 045 671 7 582 896 Off-balance sheet exposures Assets 7 060 837 6 312 509 12 836 527 3 488 679 Liabilities 6 362 169 6 038 867 12 740 609 4 032 487 Gap 698 668 273 642 95 918 -543 808 Total Gap (18 611 962) 1 728 283 9 141 589 7 039 088 above 5 years Non interest bearings Total assets/ liabilities Book value % Book value Book value % Balance sheet items Assets: 3 225 483 8,98 8 669 340 59 977 347 6,45 Cash and amounts due from - - 2 561 687 2 561 687 - Central Bank Debt securities eligible - - - 8 768 8,66 for rediscounting in the Central Bank Amounts due from banks - - - 5 961 222 4,71 Loans and advances to 843 295 17,51 2 321 740 25 657 581 8,64 customers Net investments in 9 115 5,53 - 547 324 11,04 financial leases Debt securities* 2 373 073 5,98 - 21 454 852 6,38 Others - - 3 785 913 3 785 913 Liabilities: 702 291 12,22 9 965 110 59 977 347 2,51 Amounts due to banks 524 204 15,56 - 3 484 300 10,86 Amounts due to customers - - - 45 821 645 2,42 Liabilities arising from - - - 23 205 6,40 securities issued Other 178 087 - 9 965 110 10 648 197 Gap 2 523 192 (1 295 770) - Off-balance sheet exposures Assets 513 289 - 30 211 841 Liabilities 1 060 592 - 30 234 724 Gap (547 303) - (22 883) Total Gap 1 975 889 (1 295 770) (22 883) */ This item contains unquoted debt instruments presented in the balance sheetunder Cash-in-hand, amounts due from the Central Bank, Due from banks, Loans andadvances to customers The below table presents the effective interest rates pertaining to each classesof financial assets and liabilities to which it applies, broken down by majorcurrencies: as of 31st December 2005 PLN EUR USD Other % % % % Assets Cash, amounts due from Central Bank 4,28 - - - Due from banks 4,51 2,38 4,25 3,50 Loans and advances to customers* 8,78 4,06 5,96 6,05Net investments in financial leases 10,67 6,74 7,04 7,66 Debt securities 4,78 3,46 4,78 6,87Liabilities Due to Central Bank** 15,56 - - -Due to banks 3,76 2,36 3,91 2,50Due to customers 3,50 1,24 1,73 1,87Debt securities in issue - - - - * Position include loans for central state investment, which effective interestis 17,51%. Effective interest excluding loans for central state investment is8,02% ** Refinance credit interest of central state investment Following the exemption allowed by IFRS 1 the Group does not present thecomparative data relating the effective interest rates. Currency risk The objective of the currency risk management is to create a currency profile ofthe balance sheet and off-balance items which will remain within the externaland internal limits. In 2004, the currency risk was low. The Group's exposure tothe currency risk is measured for internal purposes on a daily basis by means ofthe Value at Risk (VaR) model, as well as the extreme conditions testinganalysis that is supplementary to the VaR method. The table below presents foreign currency exposure by the separate asset,liabilities and off balance-sheet liabilities types related to financialobligations granted and guarantees granted. as of 31.12.2005 Currency('000 PLN) PLN EUR USD Others Total Assets: Cash and amounts due from 1 788 860 187 455 102 008 115 338 2 193 661Central Bank Debt securities eligible for 6 106 - - - 6 106rediscounting in the Central Bank Receivables from banks 2 912 410 826 501 2 940 152 286 912 6 965 975Loans and advances to 22 417 561 4 182 010 1 110 136 425 501 28 135 208customers Net investments in financial 557 804 110 691 3 640 73 756 745 891leases Debt securities* 15 254 222 877 304 3 719 136 390 281 20 240 943 Investments in associated 166 870 61 932 - 167 863undertakings Others 3 315 481 126 233 44 059 30 536 3 516 309 Total 46 419 314 6 310 255 7 920 063 1 322 324 61 971 956 Liabilities: Amount due to Central Bank 1 950 710 - - - 1 950 710Amounts due to banks 1 465 685 217 965 282 964 30 429 1 997 043Amounts due to customers 33 938 954 4 447 249 7 569 781 891 893 46 847 877Liabilities arising from 4 - - - 4securities issued Provisions 100 430 594 7 215 488 108 727Others 10 637 008 202 442 215 459 12 686 11 067 595 Total 48 092 791 4 868 250 8 075 419 935 496 61 971 956 Net exposure (1 673 477) 1 442 005 (155 356) 386 828 -Off-balance sheet liabilities 9 707 022 2 018 600 421 458 257 288 12 404 368related to financial obligations granted and guarantees granted */ This item contains unquoted debt instruments presented in the balance sheetunder Cash-in-hand, amounts due from the Central Bank, Due from banks, Loans andadvances to customers as of 31.12.2004 Currency (' 000. PLN) PLN EUR USD Others Total Assets Cash and amounts due from 2 132 845 209 507 110 771 108 564 2 561 687Central Bank Debt securities eligible for 8 768 - - - 8 768rediscounting in the Central Bank Receivables from banks 3 049 687 428 692 1 836 158 646 685 5 961 222Loans and advances to 19 684 566 4 004 506 1 207 152 761 357 25 657 581customers Net investments in financial 383 709 78 035 3 773 81 807 547 324leases Debt securities* 17 623 115 709 052 2 959 049 163 636 21 454 852Investments in associated 119 739 61 4 862 - 124 662undertakings Others 3 413 644 215 255 9 578 22 774 3 661 251 Total 46 416 073 5 645 108 6 131 343 1 784 823 59 977 347 Liabilities Amounts due to the Central 2 151 743 - - - 2 151 743Bank Amounts due to banks 964 895 222 379 111 622 33 661 1 332 557Amounts due to customers 33 096 320 4 422 886 7 506 433 796 006 45 821 645Liabilities arising from 23 205 - - - 23 205securities issued Provisions 340 830 2 630 5 605 1 349 066Other 9 926 629 193 683 164 175 14 644 10 299 131Total 46 503 622 4 841 578 7 787 835 844 312 59 977 347Net exposure (87 549) 803 530 (1 656 492) 940 511 -Off-balance sheet liabilities 8 961 878 1 283 280 1 070 444 145 510 11 461 112related to financial obligations granted and guarantees granted */ This item contains unquoted debt instruments presented in the balance sheetunder Cash-in-hand, amounts due from the Central Bank, Due from banks, Loans andadvances to customers Liquidity risk The objective of managing liquidity risk is: • to ensure and maintain the Group's solvency with respect to currentand future planned payables, taking into account the cost of acquiring liquidityand return on the Group's equity, • to prevent any crisis situation, and • to outline solutions that would allow the Group to overcome such asituation in case the latter occurred. The Group invests primarily in treasury securities of the Polish government,financial instruments of countries and financial institutions with the highestratings, and those with high levels of liquidity. Due to their to theirliquidity characteristics, regularly monitored the financial instruments wouldassist the Group to overcome crisis situations. According to the Banking Supervisory Board recommendations, the Group introducedinternal liquidity indices that reflect the ratios of total adjusted maturatingassets to total adjusted maturing liabilities. In addition, the Group employs the appropriate procedures protecting bothagainst the liquidity risk increase and against a substantial deterioration ofthe Group's financial liquidity. The emergency plan in case of deterioration of financial liquidity of the Grouptakes into consideration four levels of liquidity risk, depending on the amountand duration of cash outflow from the non-banking client accounts. The plan alsodetermines the sources from which the expected cash outflows will be covered andstates to what extent the Group's Management is responsible for making necessarydecisions in order to restore the required liquidity level. Both the emergencyplan and the possibility of obtaining cash from sources specified in this planare subject to periodical verification. The table presents assets and liabilities of the Group as of 31.12.2005 by maturity Balance sheet items up to1 month from 1 from 3 from 1 year above 5 Total month to 3 months to 1 to 5 years years inclusive months year inclusive inclusive inclusive Assets 15 991 640 4 063 392 11 550 590 13 357 316 17 009 018 61 971 956 Cash and amounts due from 2 193 661 - - - - 2 193 661 Central Bank Debt securities eligible for 2 483 3 623 - - - 6 106 rediscounting in the Central Bank Amounts due from banks 4 969 312 686 154 1 164 322 103 340 42 847 6 965 975 Loans and advances to 3 988 245 3 020 919 6 091 867 5 841 779 9 192 398 28 135 208 customers Net investments in financial 18 123 40 053 176 980 488 293 22 442 745 891 leases Debt securities* 4 477 877 312 643 4 117 421 6 183 093 5 149 909 20 240 943 Others 341 939 - - 740 811 2 601 422 3 684 172 Liabilities 17 288 489 11 035 704 14 936 302 12 409 457 6 302 004 61 971 956 Amounts due to banks 2 114 632 103 341 400 764 1 064 576 264 440 3 947 753 Amounts due to customers 13 116 755 10 795 255 14 535 534 4 300 385 4 099 948 46 847 877 Liabilities arising from - - 4 - - 4 securities issued Other 2 057 102 137 108 - 7 044 496 1 937 616 11 176 322 Gap (1 296 849) (6 972 312) (3 385 712) 947 859 10 707 014 - Off-balance sheet itemsAssets 7 760 484 2 348 665 3 191 364 316 562 - 13 617 075Liabilities 10 975 225 2 357 500 3 232 106 103 337 3 984 157 20 652 325 Gap (3 214 741) (8 835) (40 742) 213 225(3 984 157) (7 035 250) Gap total (4 511 590) (6 981 147) (3 426 454) 1 161 084 6 722 857 (7 035 250) */ This item contains unquoted debt instruments presented in the balance sheetunder Cash and amounts due from the Central Bank, Due from banks, Loans andadvances to customers The table presents assets and liabilities of the Group as of 31.12.2004 by maturity Balance sheet items up to1 month from 1 from 3 from 1 year above 5 Total month to 3 months to 1 to 5 years years inclusive months year inclusive inclusive inclusive Assets: 20 233 225 2 738 236 7 965 936 9 573 947 19 466 003 59 977 347 Cash and amounts due from 2 561 687 - - - - 2 561 687 Central Bank Debt securities eligible for 1 933 6 835 - - - 8 768 rediscounting in the Central Bank Amounts due from banks 3 599 984 437 367 729 853 1 107 968 86 050 5 961 222 Loans and advances to 1 418 776 1 347 535 4 995 061 5 115 723 12 780 486 25 657 581 customers Net investments in financial 15 361 29 710 125 571 354 782 21 900 547 324 leases Debt securities* 12 609 061 896 749 2 074 847 2 873 140 3 001 055 21 454 852 Others 26 423 20 040 40 604 122 334 3 576 512 3 785 913 Liabilities: 14 340 201 11 313 852 13 285 387 5 726 499 15 311 408 59 977 347 Amounts due to banks 1 785 568 43 436 46 372 477 460 1 131 464 3 484 300 Amounts due to customers 12 272 241 11 254 682 13 188 520 4 933 765 4 172 437 45 821 645 Liabilities arising from - - 23 205 - - 23 205 securities issued Other 282 392 15 734 27 290 315 274 10 007 507 10 648 197 Gap 5 893 024 (8 575 616) (5 319 451) 3 847 448 4 154 595 - Off-balance sheet itemsAssets 10 183 911 547 792 1 662 031 164 111 51 395 12 609 240Liabilities 15 188 933 678 927 1 783 657 244 319 114 979 18 010 815 Gap (5 005 022) (131 135) (121 626) (80 208) (63 584) (5 401 575) Gap total 888 002 (8 706 751) (5 441 077) 3 767 240 4 091 011 (5 401 575) */ This item contains unquoted debt instruments presented in the balance sheetunder Cash and amounts due from the Central Bank, Due from banks, Loans andadvances to customers Exposure to credit risk and market risk The tables below present the exposure of the Bank to credit risk and particulartypes of market risk. The amounts have been calculated on the basis of BankingSupervisory Board Resolution No 4/2004 dated 8 September 2004. The risk weighted value to credit risk of the balance sheet receivables iscalculated as the product of the carrying amount and the risk weight appropriatefor the client and the type of collateral. The risk weighted exposure of derivatives to credit risk is calculated on thebasis of a balance sheet equivalent of a derivative. The balance sheetequivalent of a derivative instrument is calculated according to originalexposure method for transactions in banking portfolio. In the case of the other off-balance-sheet liabilities the credit risk exposureis calculated as the product of the balance-sheet equivalent (product of thenominal value of off-balance sheet liability and percentage risk weight) and theappropriate risk weight for the given client and the type of potentialcollateral. Capital requirements resulting from credit risk are calculated by adding up therisk weighted assets and off-balance-sheet liabilities in the banking portfolioand multiplying this sum by 8%. In the case of the instruments classified to trading portfolio, capitalrequirements are calculated for the individual types of market risk. Credit and market risk at 31.12.2005 Instrument Balance value Risk weighted assets Cash 1 113 250 -Receivables 38 574 660 25 246 271Debt securities 14 405 830 110 477Other securities, shares 104 870 104 870Fixed assets 1 558 283 1 558 283Other 1 365 280 284 845Total banking portfolio 57 122 173 27 304 746Clearing collateral KDPW 1 332 -Investment securities 4 280 547 16 122Reverse repo transactions 567 904 -Total trade portfolio 4 849 783 16 122 Total 61 971 956 27 320 868 Off balance sheet instruments Instrument Replacement Balance sheet Risk weighted cost equivalent amount amount Derivates Interest rate instruments: -IRS 323 995 430 070 94 904-FRA 3 941 3 941 788-CIRS 18 988 61 070 24 363-Futures - on government bonds - - --Call options- securities 9 859 10 049 2 010instruments Currency instruments: Forward 49 400 81 848 40 888Spot 276 276 61Swap I leg - - -Swap II leg 40 141 69 628 13 926Options 47 888 56 869 17 583Other instruments: Warrants - 9 5 Total: 494 488 713 760 194 528 Including: banking portfolio - - -trading portfolio 494 488 713 760 194 528 Other off-balance sheet banking portfolio Instrument Off-balance Balance sheet Risk weighted sheet value equivalent amount amount Credit line 10 428 547 2 214 632 2 110 023Warranties granted 1 366 543 748 357 685 393Letters of credit 218 455 108 531 80 123Other 457 225 457 222 160 845 Total banking portfolio 12 470 770 3 528 742 3 036 384 Issue guarantees - - -Forwards on securities 184 437 82 872 - Total trade portfolio 184 437 82 872 - Off-balance Balance sheet Risk weighted sheet value equivalent amount amount Total banking portfolio 69 592 943 30 341 130 2 427 290(credit risk) Capital requirements for trading portfolio (Market risk) Market risk 59 417In this: Currency risk -Commodity price risk -Equity price risk 113Debt instrument specific risk 2 296Total interest rate risk 57 008 Settlement risk - delivery and contractor 15 527Other - Total capital requirement 2 502 234 Fair value of balance sheet financial instruments The market value cannot be established for numerous financial instruments;therefore, the presented fair values have been estimated on the basis of variousvaluation methods, including estimation of the present value of future cashflows. There are certain financial instruments, which are not recognized at fair valuein the financial statements of the Group. Fair value represents the amount forwhich an asset could be exchanged or a liability settled between knowledgeable,willing parties in an arm's length transaction. In the case of certain groups of financial assets, held on the basis of theamount of the payment due, it has been assumed that fair value is equal to bookvalue. This applies, in particular, to cash and cash equivalents, currentreceivables and liabilities as well as other assets and liabilities. As no quoted market price is readily available for the Bank's customer loans,the presented fair value of loans has been estimated at a high level usinginternal valuation techniques (DCF). Fair value of non impaired loans is equalto the sum of future expected cash flows discounted to the balance sheet date.The discounting rate is the sum of appropriate market risk free rate and creditspread which relates to default probability and expected recovery rate adequatefor each loan agreement. Fair value of impaired loans is equal to the sum ofexpected recoveries discounted to the balance sheet date using market risk freerate as the credit risk is incorporated into the average expected recoveries. The fair value of investment securities held to maturity amounts to PLN 2643 271 ths (as at 31.12.2004, PLN 5 003 823 ths.) and fair value of loans tocustomers amounts to PLN 28 726 716 ths, as at 31.12.2005. Custodial activities Custodial activity is done by an predominant entity of the Group on the basis ofthe decision of the Securties and Exchange Commision. The Bank offers custodial services on the basis of the decision of theSecurities and Exchange Commission. The Bank's clients include domestic andforeign financial institutions, banks offering depository and investmentservices, insurance companies, investment and pension funds, as well asnon-financial institutions. The Bank offers services involving settlement oftransactions on domestic and foreign markets, client's custody assets,maintaining securities and cash accounts, assets valuation, and servicingdividend and interest payments. In 2005 the Bank achieved an over 33% increase of assets under management. Themost significant ( c.a. 42%) increase was reached in the domestic clientssegment. The growth of assets under custody was due to higher investmentactivity of clients. Turnover generated by clients in 2005 was 2 times higherthan in 2004 and number of transactions increased by 65%. In 2005 the Bank signed a custody contract with a 7 newly created investmentfund and first time with investment fund with separated sub-investment funds (socalled umbrella). Continues agreements with foreign financial institutions for the provision ofcustodial services by the Bank on the territory of Poland and lending ofsecurities in order to ensure the liquidity of settlements. The Bank maintainedthe leading position in the area of servicing depositary notes programmes,servicing more than 50% of these programmes. 4. Information about segments of activity Segmentation by industry is the primary segmentation basis in the Group whilesegmentation by assets location is supplementary. The Group settles transactions between segments as if they concerned unrelatedentities - using current market prices. Funds transfers between Bank's businessdivisions, providing services to retail and corporate customers, and thetreasury unit are based on market prices with reference to the funds currencyand maturity. Industrial sectors Industrial sectors are as follows: o Retail banking - full-range of banking activity related to retailclients and micro and small companies with annual turnover not exceeding PLN 10million, and also income of the Group's companies consolidated under the fullmethod, providing services to retail clients, o Corporate banking - full-range of banking activity related to mediumand large companies, and also income of the Group's companies consolidated underthe full method, providing services to corporate clients, o Treasury and investment activities - Bank's involvement in inter-bankmarket, in debt securities and capital investments in companies, which are not apart of other segments, and also income of the Group's companies consolidatedunder the full method and assigned to this activity. The data on income and working assets and liabilities of each industrial sectorof the Group. Year 2005 Retail Corporate Treasury and Total activity activity investment Group activity External interest income 916 458 1 572 944 1 382 372 3 871 774External interest expense 422 298 963 791 135 261 1 521 350Net external interest 494 160 609 153 1 247 111 2 350 424income Internal interest income 1 352 569 820 823 (2 173 392) -Internal interest expense 458 941 1 020 791 (1 479 732) -Net internal interest 893 628 (199 968) (693 660) -income Net interest income 1 387 788 409 185 553 451 2 350 424 Non interest income 1 502 642 415 022 145 215 2 062 879 Total income 2 890 430 824 207 698 666 4 413 303 Working assets* 9 463 947 23 766 392 26 738 455 59 968 794Working liabilities* 29 524 861 18 431 155 2 560 031 50 516 047 * Bank only The data for the 2004 is not comparable to data for the 2005 as the Groupapplied the admissible exemptions of IFRS 1 relating mainly to effectiveinterest rate and impairment charges. Year 2004 Retail Corporate Treasury Total Group activity activity and investment activity External interest income 852 776 1 477 715 1 435 352 3 765 843External interest expense 483 912 909 567 157 520 1 550 999Net external interest 368 864 568 148 1 277 832 2 214 844income Internal interest income 1 454 335 796 408 (2 250 743) -Internal interest expense 453 757 998 676 (1 452 433) -Net internal interest 1 000 578 (202 268) (798 310) -income Net interest income 1 369 442 365 880 479 522 2 214 844 Non interest income 1 491 215 339 863 132 890 1 963 968 Total income 2 860 657 705 743 612 412 4 178 812 Working assets* 7 941 008 22 058 009 24 692 616 54 691 633Working liabilities* 31 068 056 14 199 095 1 679 834 46 946 985 * Bank only Managerial model for budgeting and monitoring the business lines is focused ontotal income. Costs are managed centrally through dedicated units and allocationto business lines is not performed. Segmentation by geographical region The operating activity of the Pekao S.A. Group is concentrated in Poland throughthe network of Bank Pekao S.A. branches and the Group's companies. In addition to Poland, the Group performs its activities also in the followingcountries: - France - through the branch of Bank Pekao S.A. in Paris, - Ukraine - through the Bank Pekao Ukraine - subsidiary company of Bank PekaoS.A. Results generated by activities of the Group performed outside Poland areinsignificant in comparison to the result of the whole Group. 5. Interest income and expense Interest income 2005 2004 Income on placements in other banks 285 402 252 973 Income on other placements on money market 55 304 46 028 Income on loans to customers 2 465 467 2 344 668 Income on investment securities 913 294 1 000 693 Income on financial assets valued at fair 152 307 121 481 value through profit and loss Total 3 871 774 3 765 843 Interest expense 2005 2004 Expense on other bank's deposits 65 360 69 223Expense on other deposits on the money 107 545 71 700market Expense on customers' deposits 971 670 972 370Expense on other due to customers 329 789 363 957Expense due to the amortization of premium 46 310 48 963on investment securities Expense on debt securities in issued 676 24 786 Total 1 521 350 1 550 999 Interest income for the 2005 includes income from impaired financial assets inthe amount of PLN 133 668 ths. Total amount of interest income for the 2005, measured at amortized cost usingthe effective interest rate method, with reference to financial assets which arenot valued at fair value through profit and loss, amounted to PLN 2 602 283 ths.Interest expense, calculated at amortized cost using the effective interest ratemethod, with reference to financial liabilities which are not valued at fairvalue through profit and loss, amounted to PLN 1 320 440 ths. 6. Fee and commission income and expense Fee and commission income 2005 2004 Accounts maintenance 599 066 593 776Payment cards 360 605 333 063Acquisition services 363 521 287 908Credits and loans granted 153 583 193 466Securities operations 147 311 129 546Servicing of pension and investment funds 56 520 44 086Guarantees and similar operations 15 185 13 117Other 74 296 124 675 Total 1 770 087 1 719 637 Fee and commission expense 2005 2004 Payment cards 125 748 120 865Securities operations 24 513 21 016Acquisition services 8 989 4 012Accounts maintenance 3 402 2 765Management of pension funds 2 443 2 215Other 18 008 12 242 Total 183 103 163 115 7. Dividend income 2005 2004 Dividend income from the issuers: Securities classified as held for trading 127 9Securities classified as available for sale 221 - Total 348 9 8. Result on financial instruments at fair value a/ Result on assets and liabilities held for trading 2005 2004 Derivative instruments (3 136) (38 148)Equity instruments 511 58Debt instruments 94 679 97 673 Total 92 054 59 583 b/ Result on financial assets and financial liabilities at fair value throughprofit and loss 2005 2004 Debt instruments (27 093) (3 921) Total (27 093) (3 921) Total result on financial instruments valued at 64 961 55 662fair value (a+b) Total change in the fair value of financial instruments valued at fair valuethrough profit and loss established using valuation techniques (where noestablished quotations were published on the active market) in 2005 was PLN 2746 ths. (in 2004: minus PLN 34 630 ths. respectively). 9. Result on investment securities Realized result on assets and financial liabilities other than valued at fairvalue through profit and loss 2005 2004 Realized profits Financial assets available for sale 74 113 14 404Investments held to maturity 98 453 Total 74 211 14 857 Realized losses Financial assets available for sale 37 567Investments held to maturity 21 214 Total 58 781 Net realized profits 74 153 14 076 Change in the fair value of financial assets available for sale recognized in2005 directly in equity amounted to PLN 140 172 ths (increase of equity) (in2004 PLN 157 179 ths - increase of equity). Profits and losses from financial assets moved in 2005 from equity to profit andloss account amounted to PLN 74 076 ths PLN (profit) (in 2004, PLN 13 837 thsprofit). 10. Changes in fair value - hedge accounting The Bank Pekao S.A. capital group does not apply hedge accounting. 11. Other operating income and expenses 2005 2004 Other operating income Revenue from sale of products and 164 709 119 632 services From the sale or liquidation of fixed 12 946 3 516 assets, intangible assets and assets for disposal From the recovered overdue, lost and 13 900 14 474 written-off receivables Received damages and penalties 2 097 1 474 Rent and other revenue 27 592 29 441 Recovered debt recovery expenses 3 529 6 141 Release of provisions for the disputed 3 333 28 164 and other receivables Awarded damages receivable - 30 000 Write-backs 4 563 7 051 Other revenue 52 307 67 602 Total 284 976 307 495 2005 2004 Other operating expenses Cost of goods and materials sold 107 675 102 419 From the sale and liquidation of the fixed 4 690 13 697 assets, intangible assets, and assets for sale From the written off receivables 2 524 5 168 Paid damages and penalties 462 744 Donations made 4 732 4 247 Amortization of start-up costs 2 992 2 995 Debt recovery costs 13 739 14 085 Provision costs for disputed and other 12 748 11 710 receivables Depreciation of purchase cost of pension 16 907 17 171 funds Impairment charges on other assets 9 206 42 880 Other costs 38 266 43 698 Total 213 941 258 814 12. Overhead costs 2005 2004 Payroll/Employee benefits 1 211 539 1 186 540 including: Wages and salaries 1 023 497 987 256 Insurance and other charges related with 174 611 192 934 employees Pension programs costs due to defined contributions programs 1 538 1 550 Cost of share-based payments 11 893 4 800 Administrative costs 777 880 776 346 Depreciation and amortization 322 891 322 761 Taxes and charges 27 886 37 532 Annual Bank Guarantee Fund fee 6 208 10 258 Total 2 346 404 2 333 437 13. Net impairment losses on financial assets and net provisions for guaranteesand commitments 2005 2004 Impairment charges Impairment charges on loans 1 357 741 1 280 577 Impairment charges on financial lease 43 200 41 919 receivables Impairment charges on financial assets 1 160 452 classified as available for sale Impairment charges on investments held to 191 316 maturity Impairment charges of the investments in the 9 8 599 associate and joint venture entities valued using the equity method Impairment charges on other financial assets 2 086 7 684 Writedowns on provisions Provisions created for off-balance sheet 54 899 59 830 liabilities Total 1 459 286 1 399 377 Writebacks on impairment Writebacks on impairment on loans 1 131 807 972 268 Writebacks on impairment on financial lease 31 813 22 181 receivables Writebacks on impairment on financial assets 501 - classified as available for sale Writebacks on impairment on investments held 1 783 316 to maturity Writebacks on impairment on investments in 742 - the associate and joint venture entities valued using the equity method Writebacks on provisions Release of the provisions for off-balance 55 163 50 543 sheet liabilities Total 1 221 809 1 045 308 Net impairment charge 237 477 354 069 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BPKD.L