Development Bank of Mongolia International Financial Reporting Standards Financial Statements and Independent Auditor's Report 31 December 2014reer Contents INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS ‘Statement of Financial Position... Statement of Profit or Loss and Other Comprehensive Income... Statement of Changes In Equity Statement of Cash Flows. NOTES TO THE FINANCIAL STATEMENTS. 21. 22. 24. 26. 26. 2. 88388 CORPORATE INFORMATION AND OPERATING ENVIRONMENT... . FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION. SIGNIFICANT ACCOUNTING POLICIES ..n.sssesnnnninnnnnnnnnnnn CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY... 18 APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS..... CASH AND CASH EQUIVALENTS. BANK DEPOSITS. ‘SHORT TERM INVESTMENT.. LOANS AND ADVANCES. INVESTMENTS SECURITIES AVAILABLE FOR SALE. OTHER ASSETS. PROPERTY AND EQUIPMENT. INTANGIBLES ASSETS ..snnstnnieninnnnnn CUSTOMER ACCOUNTS AND OTHER LIABILITIES. DUE TO OTHER BANKS... PROMISSORY NOTES. BONDS... BORROWINGS RELATED PARTY TRANSACTIONS... CONTRIBUTED CAPITAL... INTEREST INCOME. INTEREST EXPENSE FOREIGN EXCHANGE GAINS LESS LOSSES. i GAINS LESS LOSSES FROM FINANCIAL DERIVATIVES sn Srseesecnsennct 45 ADMINISTRATIVE AND OTHER EXPENSES... INCOME TAXES FINANCIAL RISK MANAGEMENT... PRESENTATION OF FINANCIAL INSTRUMENTS 8Y MEASUREMENT CATEGORY. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES. COMMITMENTS AND CONTINGENCIES... POST BALANCE SHEET EVENTS &Bsees- pwc INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors of Development Bank of Mongolia We have audited the accompanying financial statements of Development Bank of Mongolia (the “Bank”), which comprise the statement of financial position as at 31 December 2014 and the statements of profit and loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information, Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to expréss an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing ‘Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance over whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidenee about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial ‘statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstanees, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control, An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by ‘management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. F PricewaterhouseCoopers Audit LLC, Central Tower Office Building Suite 601, Floor 6, Great Chinggis Khaan's Square - 2, Ulaanbaatar 14200, Mongolia T: +976 70009089, F: +976 (11)322068, www.pwe.com/’mna pwc Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2014, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Signed by: jy ExeeutiveDindttor PrieewaterhouseCoopers Audit LLC Approved by: Matthew Pottle Managing Partner 14 April 2015 Ulaanbaatar, Mongolia PricewaterhouseCoopers Audit LLC, Central Tower Office Building Suite 601, Floor 6, Great Chinggis Khan's Square - 2, Ulaanbaatar 14200, Mongolia T: +976 70009089, F: +976 (11)322068, www.pwe.com/nnDevelopment Bank of Mongolia Statement of Financial Position Year ended at 31 December 2014 In thousands of Mongolian Tusriks Note 31 December 2014 34 December 2013 Assets ‘Cash and cash equivalents. 6 716,457,838 379,461,233 Bank deposits 7 687,600,307 852,338,027 Shor term investment 8 280,478,568 - Loans and advances 9 3,803,381 407 2,179,590,202 Investment securities availabe for sale 10 11,200,000 7 Other assets " 11,003,898 8,036,490 Current income tox prepayment 491,335 3,846,446 Property and equipment 12 1,401,720 583,037 Intangible assets 2 709,408 777.485 Deferred tax assets 2% 13,222,953 8,236,694 Total assets 506,093,612 3,230,869,554 Liabilities Customer accounts 1” 73,475,742 16,278,742 Othe abilities 4 2.814.234 ‘373,841 Due to other banks 15 195,495,809 111,081,307 Promissory notes 16 176,634,002 : Bonds 7 1.47@,955,658 972,107,029 Borrowings 18 9.327,121,709 1.967,189,199 Total liabilities 5,250,497,324 3,086,990,118 Equity Contributed captal 20 149,970,496 +123,300,000 Retained earnings 107,456,852 20,579,436 Revaluation reserve for investment securities available-for-sale ‘1,200,000 Total equity 246,536,288 143,879,436 Total liabilities and equity 5,506,033,612 3,720,889,554 Ink of Mongolia, Development Bank of Mongolia ‘The accompanying notes are an integral part of these financial statements.Development Bank of Mongolia ‘Statement of Profit or Loss and Other Comprehensive Income Year ended at 31 December 2014 c : Note Year ended Year ended { tn thousands of Mongolian Tugriks 31 December 2014 51 December 2013 t Interest income 21 333,079,836, 131,050,558 Interest expense 2 (216,885,476) (9,087,610) [ i Net interest income 116,224,360 42,001,048, C t ‘Charge of provision for loan impairment 9 (24,668,227) (6,224,792) [ \ Nat intra income afer provision fr loan pene eee f . Fee and commission income 814,908 : u Gains less losses from trading in foreign currencies (2,148,048) 2,000,002 [ Foreign exchange transition geinsloss losses 28 53,118,872 1.913878 a Gains less losses from financial derivatives 24 (1,403,624) : t Administrative and other operating expenses 25 (7,944,028) (4,593,890) Profit before tax 199,990,405 35,096,046 t Income tax expenses 26 (92,536,553) (6,200,258) [ Profit for the year 101,456,852 26,887,588 ems that may be reclassified subsequently to proft or oss: [ Gains on avallablefor-sale investment securities 1,200,000 - C Other comprehensive income for the year 1,200,000, : t Total comprehensive income for the year 102,656,852 26,887,588 C 5 t tl t t es L 4 LDevelopment Bank of Mongolia : ‘Statement of Changes in Equity [ Year ended at 31 Decomber 2014 Revaluation reserve for i Investment In thousands of Mongolian Contributed _—_—Retained Total Tugrks Note capital earnings sale equity t Balance at 01 January 2013 © 20«—73,300,000 (6,308,152) + 66,991,848 7 Profit for the year - 26,887,588 + 26,887,588 I Total comprehensive income - 26,887,588 26,887,588 Contributed capital forthe year © 20»=—_—§0,000,000 - = 50,000,000 Balance at 31 December 2013 20 © 123,300,000 20,579,436 + 143,879,436 Profitfor the year = 101,456,852 ~ 101,456,852 Other comprehensive income : - 1,200,000 1,200,000 f 7 Total comprehensive income = 101,456,852 1,200,000 102,656,852 t Conitibuted capital for the year 20==—«20,879,436 (20,579,436) : : [ Balance at 31 December 2014 20 143,879,496 101,456,052 1,200,000 246,536,268 L [ t { t C i U LL t t L LL t LDevelopment Bank of Mongolia Statement of Cash Flows Year ended at 31 December 2014 Year ended Year ended In thousands of Mongotan Tugrks 31 December 2014 31 December 2013 Cash flows from operating activities Proft before tax 139,993,405 35,096,246 ‘Acustments to: Depreciation, amotization expenses 274,807 203,986 Charge of provision for loan impairment (24,668,227 6,224,792 Unrealized foreign exchange translation losses/(gains) (1,088,620) (372,892 Unrealized losses from fancal dedvatives 4,403,620 : Property and equipment writen off 458 2087 Interest income (939,078836) (131,050,658) Interest expence 216,855,476 80,057,610 Realised FX oss from financing activites - 23,825,423 Gach tows fom oprating activ before changes in sane peat Net increase in bank deposits (23,447,042) (475,005,213) Nt increase in shor term investment (252,929,480) : Net increase in loans and advances (1.446,778,989) —_(1,496,584,570) Not (nerease)decrease in other assets (101,624) (621,823) Not increase in customer accounts 69,570,200 16,270,435 Net deorease in due to other banks 91,226,822 119,686,590 Net increase in other liabilities 1,036,773, (131,848) Net cash used in operating activities before tax and interest Income taxes paid Interest received Interest paid (1,505,247,200) (34,167,862) 275,392,471 (188,791,616) (1,810,362,422) (17,666,438) 95,301,193 (85571.417) Net cash used in operating activities (1,452,814,207) (1,827,208,084) Cash flows used in investing activities Acquisition of investment (10,000,000) - Purchase of property and equipment (979,632) (487,310) Purchase of intangible assets (46,329) (148,038) (11,025,961) (605,348) 6Development Bank of Mongolia ‘Statement of Cash Flows Year ended at 31 December 2014 in thousands of Mongolian Tugriks ‘Year ended 31 December 2014 Year ended 31 December 2013, Cash flows from financing acti Increase of contributed capital : 0,000,000 Proceeds from promissory notes 170,595,480 : Proceeds from bonds 384,820,236 112,613,993, Proceeds from borrowings 1,245,187,824 1,964,069,754 Repayment of bonds. - (135,939,416) Net cash from financing activities 1,800,003,540 1,990,744,332 Effect of exchange rate changes on cash and cash Sainte 233,233 62,127 Net increase in cash and cash equivalents. 336,996,605 162,993,027, Cash and cash equivalents at the beginning of the year 379,461,233 216,468,206 Gash and cash equivalents at the end of the year 716,487,898 379,461,233[ Development Bank of Mongolia Notes to the Financial Statements — 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) 4. CORPORATE INFORMATION AND OPERATING ENVIRONMENT The Development Bank of Mongolia (‘the Bank’) is a Government-owned, policy-oriented statutory financial institution established on 25 March 2011 pursuant to the Resolution No. 195 dated 20 July 2010 issued by the Government of Mongolia and under the Law on Development Bank of Mongolia passed by the Parliament on 10 February 2011. The Bank was registered with the Legal Entity Registration Office of the General Authority for State Registration and is the only policy bank in Mongolia. The Bank conducts its business under the direct supervision of the Cabinet, which is the highest institution of Government administration in Mongolia, and is regulated, principally, by the Law on Development Bank of Mongolia, The Bank commenced its operations in May 2011. The Government of Mongolia is the Bank's sole shareholder. The Government of Mongolia has contributed a total of MNT 143.9 billion to the Bank's share capital as at 31 December 2014. In accordance with Article 21.1 of the Law on Development Bank of Mongolia, Parliament determines the source of equity financing that the Government can provide to the Bank and determines the limits of foan guarantees to be provided by the Government. The Bank is not subject to the rules and regulations issued by the Bank of Mongolia in relation to commercial banks. The Bank's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. ‘As disclosed in Note 32, following Parliament Resolution No. 41 dated 18 February 2015, the Government of Mongolia Issued resolution No. 95 on 11 March 2015, which stipulates the actions to bbe taken by the Government and the Development Bank of Mongolia until 2018, in the Bank's gradual transition from being policy-oriented bank with majority of loan portfolio to be repaid by the State budget and high reliance on the Government in terms of direct financing of the Bank and the issuance ‘of Government guarantees in the process of obtaining funding from financial institutions and on international markets, to operating as a self-sustainable financial institution. As @ result of this decision, the Bank's mission and activities are expected to substantially change over the following years as follows: = The structure of the Bank’s loan portfolio is expected to gradually shift from loans to be repaid by the State budget and other loans guaranteed by the Government to corporate loans issued without Government guarantees. - Existing loans to be repaid by the State budget and other loans guaranteed by the Government (in case of default of corporate customers) will be gradually repaid by the State budget by 2018, while issuance of such new loans will be gradually reduced. - Further policy funding of socially beneficial projects from 2018 onwards will be primarily financed directly by the Government i.e. directly from the State budget rather than through the Bank. - As part of this transition, the Bank will transition by 2018 into largely soif-custainable financial institution, financed through funding obtained on international markets and from international financial institutions without use of Government guarantees as collateral. As part of this transition, the Bank's reliance on the Government will be also be gradually reduced through the repayment of the borrowings from the Government (Note 18). The Government is committed to supporting the Bank in the transition process, including providing financial support, when needed. For the implications of this Government's decision on the recoverability of the Bank's loans and advances to the customers refer to Note 4. ‘The Bank had an average of 88 employees during the year ended 31 December 2014 (year ended 31 December 2013: 63). ‘The Bank's principal place of business is: Max Tower Building 2-3", 5" and 7" floor, Juuichin Street 4/4 Ulaanbaatar 15170, Mongolia.f [ Development Bank of Mongolia Notes to the Financial Statements ~ 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) CORPORATE INFORMATION AND OPERATING ENVIRONMENT (CONTINUED) ‘These financial statements are presented in Mongolian Tugriks (“MNT"), unless otherwise stated. ‘These financial statements were approved for issue by the Executive management of the Bank on 14 April 2015, Operating Environment of the Bank Mongolia displays many characteristics of an emerging market including relatively high inflation and interest rates. After tecording steady growth in 2010 and 2011, the Mongolian economy has shown signs of a slowdown in 2012 and 2013 due to deciining global commodities prices, concerns over slowing growth in China and changes to the Mongolian Foreign Investment Law in 2012 have ‘slowed inbound foreign investment into the country. The slowdown of the economy continued in 2014 resulting in the country being downgraded from B1 to B2 by Moody's rating agency in July 2014, and subsequent downgrade of major commercial banks from B1 to B2 and B3. The economy is further adversely affected by significant decline In global commodity prices that took place in the last quarter of 2014 and early 2015, and further slowdown of the Chinese economy during 2014 and early 2015. ‘According to the Bank of Mongolia, the monetary policy for 2015 intends to provide external economic balance, keeping inflation at a low and stable level, strengthen economic stabilization and create an environment for balanced and sustainable medium to long term economic growth. ‘The tax and customs legistation in Mongolia is subject to varying interpretations and frequent changes (refer to Note 30). The future economic performance of Mongolia is tied to the continuing demand from China and continuing volatle global prices for commodities as well as dependent upon the effectiveness of economia, financial and monetary measures undertaken by the Government together with tax, legal regulatory and political developments. Current uncertainty in world economics, volatility of financial markets, decline in global prices of commodities, slowdown of growth of Chinese economy, slowdown of Mongolian economy and other potential risks could have a significant negative effect on Mongolian financial and corporate sectors. In ‘accordance with IFRS, the Bank's management has determined loan impairment provisions using the “incurred loss” model. Recognition of impairment losses that arose from past events is required and the recognition of impairment losses that could arise from future events is prohibited. These future events include for example future changes in the economic environment. Impairment losses that could arise from future events cannot be recognized, no matter how likely those future events are. Thus final impairment losses from financial assets could differ significantly from the current level of provisions. Management is unable to predict all developments, which could have an impact on the Mongolian economy, and consequently what effect, if any, they could have on the future financial position of the Bank. Management believes it is taking all the necessary measures to support the sustainability and development of the Bank's business, 2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION Basis of Preparation and Presentation ‘These financial statements have been prepared in accordance with International Financial Reporting ‘Standards (IFRS) under the tistoricel cost convention, as modified by the initiel recognition of financial Instruments based on fait Value. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of apolying the Bank's accounting policies. The areas Involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statement are disclosed in Note 4.ec Development Bank of Mongolia Notes to the Financial Statements - 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) 2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION (CONTINUED) Functional Currency These financial staterients are presented in Mongolian Tugriks (‘MNT’) the currency of the primary economic environment in which the Bank operates and the Bank's functional currency. Amendments of the Financial statements after issue. ‘The Bank's management has the power to amend the financial statements after issue SIGNIFICANT ACCOUNTING POLICIES Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value. Fait value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured es the product of the quoted price for the individual asset or liability and the quantity held by the entity. This is the case even if a market's normal daily trading volume is not sufficient to absorb the quantity held and placing ‘orders to sell the position in a single transaction might affect the quoted price. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which extemal market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (i) level two measurements are valuations techniques with all material inputs observable for the asset or liabiity, either directly (that is, as prices) or indirectly (that is, derived from prices), and (il) level three ‘meesurements are valuations not based on solely observable market data (thet is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have ocourred at the end of the reporting period, Transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument, An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commi Paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost. Amortised cost is the amount at which the financial instrument was recognised at Initial recognition less any principal repayments, plus accrued interest, and for financial assets less ‘any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both ‘accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the statement of financial position. The effective interest method. The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. 10f { Development Bank of Mongolia Notes to the Financial Statements ~ 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ‘The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument:The effective interest rate discounts cash flows of variable interest instruments to the next interest reprising date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part ofthe effective interest rate. Initial recognition of financial instruments. Trading securities, derivatives and other financi instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at intial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is fa difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose Inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (‘regular way" purchases and sales) are recorded at trade date, which is the date on which the Bank commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. Derecognition of financial assets. The Bank derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include all interbank placements with original maturities of less than 90 days. Funds restricted for a period of more than 90 days on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost, Bank Deposits. Bank deposit are recorded when the Bank advances money to counterparty banks with intial maturity of more than 90 days with no intention of trading the resulting unquoted non- derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost Loans and advances to customers. Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Renegotiated loans. Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past ‘due. Management continuously reviews renegotiated loans to ensure thet all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. Short-term investment. Short-term investment represents government bonds issued by the Ministry of Finance of Mongolia which are recorded when the Bank advances money to purchase or originate ‘an unquoted non-derivative receivable from an issuer due on fixed or determinable dates and has no intention of trading the recelvable. Government bonds issued by the ministry of Finance are carried at amortized cost. "l Development Bank of Mongolia Notes to the Financial Statements — 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) 3, SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (‘loss events") that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The primary factors thet the Bank considers in determining whether a financial asset is impaired its overdue status and realisability of related collateral, if any. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events ("loss events") that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The primary factors that the Bank considers in determining whether a financial asset is impaired its overdue status and realisabilty of related collateral, if any. ‘The following other principal criteria are also used to determine whether there is objective evidence that an Impairment loss has occurred: = any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; = the borrower experiences a significant financial difficulty as evidenced by the borrower's financial information that the Bank obtains; = the borrower considers bankrupicy or a financial reorganisation; = there is an adverse change in the payment status of the borrower as a result of changes in the rational of local economic conditions that impact the borrower; or - the value of collateral significantly decreases as a result of deteriorating market conditions. Future cash flows in a group of financial assets that are collectively evaluated for impairment, are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as e result of pest loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods, and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective Interest rate before the modification of terms, The renegotiated asset is then 110,546,677 5 = Uilty 207,579,518 = 227,579,518 t i 21937.792 : 2,937,792 f 7 Total neither past due nor impaired 2,051,683,496 960,082,243 3,011,765,739 i { Past due but not impaired: = 30 0.90 days overdue ~ Construction - 19,192,397 19,192,387 = 90 f0 180 days overdue : ~ Construction : 113,775,998 113,775,938 i + Over 360 days overdue = Mining - 497.913.8868 497,913,886 C Ll Total past due but not impaired loans : 630,881,621 630,881,621 Individually determined to be Impaired: ~ Less than 30 days overdue { “Mining 7 5,707,950 5,707,959 +30 to 80 days overdue ‘ ~ Manufacturing - 125,873,505 125,873,505 7 ~90 to 180 days overdue : ~ Manufacturing : 46,870,287 46,870,267 t Transportation : 13,175,338 13,175,338 : Total impaired loans : 191,627,065 191,627,066 t ‘ Less: Provision for loan impairment - (30,893,019) (20,898,019) [ ‘otal net amount of loans and advances 2,051,683,496 4,751,007,9113,803,381,407 c ian t 50 meercree Development Bank of Mongolia Notes to the Financial Statements — 31 December 2014 (Expressed in thousands of Mongollan tugriks untess otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Analysis of credit risk by sector of loans and advances outstanding at 31 December 2013 is as follows: Loans and Loans and advances tobe advances to be a repaid by the State repaid by the In thousands of Mongolian Tugriks budget (Corporates Neither past due nor impaired: = Road, 690,416,975 = 690,416,975 + Manufacturing 5,248,485 208,896,172 314,084,657 = Mining > 397,222,876 357,222,876 = Railway 301,953,037 = 30/953,037 ~ Power plant 127,700,433 = 127,700,439 = Construction - 67,364,832 67,364,832 - Morigage 101,318,012 = 101,318,012 - Uiiity 94,614,203, - 94,614,203, Total neither past due nor impaired 4,821,250,545 738,423,880 2,054,674,425 Past due but not impeired: ~ Less than 30 days overdue: ~ Transportation : 4,778,921 4,778,921 ‘Total past due but not impaired : 4,778,921 4,778,921 Individually determined to be Impaired loans but not past due: = Manufacturing - 126,961,748 126,361,748 Total impaired loans : 126,364,748 126,361,748 Less: Provision for los - 224,792) (6,224,792) Total net amount of loans and advances 4,321,250,545 258,390,757 2,179,500,302 ‘The Bank monitors concentrations of credit risk by sector. An analysis of concentrations of credit risk at the reporting date is shown on page 28. Given the current operating environment, the Bank applied prudent approach in considering the value at which different types of oollateral could be realized in Practice. At 31 December 2014, MNT 526,117,547 of the corporate loans is considered to be under- collateralized for the assessment of impairment provision. All loans were over collateralized at 31 December 2013. Credit-related Commitments Risks ‘The Bank offers guarantees and letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties. The Bank regards guarantees and letters of credit that they carry same oredit risk exposures as loans. In other words, when issuing guarantees or letters of credit, the Bank fellows the same originating, analyzing, collateral evaluation, reviewing, monitoring, and approval processes as loans. As stipulated in the Law on Development Bank of Mongolia, the total value of loans, and loan equivalent assets provided by the Bank shall not exceed the amount equal to 50 times of the Bank's, 51t C Development Bank of Mongolia Notes to the Financial Statements ~ 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit-related Commitments Risks (continued) equity capital. Total amount of letters of credit, guarantees and securities shall not exceed the amount ‘equal to 50 times of the equity Above criteria as at 31 December 2014 and 31 December 2013 are as follows: Papas rr As at 31 December 2013, In thousands of Suitable Mongoian Togris witableRestricionlimit Actual amount Restriction mit Actual amount Total amount of the loan and asseis equivalentsto “£2.50 49.996,914.400 4,751,548,370 7,193,971,780 2,801,928,820 Toan Total amount oftheloan << EQ50 uses ond seca Times 12926814400 224,162,912 7,193,071,780 128,747,828 Collateral and other credit enhancements ‘The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: a) Fixed asset: Land, Building, factory etc; b) Movable properties: Vehicles and equipment etc; ) Special property rights: Mineral licenses, Project execution right etc., d) Time deposits, Securities/Bond and Stocks ) Guarantees issued from Government, reputable insurance companies, Development banks and investment bank and commercial banks with overall rating of B2- B3 or above, f) Assets and revenues generated as a result of performance by borrower and project contractors. 9) Others. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the ‘adequacy of the allowance for impairment losses, Loan amount collection through sale of the collateral can take place by the Bank when a borrower notifies their inabilty to repay the loan and requests to make repayment through its value of the collateral, or the borrower has not made repayment for substantial period after the dalivery of Notice and Demand Notice, or has not taken any initiatives to make loan repayment. The proceeds will be used to reduce or repay the outstanding claim. The Bank does not occupy repossessed properties for business use and has no such properties as at 31 December 2014 and 31 December 2013. Impairment Assessment The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 30 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank monitors the credit quality of loans primarily based on classification of loans according to the Regulation on Asset Classification which is used for impairment provision calculation. In accordance with this regulation, the Bank is required to determine the quality of loans and advances based on their qualitative factors and time characteristics (i.e. delays in repayment). Loans are classified into the following three groups: neither past due nor impaired, past due but not impaired and impaired loans. For credit risk for off-balance sheet financial instruments, the Bank uses the same credit policies in assuming conditional obligations as it does for on balance sheet financial instruments, through established credit approvals, risk control limits and monitoring procedures. 2i L Development Bank of Mongolia ‘Notes to the Financial Statements 31 December 2014 (Expressed in thousands of Mongolian tugriks unless otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk Liquidity risk is the risk thet the Bank will encounter difficulty in meeting obligations from its financial liabilities. The Bank's approach to menaging liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its iabilties when due, under both normal and stressed conditions, ‘without incurring unacceptable losses or risking damage to the Bank's reputation. ‘The Bank manages each currency liquidity and aggregated liquidity as well. ALCO is responsible for monitoring and controling liquidity risk to which potential liquidity risks and liquidity analysis reports are submitted on regular basis. ‘The Bank invests the funds in portfolios of liquid assets, in order to be able to respond quickly and efficiently to unforeseen liquidity requirements. Since the Bank does not accept deposits, it does not have any legal obligations to maintain a statutory deposit with the Central Bank of Mongolia, The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank The liquidity plan and maturity gap report is made by the Bank for each major currency (over USD 1 milion equivalents) as well as an aggregated amount using the cash flow approach, Exposure to liquidity risk ‘The key measure used by the Bank for managing short term liquidity risk is the ratio of net liquid assets to deposits from customers/banks. For this purpose net liquid assets are considered as including cash and cash equivalents, central bank bills, current accounts and deposits placed with Bank of Mongolia and other domestic and foreign banks less clearing delay. Delails of the reported ratio of net liquid assets to deposits from customers/banks at the reporting date were as follows: 31 December 2014 31 December 2013 Net Liquid Assets 6 8 The table below shows the financial assets and liabilities at 31 December 2014 and 31 December 2013 by their remaining contractual maturity. The amounts of liabiilies and assets disclosed in the maturity table are the contractual undiscounted cash flows, gross loan commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in the statement of financial position is based on discounted cash flows. ‘The Bank places short term deposits in commercial banks and deposits are flexible to call back which has comparatively less liquidity risk. With regards to the market risk management, stronger emphasis has been put on managing the Tiquidity risk and interest rate volatity. Liquidity stress testing has been conducted on a regular basis and presented to Asset and Liability Committee (ALCO). Movements of the interest rate spread have been discussed and analysed during ALCO meatings. These analyses are performed across all business units and all loans and deposit products. 53vs egs‘ayz'6aL ‘egs'erz'6ot (eev'sai'zy) ‘zve'eo'eze boe'vra'ars set ‘eae'eut qunowre @ane;nuin [E04 e88'8rz'691. zae'zes'olz (iyv'cen'ou) §—L86'P9D'tL eze'tos‘aeL eet‘ess'eut (sonmeqensiesse eroueuy IN (osz'ore'zao'e) —(ors'orv‘ors'z) —{e9r'sae'ezz's) —(Goz'ca0'eve) (Lov‘ees'zzs) (uve'ovz'9se) 8 efoueuy e0L (ose'azs'eoo'2) (vos'zec‘zi'z) —(att'eaz't8) sBumonog (ooz'ea6'o0s) —(006'van'aiz") —(oor"teo'se) ‘spuog : - soppu Aiossiwoig (ozt‘ev6'6a) {ors‘eer'vt) ‘sued suo 0} NG pied eK you sjuowpiuuio> VEO (ece'ver'soe) —-(Zoo'vse'z12z) sonqug O40} UaAi8 soojeenD (eru'sze'22) : - - - (eru'Gzr' 92) eebess'zez's —zee'zae'uzL'z © ze0ZaU'ESG'< © oss'ehL'voL esz'toe'L99 ‘og0'¢zo'oeH't ‘syosse [e}oueuy eIOL eosereress weezseuzLz ~=—« eeO'eOESET vaeoLa EEL ‘aay 860 962 ‘Se0ueApe pue SUES] bexoe'z9z - - - - juownsonuy wo} Yous. 60} 'LOP ‘802 - : sos'ves'zes 198° W70'1Z1 sysodap 30a szz‘eap'ele - - . - ‘seu'eah 61. squareainbo yseo pus YseD syosse jepueury sear SEK SAT aa on : SOUSA revo, onan iteal ouG! Kayo or syOUXIS — SYIVOWXIS FEO: at ssa ‘eyuBny uoyoBuoy 40 spuesnoy) Up yrog 1equis3eg Fee SY Ames | pue sjesse jeoUeUy eu Jo sIsAleue Ue Seplaoid e1Ge} BuIMO}IO} CYL, (penuguos) 454 Aypinbr 91 spoyied BujUeWas ayy UO paseq sBuIdnos6 AyanjeUL JUBAOJOI OIL YUUEG OUN JO SO} (GANNLLNOD) LNSWAOVNYW 4STY TWIONWNId *Z2 (paqe7s agimsoljo ssqjun syyi6m ueyOBUOW Jo spuesnoy Ul passesdx3) LOZ Jequiesag LE — SWOUra}e}s je/ULUI 24} 0} SOON eyoBuoy 40 yueg jueurdojenegss uze'sis'z0't) —(zrt'sea'669) (uee'zeezez) —sttbev'eez es0'ose'ere aunowee eaneinuan eo, (gaa'esa'zor) —(+8'es0'zeh) (ovz'90s'z0s) (wso'vst'6) es0'oes'erz (sonmiqen)/syesse jejoueuy yon (eer‘ees‘eze'L) —(za'e6e'gez'z) (rer'pse'z6s) (o86's96'L6r) (ezv'z20'ves) ‘soniqen jeIoUeUY [eo] (zzo'019'se) (z90'eez‘or) a ‘sBuynouiog : spuog 7 ssyueg Jeujo 0} ng (tys'iex'zzs) (vz ve2"ts¥) pled yeh you syuawuUD9 UeOT : : ‘soqgu3 94} 0, Lan soojueLeND (pe'ezz'91) (er'ezz'on) ezvORSTLLNy — eh '600'126 © —se'vee‘eze': © sar‘svy's6 zee'ees'zey Zra'e96'Z6L syesse eroueuy rio, eze'eor'zeo's © —c19'600'16©—Lce'vee'eze's gat 'sv's6 zuz'ose'se ‘seoueape pus Sue07 veezoo'ss = 7 : oos'zrr'sry sysodop Yue, sivece'cat : syuejenmnbe yse9 pue use ‘syesse jepueuly a sir Siar SAT We sqou ‘SqUOU Sa didi 2A J9A0 01 320K 840 2u0 0} SqUOWXIg x18 0} B2sU4L uoWy 8857 syuBn, uayoBuow jo spuesnoy) Up sho soquieced 16 38 Sy (panuguog) ¥sy AYpINbIT (@aNNLNOD) INSWSOVNVW SIX “TVIONVNId “22 (pajeys asimseijo ssejun Sysbinj Ue,ODUGH| Jo Spuesno4) Ut pessexdg) hoz Jequieneg 4¢ — Swaurayels eFUeUL ay} 0} SCION eyoBu0y 40 yueg wourdojoneg Beebo oe bef Development Bank of Mongolia Notes to the Financial Statements — 31 December 2014 (Expressed in thousands of Mongolian tugriks uniess otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk is the risk that changes in market prices, such as interest rate and foreign exchange rates will affect the Bank's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and contro! market risk exposures within acceptable parameters, while ‘optimizing the return on risk. ‘Management of market risks: Interest rate risk is measured by the extent to which changes in market interest rates Impact margins and net income. To the extent the term structure of interest bearing assets differs from that of liabilities, net of interest income will increase or decrease as a result of movements in interest rates. The Bank principally menages interest rate risk through monitoring interest rate gaps. Financial assets and finencial liabilities presented as non-interest sensitive mostly relate to accrued interest and interest receivables and payables on interest bearing assets and liabilities. For the purposes of financial risk management, management monitors separately principal amounts of assets and liabiities (Le. amounts which generate interest at nominal contractual interest rates), and aocrued interest and interest receivables and payables, which do not generate interest based at nominal contractual interest rates. A summary of the Bank's interest rate gap position on its financial assets and liabilities are as follows: 56is ver'uis'soz ——ver'zL6'60z sboreer‘cyz «zs '0R0'G60'L © azz'esa‘ese'L cizest‘e6z = 90'98z'z9F ver'zis'soz ——‘(zaa"as'ees) (ocs'zer'zss) —pre'ese'see —«LL'ses‘os © zri'zos‘ro © $z0'9Gz"z01 (riz'gan'esz's) (eov‘oge'eco'z) —(ose'eaz‘zee'z) (oot'zio'ss) —(oos'gar'tt) —ono'yzt'vez) —_—(98°¢89"t) jerouewy eI0L, (eaz'tzs'zz'e) (@91'069"209"1) - = 7 ‘s6umouuog (eso'sse'eur't) (co0'00z'z») - : - (corer!) 7 (osr'ses'0z4) (cos'ser'se! (oor'zts'ee) —(ooe'ser'tt) —_(o0z'ezs"e8) (wzo'eor't) - - - (ru'siy'82) - - - eoz'yoo'eah's —_sr9aoe'ezs't peL'soo'oes': © vas‘soo'rey —Lis'hoo'zs © zza'eLo'rs §=——bea'so'eob syesse jejoueuy (evo, Zov'vee‘cos's —_9v9'goe'ezs't pex'soo'oes'L © ——gaL'eze‘LeL oer'ses'ou: © gos‘azh'sz seouenpe pue sueo) gos'ezy'0gz : 29V E98" 1S2 - e5e'sz0's qwousanul wo} HOUS, 266'900'289 = eos'eze'ls —ong'oro'z0s§~szsttee'SL © cou'saz'at ssysodep 4ueH acoso, : - 7 Liesis'vs =z" tL ‘sjuayennbe yseo pue USED syasse eoUueuly a aieekenp aon see TEAK BU Saou suo ‘onnsUBS ‘SB ie WH9N0_aayo1 eu Srsyourxig x8 0190141 0044) UEYR SSI]_I80I03U-UON LueyoBu0yy jo spuesnour Uy ioe Taquieseg 1612 SV {penuquo) SSH OH (G3NNILNOD) LNAIAOVNVW MSA TWIONWNIS “ZZ (parajs esywwayjo ssejun syubny UeyOBUOYY JO spuesnoys Wj pesse.dxg) 102 Joquieaag LE — SJWOWa}eIS /2/UEUI OY} 0} SCION eyoBuoy) jo yueg weudojeneqvov'ese'vel —yrv'esc'vz: —«gnz"ars‘oy © —«e0‘eea'aSH'L EsB'o0'ZSL'L eso'ese'lis —sie"ees‘st yunowe eaneinuino fevo4, por'csc're: —oz‘out‘zce) © (z6r'zu'z@9) oss'zea't —oe'zv sya aez'vce'ssy —ste"ees'st eI}ysi9sse fe!OUEUY YON {e11'o6s'o80'e) (e61‘eer‘oat'L) (oso'sce’ee't) - : (ooo'sou'ort) (Gae"zte'ze) refoueuy v0, (66L‘eei‘ze6') (661'eer'ogt't) (ooo'0so'zze)- tt sBuynouog {6z0'201'226) (oco'eer'oce) - : . (ese'eze'at) ‘spuog (zoe‘tyo'Ltt) a 7 : (ooo'sos‘orr) —(Zoe"9ee) ‘syueg s01p0 0} 9G. (bye'eze) a q f = (bye'eze) ‘senmgely JOO (eys'szz'91) 7 : : (zys'912'91) ssyunosoe rewoysn9, : ‘soniceyjepouewl zos‘ese'Liz's Ley'zzo'e08©—«CEF'9SO'LOL'L © oss'ZEo't —ouetzrL'sy9 —erz'6z0'Z09v09'srazy ‘syosse jesoueuls OL zoc‘oss'sLi'z Ler'zzo'e0e~—«eel‘9sg's0l'L ose'zeo' ~ Lovzor'lez — Suv'oni'ze ‘ssoueape pue sue0) zzosee'zs9 _ : ooe'zrl'sr9 Eeesen'L ‘sysodop ueg eec'or'eze : : lecize'sze —_Z06'eos"e suajeninbe yseo pue USED ‘syosse [epUueUl we TEOKIO ‘sqRou SOW SSN OATBUSE 7 7 a en SHEOKOAYHEAO SyyojeuQ _oysyuOWXIg _xBojeaIy, _UEYL S597 s88J0]U-UON ‘SyH6n ueyebuoy fo spuesrou) ut ‘eh0z equisseg Lee Sv {ponuguog) sysH yee (Q3NNILNOD) LNAWSOWNVW HSH TWIONWNIS “22 (pares esjmseipo SSajun Sabin} UeyoBUGHY J SpuEsnoMp UF pesse.xixg) 102 soquieneg LE — SIUOWIOLEAS feIOUEULY Yt 02 SION eyoBuoyy 40 yueg woudojonogf Development Bank of Mongolia Notes to the Financial Statements ~ 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risks (Continued) ‘The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank's financial assets and liabilities to various standard and non-standard interest rate scenarios. If interest rates had been 100 bps higher or lower and all other variables were hold constant, the Bank’s net income would have resulted as follows: 100.bp parallel __100 bp parallet ‘Sensitivity of projected net interest income Increase Decrease At31 December 2014 476614 (476,614) At 31 December 2013 1,088,604 (1,088,661) ‘The Bank is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Asset and Liability Management Depariment (ALMD) is responsible for moritoring the Bank’s exchange risk and minimising its exposure. ALMD does this by seiting limits on the level of exposure by currency, which are monitored on a frequent basis. The Bank manages its currency risk primarily through assessing the impact of foreign currency exchange rate movernents on the Bank's liquidity and profitabiity 59vor'sis'soz —et'so == (bve‘ore‘o6z) ——aae‘OL (Lre'soo'osz) —ezt‘too‘ore Uuopisod yeaus souejeg 10N (weo'eon's) zoe'zoo'sy —(sze'sov'er) sonneauog oso'eao'ssz's Loo'zesos‘zec‘zuy ere'Las‘os —ego'stt‘e00% bor‘etz'eeo'z soueuy AteyOUot [BIOL sovizvuzee : ost'are'sl —9aseze'262'+ es0'pse'oto'z ‘sBumouog sco'sse'euy'l osouvee'zuy - Gee'SHI'FLVL (L96'26r'v01) spueg zeo'ves'out : | - ze0'ves'a/t s2you Av0ss1W0ld Gos'ser'sel - sov'epo'2. © Ovozar‘ezt ssxueq Joujo 0} 09 zusiy'sL = 0gzes | sereizee == Lee'9ee synoaoe sew0¥snD soz'voo'ser's seizes © 0z'sz0'zst e00'060'Cy © age'ztS‘arh'z — Opa'zLL'C6z'z siesse jefoueuyy AleyouoU [EO Lovivee'cos'e - : pse'aaz'sL —«uv'exe'Lv0'% — yL6'eehZbz't seoueape pue Sue07 sos'azy'osz - : sae Sse'61z wouySenU WH VOUS 48698989 = 063'002'9 zez‘ozt'ez —Seo'res'se = 60S'az'zz0 ‘s180dep UE Beousr'oL, —ear'z6s «GL L'9z8'eLb 181'002 Bol'ses'lsL — 9ds'shs'28e syuajennbe Uste9 pur YSeD syossy rere, ANO aa una asn AN hoe quEsE FETE Sy ‘phog s9qw208q L¢ 18 YSU ayes aBueYOXe AoUaLIND UBlal0} 0} aunsodxe syUER ey} SOZUEWLUNS MOjOG oIGe} OWL _syu6n , ueyoBuoyy Jo spuesnoyi UW} (panuguog) sysi 3922 (GANNLNOD) LNAWIOVNVW ¥SIY TVIONVNId "22 (beqB]8 esnioyjo ssojun syiBn ueyobu0yy Jo spuesno4p Wy passat) ‘hoz sequie2eg Lé ~ SIwOWUareIS fe/OUCLL Ou) OF S2}ON eyoBuoy Jo yueg juewudojeneqDevelopment Bank of Mongolia Fi Notes fo the Financial Statements ~ 31 December 2014 : (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (Continued) The table below summarizes the Bank's exposure to foreign currency exchange rate risk at 31 December 2013: ; As at 31 December 2013, In thousands of Mongolian Tugriks . NNT usp EUR Total [ { Assets i Cash and cash equivalents 374,591,094 4,850,908 19,830 979,451,233 i Bank deposits 473,572,082 _ 178,765,945 - 852,398,027 : Loans and advances 857,930,377 1,321,650,925 = 2,179,590,302 [ Total financial assets 1,706,003,5531,505,276,173 19,830 3,211,389,562 t Liabilities f ‘Customer accounts 10,816,483 5,460,259 - 16,278,742 Other lsbiies 373/861 - - 373,841 [ Due to other banks 28,093,066 83,008,251 > 14,081,307 Promissory notes - : 7 7 r Bonds = $72,107,029 = _ 972,107,029 t Borrowings 1,540,765,736 446,423,463 > 1,987,189,199 f : Total financial liabilities 1,579,991,116 _1,506,990,002 + 3,086,990,118 [ Net financial assets/ liabilities) 126,102,497 (1,722,823) 19,830 124,399,444 The following table presents sensitivities of profit or loss to reasonably possible changes in currency 5 ‘exchange rates applied at the end of the reporting period to the functional currency of the Bank, with ‘ all other variables held constant. t Jn thousands of Mongokin Tugriks AL31 December 2014 __At31 December 2013 cL US Dollar strengthening by 15% (2013:10%) (91,801,247) (172,282) US Dollar weakening by 15% (2019:10%) 34,504,247 172,282 { Euro strengthening by 5% (2013°10%) 5519 1983 Euro weakening by 5% (2013109) (5.519) (0.983) t Yen strengthening by 10% (29,031,064) - t Yen weakening by 10% 79,031,004 : : NY strengthening by 10% 6518 : ut CNY weakening by 10% (8.18) : t Total effects : - Il l t L etDevelopment Bank of Mongolia Notes to the Financial Statements - 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 27. FINANCIAL RISK MANAGEMENT (CONTINUED) Capital Management ‘The Bank adopted the standardized approach which is a set of risk measurement techniques proposed under Basel Il capital adequacy rules. Credit risk exposure is calculated by risk weighting on and off-balance sheet exposures to credit risk according to broad categories of relative credit risk. Risk-weights are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. Foreign currency exchange risk exposure in a single foreign currency is derived by subtracting the aggregate value of financial lieblties in that foreign curreney from the aggregate value of the financial assets in that foreign currency. The Bank's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Bank recognizes the need to maintain 2 balance between the higher returns that might be possible with greater gearing and the advantages and security afforded bya sound capital postion. The ratios of the Banks capital adequacy as at 31 December 2014 and 31 December 2013, respectively, were as following: In thousands of Mongolian Tugriks 31 December 2014 31 December 2013 Tier | capital: ‘Share capital 143,879,436 123,300,000 Retained earings 101,456,852 20,579,436 Total tier | capital 245,336,288 143,879,436 Tier Il capital: fevalvation reserve for investment securities avaliabie-for-sale 1,200,000 : Total tier Il capital 4,200,000 : Total regulatory capitalicapital base 248,536,288 143,879,436 Risk weighted capital ratio. 12.49% 12.78% The Bank weights all assets where the Government of Mongolia is the counterparty at 0%.Development Bank of Mongolia [ Notes to the Financial Statements — 31 December 2014 : (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 28, PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY The following table provides a reconciliation of financial assets with measurement categories at 34 t December 2014: [ Available for [ Loans and reosivabios *20 nancial Total i Jn thousands of Mongolian Tugrks en Financial assets: f Cash and cash equivalents 716,457,038 + 716,457,638 [ Bank deposits: 687,686,397 = 687,696,397 I - Short-term placements with other banks with : ‘original matures of more than three months eee een eee t ‘Short term investment 260,478,568 - 260,478,566 [ ‘ Loans and advances to customers: 3,803,381,407 - 3,803,381,407 t Loans and advances tobe epsidby the Site 2 951,689,408 eases budget [ ~ Loans and advances to be repaid by the eee 4,751,697,911 ~ 1,751,697,911 f . Investment securities available for sale : 11,200,000 14,200,000 f Total financial assets 5,468,004,208 11,200,000 _5,479,204,208 For investment securities avaiable for sale please refer to Note 10. t The following table provides a reconciliation of financial assets with measurement categories at $1 ‘ December 2013: 7 In thousends of Mongolian Tugrik Loans and receivables Total i [ Financial assets: ' Cash and cash equivalents 379,461,233 379,464,233 Bank deposits: 652,338,027 652,338,027 5 ~ Short-term placements with other banks with orginal ‘ maturities of more than three months eee eee t Loans and advances to customers: 2,179,590,302 2,179,500,302 Loans and advances to be repaid by the State budget 1,321,250,545 4,321,250,545 L = Loans and advances to be repaid by the Corporates ‘858,339,757 858,339,757 { Total financial assets 3,211,389,562 3,211,380,562 f ‘As of 31 December 2014 all of the Bank's financial liabilities except for derivatives were carried at £ amortized cost. Derivatives belong to the fair value through profit or loss measurement category. As of 7 31 December 2013 all of the Bank’s financial liabilities were carried at amortized cost.f cee Development Bank of Mongolia Notes to the Financial Statements — 31 December 2014 (Expressed in thousands of Mongolian Tugriks uniess otherwise stated) 29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Determination of fair value and fair value hierarchy Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) ievel one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (i) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (ii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a feir value measurement uses observable inputs that require significant adjustment, that ‘measurement is @ Level 3 measurement. The significance of a veluation input is assessed against the fair value measurement in ts entirety. ‘The Bank's principal financial instruments comprise of cash on hand and in bank, deposits, loans and advances, other current assets, accounts and other payables and borrowings (including promissory notes). As outlined below, the management considers that the carrying amounts of financial assets and liabilities recognized in the financial statements approximate their fair value except for the Bank's bond. a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows: 31 December 2014 Im thousands fMongollan Levelt Level? Level? Total Levelt Level? Level Tota rugriks [ASSETS AT FAIR VALUE FINANCIAL ASSETS Investment secures avelleble : 1,200,000 14,200,000 : - 7 : tersale TOTAL ASSETS RECURRING FAIR VALUE MEASUREMENTS : + 11,200,000 11,200,000 ‘ : : : LIABILITIES CARRIED AT FAIR VALUE Other flnancial Habilities Financial derivatives + 1403,624 = 103,828 : : - : "TOTAL LIABILITIES RECURRING FAIR VALUE MEASUREMENTS 1403,528 1.403.626 Financial derivatives measured at level 2 are fair valued through interest rate parity analysis using the inter-bank rates of each currency. lavestment securities available for sale fully relate to the Bank's investment in MIK (Note 10). The Bank has purchased its shares in MIK at the same price at which other third-parties (commercial banks) purchased MIK shares during this period. These were fair valued using discounted cash flows at the weighted average cost of capital. If the share price of MIK would increase/(decrease) by 10%, the fair value of investment would increase/(decrease) by MNT 1.12 milion,t Development Bank of Mongolia Notes fo the Financial Statements ~ 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 29, FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) b) Assets and liabilities not measured at fair value but for which fair value is disclosed ‘The Bank carries its investments available for sale and financial derivatives at fair values. All other assets and liabilities are cartied at amortised cost. The Bank determines fair values for those financial struments carried at amortised cost as follows: () Financial assets and liabilities for which fair value approximates carrying amount For financial assets and financial liabilities that are liquid or have short term maturity of less than one year, carrying amounts approximate their respective fair value. (i) Fixed rate financial instruments The feir value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Thus, market interest rates when they were first recognized are compared to the current market rates offered for the comparable financial instruments available in Mongolia. In case there were no significant changes in market rates, carrying amounts approximate fair Value of the instrument. ‘The Bank does not operate in a normal market environment. On the asset side loans are provided to socially and economically important entities or sectors at well below normal commercial market rates. The rate at which the Bank has issued loans to both Ministries and Corporates has not significantly changed since inception and thus, carrying value of lending approximates its fair value. ‘The Bank's long term debt instruments consist of "Bond issued to international market” and "Samurai bond issued in the Japanese bond market”. Bond issued to international market was fully guaranteed by Mongolia and issued in March 2012 at a fixed interest rate of 5.75% and 5 years maturity. This bond js listed on the Singapore Stook Exchenge and its fair value has been calculated using its quoted price as at 31 December 2014 In January 2014, Samurai bond was issued at a fixed rate of 1.52% p.a. with 10 years maturity and guaranteed by the Mongolian Government and Japan Bank of International Cooperation (JBIC). JBIC's guarantee covers the principal and part of the interest ofthis Issue. Management believes that fair value as of 31 December 2014 approximates carrying value, as there was no substantial change in interest rates on the Japanese market since inception of the bond. Fair values of other borrowings and issued promissory notes, which represent a separate market segment (Note 4), approximate carrying values as of 31 December 2014, as there were no substantial changes in interest rates since inception and/or related liabilties (as in the case of issued promissory notes) represent principal market segment and thus their interest rates are not sensitive to the overall changes of interest rates in the Mongolian banking sector. Related loans financed from these borrowings and issued promissory notes represent principal market segment and their fair values (included in loans and advances) approximate carrying values as of 31 December 2014, as there were no substantial changes in interest rates since inception and/or related interest rates are not sensitive to the overall chenges of interest rates in the Mongolian banking sector. Discount rates, used below, depend on currency, maturity of the instrument and credit risk of the counterparty. The increase in range in for the year ending 31 December 2014 is due to new one off specific loan agreements and do reflect a general increase in the interest rates being charged by the bank in this specific market. The discount rates were as follows: 6Development Bank of Mongolia r Notes to the Financial Statements 31 December 2014 t (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) ; contractual interest rates and are not materialy different from effective interest rates. Bank deposits 34 December 2014 34 December 2013 The interest rates used in determining fair values are presented below. These rates represent f ‘Short-term placements with other banks MNT 10.10% to 18.30% pa. 8.50% to 12.00% p.a. with original maturities of more than USD. 6.00% t0 6.75% pa. 5.00% to 6.40% pia. { three months wPY 4.50% to 5.10% pa. EUR 45% to 7.40% pa. f Loans and advances funded by: t + The Bank's equity and Bond: { -LoansdiventotheMinsties TESS Raps. TE 10 TB pe WNT 4.0% t0 12.0% pa 7.38% to 1200% pa. f pice given i ie epee cre HUD, 7.35% to 8.20% pa 7.35% to 8.10% p.s. = Borrowing: { Z ae MNT 6.00% to 6.125% p.a. 6.00% to 6.125% pa. fone te eee usp 5190610 785% na. 6.125% 106.1284 pa t 5.70% 0 10.0% pa 5.70% to 7.00% p.a. ‘ ptaone oh the Corpora Ht usp. 5.13% to 8.0% pa 8.00% 0.950% pia, t EUR 4.40% to 4.79% pa. 2 : Due to other banks MNT : 8.50% pa. [ usp 6.00% pa. EUR : Promissory notes MNT : { co Bond usb 7.64% pa. PY a 5 Borrowing MNT 4.79% pa. 4.79% pa. { usb 4.47% 0 6.00%. 4.79% p EUR 2.28% pa. 7 He t é { ri c ‘ l L L L £ 66Development Bank of Mongolia Notes to the Financial Statements 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 29, FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) Fair values of financial instruments as at 31 December 2014 carried at amortised cost are as follows: 34 December 2014 In thousands of Mongotan nine Carrying Amount Levelt Level 2 Level 3 Assets: Cash and cash equivalents, 716,457,838 8618 716,449,220 : ‘Cash on hand 8,618 8618 - : Gash at Bank of Mongolia 107,197,216 ~ 107,197,216 7 Gash at other banks 2,386,481 7 2,385,481 7 Short term ceposts with focal z ae 606,926,623 606,926,528 Bank deposits 687,686,397 - 687,686,307 7 Loans and advances 3,803,381,407 : - 3,809,381,407 Loans and advances to be repaid by the State budget pioulisecnea 7 feet enone Loans and advances to be ounce 41,751,697,911 : = 1,761,697,914 Short term investment 260,478,566 260,478,566 : Total financial assets cartied pb pablo abary 5,468,004,208 8.618 1,654614183 _9,803,381,407 Liabilities: Customer accounts 78,475,742 = 79,475,742 : Due to other banks 195,495,809 = 195,495,809 i Promissory notes 176,834,092 176,634,092 Bonds 1,678,955,858 1,463,116,365 : : ‘Bond issued to international eat 1,109,319,887 1,078,425 328 - : ‘Samual bond issued in the ee ae 369,635,771 384,691,037 7 : Borowings 3,827,121,789 ~ — 3,927,121,789 : ‘hancing trom the i iGreen 2,538,910,594 - 2,838,910,504 Borrowing from fereign bank 788,211,195 - 708,211,196 - Total financial liabilities Lea mene 5,256,683,080 1,483,116,365 3,777,727,402 : 67Development Bank of Mongolia Notes to the Financial Statements ~ 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) C 29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) t Fair values of financial instruments as at 31 December 2013 carried at amortised cost are as follows: t 31 December 2013 Carving f In thousands of Mongolan Tugrks ___ Amount oul come fas Assets: f Cash and cash equivalents 379,461,233 6589 370,454,644 : Cash on hand 6,580 6,580 - : Gash at Bank of Mongolia 418,732 - 418,732 : ‘ Gash at other banks 21,293,060, > 21,298/080 : i eee 357,742,852 - 967,742,962 - Bank deposits 652,338,027 = 652,338,027 : ( Loans and advances 2,179,590,302 : ~ — 2,79,590,302 Loans and advances to be repaid : 7 . orb Site cet 1,321,250,545 1,821, 250,545 ‘ ‘cans and advances tobe repaid pies comes 858,339,757 - - 858,330,757 f Total financial assets carried at Ble hLetehs 3,211,380,562 6,589 1,034,702.671 _2,179,590,302 t f Liabilities: [ Gustomer accounts 16,278,742 : 16,278,742 : 7 Other liabilities ‘373,841 : 373,844 : f Due to other banks 149,061,307 > 411,089,307 7 Promissory notes. { Bonds 972,107,029 920,565,915 : i Seer 972,107,029 920,566,916 - : { Borrowings 4,987,189,199 + 1,987,189,199 “ 7 Financing fom the Government _1,987,189,199 > 11987/189,199 7 t Borrowing from foreign bank : ; ; _ t Total financial liabilities carried { ee 3,086,900,118 920,565,015 2,114,883,089, - i i L {Development Bank of Mongolia Notes to the Financial Statements - 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 30. COMMITMENTS AND CONTINGENCIES Jn thousands of Mongolian Tugriks 31 December 2014 31 December 2013 ‘Guerantees issued 320,139,352 198,747,823, Import letters of credit 10,980,744 : Total 331,100,096 198,747,823 The Bank has given a guarantee to the Export-Import Bank of China on behalf of "New Yarmag Housing Projecis LLC” amounting to USD 84 million on the 13th September 2012. To date the Export-Import Bank of China has not yet provided any funding to the New Yarmag Housing Project. ‘The Bank has issued @ two year guarantee in the name of Erdenes Tavan Tolgoi LLC to a local ‘commercial bank in the amount of USD 35 milion in January 2014. In April 2014, the Bank made a basic loan agreement with Commerzbank Akliengesellschatt in order to promote trade relations between Mongolia and Federal Republic of Germany and/or other member countries of the OECD. The Bank has issued a letter of credit in the name of Ere! LLC to a Commerzbank amounting to EUR 12 milion and EUR 4.8 million was unused as at 31 December 2014. The Bank has MNT 1,305,554 million of loan commitments (31 December 2013: MNT 1,228,040 million). Tax legislation. Mongolian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant authorities. ‘The Mongolian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged by tax authorities. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods, ‘The Mongolian tax legislation does not provide definitive guidance in certain areas, specifically in ‘areas such as VAT, withholding tax, corporate income tax, personal income tax, transfer pricing and other areas. From time to time, the Bank adopts interpretations of such uncertain areas that reduce the overall tax rate of the Bank. As noted above, such tax positions may come under heightened: scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity, Management believes that its interpretation of the relevant legislation is appropriate and the Bank’s positions related to tax and other legislation will be susiained. Management believes that tax and legal risks are remote at present. The management performs regular re-assessment of tax risk and its position may change in the future as a result of the change in conditions that cannot be anticipated with sufficient certainty at present. As of 31 December 2014, management has assessed that recognition of a provision for uncertain tax position is not necessary, 69i c Development Bank of Mongolia Notes to the Financial Statements — 31 December 2014 (Expressed in thousands of Mongolian Tugriks unless otherwise stated) 31, SEGMENT REPORTING Operating segments are components that engage in business activites that may eam revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available. The CODM is the person - or group of persons - who allocates resources and assesses the performance for the entity. The functions of the CODM are performed by the Management Board of the Bank. ‘The Bank is a development finance institution dedicated to the economic and social progress of Mongolia. The Bank's products and services are similar and are structured and distributed in a fairly uniform manner across borrowers. Based on the evaluation of the Bank's operations, management has determined thet the Bank has only ‘one reportable segment since the Bank does not manage its operations by allocating resources based ‘on a determination of the contribution to net income from individual borrowers. Management receives ‘and reviews financial information in IFRS format. ‘The Bank's revenue is received solely from entities with Mongolia, All non-current assets of the Bank are located within Mongol A spilt of the Bank's revenue streams from sources is shown below. In thousands of Mongolian Tugrike Year ended Year ended oa S1 December 2014 ___31 December 2013 Interest income for loan paid by: 193,000,048 94,023,422 ~ The State budget 116,481,840 45,984,927 = The Corporates 76,848,178 48,038,495 Interest income from Commercial banks: 135,893,361 37,036,138 ~Deposit 135,256,347 35,814,458 ~ Current account 877,014 1,221,678 ‘Short term investment: 4,286,457 7 ~ The State budget 4,246,487 : Fee and commission income: 814.998, fs With the Corporates 814,098 - Gain{(loss) from foreign currency trading: (2,148,048) 2,000,002 With the Government (10,072) 121 = With the Corporates (2,138,874) 4,989,681 Losses from financial derivatives: (1,409,624) - With the Corporates (1,403,624) : Total income 330,342,265 133,059,560 7Development Bank of Mongolia Notes to the Financial Statements - 31 December 2014 ' (Expressed in thousands of Mongolian Tugriks uniess otherwise stated) 32, POST BALANCE SHEET EVENTS. According to loan agreement with Chinese Development Bank, the Bank has obtained following tranche of USD 12.95 million on 6 January 2015. This loan is disclosed in borrowings (Note 18). Policy rate. Bank of Mongolia has increased policy interest rate by 1.0 percentage point to 13% effective from 1 January 2015. Following Parliament Resolution No, 41 dated 48 February 2015, the Government of Mongolia issued 1 resolution No. 95 on 11 March 2018, which stipulates the actions to be taken by the Government and the Development Bank of Mongolia until 2018, in the Bank's gradual transition from being policy- } oriented bank to operating as a self-sustainable financial institution. More detailed information on the implications of this decision is outlined in Notes 1 and 4, }