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NOTES TO THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2004 1. LEGAL STATUS AND
OPERATIONS 1.1 ORIX
Investment Bank Pakistan Limited (the Company) was incorporated as a public
limited company in Pakistan under the name of ORIX Investment Finance Company
Pakistan Limited. Subsequently, the name of the company was changed to ORIX
Investment Bank Pakistan Limited. The registered office of the company is
situated at Overseas Investors Chamber of Commerce Building, Talpur Road,
Karachi, Pakistan. The company is licensed to carry out investment finance
services as a Non-Banking Finance Company (NBFC) under the Non-Banking Finance
Companies (Establishment and Regulations) Rules, 2003 issued by the Securities
and Exchange Commission of Pakistan (SECP) previously described under SRO 585
(1)/87 dated July 13, 1987 issued by the Ministry of Finance, Government of
Pakistan). The company is listed on the Karachi and Lahore Stock Exchanges. 1.2 During
the year, the company has established an Equity Brokerage Division (EBD), which
has commenced its operation effective April 15, 2004. In this regard the
company has purchased membership of Karachi Stock Exchange and acquired a room
in the Karachi Stock Exchange building. 2. STATEMENT OF
COMPLIANCE These financial statements
have been prepared in accordance with approved accounting standards as
applicable in Pakistan and the requirements of the Companies Ordinance, 1984
and the applicable regulations and directives of SECP and State Bank of
Pakistan (SBP). Approved accounting standards comprise of such International
Accounting Standards (IASs) as notified under the provision of the Companies
Ordinance, 1984. Wherever, the requirements of the Companies Ordinance, 1984,
or regulations / directives issued by SECP and SBP differ with the requirements
of these standards, the requirements of the Companies Ordinance, 1984 or the
requirements of the said directives take precedence. 3. BASIS OF
MEASUREMENT These financial statements
have been prepared in accordance with approved accounting standards as
applicable in Pakistan and the requirements of the Companies Ordinance, 1984
and the applicable regulations and directives of SECP 4. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES 4.1 Operating fixed assets and depreciation Operating fixed assets are
stated at cost less accumulated depreciation. Depreciation is charged to income
applying the straight-line method whereby the cost of an asset is written-off
over its estimated useful life. In respect of additions and deletions of assets
during the year, depreciation is charged from the month of acquisition and up
to the month preceding the deletion respectively. Where the carrying amount
of an asset exceeds its estimated recoverable amount, it is written down to its
recoverable amount. Maintenance and normal
repairs are charged to profit and loss account as and when incurred. Major
renewals and improvements are capitalised and assets so replaced, if any, are
retired. 4.2 Intangible assets and amortisation Intangible assets are
amortised over a period of 36 months from the month in which these are
incurred. 4.3 Stock exchange
membership card and room These are stated at cost
less impairment, if any. The carrying amounts are reviewed at each balance
sheet date to assess whether they are recorded in excess of their recoverable
amounts, and where carrying value exceeds estimated recoverable amount, these
are written down to their estimated recoverable amount. 4.4 Investments The company classifies its
investments as follows: Held for
trading Investments which are
acquired principally for the purpose of generating a profit from short-term
fluctuations in price or dealer’s margin are classified as held for trading. Held to
maturity Investments with fixed
maturity where management has both the intent and ability to hold to maturity
are classified as held to maturity. Available
for sale Investments which do not
fall under the above categories are classified as available for sale. All investments are
initially recognized at cost, being the fair value of the consideration given
including acquisition charges associated with the investment. After initial
recognition, investments which have fixed maturity and which are intended to be
held to maturity, are measured at amortised cost. At each reporting date, all
marketable investments are marked to market in accordance with the guidelines
contained in the SBP’s BSD Circular No. 20 dated August 04, 2000. The
difference between the carrying amount and revalued amount is taken to “surplus
/ (deficit) on revaluation of securities” and shown separately in the balance
sheet below shareholders’ equity in accordance with the said circular. Realised
gain / loss on such securities is taken to profit and loss account on disposal. Premiums and discounts on
held to maturity and available for sale investments are amortised using the
effective interest rate method and taken to income from investments. For investments in
government securities, fair value is determined by reference to quotations
obtained form Reuters. In respect of investments in quoted marketable
securities, fair value is determined by reference to Stock Exchange quoted
market prices at the close of business on balance sheet date except for Term
Finance Certificates in respect of which rates quoted in money market are used
as these are not actively traded on the Stock Exchanges. 4.5 Derivatives Derivative instruments
held by the company generally comprise of forward contracts in the capital and
money markets. Derivatives are stated at
fair value at the balance sheet date. The fair value of a derivative is the
equivalent of the unrealized gain or loss from marking to market the derivative
using the prevailing market rates. Derivatives with positive market values
(unrealized gains) are included in other assets and derivatives with negative
market values (unrealized losses) are included in other liabilities in the
balance sheet. The resultant gains and losses are adjusted against the related
“surplus / (deficit) on revaluation of securities”. 4.6 Securities under repurchase / reverse repurchase agreements Transactions of repurchase
/ reverse repurchase of government securities, listed shares and Term Finance
Certificates are entered into at contracted rates for specified periods of time
and are accounted for as follows: Repurchase agreements Securities sold with a
simultaneous commitment to repurchase at a specified future date (Repo)
continue to be recognised in the balance sheet and are measured in accordance
with the accounting policies for investments. The counter party liability for
amounts received under these agreements is included in short-term borrowings.
The difference between sale and repurchase price is treated as mark-up on
short-term borrowings and accrued over the period of Repo agreement. Reverse repurchase agreements Securities purchased with
a corresponding commitment to resell at a specified future date (Reverse Repo)
are not recognised in the balance sheet. Amounts paid under these agreements
are recorded as funds placements with financial institutions. The difference
between purchase and resale price is treated as return from funds placement
with financial institutions and is accrued over the period of Reverse Repo
agreement. 4.7 Settlement date accounting All “regular way”
purchases and sales of financial assets are recognised on the settlement date,
i.e. the date on which the asset is delivered to or by the company. Regular way
purchases or sales of financial assets are those, the contract for which
requires delivery of assets within the time frame generally established by
regulation or convention in the market. 4.8 Foreign currency transactions Assets and liabilities in
foreign currencies are translated into Pak Rupees at the exchange rate
prevailing at the balance sheet date. Gains and losses on translation are taken
to profit and loss account. 4.9 Term finances / credit facilities Term finances and credit
facilities originated by the company are stated net of provision for losses on
such assets. The provision is determined on the basis of Prudential Regulations
issued by SECP and management’s evaluation of the specific losses that can be
reasonably anticipated. In addition to specific provision, a general provision
is created for potential losses not specifically identified but which
experience indicates are present in the portfolio. The provision is credit by
charge to profit and loss account. Bad debts, if any, are written off against
the provision. 4.10 Provisions Provisions are recognised
when the company has a present legal or constructive obligation as a result of
past events and it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable estimate of
the obligation can be made. 4.11 Certificates of deposit Return on certificates of
deposit (CODs) issued by the company is recognised on a time proportion basis
taking into account the relevant CODs issue date and final maturity date. 4.12 Taxation Current The charge for current
taxation is based on taxable income at the current rates of taxation after
taking into account applicable tax credits, rebates and exemptions available,
if any. Deferred Deferred tax is accounted
for using he liability method in respect of all temporary differences at the
balance sheet date between the tax bases of assets and liabilities and their
carrying amounts. Deferred tax liabilities are recognised for all taxable
temporary differences. Deferred tax assets are recognised for all deductible
temporary differences to the extent that it is probable that the future taxable
profits will be available against which such temporary differences can be
utilized. The carrying amount of
deferred tax asset is reviewed at each balance sheet date and reduced to the
extent that it is no longer probable that sufficient taxable profits will be
available to allow the deferred tax asset to be utilised. Deferred tax assets and
liabilities are measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on the tax
rates (and tax laws) that have been enacted or subsequently enacted at the
balance sheet date. Deferred tax on surplus /
(deficit) on revaluation of investments is charged or credited directly to the
same account. 4.13 Revenue recognition a) Income on loans and term finances originated
by the enterprise is recognised on a time proportion basis taking into account
the principal / net investment outstanding and applicable rates of profit
thereon. Where recovery is considered doubtful or expectations of ultimate
collection are unreasonable, income is recognised on actual receipt basis. b) Income on commercial papers is recognised on
a time proportion basis over the life of the instruments. c) Income from reverse repurchase transactions
is recognised on a time proportion basis. d) Capital gains or losses on sale of
investments are recognised in the period in which they arise. e) Return on Government securities and Term
Finance Certificates is recognised on an accrual basis. f) Profit on musharika transactions is
recognised on completion of each trading contract. g) Income from fees, commission and brokerage,
etc. is recognised when due, in accordance with the agreed terms. h) Dividend income is recognised, when the right
to receive the same is established. 4.14 Fiduciary assets Assets held in trust or in
a fiduciary capacity are not treated as assets of the company and accordingly
are not included in these financial statements. 4.15 Cash and cash equivalents Cash and cash equivalents
comprise of cash in hand and balances with banks. 4.16 Staff retirement benefits The company operates a
contributory provident fund scheme covering all permanent employees. Equal
monthly contributions are made to the fund by the company and employees. 4.17 Related parties transactions Transactions between the
company and its related parties are carried out on an arm’s length basis and
the related price is determined in accordance with the “Comparable Uncontrolled
Price Method”. 4.18 Financial instruments Financial assets and financial liabilities Financial assets include
trade debts, advances, deposits, other receivables and bank balances. These are
stated at their amortised cost as reduced by appropriate allowances for
estimated impairment amount, if any. Financial liabilities are
classified according to the substance of the contractual arrangements entered
into. Significant financial liabilities include creditors, accrued expenses and
other liabilities. Assets or liabilities that
are not contractual in nature and that are created, as a result of statutory
requirements imposed by the Government are not the financial instruments of the
Company. All financial assets and
liabilities are initially measured at cost, which is the fair value of the
consideration given and received respectively. Financial assets and liabilities
held for trading and available for sale are subsequently measured at fair value
whereas all other financial assets and liabilities are recorded at amortised
cost adjusted by impairment, if any. Any resulting gain/(loss),
on the recognition and de-recognition of the financial assets and liabilities
is included in the net profit and loss for the period in which it arises. All financial assets and
liabilities are recognised at the time when the company becomes a party to the
contractual provisions of the instruments. Any gain or loss on the recognition
and de-recognition of the financial assets and liabilities is included in the
net profit and loss for the period in which it arises. A financial asset and a
financial liability is only offset and the net amount is repotted in the
balance sheet, when there is a legally enforceable right to set off the
recognised amount and the company intends either to settle on a net basis or to
realize the asset and settle the liability simultaneously. 4.19 Segment reporting A business segment is a
distinguishable component within the company that is engaged in providing
products / services which are subject to risks and returns that are different
from those of other business segments. The company has following
reportable business segments on the basis of product / service characteristics
as disclosed in note 35 to the financial statements: §
Credit §
Treasury §
Corporate
finance §
Money
market brokerage §
Equity
brokerage 5. FIXED ASSETS - Tangible 5.1 The
following is a statement of operating fixed assets:
5.2 Includes
assets having book value of Rs. 777,265/- (2003: Rs. 718,353/-) which are in
the possession and use of employees in accordance with the policy of the
company. 5.3 Disposal of Fixed
Assets
6. ADVANCE AGAINST PURCHASE OF FIXED ASSETS Represents advance against
purchase of a motor vehicle for company’s executive. 7. INTANGIBLE ASSETS
7.1 This represents cost of acquisition of money market brokerage
licenses. 8. STOCK EXCHANGE MEMBERSHIP CARD AND ROOM
9.1 Represents house loan provided as per the company’s policy,
which is also duly approved by the SECP under Section 195 of the Companies
Ordinance, 1984. The loan is secured against equitable mortgage on the
property, the title documents of which are held by the company. The loan is
repayable within a period of 10 years of retirement date whichever is earlier
and carries mark-up at the rate of 5 percent per annum (2003: 10 percent). The maximum
outstanding amount at the end of any month during the year against loan to
Chief Executive was Rs. 5,155,954 /- (2003: Rs. 5,804,684/-). 9.2 Represents
house, car and other loans provide as per the company’s employee loan policy.
The loan is secured against equitable mortgage on the property, the title
documents of which are held by the company. These loans carry mark-up at the
rate of 5 percent (2003: 5 to 10 percent) per annum and are repayable within 20
years of retirement date, whichever is earlier. The maximum aggregate amount
due from executives at the end of any month during the year was Rs. 19,214,974
/ - (2003: Rs. 18,337,814/-). 9.3 Represents
finances provided both at fixed interest rate and floating interest rate. The
base rate used for floating interest rate is the SBP discount rate or KIBOR or
weighted average yield rate of treasury bills. The mark-up rate ranges from 4.7
to 18.5 percent (2003: 6.10 to 20 percent) per annum. The term finances are
repayable within a period of 13 months to 60 months from the date of financing
and are secured against charge over fixed assets, trade receivables,
pledge hypothecation of stocks and
personal guarantees of directors etc. These include finances aggregating to Rs. 117,246,975/-
(2003: Rs. 78,534,808/-) provided to leasing companies / modarabas at mark-up
rates ranging from 6.75 to 12.75 percent (2003: 12 to 18.50 percent) per annum.
These finances are repayable within a period of 1 to 3 years and are secured
against lease receivables of the leasing companies / modarabas under specified
lease contracts and corporate guarantees of the respective leasing
companies modarabas.
9.4 9.5 Particulars
of provision for losses on term finances:
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