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Development Bank of Mongolia International Financial Reporting Standards Interim Financial Statements and Independent Auditor’s Report 30 June 2013

Contents INDEPENDENT AUDITOR’S REPORT INTERIM FINANCIAL STATEMENTS Interim Statement of Financial Position ......................................................................................................... 1 Interim Statement of Comprehensive Income............................................................................................... 2 Interim Statement of Changes in Equity........................................................................................................ 3 Interim Statement of Cash Flows ............................................................................................................. 4 Notes to the Interim Financial Statements

1. CORPORATE INFORMATION AND OPERATING ENVIRONMENT 8

2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND 9

PRESENTATION

3. SIGNIFICANT ACCOUNTING POLICIES 13

4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION 21

UNCERTAINTY

5. APPLICATION OF NEW AND REIVISED INTERNATIONAL FINANCIAL 22

REPORTING STANDARDS

6. CASH AND CASH EQUIVALENTS 26

7. BANK DEPOSITS 27

8. LOAN AND ADVANCES 28

9. OTHER ASSETS 32

10. PROPERTY AND EQUIPMENT 33

11. INTANGIBLES ASSETS 34

12. CUSTOMER ACCOUNTS AND OTHER LIABILITIES 35

13. BONDS 35

14. BORROWINGS 36

15. RELATED PARTY TRANSACTIONS 36

16. CONTRIBUTED CAPITAL 38

17. INTEREST INCOME 39

18. INTEREST EXPENSE 39

19. FOREIGN EXCHANGE LOSSES LESS GAINS 40

20. ADMINISTRATIVE AND OTHER OPERATING EXPENSES 40

21. INCOME TAXES 40

22. FINANCIAL RISK MANAGEMENT 42

23. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY 55

24. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES 56

25. COMMITMENTS AND CONTINGENCIES 60

26. SEGMENT REPORTING 61

27. POST BALANCE SHEET EVENTS 62

Development Bank of Mongolia Interim Statement of Financial Position Period ended 30 June 2013

The accompanying notes are an integral part of these financial statements.

Development Bank of Mongolia Interim Statement of Comprehensive Income Period ended 30 June 2013


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Development Bank of Mongolia Interim Statement of Comprehensive Income Period ended 30 June 2013


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In thousands of Mongolian Tugriks Note

1 January 2013

to 30 June 2013

1 January 2012

to 30 June 2012

Interest income 17 40,580,655 600,573

Interest expense 18 (27,655,733) (406,668)

Net interest income 12,924,922 193,905

Net interest income after provision for loan

impairment 12,924,922 193,905

Gains less losses from trading in foreign currencies 770,852 -

Foreign exchange gains less losses 19 (1,966,848) (2,500,419)

Administrative and other operating expenses 20 (2,149,512) (755,243)

Profit/(loss) before tax 9,579,414 (3,061,757)

Income tax (expenses)/benefit 21 (2,124,726) 829,757

Profit/(loss) for the period 7,454,688 (2,232,000)

Total comprehensive income/(loss) for the period 7,454,688 (2,232,000)

Development Bank of Mongolia Interim Statement of Changes in Equity Period ended 30 June 2013


In thousands of Mongolian TugriksNote Share capital

Retained

earningsTotal equity

Balance at 1 January 2012 16 49,700,000 (602,190) 49,097,810

Loss for the period - (2,232,000) (2,232,000)

Total comprehensive loss - (2,232,000) (2,232,000)

Balance at 30 June 2012 16 49,700,000 (2,834,190) 46,865,810

Balance at 1 January 2013 16 73,300,000 (6,308,151) 66,991,849

Profit for the period - 7,454,688 7,454,688

Total comprehensive income - 7,454,688 7,454,688

Balance at 30 June 2013 16 73,300,000 1,146,535 74,446,535

Development Bank of Mongolia Interim Statement of Cash Flows Period ended 30 June 2013


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In thousands of Mongolian Tugriks

1 January 2013

to 30 June 2013

1 January 2012

to 30 June 2012

Cash flows from operating activities

Profit / (loss) before tax 9,579,414 (3,061,757)

Adjustments to:

Depreciation, amortization 84,927 75,207

Interest income (40,580,655) (600,573)

Interest expense on borrowings 27,655,733 406,668

FX (gain)/loss -Unrealized 1,638,772 186,086

Other non-cash operating expenses 233,569 114,775

Cash flows from operating activities before changes in

operating assets and liabilities (1,388,240) (2,879,594)

Net (increase)/decrease in loans and advances to customers (616,987,426) (27,225,665)

Net (increase)/decrease in other financial assets 30,917,488 (26,133,092)

Net increase/ (decrease) in other financial liabilities 38,701,826 (1,138,514)

Net cash (used in)/from operating activities before tax and interest received and paid

(548,756,352) (57,376,865)

Income taxes paid (686,593) -

Interest received 22,014,073 391,657

Interest paid on borrowings (24,357,996) (738,049)

Net cash (used in)/from operating activities (551,786,868) (57,723,257)

Development Bank of Mongolia Interim Statement of Cash Flows Period ended 30 June 2013


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1 January 2013

to 30 June 2013

1 January 2012

to 30 June 2012

Net cash (used in)/from operating activities (551,786,868) (57,723,257)

Cash flows from investing activities

Purchase of property, plant, equipment and intangible assets (297,283) (110,026)

Net cash used in investing activities (297,283) (110,026)

Cash flows from financing activities

Proceeds from borrowings 433,553,076 -

Proceeds from bonds 147,045,342 769,007,622

Net cash from/(used in) financing activities 580,598,418 769,007,622

Effect of exchange rate changes on cash and cash

equivalents 914,183 6,200,770

Net (decrease)/increase in cash and cash equivalents 29,428,450 717,375,109

Cash and cash equivalents at the beginning of the period 216,468,206 75,817,745

Cash and cash equivalents at the end of the period 245,896,656 793,192,854

Development Bank of Mongolia Notes to the Interim Financial Statement – 30 June 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

9

1. 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 Resolution No. 195 dated 20 July 2010 by the Government of Mongolia and under the Development Bank Law passed by Parliament on 10 February 2011. The Bank has been registered as a limited liability company with the Legal Entity Registration Office of the General Authority for State Registration since 25 March 2011 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 the Ministry of Economic Development, and is regulated, principally, by the Development Bank Law. The Bank commenced operations in May 2011.

The Government of Mongolia is the Bank's sole shareholder. In May and December 2011, the Government contributed MNT 16.7 billion and MNT 33.0 billion, respectively, in cash to the Bank's capital. In 2012, the Government contributed a further MNT 23.6 billion and as at 30 June 2013, the Bank's share capital was 73.3 billion. The Government has contributed a further MNT 10.0 billion, MNT 5.0 billion and MNT 35.0 billion in July, August and September 2013, respectively, to the Bank’s capital.

In accordance with Article 21.1 of the Development Bank Law, Parliament determines the source of equity financing the Government can provide to the Bank and determines the limits of loan 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.

Until July 2013, the executive management of the Bank had been carried out by a joint team from the Bank and the Korean Development Bank. In July 2013, the Management Agreement with the Korean Development Bank was changed to the Advisory Agreement, and the Bank is managed solely by Mongolian nationals appointed by the Government. The Bank had an average of 63 employees during the period ended 30 June 2013 (2012: 43). The Bank's principal place of business is: Max Tower Building 2-3

rd floor, Juulchin Street 4/4 Ulaanbaatar 15170, Mongolia.

These financial statements are presented in Mongolian Tugriks (“MNT”), unless otherwise stated.

These interim financial statements were approved for issue by the Board of Directors of the Bank on 8 November 2013.

Operating Environment of the Bank

Mongolia displays many characteristics of an emerging market including relatively high inflation and

interest rates. After recording steady growth in 2010 and 2011, the Mongolian economy has shown

signs of a slowdown in 2012 that continued to 2013 due to declining global commodities prices,

concerns over slowing growth in China and changes to the Mongolian foreign investment law which

have slowed inbound foreign investment into the country.

The tax and customs legislation in Mongolia is subject to varying interpretations. The future economic

performance of Mongolia is tied to the continuing demand from China and continuing high global

prices for commodities as well as dependent upon the effectiveness of economic, financial and

monetary measures undertaken by the Government together with tax, legal regulatory and political

developments.

The international sovereign debt crisis, stock market volatility and other risks could have a negative

effect on the Mongolian financial and corporate sector.

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.


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2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION

Statement of Compliance

The interim financial statements of the Bank have been prepared in accordance International Financial Reporting Standards (IFRS), which includes all applicable IFRS, International Accounting Standards (IAS), and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and Standing Interpretations Committee (SIC).

Basis of Preparation and Presentation

These interim financial statements have been prepared in accordance with International Accounting Standard No. 34 Interim Financial Reporting, under the historical cost convention, as modified by the initial recognition of financial instruments based on fair 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.

Functional Currency These financial statements 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.

Restatements

The following retrospective restatements have been made in these financial statements:

Accrued Interest Receivable and Accrued Interest Payable. ‘Accrued Interest Receivable’ and ‘Accrued Interest Payable’ were previously reported as separate line items in the Statement of Financial Position for the year ended 31 December 2012, while they are integral to measurement of the related assets and liabilities at amortized cost according to the Bank’s accounting policies. They have therefore been reclassified within ‘Loans and advances’, ‘Bank Deposits’, ‘Cash and cash equivalents’ and ‘Long Term Debt’ in these financial statements. ‘Accrued Interest receivables’ on bank deposits of MNT 2,350 million as at 31 December 2012 has been restated to ‘Bank Deposits’ in the amount of MNT 1,872 million and to ‘Cash and cash equivalents’ in the amount of MNT 478 million. Accrued Interest receivables’ on loans and advances of MNT 6,771 million as at 31 December 2012 has been restated to ‘Loans and advances’. ‘Accrued Interest receivables’ on bank deposits of MNT 108 million as at 1 January 2012 has been restated to ‘Bank Deposits’. ‘Accrued Interest payables’ on bonds of MNT 12,896 million as at 31 December 2012 has been restated to ‘Bonds’. ‘Accrued Interest payables’ on bonds of MNT 102 million as at 1 January 2012 has been restated to ‘Bonds’. This restatement has no impact on the Statement of Comprehensive Income while its impact on the Statement of Financial Position as of 31 December 2012 is presented below.

Unearned Income and Non-Interest income. Management has reconsidered the accounting for ‘Unearned Income’ previously reported within ‘Accounts and Other Liabilities’ and ‘Non-interest income’ which represented loan origination fees. These two items were presented as separate line items in the Statement of Financial Position and the Statement of Comprehensive Income, respectively, for the year ended 31 December 2012. They are reported within ‘Loans and advances’ and ‘Interest Income’ in these financial statements. ‘Other liabilities’ and ‘Loans and advances’ have been reduced by MNT 590 million. This restatement’s impact on the Statement of Comprehensive Income and on the Statement of Financial Position as of 31 December 2012 is presented below.


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2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION (CONTINUED)

Restatements (continued)

Deposits from Borrowers. Management has reconsidered the accounting for ‘Deposits from Borrowers’ previously shown within ‘Accounts and Other Liabilities’. These amounts represented conditional loan commitments. This was presented as a separate line in the Statement of Financial Position for the year ended 31 December 2012. Following a reassessment of the nature of this deposit amounting to MNT 2,330 million has now been presented off balance sheet as undrawn commitments with the corresponding amount removed from ‘Loans and Advances’. This restatement has no impact on the Statement of Comprehensive Income while its impact on the Statement of Financial Position as of 31 December 2012 is presented below.

Previously recorded Interest Income: In 2013, the management performed a detailed analysis of nature of certain transactions with the Government and their accounting treatment in accordance with IFRS. As a result of this analysis, management concluded that cash contributions received from the Government in the amount of MNT 23,957 million in 2012 (MNT 13 billion in the first half of the year) represents Government support with regard to the guarantee issued by the Ministry of Finance and the Bank’s repayment of notes issued under Euro Medium Term Notes Programme, and therefore meet definition of government grant under IAS 20. As a result, related amount is recognised as a reduction in the related ‘Interest Expense’ in these financial statements. Related amount was recognised as interest income in IFRS financial statements for year ended 31 December 2012. This restatement has no impact on the Statement of Financial Position as of 31 December 2012, while its impact on the Statement of Comprehensive Income as of 31 December 2012 is presented below.

Change in Deferred Tax Rate: In 2013, the management performed a detailed analysis of its deferred tax calculation and its future tax rate. As a result of this analysis and on the basis of forecasts management concluded that the Bank will incur tax at a rate of 25%. The Bank had previously used 10% to calculate deferred tax. The related deferred tax asset and income tax expense for 2012 have been restated in these financial statements. Related amount of MNT 2,475 million was recognised in ‘Deferred tax assets’ on the Statement of Financial Position as of 31 December 2012 and in ‘Income tax expense’ on the Statement of Comprehensive Income as of 31 December 2012. This restatement’s impact on the Statement of Comprehensive Income and on the Statement of Financial Position as of 31 December 2012 is presented below.

Recognition of income tax charge: In 2013, the management performed a detailed analysis of its current income tax return for 2012. As a result of this analysis management concluded that the Bank will incur a current tax charge of MNT 3,314 million for the year ending 31 December 2012. This amount has been recognised within ‘Income tax payables’ and ‘Income tax expenses’. This restatement’s impact on the Statement of Comprehensive Income and on the Statement of Financial Position as of 31 December 2012 is presented below.

Bank Deposits. Management has reconsidered the presentation of ‘Bank Deposits’ amounting to MNT 9,000 million as at 1 January 2012 which represented cash. As a result of this analysis management concluded that this amount should be restated to ‘Cash and cash equivalents’. This restatement has been reflected in the 1 January 2012 Statement of Financial Position comparatives shown on page 3.

Reclassifications

Operating expenses. In 2013, the management performed a detailed analysis of its presentation of operating expenses. As a result of this analysis management concluded that ‘Operating Expenses” should be split to show ‘Foreign exchange translation gain less loss’ and ‘Foreign exchange trading gain less loss separately on the Statement of Comprehensive Income. Of MNT 5,771 million reclassified from ‘Operating Expenses’ MNT 5,767 million was reclassified to ‘FX translation gain less losses’ and MNT 4 million was reclassified to ‘FX trading gain’. This reclassification has no impact on the Statement of Financial


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In thousands of Mongolian

Tugriks

Year ended

31 December 2012

(as previously

reported

Restatements Note

Year ended

31 December 2012

(restated)

Assets

Cash and cash equivalents 215,990,270 477,936 6 216,468,206

Bank deposits 167,052,000 1,872,490 7 168,924,490

Loans and advances 489,704,568 3,851,399 8 493,555,967

Accrued interest receivables 9,121,272 (9,121,272) 8 -

Intangible assets 726,688 - 11 726,688

Property and equipment 234,558 - 10 234,558

Deferred tax assets 3,465,282 2,475,078 21 5,940,360

Other assets 2,285,515 - 9 2,285,515

Total assets 888,580,153 444,369- 888,135,784

Liabilities

Other liabilities 3,425,135 (2,919,447) 505,688

Customer accounts 6,960 - 12 6,960

Income tax payables - 3,313,560 21 3,313,560

Accrued interest payables 12,896,260 (12,896,260) 13 -

Bonds 804,421,467 12,896,260 13 817,317,727

Total liabilities 820,749,822 394,113 821,143,935

Equity

Share capital 73,300,000 - 16 73,300,000

Retained earnings (5,469,669) (838,482) (6,308,151)

Total equity 67,830,331 (838,482) 66,991,849

Total liabilities and equity 888,580,153 (444,369) 888,135,784

2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION (CONTINUED) Reclassifications (continued)

Position as of 31 December 2012, while its impact on the Statement of Comprehensive Income as of 31 December 2012 is shown below.

Other Assets and ‘Foreign exchange gain less losses’. In 2013, the management performed a detailed analysis of nature of certain transactions with the Government and their accounting treatment in accordance with IFRS. As a result of this analysis, management concluded that receivables due from the Ministry of Finance, presented within ‘Other Assets”, in the amount of MNT 2,168,468 thousand meets the definition of a government grant under IAS 20. The grant amount is recognised in the related expense to which the grant relates to namely the ‘Foreign exchange gain less losses’ in these financial statements. This was previously treated as an embedded derivative and recorded within ‘Operating Expenses’ in the 31 December 2012 financial statements. This reclassification has no impact on the Statement of Financial Position as of 31 December 2012, and no impact on the Statement of Comprehensive Income as of 31 December 2012.

The reclassifications have no impact on the Statement of Financial Position. The impact of the above restatements on the Statement of Financial Position as of 31 December 2012 is presented below.


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Year ended

31 December

2012

(as previously

reported

Restatements Reclassific

ation Note

Year ended

31 December

2012

(adjusted)

Interest income 36,787,338 (23,909,064) - 17 12,878,274

Interest expense (37,652,609) 23,957,121 - 18 (13,695,488)

Net interest income (865,271) 48,057 - (817,214)

Non-interest income 48,057 (48,057) -

Operating expenses (7,470,614) - 5,767,295 20 (1,703,319)

Foreign exchange trading gains less losses - - 4,060 4,060

Foreign exchange gains less losses - - (5,771,355) 19 (5,771,355)

Profit before tax (8,287,828) (48,057) - (8,287,828)

Income tax expense 3,420,349 (838,482) - 21 2,581,867

Profit for the year (4,867,479) (838,482) - (5,705,962)

Total comprehensive income for the

year (4,867,479) (838,482) - (5,705,962)

2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATOIN (CONTINUED)

The impact of the above reclassification and restatements on the Statement of Comprehensive

Income as of 31 December 2012 is presented below.

The period 1 January 2012 to 30 June 2012 has never previously been audited, published or made publically available. As such the figures for this period are not restated.

The abovementioned restatements and reclassifications were reflected in the Bank’s Statement of cash flows in these financial statements. Management concluded that detailed disclosures of the effect of restatements, reclassifications or other improvements on each financial statement line item of the statement of cash flows are not necessary, given that the only impact is an increase of MNT 9 billion to the cash and cash equivalents opening balance as at 1 January 2012 and a corresponding impact on the ‘Net (increase)/decrease in other financial assets’ line.


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3. 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. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 as 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.

A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (i.e. an asset) for a particular risk exposure or paid to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date. This is applicable for assets carried at fair value on a recurring basis if the Group: (a) manages the group of financial assets and financial liabilities on the basis of the entity’s net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy; (b) it provides information on that basis about the group of assets and liabilities to the entity’s key management personnel; and (c) the market risks, including duration of the entity’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities is substantially the same.

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 external 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, (ii) 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 (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred 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 commissions 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. 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


15

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 of the effective interest rate

Initial recognition of financial instruments. Trading securities, derivatives and other financial 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 initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a 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.

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. Bank Deposits. Bank deposit are recorded when the Bank advances money to counterparty banks 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. 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 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 bankruptcy or a financial reorganisation; - there is an adverse change in the payment status of the borrower as a result of changes in

the national or local economic conditions that impact the borrower; or - the value of collateral significantly decreases as a result of deteriorating market conditions.


16


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 a result of past 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 derecognized and a new asset is recognized at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows.

Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Allowances are made against the carrying amount of loans and advances that are identified as being potentially impaired, based on regular reviews of outstanding balances, to reduce these loans and advances to their recoverable amount in accordance with Regulations on Asset Classification and provisioning approved by the Executive director of Development Bank of Mongolia.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year.

Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year.

Prepayments. Prepayments represent expenses not yet incurred but already paid in cash. Prepayments are initially recorded as assets and measured at the amount of cash paid. Subsequently, these are charged to profit or loss as they are consumed in operations or expire with the passage of time.

Property and Equipment. Property and equipment are initially measured at cost. At the end of each reporting period, property and equipment are measured at cost less any subsequent accumulated depreciation, amortization and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset.

Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When an item of property and equipment is acquired in an exchange for non-monetary asset/s, or a combination of monetary and non-monetary assets, the cost of that item is measured at fair value unless:

- the exchange transaction lacks commercial substance; or - the fair value of neither the asset received nor the asset given up is reliably measurable.


17


Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised, and the replaced part is retired.

Depreciation is computed on the straight-line method, based on the estimated useful lives of the assets as follows:

- IT Equipment 3 years - Furniture and fixture 10 years - Vehicles 10 years

Derecognition of property and equipment. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Intangible Assets. Intangible assets that are acquired by the Bank with finite useful lives are initially measured at cost. At the end of each reporting period items of intangible assets acquired are measured at cost less accumulated amortization and accumulated impairment losses. Cost includes purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates and any directly attributable cost of preparing the intangible asset for its intended use.

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied

in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

Amortization for intangible asset with finite useful life is calculated over the cost of the asset, or other

amount substituted for cost, less its residual value.

Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives are as follows:

Software 10 years

Derecognition of intangible assets. An intangible asset is derecognized on disposal, or when no

future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.

Impairment of Tangible and Intangible Assets. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment or intangible assets. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.

Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost.


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Bonds and Borrowings. Debt securities representing bonds issued are stated at amortised cost. If the Bank purchases its own debt securities in issue, they are removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from retirement of debt.

Ordinary shares. As at 30 June 2013, the Government of Mongolia had paid in capital contributions

to the Bank, but no share certificates had been issued.

Income tax. Interim period income tax expense is accrued using the effective tax rate that would be applicable to expected total annual earnings, that is, the estimated weighted average annual effective income tax rate applied to the pre-tax income of the interim period.

Deferred income tax. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Provisions, Contingent Liabilities and Contingent Assets

Provisions. Provisions are recognized when the Bank has a present obligation, either legal or constructive, as a result of a past event, it is probable that the Bank will be required to settle the obligation through an outflow of resources embodying economic benefits, and the amount of the obligation can be estimated reliably.

The amount of the provision recognized is the best estimate of the consideration required to settle the present obligation at the end of each reporting period, taking into account the risks and uncertainties surrounding the obligation. A provision is measured using the cash flows estimated to settle the present obligation; its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate.

If it is no longer probable that a transfer of economic benefits will be required to settle the obligation, the provision is reversed.

Contingent Liabilities and Assets. Contingent liabilities and assets are not recognized because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Contingent liabilities are disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote.

Contingent assets are disclosed only an inflow of economic benefits is probable.


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3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Credit related commitments. From time to time, the Bank enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognized at their fair value, which is normally evidenced by the amount of fees received. This amount is amortized on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortized balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. In cases where the fees are charged periodically in respect of an outstanding commitment, they are recognized as revenue on a time proportion basis over the respective commitment period.

Employee Benefits

Short-term benefits. The Bank recognizes a liability net of amounts already paid and an expense for services rendered by employees during the reporting period. A liability is also recognized for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

Long-term benefits. The Bank has provided funding to a 3rd

party bank in order for it to give its Employees cheaper mortgage and salary loans. The cost of this scheme has initially been booked as a prepayment and will be expensed through the statement of comprehensive income over the life-time of the loan scheme.

Post-employment benefits. The Bank does not have any pension arrangements separate from the state pension system of Mongolia, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged to the statement of comprehensive incomes in the period the related salaries and wages are payable.

Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Bank to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Bank does not designate loan commitments as financial liabilities at fair value through profit or loss.


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When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset’s effective interest rate which was used to measure the impairment loss.

All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, and which are earned on execution of the underlying transaction, are recorded on its completion.

Government Grants. Grants from the government are recognised at their fair value, where there is a reasonable assurance that the grant will be received, and the Bank will comply with all attached conditions. Government grants relating to costs are deferred, and recognised in the Statement of Comprehensive Income over the period necessary to match them with the costs they are intended to compensate. The Bank has opted to recognise its Government Grants as a reduction of the related expense. If part, or all, of a grant becomes repayable to the government, the repayment is first matched against any remaining deferred income set up for that grant. If this is insufficient, the remainder is expensed immediately.

Foreign Currency

Foreign currency transactions. Transactions in currencies other than the MNT are recorded at the rates of exchange prevailing on the dates of the transactions. At the end of each reporting period, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the end of the reporting period. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date the fair value was determined. Gains and losses arising on retranslation are included in profit or loss for the year. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are not retranslated.

Related Party Transactions

A related party transaction is a transfer of resources, services or obligations between the Bank and a related party, regardless of whether a price is charged.

A person or a close member of that person’s family is related to the Bank if that person:

has control or joint control over the Bank or has significant influence over the Bank or is a member of the key management personnel of the Bank or of a parent of the

Bank


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An entity is related to the Bank if any of the following conditions apply:

the entity and the Bank are members of the same group which means that each parent, subsidiary and fellow subsidiary is related to the others;

one entity is an associate or joint venture of the other entity or an associate or joint venture of a member of a group of which the other entity is a member;

both entities are joint ventures of the same third party; one entity is a joint venture of a third entity and the other entity is an associate of

the third entity; the entity is a post-employment benefit plan for the benefit of employees of either

the Bank or an entity related to the Bank; the entity is controlled or jointly controlled by a person who is a related party as

identified above; and A person that has control or joint control over the reporting entity has significant

influence over the entity or is a member of the key management personnel of the entity or of a parent of the entity.

Due to the nature of the Bank and its role as a policy bank almost all loans and transactions are with related parties. The Bank applies the exemption allowed under IAS 24.25.


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4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Bank's accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on the historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Key Sources of Estimation Uncertainty. The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of each reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Determining the carrying value of employee prepayments. Management has concluded that deposit to State bank of MNT 1 billion receives interest rate below market rate. Based on available information on comparable transactions, management made judgment that the policy rate of the Bank of Mongolia of 10.5% p.a. represents reasonable approximation of market interest rate on MNT funding. As a result, related prepayment was recognized at its fair value at initial recognition of MNT 776,352 thousand. The loss on initial recognition (i.e. the difference between nominal value of this deposit and its fair value) represents salary prepayments in accordance with IFRS requirements. Management has concluded that it is appropriate to recognize the cost of the scheme over the lifetime of the deposit. Refer to Note 9 for details.

Determining the level of loan loss provisioning. The purpose of the Bank is to provide financing to

development projects in the Mongolia. As a result, the projects are often of a social infrastructure

nature and may not have a clearly defined stand-alone profit-oriented cash flow sufficient to

demonstrate a long-term ability to repay the development loan. However, for substantially all loans a

guarantee is provided by the State, and this is considered when assessing whether there is a risk of

loss on any particular loan. Management does not believe any loan impairment assessment is

required on loans where guarantees have been received from the Government. No collective loan

loss provision calculation is performed by the Bank as management assess that given the structure of

the loan portfolio and the guarantees received from Government any loss given default “LGD” on loans would be zero. Given the close involvement of the Government, the Bank and the underlying

projects the Bank finances, management assess that there are no losses incurred but not reported

affecting the Bank. The level of Government guarantees and other collateral guarantees is disclosed

in Note 8. Any changes in the assessment of recoverability of guarantees would impact the profit or

loss of the Bank.

Determining the treatment of Government Grant Schemes. Management has concluded that it is

a recipient of two grant schemes described in Note 18 and Note 19 in the periods 1 January 2012 to

30 June 2012 and 1 January 2013 to 30 June 2013 amounting to MNT 13 billion and MNT 12.3 billion

respectively. Determining whether the transaction falls within the scope of IAS 20 requires

judgement. The definition of government grants includes transfers to an entity, subject to certain

conditions placed on the operating activities of the entity. However, it excludes government

assistance on which cannot be distinguished from normal trading transactions of the entity and transactions which constitute "government participation in the ownership of the entity". Management

have concluded that the two schemes fall within the scope of IAS 20. Management have also

concluded that the receivable due from Government at each reporting date was reasonably assured

to be received.


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4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (CONTINUED)

Initial recognition of borrowings and loans at below market rates. During the first half 2013, the Bank has obtained financing directly from the Government of Mongolia. These funds are

denominated in MNT and obtained at an interest rate of 4.9%, which is lower than rates at which the

Bank could source the funds from other lenders at Mongolian market. Based on available information

on comparable transactions, management made judgment that the policy rate of the Bank of

Mongolia represents the best approximation of market interest rate on MNT funding for banks

(10.5%). As a result of such financing, the Bank is able to advance funds to target customers as

determined by the Government, at advantageous rates of approximately 8% p.a. The Bank has little

or no discretionary rights in determining interest rates on issued loans should it continue to wish

receiving cheap financing from the Government. Management has considered whether gains or

losses should arise on initial recognition of such instruments. Management’s judgement is that these

funds and the related lending are at market rates and no initial recognition gains or losses should

arise. In making this judgement management also considers that these instruments are a separate market segment (i.e. the Bank operates in a separate principal market).

Deferred income tax asset recognition. The recognised deferred tax asset represents income

taxes recoverable through future deductions from taxable profits, and is recorded in the statement of

financial position. Deferred income tax assets are recorded to the extent that realisation of the related

tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in

the future are based on a medium term business plan prepared by management and extrapolated

results thereafter. The business plan is based on management expectations that are believed to be

reasonable under the circumstances taking into account the Bank’s actual profitability during 2013.

Management has concluded that it will be able to recover its deferred tax asset including tax losses

and is likely to incur tax at the rate of 25%.

5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

The following new standards and interpretations became effective for the Group from 1 January 2013:

IFRS 10 “Consolidated Financial Statements” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces all of the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation - special purpose entities”. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The Standard did not have any material impact on the Bank’s financial statements.

IFRS 11 “Joint Arrangements” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities—Non-Monetary Contributions by Ventures”. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The Standard did not have any material impact on the Bank’s financial statements.


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5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED)

IFRS 12 “Disclosure of Interests in Other Entities” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements previously found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarized financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The Standard did not have any material impact on the Bank’s financial statements.

IFRS 13 “Fair Value Measurement” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) improved consistency and reduced complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs The Standard did not have any material impact on the Bank’s financial statements.

IAS 27 “Separate Financial Statements” (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013) was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10 “Consolidated Financial Statements”. The Standard did not have any material impact on the Bank’s financial statements.

IAS 28 “Investments in Associates and Joint Ventures” (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board’s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The Standard did not have any material impact on the Bank’s financial statements.

Amendments to IAS 1 “Presentation of Financial Statements” (issued in June 2011, effective for annual

periods beginning on or after 1 July 2013) changed the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to “statement of profit or loss and other comprehensive income”. The amended standard resulted in changed presentation of financial statements, but did not have any impact on measurement of transactions and balances.

Amended IAS 19 “Employee Benefits” (issued in June 2011, effective for periods beginning on or after 1

January 2013) makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The Standard did not have any material impact on the Bank’s financial statements.

“Disclosures - Offsetting Financial Assets and Financial Liabilities” - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The Standard did not have any material impact on the Bank’s financial statements.


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Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 “Borrowing costs”, retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 now requires disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual financial statements. The Standard did not have any material impact on the Bank’s financial statements.

“Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12” (issued in June 2012 and effective for annual periods beginning 1 January 2013). The amendments clarify the transition guidance in IFRS 10 “Consolidated Financial Statements”. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”, by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The Standard did not have any material impact on the Bank’s financial statements.

Other revised standards and interpretations: IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”, considers when and how to account for the benefits arising from the stripping activity in mining industry. The interpretation did not have an impact on the Group’s financial statements. Amendments to IFRS 1 “First-time adoption of International Financial Reporting Standards - Government Loans”, which were issued in March 2012 and are effective for annual periods beginning 1 January 2013, give first-time adopters of IFRSs relief from full retrospective application of accounting requirements for loans from government at below market rates. The amendment is not relevant to the Group.

New Accounting Pronouncements

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2014 or later, and which the Group has not early adopted.

IFRS 9 “Financial Instruments Part 1: Classification and Measurement”. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) to add transition disclosures. Key features of the standard are as follows:

Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.


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An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss.

All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.

Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. The Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption by the Bank.

“Offsetting Financial Assets and Financial Liabilities” - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement. The Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption by the Bank.

“Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities” (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The Bank does not expect the amendment to have any impact on its financial statements.

IFRIC 21 – “Levies” (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The Bank does not expect the amendment to have any impact on its financial statements.


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Amendments to IAS 36 – “Recoverable amount disclosures for non-financial assets” (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment. The Bank is currently assessing the impact of the amendments on the disclosures in its financial statements.

Amendments to IAS 39 – “Novation of Derivatives and Continuation of Hedge Accounting” issued in June 2013 and effective for annual periods beginning 1 January 2014).The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. The Bank does not expect the amendment to have any impact on its financial statements.

Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank’s financial statements.

6. CASH AND CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash and cash equivalents are not collateralised. All amounts are classified as neither past due nor impaired. The interest on the short term deposit ranges from 7.5%-12.5% p.a. for MNT and 4.8%-7.2% p.a. for USD deposits for the six months of 2013 (in 2012: 4.5%-11.5% p.a.).

Cash at Bank of Mongolia and other banks and short term deposits with local banks with original

maturities of less than three months represent balances with Mongolian banks and the Bank of

Mongolia.


30 June 2013 31 December 2012

(Restated)

Cash on hand 5,322 6,132

Cash at Bank of Mongolia 130,649 31,672,320

Cash at other banks 6,551,516 31,358,100

Short term deposits with local banks 239,209,169 153,431,654

Total cash and cash equivalents 245,896,656 216,468,206


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(Restated)

B1 rated 136,007,722 140,712,501

Unrated 1,236,147 28,211,989

Total bank deposits 137,243,869 168,924,490

6. CASH AND CASH EQUIVALENTS (CONTINUED)

The credit quality of cash and cash equivalents balances may be summarised based on Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 30 June 2013 and 31 December 2012 was as follows.

The unrated balance relates to commercial banks in Mongolia, which have not been rated by any rating agency. Financial condition of these commercial banks is regularly monitored by the Bank. Based on the reputation of these banks on the Mongolian market and other available information (including financial information), management believes that counterparty risk is low and related amounts are fully recoverable.

7. BANK DEPOSITS

Bank deposits consist of term deposits at the local banks with different maturities (over three months but less than a year) and interest rate between 8.5%-11.5% p.a. for MNT deposits. The Bank has no USD deposits over 3 months. The credit quality of term deposits may be summarised based on Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 30 June 2013 and 31 December 2012 was as follows:

The unrated balance relates to commercial banks in Mongolia, which have not been rated by any rating agency. Financial condition of these commercial banks is regularly monitored by the Bank. Based on the reputation of these banks on the Mongolian market and other available information (including financial information), management believes that counterparty risk is low and related amounts are fully recoverable.



(Restated)

Neither past due nor impaired

Central Bank of Mongolia - B1 Rated 130,649 31,672,320

B1 rated 103,999,971 80,940,815

Unrated 141,760,714 103,848,939

Total cash and cash equivalents, excluding

cash on hand 245,891,334 216,462,074


29

8. LOANS AND ADVANCES Loans and advances as of 30 June 2013 and 31 December 2012 consist of the following:

The Bank has a policy to estimate allowances for loan losses. Management has concluded that the Bank requires no provisions on it loans and receivables. Management does not assess any loan impairment assessment is required on loans where guarantees have been received from the Government. Only one loan of MNT 89,825 million as at 30 June 2013 does not hold a direct or indirect guarantee from Government and no impairment indicators have been identified.

At 30 June 2013, MNT 758,911 million of loans and advances are expected to be recovered more than 12 months after the period end (2012: MNT 418,202 million).

The Bank provides loans for the projects implemented by Government under the following conditions:

1. Loans to Ministries: Socially beneficial projects under the condition of repayment from the State Budget and with a Government guarantee of repayment. These projects are not expected to create cash flows with which to repay the debt.

The following projects are included in under the condition of repayment from the State Budget and subject to a Government guarantee: improvement of city and domestic roads, building of a new railway, extension and improvement of the power and heat station, and, through other commercial banks, mortgages for families and individuals of small and medium earnings. 2. Loans to Corporates: Entities which the Government consider operate priority commercial activities (Air Transport, Mining, Railway, Infrastructure and Housing) under the condition of repayment from future income of the projects themselves. The following projects are included in programs under the condition of repayment from future income of the projects: support of small and medium-sized manufactures, support of mining industry, and support to entities for developing air transport.

Within some corporate loan agreements it has been agreed that the Ministry of Finance will pay the interest and principal on the loans.



(Restated)

Loans and advances given to the Ministries 555,774,979 256,159,934

Loans and advances given to Corporates 554,768,414 237,396,033

Total net amount of loans and advances 1,110,543,393 493,555,967


30

8. LOANS AND ADVANCES (CONTINUED)

The analysis by credit quality of loans outstanding at 30 June 2013 is as follows:

All loans to Ministries have the same credit rating as the Government of Mongolia, B1. All corporate entities are unrated. The Management believes that all neither past due nor impaired loans are performing loans. As at 30 June 2013 the aggregated amount of the top 5 largest borrowers is MNT 855,839 million (31 December 2012: MNT 394,898 million) or 77% of total loans and advances (31 December 2012: 80%).

By 30th of June 2013, loans of 29.3 billion MNT are up to 30 days overdue. As for loans and advances given to the Ministries, the Government issued a resolution outlining its plan to restructure these loans to extend principal repayment to 2017 to match the repayment of the bond. Interest continues to be earned and paid on these overdue loans at the same rate as before. The restructure loan agreements have not yet been finalised. Management believes that no impairment will arise as a result of restructuring.


Loans and

advances given

to the Ministries

Loans and

advances given

to the

Corporates

Total

Neither past due nor impaired 534,173,861 547,023,355 1,081,197,216

- Infrastructure 296,790,892 - 296,790,892

- Mortgage 82,414,583 - 82,414,583

- Mining - 312,815,338 312,815,338

- Air transportation - 114,985,383 114,985,383

- Manufacturing - 119,222,634 119,222,634

- Railway 154,968,386 - 154,968,386

Past due but not impaired:

- less than 30 days overdue 21,601,118 7,745,059 29,346,177

Total past due but not impaired 21,601,118 7,745,059 29,346,177

Total loans and advances 555,774,979 554,768,414 1,110,543,393


31

Total


Loans collateralized by:

- Government guarantees 555,774,979 308,914,883 864,689,862

- Commercial bank guarantees - 29,130,800 29,130,800

- Machinery and Equipment - 216,722,731 216,722,731

Total Loans and Advances 555,774,979 554,768,414 1,110,543,393

Loans and

advances given

to the Ministries

Loans and

advances given

to Corporates

8. LOANS AND ADVANCES (CONTINUED) Analysis by credit quality of loans outstanding at 31 December 2012 (restated) is as follows:

All loans to Ministries are have the same credit rating as the Government of Mongolia, B1. All corporate entities

are unrated.

Information about collateral as at 30 June 2013 is as follows:

Guarantee collateral values above are recorded at the lower of the carrying amount of the loan or collateral taken.


Loans and

advances given

to the Ministries

Loans and

advances given

to the

Corporates

Total

Neither past due nor impaired 256,159,934 237,396,033 493,555,967

- Infrastructure 205,385,976 - 205,385,976

- Mortgage 50,773,958 50,773,958

-Mining - 141,512,394 141,512,394

-Air transport - 7,443,401 7,443,401

-Manufacturing - 88,440,238 88,440,238

Total loans and advances 256,159,934 237,396,033 493,555,967


32

Total


Loans collateralized by:

- Government guarantees 256,159,934 141,433,083 397,593,017

- Commercial bank guarantees 2,058,000 2,058,000

- Machinery and Equipment 93,904,950 93,904,950

Total Loans and Advances 256,159,934 237,396,033 493,555,967

Loans and

advances given

to the Ministries

Loans and

advances given

to Corporates


Carrying value of

the assets

Value of

collateral

Carrying value of

the assets

Value of

collateral

loans and advances collateralized

by:

- Government guarantees 864,689,862 864,689,862 397,593,017 397,593,017

- Commercial bank guarantees 29,130,800 29,130,800 2,058,000 2,058,000

- Machinery, equipment and others 216,722,731 257,461,125 93,904,950 132,485,968

Total value 1,110,543,393 1,151,281,787 493,555,967 532,136,985

Over-collateralised assets as

at 30 June 2013

Over-collateralised assets as

at 31 December 2012

8. LOANS AND ADVANCES (CONTINUED)

Information about collateral as at 31 December 2012 is as follows:

The financial effect of collateral at 30 June 2013:

Guarantee collateral values above are recorded at the lower of the carrying amount of the loan or collateral taken.

Economic sector risk concentrations within the loan portfolio are as follows:

In thousands of Mongolian Tugriks Amount % Amount %

Loan and advances given to the Ministries 555,774,979 50% 256,159,934 52%

Mining 308,647,610 28% 141,512,394 29%

Air transportation 122,730,442 11% 7,443,401 2%

Manufacturing 123,390,362 11% 88,440,238 18%

Total Loans and Advances (before

impairment) 1,110,543,393 100% 493,555,967 100%


(Restated)


33

9. OTHER ASSETS

The receivables from the Ministry of Finance are due to the Project Financing Agreements between the Ministry of Finance and Government Project implementation bodies (Ministry of Roads Transport Construction and Urban Development and State Governor Administration, Ministry of Foods and Agriculture of Mongolia) and the Bank in the form of a Government Grant.

Loan agreements between the Government Ministries and the Bank are in MNT. As part of the agreement the Ministry of Finance has agreed to cover any movement in the MNT loans compared to a USD loan. Loans are therefore converted into USD at the date of disbursement and settlement. Any resulting foreign exchange loss will be reimbursed by the Ministry of Finance in the form of a Government Grant. As of 30 June 2013, this amounted to MNT 14.5 billion. This represents an increase of MNT 12.3 billion since 31 December 2012. MNT 428.1 million has been subsequently paid down by the Government.

The amount of receivables from Ministry of Finance is variable depending on MNT/USD exchange rate movements. Should the MNT appreciate in value against USD the receivable from Ministry of Finance would decrease with the movement being expensed in the profit and loss. MNT 14,044 million of the MNT 14,472 million is non-current.

In line with other banks in Mongolia, the Development Bank of Mongolia offers its employees reduced rates on Mortgage loans. The Bank has arranged this benefit by providing 0% interest funding to the State Bank for a period of 15 years who in turn issue loans to the bank's employees at reduced rates. This scheme began in June 2013. The initial amount of this employee benefit of MNT 776,351 is amortised over the duration of the scheme. MNT 720,281 of the MNT 772,038 is non-current.

All ‘Other receivables’, ‘prepayments’, and ‘supply materials’ are current assets.

In thousands of Mongolian Tugriks 30 June 2013 31 December 2012

Receivables from the Ministry of Finance 14,472,321 2,168,468

Other receivables 1,338 251

Prepaid employee benefit 772,038 -

Prepayments 98,711 114,283

Supply materials 8,093 2,513

Total other assets 15,352,501 2,285,515


34

10. PROPERTY AND EQUIPMENT

Movements in the carrying amounts of the Bank’s property, plant and equipment are as follows:

There was no disposal of property, plant and equipment during the first six months of 2013. Management believes that there is no indication that an impairment loss has occurred.


Equipment at

cost

Furniture and

fixtures at

cost

Vehicle at

cost

Total property

and

equipment

Cost at 1 January 2012 140,608 71,970 - 212,578

Accumulated depreciation (25,607) (4,409) - (30,016)

Carrying amount at 1 January 115,002 67,561 182,563

-

Additions 7,240 110,026 117,266

Depreciation charge (47,070) (7,197) (11,003) (65,270)

Carrying amount at 31 December

2012 75,171 60,364 99,023 234,558

Cost at 31 December 2012 147,848 71,970 110,026 329,844

Accumulated depreciation (72,677) (11,606) (11,003) (95,286)

Carrying amount at 31 December

2012 75,171 60,364 99,023 234,558

-

Additions 91,338 48,817 41,200 181,355

Depreciation charge (30,614) (4,443) (5,501) (40,558)

Carrying amount at 30 June 2013 135,895 104,738 134,722 375,355

Cost at 30 June 2013 239,186 120,787 151,226 511,199

Accumulated depreciation (103,291) (16,049) (16,503) (135,844)

Carrying amount at 30 June 2013 135,895 104,738 134,722 375,355


35

In thousands of Mongolian Tugriks Amount

Cost at 1 January 2012 840,732

Accumulated amortization (29,446)

Carrying amount at 1 January 2012 811,286

Additions -

Amortization charge (84,597)

Carrying amount at 31 December 2012 726,689

Cost at 31 December 2012 811,286


Carrying amount at 31 December 2012 726,689

Additions 115,929

Amortization charge (44,369)

Carrying amount at 30 June 2013 798,249

Cost at 30 June 2013 956,661


Carrying amount at 30 June 2013 798,249

11. INTANGIBLES ASSETS

Intangible assets relate to banking software system. The carrying amounts of the Bank’s intangible

assets are as follows:

The Bank amortises the intangible assets (software) for 10 years for financial reporting purpose and 3 years for the tax purposes

There was no disposal of intangible assets during the first six months of 2013. Management believes that there is no indication of an impairment loss.


36


(Restated)

Customer accounts 38,011,542 6,960

Total customer accounts 38,011,542 6,960

Payable to the Government 344,012 344,012

Other accrued expenses 858,920 161,676

Total other liabilities 1,202,932 505,688

Total other liabilities and customer accounts 39,214,474 512,648


12. CUSTOMER ACCOUNTS AND OTHER LIABILITIES

The Bank makes loan payments of the Borrowers through the customer accounts and the balance on customer accounts are undrawn amounts of disbursed loans. No interest is paid on these customer accounts. As at 30 June 2013 customer accounts consists of 4 accounts (2012: 1) which total MNT 38,011 million (2012: MNT 6,090 million)

Included within ‘Other accrued expenses’ is an amount of MNT 704 million penalty interest for late payment of the 31 December 2012 tax charge which was identified in 2013.

13. BONDS

This account is composed of:

The Bank has established a USD 600 million Euro Medium Term Notes Programme in November 2011 that allows it to issue notes denominated in any currency agreed between the Bank and the dealer.

The Ministry of Finance irrevocably and unconditionally guarantees the interest and principal payment of all amounts in respect of the notes.

On December 9, 2011, an initial series of notes was issued amounting to USD 20,000,000 with a fixed interest rate of 6.0% and 1 year maturity. The Bank fully repaid these notes in December 2012. The Bank issued a second series of notes in March 2012 amounting to USD 580,000,000 with fixed interest rate 5.75% and a 5 year maturity. In May 2013, the Bank issued a USD 78,550,000 bond with a fixed interest rate of 7.5% for the duration of 232 days to a local commercial bank.

Bond issuance costs are amortised over the period of the notes.


(Restated)

Bond issued to local commercial bank 114,898,282 -

Bond issued to international market 849,286,320 817,317,727

Total liabilities 964,184,602 817,317,727



37

14. BORROWINGS This account is composed of:

The Bank has received a loan from Government in order to further fund financing projects and programs. The Government has provided this money from proceeds of the Chinggis Bond. Interest is charged at 4.79% p.a on this loan. 15. RELATED PARTY TRANSACTIONS

Related parties and transactions with related parties are assessed in accordance with IAS 24 “Related Party Disclosures”. As discussed in Note 1, the Bank is 100% owned by the Government of Mongolia and its operations include the financing of projects within Mongolia, which include projects undertaken by governmental entities. Accordingly, the Bank enters into numerous transactions with related parties as a result of its ownership by the Government. These balances and transactions have been disclosed throughout the financial statements and as such have not been included below.

According to IAS 24 “Related Party Disclosures” other related parties of the Bank comprise the Government of Mongolia, national companies and other organisations controlled, jointly controlled or under significant influence of the Government.

Assets with Related Parties

An analysis of the Bank’s assets held by related parties is disclosed as follows:

Statement of

Financial

Position

Statement of

Comprehensive

Income

Statement of

Financial

Position

Statement of

Comprehensive

Income

Receivables from Ministry of

Finance 14,472,321 12,303,853 2,168,468 2,168,468

Current account with Bank of

Mongolia 130,649 - 31,672,320 -

Current account with Saving Bank 1,638 4,935 21,761,643 50,637

Short term deposits with Saving

Bank 73,363,518 2,081,515 34,853,753 61,957

Deposit with State Bank for

employee benefit 1,000,000 (2,356) - -

Total amounts to related parties 88,968,126 14,387,947 90,456,184 2,281,062


Tugriks

Six months ended 30 June 2013 31 December 2012 (Restated)


Financing from the Government 433,553,076 -

Total borrowings 433,553,076 -



38

15. RELATED PARTY TRANSACTIONS (CONTINUED)

Current accounts with the Bank of Mongolia and State Bank on the same terms and basis as the Bank’s other current accounts and deposits. Bank of Mongolia current accounts earn 0% interest and 5.6% p.a interest is earned on the State Bank current accounts. The interest on the State Bank short term deposit ranges from 7.5%-11% p.a. for MNT and is 4.8% p.a. for USD deposits.

As discussed in Note 9 the receivable from the Ministry of Finance is due to the Project Financing Agreements between the Ministry of Finance and Government Project implementation bodies (Ministry of Roads Transport Construction and Urban Development and State Governor Administration, Ministry of Foods and Agriculture of Mongolia) and the Bank in the form of a Government Grant.

The Development Bank of Mongolia offers its employees reduced rates on Mortgage loans as referred to in Note 9. The Bank has arranged this benefit by providing 0% interest funding to the State Bank of MNT 1 billion for a period of 15 years who in turn issue loans to the Bank's employees at reduced rates. The initial cost of this employee benefit is MNT 776,351 thousands which has been recorded as a prepayment. The deposit was therefore recorded at initiation of the scheme within the Statement of Financial Position at a value of MNT 223,648 thousands by discounting the deposit by 10.5%. Please refer to Note 4.

Loans to Related Parties

An analysis of the Bank loans to related parties is disclosed as follows:

Loans provided to the above related parties are provided on the same terms and basis as loans provided to non-related entities with interest rates between 6.75% - 9.6% p.a for MNT and 6.12% - 9.5% p.a for USD loans and advances and maturities of between one and five years.

Statement of

Financial

Position

Statement of

Comprehensive

Income

Statement of

Financial

Position

Statement of

Comprehensive

Income

Funded by the Government : 555,774,979 13,399,336 256,159,933 1,201,865

- The Ministries 265,359,364 7,985,481 202,611,654

- State Bank 82,414,583 2,615,625 50,773,958 1,198,125

- 4th Power Station SOSC 50,260,613 860,487 2,774,321 3,740

- Tavan tolgoi power plant 2,772,033 24,180 - -

- Mongolian Railway SOSC 154,968,386 1,913,563 - -

Funded by the Corporates : 464,943,854 12,285,099 150,934,485 2,855,613

- MIAT Airlines SC 122,730,442 1,943,297 7,443,401 297,523

- Erdenes Tavan Tolgoi SC 296,191,716 9,833,303 141,512,394 2,502,401

- Baganuur SOSC 16,623,621 296,915 - -

- SME Development Fund 29,398,074 211,584 1,978,690 55,689

Total loans to related parties 1,020,718,833 25,684,435 407,094,418 4,057,478

31 December 2012 (Restated)


Tugriks

six months ended 30 June 2013


39

In thousands of Mongolian Tugriks 30 June 2013 31 December 2012

Contributed capital 73,300,000 73,300,000

Total contributed capital 73,300,000 73,300,000

15. RELATED PARTY TRANSACTIONS (CONTINUED)

The remuneration and employee benefit paid to the executive officers, directors and members of Board for the period ended 30 June 2013 and 30 June 2012 amounted to MNT 171,905,731 and MNT 158,416,684 respectively. Guarantees Received The Bank is the recipient of a number of guarantees from the Government of Mongolia. On the lending side most loans are guaranteed by the Ministry of Finance. Please refer to Note 8 for further details On the borrowing side the Bank has a Bond issued on the Singapore stock exchange on which the Ministry of Finance irrevocably and unconditionally guarantees the interest and principal payment of all amounts in respect of the bond notes.

Guarantees Given The Bank has given a guarantee to the China Machinery Engineering Corporation on the 24th May 2013 in the amount of USD 75,900,000 on behalf of the Ministry of Energy and Ministry of Economic Development. Under the guarantee should the Bank be required to pay out on this guarantee the Bank would be refunded the cost from the State budget in accordance with resolution #155.

The Bank has given a guarantee to the Export-Import Bank of China on behalf of “New Yarmag Housing Projects LLC” amounting to USD 83,881,158 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 will earn a 2% fee when funds are provided to “New Yarmag”

16. CONTRIBUTED CAPITAL

Components of contributed capital are as follows:

In accordance with Development Bank Law, the Bank's share capital consists of contribution from government and other sources as specified in Development Bank Law. No shares had actually been issued.

As at 30 September, 2013, the Bank’s share capital has increased to MNT 123.3 billion. Refer to Note 27.


40


1 January 2013 to 30

June 2013


June 2012

Authorized:

Contribution 73,300,000 49,700,000

Paid contribution:

At January 1, 73,300,000 49,700,000

Total contributed capital 73,300,000 49,700,000

16. CONTRIBUTED CAPITAL (CONTINUED)

In May and December 2011, the Government contributed 16.7 billion and 33.0 billion, respectively in cash to the Bank's capital. An additional contribution amounting to MNT 23.6 billion was received in December 2012.

17. INTEREST INCOME

18. INTEREST EXPENSE

Under the Government Grant scheme the Ministry of Finance has agreed to provide funding to pay the interest on the Euro Medium Term Notes Programme until such time as the Bank is in an operational position to fund the interest payments from its own sources. This amounted to MNT 13 billion for the first six months of 2012. This payment has been netted off against Interest Expense (bond issued to international market) in accordance with IAS 20. From October 2012 the Bank was considered to be in operational position to fund the interest itself and no further payments from Government are expected.

In thousands of Mongolian Tugriks1 January 2013 to 30

June 2013


June 2012

Loans and advances 29,438,551 77,473

Deposits and placements at banks 11,142,104 523,100

Total interest income 40,580,655 600,573


June 2013


June 2012

Bond issued to international market 23,976,746 406,668

Bond issued to local commercial bank 1,294,501 -

Borrowings 2,384,486 -

Total interest expense 27,655,733 406,668


41

19. FOREIGN EXCHANGE GAINS LESS LOSSES Included with the Foreign exchange gain less losses is an amount of MNT 12.3 billion due from the Ministry of Finance under the scheme described in Note 9. The total amount now owed to the Bank under the scheme amounts to MNT 14.5 billion. Under the scheme Ministry of Finance has a responsibility for repayment of principal amount and interest amount with FX loss to DBM. In accordance with IAS 20 this has been netted off the related expense.

20. ADMINISTRATIVE AND OTHER EXPENSES

Included in employee cost and benefits are the contribution to state pension fund MNT 64.6 million for the period ended 30 June 2013 (30 June 2012: MNT 27.7 million). The penalty interest of MNT 704 million relates to late payment of the 31 December 2012 tax charge.

21. INCOME TAXES

Components of income tax expense charged to profit or loss are as follows:


June 2013


June 2012

Employee cost and benefit 940,013 523,143

Penalty interest 703,585 -

IT and software 90,100 1,475

Depreciation and amortization 84,927 75,207

Utilities, security and maintenance 28,805 16,305

Rental costs 51,231 -

Communication and Stationeries 62,985 39,770

Business travel and event 56,693 32,370

Audit and other professional services 72,102 33,100

Advertising 22,619 3,928

Fuel and Transportation expense 8,810 6,772

Training 3,971 2,799

Insurance cost 2,819 2,135

Others 20,854 18,239

Total operating expenses 2,149,512 755,243



June 2013


June 2012

Current income tax charge 4,317,017 -

Deferred tax (benefit) (2,192,291) (829,757)

Income tax expense/(benefit) for the period 2,124,726 (829,757)


42

21. INCOME TAXES (CONTINUED)

The Bank provides for income taxes on the basis of income for financial reporting purposes, adjusted for items which are not assessable or deductible for income tax purposes. The income tax rate for profits of the Bank is 10% for the first MNT 3 billion of taxable income, and 25% on the excess of taxable income over MNT 3 billion in accordance with Mongolian tax legislation.

Interim period income tax expense is recognised based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate applied for the six months ended 30 June 2013 is 25%.

Reconciliation between the expected and the actual taxation charge is provided below.

Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. Tax losses can be carried forward for the next two years and are deductible up to 50% of the taxable income of that year in accordance with Mongolian legislation. In order to utilise tax losses the Bank must subject itself to a voluntary tax audit, the results of which in the Mongolian tax environment can be uncertain. Please refer to Note 25. Deferred tax asset (liability) was recognized for deductible or taxable timing differences resulting from the revaluation of foreign currency denominated monetary assets and liabilities and differing amortisation rates between the tax authorities and the Bank.



June 2013


June 2012

Profit/(loss) before tax 9,579,414 (3,061,757)

Theoretical tax charge at statutory rate (2013:

25%; 2012: 25%) 2,394,854 (765,439)

Tax effect of items which are not deductible or

assessable for taxation purposes:

-Profit subject to lower tax rate (450,000) -

-Expenses not deductible for tax purposes 179,872 3,082

-Income not taxable

Estimation difference of deferred tax - (67,400)

Income tax expense/(benefit) for the period 2,124,726 (829,757)


43

21. INCOME TAXES (CONTINUED)

22. FINANCIAL RISK MANAGEMENT

Introduction and overview

The risk management function within the Bank is carried out in respect of the risks inherent in the Bank's operations, which are credit risk, liquidity risk, interest rate risk, foreign exchange risk and operational risk, all of which are monitored and controlled by the various committees and teams established by the Bank and reporting directly to the Board of Directors.

This process of risk management is critical to the Bank's continuing profitability and all of the Bank executives are accountable for the management of risks relating to their responsibilities. The day-to-day risk management process does not include business risks such as changes in the environment, technology and industry. These are addressed through the Bank's strategic planning process.

The Bank's risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, conducts its risk management in a comprehensive manner with all employees being responsible for the risk arising in their role in financial or non-financial transactions.

1 January 2013 to 30 June 2013


Opening

balance

(restated)

Recognised in

profit or lossClosing balance

Deferred tax (liabilities)/assets in relation to:

Deposits (2,091,211) 1,593,216 (497,995)

Loans and advances (408,815) (4,816,963) (5,225,778)

Other Assets (542,117) (3,075,964) (3,618,080)

Intangibles (65,215) (24,456) (89,671)

Bond 9,047,718 8,419,882 17,467,600

Other Liabilities 96,575 96,575

Deferred tax asset 5,940,360 2,192,290 8,132,651

1 January 2012 to 30 June 2012


Opening

balance

Recognised in

profit or lossClosing balance

Deferred tax (liabilities)/assets in relation to:

Cash and cash equivalents - (1,541,621) (1,541,621)

Loans and advances - (11,515) (11,515)

Intangibles (6,522) (34,238) (40,760)

Bond 51,340 1,676,668 1,728,008

Other Liabilities 114 (114) -

Tax loss carry forward - 740,578 740,578

Deferred tax asset 44,933 829,757 874,690


44

22. FINANCIAL RISK MANAGEMENT (CONTINUED)

Monitoring and controlling risks is primarily performed based on limits established by the related Management Committees of the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept. In addition, the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposures across all risk types and activities.

As part of its overall risk management, the Bank uses basic sensitivity analysis to manage exposures resulting from possible changes in interest rates, foreign currencies risks. Also, the individual mitigation plans for each type of risk are developed and implemented by each business unit, and the process is monitored by the Asset and Liability Committee.

Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Bank's risk management framework. The Board has established an Executive Committee, the Asset and Liability Management Committee (“ALCO”) and Credit Committee, which are responsible for developing and monitoring the Bank's risk management policies in their specified areas.

Board of Directors

The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles that establish the objectives guiding the Bank's activities and implement the necessary policies and procedures. The risk strategy, including all significant risk policies, is approved and periodically reviewed by the Board of Directors.

Executive Committee is responsible for conducting the Bank's daily operations consistent with the Development Bank Law of Mongolia, Company Law and other related laws and regulations.

Assets and Liabilities Committee (‘ALCO’)

The ALCO is responsible for providing centralized asset and liability management of the funding, liquidity, foreign currency, maturity and interest rate risks to which the Bank is exposed. The purpose of the ALCO is to set up the asset and liability structure of the Bank's balance sheet conducive for sustainable growth of the Bank, its profitability and liquidity through comprehensive management of the Bank's assets and liabilities and monitoring of the liquidity, foreign currency, interest rate and other market risks. The ALCO Committee is chaired by the Chief Executive Officer.

Credit Committee

The Credit Committee is responsible directly to the Board of Director. It is the credit decision making body of the Bank and operates within clearly defined parameters authorised by the Board of Director. The Committee has the following main functions:

a) approval of clearly defined Credit Policies and Procedures and amendments and

updates;

b) approval of risk classification and provisioning levels;

c) review of the quality, composition and risk profile of the entire credit portfolio on an

ongoing basis; and

d) approval of credit limits applicable in exposures to industrial sectors and

geographical regions.

Internal Audit

Risk management processes throughout the Bank are audited at least annually by the Internal Audit function that examines both the adequacy of the procedures and the Bank's compliance with established policies and procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Chief Executive Officer and the Board of Directors depending on the significance of the issues identified.


45


Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank

’s loans and

advances, and deposits in commercial banks.

The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and industry concentrations, and by monitoring exposures in relation to such limits.

The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns to each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process allows the Bank to assess the potential loss as a result of the perceived risks to which it is exposed and take corrective action.

The Board of Directors has delegated responsibility for the management of credit risk to its Credit Committee in collaboration with Risk Management Department. The Bank is required to implement its credit policies and procedures, with credit approval authorities delegated from the Board of Director. Each member of Credit Committee and relevant Bank Officers are liable for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios.

According to the Credit Policy approved by the Board of Directors, the Credit Committee has the authority to approve transactions with a total amount of up to MNT 5.0 billion. Any requests with higher amounts need to be approved by the Board of Directors, before which the Risk Management Department will issue an independent risk analysis report on case by case basis.

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 credit risk exposures as loans.


46


Loans and

advances given

to the Ministries

Loans and

advances given

to the

Corporates

Total

Neither past due nor impaired 534,173,861 547,023,355 1,081,197,216

- Infrastructure 296,790,892 - 296,790,892

- Mortgage 82,414,583 - 82,414,583

- Mining - 312,815,338 312,815,338

- Air transportation - 114,985,383 114,985,383

- Manufacturing - 119,222,634 119,222,634

- Railway 154,968,386 - 154,968,386

Past due but not impaired:

- less than 30 days overdue 21,601,118 7,745,059 29,346,177

Total past due but not impaired 21,601,118 7,745,059 29,346,177

Total loans and advances 555,774,979 554,768,414 1,110,543,393

In thousands of Mongolian Tugriks Amount % Amount %

Loan and advances given to the Ministries 555,774,979 50% 256,159,934 52%

Mining 308,647,610 28% 141,512,394 29%

Air transportation 122,730,442 11% 7,443,401 2%

Manufacturing 123,390,362 11% 88,440,238 18%

Total Loans and Advances (before

impairment) 1,110,543,393 100% 493,555,967 100%


(Restated)


Credit risk

Any credit shall be secured by collateral, guarantee, or other securities. The loan amount shall not exceed 90% of the collateral value.

The Bank operates in a very specific environment and bears minimal credit risk given the guarantees it receives from the Mongolian Government and over-collateralisation of its loan portfolio.

The Bank monitors concentrations of credit risk by sector. An analysis of concentrations of credit risk

at the reporting date is shown below:


47


Tugriks

Restriction

limit Actual amount

Restriction

limit

Actual

amount

Total amount of the loan and

assets equivalents to loan < EQ 50 times 3,722,326,750 1,243,924,904 3,349,592,425 662,480,457

Total amount of the loan

guarantee and securities < EQ 50 times 3,722,326,750 231,070,717 3,349,592,425 116,771,542

Suitable ratio As at 30 June 2013 As at 31 December 2012


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

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 30 June 2013 are as follows:

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;

c) Special property rights: Mineral licenses, Project execution right etc.,

d) Time deposits, Securities/Bond and Stocks

e) Guarantees issued from Government, reputable insurance companies, Development

banks and investment bank and commercial banks with overall rating of “Stable” or

above.

f) Assets and revenues generated as a result of performance by borrower and project

contractors.

g) 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 inability 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 delivery 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 30 June 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.


48


The Bank monitors the credit quality of loans primarily based on classification of loans based on the Regulations on Asset Classification and Provisioning which is used for impairment provision calculation, approved by the Executive Director of the Bank. 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 five groups: performing, in arrears, substandard, doubtful, and loss.

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.

Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities. The Bank's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities 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 controlling 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 statuary 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 million equivalents) as well as aggregated amount using cash flow approach.

Exposure to liquidity risk

The key measure used by the Bank for managing 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. Details of the reported ratio of net liquid assets to deposits from customers/banks at the reporting date were as follows:


Net Liquid Assets 10 55,373


49


The following table provides an analysis of the financial assets and liabilities of the Bank into relevant maturity groupings based on the remaining periods to maturity:

Less than One year to Over five

three months five years years Total

Financial assets

Cash and cash equivalents 245,896,656 - - - - 245,896,656

Bank deposits - 137,243,869 - - - 137,243,869

Loans and advances 29,809,173 117,757,417 204,066,116 598,469,869 160,440,818 1,110,543,393

Total financial assets 275,705,829 255,001,286 204,066,116 598,469,869 160,440,818 1,493,683,918

Financial liabilities -

-

Other liabilities (858,921) - - - - (858,921)

Customer accounts (38,011,542) - - - - (38,011,542)

Guarantees given to the Entities (231,070,717) - - - - (231,070,717)

Loan commitments not yet paid (659,008,241) (89,864,760) (47,322,694) (796,195,695)

Borrowings - (21,975,312) (32,114,498) (688,973,852) - (743,063,662)

Bonds (24,114,885) (119,087,158) (24,114,885) (983,467,909) - (1,150,784,836)

Total financial liabilities (953,064,305) (230,927,230) (103,552,077) (1,672,441,760) - (2,959,985,373)

Net financial assets/(liabilities) (677,358,476) 24,074,056 100,514,039 (1,073,971,891) 160,440,818 (1,466,301,455)

Total cumulative amount (677,358,476) (653,284,420) (552,770,381) (1,626,742,273) (1,466,301,455) (1,466,301,455)

As at 30 June 2013


Three to six

months

Six months to

one year


50

Less than One year to Over five

three months five years years Total

Financial assets

Cash and cash equivalents 216,468,206 - - - - 216,468,206

Bank deposits 140,712,501 28,211,989 - - - 168,924,490

Loans and advances 50,773,958 15,939,736 8,640,638 418,201,635 - 493,555,967

Total financial assets 407,954,665 44,151,725 8,640,638 418,201,635 - 878,948,663


-

Other liabilities (161,676) - - - - (161,676)

Customer accounts (6,960) - - - - (6,960)

Guarantees given to the Entities (116,770,960) - - - - (116,770,960)

Loan commitments not yet paid (149,986,913) (239,979,060) (209,981,678) (112,133,161) (712,080,811)

Bonds - (23,213,268) (23,213,268) (969,910,873) - (1,016,337,408)

Total financial liabilities (266,926,508) (263,192,328) (233,194,945) (1,082,044,034) - (1,845,357,814)

Net financial assets/(liabilities) 141,028,157 (219,040,602) (224,554,307) (663,842,399) - (966,409,150)

Total cumulative amount 141,028,157 (78,012,445) (302,566,752) (966,409,150) (966,409,150) (966,409,150)

As at 31 December 2012 /Restated/


Three to six

months

Six months to

one year


Liquidity risk (Continued) The following table provides an analysis of the financial assets and liabilities of the Bank into relevant maturity groupings

based on the remaining periods to maturity:


51

In thousands of Mongolian TugriksNon-interest

sensitive

Less than three

months

Three to six

months

Six months to

one year

One to five

years Over five years Total

Financial assets

Cash and cash equivalents 8,667,149 237,229,507 - - - - 245,896,656

Bank deposits 1,020,221 136,223,648 - - - 137,243,869

Loans and advances 26,191,355 28,782,426 116,084,378 197,555,211 582,650,389 159,279,634 1,110,543,393

Other Current Assets 14,472,320 - - - - - 14,472,320

Total financial assets 50,351,045 402,235,581 116,084,378 197,555,211 582,650,389 159,279,634 1,508,156,238


-

Other liabilities (858,921) - - - - - (858,921)

Customer accounts (38,011,542) - - - - - (38,011,542)

Borrowings (1,495,211) (432,057,865) - - - - (433,553,076)

Bonds (11,809,349) - (113,596,654) - (838,778,600) - (964,184,602)

Total financial liabilities (52,175,022) (432,057,865) (113,596,654) - (838,778,600) - (1,436,608,140)

Net financial assets/(liabilities) (1,823,977) (29,822,283) 2,487,725 197,555,211 (256,128,211) 159,279,634 71,548,098

Total cumulative amount (1,823,977) (31,646,261) (29,158,536) 168,396,675 (87,731,536) 71,548,098 71,548,098

As at 30 June 2013

(a) Market risks

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 control 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 manages interest rate risk through monitoring interest rate gaps. A summary of the Bank's interest rate

gap position on its financial assets and liabilities are as follows:


52


(d) Market risks (Continued)


Tugriks

Non-interest

sensitive

Less than three

months

Three to six

months

Six months to

one year

One to five

years

Over five

years Total

Financial assets

Cash and cash equivalents 63,514,488 152,953,719 - - - - 216,468,206

Bank deposits 1,872,490 139,210,000 27,842,000 - - - 168,924,490

Loans and advances 6,770,844 50,000,000 15,794,964 8,502,053 412,488,106 - 493,555,967

Other Current Assets 2,168,468 - - - - - 2,168,468

Total financial assets 74,326,290 342,163,719 43,636,964 8,502,053 412,488,106 - 881,117,131


-

Other liabilities (161,676) - - - - - (161,676)

Customer accounts (6,960) - - - - - (6,960)

Bonds (9,899,727) - - - (807,418,000) - (817,317,727)

Total financial liabilities (10,068,363) - - - (807,418,000) - (817,486,363)

Net financial assets/(liabilities) 64,257,928 342,163,719 43,636,964 8,502,053 (394,929,894) - 63,630,769

Total cumulative amount 64,257,928 406,421,646 450,058,610 458,560,663 63,630,769 63,630,769 63,630,769

As at 31 December 2012


53

MNT Foreign MNT Foreign

Denominated currency Denominate

d

currency

Financial assets

Cash and cash

equivalents 220,812,188 25,084,468 245,896,656 196,470,141 19,998,064 216,468,206

Bank deposits 137,243,869 - 137,243,869 - 168,924,490 168,924,490

Loans and advances 393,795,643 716,747,750 1,110,543,393 255,364,302 238,191,665 493,555,967

Other Assets 14,472,320 - 14,472,320 2,168,468 - 2,168,468

-

Total financial assets 766,324,020 741,832,218 1,508,156,238 454,002,911 427,114,219 881,117,131

Financial liabilities

Other liabilities (858,921) - (858,921) 161,676 - 161,676

Customer accounts 3,549,868 34,461,674 38,011,542 - 6,960 6,960

Borrowings 307,766,643 125,786,433 433,553,076 - - -

Bonds - 964,184,602 964,184,602 - 817,317,727 817,317,727

Total financial

liabilities 310,457,591 1,124,432,709 1,434,890,299 161,676 817,324,688 817,486,364

Net financial

assets/(liabilities) 455,866,429 (382,600,491) 73,265,939 453,841,235 (390,210,469) 63,630,767

As at 30 June 2013 As at 31 December 2012

Total Total

In thousands of

Mongolian Tugriks


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. An analysis of the Bank's sensitivity to a 100 basis point (bp) increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows:

100 bp parallel 100 bp parallel

Sensitivity of projected net interest income 2013 Increase Decrease

At 30 June 2013 733,721 (733,721)

At 31 December 2012 (6,272) 6,272

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 Department “ALD” are responsible for monitoring the Bank’s exchange risk and minimising its exposure. ALD does this by setting limits on the level of exposure by currencies, which are monitored on a frequent basis. The Bank manages its currency risk primarily through ensuring compliance with the prudential ratio for foreign currency open position established by the Bank of Mongolia (Central Bank) and through assessing the impact of foreign currency exchange rate movements on the Bank’s liquidity and profitability.


54


Market risk (Continued)

A 10 percent strengthening of the MNT against the USD at 30 June 2013 and 31 December 2012 would have increased profit by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant.

In thousands of tugriks 30 June 2013 31 December 2012

Profit before Tax 38,260,049 39,021,047

At 10 percent weakening of the MNT against the USD at 30 June 2013 and 31 December 2012 would have had the equal but opposite effect on the above currency to the amounts shown above, on the basis that all other variables remain constant.

Capital Management

The Bank sets and monitors capital requirements for the Bank as a whole.

The Bank adopted the standardised approach which is a set of risk measurement techniques proposed under Basel II 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-weighted assets 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 liabilities in that foreign currency 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 a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

There have been no material changes in the Bank's management of capital during reporting period.


55


Capital Management (Continued)

The Ratios of the Bank’s capital adequacy as at 30 June 2013 and 31 December 2012, respectively,

were as following:



(Restated)

Tier I capital

Share capital 73,300,000 73,300,000

Retained earnings 1,146,535 (6,308,151)

Total tier I capital 74,446,535 66,991,849

Total regulatory capital / capital base 74,446,535 66,991,849

Risk weighted capital ratio 10.90% 18.31%

Assets Risk weighted

assets

Assets Risk weighted

assets

0% 570,384,609 - 290,007,105 -

20% 245,760,684 49,152,137 184,789,753 36,957,951

50% 137,243,869 68,621,935 168,924,490 84,462,245

100% 564,953,511 564,953,511 244,414,436 244,414,436

Total 1,518,342,673 682,727,582 888,135,784 365,834,632

Risk weight factor

As at 30 June 2013 As at 31 December 2012


56

23. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY

The following table provides a reconciliation of financial assets with measurement categories at 30 June 2013.

The following table provides a reconciliation of financial assets with measurement categories at 31 December 2012 (restated)


Loans and

receivablesTotal

Assets

Cash and cash equivalents 245,896,656 245,896,656

Due from other banks

- Short-term placements with other banks with original

maturities of more than three months 137,243,869 137,243,869

- Reverse sale and repurchase agreements with other

banks with original maturities of more than three

months

- -

Loans and advances to customers

- Loans to Corporate entities 554,768,414 554,768,414

- Loans to Ministries 555,774,979 555,774,979

Total Financial assets 1,493,683,918 1,493,683,918


Loans and

receivablesTotal

Assets

Cash and cash equivalents 216,468,206 216,468,206


- Short-term placements with other banks with original

maturities of more than three months 168,924,490 168,924,490

- Reverse sale and repurchase agreements with other

banks with original maturities of more than three

months

- -


- Loans to Corporate entities 237,396,033 237,396,033

- Loans to Ministries 256,159,934 256,159,934

Total Financial assets 878,948,663 878,948,663

Development Bank of Mongolia Notes to the Financial Statements – 30 June 2013 (Expressed in thousands of Mongolian Tugriks unless otherwise stated)

57

24. 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) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) 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 (iii) 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 fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety.

The Bank's principal financial instruments comprise of cash on hand and in bank, investments, loans and advances, accrued interest receivable and payable, other current assets, accounts and other payable, long term debt. The management considers that the carrying amounts of financial assets and liabilities recognized in the financial statements approximate their fair value.

Fair Values of Financial Assets and Liabilities

The Bank has no financial assets or liabilities carried at fair value i.e. all of the Bank’s financial assets and liabilities are carried at amortised cost. The Bank determines fair values for those financial instruments as follows:

(i) 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.

(ii) Fixed rate financial instruments

The fair 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 of the Bank has issued loans at has not significantly changed since inception and thus, carrying value of lending approximates its fair value.

The Bank has only one long term fixed rate debt instrument “Bond issued to international market” which was fully guaranteed by Mongolia and issued back in March 2012 at a rate of 5.75%. This bond is listed on the Singapore Stock Exchange and its fair value has been calculated using its quoted price as at 30 June 2013.

Discount rates, used below, depend on currency, maturity of the instrument and credit risk of the counterparty and were as follows:


58



Short-term placements with other banks with

original maturities of more than three months8.5% to 11.5% pa% 4.5% to 11.25% pa%


Loans to Corporate entities 6.75% to 9.6% pa% 7.35% to 8.1% pa%

Loans to Ministries 6.125% to 7.34% pa% 6.75% to 7.34% pa%

Customer accounts 0% 0%

Bond 5.75% to 7.5% pa% 5.75% pa%

Borrowing 4.79% pa% -

24. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED)

The rates used in determining fair values.

The discount rates, used above, to calculate the fair value of financial assets and liabilities presented below, depend on currency, maturity of the instrument and credit risk of the counterparty.


59


Fair values of financial instruments as at 30 June 2013 carried at amortised cost are as follows


Carrying

Amount Level 1 Level 2 Level 3

Assets

Cash and cash equivalents 245,896,656

Cash on hand 5,322 5,322 - -

Cash at Bank of Mongolia 130,649 130,649 - -

Cash at other banks 6,551,516 6,551,516 - -

Short term deposits with local banks 239,209,169 - 239,209,169 -

Bank deposits 137,243,869 - 137,243,869 -

Loans and advances 1,110,543,393

loans and advances given to the

Ministries 555,774,979 - 555,774,979 -

loans and advances given to

Corporates 554,768,414 - 554,768,414 -

Total financial assets carried at

amortised cost 1,493,683,918 6,687,487 1,486,996,431 -

Liabilities

Other liabilities 858,920

Other accrued expenses 858,920 858,920 - -

Customer accounts 38,011,542 38,011,542 - -

Borrowings 433,553,076 - 433,553,076 -

Bonds 964,184,602

Bond issued to local commercial bank 114,898,282 - 114,898,282 -

Bond issued to international market 849,286,320 838,670,241 - -

Total financial liabilities carried

at amortised cost 1,436,608,140 877,540,703 548,451,358 -

30 June 2013


60


Fair values of financial instruments as at 31 December 2012 carried at amortised cost are as follows


Carrying

Amount Level 1 Level 2 Level 3

Assets

Cash and cash equivalents 216,468,206

Cash on hand 6,132 6,132 - -

Cash at Bank of Mongolia 31,672,320 31,672,320 - -

Cash at other banks 31,358,100 31,358,100 - -

Short term deposits with local bank 153,431,654 - 153,431,654 -

Bank deposits 168,924,490 - 168,924,490 -

Loans and advances 493,555,967

loans and advances given to the

Ministries 256,159,934 - 256,159,934 -

loans and advances given to

Corporates 237,396,033 - 237,396,033 -

Total financial assets carried at

amortised cost 878,948,663 63,036,552 815,912,111 -

Liabilities

Other liabilities 161,676

Other accrued expenses 161,676 161,676 - -

Customer accounts 6,960 6,960 - -

Borrowings - - - -

Bonds 817,317,727

Bond issued to local commercial bank - - - -

Bond issued to international market 817,317,727 807,101,255 - -

Total financial liabilities carried

at amortised cost 817,486,363 807,269,891 - -

31 December 2012 (Restated)


61

25. COMMITMENTS AND CONTINGENCIES

Guarantees provided 30 June 2013 31 December 2012

Within a year 121,306,414 116,770,960

Later than one year but not later than five years 109,764,303 -

The Bank has given a guarantee to the China Machinery Engineering Corporation on the 24th May 2013 in the amount of USD 75,900,000 on behalf of the Ministry of Energy and Ministry of Economic Development. Under the guarantee should the bank be required to pay out on this guarantee the Bank would be refunded the cost from the State budget in accordance with resolution #155.

The Bank has given a guarantee to the Export-Import Bank of China on behalf of “New Yarmag Housing Projects LLC” amounting to USD 83,881,157.75 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 MNT 796,195 million of loan commitments (2012: MNT 116,770 million).

The Bank has MNT 4,937 million of undrawn conditional loan commitments to be paid if certain conditions are met by the Borrowers.

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 sustained. 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 30 June 2013, management has assessed that recognition of a provision for uncertain tax position is not necessary.


62


June 2013


June 2012

Loan interest income given to: 29,438,551 77,473

- The Government 13,610,920 60,000

- Corporates 15,827,631 17,473

Interest income from Commercial banks: 11,142,104 523,100

- Deposit 10,855,134 523,100

- Current account 286,971 -

Foreign Exchange trading gain: 770,852 -

- From the Government - -

- From Corporates 770,852 -

Total income 41,351,508 600,573

26. SEGMENT REPORTING

Operating segments are components that engage in business activities that may earn 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 Group.

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 that 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 Mongolia.

A spilt of the Bank’s revenue streams from sources is shown below.


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27. POST BALANCE SHEET EVENTS

The Government of Mongolia has a plan to increase Development Bank of Mongolia’s capital up to USD 200million momentarily and issued resolution no 238 in July 2013. In accordance with this resolution the Government has contributed MNT 10.0 billion, MNT 5.0 billion and MNT 35.0 billion in July, August and September 2013 respectively to the Bank’s capital. As at 30 September, 2013, the Bank’s share capital is MNT 123.3 billion.

The Government of Mongolia issued a resolution on the 10 September 2013 ordering the conversion of the Bank’s USD 200 million loan to Erdenes Tavan Tolgoi LLC into equity shares. Detailed information about the transaction is not yet available.

The executive management of the Bank was carried out by a joint team from Development Bank of Mongolia and the Korean Development Bank (“KDB”). In July 2013, the Management Agreement with the Korean Development Bank was changed to the Consulting Agreement, and the Bank is now managed solely by Mongolian nationals appointed by the Government. A new local CEO Mr Munkhbat Nanjid was appointed in August 2013.

The Government of Mongolia has approved “Export Promotion Program” on July 6th, 2013 through Resolution No. 239 to increase Mongolia’s export revenues by promoting export oriented and import substituting markets, in which the Bank will perform a significant role as the main liaison with foreign export-credit agencies (ECA) as well as the provider of necessary funds.

During the Prime Minister Mr Altankhuyag Norov’s official visit to Japan in September 2013 a Memorandum of Understanding (‘MOU”) between the Bank and Japan Bank for International Cooperation (“JBIC”) was signed. According to the MOU, the Bank and JBIC have agreed to exchange views regarding the Bank’s foreign funding operations, including the potential issuance of Samurai Bond supported by JBIC. During that visit to Japan in September 2013, the Bank has initiated discussions with Multilateral Investment Guarantee Agency (“MIGA”), a World Bank Group company, to facilitate low-cost, long-term foreign funding resources to Mongolia by utilizing the guarantee agency’s AAA-rating credit enhancement program. The draft of the Amendment to the Law on Development Bank of Mongolia was formulated and discoursed among Ministers on the Cabinet meeting of the Government of Mongolia. In the Meeting Minutes of the Cabinet of the Government of Mongolia dated June 26, 2013, it is stated: “... The draft of the Amendment to the Law on Development Bank of Mongolia was discussed and supported to submit to the Parliament of Mongolia reflecting proposals of the Cabinet members”. The core amendment to the law is highlighting the Bank’s ability to maintain a sufficient capital adequacy ratio through Government support of capital injection, and regulating the procedure of project financing repayment by Government in detail.

dbm fs_updated 18 nov 15pm

Documents

financial reporting

financial risk management

income taxes

accompanying notes

equity period

income tax expensesbenefit

bank deposits

foreign exchange losses