(1) Significant accounting principles

Unless indicated otherwise, all figures are in millions of euros (€).

Pursuant to Section 59a of the Austrian Banking Act, the 2004 consolidated financial statements of Bank Austria Creditanstalt have been prepared in accordance with International Financial Reporting Standards (IFRSs) published by the International Accounting Standards Board (IASB) and in accordance with the interpretations of the International Financial Reporting Interpretations Committee (IFRIC/SIC) applicable at the balance sheet date. All IFRSs/IASs published by the IASB in the International Financial Reporting Standards 2004 as Accounting Standards required to be applied to financial statements for 2004 have been applied. The comparative figures for the previous year are also based on these standards.

Material differences between IFRSs (previously: IASs) and Austrian generally accepted accounting principles are explained in note 49.

Spot (regular way) purchases and sales of financial assets are recognised on the trade date.

Consolidation methods
All companies that are material and are directly or indirectly controlled by Bank Austria Creditanstalt have been consolidated in the consolidated financial statements. In this context, uniform Group-wide criteria (primarily total assets and results of operations) are applied in determining materiality; these criteria relate to the effect of inclusion or non-inclusion of a subsidiary in the presentation of the Group’s financial position and the results of its operations. The consolidated financial statements of Bank Austria Creditanstalt are based on the separate financial statements of all consolidated companies prepared on a uniform basis.

Material investments in associated financial companies, i.e., companies which are neither indirectly nor directly controlled by Bank Austria Creditanstalt but in which it can exercise a significant influence, are accounted for using the equity method.

Shares in all other companies are classified as investments available for sale and recognised at their fair values, to the extent that fair value is reliably measurable. Changes in value are directly recognised in equity after taking deferred taxes into account. In the case of an impairment within the meaning of IAS 39.109, a loss is recorded which is reversed when the circumstances that led to such impairment cease to exist.

The method of inclusion in the consolidated financial statements is shown in the list of selected subsidiaries and equity interests displayed in note 37.

Business combinations
When a subsidiary is acquired, its identifiable assets and liabilities measured at their fair values are offset against the cost of acquisition. The difference between the cost of acquisition and the fair value of net assets is recognised in the balance sheet as goodwill and, until first-time application of the new IFRS 3, amortised over its estimated useful life on a straight-line basis over a period of 20 (in some cases, 15) years. Goodwill arising on business combinations on or after 31 March 2004 is not amortised in the consolidated financial statements for 2004.

As at the date of acquisition, shareholders’ equity of foreign subsidiaries is translated into euros. Gains and losses arising on the foreign currency translation of shareholders’ equity of foreign subsidiaries are recorded directly in retained earnings as at the subsequent balance sheet dates. The effect is shown in the statement of changes in shareholders’ equity of the Group.

Goodwill arising on acquisitions of subsidiaries and other equity interests before 1 January 1995 has been offset against retained earnings.

When a subsidiary is acquired, the calculation of minority interests is based on the fair values of assets and liabilities.

Consolidation procedures
Intragroup receivables, liabilities, expenses and income are eliminated unless they are immaterial. Intragroup profits are also eliminated.

Foreign currency translation
Foreign currency translation is performed in accordance with IAS 21. Monetary assets and liabilities denominated in currencies other than the euro are translated into euros at market exchange rates prevailing at the balance sheet date. Forward foreign exchange transactions not yet settled are translated at the forward rate prevailing at the balance sheet date.

For the purpose of foreign currency translation of the financial statements of foreign subsidiaries, which are prepared in a currency other than the euro, the middle exchange rate prevailing at the balance sheet date has been applied to balance sheet items and the annual average exchange rate (until 2003, the year-end exchange rate) has been applied to income statement items.

Cash and cash equivalents
The amount of cash and cash equivalents stated in the cash flow statement is equal to the balance sheet item Cash and balances with central banks.

Trading assets
Trading assets – securities held for trading and positive market values of derivative financial instruments – are recognised at their fair values. To determine fair values, market prices and quotes via Bloomberg, Reuters, Telerate, etc. are used. Where such prices or quotes are not available, values based on present value calculations or option pricing models are applied. Changes in the fair values of trading assets (including trading derivatives) are recognised in net income.

Netting
Netting is performed only to the extent that there is an enforceable right to set-off and this reflects the expected future cash flows from the transaction.

Derivatives
Financial derivatives are measured at their fair values. Changes in fair value are included in income. Exceptions are those derivatives which are designated as cash flow hedges. Bank Austria Creditanstalt accounts for hedging relationships between financial instruments in the ways set out in IAS 39: as cash flow hedges or as fair value hedges. Financial derivatives which are embedded in other financial instruments and are required to be separated from the host contracts are recognised accordingly.

A fair value hedge – a hedge of the exposure to changes in fair value of a recognised asset or liability – is used by Bank Austria Creditanstalt especially for its own issues. Adjustments are made for changes in the fair values of derivatives designated as hedging instruments. The carrying amounts of hedged items are adjusted for gains or losses, to the extent that the gains or losses are attributable to the hedged risk.

Derivatives designated as hedges of interest rate risk within the framework of Bank Austria Creditanstalt’s asset-liability management activities are accounted for as cash flow hedges. For the purpose of cash flow hedge accounting, variable-rate interest payments on variable-rate assets and liabilities are swapped for fixed-rate interest payments primarily by means of interest rate swaps. The effective part of changes in the fair values of derivatives designated as hedging instruments is recognised in a separate component of shareholders’ equity (cash flow hedge reserve) with no effect on income. The cash flow hedge reserve will be released through the income statement in those periods in which the cash flows from the hedged items are recognised in income for the period.

Loans and advances
Loans and advances originated by Bank Austria Creditanstalt are carried in the balance sheet at amortised cost, before deduction of provisions, including accrued interest. Interest is accrued only to the extent that interest is expected to be received. Amounts of premiums or discounts are accounted for at amortised cost.

Leasing
The classification of leases is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee.

Accounting for leases as lessor: assets held under a finance lease (which transfers to the lessee substantially all the risks and rewards incident to ownership) are accounted for as receivables, stated as loans and advances at amounts equal to the net investment (present value). The recognition of interest income reflects a constant periodic rate of return on the net investment outstanding.

In the case of operating leases, the risks and rewards incident to ownership are not transferred. The relevant assets are included in property and equipment and measured according to the principles applied to such items. Lease income is recognised on a straight-line basis over the term of the agreement. Bank Austria Creditanstalt is mainly active as a lessor under finance leases.

Accounting for leases as lessee: in the case of a finance lease, the leased asset is recognised in property and equipment, and the obligation as a liability. The leased asset and the obligation are stated at amounts equal at the inception of the lease to the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. The interest rate implicit in the lease is used for calculating the present value of the minimum lease payments.

Lease payments are apportioned between the interest expense and the reduction of the outstanding liability. Lease payments under operating leases are recognised as rent expenses. Contracts under which Bank Austria Creditanstalt is the lessee are of relatively small significance.

Loan loss provisions
Loan loss provisions show the total amount of provisions made for losses on loans and advances in the form of specific provisions (including flat-rate specific provisions, i.e., provisions for small loans evaluated according to customer-specific criteria). Loan loss provisions are made on the basis of estimates of future loan losses and interest rebates. Provisions for contingent liabilities are recognised in provisions on the liabilities side.

Investments
Held-to-maturity investments are carried at amortised cost. Cost is amortised to the repayable amount until maturity. A held-to-maturity investment is impaired within the meaning of IAS 39.109 if its carrying amount is greater than its estimated recoverable amount. Such an impairment is recognised in net income.

Available-for-sale financial assets are a separate category of financial instruments. To determine fair values, market prices are used; in the case of profit and liquidation-sharing rights, the market prices used are those of the underlying investments. If such prices are not available, the present value is calculated by discounting future cash flows, using the current swap interest rate curve for the respective currency. Changes in fair values resulting from remeasurement are recognised in a component of equity (available-for-sale reserve) with no effect on net income until such asset is disposed of. Any impairment is recognised in net income. Shares in companies which are neither consolidated nor accounted for under the equity method are classified as available for sale.

Land and buildings held as investment property to earn rental income and/or for capital appreciation are classified as investments and recognised at amortised cost. Rental income from investments is included in net interest income, as is interest paid on related funding. As a rule, buildings are depreciated over a period of 50 years.

Property and equipment, intangible assets
Property and equipment as well as intangible assets are carried at cost less depreciation and/or amortisation.

Assets are depreciated and amortised on a straight-line basis over their estimated useful lives. At Bank Austria Creditanstalt, depreciation and amortisation is calculated on the basis of the following average useful lives:

• buildings used for banking operations: 25–50 years 
• office furniture and equipment: 4–15 years 
• software: 4–6 years 
• goodwill: 20 years (in some cases, 15 years)

Any impairments are recognised in income. When the circumstances that led to such an impairment cease to exist, a reversal of the impairment loss is made.

Other assets
The principal components of this item are receivables not relating to the banking business (mainly accounts receivable from deliveries of goods and the performance of services), tax claims and deferred tax assets, and positive market values of derivative financial instruments not included in the trading book (exclusively held for hedging purposes).

Deferred taxes
Taxes on income are recognised and calculated in accordance with IAS 12 under the balance sheet liability method. At any taxable entity, the calculation is based on the tax rates that are expected to apply to the period in which the deferred tax asset or liability will reverse.

Deferred tax assets and liabilities are calculated on the basis of the difference between the carrying amount of an asset or a liability recognised in the balance sheet and its respective tax base. This difference is expected to increase or decrease the income tax charge in the future (temporary differences). Deferred tax assets are recognised for tax losses carried forward if it is probable that future taxable profits will be available at the same taxable entity. Deferred tax assets and liabilities are not discounted.

The tax expense included in the determination of net income is recognised in the item Taxes on income in the consolidated income statement. Taxes other than those on income are included in the item Balance of other operating income and expenses.

Trading liabilities
This item includes negative fair values of derivative financial instruments held in the trading portfolio. To determine fair values, market prices and quotes via Bloomberg, Reuters, Telerate, etc. are used. Where such prices or quotes are not available, values based on present value calculations or option pricing models are applied. Changes in the fair values of trading liabilities (including trading derivatives) are recognised in net income.

Liabilities
All liabilities other than trading liabilities are as a rule carried at amortised cost.

In the case of liabilities evidenced by certificates, any difference between the issue price and the amount repayable is amortised over the period to maturity.

The dividend proposed at the Annual General Meeting is not included in the liabilities.

Provisions
A provision is recognised only if there is a legal or constructive obligation towards third parties outside the Group and a reliable estimate can be made of the amount of the obligation.

Provisions for post-employment benefits are recognised using the projected unit credit method in accordance with IAS 19.

Under a commitment to provide defined benefits, Bank Austria Creditanstalt AG continues to recognise a pension provision for the entitlements of employees who retired before the pension reform as at 31 December 1999 became effective, and – as a special feature of Bank Austria Creditanstalt AG’s staff regulations – for the future benefits, equivalent to those under mandatory insurance, earned by active employees for whom Bank Austria Creditanstalt AG has assumed the obligations of the mandatory pension insurance scheme pursuant to Section 5 of the Austrian General Social Insurance Act (ASVG). Disability risk, less reimbursement from the pension funds, is covered by the provision.

The present value of pension obligations and severance-payment obligations is determined with due regard to internal service regulations, on the basis of the following actuarial assumptions:

• discount rate/Austria: 5.25% (2003: 5.5%) 
• increases under collective bargaining agreements: 1.75% p.a. (assumption of increases for employees and pensioners) 
• career trends including regular salary increases under Bank Austria Creditanstalt’s remuneration system: 0.77%–1.02% p.a. (assumption of increases for employees) 
• retirement age: as a basis for calculation in respect of employees enjoying “permanent tenure” status, the age of 60 for men and 55 for women, with a transition to the retirement age of 60 in ten semi-annual steps for women who were born in or after 1964, has been taken into account. For employees insured pursuant to the provisions of the Austrian ASVG, the new retirement age of 65 for men and women has been taken into account in accordance with the new rules (2003 pension reform including transitional rules) 
• AVÖ 1999-P statistical tables (most recent life-expectancy tables for salaried staff)

For provisions for severance payments and pensions, actuarial losses up to a limit of 10% of the present value (“corridor”) are not recognised in net income.

No provisions are made for defined-contribution plans. Payments agreed to be made to a pension fund for defined-contribution plans are recognised as an expense, with no further obligations.

Minority interests
The amount of minority interests is calculated in proportion to the interests of minority shareholders in the net assets of subsidiaries.

Shareholders’ equity
Shareholders’ equity is composed of paid-in capital, i.e., capital made available to the company by shareholders (subscribed capital plus capital reserves), and earned capital (retained earnings, foreign currency translation reserves, IAS 39 reserves, profit carried forward from the previous year, and net income). The IAS 39 reserves include gains and losses on available-for-sale financial assets (available-for-sale reserve), which are not recognised in income, and those components of hedge accounting in accordance with IAS 39 which are not included in income (cash flow hedge reserve), after adjustment for deferred taxes.

Other liabilities
This item includes in particular liabilities not relating to the banking business (mainly accounts payable for deliveries of goods and the performance of services), tax liabilities, negative fair values of derivative financial instruments which are not part of the trading book (exclusively used for hedging purposes) and other accruals.

Net interest income
Interest income is accrued and recognised as long as such income is expected to be recoverable. Income mainly received as payment for the use of capital (usually calculated, like interest, on the basis of a specific term or on the amount receivable) is included in income similar to interest. Income from equity interests and from investment property is also included in this item.

The same principles apply to the recognition of interest expenses.

Losses on loans and advances
This item includes additions to provisions for losses on loans and advances, and income from the release of loan loss provisions as well as recoveries of loans and advances previously written off.

Net fee and commission income
Net fee and commission income comprises income from services provided on a fee and commission basis as well as expenses incurred for services provided by third parties and related to the Group’s fee-earning business.

Net trading result
In addition to the realised and unrealised results from measuring the trading positions using the mark-to-market method, the net trading result includes accrued interest and funding costs relating to trading assets other than shares, as well as dividend income and funding costs relating to shares held for trading.