Sberbank - Annual Report 2010 - 32 Contingencies and Commitments

Home Financial Report Financial Statements Notes 32 Contingencies and Commitments

# 32 Contingencies and Commitments

Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and internal professional advice the Management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in these consolidated financial statements.

Tax legislation. Major part of the Group's business activity is carried out in the Russian Federation. Russian tax, currency and customs legislation is subject to varying interpretations and changes, which could occur frequently, at short notice and have retroactive effect. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. The Russian tax authorities may be taking a more assertive and sophisticated approach in their interpretation of the legislation and tax examinations. It is possible that transactions and activities that have not been challenged in the past may be challenged in the future. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review and investigations by the authorities in respect of taxes for three calendar years preceding the year in which the decision to conduct the review is taken. Under certain circumstances tax reviews may cover longer periods.

Transfer pricing legislation in Russia allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all "controlled" transactions (except for those conducted at state regulated prices and tariffs), if the transaction price differs upwards or downwards from the market price by more than 20 percent. Under current transfer pricing legislation "controlled" transactions include transactions with related parties, barter transactions, foreign trade transactions and transactions with unrelated parties characterised by significant price fluctuations (i.e., if the price applied under these transactions differs from prices applied under similar transactions by more than 20 percent within a short period of time). Special transfer pricing rules apply to transactions with securities and derivatives. Transfer pricing rules as currently in effect are vaguely drafted, generally leaving wide scope for their interpretation by the tax authorities and courts in practice.

There is a plan to introduce substantial amendments to the Russian transfer pricing legislation. A new draft law introducing a wholesale reform to the transfer pricing legislation was approved by the Russian Parliament in the first reading on 19 February 2010 with the second and third readings initially expected in December 2010 but then postponed until 2011. At this point it cannot be predicted with the absolute certainty when these amendments will be enacted, if at all, what will be their exact content and what effect they may have on taxpayers, including the Group.

Capital expenditure commitments. At 31 December 2010 the Group has contractual capital expenditure commitments in respect of premises and equipment totalling RR 12 546 million (2009: RR 7 394 million) and in respect of computer equipment acquisition of RR 406 million (2009: RR 635 million). The Group has already allocated the necessary resources in respect of these commitments. The Group believes that future net income and funding will be sufficient to cover these and any similar commitments.

Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under operating leases, both cancellable and non-cancellable, are as follows:

| 2010 | 2009
--- | --- | ---
In millions of Russian Roubles | Lease payments under cancellable operating lease | Lease payments under non-cancellable operating lease | Lease payments under cancellable operating lease | Lease payments under non-cancellable operating lease
Not later than 1 year | 6,413 | 1,069 | 4,261 | 785
Later than 1 year and not later than 5 years | 10,527 | 3,327 | 7,943 | 1,242
Later than 5 years | 6,626 | 1,689 | 6,784 | 982
Total operating lease commitments | 23,566 | 6,085 | 18,988 | 3,009

Compliance with covenants. The Group is subject to certain covenants related primarily to its borrowings. Noncompliance with such covenants may result in negative consequences for the Group. The Group is in compliance with covenants as at 31 December 2010 and as at 31 December 2009.

Credit related commitments. The primary purpose of credit related commitments instruments is to ensure that funds are available to a customer when required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet the obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than direct lending. Commitments to extend credit represent unused portions of authorisations to extend credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to a loss equal to the total amount of unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the maturities of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows:

In millions of Russian Roubles | 2010 | 2009
--- | --- | ---
Commitments to extend credit | 488,029 | 328,013
Export letters of credit | 353,366 | 264,196
Undrawn credit lines | 182,220 | 108,448
Guarantees issued | 159,158 | 137,522
Import letters of credit and letters of credit for domestic settlements | 143,369 | 118,463
Total credit related commitments | 1,326,142 | 956,642

At 31 December 2010 included in Due to corporate customers are deposits of RR 78 749 million (31 December 2009: RR 82 068 million) held as collateral for irrevocable commitments under import letters of credit. Refer to Note 17.

The total outstanding contractual amount of undrawn credit lines, letters of credit and guarantees does not necessarily represent future cash payments, as these financial instruments may expire or terminate without any payments being made.

Fiduciary assets. These assets are not included in the consolidated statement of financial position as they are not assets of the Group. Nominal values disclosed below are normally different from the fair values of respective securities. The fiduciary assets fall into the following categories:

In millions of Russian Roubles | 2010 Nominal value | 2009 Nominal value
--- | --- | ---
State savings bonds and OFZ bonds | 315,649 | 269,324
Corporate shares | 196,605 | 179,261
Bonds of the Bank of Russia | 31,197 | -
Promissory notes | 17,930 | 23,119
Corporate bonds | 8,281 | 3,586
Eurobonds of the Russian Federation | 1,406 | 796
Debt securities of municipal and subfederal bodies of the Russian Federation | 636 | 620
State domestic loan bonds (OVGVZ) | 31 | 31
Other securities | 205 | 468

Assets under management. In December 2010 the Group incorporated three mutual investment funds under the management of Sberbank Asset Management Company, a member of the Group. The company was established in June 2010 to provide professional asset management services to a broad client base.

As at 31 December 2010 the value of net assets of each mutual investment fund was as follows:

In millions of Russian Roubles | Value of net assets
--- | ---
Mutual investment fund 'Sberbank - shares fund' | 73
Mutual investment fund 'Sberbank - 'balanced fund' | 49
Mutual investment fund 'Sberbank - 'bonds fund' | 18
Total | 140

Assets pledged and restricted. As at 31 December 2010 the Group has pledged federal loan bonds (OFZ bonds) and Eurobonds of the Russian Federation on the special accounts with the Bank of Russia as collateral against overnight interbank borrowings that the Group attracts on a regular basis from the Bank of Russia. The carrying value of assets pledged is as follows:

In millions of Russian Roubles | Notes | 2010 | 2009
--- | --- | --- | ---
Trading securities | 8 |  |
- Federal loan bonds (OFZ bonds) |  | 14,715 | 18,105
- Russian Federation Eurobonds |  | - | 6,348
Securities designated at fair value through profit or loss | 9 |  |
- Federal loan bonds (OFZ bonds) |  | 31,520 | 39,658
Investment securities available for sale | 12 |  |
- Federal loan bonds (OFZ bonds) |  | 42,498 | 65,299
- Russian Federation Eurobonds |  | 5 | 13,768
Investment securities held to maturity | 13 |  |
- Federal loan bonds (OFZ bonds) |  | 37,044 | -
Total |  | 125,782 | 136,830

Mandatory cash balances with the Bank of Russia in the amount of RR 50 532 million (2009: RR 40 572 million) represent mandatory reserve deposits, which are not available to finance the Group's day-to-day operations.

The Group also had assets pledged as collateral under repurchase agreements with other banks and corporate customers with the following carrying value:

|  | 2010 | 2009
--- | --- | --- | ---
In millions of Russian Roubles | Notes | Asset pledged | Related liability | Asset pledged | Related liability
Securities pledged under repurchase agreements | 11 | 81,493 | 67,323 | 2,699 | 2,285
Total |  | 81,493 | 67,323 | 2,699 | 2,285

Refer to Note 11 for more detailed information on securities pledged under repurchase agreements.

## History

- 31 Financial Risk Management
- 30 Segment Analysis
- 6 New Accounting Pronouncements
- 5 Adoption of New or Revised Standards and Interpretations
- 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies

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