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Part2:Financial Statements

1 - Accounting Convention

Financial statements of Bank Mellat have been prepared under historical cost convention

and current values have also been applied when deemed appropriate .

2- Basis of Determining Depositors ’ Profit Share from Joint Income

By virtue of usury - free banking Act ratified on 30.08.1983 and the executive directives

thereof , and considering the circular number 1799 dated 08.01.2004 issued by the Central

Bank of the Islamic Republic of Iran , incomes gained out of granting financial facilities ,

investing in the stock and participating bonds , which are recognized within the framework

of the accounting policies practiced by the Bank , are considered as the joint income and

the depositors ’ share is determined in proportion to the net amount of their deposits

invested in the above stated activities .

3- Summary of Significant Accounting Policies

3-1- Investments

3-1-1- Evaluation Method

Long - lived assets are evaluated based on cost price less the provisioning for impairment

loss for each investment .

Liquid current assets are evaluated at their market value at the date of preparing the

balance sheet . Other current assets are evaluated at the least cost price and net sale value

of each asset .

3-1-2- Income Recognition Method

Profit from the investment in the subsidiaries and affiliated companies are recognized at

the date of approval of their financial statements by the general meeting of stockholders

( until the date of approval of the financial statements ).

Profit from the investments in the other companies , current or long term , are recognized

at the date of approval of their financial statements by the general meeting of stockholders

( until the balance sheet date ).

3-2- Tangible Fixed Assets

3-2-1- Tangible fixed assets , except for those mentioned in note 3-2-2 , are posted at the cost

price in the accounts . The repairs and improvements , that lead to considerably increase in

the capacity or estimated useful life of the fixed assets or essentially improve their utility

are charged as capital expenses and are depreciated during the remaining useful life of

the asset . Maintenance costs incurred in order to partial repair and retain the economic

interests as per initially evaluated performance standards expected from the business

unit , are deemed as current expenses and charged the profit ( loss ) of the period

3-2-2- By virtue of the article 62 of the third five –year development plan , the land and building of the

head office of the Bank was revaluated at Rls 11 , 543 bn and the resulted surplus amounting to Rls 10 , 637

bn was posted to the capital increase account of the government in the bank

3-2-3- According to the resolution adopted in the 1077 th session of the Money and Credit Council on

1 7.02.2007 , since 1386(2007/08) Depreciation of tangible fixed assets are calculated in accordance with

depreciation schedule set forth in the article 151 of Direct Taxes Act , based on the rates and methods as

follows :

Asset Depreciation Rate Depreciation Method

Premises 7 % Declining

Automobiles 25 % Declining

Equipment &Computer Systems ’ Hardware 10 years Direct line

PC Hardware 3 years Direct line

t"DDPSEJOHUPOPUF 10 of the code of conduct for the depreciations , based on article 151 of the Direct

Taxes Act , the depreciation rate for the buildings revaluated at the end of 1383(2004/05) has been charged

at 3.5 % using declining method .

3-3- Goodwill

By virtue of the article 62 of the third five –year development plan , the Bank ’ s good will was posted

based on revaluated price in 1383(2004/05) . Meanwhile , as according to the resolution adopted in the

1077 th session of the Money and Credit Council , depreciation of assets are calculated in accordance with

depreciation schedule of the article 151 of Direct Taxes Act; therefore , no amortization is calculated since

the beginning of 1386(2007/08).

3-4- Income Recognition

According to the resolution of the Money and Credit Council , the income derived from the facilities

granted in accordance with Shariah based contracts by the end of 1382(2003/04) , have been recognized

based on cash basis . Since 1383 (2004/05), however , in order to comply with the accounting standards , all

the Bank ’ s incomes have been calculated and posted on accrual basis .

3-5- Foreign Currency Translation

3-5-1 Domestic Accounts

Foreign currency monetary items are translated in the market rate ( reference rate of the inter bank

market that is everyday announced by the Central Bank of the Islamic Republic of Iran ) and foreign

currency nun monetary items are translated in the market rate on the transaction date . The difference

arisen from settlement or translation of Foreign Currency monetary items are recognized as the income

and expenses of contracts periods .

3-5-1-1 in accordance with the provisions of article 136 of the Public Audits Act concerning translating

foreign currency denominated assets and liabilities , the difference resulted from translation was posted

to the foreign currency translation reserve account in 1383(2004/05) as described in note 24 .

3-5-2- Foreign Branches and subsidiaries

All the monetary and non - monetary items of the Foreign Branches and subsidiaries ( except shareholders ’

equity ) are translated at the market value at the balance sheet date , and shareholders ’ equity are translated

at the market value at the creation date ( historical rates ). Profit and loss items are translated at the

banking market value at the transaction date . The difference resulted from translation of their balance

sheets are posted under shareholders ’ equity .

3-6- Provision for Doubtful Debts

According to the codes of conduct adopted in the 1074th and 1077th sessions resolution dated 29/12/2006

and 16/02/2007 of the Money and Credit Council , doubtful debts provisions are calculated and charged

to the accounts as follows :

3-6-1 since inception of 1386(2007/08) , a general provisions of 1.5% ( up until end of 1385 (2006/07) equaling

2%) of the balance of total facilities is calculated and charged to the accounts , except for the balance of

the facilities for which specific provisions have been put aside .

3-6-2 Specific provisions is calculated and charged to the accounts proportionate to the category of over

due loans and when they lose their collateral coverage as follows :

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