This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. All possible care has

Transcription

1 Montenegrin. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes

2 Montenegrin. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes

3 CONTENTS Page Statement of Financial Position 1 Statement of Comprehensive Income 2 Statement of Cash Flow 3 Statement of Changes in Equity 4 Notes to the Financial Statements 5-56 Montenegrin. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes

4 STATEMENT OF FINANCIAL POSITION 2

5 STATEMENT OF COMPREHESIVE INCOME Revenue For the year ended 31 December Note Revenue from fixed lines and Internet 19 a 63,123,809 63,092,700 Revenue from mobile lines 19 b 50,953,125 53,796,428 Total revenue 114,076, ,889,128 Other operating income 249, ,687 Operating expenses Employee related expenses 20 (20,674,655) (24,791,586) Depreciation, amortization and impairment 21 (21,432,308) (24,694,691) Payments to other network operators 22 (18,237,414) (19,977,764) Cost of equipment sold (5,784,610) (6,153,642) Other operating expenses 23 (27,097,037) (25,598,505) Total operating expenses (93,226,024) (101,216,188) Operating profit 21,100,575 16,131,627 Finance income 24 2,855,494 2,729,957 Finance costs 24 (845,260) (315,890) Finance income net 2,010,234 2,414,067 Profit before income tax 23,110,809 18,545,694 Income tax expense 25 (3,170,805) (2,047,450) Profit for the year 19,940,004 16,498,244 Other comprehensive income for the year - - Total comprehensive income for the year 19,940,004 16,498,244 Attributable to: Equity holders of the company 19,940,004 16,498,244 Earnings per share of the Company during the year (expressed in EUR per share) - basic and diluted The accompanying notes on pages 5-56 are an integral part of these financial statements. 3

6 STATEMENT OF CASH FLOW Cash flows from operating activities For the year ended December 31, Note Cash generated from operations 31 41,629,270 39,573,308 Interest paid 24 (144,634) (55,875) Income tax paid 25 (3,080,020) (2,533,205) Net cash generated from operating activities 38,404,616 36,984,228 Cash flows from investing activities Purchase of tangible and intangible assets 6,7 (13,898,095) (13,922,285) Short term bank deposits inflow 11 26,900,000 17,500,000 Short term bank deposits outflow 11 (13,700,000) (26,500,000) Interest received 24 2,507,882 2,303,825 Proceeds from disposal of non current assets 252,685 44,254 Long term loans and other receivables 8 383, ,235 Net cash generated from/used in investing activities 2,446,155 (20,121,971) Cash flows from financing activities Dividends paid to shareholders 27 (16,504,600) (17,973,591) Net cash used in financing activities (16,504,600) (17,973,591) Net increase/decrease in cash and cash equivalents 24,346,171 (1,111,334) Cash and cash equivalents, beginning of period 2,093,407 3,203,450 Exchange gains/(losses) on cash and cash equivalents (713) 1,291 Cash and cash equivalents, end of period 12 26,438,865 2,093,407 The accompanying notes on pages 5 to 56 are an integral part of these financial statements. 4

7 STATEMENT OF CHANGES IN EQUITY Share Capital Statutory reserves Retained earnings Total Balance at January 1, ,996,394 7,074,778 19,865, ,936,936 Dividends - - (18,000,000) (18,000,000) Allocation to statutory reserves (Note 15) - 971,581 (971,581) - Profit for the year ,498,244 16,498,244 Other comprehensive income for the year Balance at December 31, ,996,394 8,046,359 17,392, ,435,180 Balance at January 1, ,996,394 8,046,359 17,392, ,435,180 Dividends (Note 28) - - (16,500,000) (16,500,000) Allocation to retained earnings (Note 15) - (8,046,359) 8,046,359 - Profit for the year ,940,004 19,940,004 Other comprehensive income for the year Balance at December 31, ,996,394-28,878, ,875,184 The accompanying notes on pages 5 to 56 are an integral part of these financial statements 5

8 1. GENERAL INFORMATION Crnogorski Telekom A.D. Podgorica (also referred to as Telekom or the Company ) is a principal provider of fixed telephony services in Montenegro, as well as of local, national and international telephony services, in addition to a wide range of other telecommunication services involving mobile network, internet, leased circuits, data networks, cable television services and other telecommunication services in Montenegro. The Company is a shareholding company listed on the Montenegro Stock Exchange (TECG). The Company was acquired in 2005 by Magyar Telekom Nyrt. (hereinafter referred to as Magyar Telekom ) with 76.53% of ownership interest. On April 30, 2009, the General Assembly of Crnogorski Telekom A.D decided to merge T Mobile d.o.o. and Internet d.o.o., into Crnogorski Telekom A.D.. Deutsche Telekom AG ( DTAG ) is the ultimate controlling owner of Magyar Telekom Plc. holding 59.21% of the issued shares. Deutsche Telekom ( DT ) Group has a number of fixed lines, mobile and IT service provider subsidiaries worldwide, with whom Magyar Telekom Group has regular transactions. Telekom is domiciled in Montenegro at the following address: Moskovska 29, Podgorica. As at December 31, 2012 the Company had 774 employees (759 employees as at 31 December 2011). Investigation into certain consultancy contracts As previously disclosed, in the course of conducting their audit of Magyar Telekom s 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. ( PWC ) identified two contracts the nature and business purposes of which were not readily apparent to them. In February 2006, Magyar Telekom s Audit Committee retained White & Case LLP (the independent investigators or White & Case ), as its independent legal counsel, to conduct an internal investigation into whether Magyar Telekom and/or any of its affiliates had made payments under those, or other contracts, potentially prohibited by U.S. laws or regulations, including the Foreign Corrupt Practices Act ( FCPA ), or internal company policy. The Audit Committee also informed the U.S. Department of Justice ( DOJ ) and the U.S. Securities and Exchange Commission ( SEC ), and the Hungarian Financial Supervisory Authority of the internal investigation. On December 2, 2009, the Audit Committee provided Magyar Telekom s Board of Directors with a Report of Investigation to the Audit Committee of Magyar Telekom Nyrt. dated November 30, 2009 (the Final Report ). The Audit Committee indicated that it considers that, with the delivery of the Final Report based on currently available facts, White & Case has completed its independent internal investigation. 6

9 1. GENERAL INFORMATION (continued) Investigation into certain consultancy contracts (continued) The Final Report includes the following findings and conclusions, based upon the evidence available to the Audit Committee and its counsel: The information obtained by the Audit Committee and its counsel in the course of the investigation demonstrates intentional misconduct and a lack of commitment to compliance at the most senior levels of Magyar Telekom, Crnogorski Telekom, and Makedonski Telekom during the period under investigation. As previously disclosed, with respect to Montenegrin contracts, there is insufficient evidence to establish that the approximately EUR 7 million in expenditures made pursuant to four consultancy contracts... were made for legitimate business purposes, and there is affirmative evidence that these expenditures served improper purposes. These contracts were not appropriately recorded in the books and records of Magyar Telekom and its relevant subsidiaries. Two of these contracts, amounting to EUR 2.88 million in total, were entered into by Crnogorski Telekom and a subsidiary thereof, while two others were entered into by other affiliates in the Group. In 2007 the Supreme State Prosecutor of Montenegro informed the Board of Directors of Crnogorski Telekom, of its conclusion that the contracts subject to the internal investigation in Montenegro included no elements of any type of criminal act for which prosecution would be initiated in Montenegro. However, since 2007, the Supreme State Prosecutor of Montenegro has been provided with all new data and/or documents which became available for Crnogorski Telekom. Additionally, the Ministry of Interior of the Republic of Macedonia and the Hungarian Central Investigating Chief Prosecutor s Office commenced investigations into certain of the activities that were the subject of the internal investigation. These governmental investigations are continuing, and relevant affiliates of Crnogorski Telekom continue to cooperate with these investigations. The DOJ and the SEC also commenced investigations into the activities that were the subject of the internal investigation. In 2011, Magyar Telekom entered into final settlements with the DOJ and the SEC to resolve the DOJ s and the SEC s investigations relating to Magyar Telekom. The settlements concluded the DOJ s and the SEC s investigations relating to Magyar Telekom. As of 31 December, 2012 the above mentioned investigations had no impact on financial statements of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 years presented, unless otherwise stated Basis of Preparation The financial statements of Crnogorski Telekom A.D. have been prepared in accordance with the International Financial Reporting Standards (IFRS) and IFRIC interpretations as issued by the International Accounting Standards Board (IASB) and effective at the time of preparing the financial statements, and in accordance with requirements of the Law on Accounting and Auditing of Montenegro. The financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale financial assets. 7

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1. Basis of Preparation (continued) The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. The Company maintains its accounting records in accordance with the Accounting and Auditing Law of Montenegro ( Official Gazette of the Republic of Montenegro, No. 69/2005 and Official Gazette of Montenegro, no. 80/08 and 32/11) and in particular, based on the relevant legal decision defining the mandatory application of IFRS in the Republic of Montenegro ( Official Gazette of the Republic of Montenegro, No. 69/2002). These financial statements of the Company are authorised for issue by the Company s Board of Directors (BoD), however, the Annual General Meeting (AGM) of the owners, authorized to accept these financials, has the right to require amendments before acceptance. As the controlling shareholders are represented in the Board of Directors (BoD) that approves these financial statements for issuance, the probability of any potential change required by the AGM is extremely remote, and has never happened in the past. The official currency in Montenegro and the functional currency of the Company is Euro (EUR) Comparative information Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current period. The changes in presentations were made to reflect better the Company s business. They were applied retrospectively and, consequently, the third balance sheet as of 31 December 2010 has been presented Changes in accounting policies and disclosures a) New and amended standards adopted by the Company During 2012, the Company implemented the following amended standards: - IFRS 7 (amended) The IASB published an amendment to IFRS 7 Amendments to IFRS 7 Financial Instruments: Disclosures in October The amendment requires quantitative and qualitative disclosures regarding transfers of financial assets that do not result in entire derecognition, or that result in continuing involvement. This is intended to allow users of financial statements to improve their understanding of such transactions (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of such transactions are undertaken around the end of a reporting period. The Company adopted the amended standard as of January 1, The amended standard did not have a significant impact on the disclosures in the Company s financial statements. - IAS 12 (amended). In December 2010, the IASB issued the pronouncement Deferred Tax: Recovery of Underlying Assets Amendments to IAS 12. The new pronouncement Deferred Tax: Recovery of Underlying Assets Amendments to IAS 12 sets presumptions for the recovery (e.g. use or sale) of certain assets. This is relevant in cases where the type of recovery has different tax consequences. The pronouncement sets the rebuttable presumption that the carrying amount of investment property that is measured using the fair value model in IAS 40 will be recovered through sale. Moreover, the carrying amount of a non-depreciable asset measured using the revaluation model in IAS 16 is always deemed to be recovered through sale. The amendment superseded SIC 21. As Crnogorski Telekom does not have investment properties or non-depreciable asset measured using the revaluation model in IAS 16, the amended standard did not have any impact on the Company s financial statements. 8

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2012, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Company, except the following set out below: Amendments to IAS 1, Financial statements presentation published in June The amendments retain the 'one or two statement' approach at the option of the entity and only revise the way other comprehensive income is presented: requiring separate subtotals for those elements which may be reclassified to the profit or loss section of the income statement (recycled) and those elements that will not. The application of the amendment is required for annual periods beginning on or after July 1, IAS 19, Employee benefits was amended in June The amendments focus on recognition, presentation and disclosures of the defined benefit plans. The application of the amendment is required for annual periods beginning on or after January 1, The management does not expect any significant impact on the financial statements of the Company. IAS 32 (amended) The IASB published amendments to IAS 32 Financial Instruments: Presentation in December The amendments to IAS 32 clarify the IASB s requirements for offsetting financial instruments. The application of the amendment is required for annual periods beginning on or after January 1, The management does not expect any significant impact on the financial statements of the Company. IFRS 7 (amended) The IASB published amendments to IFRS 7 Amendments to IFRS 7 Financial Instruments: Disclosures in December These amendments are part of the IASBs comprehensive review of off balance sheet activities. The amendments promote transparency in the reporting of transfer transactions and improve users understanding of the risk exposures relating to transfers of financial assets and the effect of those risks on an entity s financial position, particularly those involving securitisation of financial asset.. The application of the amendment is required for annual periods beginning on or after January 1, The management does not expect any significant impact on the financial statements of the Company. IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is 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. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Company is yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 January The Company will also consider the impact of the remaining phases of IFRS 9 when completed by the Board. 9

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) New standards and interpretations not yet adopted (continued) - IFRS 13 The IASB published IFRS 13 Fair Value Measurement in May 2011in order to replace the guidance on fair value measurement in existing IFRS accounting literature with a single standard. The IFRS is the result of joint efforts by the IASB and FASB to develop a converged fair value framework. IFRS 13 defines fair value, provides guidance on how to determine fair value and requires disclosures about fair value measurements. However, IFRS 13 does not change the requirements regarding which items should be measured or disclosed at fair value. IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorizes the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure fair value are categorized into different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety in the level of the lowest level input that is significant to the entire measurement (based on the application of judgment). The new standard should be applied for annual periods beginning on or after January 1, Earlier application is permitted. We do not expect that the adoption of the new standard would result in significant changes in the financial statements of the Company, the exact extent of which we are currently analyzing. c) New standards, amendments and interpretations that are not yet effective and not relevant for the Company s operations - IFRS 1 In March 2012, the IASB published amendments to IFRS 1, dealing with loans received from governments at a below market rate interest. As Crnogorski Telekom already adopted IFRS, the amendments will not have any impact on the Company s financial statements. - IFRS 10, IFRS 12, IAS 27 (amended) The IASB published "Investment Entities" (Amendments to IFRS 10, IFRS 12 and IAS 27) in October The amendments apply to a particular class of business that qualify as investment entities. The IASB uses the term investment entity to refer to an entity whose business purpose is to invest funds solely for returns from capital appreciation, investment income or both. An investment entity must also evaluate the performance of its investments on a fair value basis. Such entities could include private equity organisations, venture capital organisations, pension funds, sovereign wealth funds and other investment funds. The amendments provide an exception to the consolidation requirements in IFRS 10 and require investment entities to measure particular subsidiaries at fair value through profit or loss, rather than consolidate them. They also set out disclosure requirements for investment entities. The amendments are effective from 1 January 2014 with early adoption permitted. As Crnogorski Telekom is a single entity and does not have any investment entities and joint arrangements, the amended standards will not have any impact on the Company s financial statements. - IFRIC 20 In October 2011, the IASB published IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine. As Crnogorski Telekom does not have mining activity, the interpretation will not have any impact on the Company s financial statements Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision-Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Management Board that makes strategic decisions. There are two identifiable segments in Crnogorski Telekom: Fixed Line and Mobile Line Foreign currency translation The functional and presentation currency of the Company is Euro (EUR). Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized as finance income or finance costs. 10

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4. Property, Plant and Equipment Property, plant and equipment of the Company are stated at historical cost less accumulated depreciation and impairment losses. Historical cost comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, as well as costs to decommission the asset if necessary. Historical cost of telecommunications equipment comprises all expenditures including the cabling to the customers' premises. Cost also includes internally generated work for a specific item of property, plant and equipment. Subsequent costs are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other costs of maintenance and repairs are charged to the financial period in which they are incurred. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within Other operating income/other operating expense in the income statement. Construction in progress includes third-party and internally generated work for property, plant, and equipment not yet completed. This item discloses investments made (but not yet completed) in the current and/or previous financial year(s). After completion of such property and equipment, the related amounts carried under advance payments or construction in progress are capitalized as items for property, plant, and equipment. In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 - Property, Plant and Equipment or under IAS 38 Intangible Assets, management uses judgment to assess which element is more significant, to recognize the asset accordingly. Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost to residual values over their estimated useful lives, as follows: Major categories in years Buildings 40 Access networks 20 Optical connectors 20 Exchanges 7 Transmission system equipment 10 Computer equipment 3 Mipnet network 5-6 Routers and switches 5-8 The assets residual values and useful lives are reviewed, and adjusted if appropriate, once per year. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. 11

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5. Intangible Assets a) Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Company s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree. The Company recognized goodwill on the acquisition of fully owned subsidiary, Internet Crna Gora d.o.o., on March 7, Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognised immediately as an expense and is not subsequently reversed. b) Licences Separately acquired licences are shown at historical cost. Licences acquired in a business combination are recognised at fair value at the acquisition date. Licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of licences over their estimated useful lives. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives. c) Computer software Costs associated with maintaining computer software programmes are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Company are recognised as intangible assets when the following criteria are met: it is technically feasible to complete the software product so that it will be available for use; management intends to complete the software product and use or sell it; there is an ability to use or sell the software product; it can be demonstrated how the software product will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and the expenditure attributable to the software product during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. 12

15 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5. Intangible Assets (continued) Amortization of intangibles other than goodwill is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives as follows: Intangible Assets in years Telecommunication license - (public fixed telephony services) 25 Telecommunication license - (international traffic) 23 IPTV licence 10 Mobile telephony license 15 3G license 15 Internet web services license 10 Purchased computer software 5 Microsoft licence Impairment of non-financial assets Assets that have an indefinite useful life for example, goodwill or intangible assets not ready to use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Management performs quarterly assessment whether there are indicators of impairment and reports the results of analysis to the ultimate parent. No indicators of impairment of property, plant and equipment and intangible assets are identified as at and for the year ended December 31, Financial assets The Company classifies its financial assets in the following categories: loans and receivables and available-forsale assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition Classification a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables are included in current assets, except those with maturities over 12 months after the financial statement date. These are classified as non-current financial assets. Loans and receivables include the following: trade receivables, housing loans and other receivables, short term bank deposits and cash and cash equivalents. Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non- current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. 13

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Classification (continued) a) Loans and receivables (continued) Long-term loans for employees housing purposes, which bear an interest rate significantly below the prevailing market rates of interest, or interest free loans, are initially recognised at fair value, being determined as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. The difference between cash transfer and fair value is treated as employee remuneration recognized in the Statement of comprehensive income over the shorter of the term of the loan and the expected service life of the employee. Short term bank deposits are deposits with a maturity of more than three months up to twelve months measured at their amortized cost. Interest receivable on bank deposits is presented separately within the Statement of financial position as other receivable. The associated interest income is presented in the Statement of comprehensive income as finance income. Cash and cash equivalents include cash on hand and in banks and all highly liquid deposits with original maturities of three months or less. b) Available-for-sale (AFS) financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the Statement of financial position date. Available for sale financial assets consist of the Company s participation in the share capital of foreign entities which are not quoted at active markets Recognition Regular purchases and sales of financial assets are recognised on the trade-date the date on which the Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs. Available-for-sale financial assets are subsequently carried at fair value and loans and receivables are subsequently carried at amortised cost using the effective interest method. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in other comprehensive income. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of finance income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Company s right to receive payments is established. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership Offsetting financial instruments Financial assets and liabilities such as interconnection revenue and receivables are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. 14

17 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of financial assets a) Assets carried at amortised cost The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Profit for the year (Other operating expenses Bad debt expense). The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. Provision on accounts receivable balances are calculated based on Company s best estimates or their deemed recoverability, by taking into consideration the historical data of customers payment. If no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, Crnogorski Telekom includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is recognized are not included in a collective assessment of impairment. The Company s policy for collective assessment of impairment is based on the aging of the receivables due to the large number of relatively similar type of customers. When a trade receivable is established to be uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against Other operating expenses Bad debt, in the statement of comprehensive income. For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. 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 reversal of the previously recognised impairment loss is recognised in the statement of comprehensive income. b) Assets classified as available for sale The management assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. Evidence that an asset is impaired, besides the criteria referred to in a) above is also a significant or prolonged decline in the fair value of the security below its cost. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in profit or loss. Impairment losses recognised in the statement of comprehensive income are not reversed. As at 31 December 2012, these assets are fully impaired because no cash flows are expected in the future. 15

18 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories comprises cost of purchase and other incurred costs necessary to bring the inventories to their present location and condition. Net realizable value represents the amount at which inventories can be realized in the ordinary course of business less estimated costs necessary to make the sale. Mobile handsets are often sold for less than cost in connection with promotions to obtain new subscribers with minimum commitment periods. Such loss on the sale of equipment is only recorded when the sale occurs if the cost of the handsets exceeds the revenue allocated to the handsets Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds Dividends Dividends payable to the Company s shareholders are recorded as a liability and debited against equity (Retained earnings) in the Company s financial statements in the period in which the dividends are approved by the shareholders Deferred income tax and current income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in theprofit or loss, except to the extent that it relates to items recognised in other comprehensive income. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted by the Statement of financial position date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority e entities where there is an intention to settle the balances on a net basis. 16

19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Employee benefits a) Short term employee benefits Short term employee benefits are recognized as a current expense in the period when employees render their services. These include wages, social security contributions, bonuses, paid holidays, discounted telephone bills, meal and holiday contributions and other fringe benefits and the tax charges thereon. In accordance with signed Collective Bargaining Agreement (CBA), the Company is also obliged to pay to all employees winter supply allowance in the amount of four minimum monthly salaries in the Company. Payments to defined contribution pension and other welfare plans are recognized as an expense in the period in which they are earned by the employees. b) Employee Taxes and Contributions for Social Security In accordance with the regulations prevailing in the Republic of Montenegro, the Company has an obligation to pay contributions to various State Social Security Funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates. The Company is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of the employees, to transfer the withheld portions directly to government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise, and have been included under "Employee related expenses". The Company has no further obligation in respect of these contributions towards the employees, apart from the payment of the monthly pension contributions. c) Obligations for Retirement Benefits The Company has a defined contribution plan, under which the Company pays fixed contributions on a mandatory basis into a publicly administered insurance plan. The Company has no legal or constructive obligations to pay further contributions if the plan does not hold sufficient assets to pay all employees the benefits related to their service in the current and prior periods. Contributions to the publicly administered insurance plan are recognized as employee benefit expense when they are due. As defined by the Montenegrin Labour Law, employees are eligible for retirement after 67 years of age and at least 15 years of labour. Pursuant to the signed CBA, the Company is obliged to make a severance payment in the amount equal to ten minimal monthly salaries in the country to the employees meeting the criteria for retirement. The payment is due on the day of the retirement, but not later than 30 days following the termination of employment. Defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method (see note 4.f)). Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. 17

20 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Employee benefits (continued) d) Obligations for jubilee awards Pursuant to the signed Collective Bargaining Agreement (CBA), the Company is obligated to pay between three and nine minimal monthly salaries as a jubilee award. The number of minimal monthly salaries for jubilee awards corresponds to the total number of years of service of the employee as presented in the table below: Total number of service years Number of minimal wages Obligations for jubilee awards are accounted for in the same manner as defined benefit plans, except that any actuarial gains and losses on jubilee payments as well as past service cost are recognized directly in the Income statement in the period in which they are incurred. e) Housing loans During 2007, in accordance with the Company s Statute and the Rules on the Fulfilment of Employee Residential Housing Requirements, The Company s Operative committee decided to grant housing loans to employees in total amount of EUR 1,282,000. These loans were approved for repayment periods of 5, 7, 10 and 20 years, and were issued at annual interest rates ranging from 0% to 2% (Note 2.7.1a). The total amount of the approved loans per employee ranges from EUR to EUR A condition for the realization of these loans is that the employees had to stay employed in the Company for a loyalty period of minimum three years. If an employee left the Company before the 3-years term, loan principal and interest became immediately due. The Company obtained mortgages on the residential housing units occupied by the loan beneficiaries and other real estate property, in order to secure timely loan repayments. Long-term loans to employees for residential housing purposes, which bear an interest rate significantly below the prevailing market rates of interest, or interest free loans, are initially recognised at fair value, being determined as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. The difference between cash transfer and fair value is treated as employee remuneration recognized in the Statement of comprehensive income over the shorter of the term of the loan and the expected service life of the employee. This is because the Company expects future economic benefit embodied in that asset to flow to the Company over the loyalty period, or otherwise, breach of the contract by employees (in a sense of termination of employment contract before expiration of the stipulated loyalty period) will lead to a cash refund under the concluded contract. Amortization of prepaid employee benefits is recognized in Statement of comprehensive income within Other personnel costs. f) Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the Statement of financial position date are discounted to present value. Termination benefits are calculated based on specific conditions contained in detailed formal plan communicated to the employees. 18

21 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) g) Mid-term incentive plan (MTIP) In 2007 the Company launched a Mid-Term Incentive Plan (MTIP) for its top and senior management. The provision is calculated based on the probability of the achievement of the targets. At the beginning of the plan each participant has an offered bonus. This bonus will be paid out at the end of the plan, depending on the achievement of the fixed targets. e) Varial bonuses programme(var II) Also in 2011 the Company launched Var II programme for top senior management on 4 years period. Provision is calculated based on the probability of the achievement of the targets, and payments will be paid out at the end of the plan, depending on the achievement of the fixed targets Trade and other payables Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method. The carrying values of trade and other payables approximate their fair values due to their short maturity Provisions and contingent liabilities Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, when it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Expenses for provisions are recognized in the income statement line where the actual expense is expected to be incurred. When a provision is released unused, it is released to the same income statement line where it was originally provided for. Provisions made for liabilities expected to be incurred in foreign currency are recognized in the functional currency at the spot foreign exchange rate, and any change in the provision in the functional currency as a result of a subsequent change in the foreign exchange rate is recognized in Other finance expense net. A contingent liability is a possible obligation that arises from past events and whose 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; or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or an obligation which the amount cannot be measured with sufficient reliability. No provision is recognized for contingent liability. 19