JSC MICROFINANCE ORGANIZATION FINCA GEORGIA. Financial statements. Together with the Auditor s Report. Year ended 31 December 2010

Transcription

1 JSC MICROFINANCE ORGANIZATION FINCA GEORGIA Financial statements Together with the Auditor s Report Year ended 31 December 2010

2 JSC MICROFINANCE ORGANIZATION FINCA Georgia FINANCIAL STATEMENTS Contents: FINANCIAL STATEMENTS STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENT... 3 INDEPENDENT AUDITORS REPORT... 4 STATEMENT OF COMPREHENSIVE INCOME... 5 STATEMENT OF FINANCIAL POSITION... 6 STATEMENT OF CHANGES IN EQUITY... 7 STATEMENT OF CASH FLOWS General information Summary of significant accounting policies Critical accounting estimates and judgments Prior period errors and reclassifications Net interest income before loan impairment charge Loan impairment charge Other operating income Loss/ (income) from exchange rate difference Salaries and other employer benefits General and administrative expenses Other operating expenses Unrestricted revenue from received grants Income tax expenses Cash and cash equivalents Loans to customers Amounts due from credit institutions Other assets Property, plant and equipment Intangible assets Deferred tax asset Notes payable Other liability Statutory capital Financial instruments risk management Transactions with related parties Post balance sheet events...38 Page 2 of 38

3

4

5

6

7

8

9 1. General information Microfinance Organization FINCA Georgia is a Joint Stock Company (the Company ) which was established on December 20, 2007 in Tbilisi, Georgia. The founder of the Company is FINCA International Inc., a network of microfinance institutions based in Washington, D.C., with affiliates/subsidiaries operating in 21 countries around the world. The Company is regulated by Georgian Financial Supervisory agency and conducts its business under the Law on Microfinance Activity. The Company was registered as a microfinance organization in 2007 with the registration number The Company s main activity is to provide micro and small loans to individuals. The loans are disbursed both in local and foreign currencies. Its main office is 71 Vazha Pshavela Avenue, 0186, Tbilisi, Georgia. As at 31 December, 2010 the organization has 30 operating outlets in major cities of Georgia. JSC FINCA Georgia serves over 27,000 clients and represents one of the largest microfinance organizations throughout the country. The Company had an average of 330 employees during As at December 31, 2010 and 2009, FINCA International was 100% shareholder of the organization. 2. Summary of significant accounting policies 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 Basis of preparation a) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and IFRIC Interpretations applicable to companies reporting under IFRS. 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. The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the most appropriate application in applying the accounting policies. The areas where significant judgments and estimates have been made in preparing the financial statements and their effect are disclosed in note 3. b) Basis of measurement The financial statements have been prepared under the historical cost convention as modified by the initial recognition of financial instruments based on fair value. The reporting period for the Company is the calendar year from January 1 to December 31. c) Going concern These financial statements have been prepared on the assumption that the Company is a going concern and will continue its operations for the foreseeable future. The management and shareholder have the intention to further develop the business of the Company in Georgia. The management believes that the going concern assumption is appropriate for the Company. Page 9 of 38

10 2. Summary of significant accounting policies (continued) The reporting period for the Company is the calendar year from January 1 to December Adoption of new IFRSs a) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the company IFRS 3 (revised), Business combinations, and consequential amendments to IAS 27, Consolidated and separate financial statements, IAS 28, Investments in associates, and IAS 31, Interests in joint ventures, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with IFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. All acquisition-related costs are expensed. IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. IAS 27 (revised) has had no impact on the current period. IFRIC 17, Distribution of non-cash assets to owners. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. IFRIC 18, Transfers of assets from customers, effective for transfer of assets received on or after 1 July This interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both). IFRIC 9, Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement, effective 1 July This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, the hybrid instrument must remain classified as at fair value through profit or loss in its entirety. IFRIC 16, Hedges of a net investment in a foreign operation effective 1 July This amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of IAS 39 that relate to a net investment hedge are satisfied. In particular, the Page 10 of 38

11 2. Summary of significant accounting policies (continued) group should clearly document its hedging strategy because of the possibility of different designations at different levels of the group. IAS 38 (amendment), Intangible assets, effective 1 January The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. IAS 1 (amendment), Presentation of financial statements. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or noncurrent. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. IAS 36 (amendment), Impairment of assets, effective 1 January The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, Operating segments (that is, before the aggregation of segments with similar economic characteristics). IFRS 2 (amendments), Group cash-settled share-based payment transactions, effective form 1 January In addition to incorporating IFRIC 8, Scope of IFRS 2, and IFRIC 11, IFRS 2 Group and treasury share transactions, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation. IFRS 5 (amendment), Non-current assets held for sale and discontinued operations. The amendment clarificaties that IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of IAS 1 still apply, in particular paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1. b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2010 and not early adopted IFRS 9, Financial instruments, issued in November This standard is the first step in the process to replace IAS 39, Financial instruments: recognition and measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect company s accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by the EU. Revised IAS 24 (revised), Related party disclosures, issued in November It supersedes IAS 24, Related party disclosures, issued in IAS 24 (revised) is mandatory for periods beginning on or after 1 January Earlier application, in whole or in part, is permitted. However, the standard has not yet been endorsed by the EU. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for governmentrelated entities to disclose details of all transactions with the government and other government-related entities. The company will apply the revised standard from 1 January Classification of rights issues (amendment to IAS 32), issued in October The amendment applies to annual periods beginning on or after 1 February Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative Page 11 of 38

12 2. Summary of significant accounting policies (continued) liabilities. The amendment applies retrospectively in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. The company will apply the amended standard from 1 January IFRIC 19, Extinguishing financial liabilities with equity instruments, effective 1 July The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The company will apply the interpretation from 1 January 2011, subject to endorsement by the EU. It is not expected to have any impact on the group or the parent entity s financial statements. Prepayments of a minimum funding requirement (amendments to IFRIC 14). The amendments correct an unintended consequence of IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct this. The amendments are effective for annual periods beginning 1 January Earlier application is permitted. The amendments should be applied retrospectively to the earliest comparative period presented Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). Financial statements are presented in Georgian lari, which is the company s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are premeasured. 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 recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses that relate to notes payables and cash and cash equivalents are presented in the statement of comprehensive income within Net foreign exchange loss/gain with other foreign exchange gains and losses. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale are included in the available-for-sale reserve in equity. At 31 December 2010 and 2009 the closing rate of exchange used for translating foreign currency balances was: Page 12 of 38

13 2. Summary of significant accounting policies (continued) Official rate of the National Bank of Georgia USD EUR GBP Exchange rate as at ,6858 2,4195 2,6735 Exchange rate as at Average exchange rate for ,6705 2,3305 2,6143 Average exchange rate for Financial Instruments Initial recognition. Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available for sale financial assets. The Company determines the classification of its financial assets upon initial recognition. Fair value through profit or loss This category comprises only in-the-money derivatives. They are carried in the statement of financial position at fair value with changes in fair value recognised in the statement of comprehensive income in the finance income or expense line Other than derivative financial instruments which are not designated as hedging instruments, company does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss. Held to maturity investments Non derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to maturity when the company has positive intention and ability to hold them upon maturity. Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Available-for-sale Non-derivative financial assets not included in the above categories are classified as available for sale and comprise principally the company's strategic investments in entities not qualifying as subsidiaries, associates or jointly controlled entities as well as corporate bonds. They are carried at fair value with changes in fair value generally recognised in other comprehensive income and accumulated in the available-for-sale reserve; Where there is a significant or prolonged decline in the fair value of an available for sale financial asset (which constitutes objective evidence of impairment), the full amount of the impairment, including any amount previously recognised in other comprehensive income, is recognised in profit or loss. Purchases and sales of available for sale financial assets are recognised on settlement date with any change in fair value between trade date and settlement date being recognised in the available-for-sale reserve. On sale, the cumulative gain or loss recognised in other comprehensive income is reclassified from the available-for-sale reserve to profit or loss. Page 13 of 38

14 2. Summary of significant accounting policies (continued) Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes 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 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, are not presented separately and are included in the carrying values of related balance sheet items. Derecognition of financial assets The Company derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Company 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 the 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 additional restrictions on the sale. Financial liabilities The Company classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. Other than financial liabilities in a qualifying hedging relationship (see below), the Company's accounting policy for each category is as follows: I) Fair value through profit or loss This category comprises only out-of-the-money derivatives (see financial assets for in the money derivatives). They are carried in the statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. The organisation does not hold or issue derivative instruments for speculative purposes, but for hedging purposes. The Company does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value through profit or loss. II) Other financial liabilities Other financial liabilities include the following items: Notes payable are initially recognised at fair value net of any transaction costs directly attributable to the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. Interest expense in this context Page 14 of 38

15 2. Summary of significant accounting policies (continued) includes initial transaction costs and premia payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Liability components of convertible loan notes are measured as described further below. Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. 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. IFRS 7 fair value measurement hierarchy IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels Cash and cash equivalents Cash and cash equivalents include cash on hand, non-restricted cash on current accounts in banks, and non-restricted cash on bank deposits with original maturity of less than 3 months Impairment of financial assets carried at amortised cost Impairment losses are recognised in profit or loss 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 primary factors that the company considers whether a financial asset is impaired is its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred: - Any installment 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 borrower s financial information that the organisation obtains; - The borrower considers bankruptcy or a financial reorganisation; - There is 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; Page 15 of 38

16 2. Summary of significant accounting policies (continued) - The value of collateral significantly decreases as a result of deteriorating market conditions. The impairment is calculated based on the analysis of assets subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding financial assets being material individually and on the basis of an individual or joint evaluation of financial assets not being material individually. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience and the success of recovery of overdue amounts. Historical 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. 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. It should be noted that the evaluation of losses includes a subjective factor. The management of the Company believes that the amount of recorded impairment is sufficient to cover losses incurred on assets subject to risks at the reporting date, although it is probable that in certain periods the Company can incur losses greater than recorded impairment Held for sale assets Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets are carried at historical cost less accumulated depreciation and recognized impairment loss, if any. Depreciation is charged on the carrying value of property, plant and equipment and is designed to write off assets over their useful economic lives. Depreciation is calculated on a straight line basis at the following annual prescribed rates: Group Useful life (year) Furniture and computer equipment 3-5 IT equipment 3-6 Leasehold improvement According to lease contracts Intangible assets 3 Other 2-5 Page 16 of 38

17 2. Summary of significant accounting policies (continued) Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of property, plant and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount. Impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge property, plant and equipment is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life Taxation The tax expense for the period comprises current and deferred tax. Tax is recognized in the statement of comprehensive income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the country where the company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rate (and laws) that has been enacted or substantially enacted by the balance sheet date and is expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. 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 taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity where there is an intention to settle the balances on a net basis Notes payable Notes payable are initially recognized at fair value. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the statement of operations over the period of the notes payable, using the effective interest method Restricted revenue from received grants Restricted revenue from received grants are recorded as restricted revenue (deferred revenue) and an amount equal to the period s loan issue from the grant funds (which should be in accordance with grant Page 17 of 38

18 2. Summary of significant accounting policies (continued) agreement terms) is transferred to income as unrestricted revenue Contingencies Contingent liabilities are not recognized in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the statement of financial position but disclosed when an inflow of economic benefits is probable Recognition of income and expense Interest income and expense are recorded in the income statement 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 Company to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Company will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. When loans and other debt instruments become doubtful of collection, they are written down to 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 Post balance-sheet events Post-balance sheet events and events before the date of financial statements authorization for issue that provide additional information about the Company s financial statements are reported in the financial statements. Post-balance sheet events that do not affect the financial position of the Company at the balance sheet date are disclosed in the notes to the financial statements when material Staff costs and related contributions Wages, salaries, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Company Provisions, Contingent Liabilities and Contingent Assets Contingent liabilities are not reflected in the financial statements, except for the cases when the outflow of economic benefits is likely to origin and the amount of such liabilities can be reliably measured. The information on contingent liabilities is disclosed in the Notes to the financial statements with the exception of cases, when the outflow of economic benefits is unlikely. Page 18 of 38

19 2. Summary of significant accounting policies (continued) Contingent assets are not reflected in the financial statements, but the information on them is disclosed when inflow of economic benefits is possible. If economic benefits are sure to occur, an asset and related income are recognized in the financial statements for the period, when the evaluation change occurred A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from: (a) A contract (through its explicit or implicit terms); (b) Legislation; or (c) Other operation of law. A constructive obligation is an obligation that derives from an entity's actions where: (a) By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. 3. Critical accounting estimates and judgments The Company makes certain estimates and assumptions regarding the future. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair value of financial instruments. Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, there are determined using variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but if it is not feasible, a degree of judgment is required in establishing a fair value. Determination of collateral value. Management monitors market value of collateral on a regular basis. Management uses its experienced judgment to adjust the fair value to reflect current circumstances. The amount and type of collateral depends on the assessment of credit risk of the counterparty. Allowance for impairment of loans and receivables. The Company regularly reviews its loan portfolio to assess impairment. In determining whether an impairment loss should be recorded in the income statement, the Company makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers, or national or local economic conditions that correlate with defaults on assets in the company. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Page 19 of 38

20 3. Critical accounting estimates and judgments (continued) Initial recognition of related party transactions. In the normal course of business the Company enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or nonmarket interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. In management judgment, at December 31, 2010 and 2009, there were no loans and advances at other then market conditions. Terms and conditions of related party balances are disclosed in Note 25. Income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the company s belief that its tax return positions are supportable, the company believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities. As a result company minimizes the risks related to this fact. The company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made. Legal proceedings. The Company only recognizes a provision where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Realization of any contingent liabilities not currently recognized or disclosed in the financial statements could have a material effect on the Company s financial position. Application of these accounting principles to legal cases requires the Company s management to make determinations about various factual and legal matters beyond its control. The Company reviews outstanding legal cases following developments in the legal proceedings and at each balance sheet date, in order to assess the need for provisions in its financial statements. Among the factors considered in making decisions on provisions are the nature of litigation, claim or assessment, the legal process and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including the progress after the date of the financial statements but before those statements are issued), the opinions or views of legal advisers, experience on similar cases and any decision of the Company s management as to how it will respond to the litigation, claim or assessment. 4. Prior period errors and reclassifications The Company corrects prior period material errors retrospectively in the financial statements after their discovery by restating the comparative amounts for the prior period presented in which the error occurred; and if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities, equity and comprehensive income statements components for the earliest prior period presented. In 2010, the Company identified an error made in the recording of other assets and other items in its financial statements as of and for the year ended 31 December Also where necessary, corresponding figures have been adjusted to conform to the presentation of the current year amounts. The effect on the financial statements for the year ended 31 December 2009 as a result of the errors and reclassifications was as follows: Page 20 of 38

21 4. Prior period errors and reclassifications (continued) As previously stated Adjustment Restatement As restated Retained earnings as at (8,912) (4,036) - (12,948) Cash and cash equivalents 9,541,736 - (4,214,500) 5,327,236 Loans to customers 26,712,426 (12,996) (907,019) 25,792,411 Held-to-maturity investment - - 4,214,500 4,214,500 Other receivables* 607,760 (63,924) (543,836) - Other Assets 500,010 (51,516) (166,846) 281,648 Deferred income tax assets , ,321 Trading liabilities* (38,591) - 38,591 - Notes payable (26,016,462) (1,165) (223,343) (26,240,970) Refundable advances* (738,640) - 738,640 - Current income tax liability (361,452) (26,876) - (388,328) Other liabilities (1,173,242) - 938,491 (234,751) Interest income (8,750,286) 18, ,574 (8,566,952) Interest expenses 1,853,882-11,742 1,865,624 Loan impairment charge 779,758 24, ,514 Other operating income (84) - (164,575) (164,659) Loss (income) from exchange rate difference (14,848) (14,641) Salaries and other employee benefits 2,991,574-65,434 3,057,008 General and administrative expenses 1,436,577 68,668 (345,759) 1,159,486 Depreciation and amortization expenses 106, ,216 Other operating expenses , ,585 Income tax expenses 359,239 40, ,289 * These items aren t presented in the financial statement for the year ended 31 December, Net interest income before loan impairment charge Net interest income before loan impairment charge for the year ended December 31, 2010 and 2009 can be presented as follows: Interest income comprises: Interest income on financial assets recorded at amortized cost comprises: Loans to customers 13,676,784 8,426,961 Placement with banks 892, ,348 Other interest income 38,518 15,643 Total interest income on financial assets recorded at amortized cost 14,607,896 8,566,952 Interest expense comprises: Interest expense on financial liabilities recorded at amortized cost comprise: Loans and borrowings (3,606,408) (1,865,624) Total interest expense (3,606,408) (1,865,624) Net interest income 11,001,488 6,701,328 Page 21 of 38

22 6. Loan impairment charge Loan impairment charge for the year ended December 31, 2010 and 2009 can be presented as follows: 2010 At 1 January ,064 Reversal for the year (107,709) Recoveries 172,617 Write off (586,283) At 31 December ,689 Individual impairment - Collective impairment 51,689 51,689 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance At 1 January ,354 Charge for the year 804,514 Recoveries (417,804) Write off - At 31 December ,064 Individual impairment - Collective impairment 573, ,064 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance - The Company s exposure to impairment losses related to loan portfolio is disclosed in note Other operating income Other operating income for the year ended December 31, 2010 and 2009 can be presented as follows: Penalties and fines 613, ,099 Other 38,808 6, , ,659 The Company charges clients with penalties on a daily basis in case of overdue payments. Clients are also charged with fines, if they close the loan earlier than the date indicated in the agreement. 8. Loss/ (income) from exchange rate difference Loss (income) from exchange rate difference for the year ended December 31, 2010 and 2009 can be presented as follows: Page 22 of 38

23 8. Loss/ (income) exchange rate difference (continued) Realized foreign exchange gain (loss) (86,876) 53,116 Unrealized foreign exchange loss (27,855) (38,475) (114,731) 14, Salaries and other employer benefits Salaries and other employer benefits for the year ended December 31, 2010 and 2009 can be presented as follows: Salaries and bonuses 5,499,248 2,859,044 Social security costs 95,641 64,658 Other benefits 64, ,306 5,659,665 3,057,008 Salaries and Bonuses include the fixed salaries as well as bonuses for the personnel, including the loan officers and the management. Refer to Note 25 for the disclosures regarding key management compensations. 10. General and administrative expenses General and administrative expenses for the year ended 31 December, 2010 and 2009 can be presented as follows: Rent expenses 1,010, ,515 Communication 217, ,524 Fuel expenses 181,012 84,787 Legal and other professional services 204,803 63,299 Consumables and office supplies 165,355 84,774 Security expenses 138,798 77,704 Business trips 97,675 39,435 Utilities 92,719 36,899 Marketing and advertising 75,673 15,746 Personnel training and recruitment 35,430 5,189 Corporate hospitality and entertainment 14,610 7,900 Repair and maintenance 12,726 4,231 Taxes other than income tax 4,302 5,140 Other 7,622 4,343 2,258,041 1,159, Other operating expenses Other operating expenses for the year ended December 31, 2010 and 2009 can be presented as follows: Bank charges 137, ,629 Lawsuit expenses related to doubtful debts 43,555 66,496 Other 44,431 39, , ,585 Page 23 of 38