Contents: FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS

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2 Contents: FINANCIAL STATEMENTS STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS... 3 INDEPENDENT AUDITORS REPORT... 4 STATEMENT OF COMPREHENSIVE INCOME... 6 STATEMENT OF FINANCIAL POSITION... 7 STATEMENT ON CHANGES IN EQUITY... 8 STATEMENT OF CASH FLOWS General information Summary of significant accounting policies Critical accounting estimates and judgments Earned premium Interest income Total insurance benefits and claims Acquisition cost General and administrative expenses Marketing and advertising expenses Interest expense Income tax expense Property, plant and equipment Intangible assets Deferred acquisition costs Deferred income tax Other assets Insurance receivables Amounts Due from credit institutions Cash and cash equivalents Charter capital Insurance contract liabilities and reinsurance assets Other insurance liabilities Borrowings Trade and other payables Risk management Transactions with related parties Post balance sheet events Page 2 of 36

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4 INDEPENDENT AUDITORS REPORT To the owners and management of Insurance Company Ardi Group LLC Report on the Financial Statements We have audited the accompanying Financial Statements of the Insurance Company Ardi Group LLC (hereinafter - the Company), which comprise the Statement of Financial Position as at 31 December, 2011 and the Statement of Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these Financial Statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with international Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Basis for Qualified Opinion As it is disclosed in Note 12 of the financial statements, valuation of the Company's building was made on 29 March 2011 by an independent valuator. We could not reach an appraiser working files, therefore we were unable to examine if revaluation results were fair. Therefore, we are unable to express an opinion on the revalued amount (which equals GEL 992,357 for the reporting date), as well as on accuracy of the revaluation reserve (which equals GEL 92,497 for the reporting date).

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10 1. General information Insurance Company Ardi Group LLC (the Company ) was established on 30 March 2010 Shareholders of the company As at December 31, 2011 and 2010 were: Aversi Pharma LLC 50% 80% Zaza Nishnianidze 20% 15% Armaz Tavadze 30% 5% 100% 100% Shareholders of Aversi Pharma LLC are Paata Kurtanidze and Nikoloz Kurtanidze. The Company is regulated by National Bank of Georgia and conducts its business under the Law on Insurance activity. The Company was registered as an insurance company in The Company s main activity is to provide non-life insurance services and insurance products relating to property, liability, personal insurance and others. Head office of the company is located at: 14a Kazbegi Avenue. The registered office is located at: 3 Vazha Pshavela Avenue, 0186, Tbilisi, Georgia. The Company had an average of 30 employees during Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. 2.1 Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union ("adopted IFRSs"), and are in accordance with IFRSs as issued by the IASB. These are the Company s first financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The Company s accounting policies presented in Note 2 have been applied in preparing the financial statements for the year ended 31 December 2011 and for the comparative information. The Group has applied IFRS 1 First-time Adoption of International Financial Reporting Standards (as revised in 2008) in preparing these first IFRS financial statements, the use of IFRS didn t affect financial statements of the Company and as a result reconciliation was not made. Financial statements have been prepared under the historical cost bases except for the buildings which are carried at revalued amount following initial recognition. 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 shareholders 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. The reporting period for the Company is the calendar year from January 1 to December 31. The preparation of financial statements in compliance with IFRSs 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. Page 10 of 36

11 Adoption of new or revised standards and interpretations a) New standards, interpretations and amendments effective from 1 January 2011 None of the new standards, interpretations and amendments, effective for the first time from 1 January 2011, have had a material effect on the financial statements. b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2011 and not early adopted Amendments to IFRS 7, Financial instruments: Disclosures on transfers of financial assets, promote transparency in the reporting of transfer transactions and improves 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 securitization of financial assets. The Company is yet to assess the full impact of the amendments and intends to adopt IFRS 7 no later than the accounting period beginning on or after 1 January 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 amortized 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 IFRS 10, Consolidated financial statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Company is yet to assess IFRS 10 s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after 1 January IFRS 11, Joint arrangements, is a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement rather than its legal form. There are two types of joint arrangement: joint operations and joint ventures. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and hence equity accounts for its interest. Proportional consolidation of joint ventures is no longer allowed. The Company is yet to assess IFRS 11 s full impact and intends to adopt IFRS 11 no later than the accounting period beginning on or after 1 January IFRS 12, Disclosures of interests in other entities, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Company is yet to assess IFRS 12 s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after 1 January IFRS 13, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. The Company is yet to assess IFRS 13 s full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after 1 January Amendment to IAS 12, Income taxes, on deferred tax currently requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be Page 11 of 36

12 through use or through sale when the asset is measured using the fair value model in IAS 40, Investment property. This amendment therefore introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, Income taxes - recovery of revalued non-depreciable assets, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. The Company is yet to assess IAS 12 s full impact and intends to adopt IAS 12 no later than the accounting period beginning on or after 1 January IAS 19, Employee benefits, was amended in June The impact on the Company will be as follows: to eliminate the corridor approach and recognize all actuarial gains and losses in OCI as they occur; to immediately recognize all past service costs; and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). The Company is yet to assess the full impact of the amendments and intends to adopt IAS 12 no later than the accounting period beginning on or after 1January 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 borrowings and cash and cash equivalents are presented in the statement of comprehensive income within foreign exchange gain/loss with other foreign exchange gains and losses. Changes in the fair value of monetary securities denominated in foreign currency classified as availablefor-sale are analyzed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in equity. 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. Official rate of the National Bank of Georgia Exchange rate as at Exchange rate as at USD EUR 2.3 Insurance contracts classification The Company issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. The significance of insurance risk is dependent on both the probability of an insured event and the Page 12 of 36

13 magnitude of its potential effect. Contract Bonds issued by the Company are guaranteeing the performance of contractual obligations, contract Bonds can be: - Advance Payment Bonds - Securing the proper use or repayment of the advance payments made to the Principal by the Beneficiary under or for the purposes of the contract, where such sum is advanced before the carrying out of works, the performance of services or the supply of provision of any goods pursuant to such contract. The bond usually decreases according to the progress of construction. - Performance Bond - Protecting the Beneficiary against the financial loss if the Principal fails to fulfill the terms and conditions of the (underlying) written contract. - Tender/Bid Bond: Used to pre-qualify contractors submitting proposals on potential contracts and serve to guarantee that the contractor, if awarded the construction project, will enter into a contract at the estimate submitted at the bid letting (as well be in the position to provide the required project bonds). The Beneficiary is provided protection up to the amount of the bid, which is a percentage of the total contract, if the bidder fails to honor its commitment. - Maintenance Bond: Securing the contractual obligations relating to the maintenance of works or goods following the physical completion or the provision thereof, pursuant to a contract. - Customs Bonds (Same as we call Financial Risks insurance policies) - Guaranteeing the proper declaration and timely payment of customs and excise duty, import duty or re-exportation to the Customs & Excise Authorities at due date (temporary importation, transit procedures etc.). Contract bonds are accounted as insurance contracts. Investment contracts are those contracts that transfer significant financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of price or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. 2.4 Deferred policy acquisition costs (DAC) Commissions and other acquisition costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as an intangible asset (DAC). All other costs are recognised as expenses when incurred. The DAC is subsequently amortised over the life of the contracts as follows: For property and casualty DAC is amortised over the terms of the policies as premium is earned; For long-term insurance contracts with fixed and guaranteed terms, DAC is amortised in line with premium revenue using assumptions consistent with those used in calculating future policy benefit liabilities; and For long-term insurance contracts without fixed terms DAC is amortised over the expected total life of the contract. The pattern of expected profit margins is based on historical and anticipated future experience and is updated at the end of each accounting period. The resulting change to the carrying value of the DAC is charged to revenue. 2.5 Liability adequacy test At each end of the reporting period, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related DAC and VOBA assets. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing off DAC or VOBA and by subsequently establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision). Page 13 of 36

14 2.6 Reinsurance contracts held Contracts entered into by the Company with reinsurers under which the Company is compensated for losses on one or more contracts issued by the Company and that meet the classification requirements for insurance contracts, are classified as reinsurance contracts held. Insurance contracts entered into by the Company under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts. The benefits to which the Company is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers, as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when due. 2.7 Receivables and payables related to insurance contracts and investment contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Company reduces the carrying amount of the insurance receivable accordingly and recognises that impairment loss in the income statement. The Company gathers the objective evidence that an insurance receivable is impaired using the same process adopted for loans and receivables. The impairment loss is calculated under the same method used for these financial assets. (i) Salvage and subrogation reimbursements Some insurance contracts permit the Company to sell (usually damaged) property acquired in settling a claim (for example, salvage). The Company may also have the right to pursue third parties for payment of some or all costs (for example, subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims, and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party. 2.8 Reserves for loss and loss adjustment expenses Reserves are established for the payment of losses and loss adjustment expenses (LAE) on claims which have occurred but are not yet settled. Reserves for loss and loss adjustment expenses fall into two categories: case reserves for reported but not settled insurance claims (RBNS) and reserves for incurred but not reported losses (IBNR). (i) reported but not settled insurance claims (RBNS) Case reserves for reported claims are based on estimates of future payments that will be made with respect to claims, including LAE relating to such claims. Such estimates are made on a case-by-case basis, based on the facts and circumstances available at the time the reserves are established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly reevaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available. (ii) reserves for incurred but not reported losses (IBNR) IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Company has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. The Company relies on its past experience, adjusted for current trends and any other Page 14 of 36

15 relevant factors to estimate IBNR reserves. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends in claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported. 2.9 Financial instruments Financial assets The Company classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Company's accounting policy for each category is as follows: (a) Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers and loans granted, but also incorporate other types of contractual monetary asset. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortized cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognized when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Company will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables and loans granted, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognized in the statement of comprehensive income. On confirmation that the trade receivable and loan granted will not be collectable, the gross carrying value of the asset is written off against the associated provision. (b) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity other than: (a) (b) (c) Those that the entity upon initial recognition designates as at fair value through profit or loss Those that the entity designates as available for sale; and Those that meet the definition of loans and receivables. In current period the Company does not have held-to-maturity investments. (c) Fair value through profit or loss A financial asset at fair value through profit or loss is a financial asset that meets either of the following conditions: (a) (b) It is classified as held for trading. A financial asset is classified as held for trading if it is: (i) (ii) (iii) It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term On initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit-taking; or It is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument). Upon initial recognition it is designated by the entity as at fair value through profit or loss. An entity may use this designation only: Page 15 of 36

16 (i) (ii) If a contract contains one or more embedded derivatives. In this case an entity may designate the entire hybrid (combined) contract as a financial asset at fair value through profit or loss unless: - The embedded derivative(s) does not significantly modify the cash flows that otherwise would be required by the contract; or - It is clear with little or no analysis when a similar hybrid (combined) instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortized cost; or When doing so results in more relevant information, because either: - It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that would otherwise arise from measuring assets or recognizing the gains and losses on them on different bases; or - A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel. In current period the Company does not have financial assets at fair value through profit or loss. (d) Available-for-sale Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. In current period the Company does not have available-for-sale financial assets. Financial liabilities The Company classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The Company's accounting policy for each category is as follows: (a) Fair value through profit or loss A financial liability at fair value through profit or loss is a financial liability that meets either of the following conditions (see financial assets for detailed information): (a) (b) It is classified as held for trading Upon initial recognition it is designated by the entity as at fair value through profit or loss. In current period the Company does not have financial liabilities at fair value through profit or loss. (b) Other financial liabilities Other financial liabilities include the following items: Trade payables which are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method. 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. Page 16 of 36

17 2.10 Impairment of financial assets A financial asset not carried at fair value through profit or loss (trade or finance lease receivable) is assessed at each reporting date to determine whether there is objective evidence that it is impaired. If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, 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 (ie the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognised in profit or loss. An entity first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If an entity determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it 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 or continues to be recognised are not included in a collective assessment of impairment. 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 previously recognised impairment loss shall be reversed either directly or by adjusting an allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal shall be recognised in profit or loss Property, plant and equipment Property plant and equipment, except for buildings, are stated at cost, less accumulated depreciation and provision for impairment, where required. Following initial recognition, buildings are carried at revalued amount, being the fair value at the date of revaluation, less any subsequent accumulated impairment losses. Revaluations are performed frequently enough to ensure that the carrying amount does not differ materially from that which would be determined using fair values at the end of reporting period. Any revaluation surplus is credited to the revaluation reserve for property and equipment included in equity, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the statement of profit or loss, in which case the increase is recognized in the statement of profit or loss to the extent of the decrease previously charged. Depreciation on revalued buildings is charged to the statement of profit or loss. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. Land and construction in progress are not depreciated. Depreciation on other items of PPE is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows: Buildings 25 years; Furniture and office equipment 3-5 years; Computers 3 5 years; Other equipment 3 5 years; The residual value of an asset is the estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Company Page 17 of 36

18 expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period Intangible Assets All of the Company s intangible assets have definite useful life and primarily include capitalised computer software. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Intangible assets are amortised on a straight line basis over expected useful lives of three to five years Current and deferred income tax 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 or 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 Financial and operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of comprehensive income on a straight-line basis over the period of the lease Recognition of income and expenses Insurance premium All insurance premiums are recognised upon issuing the policy, while the earnings are recognised on the proportional basis, within the period of validity of the policy. Premiums written at the reporting date but still pending are estimated based on the results of underwriting evaluation or according to the previous experience and the premiums are then included in the earned premiums. If the insurance policy turns invalid due to the uncollected premiums, all related accumulated premium income, which is also not collected, shall then be deducted. Unearned premium is the part of the premiums, written throughout the year, related to the post reporting date risk periods. Unearned premiums are mainly calculated on a daily or monthly basis proportionally. Page 18 of 36

19 Insurance benefit and claims pad The originated general insurance demands cover all losses occurred throughout the year, declared or nondeclared, including administrative expenses, value reduction, other related costs and adjustments for the previous years unregulated demands. Costs of administration of demands constitute internal and external expenses related to the negotiations on and regulation of the demands. Internal expenses include the direct costs related to the demands department and part of general administrative costs relate directly to the demands. 3. Critical accounting estimates and judgments 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 differ 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. Estimates and assumptions a) The ultimate liability arising from claims made under insurance contracts The estimation of the ultimate liability arising from claims made under general insurance contracts is the Company s most significant accounting estimate. There are several sources of uncertainty that need to be considered in the estimation of the liability that the Company will ultimately pay for those claims. For general insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not yet reported (IBNR) at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty and for some type of policies, IBNR claims form the majority of the statement of financial position insurance liability. General insurance claims provisions are not discounted for the time value of money. b) Useful lives of property, plant and equipment Property, plant and equipment are depreciated over their useful lives. Useful lives are based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the statement of comprehensive income in specific periods. More details including carrying values are included in note 12. c) Income tax Company is subject to income tax and significant judgment is required in determining the provision for income taxes. During the ordinary course of business, there are 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. Page 19 of 36

20 4. Earned premium Earned premium for the year ended 31 December, 2011 and 2010 can be presented as follows: Gross premium from: Financial risk 2,225, ,798 Casco 547, ,193 Responsibility 270,595 14,028 Property 135,010 68,349 Cargo 101,491 64,313 Other 145,206 18,418 3,425, ,099 Changes in unearned premium reserves (398,155) (630,111) Net premium revenue 3,026, , Interest income Interest income for the year ended 31 December, 2011 and 2010 can be presented as follows: Interest income from deposits 112,525 85,065 Interest income from loans issued 8, ,589 85, Total insurance benefits and claims Insurance benefits and claims for the year ended 31 December, 2011 and 2010 can be presented as follows: 2011 Insurance claims Subrogation incurred: revenue Net Financial risk (1,122,671) 1,116,563 (6,108) Casco (205,659) 59,569 (146,090) Health (15,766) - (15,766) Other (32,810) - (32,810) Responsibility (4,287) - (4,287) (1,381,193) 1,176,132 (205,061) Reinsurers' share of general claims paid Changes in insurance contract liabilities (177,398) - (177,398) Net insurance claims and benefits (1,558,591) 1,176,132 (382,459) Page 20 of 36

21 2010 Insurance claims Subrogation incurred: revenue Net Casco (16,695) 8,324 (8,371) Other (917) - (917) (17,612) 8,324 (9,288) Reinsurers' share of general claims paid Changes in insurance contract liabilities (63,322) - (63,322) Net insurance claims and benefits (80,934) 8,324 (72,610) 7. Acquisition cost Acquisition costs for the year ended 31 December 2011 and 2010 can be presented as follow: Acquisition costs (406,722) (182,983) Acquisition costs deferred 94, ,221 Amortization of deferred acquisition cost (97,174) - (409,087) (62,762) 8. General and administrative expenses General and administrative expenses for the year ended 31 December 2011 and 2010 can be presented as follows: Salaries (278,686) (118,424) Fines (83,000) (5,000) Rent (51,137) (28,663) Depreciation and Amortisation (46,459) (3,763) Other expense (44,573) (8,442) Stationery (24,968) (5,063) Communication expenses (23,736) (5,059) Office maintenance expenses (14,280) (11,531) Consultation expenses (15,505) (7,500) Utility (7,952) (2,296) Bank charges (5,642) (1,626) Public register and notary service fees (5,278) (556) Fuel (3,446) - (604,662) (197,923) 9. Marketing and advertising expenses Marketing and advertising expenses for the year ended 31 December 2011and 2010 can be presented as follows: Advertising expenses (114,763) (26,958) Salary of sales stuff (153,655) (48,008) Other sales expenses (19,895) - (288,313) (74,966) Page 21 of 36

22 10. Interest expense Interest expense for the year ended 31 December 2011and 2010 can be presented as follows: Interest expense on bank loans (81,697) (5,991) Interest expense on shareholder loans (1,500) (3,000) (83,197) (8,991) 11. Income tax expense Income tax expense for the year ended 31 December 2011 and 2010 can be presented as follows: Current tax (219,228) (1,861) Effect of temporary differences 56,549 (3,024) Income tax expense (162,679) (4,885) Reconciliation between the expected and the actual taxation charge is provided below. Profit before income tax 980,097 (41,540) Applicable tax rate 15% 15% Theoretical income tax (147,015) 6,231 Effect of changes in not recognized deferred tax and tax effect of expenses that are not include for tax purposes (15,664) (11,116) Income tax expense (162,679) (4,885) Changes in income tax liabilities during the year 2011 were as follows: Deferred Income tax liability as at 1 January 2011 (3,024) Recognized in profit and loss 56,549 Recognized in other comprehensive income (16,323) Deferred Income tax asset as at 31 December ,202 Page 22 of 36

23 12. Property, plant and equipment Property, plant and equipment as at 31 December 2011and 2010 can be presented as follows: Buildings IT equipment Leasehold Improvements Furniture and office equipment Other Total Cost: Acquisitions - 26,736 5,853 11, ,685 Disposals Balance at December 31, ,736 5,853 11, ,685 Acquisitions 914,720 9,337-1, ,401 Revaluation surplus 108, ,820 Disposals Balance at December 31, ,023,540 36,073 5,853 12, ,078,906 Depreciation: Depreciation for the period Balance at December 31, , , ,645-1, , ,645 Depreciation for the period Balance at December 31, ,182 6,458 1,171 2, ,408 31,182 8,337 1,813 3, ,052 Carrying amounts: Balance at December 31, ,856 5,211 10, ,040 Balance at December 31, ,358 27,736 4,040 9, ,033,854 The Company s building was revalued at 29 March 2011 by independent valuator Giorgi Lezhava. Valuation was made on the basis of open market value. The revaluation surplus net of applicable deferred income taxes was credited in equity, revaluation surplus. If building were stated on a historical cost basis, the amounts would be as follows: At 31 December 2011 Cost 914,720 Accumulated depreciation (27,868) Net book value 886,852 Page 23 of 36

24 13. Intangible assets Intangible assets of the company include software for accounting and operational activity of the Company. The assets have defined useful life - 5 years. Amortization expense of intangible assets in 2011 and 2010 were GEL 5,051 and GEL 118 respectively. 14. Deferred acquisition costs Movements on deferred policy acquisition costs ("DAC") can be presented as follows: Balance at 1 January 120,221 - Deferred expense 408, ,983 Amortization (409,087) (62,762) Balance at 31 December 119, ,221 Acquisition costs comprise: Acquisition costs for the year (406,722) (182,983) Acquisition costs deferred 94, ,221 Amortization of deferred acquisition costs (97,174) - (409,087) (62,762) 15. Deferred income tax Deferred tax asset/liabilities as at December 31, 2011 can be presented as follows: Asset Liability Net (Charged)/ credited to profit or loss (Charged)/ credited to equity Property plant and equipment - (3,659) -3,659 (635) - Provision on doubtful debts 51,281-51,281 51,281 - Revaluation surplus - (16,323) (16,323) - (16,323) Reserve for reported but not settled claims 5,903-5,903 5,903 - Tax asset/(liabilities) 57,184 (19,982) 37,202 56,549 (16,323) Set off of tax (19,982) 19, Net tax assets 37,202-37,202 56,549 (16,323) Page 24 of 36

25 Deferred tax as at December 31, 2010 can be presented as follows: Asset Liability Net (Charged)/cr edited to profit or loss (Charged)/cre dited to equity Property, plant and equipment - (3,024) (3,024) (3,024) - Tax asset/(liabilities) - (3,024) (3,024) (3,024) - Set off of tax Net tax liabilities - (3,024) (3,024) (3,024) Other assets Other assets as at December 31, 2011 and 2010 can be presented as follows: Issued loans 151,564 - Prepayments to employees 80, other receivables 10,174 4,377 Prepayments to related parties - 231,400 Inventory 6, Insurance receivables Insurance receivables as at 31 December 2011 and 2010 can be presented as follows: 248, ,704 Insurance premium receivable 883, ,539 Less provision for impairment on receivables from contract holders (69,936) - Subrogation receivable 525,943 4,763 Less provision for impairment on subrogation receivable (54,429) - 1,285, ,302 Current portion 1,268, ,282 Noncurrent portion 17,052 53,020 The movements on allowance for insurance and subrogation receivables were as follows: Insurance Subrogation receivables receivables Total Charge Write off Balance 31 December Charge 204, , ,874 Write off (134,958) (82,551) (217,509) Balance 31 December ,936 54, ,365 The Company creates general reserve for its due date accounts receivables. The policy for applying provision rates on overdue receivables is disclosed in Note 2. Page 25 of 36