Doğuş Holding Anonim Şirketi and its Subsidiaries

Transcription

1 Doğuş Holding Anonim Şirketi and its Subsidiaries Consolidated Financial Statements As at and for the Year Ended 31 December 2009 With Independent Auditors Report Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi 16 April 2010 This report includes 2 pages of independent auditors report and 125 pages of consolidated financial statements together with their explanatory notes and 3 pages of supplementary information.

2 Table of Contents Independent Auditors Report Consolidated Statement of Financial Position Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Appendix: Supplementary Information Convenience Translation to US Dollar

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5 Consolidated Statement of Financial Position As at 31 December 2009 Currency: Thousands of Turkish Lira ( TL ) Notes Assets Property and equipment 13 2,824,971 2,575,568 Intangible assets 14 1,168,344 1,197,110 Investments in debt securities 15 11,292,586 7,972,673 Investments in equity securities 16 53,584 48,269 Investment property 17 1,218,187 1,052,924 Other non-current assets 18 1,028, ,445 Deferred tax assets , ,738 Total non-current assets 17,778,906 13,839,727 Inventories , ,782 Accounts receivable 20 1,537,170 1,214,537 Due from related parties 39 10,751 14,998 Other current assets , ,267 Banking loans and advances to customers 23 16,618,038 16,560,166 Banking loans and advances to banks 24 3,254,878 2,418,882 Financial assets at fair value through profit or loss ,384 76,952 Cash and cash equivalents 26 2,358,320 2,256,649 Total current assets 25,144,138 24,055,233 Total assets 42,923,044 37,894,960 Equity Paid-in capital 2,010,192 2,010,192 Capital stock held by subsidiaries (53,655) (53,655) Share premium 159, ,350 Fair value reserves 398,523 36,490 Translation reserve 46,888 49,421 Hedging reserve (8,226) 7,362 Revaluation surplus 1,081,534 1,024,867 Retained earnings 3,094,260 2,322,134 Total equity attributable to equity holders of the Company 6,728,866 5,556,161 Minority interest Şahenk Family 106, ,530 Others 123, ,107 Total minority interest 230, ,637 Total equity 27 6,959,298 5,756,798 Liabilities Long-term bank borrowings 28 5,039,922 4,299,548 Subordinated liabilities , ,344 Deferred tax liabilities , ,297 Retirement benefit obligations ,006 Other non-current liabilities , ,198 Total non-current liabilities 6,062,412 5,287,393 Short-term bank borrowings 32 2,241,507 1,969,524 Short-term portion of long-term bank borrowings 28 1,301,579 1,435,814 Banking deposits from banks , ,446 Banking customers deposits 34 19,841,322 16,777,909 Obligations under repurchase agreements 35 3,254,178 3,370,491 Accounts payable ,612 1,332,582 Due to related parties 39 3,470 3,695 Taxes payable on income 12 70,606 39,028 Other current liabilities 37 1,487,260 1,281,280 Total current liabilities 29,901,334 26,850,769 Total liabilities 35,963,746 32,138,162 Total equity and liabilities 42,923,044 37,894,960 The accompanying notes are an integral part of these consolidated financial statements. 1

6 Consolidated Statement of Comprehensive Income For the Year Ended 31 December 2009 Notes Revenues 7,819,616 6,950,442 Cost of revenues (5,152,306) (4,968,267) Gross profit 7 2,667,310 1,982,175 Administrative expenses 8 (1,028,810) (965,799) Selling, marketing and distribution expenses (143,407) (181,680) Impairment losses, net 9 (589,438) (181,974) Trading gain, net , ,504 Other operating income, net 10 8, ,957 Result from operating activities 1,133,383 1,040,183 Finance income 616, ,199 Finance expense (686,581) (1,410,442) Net finance costs 11 (69,698) (537,243) Share of profit of equity accounted investees 5,755 5,592 Profit before income tax 1,069, ,532 Income tax expense 12 (267,423) (98,486) Profit for the year 802, ,046 Other comprehensive income Revaluation of property and equipment 87, ,838 Change in fair value of availablefor-sale financial assets 383,860 (19,140) Change in translation reserve (2,533) 45,373 Effective portion of changes in fair value of cash flow hedges (15,588) (682) Income tax on other comprehensive income (24,448) (49,439) Other comprehensive income for the year, net of income tax 428, ,950 Total comprehensive income for the year 1,230, ,996 Profit attributable to: Equity holders of the Company 782, ,145 Minority interest 27 19,130 (27,099) -Şahenk Family 7,415 (6,998) -Others 11,715 (20,101) Total comprehensive income attributable to: 2 802, ,046 Equity holders of the Company 1,199, ,956 Minority interest 31,160 (27,960) -Şahenk Family 6,903 (6,881) -Others 24,257 (21,079) The accompanying notes are an integral part of these consolidated financial statements. 1,230, ,996

7 Consolidated Statement of Changes in Equity For the Year Ended 31 December 2009 Attributable to the equity holders of the Company Capital stock Fair Paid-in held by Share Translation value Hedging Revaluation Retained Minority Total capital subsidiaries premium reserve reserve reserve surplus earnings Total interest equity Balances at 1 January ,010,192 (53,655) 159,350 4,048 47,346 8, ,603 1,897,556 4,899, ,242 5,111,726 Total comprehensive income for the year Profit for the year , ,145 (27,099) 410,046 3 Other comprehensive income Net fair value losses from cash flow hedges, net of tax (682) (682) -- (682) Net market value losses from available-for-sale portfolio, net of tax , , ,660 Transferred to net income from fair value increases, net of tax (18,516) (18,516) -- (18,516) Foreign currency translation differences for foreign operations , , ,373 Change in revaluation surplus, net of tax ,264 9, ,976 (861) 207,115 Total other comprehensive income ,373 (10,856) (682) 198,264 9, ,811 (861) 240,950 Total comprehensive income for the year ,373 (10,856) (682) 198, , ,956 (27,960) 650,996 Dividends paid (22,279) (22,279) (7,165) (29,444) Change in minority interest on consolidated subsidiaries ,520 23,520 Balances at 31 December ,010,192 (53,655) 159,350 49,421 36,490 7,362 1,024,867 2,322,134 5,556, ,637 5,756,798 The accompanying notes are an integral part of these consolidated financial statements.

8 Consolidated Statement of Changes in Equity (continued) For the Year Ended 31 December 2009 Attributable to the equity holders of the Company Capital stock Fair Paid-in held by Share Translation value Hedging Revaluation Retained Minority Total capital subsidiaries premium reserve reserve reserve surplus earnings Total interest equity Balances at 1 January ,010,192 (53,655) 159,350 49,421 36,490 7,362 1,024,867 2,322,134 5,556, ,637 5,756,798 Total comprehensive income for the year Profit for the year , ,887 19, ,017 4 Other comprehensive income Net fair value losses from cash flow hedges, net of tax (15,588) (15,588) -- (15,588) Net market value losses from available-for-sale portfolio, net of tax , , ,542 Transferred to net income from fair value increases, net of tax (37,509) (37,509) -- (37,509) Foreign currency translation differences for foreign operations (2,533) (2,533) -- (2,533) Change in revaluation surplus, net of tax ,667 15,865 72,532 12,030 84,562 Total other comprehensive income (2,533) 362,033 (15,588) 56,667 15, ,444 12, ,474 Total comprehensive income for the year (2,533) 362,033 (15,588) 56, ,752 1,199,331 31,160 1,230,491 Adjustments to retained earnings for a new proportionately consolidated joint venture (1,647) (1,647) -- (1,647) Dividends paid (24,979) (24,979) (306) (25,285) Change in minority interest on consolidated subsidiaries (1,059) (1,059) Balances at 31 December ,010,192 (53,655) 159,350 46, ,523 (8,226) 1,081,534 3,094,260 6,728, ,432 6,959,298 The accompanying notes are an integral part of these consolidated financial statements

9 Consolidated Statement of Cash Flows For the Year Ended 31 December 2009 Notes Cash flows from operating activities Profit for the year 802, ,046 Adjustments for: Impairment losses 9 589, ,974 Fair value change in tangible assets held for sale Fair value change in investment property 10 (42,743) (134,574) Provision for and reversal of employee severance indemnity 6 and 30 11,442 15,851 Reversal of retirement benefit obligation 6 and 31 (31,006) (18,735) Depreciation and amortisation 6 196, ,341 Technical reserves relating to insurance operations ,124 Gain on sales of property and equipment (1,750) (8,024) Gain on sales of investment property (413) -- Share of profit of equity accounted investees 6 (5,755) (5,592) Change in accrued interest expense/(income), net 6 59,684 (206,053) Provision for taxes on income , ,555 Deferred tax benefit 12 (26,340) (37,069) Gain on sale of founder shares (232,444) Warranty provision 6 25,043 24,744 1,870, ,637 Changes in operating assets and liabilities Change in banking customer deposits 4,233,807 5,417,373 Change in banking deposits from banks 236,512 (49,008) Change in banking loans and advances to banks (922,085) (572,176) Change in balances with the Central Bank 98, ,255 Change in banking loans and advances to customers (2,762,780) (5,815,617) Change in financial assets at fair value through profit or loss (119,021) 91,354 Change in other assets (338,698) (395,631) Change in inventories 300,377 (368,499) Change in accounts receivable (164,559) (455,609) Change in due from related parties 4,247 11,823 Change in obligations under repurchase agreement 65,613 1,004,854 Change in accounts payable (458,970) 641,185 Change in due to related parties (225) (2,226) Change in other liabilities 284, ,330 2,326,958 1,082,045 Interest paid (2,078,457) (2,026,638) Interest received 3,768,626 3,060,937 Taxes paid 12 (325,070) (98,128) Dividend paid (24,979) (22,279) Warranties paid (26,203) (24,560) Employee severance indemnity paid 30 (7,528) (8,928) Net cash from operating activities 3,633,347 1,962,449 Cash flows from investing activities Increase in interest in consolidated subsidiaries (2,245) (24,027) Decrease in interest in consolidated subsidiaries ,382 Proceeds from sale of founder shares ,062 Acquisitions of investment property (32,270) (20,835) Increase in investments in debt securities (4,339,422) (3,606,682) Acquisition of property and equipment and intangible assets 6 (666,089) (750,616) Proceeds from sale of property and equipment 58,135 95,582 Proceeds from sale of investment property 9, Cash flows used in investing activities (4,971,530) (3,994,134) Cash flows from financing activities Change in short-term bank borrowings, net 455,023 1,470,641 Change in long-term bank borrowings, net 1,135,831 2,239,115 Change in subordinated liabilities 13, Cash flows from financing activities 1,603,921 3,709,756 Net increase in cash and cash equivalents 265,738 1,678,071 Cash and cash equivalents at 1 January 3,215,667 1,537,606 Cash and cash equivalents at 31 December 26 3,481,405 3,215,677 The accompanying notes are an integral part of these consolidated financial statements. 5

10 Notes to the consolidated financial statements Note Description Pages 1 Reporting entity 7 2 Basis of preparation 7 3 Significant accounting policies 9 4 Determination of fair values 32 5 Financial risk management 34 6 Segment reporting 48 7 Revenues and cost of revenues 55 8 Administrative expenses 55 9 Impairment losses, net Other operating income, net Net finance costs Taxation Property and equipment Intangible assets Investments in debt securities Investments in equity securities Investment property Other non-current assets Inventories Accounts receivable Due from/due to customers for contract work Other current assets Banking loans and advances to customers Banking loans and advances to banks Financial assets at fair value through profit or loss Cash and cash equivalents Capital and reserves Long-term bank borrowings Subordinated liabilities Other non-current liabilities Retirement benefit obligation Short-term bank borrowings Banking deposits from banks Banking customer deposits Obligations under repurchase agreements Accounts payable Other current liabilities Commitments and contingencies Related party disclosures Financial instruments Use of estimates and judgments Group enterprises Significant events Subsequent events 124 Appendix: Supplementary information 6

11 1 Reporting entity Doğuş Holding Anonim Şirketi ( Doğuş Holding or the Company ) was established in 1975 to invest in and coordinate the activities of companies operating in different industries, including banking and finance, automotive, construction, tourism, media, real estate and energy and is registered in Turkey. Doğuş Holding is owned and managed by the members of Şahenk Family. As at 31 December 2009, Doğuş Holding has 63 (2008: 53) subsidiaries (the Subsidiaries ), 40 (2008: 32) joint ventures (the Joint Ventures ) and 8 (2008: 8) associates (the Associates ) (referred to as the Group or Doğuş Group herein and after). The consolidated financial statements of Doğuş Group as at and for the year ended 31 December 2009 comprises Doğuş Holding and its subsidiaries and the Group s interest in associates and jointly controlled entities. As explained in more detail in note 42, Doğuş Holding holds controlling interest directly or indirectly via other companies owned and/or exercising the control over the voting rights of the shares held by the members of the Şahenk Family, in all its subsidiaries included in the Group. The Group operates partnerships and has distribution, management and franchise agreements with internationally recognised brand names, such as General Electric Consumer Finance, Volkswagen AG, Volkswagen Finance AG, Audi AG, Porsche AG, Bentley Motors Limited, Seat SA, Scania, Krone, Meiller Fahrzeug&Maschinenfabrik-GMBH&Co KG, Lamborghini S.p.A., Thermo King, ITT Sheraton, Neckerman Reisen, Hyatt International Ltd., HMS International Hotel GMBH, Emporio Armani, Guccio Gucci Spa, CNBC, Condé Nast New Markets Europe/Africa NC (Vogue), Loro Piana, Aldiana GMBH and Starwood Hotel & Resort Worldwide Inc.. The address of the registered office of Doğuş Holding is as follows: Eski Büyükdere Caddesi Oycan Plaza No: Maslak/ İstanbul-Turkey The number of employees of the Group at 31 December 2009 is approximately 28,000 (2008: 20,000). 2 Basis of preparation (a) Statement of compliance Doğuş Group entities operating in Turkey maintain their books of account and prepare their statutory financial statements in Turkish Lira ( TL ) in accordance with the Accounting Practice Regulations as promulgated by the Banking Regulatory and Supervision Agency ( BRSA ) applicable to Türkiye Garanti Bankası Anonim Şirketi ( Garanti Bank ), Turkish insurance legislation and accounting principles applicable to insurance business, and accounting principles per Turkish Uniform Chart of Accounts and per Capital Market Board of Turkey applicable to entities operating in other businesses. Doğuş Group s foreign entities maintain their books of account and prepare their statutory financial statements in accordance with the generally accepted accounting principles and the related legislation applicable in the countries they operate. The accompanying consolidated financial statements are based on these statutory records with adjustments and reclassifications for the purpose of fair presentation in accordance with International Financial Reporting Standards ( IFRS ). 7

12 2 Basis of preparation (continued) (b) Basis of measurement (c) (d) The consolidated financial statements have been prepared on the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the following: derivative financial instruments are measured at fair value, available-for-sale financial assets are measured at fair value, financial instruments at fair value through profit and loss are measured at fair value, investment property is measured at fair value, certain tangible assets are measured at fair value. The methods used to measure the fair values are discussed further in note 4. Functional and presentation currency These consolidated financial statements are presented in TL which is Doğuş Holding s functional currency. All financial information presented in TL has been rounded to the nearest thousand. Use of estimates and judgements The preparation of consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes: Note 15 Investment in debt securities Note 23 Banking loans and advances to customers Note 25 Financial assets at fair value through profit or loss Note 33 Banking deposits from banks Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 4 - Determination of fair values Note 12 Taxation (utilisation of tax losses) Note 14 Intangible assets Note 31 Retirement benefit obligation Note 38 Commitments and contingencies Note 40 Financial instruments 8

13 2 Basis of preparation (continued) (e) (i) Changes in accounting policies Overview Starting as of 1 January 2009, the Group has changed its accounting policies in the following areas: Presentation of financial statements Determination and presentation of operating segments Presentation of financial statements The Group applies revised IAS 1 Presentation of Financial Statements (2007), which became effective as at 1 January As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. (ii) Determination and presentation of operating segments As of 1 January 2009, the Group determines and presents operating segments based on the information that internally is provided to the CEO and the board of directors as well, who are the Group s chief operating decision makers. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows: Comparative segment information has been re-presented in conformity with the transitional requirements of IFRS 8. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components. An operating segment s operating results are reviewed regularly by the CEO and the board of directors to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in note 2(e), which addresses changes in accounting policies. Certain comparative amounts have been reclassified to conform with the current year s presentation as summarised below: Subordinated liabilities, previously classified under banking customer deposits amounting to TL 31,396 thousand, long-term bank borrowings amounting to TL 235,759 thousand and other noncurrent liabilities amounting to TL 19,189 thousand were reclassified to subordinated liabilities as at 31 December Other current liabilities amounting to TL 177,476 were reclassified to other non-current liabilities as at 31 December Advertising agency risturn and commission expenses amounting to TL 12,147 thousand included in selling, marketing and distribution expenses in the consolidated statement of comprehensive income for the year ended 31 December 2008, has been netted-off against revenues. 9

14 3 Significant accounting policies (continued) (a) Basis of consolidation The accompanying consolidated financial statements include the accounts of the parent company, Doğuş Holding, its subsidiaries, joint ventures and associates on the basis set out in sections below. The financial statements of the entities included in the consolidation have been prepared as at the date of the consolidated financial statements. (i) (ii) (iii) (iv) Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Special purpose entities The Group has established a number of special purpose entities ( SPEs ) to accomplish a narrow and well defined objective such as securitisation of particular assets, or the execution of specific borrowing or lending transactions. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE s risks and rewards, the Group concludes that it controls the SPE. SPEs controlled by the Group were established under terms that impose strict limitations on the decision-making powers of the SPEs management and that result in the Group receiving the majority of the benefits related to the SPEs operations and net assets, being exposed to risks incident to the SPEs activities, and retaining the majority of the residual or ownership risks related to the SPE or their assets. Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The consolidated financial statements include the Group s share of the income and expenses and equity movements of associates after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds its interest in an associates, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. Joint ventures Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the proportionate consolidation method. The consolidated financial statements include the Group s proportionate share of the enterprises assets, liabilities, revenues and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. 10

15 3 Significant accounting policies (continued) (a) (v) Basis of consolidation (continued) Transactions eliminated on consolidation Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Accounting in hyperinflationary economies Until 31 December 2005, the financial statements of the Turkish entities have been restated for the changes in the general purchasing power of the Turkish Lira based on IAS 29 Financial Reporting in Hyperinflationary Economies. Beginning from January 2006, it was declared that Turkey should be considered a nonhyperinflationary economy under IAS 29. Therefore, IAS 29 has not been applied to the accompanying consolidated financial statements since 1 January (c) (i) (ii) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Nonmonetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation (see (iii) below), or qualifying cash flow hedges, which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to TL at exchange rates at the reporting date. The income and expenses of foreign operations are translated to TL at average exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and are presented within equity in the translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss as part of the profit or loss on disposal. 11

16 3 Significant accounting policies (continued) (c) (ii) (iii) (d) (i) Foreign currency (continued) Foreign operations (continued) When the settlement of a monetary item receivable from or payable to a foreign operations is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the translation reserve. Hedge of net investment in foreign operation The Group applies hedge accounting to foreign currency differences arising between the functional currency of the foreign operation and the parent entity s functional currency (TL), regardless of whether the net investment is held directly or through an intermediate parent. Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in other comprehensive income, to the extent that the hedge is effective, and are presented within equity in the translation reserve. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of net investment is disposed of, the relevant amount in the translation reserve is transferred to profit or loss as a part of the profit or loss on disposal. Financial instruments Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets and loans and receivables and availablefor-sale financial assets. Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. These include investments and certain purchased loans. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. 12

17 3 Significant accounting policies (continued) (d) (i) Financial instruments (continued) Non-derivative financial assets (continued) Held to maturity financial assets If the Group has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held to maturity financial assets are measured at amortised cost using the effective interest method less and impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years. These include certain banking loans and advances to banks and customers and certain debt instruments. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise banking loans and advances to customers and banks, trade and other receivables, including service concession receivables, and due from related parties. Finance lease receivables Leases where the entire risks and rewards incident to ownership of an asset are substantially transferred to the lessee are classified as finance leases. A receivable at an amount equal to the present value of the lease payments, including any guaranteed residual value, is recognised. The difference between the gross receivable and the present value of the receivable is unearned finance income and is recognised over the term of the lease using the effective interest rate method. Finance lease receivables are included in banking loans and advances to customers. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, balances with Central Bank of Turkey ( CBT ) and other central banks and other liquid assets with original maturities of three months or less. Money market placements are classified in banking loans and advances to banks. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. The Group s investments in certain debt and equity instruments are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(m)) and foreign currency differences on available-forsale equity instruments (see note 3(c)(i)), other comprehensive income are recognised directly in other comprehensive income and presented within equity in the fair value reserve. When an instrument is derecognised, the cumulative gain or loss in other comprehensive income is transferred to profit or loss. Accounting for interest income and expenses for banking and finance segment is discussed in note 3 (q). Accounting for finance income and expenses for segments other than banking and finance is discussed in note 3 (t). 13

18 3 Significant accounting policies (continued) (d) (i) (ii) Financial instruments (continued) Non-derivative financial assets (continued) Service concession arrangements The Group recognises a financial asset arising from a service concession arrangement when it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction or upgrade services provided. Such financial assets are measured at fair value upon initial recognition. Subsequent to initial recognition the financial assets are measured at amortised cost. If the Group is paid for the construction services partly by a financial asset and partly by an intangible asset, then each component of the consideration received or receivable is accounted for separately and is recognised initially at the fair value of the consideration received or receivable (see also note 3(f)(ii)). Other Other non derivative financial instruments are measured at amortised cost using the effective interest rate method, less any impairment losses (see accounting policy 3m). Change in accounting policy In October 2008, the IASB issued Reclassification of Financial Assets (Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. The amendment to IAS 39 permits an entity to reclassify non-derivative financial assets, other than those designated at fair value through profit or loss upon initial recognition, out of the fair value through profit or loss category if they are no longer held for the purpose of being sold or repurchased in the near term, as follows: If the financial asset would have met the definition of loans and receivables, if the financial asset had not been required to be classified as fair value through profit or loss at initial recognition, then it may be reclassified if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of loans and receivables, then it may be reclassified out of the financial assets at fair value through profit or loss category only in rare circumstances. The amendments are effective retrospectively from 1 July Non-derivative financial liabilities The Group initially recognises in debt securities issued, banking deposits from banks and customers, obligations under repurchase agreements, due to related parties and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. 14

19 3 Significant accounting policies (continued) (d) Financial instruments (continued) (ii) Non-derivative financial liabilities (continued) The Group has the following non-derivative financial liabilities: banking deposits from banks, banking deposits from customers, obligations under repurchase agreements, borrowings, accounts and other payables, subordinated liabilities, due to related parties and liabilities from short-term sales of financial instruments. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. (iii) Derivative financial instruments including hedge accounting The Group holds derivative financial instruments to hedge its certain risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of percent. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. All trading derivatives in a net receivable position (positive fair value) as well as options purchased are reported as trading assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as trading liabilities. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. The amount recognised in other comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss under the same line item in the statement of comprehensive income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. 15

20 3 Significant accounting policies (continued) (d) Financial instruments (continued) (iii) Derivative financial instruments, including hedge accounting (continued) Cash flow hedges (continued) If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects profit or loss. When the hedged item is a non-financial asset, the amount recognised in other comprehensive income is transferred to the carrying amount of the asset when the asset is recognised. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is recognised immediately in profit or loss. In other cases the amount recognised in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss. Embedded derivatives Derivatives may be embedded in another contractual arrangement (a host contract ). The Group accounts for embedded derivatives separately from the host contract when the host contract is not itself carried at fair value through profit or loss, and the characteristics of the embedded derivatives are not clearly and closely related to the host contract. Separated embedded derivatives are accounted for depending on their classification, and are presented in the statement of financial position together with the host contract. (iv) (e) (i) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Repurchase of share capital (Treasury shares) When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and resulting surplus or deficit on the transaction is transferred to/from retained earnings. Property and equipment Recognition and measurement The costs of items of property and equipment purchased before 31 December 2005 are restated for the effects of inflation in TL units current at 31 December 2005 pursuant to IAS 29. Property and equipment purchased after this date are recorded at their historical costs. Accordingly, property and equipment are measured at cost, less accumulated depreciation and accumulated impairment losses, if any (see accounting policy 3m), except as explained below: In the first year of application of IAS 29, the construction machineries and equipment owned by a consolidated entity, Doğuş İnşaat ve Ticaret Anonim Şirketi ( Doğuş İnşaat ), were reflected at their replacement costs on the basis of publicly available information on their quoted prices or on the prices of the comparable items as at 31 December 1997; and such replacement costs were restated for the effects of inflation in TL units current at 31 December 2005 pursuant to IAS 29. In 2006, Doğuş İnşaat assigned a third party appraisal company to count and evaluate the market prices of its construction machineries and motor vehicles. Based on the report of the appraisal company Doğuş İnşaat adjusted its construction machineries and motor vehicles. 16

21 3 Significant accounting policies (continued) (e) (i) (ii) (iii) (iv) Property and equipment Recognition and measurement (continued) In 2001, the Group started to reflect the land and buildings at their fair values as appraised by independent third party appraisers. Any increase arising on the revaluation of such land and buildings is credited to other comprehensive income, and presented in revaluation surplus in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to profit or loss to the extent of the decrease previously charged. A decrease in the carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the revaluation surplus relating to a previous revaluation of that asset. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognised net within other operating income, net in profit or loss. When revalued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings. Reclassification to investment property When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Property that is being constructed for future use as investment property is accounted for at fair value. Any gain arising on remeasurement is recognised in profit or loss to the extent the gain reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in the revaluation reserve in equity. Any loss is recognised in other comprehensive income and presented in the revaluation reserve in equity to the extent that an amount had previously been included in the revaluation reserve relating to the specific property, with any remaining loss recognised immediately in profit or loss. Subsequent costs The cost of replacing a part of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. 17

22 3 Significant accounting policies (continued) (e) (iv) (f) (i) (ii) Property and equipment (continued) Depreciation (continued) Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Description Year Buildings 50 Furniture and equipment 4-20 Motor vehicles 5-10 Leasehold improvements are amortised over the periods of the respective leases, also on a straight-line basis. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. Tangible assets purchased before 2005 at Garanti Bank and its subsidiaries are depreciated over their estimated useful lives on a straight line basis from the date of their acquisition. Assets acquired after this date are depreciated based on the declining balance method, one of the accelerated depreciation methods. For the assets acquired after 1 January 2009, the straight line depreciation method is in use. Intangible assets Goodwill Goodwill that arises upon the acquisition of subsidiaries and joint ventures is included in intangible assets. Goodwill represents the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses (see accounting policy 3m). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the associates. Service concession arrangements Concession rights acquired by the Group have finite useful lives of 20 years starting from 15 August 2007, and are measured at cost less accumulated amortisation. Cost includes borrowing costs directly attributable to the acquisition of the concession rights. The Group capitalises the borrowing costs directly attributable to the acquisition, or construction of a qualifying asset as part of the cost of that asset. 18