Public Limited Company Latvenergo Annual Report and Consolidated Annual Report 2008

Transcription

1 Public Limited Company Latvenergo Annual Report and Consolidated Annual Report

2 Key figures Sales 475, , , ,326 Including electricity sales 386, , , ,229 EBITDA 107,052 89, ,972 87,534 EBITDA margin 22% 25% 19% 22% Operating profit 18,345 17,174 20,844 16,496 Operating margin 4% 5% 4% 4% Net profit 11,146 9,432 13,001 7,864 Cash flow from operating activities 84, , , ,636 Capital expenditure 197, , , ,362 Total equity as at the end of the year 872, , , ,955 Number of employees at the end of the year 5,375 5,353 1,500 1,244 EBITDA earnings before interest, income tax, share of result of associates, depreciation and amortisation, and impairment of intangible and fixed assets EBITDA margin EBITDA / sales Operating margin operating profit / sales Management report The public limited company Latvenergo or Latvenergo AS (hereinafter the Company) is an energy power supply enterprise engaged in the production of electricity and therminal energy and heat, electricity trade, as well as the provision of IT and telecommunication services. Latvenergo AS is one of the largest corporate entities in Latvia was the fourth reporting year with Latvenergo AS heading a corporate group. Latvenergo Group also includes five subsidiaries: Augstsprieguma tīkls AS, Sadales tīkls AS, Latvenergo Kaubandus OÜ, Latvenergo Prekyba UAB and Liepājas enerģija SIA. Augstsprieguma tīkls AS is a 100% subsidiary of Latvenergo AS. Since 1 September 2005 it performs the functions of the Latvian electricity transmission system operator (the respective license from the Public Utilities Commission is dated 8 June 2005). Liepājas enerģija SIA, with Latvenergo AS having the controlling interest of 51%, was registered in the 1

3 Commercial Register of Latvia on 6 July Since 1 November 2005, it provides district-heating supply services in Liepaja (thermal energy generation, transmission, distribution and trade license issued by the Municipal Public Service Regulator of Liepaja on 21 October 2005). Sadales tīkls AS, another 100% subsidiary of Latvenergo AS, was formed on 1 September 2006 and registered in the Commercial Register of Latvia on 18 September Since 1 July 2007, it performs the functions of the Latvian electricity distribution system operator (under the license issued by the Public Utilities Commission on 21 February 2007). Latvenergo Kaubandus OÜ, 100% subsidiary of Latvenergo AS, was formed on 20 June 2007 and registered in the Commercial Register of Estonia on 27 June Under the license issued by the Estonian regulatory authority, from 1 August 2007 Latvenergo Kaubandus OÜ performs electricity trading activities in Estonia according to signed trade agreements. Latvenergo Prekyba UAB, fully owned by Latvenergo AS, was established on 20 December 2007 and registered in the Register of Legal Persons of Lithuania on 7 January After receiving electricity import and export permissions, Latvenergo Prekyba UAB will commence electricity trading in Lithuania (including import and export). Financial results In 2008, the consolidated net sales of Latvenergo Group reached LVL million exceeding the annual result for 2007 by LVL million or 32%. This increase was achieved mainly by growth in the electric and heat sales (LVL 84.0 million and LVL 23.1 million respectively). The consolidated profit for 2008 was LVL 11.1 million; it is very close to the annual result in 2007 LVL 9.4 million. The consolidated profit was positively affected by electricity and electricity service export deals, but negatively by losses incurred by subsidiaries. In 2008, the Group s aggregate electricity sales amounted to 7,457 GWh, which is by 57 GWh or 1% less than in Heat sales amounted to 2,629 GWh in 2008 and were by 239 GWh or 8% less than in 2007, because of warmer weather conditions. 4,567 GWh of electricity were produced in the power plants of the Latvenergo AS in 2008, that is by 439 GWh or 11% more than in A deficient amount of electricity was imported and bought from independent producers and the total amount of purchased electricity decreased to 3,479 GWh (2007: 3,981 GWh). At the end of 2008, the value of the non-current assets of Latvenergo AS increased to LVL 1,475.6 million (LVL million increase from the end of 2007). The rise in the value of non-current assets was due to revaluation of the transmission system s assets in the amount of LVL million and capital investments. The revaluation effect and capital investments considerably exceeded depreciation and amortisation expenses. The revaluation of the assets was critical in order to present fair value of the assets and to continue an investment programme while complying with capital structure requirements under the loan agreements with financial institutions. In 2008, the Group s capital expenditures totalled LVL million, including LVL 66.1 million invested into power generation, LVL 80.5 million - into the reconstruction and development of distribution system, and LVL 19.2 million - into the transmission system. Major investments have been made in the reconstruction of the Riga combined heat and power plant TEC-2, with the total amount invested during LVL 41.9 million. 2

4 The Group s total non-current and current borrowings from financial institutions increased by LVL million reaching LVL million at the end of Accordingly, financing costs raised to the amount of LVL 19.3 million in 2008 (2007: LVL 13.0 million). At the end of 2008, the total equity of the Group was LVL million which is LVL million more than at the end of The increase in equity was a result of the revaluation of the transmission system s assets. This is reflected in the balance sheet position Non-current assets revaluation reserve, which at the end of 2008 amounted to LVL million. This position also includes the revaluation reserve of the Daugava hydro power plants (revaluation was done in 2007). As a result of the revaluation of the transmission system s assets, the Group s capital structure has been improved. Plans for development In 2009, Latvenergo AS will continue with its programme of renovation and development of the power system. Moderate investments in the transmission and distribution network are planned in order to meet the demand of customers for new connections and capacities as well as the stringent safety and licensing requirements. It is planned to continue with development of domestic and international voice telephony and transmission of public data and electronic messages. Taking the recent developments in the electricity market and its recently updated strategy into account, Latvenergo Group will continue to optimize the efficiency of its businesses and functions in line with customer needs. Latvenergo AS will continue to implement safety improvement measures at Daugava hydropower plants structures. They include preparations for the project on construction of a reserve spillway at Pļaviņas hydropower plant. The project aims to negate several environmental risks. In 2009, it is planned to prepare a complete application for co-financing from the EU Cohesion Fund. Latvenergo AS will investigate new business opportunities on the basis of its restated corporate strategy. Among the objectives set in the strategy are the continued modernisation of its electricity generation units as well as investigation and participation in new power generation projects in the Baltic countries. The strategy also aims at engaging more actively in the renewable energy business. On the basis of its new strategy, in 2009 Latvenergo AS will continue to develop its cogeneration assets by developing the Riga TEC-2 project. Latvenergo AS will also evaluate forthcoming public tenders on the development of base-load power generation and tenders on renewable energy projects. Following the allocation of anticipated financial aid from the EU, Latvenergo AS will reactivate its efforts to develop, jointly with Lithuania and Sweden, a Baltic Sweden interconnection cable project. Latvenergo AS will continue the expansion started in 2007 into the neighbouring countries, Estonia and Lithuania by looking for new customers for its electrical power services. Financial risk management The Group and the Company face various financial risks, mostly credit risk, liquidity risk, currency and interest rate risk, as well as risk of fair value fluctuation of financial assets and liabilities. The Company s management strives to minimize possible negative influence of financial risks on the Group s or the Company s financial position by executing regular credit risk analysis and control, as well as regular customer credit control 3

5 activities. The Group and the Company follow prudent liquidity risk control to ensure appropriate and sufficient availability of funds to meet its obligations. Financial instruments The major financial instruments of the Group and the Company are non-current and current borrowings from financial institutions, trade receivables and payables, derivative financial instruments (interest rate swaps) and cash. The main objective of borrowings is to finance the Group s and the Company s operating activities and investments in property, plant and equipment. Management and supervision From 9 December 2006 until 21 April 2009 the Supervisory Board of Latvenergo AS was comprised of the following members: Andris Bērziņš (Chairman), Roberts Dilba (Deputy Chairman), Edvīns Kočāns (Secretary), Juris Radzevičs and Uldis Sesks. As of 22 April 2009, the composition of the Supervisory Board has been changed now including Juris Zvirbulis (Chairman), Roberts Dilba and Margarita Brikmane. From 16 November 2006 until the date of signing off this report, the Management Board of Latvenergo AS includes the following members: Kārlis Miķelsons (Chairman), Uldis Bariss, Arnis Daugulis, Arnis Kurgs and Aigars Meļko. Events after the balance sheet date After the balance sheet date, there have been no events that would materially affect the financial position of the Company or the Group as at 31 December Profit distribution According to government regulations No. 996 providing for dividend payments to the state budget, the management of the Company proposes to allocate LVL 6,503,034 to be paid in dividends for the invested public funds and to transfer the remaining profit portion of LVL 6,497,280 to the Company s reserves. The distribution of profit for 2008 is subject to a resolution of the Latvenergo AS shareholders meeting. The Management Board of Latvenergo AS: Kārlis Miķelsons Uldis Bariss Arnis Daugulis Chairman Arnis Kurgs Aigars Meļko 19 May

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8 Income statement Notes Revenue 5 475, , , ,326 Other income 6 2,322 2,845 1,896 20,822 Raw materials and consumables used 7 (264,377) (180,965) (253,548) (186,618) Personnel expense 8 (72,750) (63,910) (22,487) (33,653) Depreciation, amortisation and impairment of intangible assets and property, plant and equipment 12, 13 (88,707) (72,645) (87,128) (71,038) Other operating expenses 9 (33,999) (29,780) (188,238) (118,343) Operating profit 18,345 17,174 20,844 16,496 Finance income 10a 7,365 5,211 7,388 5,412 Finance costs 10b (19,350) (12,992) (19,836) (13,083) Share of results of associates 14b Profit before tax 6,448 9,535 8,396 8,825 Income tax 11 4,698 (103) 4,605 (961) Profit for the year 11,146 9,432 13,001 7,864 Attributable to: Equity holders of the Company 11,037 9,549 13,001 7,864 Minority interest 109 (117) - - The notes on pages 11 to 58 form an integral part of these financial statements. The Management Board of Latvenergo AS: Kārlis Miķelsons Uldis Bariss Arnis Daugulis Chairman Arnis Kurgs Aigars Meļko 7

9 Balance sheet ASSETS Non-current assets Intangible assets 12 11,305 10,222 11,213 10,171 Property, plant and equipment 13 1,457,964 1,183,761 1,449,451 1,175,901 Investment property Investments in subsidiaries 14a) - - 8,912 7,961 Investments in associates 14b) 4,063 3,975 3,889 3,889 Trade and other non-current receivables Derivative financial instruments 24-2,266-2,266 Deferred income tax assets 11 1,324 1, Total non-current assets 1,475,618 1,201,742 1,473,465 1,200,188 Current assets Inventories 15 19,127 12,275 5,652 1,989 Trade receivables 16a) 52,159 35,173 48,247 32,709 Income tax prepayment 2,278 1,179 1,902 1,179 Other receivables 16b) 27,724 25,445 42,343 30,925 Derivative financial instruments Assets held for sale Cash and cash equivalents ,550 39, ,686 37,429 Total current assets 204, , , ,200 TOTAL ASSETS 1,680,567 1,315,958 1,673,406 1,305,388 EQUITY Capital and reserves attributable to equity holders of the Company Share capital , , , ,049 Non-current assets revaluation reserve , , , ,941 Hedge reserve 19 (12,940) 52 (12,940) 52 Other reserves 19 5,743 98,049 5,743 98,049 Retained earnings 12,714 9,541 13,001 7, , , , ,955 Minority interest in equity 1, Total equity 872, , , ,955 LIABILITIES Non-current liabilities Borrowings , , , ,155 Deferred income tax liabilities ,013 92, ,013 92,490 Provisions for post-employment benefits 21a) 10,103 8,305 3,026 2,480 Environmental provisions 21b) 1,376 1,216 1,376 1,216 Derivative financial instruments 24 17,267-17,267 - Other liabilities and deferred income 22 67,237 46,639 67,131 46,638 Total non-current liabilities 680, , , ,979 Current liabilities Trade and other payables ,503 98, , ,702 Income tax payable Borrowings 20 24,967 12,338 23,161 10,752 Derivative financial instruments 24, 26 2,677-2,677 - Total current liabilities 128, , , ,454 TOTAL EQUITY AND LIABILITIES 1,680,567 1,315,958 1,673,406 1,305,388 The notes on pages 11 to 58 form an integral part of these financial statements. The Management Board of Latvenergo AS: Kārlis Miķelsons Uldis Bariss Arnis Daugulis Arnis Kurgs Aigars Meļko Chairman Notes 8

10 Statement of changes in equity Company Group Share Retained Notes capital Reserves earnings TOTAL As at 31 December , ,049 80,500 24, ,603 Transfer to reserves 19-17,549 (17,549) - Dividends for (6,505) (6,505) Income recognized directly in equity: Change in hedge reserve Revaluation of property, plant and equipment , ,941 Total income recognized directly in equity for the year - 411, ,993 Profit for the year - - 7,864 7,864 Total income for the year - 411,993 7, ,857 As at 31 December , , ,042 7, ,955 Increase in share capital ,101 (98,047) - 20,054 Transfer to reserves 19-5,741 (5,741) - Dividends for (2,123) (2,123) Income/(loss) recognized directly in equity: Change in hedge reserve 19 - (12,992) - (12,992) Revaluation of property, plant and equipment , ,393 Total income recognized directly in equity for the year - 129, ,401 Profit for the year ,001 13,001 Total income for the year - 129,401 13, ,402 As at 31 December , , ,137 13, ,288 The notes on pages 11 to 58 form an integral part of these financial statements. Attributable to equity holders of the Company Share Retained Minority Notes capital Reserves earnings Total interest TOTAL As at 31 December ,049 80,500 24, , ,333 Transfer to reserves 19-17,549 (17,549) Dividends for (6,505) - - (6,505) Minority interest arising on increase in subsidiary s share capital Income recognized directly in equity: Change in hedge reserve Revaluation of property, plant and equipment , , ,941 Total income recognized directly in equity for the year - 411, , ,993 Profit/(loss) for the year - - 9,549 - (117) 9,432 Total income for the year - 411,993 9, ,542 (117) 421,425 As at 31 December , ,042 9, , ,596 Increase in share capital ,101 (98,047) - 20,054-20,054 Transfer to reserves 19-5,741 (5,741) Dividends for (2,123) (2,123) - (2,123) Income/(loss) recognized directly in equity: Change in hedge reserve 19 - (12,992) - (12,992) - (12,992) Revaluation of property, plant and equipment , , ,393 Total income recognized directly in equity for the year - 129, , ,401 Profit for the year ,037 11, ,146 Total income for the year - 129,401 11, , ,547 As at 31 December , ,137 12, ,001 1, ,074 The notes on pages 11 to 58 form an integral part of these financial statements. 9

11 Cash flow statement Notes Cash flows from operating activities Profit before tax 6,448 9,535 8,396 8,825 Adjustments for: Amortisation and depreciation 12, 13 81,681 71,948 80,148 70,340 Impairment of non-current assets 13 7, , (Gain)/loss from disposal of non-current assets (214) 6,674 (167) (6,536) Loss from disposal of non-current investments Investments accounting at equity method (88) (142) - - Interest expense 10b) 21,001 12,644 21,498 12,743 Interest income 10a) (4,929) (3,191) (4,956) (3,385) Loss/(gain) from fair value changes of financial instruments 10 10,143 (1,323) 10,143 (1,323) Loss/(gain) from change in carrying value of investments in associates/subsidiaries 14a) - (351) 2,055 9,225 Changes in provisions 21 1,958 4, (852) (Increase)/decrease in inventories (6,852) (3,506) (3,663) 6,544 Increase in receivables (20,180) (25,459) (23,584) (26,122) Increase in payables, accrued expense, deferred income and other liabilities 5,630 65,096 21,276 55,367 Cash generated from operations 101, , , ,920 Interest paid (19,617) (12,428) (20,105) (11,841) Interest received 4,929 3,191 4,956 3,299 Income tax paid (2,517) (3,139) (1,893) (2,742) Net cash generated from operating activities 84, , , ,636 Cash flows from investing activities Investments in subsidiaries 14a) - - (3,006) (12,384) Proceeds from sale of investments in associates Loans to subsidiaries - - (4,203) - Proceeds from sale of intangible assets and PPE 365 1, ,837 Purchase of intangible assets and PPE (160,274) (227,306) (159,338) (225,081) Net cash used in investing activities (159,909) (225,306) (166,375) (235,470) Cash flows from financing activities Proceeds on borrowings from credit institutions , , , ,531 Proceeds on borrowings from subsidiaries ,473 Repayment of borrowings from subsidiaries - - (10,815) - Repayment of borrowings 20 (9,025) (5,657) (8,374) (5,125) Minority s contribution to subsidiaries share capital Dividends paid* - - (7,353) - (7,353) Net cash from financing activities 139, , , ,526 Net increase in cash and cash equivalents 64,375 9,258 64,257 9,692 Cash and cash equivalents at the beginning of the year 39,175 29,917 37,429 27,737 Cash and cash equivalents at the end of the year ,550 39, ,686 37,429 * - dividends paid for 2007 are settled by income tax and VAT overpayment in the amount of LVL 2,123 thousand The notes on pages11 to 58 form an integral part of these financial statements. 10

12 Notes to the Financial Statements 1. CORPORATE INFORMATION All of the shares of public limited company Latvenergo or Latvenergo AS (hereinafter the Parent Company) are owned by the State of Latvia and are held by the Latvian Ministry of Economy. The registered address of the Company is 12 Pulkveža Brieža Str., Riga, LV-1230, LATVIA. Pursuant to the Latvian Energy Law, Latvenergo AS is designated as a key asset of the national economy and, therefore, is not subject to privatisation. The consolidated financial statements and the Company s separate financial statements include the financial information in regard to the Company and its all subsidiaries (hereinafter the Group) for the annual period ending 31 December 2008 and comparative information for annual period ending 31 December The Company is engaged in the generation of electricity and thermal energy, electricity trading, as well as the provision of IT and telecommunication services in the territory of Latvia and the EU. The Company is one of the largest corporate entities in Latvia. The Group also includes five subsidiaries: Augstsprieguma tīkls AS, Sadales tīkls AS, Latvenergo Kaubandus OÜ, Latvenergo Prekyba UAB and Liepājas enerģija SIA. The subsidiary Augstsprieguma tīkls AS performs the functions of the Latvian electricity transmission system operator. The subsidiary Sadales tīkls AS performs the functions of the Latvian electricity distribution system operator. Liepājas enerģija SIA provides district-heating supply services in Liepaja (thermal energy generation, transmission, distribution and trade). Latvenergo Kaubandus OÜ was formed on 20 June It provides electricity trading services in Estonia and has concluded cross-border deals. Latvenergo Prekyba UAB was established on 20 December It will commence electricity trading in Lithuania in 2009 (including import and export). The Company s associate Nordic Energy Link AS carries out the functions of the operator of an interconnection power cable between Estonia and Finland. The Company s associate Pirmais Slēgtais Pensiju Fonds AS manages a defined-contribution corporate pension plan in Latvia. The Company s Management Board has approved the Company s separate and consolidated financial statements for issue on 19 May SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements and consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Where necessary comparatives are reclassified. 11

13 2.1. Basis of Preparation of the Financial Statements These consolidated financial statements and the Company s separate financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union. Due to the European Union s endorsement procedure, the standards and interpretation not approved for use in the European Union are presented in this note as they may have an impact on financial statements of the Group and the Company s separate financial statements in the following periods if endorsed. The consolidated financial statements and the Company s separate financial statements are prepared under the historical cost convention, as modified by the revaluation of property, plant and equipment and derivatives, which have been measured at fair value through profit and loss as disclosed in accounting policies presented below. All amounts shown in these consolidated financial statements and the Company s separate financial statements are presented in thousand Latvian Lats (LVL), unless stated otherwise. The preparation of the consolidated financial statements and the Company s separate financial statements in conformity with IFRS requires use of certain critical accounting estimates. It also requires the management of the Company to exercise its assumptions and judgment in the process of applying the Group s and the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated or the Company s financial statements are disclosed in Note 4. (a) Amendments to standards which have an impact on the Group and the Company and which the Group and Company have adopted from an earlier date The following interpretations of International Financial Reporting Standards (IFRS) and amendments to International Accounting Standards (IAS) that are mandatory for accounting periods beginning on 1 January 2008 and relevant to the Group s and the Company s operations, have been published or amended: IAS 23, 'Borrowing costs' (revised March 2007; effective for annual periods beginning on or after 1 January 2009) The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalize such borrowing costs as part of the cost of the asset. The Group and the Company have applied the amendment to the standard from 1 January The effect of application of the amendment to the standard is disclosed in Note 10 b. IAS 1, Presentation of Financial Statements (and consequential amendments to IAS 7) The amendments are part of IASB s annual improvements project published in May The previous wording of the standard, which stated that all financial assets and liabilities held for trading should be classified as current, is amended to allow non-current classification for some such assets and liabilities (Note 24). (b) Interpretations and amendments to standards effective in 2008 but not relevant to the Group s and Company s operations The following standards and IFRIC interpretations that is mandatory for accounting periods beginning on 1 January 2008, but that is not relevant to the Group s and the Company s operations, has been published or amended: IAS 39, Financial instruments: Recognition and measurement and IFRS 7, Financial instruments: Disclosures on the Reclassification of financial assets (Effective for annual periods beginning on or after 1 July 2008) This amendment allows the reclassification of certain financial assets previously classified as 'held-for-trading' 12

14 or 'available-for-sale' to another category under limited circumstances. Various disclosures are required where a reclassification has been made. Derivatives and assets designated as 'at fair value through profits or losses' under the fair value option are not eligible for this reclassification. Given the urgency of the issue, due process was suspended and there was no comment period. Amendment confirms that any reclassifications made on or after 1 November 2008 should take effect only from the date of the reclassification and may not be backdated. The Group and the Company do not have respective categories of financial assets. IFRIC 11, 'IFRS 2 (effective for annual periods beginning on or after 1 March 2007) Group and treasury share transactions This interpretation provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent's shares) should be accounted for as equitysettled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have an impact on the Group s and the Company s financial statements. (c) Standards, interpretations and amendments to standards relevant but not adopted from an earlier date by the Group and the Company The following IAS, IFRS and IFRIC interpretations that are mandatory for accounting periods beginning on or after 1 January 2009, but that have not been adopted from an earlier date by the Group and the Company: IAS 1, 'Presentation of financial statements' (revised September 2007; effective for annual periods beginning on or after 1 January 2009) The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group and the Company expect the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specified transactions and balances. IAS 27, 'Consolidated and separate financial statements' (revised January 2008; effective for annual periods beginning on or after 1 July 2009) The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in profits or losses. The revised standard has not yet been endorsed within the EU. The Group and the Company will apply IAS 27 (Revised) prospectively to transactions with non-controlling interests from the date it will come into force in the EU. IFRS 3, 'Business combinations' (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009) The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquired company s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to revaluate its previously held equity interest in the acquire company at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profits or losses. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after 13

15 the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised standard has not yet been endorsed in the EU. The Group and the Company are currently assessing the impact of the amended standard on its financial statements. IAS 23, Borrowing Costs The amendment is part of IASB s annual improvements project published in May The definition of borrowing costs is revised to specify that interest expense forming part of borrowing costs is to be calculated using the effective interest rate method as described in IAS 39. The Group and the Company will apply the amendment prospectively to the capitalisation of borrowing costs on qualifying assets from the date it will come into force. IAS 28, Investments in Associates (and consequential amendments to IFRS 7 and IAS 32) The amendments are part of IASB s annual improvements project published in May The amendment clarifies that an associate is treated as a single asset for the purposes of impairment testing. Any impairment loss is not allocated to specific assets included within investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to the investment balance to the extent that the recoverable amount of associate increases. The amendment also reduces the disclosure requirements relating to associates accounted for at fair value through profits or losses. The Group and the Company will apply the IAS 28 (Amendment) to impairment tests related to investment in associates and any related impairment losses from the date it will come into force. IAS 36 (Amendment), 'Impairment of assets' (effective from 1 January 2009) The amendment is part of IASB s annual improvements project published in May Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-inuse calculation should be made. The Group and the Company will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from the date it will come into force. IAS 38, Intangible Assets The amendment is part of IASB s annual improvements project published in May The amendment clarifies that a prepayment asset may only be recognised where an entity makes a payment in advance of obtaining a right to access goods or receive services. In addition, the provision that there is rarely, if ever support for use of an amortisation method that results in a lower amortisation than the amount determined using the straight line method is removed from the standard. The Group and the Company are currently assessing the impact of the amendment to the standard on its financial statements. IAS 40 (Amendment), 'Investment property' (and consequential amendments to IAS 16) (effective from 1 January 2009) The amendment is part of IASB s annual improvements project published in May Property that is under construction or development for future use as investment property is within the scope of IAS 40. Where the fair value model is applied, such property is, therefore, measured at fair value. Where fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably measurable. The Group and the Company will amend its accounting policies accordingly when the amendment will be effective. IAS 39, Financial Instruments: Recognition and Measurement The amendment is part of IASB s annual improvements project published in May The revised standard allows movements into and out of the fair value through profits or losses category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge; and where financial assets are reclassified following a change in policy by an insurance company in accordance with IFRS 4. The amendment also clarifies that when revaluating the carrying amount of a debt instrument on cessation of fair value hedge accounting, a revised effective interest rate (calculated at the date fair value hedge accounting ceases) is used. The Group and the Company will amend its accounting policies accordingly when the amendment will be effective. 14

16 IAS 39, Financial Instruments: Recognition and Measurement: Eligible Hedged Items (Amendment) (effective with retrospective application for annual periods beginning on or after 1 July 2009) The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The Group and the Company will apply amendments from the date they will come into force. Improvements to International Financial Reporting Standards (issued in May 2008) In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of curtailment under IAS 19; making the definition of borrowing costs in IAS 23 consistent with the effective interest rate method; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; amending the definition of the fair value through profits or losses category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40. Further amendments made to IAS 8, 10, 18, 20, 40 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group and the Company do not expect the amendments to have any material effect on the financial statements. IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009) The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. The Group and the Company will apply interpretation from the date they will come into force. (d) Interpretations and amendments to existing standards that have not yet come into force and are not relevant to the Group s and the Company s operations IFRS 8, Operating segments (effective for annual periods beginning on or after 1 January 2009) IFRS 8 replaces IAS 14, Segment reporting. The Standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis used for internal reporting purposes. The standard is not applicable to the Group and the Company as their shares are not publicly traded. IFRS 2, 'Share-based payment' (issued in January 2008, effective for annual periods beginning on or after 1 January 2009) The amended standard deals with vesting conditions and cancellations. It clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The amendment is not relevant to the Group s and the Company s financial statements. IAS 16 (Amendment), 'Property, plant and equipment' (and consequential amendment to IAS 7, 'Statement of cash flows') (effective from 1 January 2009) The amendment is part of IASB s annual improvements project published in May Under the amended standard, entities that routinely sell assets previously held for rental are required to classify such assets as 15

17 inventories from the point that the assets cease to be leased and become held for sale, while the proceeds from sale are to be recognised as revenue. The rent and proceeds from sale will have to be classified as cash flows from operating activities. The Group and the Company do not routinely sell assets previously held for rental. IAS 27, Consolidated and Separate Financial Statements The amendment is part of IASB s annual improvements project published in May Following the amendment, a parent entity that accounts for an investment in a subsidiary in accordance with IAS 39 in its separate financial statements will continue to measure the investment in accordance with IAS 39, even when the investment becomes held for sale (or held in a disposal group held for sale). The amendment applies prospectively from the date at which the entity first applied IFRS 5. Amendment to the standard is not relevant as subsidiaries are not accounted in accordance with IAS 39. IAS 32, 'Financial instruments: Presentation', and IAS 1 (Amendment), 'Presentation of financial statements' 'Puttable financial instruments and obligations arising on liquidation' (effective from 1 January 2009) The amended standards require classification as equity of some financial instruments that meet the definition of financial liabilities. The amendment is not relevant to the Group s and the Company s financial statements. IFRS 1 'First time adoption of IFRS' and IAS 27 'Consolidated and separate financial statements' (Amendment) (issued in May 2008; effective for annual periods beginning on or after 1 January 2009) The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profits or losses rather than as a recovery of the investment. The amendment is not relevant to the Group s and the Company s financial statements. IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009) The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The amendment is not relevant to the Group s and the Company s financial statements. IFRIC 12, Service Concession Agreements (effective for annual periods beginning on or after 1 January 2008) This interpretation applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. Under these arrangements, assets are assessed as either intangible assets or finance receivables. The interpretation has not yet been endorsed in the EU. This interpretation is not relevant to the Group s and the Company s financial statements. IFRIC 13, 'Customer loyalty programmes' (effective for annual periods on or after 1 July 2008; for entities applying IFRS as adopted in the EU effective for annual periods beginning after 31 December 2008) IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. This interpretation is not relevant to the Group s and the Company s financial statements. IFRIC 14, 'IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction', (effective for annual periods beginning on or after 1 January 2008; for entities applying IFRS as adopted in the EU effective for annual periods beginning after 31 December 2008) Interpretation provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation is not relevant to the Group s and the Company s financial statements. 16

18 IFRIC 15, Agreements for construction of real estates (effective for annual periods beginning on or after 1 January 2009) The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. The interpretation has not yet been endorsed in the EU. IFRIC 15 will not be relevant to the Group s and the Company s operations as all of the Group s and the Company s construction relates to property developed to hold as property for own use or investment property, rather than with a view to sale. IFRIC 16, Hedges of a net investment in a foreign operation (effective for annual periods beginning on or after 1 October 2008) IFRIC 16 clarifies the accounting treatment in regard to net investment hedging. This includes the fact that net investment hedging relates to differences in functional currency not presentation currency, and hedging instruments may be held anywhere in the group. The requirements of IAS 21, The effects of changes in foreign exchange rates, do apply to the hedged item. The interpretation has not yet been endorsed in the EU. IFRIC 18 is not relevant to the Group s and the Company s financial statements as the Group and the Company do not apply hedge accounting. IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009) The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on the disposal of the distributed non-cash assets will be recognised in profits or losses when the entity settles the dividend payable. IFRIC 17 is not relevant to the Group s and the Company s operations because they do not distribute non-cash assets to owners. Improvements to International Financial Reporting Standards (issued in May 2008) In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; accounting for below market interest rate government loans in accordance with IAS 20; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; clarification of accounting for advertising costs under IAS 38; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 29, 34, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group and the Company do not expect the amendments to have any material effect on the financial statements. In April 2009, the International Accounting Standards Board published amendments to following International Financial Reporting Standards: IFRS 2, IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 18, IAS 36, IAS 38, IAS 39, IFRIC 9 and IFRIC 16. Most of the amendments are effective for annual periods beginning on or after 1 January 2010 and are subject to EU endorsement. The amendments have not been adopted from an earlier date by the Group or the Company Consolidation and accounting for investments in subsidiaries and associates (a) Subsidiaries The financial reports of subsidiaries, which are those entities where the Group has control over the financial and operating policies of the entity, are consolidated. The existence of control is assumed when the Parent 17

19 company s voting rights in the subsidiary exceed 50%. The financial reports of subsidiaries are consolidated from the date on which control is transferred to the Parent company and are no longer consolidated from the date when control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured, as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Parent company s share of the identifiable net assets of the subsidiary acquired is recorded as goodwill. If the costs of acquisition are less than the fair value of net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Intercompany transactions, balances and unrealised gains on transactions between the Group s entities are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. The accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in subsidiaries are accounted for at cost less impairment, if any, under the cost method in the separate financial statements of the Company. (b) Transactions and minority interests The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in profit and losses for the Group that are recorded in the income statement. (c) Associates Associates are all entities over which the Group or the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting in the consolidated financial statements and are initially recognized at cost. Under this method the Group s share of its associate s post-acquisition profits and losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group s share of losses in associate equals or exceeds its interest in associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in associates in the Company s separate financial statements are accounted at cost less impairment, if any Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of the Company and each of the Group s entities is measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Latvian Lats (LVL), which is the Company s functional currency. 18