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6 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius (All amounts are in thousand litas (LTL 000), unless otherwise stated) BALANCE SHEET As at 31 December 2008 No. Items Notes As at 31 December GROUP COMPANY A. Non-current assets 879, ,376 67,966 68,360 I. INTANGIBLE ASSETS 6 48,364 95, I.1. Development works I.2. Goodwill 29,625 78, I.3. Patents and licenses 13,665 12, I.4. Computer software 2,630 1, I.5. Other intangible assets 2,441 2, II. PROPERTY, PLANT AND EQUIPMENT 7 347, ,696 1,555 1,965 II.1. Land , II.2. Buildings and constructions 113, , II.3. Plant and machinery 46,962 53, II.4. Motor vehicles 12,027 11,072 1,438 1,780 II.5. Other fixtures, fittings, tools and equipment 58,005 59, II.6. Construction in progress 88,257 30, II.7. Other property, plant and equipment 28,064 41, III. INVESTMENT PROPERTY 8 422, , IV. FINANCIAL ASSETS 9 53,747 39,176 66,395 66,395 IV.1. Investments in subsidiaries and associates 2,959 12,665 66,395 66,395 IV.2. Loans to associates - 14, IV.3. Amounts receivable after one year 50,283 12, IV.4. Other financial assets V. OTHER NON-CURRENT ASSETS 8,098 4, V.1. Deferred tax assets 10 8,084 4, V.2. Deferred charges B. CURRENT ASSETS 601, ,975 1, I. INVENTORIES, PREPAYMENTS AND CONTRACTS IN PROGRESS 268, , I.1. Inventories , , I.2. Prepayments 17,637 17, I.3. Amounts receivable on long-term contracts II. AMOUNTS RECEIVABLE WITHIN ONE YEAR , , II.1. Trade receivables 225, , II.2. Receivables from subsidiaries and associates 28,704 3, II.3. Accrued income 1,276 2, II.4. Prepaid income tax 3, II.5. Other amounts receivable 28,204 31, III. OTHER CURRENT ASSETS 2,524 8, III.1. Available-for-sale investments 13 2,497 8, III.2. Time deposits III.3. Other current assets IV. CASH AND CASH EQUIVALENTS 14 42,863 44, TOTAL ASSETS 1,481,310 1,452,351 69,038 69,068 The notes on pages 11 to 49 form an integral part of these financial statements 6

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11 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) GENERAL INFORMATION Koncernas MG Baltic UAB (hereinafter the Company ) is a private company registered with the Register of Legal Entities on 12 December 2000 in accordance with the Lithuanian Law on Register of Companies. Koncernas MG Baltic UAB is one of the largest groups in Lithuania engaged in production, distribution, media activities, development and maintenance of real estate projects, construction and retail trade in apparel. As at 31 December 2008, the Company had 8 (31 December 2007: 8) employees. All the shares of Koncernas MG Baltic UAB are owned by Mr. Darius Juozas Mockus. Consolidated group (hereinafter the Group ) comprises the Company, its subsidiary holdings MG Baltic Trade UAB (company code ), MG Baltic Investment UAB (company code ), MG Valda UAB (company code ), as well as other companies controlled by these holdings. As at 31 December 2008, the Group had 3,882 (31 December 2007: 4,125) employees. The Group structure below contains information on subsidiaries and associates that were included in the Group s consolidated financial statements as of and for the year ended 31 December

12 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) Subsidiaries/Associates Country of incorporation Address Profile of activities Subsidiaries UAB "MG Baltic Trade" Lithuania J. Jasinskio g. 16, Vilnius Controlling entity UAB "Mineraliniai vandenys" Lithuania J. Jasinskio g. 16, Vilnius Wholesale and retail trade in consumer goods AB "Stumbras" Lithuania K. B gos g. 7, Kaunas Production of alcoholic beverages AB "Biofuture" Lithuania Šilo g. 4, Šilut Production of biofuel and ethanol MV Poland S.P.z.o.o. Poland Ul. Agatowa 2, Warszawa Wholesale and retail trade in consumer goods Mineraliniai vandenys Latvija SIA Latvia Kandavas 41A, Riga Wholesale and retail trade in consumer goods Mineraliniai vandenys Eesti OU (until 31/12/2008) Estonia Kesk Söjamäe 3e, Tallinn Wholesale and retail trade in consumer goods MV Eesti OU (from 12/03/2008) Estija Kesk Söjamäe 3e, Tallin Wholesale and retail trade in consumer goods UAB "Tromina" Lithuania V. A. Grai i no g. 38, Vilnius Logistics services UAB "Trojina" (until 29/05/2008) Lithuania J. Jasinskio g. 16, Vilnius Trade UAB "MG Baltic Investment" Lithuania J. Jasinskio g. 16, Vilnius Controlling entity APB "Apranga" Lithuania Kirtim g. 51, Vilnius Wholesale and retail trade in apparel UAB "Apranga LT" Lithuania Kirtim g. 51, Vilnius Retail trade in apparel UAB"Apranga BPB LT" Lithuania Kirtim g. 51, Vilnius Retail trade in apparel UAB"Apranga P LT" Lithuania Kirtim g. 51, Vilnius Retail trade in apparel UAB "Apranga SLT" Lithuania Kirtim g. 51, Vilnius Retail trade in apparel Apranga SIA Latvia Elizabetes 51, Riga Retail trade in apparel Apranga LV SIA Latvia Elizabetes 51, Riga Retail trade in apparel Apranga BPB LV SIA Latvia Elizabetes 51, Riga Retail trade in apparel Apranga PLV SIA Latvia Elizabetes 51, Riga Retail trade in apparel Apranga SLV SIA (from 20/11/2008) Latvia Terbatas 30, Riga Retail trade in apparel Apranga OU Estonia Ravala 4/Laikmaa 15, Tallinn Retail trade in apparel Apranga Estonia OU Estonia Viru 4, Tallinn Retail trade in apparel Apranga BEE OU Estonia Ravala 4/Laikmaa 15, Tallinn Retail trade in apparel Apranga PB Trade OU (from 09/10/2008) Estonia Ravala 4/Laikmaa 15, Tallinn Retail trade in apparel Apranga ST Retail OU (from 09/10/2008) Estonia Ravala 4/Laikmaa 15, Tallinn Retail trade in apparel UAB "MG Baltic Media" Lithuania J. Jasinskio g. 16, Vilnius Controlling entity UAB "Alfa Media" Lithuania J. Jasinskio g. 16, Vilnius Internet-based news portal UAB "Neo press" Lithuania J. Jasinskio g. 16F, Vilnius Publication of magazines UAB "UPG Baltic" Lithuania Jonavos g. 254A, Kaunas Publication of magazines UAB "Laisvas ir nepriklausomas kanalas" Lithuania Šeškin s g. 20, Vilnius Broadcasting of LNK TV channel UAB "LNK studija" Lithuania Šeškin s g. 20, Vilnius Provision of editing and technical maintenance services for LNK and TV1 channels UAB "Mediafon" Lithuania Olimpie i g. 1-31, Vilnius Wholesale telecommunication services UAB "Teleo" (from 16/01/2008) Lithuania Laisv s pr. 60, Vilnius Interactive TV projects UAB "Euroloto" (from 16/01/2008) Lithuania J. Basanavi iaus g. 16-6, Vilnius Interactive lottery games UAB "Euvalda" Lithuania J. Jasinskio g. 16, Vilnius Investing activities 12

13 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) UAB "Mitnija" Lithuania Palemono g. 3, Kaunas Building-mounting works, real estate projects TUB "Mitnijos investicija" Lithuania Palemono g. 3, Kaunas Real estate development and sale UAB "Mažeiki statybos kompanija" Lithuania Kurmai i g. 13, Mažeikiai Building-mounting works UAB "Žaliasis kvartalas" Lithuania Palemono g. 3, Kaunas Real estate development and sale UAB "Vilmeta" Lithuania Granito g. 10, Vilnius Manufacturing of metal products Mitnija SIA (from 25/09/2008) Latvia Vestienas 6C, Riga Construction Renessans stroi plius OOO (from 31/10/2008) Russia Donskaja 15-2, Kaliningrad Construction AB "Salvyda" (until 04/09/2008) Lithuania Palemono g. 9, Kaunas Construction UAB "MG Valda" Lithuania J. Jasinskio g. 16, Vilnius Controlling entity UAB "Verslo trikampis" (from 01/01/2008) Lithuania J. Jasinskio g. 16, Vilnius Real estate rent UAB "Troja" Lithuania J. Jasinskio g. 16, Vilnius Real estate rent UAB "Teniso pasaulis" VŠ "Vito Gerulai io Lithuania žuolyno g. 5, Vilnius Management of tennis-courts and multifunctional sports facility vardo teniso akademija" Lithuania J. Jasinskio g. 16, Vilnius Management of multifunctional sports facility VŠ "Vilniaus teniso akademija" (from 29/07/2008) Lithuania žuolyno g. 5, Vilnius Management of tennis-courts UAB "Timidus" Lithuania Nemen in s pl. 4, Vilnius Real estate rent and project development UAB "Eveleta" Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "MG Valda turtas" Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "Sm liakalnis" Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "Pilies Projektai" Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "VD kepykla" Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "Kelvesta" Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "Šiaurin žvaigžd " Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "Daltonas" (from 11/08/2008) Lithuania J. Jasinskio g. 16, Vilnius Real estate project UAB "Alfa Limited" (from 19/12/2008) Lithuania Jogailos g. 4, Vilnius Real estate project UAB "Megarenta" (until 14/08/2008) Lithuania V. A. Grai i no g. 38, Vilnius Real estate rent Associates UAB "Dommo Nerija" Lithuania Smiltyn s g. 25, Klaip da Real estate project VŠ "Klaip dos jachtklubas" Lithuania Smiltyn s g. 25, Klaip da Real estate project MTK Construction SIA Latvia Daugagrivas 8A, Riga Construction Ammo SIA Latvia M kusalas iela 45/47, R ga Real estate project Dommo Grupa SIA Latvia M kusalas iela 45/47, R ga Real estate project development and rent Burusala SIA Latvia M kusalas iela 45/47, R ga Real estate project Sidateks SIA Latvia M kusalas iela 45/47, R ga Real estate project Dommo SIA Latvia M kusalas iela 45/47, R ga Real estate project Dommo biznesa parks SIA Latvia M kusalas iela 45/47, R ga Real estate project DB 120 SIA Latvia M kusalas iela 45/47, R ga Real estate project Uran SIA Latvia M kusalas iela 45/47, R ga Real estate project 13

14 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated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

15 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below: A Basis of preparation The Company prepares its financial statements in accordance with the Lithuanian regulatory legislation on accounting and Business Accounting Standards. The financial statements have been prepared on an assumption that the Company will be able to continue its operations in the near future. The Group s and the Company s financial year coincides with the calendar year. All amounts in these financial statements are presented in a local currency, the litas (LTL). With effect from 2 February 2002, the litas has been pegged with the euro at an exchange rate of LTL to EUR 1. The principal accounting policies adopted by the Company in the preparation of stand-alone and consolidated financial statements are set out below. B Consolidation Consolidated financial statements of Koncernas MG Baltic UAB have been prepared in accordance with the Lithuanian Law on Consolidated Accounts of Entities, Business Accounting Standards and group accounting policies approved by Koncernas MG Baltic UAB. Subsidiaries Subsidiaries, which are those companies in which the Group, directly or indirectly, has an interest of more than one half of voting rights or otherwise has power to govern the financial and operating policies, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that 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 up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. Intercompany transactions, balances and unrealised gains on transactions between the Group companies are eliminated; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The consolidated financial statements have been prepared using the same accounting principles to similar transactions or other events occurring under similar circumstances. For the purpose of preparation of the Group s consolidated financial statements, foreign subsidiaries (if any) or associates present their financial statements prepared in accordance with the requirements of group accounting policies approved by Koncernas MG Baltic UAB. Minority interest Minority interest represents the fair value of assets and liabilities of the acquired subsidiary as at the date of acquisition of the subsidiary, and minority s post-acquisition share of result of operations of the subsidiary. 15

16 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) C Foreign currencies (1) Presentation currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity ( presentation currency ). The consolidated financial statements are presented in the litas, which is the presentation currency of the parent. (2) Transactions and balances Foreign currency transactions are translated into the presentation currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of balances of monetary assets and liabilities denominated in foreign currencies at the end of the reporting period are recognised in the income statement. (3) Group companies Income statements and cash flows of foreign entities are translated into the Group s presentation currency at average exchange rates for the year and their balance sheets are translated at the exchange rates prevailing on 31 December. Foreign exchange differences are taken to shareholders equity and recorded as foreign exchange effect. D Property, plant and equipment Property, plant and equipment are stated at acquisition (production) cost less subsequent accumulated depreciation and impairment. Depreciation is calculated on a straight-line basis over the useful lives established for property, plant and equipment. The items of property, plant and equipment, which are conserved and no longer in use, are not depreciated. The Company and the Group apply the following useful lives to property, plant and equipment: Buildings and constructions Plant and machinery Motor vehicles Other fittings, fixtures, tools and equipment Other property, plant and equipment 5-50 years 5-20 years 4-10 years 3-10 years 4 years Items of assets with an estimated useful life over 1 year and acquisition cost over LTL 500 are recognised as property, plant and equipment. Repair and reconstruction costs are recognised as expenses when the expenditure is incurred. Gains or losses on disposal of property, plant and equipment are determined by reference to the proceeds from disposal less the carrying amount of the asset concerned and all the expenses related to such disposal. Upon the disposal of property, plant and equipment, the result of the transaction is accounted for in the income statement. Items of property, plant and equipment, except for real estate, that are no longer used in the Company s activities and held for sale are recorded as inventories in the balance sheet. Such assets are stated at the lower of acquisition (production) cost and net realisable value. Construction in progress is stated at acquisition cost. Acquisition cost comprises the value of constructions and facilities and other directly attributable costs. Constructions in progress are not depreciated until the completion of constructions and putting of assets into exploitation. 16

17 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) E Intangible assets Intangible assets are stated at acquisition cost, less subsequent accumulated amortisation. Amortisation is calculated on a straight-line basis over the useful lives established for intangible assets. For the purpose of the income statement, amortisation expenses of intangible assets are accounted for as operating expenses. The Company and the Group apply the following useful lives to intangible assets: Licenses Computer software Other intangible assets Goodwill 1-6 years 3-6 years 3-5 years 5 years Costs associated with renewal and development of intangible assets incurred following the acquisition or creation of assets are recognised as expenses when incurred. F Investment property Investment property is defined as property held to earn rentals or realise capital appreciation or both, and is not occupied by the Group. Investment property includes own land and buildings and property, plant and equipment which constitutes an integral part of buildings. Investment property is initially recognised at acquisition cost plus transaction costs and subsequently remeasured at fair value based on its market value. The market value of the Group s investment property is obtained from the reports issued by external valuers with adequate and generally recognised professional qualification and with recent relevant expertise in assessing property in a similar location and of a similar category. Assets constructed or under development for use in future as investment property is accounted for at acquisition cost as property, plant and equipment for as long as the construction works have not been completed. Upon completion of construction works, such assets are reclassified from construction in progress and subsequently accounted for as investment property. The fair value of investment property is reviewed on each date of preparation of the financial statements, and changes in fair values are recorded in the income statement as part of income or expenses of financing and investing activities. Subsequent costs are capitalised only when it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. All other repair and maintenance costs are charged to the income statement in the period when the expenditure is incurred. At the Group s level, investment property is recognised to the extent it is used to earn rentals or realise capital appreciation. The portion of property used for the Group s administrative needs or the needs (rent) of other group companies is accounted for at acquisition cost, and accumulated depreciation is accounted for under the items of property, plant and equipment. The above-mentioned portions of property (investment property/property for administrative needs) are calculated based on the area of property attributable to each portion of property. Such apportionment of property is reviewed annually at the end of each financial year. 17

18 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) G Finance lease where the Group and the Company are lessees The Company and the Group companies account for finance leases as assets and liabilities in the balance sheet at the lower of the fair value of property leased and the present value of the minimum lease payments at the date of commencement of lease. The present value of minimum lease payments is determined using a discount rate equal to interest rate charged on lease payments, if possible to distinguish, otherwise general interest rate on the Company s and the Group s borrowings is used. Direct initial costs are added to the value of property. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Depreciation is charged on property acquired under finance leases, and the related finance costs are incurred in each reporting period. The procedure of calculation of depreciation for property acquired under finance leases is the same as that applied to freehold property, however, such property cannot be depreciated over the period longer than the lease period, unless the ownership is transferred to the Company or the Group upon expiry of the finance lease contract term. When the outcome of disposal or lease-back arrangement is finance lease, any gain on disposal exceeding the carrying amount is not recognised as income immediately, but rather deferred and amortised over the finance lease period. H Finance lease where the Group is a lessor Fixed assets under finance lease are recorded as finance lease receivables at the amount that is equal to the present value of the minimum lease payments. The difference between the gross receivables and the present value of the receivable is recognised as unearned lease income. The rights and obligations arising from finance leases are recognised at the date of transfer of the asset to the lessee. Until that day, the payment from the prospective lessee is considered as a prepayment. The lease receivable is the amount financed in respect of the leased property less the amount of the prepaid first instalment. Interest income from leasing activities is recognised based on contractual lease terms commencing from the date of delivery of the leased assets and is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Revenues from administration fees are recognised during the contract period. I Impairment of non-financial assets Assets that are subject to amortisation and depreciation are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). J Investments in subsidiaries Investments in subsidiaries in the Company s stand-alone financial statements are stated at acquisition cost less impairment. 18

19 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) K Investments in associates Due to the fact that the Company also prepares consolidated financial statements, investments in associates in the Company s stand-alone financial statements are stated at acquisition cost less impairment. Investments in associates in the consolidated financial statements are accounted for under the equity method. Under this method the Group s share of profits or losses of associates is recognised in the Group s income statement, and its share of post-acquisition movements in reserves is recognised in reserves. When under the equity method, the Group s share of losses in an associate equals or exceeds the acquisition cost of the investment, such investment is recognised at zero value in the balance sheet. The provision for additional losses is established provided that the Company has incurred obligations or made payments on behalf of the subsidiary. The provision for additional losses is recognised in the income statement in the share of result of associates. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net assets of the acquired associate at the date of acquisition. Goodwill is recognised at cost in the same account as investments in associates. Goodwill is amortised over the period of 5 years. L Inventories Inventories are stated at the lower of acquisition (production) cost or net realisable value. The cost is determined using the first-in, first-out (FIFO) method. The cost of inventories comprises purchase price adjusted with write-down amounts and discounts received, related taxes, dues, transportation, preparation for use and other costs directly attributable to the acquisition of inventories. Net realisable value is the estimate of the selling price in the ordinary course of business, less the estimated costs of completion and possible selling expenses. All costs incurred in relation to performance of residential housing projects are included in contracts in progress. M Financial assets and financial liabilities Financial assets include cash and cash equivalents, amounts receivable, loans granted and available-forsale investments. Financial assets are recorded when the Group or the Company receives or obtains a contractual right to receive cash or any other financial assets. Amounts receivable are stated at acquisition cost, less impairment loss. Cash and cash equivalents are carried at acquisition cost. Loans granted are initially recognised at cost and subsequently carried at amortised cost. Available-for-sale investments are investments acquired by the Group for the purpose of selling or generating a profit from short-term fluctuations in price. Available-for-sale investments are carried at cost on the moment of acquisition, and subsequently measured at fair value on each date of preparation of the financial statements. When it is probable that the Group or the Company will not be able to recover the amounts receivable, it is necessary to recognise the impairment loss, which is determined as the difference between the carrying value of assets and the present value of future cash flows discounted using the effective interest rate. Financial liabilities include amounts payable for goods and services received, borrowings and finance lease liabilities, and bonds. 19

20 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) Financial liabilities are recorded when the Group or the Company assumes a commitment to pay cash or any other financial assets. Amounts payable for goods and services received are stated at acquisition cost, which is the value of assets or services received. Loans are initially stated at acquisition cost and subsequently carried at amortised cost. Accrued interest is included in other amounts payable. Accounting for finance lease is described in section (g) of the accounting policies. Bonds issued are classified as financial liabilities redeemable for one-off payment or by instalments based on the established schedule of redemption. Bonds issued are initially recognised at fair value, which is equal to the amount of consideration received less transactions costs. Subsequently they are measured at amortised cost using the effective interest rate method. N Derivative financial instruments and hedge accounting Derivatives are carried as financial assets or financial liabilities, when derivative contract providesthe Group with a right to aquire assets or requires to fulfil an obligation. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are designated as hedging instruments, when they are used to hedge against the risks arising to financial assets and financial liabilities of the Group. These hedging instruments and underlying hedged items are carried at fair value. When the fair value of the hedging instrument is recognised, the effectiveness of the hedge is determined. The effective portion of the gain or loss on the hedging instrument is recognised as revaluation reserves (results) directly in equity. O Provisions Provisions are recognised in liabilities when the Group or the Company has a present legal obligation or irrevocable commitment as a result of past events, it is probable that an outflow of resources will be required to settle the legal obligation or irrevocable commitment, and a reliable estimate of the amount can be made. P Sales revenue Sales revenue is recognised on an accrual basis. Sales revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group s or the Company s activities. Sales revenue is stated net of value added tax, goods returned and discounts. R Construction contracts When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs are recognised by reference to works actually completed at the end of each reporting period. The stage of completion is measured by reference to the relationship between contract revenue and contract costs incurred up to the current stage of completion. Changes in works stipulated in a contract, claims and incentive payments are recognised only if they have been defined in mutual agreement between the client and the contractor. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. Contracts costs are recognised as an expense in the period when the expenditure is incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. 20

21 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) S Cost of sales and operating expenses Expenses are recognised on an accrual basis and matching principle during the reporting period when income related to such expenses is earned. Expenses incurred during the reporting period, which cannot be attributed directly to specific income earned and will not generate any income in subsequent reporting periods, are recognised as expenses when incurred. Expenses are stated at fair value. T Borrowing costs Interest on loans and finance leases is recognised in the income statement on an accrual basis. U Operating lease where the Group and the Company are lessees Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. V Operating lease where the Group is a lessor Rental income under operating lease contracts is recognised on a straight-line basis over the period of the lease. In case the Group provides discounts to its clients, the cost of such discounts is recognised on a straight-line basis over the period of the lease as reduction of rental income. Assets leased are recognised as investment property. Z Income tax The Group s and the Company s profit is subject to income tax of 15 per cent in accordance with the Lithuanian regulatory legislation on taxation. Pursuant to the effective Lithuanian Provisional Law on Social Tax, taxable profit for 2007 is subject to additional social tax at a rate of 3%. Income tax at the rate of 20 per cent is applicable as from 1 January Income tax expenses are calculated and accumulated in the financial statements based on information available as at the date of preparation of the financial statements and calculations of income tax carried out by management in accordance with the Lithuanian regulatory legislation on taxation. Deferred income tax is provided in full, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised on all temporary differences to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilised. Y Cash flow statement For the purpose of the cash flow statement, cash and cash equivalents comprise cash in hand and at bank, and short-term time deposits. For the purpose of the cash flow statement, dividends received are attributed to investing activities, whereas dividends paid are attributed to financing activities. Interest paid on loans and finance leases is attributed to financing activities. Interest received on time deposits is accounted for in investing activities. The main non-cash transactions conducted during 2008 are related to offsetting amounts receivable against amounts payable among Koncernas MG Baltic group companies. 21

22 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) Q Segments Business segment is a distinguished business component, which produces separate or related products or provides separate or related services and that is subject to risks and returns that are different from those of other business segments. All revenue of the Company is derived from the provision of consultations to the Group companies. Four business segments can be distinguished at the Group level: Production; Trade; Services; Real estate and construction. Geographical segment is a distinguished business component, which sells products or provides services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other geographical economic environments. The Company operates in a single geographical segment - Lithuania. The Group has the following geographical segments: Lithuania; Latvia; Estonia; Other countries. W Intercompany offsetting Amounts receivable and amounts payable are offset with the same third party when there are sufficient legal grounds for that purpose. X Grants and subsidies Subsidies are recognised where there is a reasonable assurance that the subsidy will be received and the Group will comply with all attached conditions. Subsidies reduce the value of current assets in cost of sales by reference to the value of current assets used. AA Change in accounting policy and correction of errors Change in accounting policy In 2008, the Group and the Company did not make changes to their accounting policies. 22

23 KONCERNAS MG BALTIC UAB Company code , J. Jasinskio g. 16B, LT Vilnius NOTES TO THE FINANCIAL STATEMENTS (All amounts are in thousand litas (LTL 000), unless otherwise stated) FINANCIAL RISK MANAGEMENT When performing their activities, the Group and the Company are exposed to a variety of financial risks. The Group and the Company apply the following key financial risk management procedures in their activities: Credit risk Credit risks or the risks of counterparties defaulting, are controlled by the application of credit terms and monitoring procedures. Decreased liquidity could affect financial strength of the Group s and the Company s debitors, which in turn could decrease their ability to settle payments. Deteriorating conditions for the Group s and th Company s clients could also affect management s cash flow forecasts and assesments of impairment for financial and non-financial assets. Given currently available information, management s estimation of future cash flows less probable impairment was proper. Foreign exchange risk Most of the Group s and the Company s financial assets and liabilities are denominated in litas or euro currencies. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents necessary to cover the expected expenditures. The Group and the Company make short-term cash flow forecasts. The Group and the Company have signed contracts with the banks to ensure the availability of funding upon necessity. Management can not reliably measure the effect that current illiquidity in financial markets and increasing volatility in foreign exchange/equity markets coud have to the Group s and the Company s financial strength. In Managements opinion, all the necessary measures have been taken to ensure the stability and growth of the Group s and the Company s activities. Interest rate risk Loans outstanding is the most interest rate change sensitive unit in the Group s and the Company s balance sheet. Either fixed or floating interest rate is applied to Group s loans. Interest expenses are subject to changes in the market intrest rate. Floating part of interest rate is subject to changes in the interbank market interest rate. The fluctuation of the Group s and the Company s interest expenses mostly depends on the fluctuation of the market interest rate. The distribution between fixed and variable rate instruments depends on actual situation in the market. Negative effect of the interest rate fluctuations on the Group s cash flows may be hedged by using derivative financial instruments cntracts with the Lithuanian financial institutions. 23

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