Annual Financial Statements of the HYDROTOR S.A Company for the year 2011 prepared in accordance with International Financial Reporting Standards

Transcription

1 Annual Financial Statements of the HYDROTOR S.A Company for the year 2011 prepared in accordance with International Financial Reporting Standards April

2 CONTENTS Financial Statement of Comprehensive Income.4 Statement of Financial position 5 Statement of Cash Flows 6 Statement of Changes in Equity 7 Notes to Financial Statements 8 1. General information 8 2. International Financial Reporting Standards as a basis of financial reporting Statement of Compliance Status of approval standards in the European Union member states Standards applied for the first time Early application of standards and interpretations Standards published but not yet in force Voluntary changes in accounting principles Accounting principles applied Basis of preparation Accounting principles Fixed assets classified as held for sale Sales revenues Lease Foreign currency Interest expense Subsidies Profit on ordinary business activities Taxes Tangible fixed assets Intangible assets research and development costs Patents and trademarks Impairment Inventory Financial instruments Trade receivables Investment in securities Financial liabilities and equity instruments Bank loans and credits Trade liabilities Derivatives and hedge accounting Provisions Sales revenues Business segmentation branch and geographic segments Branch segments 20 2

3 5.2. Geographic segments Profit on operating activities Employment costs Income financial costs Income tax Dividends Earnings per share Other intangible assets Tangible fixed assets Longterm investments Financial assets available for sale Inventory Fixed assets held for sale Other financial assets Trade and other receivables Gross trade receivables Receivables currency structure Shortterm investments Cash currency structure Credit risk Accruals Loans and credits Convertible bonds Financial derivatives Currency derivatives Interest rate swap contracts Deferred tax Trade and other payables Provisions Share capital Supplementary capital Revaluation reserve Other reserve capitals Retained earnings Book value per share Employee benefit programs Events after the balance sheet date Contract to audit financial statements Transactions with related parties Approval of financial statements 38 3

4 FINANCIAL STATEMENT OF COMPREHENSIVE INCOME Profit and loss account from January 01, 2011 to December 31, 2011 Profit and loss account (in PLN thousand) Note For the year 2011 from to For the year 2010 from to Operating activities Revenues from sales of products 4, Revenues from sales of goods and materials 4, Revenues from sales 4, Cost of goods sold 4, 5 (48 439) (41 811) Gross profit (loss) on sales Other operating income Selling costs (810) (718) General and administrative expenses (4 238) (3 674) Other operating expenses (686) (576) Restructuring costs Operating profit (loss) Financial revenues Financial expenses 8 (117) (43) Profit (loss) before tax Income tax 9 (828) (743) Net profit (loss) from continuing operations Discontinued operations Net profit (loss) from discontinued operations Net profit (loss) Profit (loss) per share (in PLN) 11 1,75 1,79 4

5 Statement of Financial Position As of December 31, 2011 ASSETS Note At the end of 2011 as of December 31, 2011 At the end of 2010 as of December 31, 2010 At the beginning of 2010 as of January 31, 2010 Fixed assets Tangible fixed assets Other intangible assets Longterm investments Total fixed assets Current assets Inventory Trade and other receivables Current income tax assets Prepayments and accruals Cash and cash equivalents Noncurrent assets classified as held for sale Total current assets TOTAL ASSETS LIABILITIES EQUITY Share capital Supplementary capital Revaluation reserve Reserve capitals Retained earnings LONGTERM LIABILITIES Provision for deferred income tax Employee benefits liability Longterm loans and credits Longterm provision Deferred income SHORTTERM LIABILITIES Trade and other liabilities Current tax liabilities Liabilities associated with acquisition of shares Financial liabilities 41 Employee benefit liabilities Deferred income Total Liabilities Book value per 1 share (in PLN) 31 26,78 25,97 25,23 Offbalance sheet items Forward contracts Guarantees Promissory notes Others 122 5

6 Cash flow statement (indirect method) in PLN thousand Statement of Cash Flows from January 01, 2011 to December 31, 2011 For the year 2011 from to For the year 2010 from to A. CASH FLOWS FROM OPERATING ACTIVITIES Net profit (loss) Income tax expenses recognized in the profit and loss account Income tax paid (997) (801) Investment income included in the profit (126) (369) and loss account Profit on the sale or disposal of tangible (44) (3) assets Dividends from subsidiaries (203) (986) Depreciation of fixed assets Positive/ negative foreign currency (39) (31) translation differences (Increase) / decrease in trade and other (2 866) (2 012) receivables (Increase)/ decrease in inventories 518 (327) Decrease in trade and other receivables (64) Increase/ (decrease) in reserves (15) (36) Increase in deferred income (128) Net cash flows from operating activities B. Cash flows from investment activities Proceeds from disposal of tangible fixed assets 44 3 Interest received Dividends from subsidiaries and related parties Repayments/ payments of loans by (438) (135) related parties Payments for tangible fixed assets (12 878) (2 033) Payments for intangible assets (139) Development expenses paid (1 772) Costs attributable to the acquisition of financial assets Net cash flows from investment activities C. Cash flows from financial activities Longterm loans and credits Dividends paid to: Parent entity s shareholders Net cash flows from financial activities (1 350) ( ) (2 300) (2 039) (2 039) (2 998) (2 998) (2 998) D. Total net cash flows (A.+/B.+/C.) (3 733) Cash and cash equivalents at the beginning of the period Change in cash and cash equivalents due to foreign currency translation differences E. Cash and cash equivalents at the end of the period 38 (31)

7 Statement of Changes in Equity from January 01, 2011 to December 31, 2011 For the year 2011 from to For the year 2010 from to Equity at the beginning of the period (BO) Changes in accounting policies and the correction of fundamental errors Equity at the beginning of the period (BO), after reconciliation with comparable data A. Share capital at the beginning of the period 1. Changes in share capital 2. Share capital at the end of the period B. Supplementary capital at the beginning of the period 1. Changes in supplementary capital due to: distribution of profits (more than statutory minimum) capital revaluation 2. Supplementary capital at the end of the period C. Revaluation reserve at the beginning of the period (BO) 1. Changes in revaluation reserve release of provisions for deferred income tax on revaluation of fixed assets revaluation of fixed assets disposal of fixed assets 2. Revaluation reserve at the end of the period D. Other reserves at the beginning of the period (BO) 1. Changes in other reserves 2. Other reserves at the end of the period E. Profit (loss) from previous years at the beginning of the period (BO) Changes in accounting policies and the correction of fundamental errors 1. Profit from previous years at the beginning of the period, after reconciliation with comparable data 2. Changes in earnings from previous periods writeoff to supplementary capital changes in accounting policies payment of dividends to shareholders acquisition of shares of subsidiary valuation/ liquidation of fixed assets 3. Profit (loss) from previous years at the end of the period (BZ) F. Net result for the current period net profit (loss) (334) 21 (355) (4 189) (2 256) (2 039) (118) (5 669) (2 755) (2 998) Equity at the end of the period (BZ) Equity after proposed distribution of earnings (covering the loss) 7

8 1. General information 1.1. Information about the Company Name and seat NOTES TO THE FINANCIAL STATEMENTS Przesiębiorstwo Hydrauliki Siłowej HYDROTOR S.A., with the registered office in Tuchola, 72 Chojnicka str. The Company was set up on the basis of the notarial deed of , Repertory Act no. 6529/1991, in the Individual Notary Public Office No. 77 in Świecie n/wisłą Registration Presently, the Company is registered in the National Court Register of Companies (KRS) in the District Court in Bydgoszcz, 13th Economic Division under KRS No Principal business activities Business activities of HYDROTOR S.A are related to commercial transactions including manufacturing, services and trade within the country and abroad, with specialization in hydraulics. Principal segment of business activities include: production, repair and design of hydraulic parts and components which are used in agriculture and various types of industry branches, such as engineering industry, construction, extractive industry, energy and automotive industry. Pursuant to the Polish Statistical Classification of Economic Activities the Company is classified under no. 2830Z production of agricultural and forestry machinery, whereas according to the Warsaw Stock Exchange the Company is presented in the industrial machinery sector Duration of the Company s business Business duration of the PHS HYDROTOR S.A. is indefinite The Management Board and Supervisory Board Share ownership with the number of votes held by the Management Board and Supervisory Board is presented in the note no The Management Board Within the period from to the Company s Management Board was composed of the following members: Wacław Kropiński President Janusz Czapiewski Marketing & Development Director, Member of the Management Board The Supervisory Board Until the Supervisory Board was composed of five persons. Within the period from to the Supervisory Board was composed of the following members: 1. Czesław Główczewski Chairman 2. Mariusz Lewicki ViceChairman 3. Janusz Deja Secretary 4. Waldemar Stachowiak Member 5. Mieczysław Zwoliński Member On the General Meeting of Shareholders established 6person composition of the Supervisory Board. Until the end of 2011 the composition of the Supervisory Board was as follows: 1. Czesław Główczewski Chairman 2. Mariusz Lewicki ViceChairman 3. Janusz Deja Secretary 4. Waldemar Stachowiak Member 5. Mieczysław Zwoliński Member 6. Ryszard Bodziachowski Member 8

9 1.3. Share ownership structure The share ownership as at structure is as follows: Entity Place of registered office Number of shares Number of votes % of the share capital % of voting rights PKO FIO Warszawa ,85 9,17 Ryszard Bodziachowski with Warszawa ,86 8,55 a closely related person Wacław Kropiński Tuchola ,69 10,87 Other shareholders ,6 71,41 TOTAL % 100% 1.4. Functional and presentation currency The financial statements have been prepared in PLN. PLN is a functional and presentation currency for the Capital Group. The data in the statements is shown in PLN thousand, when needed particular items are presented with greater accuracy Reporting period The financial year of the parent Company and Group companies is the calendar year. The financial statements cover the period from to and comparable financial data of the period from to Participation in the share capital of subsidiaries PHS HYDROTOR participates in the share capital of five companies forming the Capital Group. HYDROTOR S.A. Tuchola Agromet ZEHS Lubań S.A. Lubań 99,99 % of shares WPH Sp. Z o.o. Wrocław 100 % of shares Subsidiaries Hydrotorbis Sp. Z o.o. Tuchola 100 % of shares Defka Sp. Z o.o. Dzierżoniów 57,05% of shares WZM Wizamor Sp. Z o.o. Więcbork 94,73% of shares 1.7. Euro exchange rates used in translation selected financial data The following exchange rates we used in translation selected data: a/ for balance sheet items an exchange rate announced by the National Bank of Poland as at and b/ for profit and loss account items an exchange rate calculated as the arithmetic mean of exchange rates announced by the National Bank of Poland as at the end of each month of 2011 and 2010 c/ for cash flows items from operating activities, investing activities and financing activities, and cash and cash equivalents at the end of the period an exchange rate calculated as the average Euro exchange rate announced by the National Bank of Poland as at and d/ cash and cash equivalents at the beginning of the reporting period an exchange rate calculated at the average Euro exchange rate announced by the National Bank of Poland as at , and at the beginning of comparable period the average Euro exchange rate as at

10 The exchange rates used (in PLN): Period date Average exchange rate in the period Min. exchange rate in the period Max. exchange rate in the period The average exchange rate at the last day of the period ,1401 3,8403 4,5642 4, ,0044 3,8356 4,1770 3, ,3406 3,9170 4,8999 4, Selected financial data Key items in the balance sheet, the profit and loss account, and the cash flow statement that are included the financial statements for 2011 and the corresponding financial data for 2010, converted into EUR are as follows: Item of the financial statements PLN thousand EUR thousand PLN thousand EUR thousand BALANCE SHEET ASSETS Fixed assets Current assets Total assets BALANCE SHEET LIABILITIES Equity Share capital Liabilities and provisions for liabilities Longterm liabilities Shortterm liabilities Total liabilities PROFIT AND LOSS ACCOUNT Net revenues from sales of products, goods and materials Gross profit on sales Profit on sales Profit on operating activities Gross profit Net profit CASH FLOWS Net cash flows from operating activities Cash flows from investment (14 712) (3 331) (2 300) (581) activities Cash flows from financial (2 998) (757) activities Total net cash flows (3 733) (943) Opening cash balance Closing cash balance

11 2. Application of International Financial Reporting Standards (IFRS) 2.1. Statement of compliance The financial statements has been drawn up according to International Financial Reporting Standards with consideration of their interpretations in the form as adopted by the European Commission The Official Standards Approved by the European Union The International Financial Reporting Standards (IFRS) in the form adopted in the European Union do not differ significantly from the standards issued by the International Accounting Standards Board (IASB), with the exception of the interpretations which as at December 31, 2011 have not yet been approved. (i) IFRS 9 Financial instruments (the effective date of IFRS 9 to annual periods beginning on or after January 1, 2013) was issued by the International Accounting Standards Board (IASB) on November 12, On September 28, 2010 the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. The standard divides all financial assets that are currently in the scope of IAS 39 into two classifications those measured at amortized cost and those measured at fair value. The IFRS 9 approach is based on the assessment how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The revised standard requires the application of a single method for recognizing impairment losses, replacing the IAS 39 rules. The new requirements on the accounting for financial liabilities address the problem of financial instability arising from the issuer s management strategies regarding measurement of its own liabilities at fair value. For most liabilities, the IASB decided to retain the measurement at amortized cost, amending only the provisions that address the issue of own credit risk. In the scope of the new requirements the entity who chooses to measure its liabilities at fair value recognizes the change in the fair value that is attributable to changes in the credit risk of the liability in other comprehensive income, and not in the result. The Management Board expects that the IFRS 9 will be applicable to financial statements for the annual reporting period beginning on January 1, 2013, and that the IFRS 9 will have an impact on the assets and financial statements. A detailed analysis of the impact of the new standard on the Company s financial statements has not been completed yet and it is impossible at present to make a reliable estimate of the impact of this standard on the amounts reported in the financial statements. (ii) IFRS 13 Fair value measurement defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. However, the IFRS 13 does not establish requirements for the issue which items should be measured or disclosed at fair value. The Management Board expects that the IFRS 13 will be applicable to financial statements for the annual reporting period beginning on January 1, 2013, and that the IFRS 13 will have an impact on the amounts reported in the Company s financial statements and on increased disclosure. (iii) Amendments to IAS 1 Presentation of financial statements require companies preparing financial statements in accordance with IFRSs to group together items within other comprehensive income (OCI) that may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. The amendments to IAS 1 will be applicable for annual reporting periods beginning on July 1, Presentation of items of other comprehensive income will be appropriately converted in future reporting periods. (IV) Amendments to IAS 12 Income taxes deferred tax: requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will normally be through sale. The amendments to IAS 12 are applicable for annual reporting periods beginning on January 1, The Management Board of the Group expects that application of these standards will have an impact on calculation of deferred tax in future reporting periods in relation to investment property, in which the 11

12 carrying amount will be recovered through sale. A detailed analysis of the impact of the new and modified standards on the Company s financial statements has not been completed yet and it is impossible at present to make a reliable estimate of the impact of this standard on the amounts reported in the financial statements. (V) Amendments to IAS 19 Employee benefits improve the accounting for postemployment employee benefits by: 1/ Elimination of the option to defer the recognition of gains and losses resulting from defined benefit plans (the corridor approach) thus helping to improve the comparability and transparency of the reported data. 2/ Improved presentation of changes in assets and liabilities of the balance sheet that are the effect of defined employee benefits, including the required presentation of changes resulting from revaluation in other comprehensive income, thus distinguishing these changes from the changes resulting from regular business operations of an entity. 3/Improvement of disclosure requirements that will better show the characteristics of defined benefit plans and the risks arising from those plans. The amendments to IAS 19 will be applicable for annual reporting periods beginning on January 1, 2013, retrospective application, with very few exceptions, is required. The Management Board expects that the amendments to IAS 19 will be applicable in the financial statements for the annual period beginning on January 1, 2013 and that the adoption of the amendments may affect the reported value of the defined employee benefit obligation. A detailed analysis of the impact of the new and modified standards on the Company s financial statements has not been completed yet and it is impossible at present to make a reliable estimate of the impact of this standard on the amounts reported in the financial statements. Still, apart from the regulations adopted by the European Union, some rules of hedge accounting for a portfolio of assets and financial liabilities have not been approved for use in the European Union. It is estimated that application of hedge accounting for a portfolio of assets or financial liabilities in accordance with the guidance in IAS 39 Financial instruments: recognition and measurement would not have a significant impact on the financial statements if the European Union approved it for use on the balance sheet date Firsttime Adoption of International Financial Reporting Standards The newly issued or revised IFRSs that have an impact on the amounts reported in the current year (and/or previous years) The newly issued and revised IFRSs which only impact presentation and disclosures in the financial statements: Amendments to IAS 1 Presentation of Financial Statements (as amendments do IFRS2010) Amendments to IAS 24 (2009) Related Party Disclosures The amendments to IAS 1 Presentation of Financial Statements require companies preparing financial statements in accordance with IFRSs to group together items within OCI that may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements. These amendments have been applied retrospectively. The information contained in the financial statements has been modified in order to reflect the above amendments. In a significant change from the existing IAS 24, the revised standard provides a partial exemption from related party disclosures by statecontrolled entities. Previously, such an entity that is controlled, jointly controlled or significantly influenced by state was required to disclose any transactions with other entities controlled or significantly influenced by the same state. The modified standard still requires disclosure of information that is important for financial statement users, but it eliminates the requirement to disclose such information if the costs of obtaining it outweighs the expected benefits. The IASB amended the definitions of a related party and of a related party transactions to clarify the intended meaning and remove some inconsistencies. The Company and its subsidiaries are not statecontrolled entities. The application of the revised definition of a related party set out in IAS 24 (as revised in 2009) in the current year has resulted in the 12

13 identification of related parties that were not identified as related parties under the previous standard. Specifically, associates of the ultimate holding company are treated as related parties of the company under the revised standard, whilst such entities were not treated as its related parties under the previous standard. The newly issued and revised IFRSs which have an impact on the financial position and performance The amendments to IFRS 3 Business combinations The following amendments to IFRS 3, incorporated as part of the annual improvements to IFRS 2010 specify that the option to measure noncontrolling interests either at fair value or at the proportionate share of the acquiree s net identifiable assets at the acquisition date under the IFRS 3 (2008) applies only to noncontrolling interests that are present ownership interests end entitle their holders to a proportionate share of the acquiree s net assets in the event of liquidation. Other noncontrolling interests are measured at the acquisition date fair value unless another measurement basis is required by IFRSs. The amendments also specify that the current requirement to measure awards of the acquirer that replace acquire sharebased payment transactions in accordance with IFRS 2 at the acquisition date ( marketbased measure ) applies also sharebased payment transactions of the acquiree that are not replaced The newly issued and revised IFRS which do not have a significant impact on financial statements The following new and revised IFRS have been adopted in these financial statements. Adoption of the new and revised IFRS s has no significant impact on the amounts reported in the current and previous years, but may have an impact on accounting of future transactions or arrangements. The amendments to IAS 32 Financial instruments presentation Classification of rights issues The amendments to IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. IFRIC Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments Amended standards and interpretations Amendments to IFRS (2010) The amendment to IAS 32 addresses to accounting for rights issues (rights, options and warrants) that are denominated in a currency other than the functional currency of the issuer. Previously, the standard required recognition of preemptive rights as derivative liabilities. Such preemptive rights, subject to certain conditions, must be classified as equity. The currency that the exercise price is stated irrelevant. Application of the changes under the revised standard has no impact on the amounts reported in the current and previous year, as the Group as the Group has not issued such equity instruments. Previously, the interpretation 14, in certain circumstances, did not allow entities to recognize an asset for any surplus arising from the voluntary prepayment of a minimum funding contribution that relates to future service. This restriction has now been removed. Application of the revised standard has no significant impact on the consolidated financial statement of the Group. The interpretation clarifies the requirements set out by IFRS in situations when some entities are renegotiating the terms of financial liabilities with their creditors. In some circumstances, the creditor agrees to accept an entity s shares or other equity instruments to settle the financial liability fully or partially. Application of this interpretation has no impact on the amounts reported in the current and previous year, as the Group has not carried out such transactions. Apart from the previously mentioned amendments to IAS 1 and IFRS 3, application of the amendments to the IFRS 10 has no significant impact on the amounts reported in the financial statements. 13

14 2.4. Early application of standards and interpretations While preparing the financial statements the Management Board decided not to make early application of the standards Standards published but not yet effective The below described standards, interpretations or their amendments have been published but are not yet effective and the Company has not adopted them prior to the mandatory application date: Amendments to ISFR 7 Financial instruments Financial Disclosures transfers of financial assets, approved by the European Union on November 22, 2011 (effective for annual periods beginning on or after July 1, 2011). The objective of the amendments is to improve the quality of the information reported about financial assets that have been transferred but are still, at least partially, recognized by the entity because they do not qualify for derecognition; and financial assets that are no longer recognized by an entity, because they qualify for derecognition, but with which the entity continues to have some involvement. In the opinion of management, the amendments to MSSF 7 will not have a significant impact on disclosures for transfers of receivables. However, if in the future the company chooses a different accounting for transfers of financial assets, the amendment to the standard may impact the extend of disclosures. The Company decided not to adopt the above described standards, interpretations or the amendments prior to the mandatory application date. In the opinion of the Company, the standards, interpretations and their amendments are not expected to have a material impact on the financial statements if applied at the balance sheet date Voluntary changes in accounting principles While preparing these financial statements, in relation to previous periods the Company has not applied any voluntary changes in accounting principles. 3. Accounting policies 3.1. Basis of preparation These financial statements have been prepared on the assumption that the Company will continue its business activities in the foreseeable future. As at the date of approval of these financial statements no facts or circumstances have been identified that might pose a threat to the continuation of the Company s business activities. These financial statements have been prepared under the historical cost convention, except for the revaluation of certain fixed assets and financial instruments. The Company s principal accounting policies are set out below Accounting policies Financial statements of the PHS HYDROTOR S.A are prepared in accordance with the International Financial Reporting Standards (IFRS). These financial statements have been prepared under the historical cost convention, except for the revaluation of certain fixed assets and financial instruments. The Company s principal accounting policies are set out below Noncurrent assets held for sale Noncurrent assets (and group of net assets held for sale) classified as held for sale are recognized at the carrying amount or at fair value reduced by the cost of such assets. An entity classifies a noncurrent asset as heldforsale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The conditions for a noncurrent asset or disposal group to be classified as heldforsale is that the assets must be available for immediate sale in their present condition and its sale must be highly probable. The sale should be completed, or expected to be so, within a year from the date of the classification. 14

15 3.4. Sales revenue Revenue from the sale of goods in the course of the ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates, VAT and other salesrelated taxes (excise duty). The revenue on the sale of goods is to be recognized when the seller has transferred the ownership of the goods. Interest income is recognized increasingly and calculated on the principal amount due, in accordance with the effective interest method rate. Dividend income from investments is recognized when the shareholders' right to receive the payment is established Leases A lease transaction is a commercial arrangement whereby the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed payment or a series of payments. Lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership of the assets. Legal title may or may not eventually be transferred. Operating lease is a lease other than a finance lease. Tangible fixed assets used under lease agreements should be accounted for in accordance with IAS 17. The classification of a lease (as an operating or finance lease) affects how it is reported in the accounts. a/ Finance lease At the commencement of the lease term, the PHS HYDROTR S.A. Company the lessee recognizes finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee s incremental borrowing rate shall be used. used. Any initial direct costs of the Group are added to the amount recognized as an asset. Minimum finance lease payments should be apportioned between the finance charge and the reduction of the outstanding liability. The financial charge should be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents shall be charged as expenses in the periods in which they are incurred. A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. The depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned, and the depreciation recognized shall be calculated in accordance with IAS 16 and IA 38. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life. Financial lease payments payable within the period longer than one year (reduced by the amount of interest) are reported as longterm liabilities. Financial lease payments payable within the period shorter than one year (reduced by the amount of interest) are reported as shortterm liabilities. The amount of interest is recognized in finance costs in the income statement over the lease term. To determine whether a leased asset has become impaired, the Group s companies apply the IAS 36 Accounting Standard dealing with impairment of assets. b/ Operating lease Lease payments under an operating lease shall be recognized as an expense on a straightline basis over the lease term unless another systematic basis is more representative of the time pattern of the HYDROTOR S.A. benefit Foreign currencies Transactions carried out in a foreign currency other than Polish zloty (PLN) are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in a foreign currency are translated into Polish zloty using a closing rate i.e. the average rate communicated by the National Bank of Poland for a given currency prevailing at the 15

16 balance sheet date. 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 the fair value was determined. Exchange differences on monetary items are recognized directly in profit or loss. Exchange differences on nonmonetary items are recognized in equity Interest expense Borrowing costs relating to external borrowings that are directly attributable to the acquisition, construction, or production of a qualifying asset that take a substantial period of time to get ready for their intended use or sale. Borrowing costs form part of the cost of that asset until it is ready for its intended use or sale. Investment gains derived from temporary investments of borrowings that are attributable to production of a qualified asset reduce the amount of the capitalized borrowing costs. All the other borrowing costs are recognized directly in profit and loss account in the period in which they are incurred Subsidies Subsidies are used for investments projects connected with realization of specific objectives (for example: employment of people with disabilities, activation of people from the areas threatened with particularly high structural unemployment, etc.), grants are recognized as income over consecutive periods in order to match it with the corresponding costs. Government subsidies to noncurrent assets are presented in the balance sheet as deferred income and are charged to profit and loss account over the useful life of the asset Profit on ordinary activities Profit on ordinary activities includes restructuring costs and share of profit of associates, but excludes financial costs and income Tax Obligatory charges on the financial result are paid through: current tax (CIT) and deferred tax. The tax currently payable is based on the taxable profits (the tax base) for the fiscal year. Taxable profit (loss) differs from net profit (loss) as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. Liability for current tax is calculated using tax rates applicable in the given fiscal year. Deferred tax is measured under the balance sheet approach as the amount to be paid or recovered in future periods on the basis of differences between the carrying amount of an asset or liability and the corresponding tax used to calculate a tax base. Deferred tax assets arise from all taxable temporary differences, while a deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that future taxable profits will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that affects neither accounting profit not taxable profit or loss. Deferred tax assets are recognized for deductible temporary differences arising from investments in subsidiaries, associates, branches and joint ventures, unless the Group is able to the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future. The carrying amount of deferred tax assets should be reviewed at the each balance sheet date, and if the expected future taxable profits will not be sufficient to realize the asset or part thereof, it is offwritten. Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied at the moment when the asset is realized. Deferred tax is recognized on the balance sheet, unless related to items directly recognized in equity, then it is also recognized in equity Tangible fixed assets Property, plant and equipment used for the production, supply of goods and services, or for administrative purposes, is recognized on the balance sheet at the revalued amount equal to the fair value of an item of 16

17 property, plant and equipment, determined from the evidence based on the market that offers valuation, and done by a professionally qualified independent expert (as of the date of its valuation), in later periods reduced by depreciation and losses from the impairment of value. The revaluation is made with sufficient regularity to ensure that the carrying amount, at any time, does not differ significantly from that which could be determined using the fair value at the balance sheet date. Depreciation of revalued property and buildings is recognized in the profit and loss account. When the revalued property and building are sold or their use is terminated, the revaluation surplus is transferred directly from revaluation reserve to retained earnings. Tangible fixed assets under construction for the production, rental or administrative purposes are recognized in the balance sheet at cost less accumulated depreciation and any recognized impairment loss. The cost originally incurred to acquire or construct an item of property is increased by legal and accounting fees, and for certain assets, by borrowing costs capitalized in accordance with the Group s accounting policies. Depreciation begins on the day when the asset is placed in service, in accordance with the principles of accounting for tangible fixed assets. Property, plant and equipment is recorded at historical cost, less accumulated depreciation and impairment losses. Apart from lands and the assets under construction, all tangible fixed assets are depreciated over the useful life of the asset, using the straightline depreciation method, at the following annual depreciation rates: Buildings and premises 2,5% 4,0% Machinery and equipment 6,0% 33,0% Vehicles 12,5% 33,0% Other tangible fixed assets 10,0% 25,0% The assets held under finance leases are depreciated over their useful life, respectively as own assets, but not longer than the term of a lease. Profit or loss on sales/ liquidation or abandonment of tangible fixed assets is defined as the difference between the sale proceeds and the net asset value, and is recognized in the profit and loss account Intangible fixed assets research and development costs Intangible fixed asset is an identifiable nonmonetary asset from which future economic benefits are expected. An intangible asset should be measured initially at cost. After initial recognition (at subsequent balance sheet dates) intangible assets should be carried at cost less any amortization and impairment losses. In accordance with the amortization plans of the companies in the Group, straight line amortization is used to amortize the intangible assets. The Group s intangible assets mainly consist of the computer software and research and development costs. Development costs are capitalized only, when: specific project is implemented (for example: the software or new procedures), it is probable that the future economic benefits that are attributable to the asset will flow to the entity, the project related cost can be measured reliably. Development costs are amortized using straightline method over their useful life. When it is impossible to recognize the asset whether purchased or selfcreated, then the development costs are recognized in profit or loss in the period in which they were incurred. 17

18 3.13. Patents and trademarks Patents and trademarks are recognized on the balance sheet at the acquisition price less accumulated amortization. Amortization is provided using the straightline method over their useful life Impairment PHS HYDROTOR S.A. reviews the net value of fixed assets at each balance sheet date in order to determine whether there are indications of possible impairment. Following the identification of any indication of impairment, the company makes a formal estimate of the recoverable amount of the given asset to determine a writeoff. If this asset does not generates cash flows that are largely independent of cash flows generated by other assets, the analysis is made for the group of assets that generate cash flows and to which the given asset belongs. Intangible fixed assets that have indefinite useful life are tested for impairment annually, and additionally, when there are indications of possible impairment. The recoverable amount is defined as the higher of the 'fair value less costs to sell and its value in use. The last one corresponds to the amount of expected future cash flows that are discounted using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount is lower than the net carrying amount the assets (or the group of assets), the carrying amount should be reduced to its recoverable amount. The impairment loss is recognized as an expense in the income statement, unless it relates to a revalued asset (any impairment loss of a revalued asset shall be treated as a revaluation decrease). When the impairment loss is reversed, the carrying amount of the assets (or the group of assets) should be increased to its new recoverable amount. The recoverable amount shall not exceed the carrying amount that would have been determined, had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss on a revalued asset is credited directly to equity under the heading revaluation reserve Inventory Inventory is reported on the balance sheet at the amount paid to obtain (purchase) the merchandise, or at the production cost that should not be higher than the net sale price. Inventory costs include the cost of direct materials, and where appropriate, the direct salary costs and a reasonable proportion of indirect costs. Inventory of goods and raw materials are valuated using the weighted average cost method. The net sale price represents the estimated selling price less the estimated costs to complete production and get the product into a condition necessary to complete the sale (selling and marketing expenses, etc.) Financial instruments Financial assets and liabilities are recognized on the entity s balance sheet when it enters into a binding agreement Trade and other receivables Trade and other receivables are noninterest bearing, they are evaluated in the accounting books at nominal value corrected by adequate revaluation writedowns for doubtful receivables Investment in securities In the case that market convention predicts delivery of security in the specified time after transaction has been performed, the investment in securities is recognized in the accounting books. They are deleted from the accounting books on the purchase / sale transaction day. Investment in securities is initially estimated as per purchase price corrected by transaction costs. Investment in securities is classified as directed to turnover or available for sale and evaluated for balance day at their fair value. In the case that securities were classified as directed to turnover, the profit and loss arising from change in the fair value are recognized in the profit and loss account in a given period. In the case that assets are available for sale, the profit and loss arising from the change of the fair value are directly recognized in the capital until the asset is sold or impaired. As such cumulated profit or loss previously recognized in the capital is transferred to the profit and loss account of a given period. 18

19 3.19. Financial liabilities and equity instruments Financial liabilities and equity instruments are classified depending on their economic content arising from the concluded contracts. Equity instrument is any contract that gives the right to participate in the Group s assets decreased by all liabilities Bank loans and credits Bank loans and credits (including current account credit) are entered in the accounting books as per value of gained proceeds decreased by direct costs of gaining them. Financial costs along with commission payable during repayment or redemption and direct costs of taking up credits, are recognized in the profit and loss account by means of memorial method. They increase the book value of the instrument with inclusion of repayments in a given period Trade liabilities Trade liabilities are noninterest bearing, they are recognized on the balance sheet at a nominal value Derivatives and hedge accounting In the course of its business activities, the PHS HYDROTOR S.A company is subject to foreign currency exchange risks due to exchange rates and interest rates. In order to manage costly exposure to those risks, the entity may use forward contracts and interest rate swaps. The PHS.HYDROTOR S.A. does not use derivatives for speculative purposes. Valuation is done taking into consideration the exchange rate applicable at the balance sheet date Provisions A provision is a liability of uncertain timing or amount. A provision should be recognized when: a/ an entity has a present obligation (legal or constructive) as a result of a past event, b/ it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate. When it not probable that an outflow of resources embodying economic benefits will be required to settle the obligation (contingent liability) the provision shall be reversed. Each provision should be used only for expenditures for which it was originally recognized. The PHS HYDROTOR S.A. recognizes provisions for: employee benefits (retirement provision, jubilee bonuses, provision for unused leave), provision for losses from business transactions in progress. 19