Doğuş Holding Anonim Şirketi and its Subsidiaries

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

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5 Consolidated Statement of Financial Position As at 31 December 2010 Currency: Thousands of Turkish Lira ( TL ) 31 December December 2009 (*) 1 January 2009 (*) Notes Assets Property and equipment 14 3,310,288 2,824,971 2,575,568 Intangible assets 15 1,114,392 1,168,344 1,197,110 Investments in debt securities 16 9,067,893 8,207,282 6,800,593 Investments in equity securities 17 73,144 53,584 48,269 Accounts receivable 21 13,741 6,118 62,630 Banking loans and advances to customers 24 12,476,609 8,925,379 8,886,696 Banking loans and advances to banks 25 1,375,606 1,390, ,456 Financial assets at fair value through profit or loss ,718 39,821 47,251 Investment property 18 1,528,750 1,218,187 1,052,924 Other non-current assets , , ,970 Deferred tax assets , , ,738 Total non-current assets 29,763,782 24,501,426 21,887,205 Inventories , , ,782 Accounts receivable 21 1,888,425 1,531,052 1,151,907 Due from related parties ,791 10,751 14,998 Other current assets 23 1,549,220 1,263,943 1,127,742 Investments in debt securities 16 3,143,254 3,085,304 1,172,080 Banking loans and advances to customers 24 8,513,765 7,692,659 7,673,470 Banking loans and advances to banks 25 1,591,059 1,864,621 1,806,426 Financial assets at fair value through profit or loss , ,563 29,701 Cash and cash equivalents 27 2,010,936 2,358,320 2,256,649 Total current assets 19,522,148 18,421,618 16,007,755 Total assets 49,285,930 42,923,044 37,894,960 (*) See note 2 (f) The accompanying notes are an integral part of these consolidated financial statements. 1

6 Consolidated Statement of Financial Position As at 31 December December December 2009 (*) 1 January 2009 (*) Notes Equity Paid-in capital 2,055,292 2,010,192 2,010,192 Capital stock held by subsidiaries (98,755) (53,655) (53,655) Share premium 159, , ,350 Fair value reserves 484, ,523 36,490 Translation reserve 3,368 46,888 49,421 Hedging reserve (7,859) (8,226) 7,362 Revaluation surplus 1,086,198 1,081,534 1,024,867 Legal reserves 270, , ,883 Retained earnings 3,748,970 2,882,502 2,128,251 Total equity attributable to owners of the Company 7,701,796 6,728,866 5,556,161 Non-controlling interests Şahenk Family 100, , ,530 Others 178, , ,107 Total non-controlling interests 278, , ,637 Total equity 28 7,980,755 6,959,298 5,756,798 Liabilities Long-term bank borrowings 29 6,271,098 5,039,922 4,299,548 Subordinated liabilities , , ,246 Deposits , , ,003 Obligations under repurchase agreements , ,771 Deferred tax liabilities , , ,297 Retirement benefit obligations ,006 Other non-current liabilities , , ,005 Total non-current liabilities 7,803,127 6,602,717 5,931,876 Subordinated liabilities ,469 16,098 Short-term bank borrowings 33 2,671,315 2,241,507 1,969,524 Short-term portion of long-term bank borrowings 29 1,018,001 1,301,579 1,435,814 Deposits 34 23,429,175 20,347,308 17,031,352 Obligations under repurchase agreements 35 3,548,767 3,207,075 3,197,720 Accounts payable 36 1,141, ,612 1,332,582 Due to related parties 39 61,912 3,470 3,695 Taxes payable on income 13 99,279 70,606 39,028 Other current liabilities 37 1,532,245 1,306,403 1,180,473 Total current liabilities 33,502,048 29,361,029 26,206,286 Total liabilities 41,305,175 35,963,746 32,138,162 Total equity and liabilities 49,285,930 42,923,044 37,894,960 (*) See note 2 (f) The accompanying notes are an integral part of these consolidated financial statements. 2

7 Consolidated Statement of Comprehensive Income For the Year Ended 31 December 2010 Notes Revenues 8,654,592 7,819,616 Cost of revenues (5,910,319) (5,152,306) Gross profit 8 2,744,273 2,667,310 Administrative expenses 9 (1,153,172) (1,028,810) Selling, marketing and distribution expenses (204,878) (143,407) Impairment losses, net 10 (89,106) (589,438) Trading gain, net 26 95, ,638 Other operating income, net 11 33,081 8,090 Result from operating activities 1,425,944 1,133,383 Finance income 476, ,883 Finance expense (581,656) (686,581) Net finance costs 12 (105,417) (69,698) Share of profit of equity accounted investees 17,667 5,755 Profit before income tax 1,338,194 1,069,440 Income tax expense 13 (321,423) (267,423) Profit for the year 1,016, ,017 Other comprehensive income Revaluation of property and equipment (16,570) 87,183 Change in fair value of available-for-sale financial assets 114, ,860 Change in translation reserve (43,520) (2,533) Effective portion of changes in fair value of cash flow hedges 367 (15,588) Income tax on other comprehensive income 13 3,007 (24,448) Other comprehensive income for the year, net of income tax 57, ,474 Total comprehensive income for the year 1,074,256 1,230,491 Profit attributable to: Owners of the Company 966, ,887 Non-controlling interests 28 50,756 19,130 -Şahenk Family 8,069 7,415 -Others 42,687 11,715 1,016, ,017 Total comprehensive income attributable to: Owners of the Company 1,028,131 1,199,331 Non-controlling interests 46,125 31,160 -Şahenk Family 6,571 6,903 -Others 39,554 24,257 1,074,256 1,230,491 The accompanying notes are an integral part of these consolidated financial statements. 3

8 Consolidated Statement of Changes in Equity For the Year Ended 31 December 2010 Attributable to owners of the Company Capital stock Fair Non- Paid-in held by Share Translation value Hedging Revaluation Legal Retained controlling Total capital subsidiaries premium reserve reserve reserve surplus reserves earnings Total interests equity Balances at 1 January ,010,192 (53,655) 159,350 49,421 36,490 7,362 1,024, ,883 2,128,251 5,556, ,637 5,756,798 Total comprehensive income for the year Profit for the year , ,887 19, ,017 4 Other comprehensive income Net fair value losses from cash flow hedges, net of tax (15,588) (15,588) -- (15,588) Net market value gain from available-for-sale portfolio, net of tax , , ,542 Transferred to net income from fair value increases, net of tax (37,509) (37,509) -- (37,509) Foreign currency translation differences for foreign operations (2,533) (2,533) -- (2,533) Change in revaluation surplus, net of tax , ,865 72,532 12,030 84,562 Total other comprehensive income (2,533) 362,033 (15,588) 56, , ,444 12, ,474 Total comprehensive income for the year (2,533) 362,033 (15,588) 56, ,752 1,199,331 31,160 1,230,491 Transactions with owners, recorded directly in equity Adjustments to retained earnings for a new proportionately consolidated joint venture (1,647) (1,647) -- (1,647) Transfers ,875 (17,875) -- (974) (974) Dividends paid (24,979) (24,979) (306) (25,285) Change in non-controlling interests on consolidated subsidiaries (85) (85) Total transactions with owners ,875 (44,501) (26,626) (1,365) (27,991) Balances at 31 December ,010,192 (53,655) 159,350 46, ,523 (8,226) 1,081, ,758 2,882,502 6,728, ,432 6,959,298 The accompanying notes are an integral part of these consolidated financial statements.

9 Consolidated Statement of Changes in Equity (continued) For the Year Ended 31 December 2010 Attributable to owners of the Company Capital stock Fair Noncontrolling Paid-in capital held by subsidiaries Share premium Translation reserve value reserve Hedging reserve Revaluation surplus Legal reserves Retained earnings Total interests Total equity Balances at 1 January ,010,192 (53,655) 159,350 46, ,523 (8,226) 1,081, ,758 2,882,502 6,728, ,432 6,959,298 Total comprehensive income for the year Profit for the year , ,015 50,756 1,016,771 5 Other comprehensive income Net fair value gain from cash flow hedges, net of tax Net fair value gains from available-for-sale portfolio, net of tax , , ,721 Transferred to net income from fair value increases, net of tax (60,519) (60,519) -- (60,519) Foreign currency translation differences for foreign operations (43,520) (43,520) -- (43,520) Change in revaluation surplus, net of tax , ,403 19,067 (4,631) 14,436 Total other comprehensive income (43,520) 86, , ,403 62,116 (4,631) 57,485 Total comprehensive income for the year (43,520) 86, , ,418 1,028,131 46,125 1,074,256 Transactions with owners, recorded directly in equity Increase in capital stock held by subsidiaries 45,100 (45,100) Acquisition of non-controlling interests in a consolidated subsidiary without a change in control (21,120) (21,120) (8,104) (29,224) Adjustment to non-controlling interests for a new subsidiary of proportionately consolidated joint venture ,303 8,303 Transfers ,749 (58,749) -- (317) (317) Dividends paid (34,081) (34,081) (1,259) (35,340) Change in non-controlling interests in consolidated subsidiaries ,779 3,779 Total transactions with owners ,749 (113,950) (55,201) 2,402 (52,799) Balances at 31 December ,055,292 (98,755) 159,350 3, ,725 (7,859) 1,086, ,507 3,748,970 7,701, ,959 7,980,755 The accompanying notes are an integral part of these consolidated financial statements.

10 Consolidated Statement of Cash Flows For the Year Ended 31 December 2010 Notes Cash flows from operating activities Profit for the year 1,016, ,017 Adjustments for: Impairment losses 10 89, ,438 Fair value change in investment property 6 and 11 (189,540) (42,743) Provision for and reversal of employee severance indemnity 6 and 31 15,918 11,442 Reversal of retirement benefit obligation 6 and (31,006) Depreciation and amortisation 6 241, ,023 Technical reserves relating to insurance operations 6 3, Gain on sales of property and equipment (1,692) (1,750) Gain on sales of investment property -- (413) Loss on partial sale of proportionately consolidated joint venture 24, Share of profit of equity accounted investees 6 (17,667) (5,755) Change in accrued interest expense/(income), net 6 113,359 59,684 Provision for taxes on income , ,763 Deferred tax benefit 13 (35,855) (26,340) Warranty provision 6 31,154 25,043 1,647,972 1,870,060 Changes in operating assets and liabilities Change in deposits 4,312,506 4,470,319 Change in banking loans and advances to banks (506,779) (922,085) Change in balances with the Central Bank 478,206 98,633 Change in banking loans and advances to customers (6,410,138) (2,762,780) Change in financial assets at fair value through profit or loss (61,521) (119,021) Change in other assets (1,005,453) (338,698) Change in inventories (90,569) 300,377 Change in accounts receivable (364,479) (164,559) Change in due from related parties (116,040) 4,247 Change in obligations under repurchase agreement 481,901 65,613 Change in accounts payable 266,893 (458,970) Change in due to related parties 58,442 (225) Change in other liabilities 87, ,047 (1,221,109) 2,326,958 Interest paid (1,584,759) (2,078,457) Interest received 3,195,857 3,768,626 Taxes paid 13 (324,042) (325,070) Dividend paid (34,081) (24,979) Warranties paid (28,550) (26,203) Employee termination indemnity paid 31 (13,744) (7,528) Net cash (used in) / provided from operating activities (10,428) 3,633,347 Cash flows from investing activities Increase in ownership interest in consolidated subsidiaries (34,126) (2,245) Decrease in ownership interest in consolidated subsidiaries 28, Acquisition of subsidiaries 7 (126,333) -- Acquisition of additional interest in jointly control entities 7 (28,745) -- Proceeds from partial sale of proportionately consolidated joint venture 72, Acquisitions of investment property 18 (40,003) (32,270) Increase in investments in debt securities (2,085,471) (4,339,422) Acquisition of property and equipment and intangible assets (707,513) (666,089) Proceeds from sale of property and equipment 39,204 58,135 Proceeds from sale of investment property -- 9,481 Cash flows used in investing activities (2,882,507) (4,971,530) Cash flows from financing activities Change in short-term bank borrowings, net 306, ,023 Change in long-term bank borrowings, net 1,670,936 1,135,831 Change in subordinated liabilities (3,647) 13,067 Cash flows provided by financing activities 1,973,693 1,603,921 Net (decrease) / increase in cash and cash equivalents (919,242) 265,738 Cash and cash equivalents at 1 January 3,481,405 3,215,667 Cash and cash equivalents at 31 December 27 2,562,163 3,481,405 The accompanying notes are an integral part of these consolidated financial statements. 6

11 Notes to the consolidated financial statements Notes Description Pages 1 Reporting entity 8 2 Basis of preparation 8 3 Significant accounting policies 14 4 Determination of fair values 36 5 Financial risk management 38 6 Segment reporting 53 7 Acquisitions 60 8 Revenues and cost of revenues 62 9 Administrative expenses Impairment losses, net Other operating income, net Net finance costs Taxation Property and equipment Intangible assets Investments in debt securities Investments in equity securities Investment property Other non-current assets Inventories Accounts receivable Due from/due to customers for contract work Other current assets Banking loans and advances to customers Banking loans and advances to banks Financial assets at fair value through profit or loss Cash and cash equivalents Capital and reserves Long-term bank borrowings Subordinated liabilities Other non-current liabilities Retirement benefit obligation Short-term bank borrowings Deposits Obligations under repurchase agreements Accounts payable Other current liabilities Commitments and contingencies Related party disclosures Financial instruments Use of estimates and judgments Group enterprises Significant events Subsequent events 140 Appendix: Supplementary information 7

12 1 Reporting entity Doğuş Holding Anonim Şirketi ( Doğuş Holding or the Company ) was established in 1975 to invest in and coordinate the activities of companies operating in different industries, including banking and finance, automotive, construction, tourism, media, real estate and energy and is registered in Turkey. Doğuş Holding is owned and managed by the members of Şahenk Family. As at 31 December 2010, Doğuş Holding has 72 (2009: 63) subsidiaries (the Subsidiaries ), 42 (2009: 40) joint ventures (the Joint Ventures ) and 9 (2009: 8) associates (the Associates ) (referred to as the Group or Doğuş Group herein and after). The consolidated financial statements of Doğuş Group as at and for the year ended 31 December 2010 comprises Doğuş Holding and its subsidiaries and the Group s interest in associates and jointly controlled entities. As explained in more detail in note 42, Doğuş Holding holds controlling interest directly or indirectly via other companies owned and/or exercising the control over the voting rights of the shares held by the members of the Şahenk Family, in all its subsidiaries included in the Group. The Group operates partnerships and has distribution, management and franchise agreements with internationally recognised brand names, such as General Electric Consumer Finance, Volkswagen AG, Volkswagen Finance AG, Audi AG, Porsche AG, Bentley Motors Limited, Seat SA, Scania, Krone, Meiller Fahrzeug&Maschinenfabrik-GMBH&Co KG, Lamborghini S.p.A., Thermo King, ITT Sheraton, Neckerman Reisen, Hyatt International Ltd., HMS International Hotel GMBH, Emporio Armani, Guccio Gucci Spa, CNBC, Condé Nast New Markets Europe/Africa NC (Vogue), Loro Piana, Aldiana GMBH and Starwood Hotel & Resort Worldwide Inc.. The address of the registered office of Doğuş Holding is as follows: Eski Büyükdere Caddesi Oycan Plaza No: Maslak/ İstanbul-Turkey The number of employees of the Group at 31 December 2010 is approximately 28,000 (2009: 28,000). 2 Basis of preparation (a) Statement of compliance Doğuş Group entities operating in Turkey maintain their books of account and prepare their statutory financial statements in Turkish Lira ( TL ) in accordance with the Accounting Practice Regulations as promulgated by the Banking Regulatory and Supervision Agency ( BRSA ) applicable to Türkiye Garanti Bankası Anonim Şirketi ( Garanti Bank ), Turkish insurance legislation and accounting principles applicable to insurance business, and accounting principles per Turkish Uniform Chart of Accounts and per Capital Market Board of Turkey applicable to entities operating in other businesses. Doğuş Group s foreign entities maintain their books of account and prepare their statutory financial statements in accordance with the generally accepted accounting principles and the related legislation applicable in the countries they operate. The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ). The consolidated financial statements were authorised for issue by Doğuş Holding s management on April The Doğuş Holding s General Assembly and the other reporting bodies have the power to amend the consolidated financial statements after their issue. 8

13 2 Basis of preparation (continued) (b) (c) (d) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the following: derivative financial instruments are measured at fair value, available-for-sale financial assets are measured at fair value, financial instruments at fair value through profit and loss are measured at fair value, investment property is measured at fair value, certain tangible assets are measured at fair value. The methods used to measure the fair values are discussed further in note 4. Functional and presentation currency These consolidated financial statements are presented in TL which is Doğuş Holding s functional currency. All financial information presented in TL has been rounded to the nearest thousand. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes: Note 16 Investment in debt securities Note 24 Banking loans and advances to customers Note 26 Financial assets at fair value through profit or loss Note 34 Deposits Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 4 Determination of fair values Note 13 Taxation (utilisation of tax losses) Note 15 Intangible assets Note 32 Retirement benefit obligation Note 38 Commitments and contingencies Note 40 Financial instruments 9

14 2 Basis of preparation (continued) (e) (i) (ii) Changes in accounting policies Overview Starting as of 1 January 2010, in accordance with the change in IFRS, the Group has changed its accounting policies in the following areas: Accounting for business combinations Accounting for acquisition of non-controlling interests Accounting for business combinations From 1 January 2010 the Group has applied IFRS 3 Business Combinations (2008) in accounting for business combinations. The change in accounting policy has been applied prospectively. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. Acquisitions on or after 1 January 2010 For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of preexisting relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. 10

15 2 Basis of preparation (continued) (e) (ii) (iii) Changes in accounting policies (continued) Accounting for business combinations (continued) Acquisitions before 1 January 2010 For acquisitions before 1 January 2010, goodwill represents the excess of the cost of the acquisition over the Group s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisition. See note 7 for the application of the new policy to the business combination that occurred during the year. Accounting for acquisitions of non-controlling interests From 1 January 2010 the Group has applied IAS 27 Consolidated and Separate Financial Statements (2008) in accounting for acquisitions of non-controlling interests. The change in accounting policy has been applied prospectively. Under the new accounting policy, acquisitions of non-controlling interests are accounted for as transactions with equity holders in their capacity as equity holders and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on proportionate amount of the net assets of the subsidiary. Previously, goodwill was recognised on the acquisition of non-controlling interests in a subsidiary, which represented the excess of the cost of the additional investment over the carrying amount of the interest in the net assets acquired at the date of the transaction. 11

16 2 Basis of preparation (continued) (f) Comparative information The accompanying consolidated financial statements are presented comparatively to give a true and fair view of financial performance of the Group. Certain comparative amounts have been reclassified to conform with the current year s presentation as summarised below: Statement of financial position Amount reported as at 31 December 2008 Effect of reclassification Restated amount as at 1 January 2009 Non-current assets Investments in debt securities 7,972,673 (1,172,080) 6,800,593 Accounts receivable -- 62,630 62,630 Banking loans and advances to customers -- 8,886,696 8,886,696 Banking loans and advances to banks , ,456 Financial assets at fair value through profit or loss -- 47,251 47,251 Other non-current assets 827,445 (389,475) 437,970 8,800,118 8,047,478 16,847,596 Current assets Investments in debt securities -- 1,172,080 1,172,080 Accounts receivable 1,214,537 (62,630) 1,151,907 Other current assets 738, ,475 1,127,742 Banking loans and advances to customers 16,560,166 (8,886,696) 7,673,470 Banking loans and advances to banks 2,418,882 (612,456) 1,806,426 Financial assets at fair value through profit or loss 76,952 (47,251) 29,701 21,008,804 (8,047,478) 12,961,326 29,808, ,808,922 Non-current liabilities Subordinated liabilities 286,344 (16,098) 270,246 Deposits , ,003 Obligations under repurchase agreements , ,771 Other non-current liabilities 545, , , , ,483 1,476,025 Current liabilities Subordinated liabilities -- 16,098 16,098 Deposits 17,418,355 (387,003) 17,031,352 Obligations under repurchase agreements 3,370,491 (172,771) 3,197,720 Other current liabilities 1,281,280 (100,807) 1,180,473 22,070,126 (644,483) 21,425,643 22,901, ,901,668 12

17 2 Basis of preparation (continued) (f) Comparative information (continued) Statement of financial position Amount reported as at 31 December 2009 Effect of reclassification Restated amount as at 31 December 2009 Non-current assets Investments in debt securities 11,292,586 (3,085,304) 8,207,282 Accounts receivable -- 6,118 6,118 Banking loans and advances to customers -- 8,925,379 8,925,379 Banking loans and advances to banks -- 1,390,257 1,390,257 Financial assets at fair value through profit or loss -- 39,821 39,821 Other non-current assets 1,028,947 (553,751) 475,196 12,321,533 6,722,520 19,044,053 Current assets Investments in debt securities -- 3,085,304 3,085,304 Accounts receivable 1,537,170 (6,118) 1,531,052 Other current assets 710, ,751 1,263,943 Banking loans and advances to customers 16,618,038 (8,925,379) 7,692,659 Banking loans and advances to banks 3,254,878 (1,390,257) 1,864,621 Financial assets at fair value through profit or loss 180,384 (39,821) 140,563 22,300,662 (6,722,520) 15,578,142 34,622, ,622,195 Non-current liabilities Subordinated liabilities 299,411 (9,469) 289,942 Deposits , ,814 Obligations under repurchase agreements -- 47,103 47,103 Other non-current liabilities 573, , , , ,305 1,412,841 Current liabilities Subordinated liabilities -- 9,469 9,469 Deposits 20,669,122 (321,814) 20,347,308 Obligations under repurchase agreements 3,254,178 (47,103) 3,207,075 Other current liabilities 1,487,260 (180,857) 1,306,403 25,410,560 (540,305) 24,870,255 26,283, ,283,096 13

18 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in note 2(e), which addresses changes in accounting policies. (a) Basis of consolidation The accompanying consolidated financial statements include the accounts of the parent company, Doğuş Holding, its subsidiaries, joint ventures and associates on the basis set out in sections below. The financial statements of the entities included in the consolidation have been prepared as at the date of the consolidated financial statements. (i) Business combinations The Group has applied the new accounting policy with respect to accounting for business combinations. See note 2(e)(ii) for further details. (ii) Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when it is necessary to align them with the policies adopted by the Group. Losses applicable to the noncontrolling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. (iii) Special purpose entities The Group has established special purpose entities ( SPEs ) to accomplish a narrow and well defined objective such as securitisation of particular assets, or the execution of specific borrowing or lending transactions. The Group does not have any direct or indirect shareholdings in these entities. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE s risks and rewards, the Group concludes that it controls the SPE. SPEs controlled by the Group were established under terms that impose strict limitations on the decision-making powers of the SPEs management and that result in the Group receiving the majority of the benefits related to the SPEs operations and net assets, being exposed to risks incident to the SPEs activities, and retaining the majority of the residual or ownership risks related to the SPE or their assets. (iv) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method and are initially recognised at cost. The consolidated financial statements include the Group s share of profit and loss and other comprehensive income, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds its interest in an associates, the carrying amount of that interest, including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. 14

19 3 Significant accounting policies (a) (v) (vi) (vii) (b) (c) (i) Basis of consolidation (continued) Joint ventures Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the proportionate consolidation method. The consolidated financial statements include the Group s proportionate share of the enterprises assets, liabilities, revenues and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. Transactions eliminated on consolidation Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Loss of control Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained Accounting in hyperinflationary economies Until 31 December 2005, the financial statements of the Turkish entities have been restated for the changes in the general purchasing power of the Turkish Lira based on IAS 29 Financial Reporting in Hyperinflationary Economies. Beginning from January 2006, it was declared that Turkey should be considered a nonhyperinflationary economy under IAS 29. Therefore, IAS 29 has not been applied to the accompanying consolidated financial statements since 1 January Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Nonmonetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation (see (iii) below), or qualifying cash flow hedges, which are recognised in other comprehensive income. 15

20 3 Significant accounting policies (continued) (c) Foreign currency (continued) (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to TL at exchange rates at the reporting date. The income and expenses of foreign operations are translated to TL at average exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. When the settlement of a monetary item receivable from or payable to a foreign operations is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented within equity in the translation reserve. (iii) Hedge of net investment in foreign operation The Group applies hedge accounting to foreign currency differences arising between the functional currency of the foreign operation and the parent entity s functional currency (TL), regardless of whether the net investment is held directly or through an intermediate parent. Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in other comprehensive income, to the extent that the hedge is effective, and are presented within equity in the translation reserve. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of net investment is disposed of, the relevant amount in the translation reserve is transferred to profit or loss as a part of the profit or loss on disposal. (d) Financial instruments (i) Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. 16

21 3 Significant accounting policies (continued) (d) Financial instruments (continued) (i) Non-derivative financial assets (continued) Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, held-to-maturity financial assets and loans and receivables and available-for-sale financial assets. Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. These include investments and certain purchased loans. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Held to maturity financial assets If the Group has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held to maturity financial assets are measured at amortised cost using the effective interest method less and impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years. Held to maturity financial assets include certain banking loans and advances to banks and customers and certain debt instruments. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise banking loans and advances to customers and banks, trade and other receivables, including service concession receivables, and due from related parties. Finance lease receivables Leases where the entire risks and rewards incident to ownership of an asset are substantially transferred to the lessee are classified as finance leases. A receivable at an amount equal to the present value of the lease payments, including any guaranteed residual value, is recognised. The difference between the gross receivable and the present value of the receivable is unearned finance income and is recognised over the term of the lease using the effective interest rate method. Finance lease receivables are included in banking loans and advances to customers. Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, balances with Central Bank of Turkey ( CBT ) and other central banks and other liquid assets with original maturities of three months or less. Money market placements are classified in banking loans and advances to banks. 17

22 3 Significant accounting policies (continued) (d) Financial instruments (continued) (i) (ii) Non-derivative financial assets (continued) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories of financial assets. The Group s investments in certain debt and equity instruments are classified as available-forsale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(m)) and foreign currency differences on available-for-sale equity instruments (see note 3(c)(i)), are recognised in other comprehensive income and presented within equity in the fair value reserve. When an instrument is derecognised, the gain or loss accumulated in equity is reclassified to profit or loss. Accounting for interest income and expenses for banking and finance segment is discussed in note 3 (q). Accounting for finance income and expenses for segments other than banking and finance is discussed in note 3 (t). Service concession arrangements The Group recognises a financial asset arising from a service concession arrangement when it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction or upgrade services provided. Such financial assets are measured at fair value upon initial recognition. Subsequent to initial recognition the financial assets are measured at amortised cost. If the Group is paid for the construction services partly by a financial asset and partly by an intangible asset, then each component of the consideration received or receivable is accounted for separately and is recognised initially at the fair value of the consideration received or receivable (see also note 3(f)(ii)). Other Other non derivative financial instruments are measured at amortised cost using the effective interest rate method, less any impairment losses (see accounting policy 3(m)). Non-derivative financial liabilities The Group initially recognises debt securities issued, deposits, obligations under repurchase agreements, due to related parties and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. 18

23 3 Significant accounting policies (continued) (d) (ii) (iii) Financial instruments (continued) Non-derivative financial liabilities (continued) The Group has the following non-derivative financial liabilities: deposits, obligations under repurchase agreements, borrowings, accounts and other payables, subordinated liabilities, due to related parties and liabilities from short-term sales of financial instruments. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. Derivative financial instruments including hedge accounting The Group holds derivative financial instruments to hedge its certain risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. On initial designation of the derivative as the hedging instrument, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction and the hedged risk, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items attributable to the hedged risk, and whether the actual results of each hedge are within a range of percent. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported profit or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss as incurred. All trading derivatives in a net receivable position (positive fair value) as well as options purchased are reported as trading assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as trading liabilities. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. 19

24 3 Significant accounting policies (continued) (d) Financial instruments (continued) (iii) Derivative financial instruments, including hedge accounting (continued) Cash flow hedges (continued) When the hedged item is a non-financial asset, the amount accumulated in equity is included in the carrying amount of the asset when the asset is recognised. In other cases, the amount accumulated in equity is reclassified to profit or loss in the same period that the hedged item affects profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the balance in equity is reclassified in profit or loss. Separable embedded derivatives Changes in the fair value of separated embedded derivatives are recognized immediately in profit or loss. Other non-trading derivatives When a derivative financial instrument is not designated in a hedge relationship that qualifies for hedge accounting, all changes in its fair value are recognised immediately in profit or loss. (iv) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Repurchase, disposal and reissue of share capital (Treasury shares) When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in share premium. (e) Property and equipment (i) Recognition and measurement The costs of items of property and equipment purchased before 31 December 2005 are restated for the effects of inflation in TL units current at 31 December 2005 pursuant to IAS 29. Property and equipment purchased after this date are recorded at their historical costs. Accordingly, property and equipment are measured at cost, less accumulated depreciation and accumulated impairment losses, if any (see accounting policy 3m), except as explained below: In the first year of application of IAS 29, the construction machineries and equipment owned by a consolidated entity, Doğuş İnşaat ve Ticaret Anonim Şirketi ( Doğuş İnşaat ), were reflected at their replacement costs on the basis of publicly available information on their quoted prices or on the prices of the comparable items as at 31 December 1997; and such replacement costs were adjusted for the effects of inflation in TL units current at 31 December 2005 pursuant to IAS 29. In 2006, Doğuş İnşaat assigned a third party appraisal company to count and evaluate the market prices of its construction machineries and motor vehicles. Based on the report of the appraisal company Doğuş İnşaat adjusted its construction machineries and motor vehicles. 20