FINASTA ASSET MANAGEMENT UAB

Transcription

1 FINASTA ASSET MANAGEMENT UAB COMPANY S PREPARED ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS, AS ADOPTED BY THE EUROPEAN UNION, PRESENTED TOGETHER WITH INDEPENDENT AUDITOR S REPORT

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5 ANNUAL REPORT FOR THE YEAR 2013 (All amounts are in the litas (LTL), unless otherwise stated) Main data about the Company ANNUAL REPORT OF FINASTA ASSET MANAGEMENT UAB FOR 2013 Finasta Asset Management UAB (hereinafter the Company) the company providing asset management services to private and institutional clients. Services of the Company include management of pension, investment funds and private portfolios, individual advisory services. In total, the Company manages assets of nearly 429 million LTL, it has 52 thousand customers. The Company manages three investment funds, one umbrella investment fund and eight pension funds, as well as 210 private client portfolios. The Company has close cooperation with Lithuanian and foreign financial institutions. Address: Maironio str. 11, Vilnius. The Company has no subsidiaries or branches. Sole shareholder: The sole shareholder is Finasta Holding AB. Since the decision of Government of Republic of Lithuania made on 16 November 2011 to nationalize Bankas Snoras AB and announcement of bankruptcy of Bankas Snoras AB on 7 December 2011, the ultimate controlling shareholder at 31 December 2013 is the bankruptcy administrator of Bankas Snoras AB (in the process of bankruptcy). Shares: As of 31 December 2013 share capital of the Company is LTL 1,950,000 and was divided to 1,950,000 ordinary shares with a nominal value of LTL 1 each. Head of the Company: As at 31 December 2012 and 2013 Andrej Cyba was the general director of the Company. Board of Directors: As at 31 December 2013 the Board consisted of 4 members. They were: Andrius Barštys Chairman of the Board; Andrej Cyba member; Aurimas Martišauskas member; Vitalijus Šostak member. Significant events in 2013 As at 8 January 2013 transfer agreement of the rights to manage and distribute investment fund Prudentis Baltic Fund was signed with Prudentis UAB. As at 18 February 2013 the Supreme Administrative Court of Lithuania rejected the appeals of the Company and of the Bank of Lithuania (as the successor in title of the Securities Commission) in administrative proceeding and the decision of the Vilnius Regional Administrative Court remained unchanged. By decision of 21 August 2012, Vilnius Regional Administrative Court, after examining the case, decided to reduce the fine, appointed by the Securities Commission, to LTL 10,000 and to compensate the investment result to the Company s pension funds that amounts LTL 362,368. As at 19 February 2013 the Supervision Authority of the Bank of Lithuania allowed to change the rules of the investment fund Prudentis Baltic Fund. Fund name was changed to Finasta Baltic Fund. As at 24 May 2013 the Supervision Authority of the Bank of Lithuania ruled that founding documents of open alternative investment fund Finasta Sigma are no longer valid. Fund was closed based on decision of the Board of the Company. Significant events of post-financial-year As at 4 March 2014 the Supervision Authority of the Bank of Lithuania allowed merging two pension funds managed by the Company with other two pension funds with similar profile. It was allowed to merge a pension fund for the accumulation of a portion of the state social insurance contribution Finasta moderate pension fund into a pension fund for the accumulation of a portion of the state social insurance contribution Finasta conservative investment pension fund, and a pension fund for the accumulation of a portion of the state social insurance contribution Finasta balanced pension fund into a pension fund for the accumulation of a portion of the state social insurance contribution Finasta active investment pension fund. After the merger of the pension funds the Company will manage four II pillar pension funds instead of six which will have clearly defined investment strategy and investment risk. Also, my merging above pension funds it is planned to unify fees for participants of pension funds with similar investment strategy. Overview of the status, performance and development of the Company The main activity of the Company is the management of the clients assets. Specialization of the Company Central and Eastern Europe companies shares and debt securities where the Company invests majority of managed funds. Most of the funds are attracted through intermediaries, the biggest of which is Bankas Finasta AB. 5

6 ANNUAL REPORT FOR THE YEAR 2013 (All amounts are in the litas (LTL), unless otherwise stated) Investment funds As at 31 December 2013 total assets managed by the Company in investment funds was LTL million (LTL million as at 31 December 2012). Total assets in the managed funds increased due to the increase in the prices of financial instruments funds and due to the growth in number of participants in Finasta Emerging Europe Bond Subfund According to the data of the Bank of Lithuania, the value of all investment funds of Lithuanian asset management companies in the IV quarter of 2013 comparing to 2012, increased by 30.7% - from LTL million to LTL million. Participants of investment funds managed by the Company constituted almost half of all registered collective investment subjects participants in Lithuania. During the 2013 this share increased from 42.5% to 44.82%. The largest fund by the number of participants fourth year in a row was Finasta New Europe fund (4,652 participants). Finasta Russia TOP20 subfund had 1,512 participants. The Company in 2013 was the third largest Lithuanian asset management company by the assets of the managed investment funds with the share of 16.09% in 2103 (18.7% in 2012). Results and assets of the managed funds are provided in the table below: Name of the fund Fund unit value LTL NAV LTL Finasta Vitality Fund ,994,515 5,216,778 Finasta Emerging Europe Bond Subfund ,039,777 33,658,606 Finasta Global Flexible Subfund ,318,609 2,650,931 Finasta New Europe Subfund ,288,267 43,889,422 Finasta World Equity Fund Subfund ,393,662 1,457,617 Finasta Russia TOP20 Subfund ,345,996 16,544,443 Finasta Delta fund ,457,129 Real estate fund My residence 167, , ,259,652 19,990,118 Finasta Baltic fund ,175,735 - Total investment funds: ,816, ,865,044 As of 8 January 2013 fund Prudentis Baltic Fund was acquired. On 19 February 2013 name of this fund was changed to Finasta Baltic Fund. 6

7 ANNUAL REPORT FOR THE YEAR 2013 (All amounts are in the litas (LTL), unless otherwise stated) Overview of the status, performance and development of the Company (continued) Pension funds In 2012 financial markets were favourable to the investors and all pension funds managed by the Company earned positive returns. It is worth noting that during last year II pillar pension funds managed by the Company received influx of participants of the closed fund Citadele Pensija 1 managed by the company Citadele Investiciju Valdymas. The Bank of Lithuania acknowledged that out of nine conservative investment pension funds, acting in the market, Finasta conservative investment pension fund had the biggest ratio between return and risk taken. Based on this analysis, participants of the closed fund where moved to the pension fund managed by the Company. Last year was also important due to the fact that it was the tenth year of the activity II pillar pension funds. By reviewing long term results, i.e. starting from the beginning of the pension reform, pension funds of the Company showed the highest return in three out of four risk groups (source: Bank of Lithuania). In the top five pension funds investing in shares of the decade there are three funds managed by the Company (first, second and fourth place based on investment returns since inception). In the top three pension funds with conservative strategy of the decade the first place belongs to the Finasta conservative investment pension fund, also managed by the Company Expectations about world economy are favourable for investments, thus positive trends in financial markets should continue. Of course, after prolonged increase in share prices of the developed markets price volatility throughout the year is quite likely. Very important question to the investors in shares can the upward trend be intercepted by the emerging markets? Prices of equities in developed markets became quite high, while in emerging markets much lower thus wide price differential might draw the attention of investors to the wide region of emerging markets. And while emerging markets remain outside the attention of investors, the team of investment managers of the Company has excellent opportunities to look for equities of attractive companies and bonds for favourable prices II pillar fund Short fund investment strategy Change in unit value, m. duomenys Change in comparative index, 2013 Change in unit value since inception Finasta conservative investment Government bonds +3.2% +1.4% +58.3% pension fund Finasta growing yield pension fund Low share of equities +4.7% +0.2% % Finasta active investment pension Average share of equities +5.8% +0.1% % fund Finasta rational risk pension fund Equities +9.9% -0.7% +71.0% Finasta moderate pension fund Government bonds +1.4% +2.2% +26.1% Finasta balanced pension fund Average share of equities +4.5% +8.0% -3.9% As at 31 December 2013, the value of total assets of a pension fund for the accumulation of a portion of the state social insurance contribution was LTL million or 14.57% higher than a year ago (as at 31 December LTL million) In the end of 2013, number of participants of Company s managed II pillar pension funds was 40,165, i.e. it decreased by 1,714 participants (41,879 participants as at 31 December 2012). Unit value changes and assets under management of II pillar pension funds is provided in the table below: Name of the fund Unit value LTL NAV LTL Finasta conservative investment pension fund ,344,279 12,459,499 Finasta growing yield pension fund ,867,308 12,385,807 Finasta active investment pension fund ,928,397 37,418,326 Finasta rational risk pension fund ,827,236 57,207,286 Finasta moderate pension fund ,030,635 10,226,172 Finasta balanced pension fund ,400,968 34,739,235 Total II pillar pension funds: ,398, ,436,325 7

8 ANNUAL REPORT FOR THE YEAR 2013 (All amounts are in the litas (LTL), unless otherwise stated) Overview of the status, performance and development of the Company (continued) In the end of 2013, total value of assets in Company s managed III pillar pension funds was LTL million or 38.65% higher than a year ago (LTL million). Number of participants was 3,185 (2,823 a year ago). Unit values and assets under management are provided in table below: Name of the fund Unit value LTL NAV LTL Finasta Equity pension fund plus ,567,945 6,231,321 Finasta Bond pension fund plus ,394,597 4,558,734 Total III pillar pension funds: ,962,542 10,790,055 Management of portfolios of financial assets In the end of 2013 the Company managed 210 client portfolios while the number in the end of 2012 was 204. The value of managed portfolios increased by 6% - from LTL 86.7 million to LTL 91.9 million. The company plans to continue developing this service and attract both institutional and private clients. Growth perspectives In 2014 the Company plans to remain market leader by the number of clients in the market of investment funds and portfolio management. The main goal for 2014 is to increase managed client assets by 10%, also to increase sales of investment funds in other countries. Analysis of financial and non-financial operating results The year 2014 is expected to be stronger in terms of economic growth, but it requires one key assumption a recovery in the external markets as well. Economic prospects of the Eurozone are considered with precaution, but it is expected not to experience recession this year. Therefore if global economy accelerates and key Lithuanian export markets gain strength, our GDP should be growing faster. We are pretty conservative so far Lithuanian GDP is expected to grow 3.6% in The economy will finally return to the pre-crisis level of In 2015 GDP is expected to grow up to 5%. Eurozone GDP may grow 1.0%, German 1.7% and Russian 2.2% in No major changes in the key interest rates are expected. It is unlikely that FED or ECB would enter the phase of monetary tightening as economic conditions are not sufficient. However, this year FED should be gradually reducing its bond purchases. Thus investors focus will move for central bank liquidity to macroeconomic conditions and corporate results. Last year was favourable in terms of demand for risky assets, this year returns in the stock market are expected to be smaller. Bond returns may be slightly above inflation. Investors will remain more aligned to the developed markets, but emerging markets which have been neglected for a while may attract fresh attention. The sales revenue of the Company during the reporting period comparing to prior period increased by 21.5%. Increase occurred due to increase in assets managed by the Company, which increased due to the contributions by clients and due to investment returns on funds under management. In 2013 the Company continued to optimise operating expenses which decreased by 13 percent Respectively in 2013 the net profit of the Company was LTL 250 thousand compared to the net loss of LTL 357 thousand in In 2013 the Company did not pay dividends, the Company s share capital did not change.. 8

9 ANNUAL REPORT FOR THE YEAR 2013 (All amounts are in the litas (LTL), unless otherwise stated) Overview of the status, performance and development of the Company (continued) The main operating indicators of the Company are provided below. Clause LTL LTL Change Commissions, management and client service operating revenue 4,533,335 3,740, % Profit (Loss) before tax 232,244 (239,974) n/a Net profit (loss) 250,120 (357,369) n/a Assets 2,585,531 2,664,042 (2.9)% Equity 1,808,898 1,565, % Share book value % Indicators 2012 % 2011 % Net profit ratio 6 proc. (10) proc. * Return on assets (ROA) 10 proc. (13) proc. * Return on equity (ROE) 14 proc. (23) proc. * Links and other explanations about data provided in financial statements Annual financial reports are detailed enough, therefore, links and additional explanations are not provided. Description of main risks and uncertainty that Company faces The main kinds of risk that the Company faces in its operations is credit risk, operational risk, liquidity risk and market risk which involves interest rate risk and foreign exchange rate risk. Credit risk. It is a risk that the other party will not be able to fulfill its obligations to the Company. The Company applies tools with which it seeks to constantly ensure that transactions would be made with credible clients and amount of transactions would not exceed credit risk limits. The Company has not issued any guarantees for obligations of other parties. Operational risk: It is a kind of risk to suffer direct and (or) indirect losses because of unsuitable or unimplemented internal control processes, employees mistakes and (or) illegal actions and failures of functioning of informational systems and technologies or influence by external factors. Operational risk management is performed by implementing an internal control function, establishing the orders to limit unintended risk and plans of the business continuity, insuring assets of the Company, evaluating acceptability of the services provided by the Company, performing the product and service valuation management and internal resource redistribution functions, analyzing processes and procedures of the Company, identifying points of risk and evaluating sufficiency of their control. Liquidity risk. It is a risk not to meet one s obligations. The Company manages liquidity risk by keeping sufficient amount cash and cash equivalents through credit lines or other means of borrowing to ensure meeting of obligations. Market risk. It is a risk that the Company will suffer losses because of fluctuations in market variables. The most relevant market risks for company are interest rate risk and foreign exchange rate risk. Debts of the company were short-term, therefore, interest rate risk is considered to be insignificant. Also, the Company did not have any financial instruments which purpose is to control interest rate risk. The main exchange rate risk that the Company faces comes from transactions in foreign currencies and has an open position for some foreign currencies. The policy of the company is to combine cash flows from very likely future transaction in every foreign currency. Scope of financial risk and aims of management The company manages financial risk as explained in annual financial reports. Scope of financial risk is explained in the same sections. Performing risk assessment and management activities the Company uses principles of prudence and conservatism. 9

10 ANNUAL REPORT FOR THE YEAR 2013 (All amounts are in the litas (LTL), unless otherwise stated) Overview of the status, performance and development of the Company (continued) Personnel management policy As at 31 December 2013, the number of Employees (except staff on maternity leave) working at UAB Finasta Asset Management was 30 compared to 28 by the end of % of staff has a high education (holders of bachelor and master degrees). The Company encourages and provides the employees with the opportunities to obtain brokerage license. 30 % of employees (i.e. 9 employees) are holders of brokerage license. The Company s staff training was conducted based on needs of employees and the need to develop necessary competencies. Based on the size of the Company and organisational structure Remuneration Committee is not established. Decision on salary of the regulated employees is made by the Board of the company by the suggestion of direct supervisor, ensuring that there are no preconditions for the threats to arise on objectiveness in the work performed by regulated employees, also by encouraging effective and reliable risk management in the Company. While implementing requirements of paragraph III of the decision of the Board of the Bank of Lithuania on "approval of the minimum requirements for remuneration Policy of employees in brokerage, asset management and investment management companies" dated 12 July 2012, the Company discloses that in 2013 the Company employed 12 employees having significant impact on the risk undertaken by the Company and their gross remuneration for 2013 totalled LTL 805 thousand. The data for 2013 financial year on specially regulated employees number and remuneration amounts are presented in the table below. Number of employees Fixed pay for year, thousand LTL Variable pay Management Staff Total: In 2013 severance pay to special regulated employees was not made. Regular pay includes official salary and additional benefits, which are paid to all employees regardless employee s performance based on defined criteria. Criteria are indicated in Staff Management Policy (e.g. allowance in case of death, contributions to III pillar pension funds, and additional paid holidays for workers who study and others). In accordance with the remuneration Policy approved by the Company, the employees having significant impact on the risk taken by the Company are paid with fixed pay only. Also, considering the current situation of the Company one-off retention payment was made to the part of the management of the Company in 2013 in amount of LTL 39 thousand in order to maintain them as critically important employees and to ensure continuity of business activities. The remuneration for Company s employees is defined based on the following principles: The salary is set in accordance with long term objectives and strategies of the Company it s values and interests, situation in salary market, capital and liquidity situation of the Company and also aiming at managing properly the risks; To comply with operational risk management Policy and ensure that the employee is not encouraged to take excessive risks; To match the long term objectives of the Company with the personal objectives of the employee; To ensure the implementation of protection principles for investors and Company s customers; To ensure as far as possible the avoidance of potential interest conflicts arising from dependence of remuneration practices between the employees working in different functions that may enter into potential interest conflict. In implementing these principles, the Company strives to match the interests of shareholders, management and employees while attracting, retaining and motivating the employees to represent properly the interests of the Company by deploying effectively its professional expertise and capabilities. 10

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17 Notes to the financial statements 1 General information Finasta Asset Management UAB (hereinafter the Company ) is a private limited liability company registered in the Republic of Lithuania. The address of its registered office is as follows: Maironio g. 11, Vilnius, Lithuania. The Company was established and registered with the Register of Legal Entities on 21 July 2003 under the name of Finasta Investicijų Valdymas UAB. On 8 October 2009, the Company was renamed to Finasta Asset Management UAB. As at 31 December 2013 and 2012, the sole shareholder of the Company was Finasta Holding AB. As at 31 December 2013 and 2012, the authorised share capital was divided into 1,950,000 ordinary registered shares with a nominal value of LTL 1 each. All the shares were issued, registered and fully paid. As at 31 December 2010, the ultimate controlling party was Bankas Snoras AB. However, following the resolution adopted by the Lithuanian Government on 16 November 2011 regarding the nationalisation of Bankas Snoras AB and the announcement of bankruptcy of Bankas Snoras AB on 7 December 2011, the Company's ultimate controlling party was the bankruptcy administrator of Bankas Snoras AB (in the process of bankruptcy) as at 31 December 2013 and As at 31 December 2013, the Company had 30 (31 December 2012: 28) employees. The Company's activities are regulated by the Lithuanian Law on Collective Investment Undertakings. On 15 January 2004, the Securities Commission of the Republic of Lithuania issued a license No. VĮK 005 to Finasta Asset Management UAB which was supplemented on 21 August The license issued permits the Company to perform the following operations: - Manage coordinated collective investment subjects; - Manage collective investment subjects investing into transferable securities; - Manage real estate collective investment subjects; - Manage private capital collective investment subjects; - Manage collective investment subjects investing into other collective investment subjects; - Manage alternative investment collective investment subjects; - Manage financial securities portfolios of other bodies; - Manage II pillar pension funds financial securities portfolios; - Manage III pillar pension funds financial securities portfolios; - Consult on issues relating to investment into financial instruments; - Safe-keep and handle investment units of investment funds managed by other management companies or shares of investment companies. As at 31 December 2013, the Company managed 3 investment funds, 1 umbrella investment fund consisting of 5 sub-funds and 8 pension funds, as well as 210 portfolios of individual clients (31 December 2012: 4 investment funds, 1 umbrella investment fund consisting of 5 sub-funds and 8 pension funds, as well as 204 portfolios of individual clients). On 8 January 2013, the transfer-acceptance statement on assets management was signed with Prudentis UAB regarding the rights to manage and distribute units of the investment fund Prudentis Baltic Fund. On 19 February 2013, this fund was renamed to Finasta Baltic Fund. On 24 May 2013, following the examination of the request of Finasta Asset Management UAB, the Supervision Service of the Bank of Lithuania recognised the establishment documents of an open type special alternative investment fund Finasta Sigma as null and void. This fund has been dissolved by the decision of the Board of Finasta Asset Management UAB. As required by the Lithuanian Law on Companies the management prepared annual financial statements which should be approved at the General Shareholders Meeting. The shareholders of the Bank have a statutory right to approve these financial statements or not to approve them and to require preparation of a new set of the financial statements. 17

18 2 Going concern basis Bankas Snoras BAB (in the process of bankruptcy), Finasta Asset Management UAB (hereinafter "the Company") the ultimate parent company, was placed into bankruptcy on 7 December 2011, which had a material effect on the Company s financial result for Uncertainty regarding the Company's future activities caused reduction in the number of the Company's client base in As a result, assets managed by the Company reduced by 11% or down to LTL 303 million as at 31 December In 2012, the number of the Company's clients increased and business activities became stable. Assets of clients under management rose by 23% or up to LTL 393 million. In 2012, improved client confidence, favourable conditions in financial markets and strengthened control over operating expenses enabled the Company to earn profit before non-recurring expenses. Efforts made in 2012 led to successful and profitable activities in In 2013, the Company continued to focus on attracting new clients and conducted normal business activities irrespective of surrounding circumstances. Consequently, assets managed by the Company increased up to LTL 429 million in 2013 and the net profit earned by the Company totalled LTL 250 thousand. Currently, the bankruptcy administrator of Bankas Snoras BAB (in the process of bankruptcy), the ultimate parent company of the Company, continues the sale of the Company and Finasta Group. As of the date of these financial statements, the only investor LHV Group AS (Estonia) has received a permission from the Bank of Lithuania to acquire Bankas Finasta AB, brokerage company Finasta FMI AB and asset management company Finasta Asset Management UAB. On the 30 January 2014 the Bank of Lithuania has granted the permission to extend the term for acquisition completion up to 30 April 2014 (initial term was 31 January 2014). The term was extended on the request of the investor, as it will have to perform due diligence procedures and receive a permission from the Competition Council of the Republic of Lithuania. Although the possibility for other investors to participate in the acquisition process is still available as of the date of these financial statements, there were no official confirmations about new participants in the acquisition process. Management of the Company believes that LHV Group AS (Estonia) is the most likely acquirer of Bankas Finasta AB and other aforementioned companies. Management strongly believes that before the new shareholder completes the acquisition process, the Company will tackle all challenges in 2014 by resorting to proper tactical measures such as cost reduction and other appropriate measures if needed. Moreover, in case additional capital is required, the Company will apply to the bankruptcy administrator and the Committee of Creditors. Therefore, in order to comply with capital adequacy ratio, the Company needs ongoing support from shareholders. Carefully considering the aforementioned facts, management puts all efforts to remove material uncertainty and relying on the positive outcome of actions described above, management continues to adopt the going concern basis in preparing these financial statements. 3 Significant accounting policies The principal accounting policies applied in the preparation of the Company s financial statements for 2013 are set out below Basis of preparation These financial statements have been prepared on a historical cost basis, except for derivative financial instruments and available-for-sale financial assets stated at fair value. These financial statements of the Bank have been prepared on a going concern basis, consistently applying International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) effective as at 31 December Presentation currency The Company records all amounts in the litas and the amounts in these financial statements are also presented in the national currency of the Republic of Lithuania, the litas (LTL). With effect from 2 February 2002, Lithuanian litas has been pegged to the euro at an exchange rate of LTL to EUR 1, and the exchange rates of the litas against other currencies are set daily by the Bank of Lithuania. Adoption of new and (or) amended IFRS and interpretations of the International Financial Reporting Interpretations Committee (IFRIC) 18

19 3 Significant accounting policies (continued) 3.1 Basis of preparation (continued) New and amended IFRS and IFRIC interpretations adopted by the Company as at 1 January 2013 were as follows: IFRS 13, 'Fair value measurement' (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013). The standard aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The standard resulted in additional disclosures in the financial statements. Refer to Note 24. Amendments to IAS 1, 'Presentation of financial statements' (issued in June 2011, effective for annual periods beginning on or after 1 July 2012), change the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to statement of profit or loss and other comprehensive income. The amended standard resulted in a respective grouping of other comprehensive income in these financial statements. Amendment to IAS 19, 'Employee benefits' (issued in June 2011 and effective for periods beginning on or after 1 January 2013). The amended standard makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The amended standard did not result in any changes in these financial statements. Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23, Borrowing costs, retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual financial statements. These improvements did not result in any changes in these financial statements. Standards approved but not yet effective The following IFRS and IFRIC interpretations have been approved, but not yet effective and are expected to have impact on the Company's financial statements: Offsetting financial assets and financial liabilities Amendment to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of currently has a legally enforceable right of set-off and that some gross settlement systems may be considered equivalent to net settlement. The Company is considering the implications of the amendment, the impact on the Company and the timing of its adoption by the Company. 19

20 3 Significant accounting policies (continued) 3.1 Basis of preparation (continued) 3.2. Property, plant and equipment Property, plant and equipment is stated at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and estimated impairment. Cost includes replacement expenses of parts of property, plant and equipment as incurred, if these expenses meet the recognition criteria to be classified as assets. Depreciation is calculated using the straight-line method over useful lives established as follows: Computer hardware 3-4 years Office equipment 4-6 years The assets residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at the end of each financial year to ensure than they reflect economic benefits expected to be derived from property, plant and equipment. All other property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year in which the asset is derecognised Intangible assets The Company's intangible assets include computer software and agreements acquired. Intangible assets are initially stated at acquisition cost. Intangible assets are recognised only when it is probable that future economic benefits associated with these assets will flow to the Company and the value of assets can be measured reliably. Following the initial recognition, intangible assets are stated at acquisition cost, less accumulated amortisation and impairment losses, if any. Intangible assets, excluding goodwill, is deemed to have a finite useful life. Intangible assets are amortised using the straight-line method over the estimated useful live. Computer software Costs associated with the acquisition of new computer software are capitalised and recognised as intangible assets, provided that such costs are not associated with computer hardware. Computer software is amortised over a period of 2-4 years. Costs incurred in relation to restoration or maintenance of the expected economic benefits from operation of the existing software systems are recognised as expenses in the period during which such maintenance and support works have been carried out. Agreements Agreements include agreements on pension accumulation funds acquired as an aggregate of rights and obligations. On 17 December 2007, the Company signed the Agreement on the Transfer of Rights and Obligations with PZU Lietuva Gyvybės Draudimas UAB and transfer-acceptance statements on 20 December 2007 under which the Company took over assets, rights and obligations of PZU Lietuva Gyvybės Draudimas UAB arising from four II pillar pension funds (pension funds accumulated from a part of the State Social Security contributions). Agreements were amortised over the period of 10 years. With contributions to pension funds and management fees declining and the overall economic situation in the country changing, on 30 December 2011 the Company's management decided to account for a 100% provision for impairment of these intangible assets and to recognise the amount of LTL 3,200,000 as expenses Impairment of non-financial assets The Company assess at the reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset's recoverable amount. The recoverable amount is the higher of an asset s net realisable value and value in use. An asset's recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are independent of those from other assets or groups of assets Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In assessing fair value, less estimated selling expenses, a respective valuation method is used. Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset. 20

21 3 Significant accounting policies (continued) For assets an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If any such indication exists, the Company makes an estimate of the asset's recoverable. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation (if any), had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss Investments and other financial assets Financial assets in the scope of IAS 39 are classified as either financial assets held at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. Financial assets are initially recognised at acquisition cost which equals to the fair value of consideration paid plus transaction costs for all financial assets not carried at fair value through profit or loss. The Company determines the classification of its financial assets on initial recognition and, where allowed and appropriate, re-evaluates this classification at each financial year-end. Regular purchases and sales of financial assets are recognised on the settlement-date the date on which the Company commits to purchase the asset. Regular purchases and sales of financial assets require delivering the assets over the term set in regulations or market agreement. During the reporting period the Company's financial assets were classified as loans and receivables and available-for-sale financial assets. Available-for-sale financial assets had the most significant impact on the Company's financial performance during the reporting period. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less impairment. Amortised cost is calculated taking into account all acquisition discounts or extra pays and fees treated as integral part of effective interest rate or transaction price. Gains and losses are recognised in the income statement when the loans and receivables are derecognised, impaired or amortised. Current amounts receivable are carried at cost less impairment. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as held-for-sale or are not classified in any of the three preceding categories. For the purpose of the financial statements available-for-sale financial assets are subsequently measured at fair value including gain or loss that was previously recognised in the statement of comprehensive income. When the investment is sold, the accumulated gain or loss previously recognised in the statement of comprehensive income is reclassified to the income statement. Interest received or paid on investments are recognised as interest income or expense using the effective interest rate. Dividends received on investments are presented in the income statement within 'dividend income' when the right to receive the payment of dividends is established. Fair value The fair value of investments traded in active financial markets is based on quoted closing market prices available at the date of the statement of financial position. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm s length market transactions, reference to the current market value of another instrument, which is substantially the same, the discounted cash flow analysis and other valuation models. 21

22 3 Significant accounting policies (continued) 3.6. Impairment of financial assets The Company assesses at each date of the statement of financial position whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Assets stated at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e. the effective interest rate estimated at initial recognition). The carrying amount of the asset is reduced by the amount of estimated impairment loss and the amount of the loss is included in the income statement. The Company first assesses whether objective evidence of impairment exists for financial assets that are individually significant. Objective evidence of impairment may include indications that the borrower is experiencing significant financial difficulty, the probability that recovery procedures will be initiated against the borrower, an active market of the financial asset disappears, there are significant changes in technological, economic or legal conditions and circumstances surrounding the borrower's market and that there is a constant decline in the fair value of financial assets below their amortised cost. Financial assets are written off when these is no expectation of recovering them. Objective evidence in this case may include claims filed against the borrower and insufficient assets held by the borrower to settle liabilities to creditors or whereabouts of the borrower is unknown. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are reversed. Any future impairment reversal is recognised as gain or loss to the extent that the asset's carrying amount does not exceed its amortised cost at the date of reversal. Available-for-sale financial assets Investments classified as available-for-sale financial assets are tested for impairment whenever there is a prolonged significant decline in the fair value of the security below its cost. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in profit or loss. Impairment losses previously recognised in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement Financial liabilities Trade and other amounts payable, and borrowings are initially recorded at the fair value of proceeds received, less the costs of transaction. Subsequently, they are carried at amortised cost and the difference between proceeds received and the amount to be repaid over the term of the debt is recorded in profit or loss of the reporting period. If a financing agreement concluded before the date of the statement of financial position proves that the liability was non-current as of the date of of the statement of financial position, that financial liability is classified as non-current Cash and cash equivalents Cash includes cash on hand and cash in bank accounts. Cash equivalents represent short-term highly liquid investments easily convertible to a known amount of cash. The term of such investments does not exceed three months and the risk of changes in value is very insignificant. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits in current bank account, and other highly liquid current investments Share capital The share capital is presented in the statement of financial position at the amount subscribed. 22

23 3 Significant accounting policies (continued) Leases The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating lease the Company is a lessee Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Operating lease payments are recognised as expenses on a straight-line basis over the lease term and included into other administrative and operating expenses Revenue recognition Revenue is recognised when it is probable that economic benefits will flow to the Company, and a reliable estimate of the amount can be made. Revenue is measured at the fair value, net of discounts granted, refunds of overpayments and other sale fees and obligations. Revenue is recognised when the criteria indicated below are met. Sales of services Revenue from sale of services is recognised when the following criteria are met: (a) the amount of income can be estimated reliably; (b) it is probable that future economic benefits will flow to the entity; (c) the stage of completion of a transaction can be estimated reliable at the date of the statement of financial position; (d) expenses related to the service provision transaction and its completion can be estimated reliably. Interest income Interest income is recognised on an accrual basis using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future net cash receipts through the expected life of the financial instruments to the net carrying amount of the financial instruments. Dividend income Dividend income is recognised when the right to receive dividend payment is established. Dividend distribution to the Company s shareholders is recognised as a liability in the Company s financial statements in the period in which the dividends are approved Employee benefits Social security contributions The Company pays social security contributions to the state Social Security Fund (hereinafter the Fund ) on behalf of its employees based on the defined contribution plan in accordance with the local legal requirements. A defined contribution plan is a plan under which the Company pays fixed contributions into the Fund and will have no legal or constructive obligations to pay further contributions if the Fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior period. The social security contributions are recognised as an expense on an accrual basis and are included within staff costs. Social security contributions each year are allocated by the Fund for pension, health, sickness, maternity and unemployment payments. Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value. 23