Asseco Group. Annual Report. Annual Report

Transcription

1 Asseco Group Annual Report Annual Report

2 Present in over 54 countries 7,831 in sales revenues 24,053 highly committed employees 467 in net profit for Shareholders of the Parent Company 5,459 in order backlog for th largest software vendor in Europe

3 CONSOLIDATED FINANCIAL STATEMENTS OF ASSECO GROUP For the year ended 31 December 2017 Table of contents FINANCIAL HIGHLIGHTS OF ASSECO GROUP... 6 CONSOLIDATED FINANCIAL STATEMENTS OF ASSECO GROUP... 7 CONSOLIDATED INCOME STATEMENT... 9 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED FINANCIAL STATEMENTS I. GENERAL INFORMATION II. BASIS FOR THE PREPARATION OF FINANCIAL STATEMENTS Basis for preparation Compliance statement Estimates Professional judgement and estimates Accounting policies applied New standards and interpretations published but not in force yet Corrections of material errors Changes in comparable data III. SIGNIFICANT ACCOUNTING POLICIES Consolidation rules Investments in associates Goodwill Participation in a joint venture Put options of non-controlling interests in the consolidated financial statements Combinations of businesses under common control Translation of items expressed in foreign currencies Property, plant and equipment Investment property Intangible assets Government grants Borrowing costs Impairment of non-financial assets Financial assets Inventories Prepayments and accrued income Trade receivables Cash and cash equivalents Interest-bearing bank loans and borrowings Leases Trade payables Provisions Provision for warranty repairs Revenues Revenues and costs related to the execution of implementation contracts Operating costs Income tax and value added tax Page All figures in millions of PLN, unless stated otherwise 3

4 28. Earnings per share (basic and diluted) IV. ORGANIZATION AND CHANGES IN THE STRUCTURE OF ASSECO GROUP, INCLUDING THE ENTITIES SUBJECT TO CONSOLIDATION V. INFORMATION ON OPERATING SEGMENTS VI. EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Sales revenues and operating costs Other operating income and expenses Financial income and expenses Corporate income tax Discontinued operations Earnings per share Information on dividends paid out Loss of control over Formula Systems (1985) Ltd Property, plant and equipment Intangible assets Investment property Goodwill Impairment testing Entities with significant non-controlling interests Associates and joint ventures Other financial assets Prepayments and accrued income Long-term and short-term receivables Implementation contracts Inventories Cash and cash equivalents Non-current assets held for sale Share capital Interest-bearing bank loans and debt securities issued Finance lease liabilities Other financial liabilities Provisions Long-term and short-term liabilities Accruals and deferred income Related party transactions Notes to the Statement of Cash Flows Off-balance-sheet liabilities towards other entities Objectives and principles of financial risk management Employment Remuneration of the entity authorized to audit financial statements Remuneration of the Management Board and Supervisory Board of Asseco Poland S.A Capital management Significant events after the reporting period All figures in millions of PLN, unless stated otherwise 4

5 Financial Highlights of Asseco Group Selected financial data

6 FINANCIAL HIGHLIGHTS OF ASSECO GROUP The following table presents selected financial data of Asseco Group. 12 months ended 31 Dec months ended 31 Dec months ended 31 Dec months ended 31 Dec meur meur Sales revenues 7, , , ,812.7 Operating profit Pre-tax profit and share of profits of associates Net profit Net profit attributable to Shareholders of the Parent Company Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities (125.8) (483.6) (29.6) (110.5) Net cash provided by (used in) financing activities (364.4) (487.9) (85.8) (111.5) Cash and cash equivalents at the end of period 1, , Basic earnings per ordinary share attributable to Shareholders of the Parent Company (in PLN/EUR) The financial highlights disclosed in these consolidated financial statements have been translated into EUR in the following way: Items of the consolidated income statement and consolidated statement of cash flows have been translated into EUR at the arithmetic average of mid exchange rates as published by the National Bank of Poland and in effect on the last day of each month. These exchange rates were respectively: o in the period from 1 January 2017 to 31 December 2017: EUR 1 = PLN o in the period from 1 January 2016 to 31 December 2016: EUR 1 = PLN The Group s cash and cash equivalents as at the end of the reporting period and the comparable period of the previous year have been translated into EUR at daily mid exchange rates as published by the National Bank of Poland. These exchange rates were respectively: o exchange rate effective on 31 December 2017: EUR 1 = PLN o exchange rate effective on 31 December 2016: EUR 1 = PLN All figures in millions of PLN, unless stated otherwise 6

7 Consolidated Financial Statements of Asseco Group Consolidated Financial Statements prepared in accordance with the International Financial Reporting Standards as endorsed by the EU

8 CONSOLIDATED FINANCIAL STATEMENTS of Asseco Group These consolidated financial statements have been approved for publication by the Management Board of Asseco Poland S.A. on 19 March Management Board: Adam Góral President of the Management Board Andrzej Dopierała Vice President of the Management Board Tadeusz Dyrga Vice President of the Management Board Krzysztof Groyecki Vice President of the Management Board Rafał Kozłowski Vice President of the Management Board Marek Panek Vice President of the Management Board Paweł Piwowar Vice President of the Management Board Zbigniew Pomianek Vice President of the Management Board Artur Wiza Vice President of the Management Board Gabriela Żukowicz Vice President of the Management Board All figures in millions of PLN, unless stated otherwise 8

9 CONSOLIDATED INCOME STATEMENT ASSECO GROUP 12 months ended 31 Dec months ended 31 Dec Note Sales revenues 1 7, ,932.0 Cost of sales 1 (6,158.7) (6,065.5) Gross profit on sales 1, ,866.5 Selling costs 1 (446.8) (480.8) General and administrative expenses 1 (624.9) (620.9) Net profit on sales Other operating income Other operating expenses 2 (57.0) (56.6) Operating profit Financial income Financial expenses 3 (316.9) (98.3) Pre-tax profit and share of profits of associates and joint ventures Corporate income tax (current and deferred tax expense) 4 (122.0) (179.0) Share of profits of associates and joint ventures 15 (37.7) 2.7 Net profit for the reporting period Attributable to: Shareholders of the Parent Company Non-controlling interests Basic and diluted consolidated earnings per share from continuing operations for the reporting period, attributable to shareholders of the Parent Company (in PLN) All figures in millions of PLN, unless stated otherwise 9

10 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ASSECO GROUP 12 months ended 31 Dec months ended 31 Dec Net profit for the reporting period Other comprehensive income: Components that may be reclassified to profit or loss Net profit/loss on valuation of financial assets available for sale Foreign exchange differences on translation of foreign operations (639.5) Components that will not be reclassified to profit or loss Amortization of intangible assets recognized directly in equity (0.8) (0.8) Actuarial gains/losses (2.9) (13.9) Income tax relating to components of other comprehensive income Total other comprehensive income (641.3) TOTAL COMPREHENSIVE INCOME FOR THE REPORTING PERIOD (24.5) Attributable to: Shareholders of the Parent Company Non-controlling interests (423.5) All figures in millions of PLN, unless stated otherwise 10

11 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSECO GROUP ASSETS Note 31 Dec Dec Non-current assets Property, plant and equipment Intangible assets 10 2, ,124.8 Investment property Goodwill 12 7, ,978.5 Investments accounted for using the equity method Long-term receivables Deferred tax assets Other non-financial assets Other long-term financial assets Long-term prepayments and accrued income , ,459.4 Current assets Inventories Prepayments and accrued income Trade receivables 18 2, ,209.0 Corporate income tax receivable Receivables from the state and local budgets Other receivables Other non-financial assets Other financial assets Cash and short-term deposits 21 1, ,502.6 Non-current assets held for sale , ,331.8 TOTAL ASSETS 15, ,791.2 All figures in millions of PLN, unless stated otherwise 11

12 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSECO GROUP EQUITY AND LIABILITIES Note 31 Dec Dec Equity (attributable to shareholders of the Parent Company) Share capital Share premium 4, ,180.1 Transactions with non-controlling interests (150.7) (108.9) Foreign exchange differences on translation of foreign operations (41.2) 40.3 Retained earnings / accumulated losses 1, , , ,505.1 Non-controlling interests 5, ,165.5 Total equity 10, ,670.6 Non-current liabilities Interest-bearing bank loans, borrowings and debt securities 24 1, Long-term finance lease liabilities Other financial liabilities Deferred tax liabilities Long-term provisions Long-term deferred income Other long-term liabilities , ,624.7 Current liabilities Interest-bearing bank loans, borrowings and debt securities Finance lease liabilities Other financial liabilities Trade payables Corporate income tax payable Liabilities to the state and local budgets Other liabilities Provisions Deferred income Accruals , ,495.9 TOTAL LIABILITIES 4, ,120.6 TOTAL EQUITY AND LIABILITIES 15, ,791.2 All figures in millions of PLN, unless stated otherwise 12

13 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ASSECO GROUP Share capital Share premium Transactions with non-controlling interests Foreign exchange differences on translation of foreign operations Retained earnings and current net profit Equity attributable to shareholders of the Parent Company Non-controlling interests Total equity As at 1 January ,180.1 (108.9) , , , ,670.6 Net profit for the reporting period Other comprehensive income for the reporting period (66.6) (1.0) (67.6) (573.7) (641.3) Total comprehensive income for the reporting period (66.6) (423.5) (24.5) Dividend for the year (249.8) (249.8) (142.4) (392.2) Share-based payment transactions with employees Transactions with non-controlling interests (including settlement of contingent financial liabilities to non-controlling interests (put - - (41.8) - - (41.8) options)) Loss of control over subsidiaries (14.9) 4.3 (10.6) (2,466.2) (2,476.8) Obtaining control over subsidiaries , ,002.9 As at 31 December ,180.1 (150.7) (41.2) 1, , , ,846.6 All figures in millions of PLN, unless stated otherwise 13

14 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ASSECO GROUP (continued) Share capital Share premium Transactions with non-controlling interests Foreign exchange differences on translation of foreign operations Retained earnings and current net profit Equity attributable to shareholders of the Parent Company Non-controlling interests Total equity As at 1 January ,180.1 (106.8) (57.9) 1, , , ,327.9 Net profit for the reporting period Other comprehensive income for the reporting period (3.2) Total comprehensive income for the reporting period Dividend for the year (249.8) (249.8) (164.3) (414.1) Share-based payment transactions with employees Transactions with non-controlling interests (including settlement of contingent financial liabilities to non-controlling interests (put - - (2.1) - - (2.1) (149.6) (151.7) options)) Obtaining control over subsidiaries As at 31 December ,180.1 (108.9) , , , ,670.6 All figures in millions of PLN, unless stated otherwise 14

15 CONSOLIDATED STATEMENT OF CASH FLOWS ASSECO GROUP Note 12 months ended 31 Dec months ended 31 Dec Cash flows operating activities Pre-tax profit and share of profits of associates and joint ventures Total adjustments: Depreciation and amortization Changes in working capital 31 (70.8) (26.0) Interest income/expenses Gain/loss on foreign exchange differences Gain/loss on financial assets (valuation, disposal, impairment, etc.) (71.1) 5.8 Other financial income/expenses Gain on loss of control over subsidiaries and gain on sale of shares in associates (359.2) (6.0) Impairment write-down on goodwill Gain/loss on disposal of property, plant and equipment and intangible assets (5.5) (20.0) Loss on liquidation of property, plant and equipment Costs of share-based payment transactions with employees Other adjustments to pre-tax profit Cash provided by (used in) operating activities ,032.0 Corporate income tax paid (171.7) (148.8) Net cash provided by (used in) operating activities Cash flows investing activities Disposal of property, plant and equipment and intangible assets Disposal of assets classified as held for sale Acquisition of investment property (1.4) - Acquisition of property, plant and equipment, and intangible assets 31 (224.5) (210.7) Acquisition of subsidiaries and associates 31 (675.9) (316.0) Cash and cash equivalents in subsidiaries acquired Sale of shares in subsidiaries and associates Cash and cash equivalents in subsidiaries disposed of (725.8) - Disposal/settlement of financial assets carried at fair value through profit or loss Acquisition/settlement of financial assets carried at fair value through profit or loss (7.7) (25.5) Disposal of financial assets available for sale Acquisition of financial assets available for sale (18.5) (55.0) Loans granted 31 (74.5) (132.2) Loans collected Interest received Dividends received Other cash flows from investing activities 8.6 (11.1) Net cash provided by (used in) investing activities (125.8) (483.6) All figures in millions of PLN, unless stated otherwise 15

16 (continued) Note 12 months ended 31 Dec months ended 31 Dec Cash flows financing activities Proceeds from transactions with non-controlling interests and settlements under employee stock option plan Expenditures for the acquisition of non-controlling interests 31 (4.7) (133.9) Proceeds from bank loans and borrowings obtained, and debt securities issued Proceeds from issuance of debt securities Redemption of debt securities (14.1) - Repayments of bank loans and borrowings, and redemption of debt securities (306.1) (211.6) Finance lease liabilities paid (28.5) (28.3) Interest paid (39.8) (40.9) Dividends paid out by the Parent Company (249.8) (249.8) Dividends paid out to non-controlling shareholders 14 (168.9) (164.3) Grants received for purchases of property, plant and equipment Other cash flows from financing activities (3.4) - Net cash provided by (used in) financing activities (364.4) (487.9) Net increase (decrease) in cash and cash equivalents (88.3) Net foreign exchange differences (189.3) 71.8 Net cash and cash equivalents as at 1 January 1, ,488.6 Net cash and cash equivalents as at 31 December 21 1, ,472.1 All figures in millions of PLN, unless stated otherwise 16

17 SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED FINANCIAL STATEMENTS I. GENERAL INFORMATION Asseco Group ( Asseco Group, the Group ) is a group of companies, whose Parent Company is Asseco Poland S.A. (the Parent Company, Company, Issuer ) with registered office at 14 Olchowa St., Rzeszów, Poland. The Company was established on 18 January 1989 as a limited liability company and subsequently, under notary deed of 31 August 1993, it was transformed into and since then has operated as a joint-stock company with registered office at 72a, 17 Stycznia St., Warsaw, Poland. The Company is entered in the Register of Entrepreneurs of the National Court Register under the number KRS (previously it was entered in the Commercial Register maintained by the District Court of the Capital City of Warsaw, Commercial Court, XVI Commercial and Registration Department, under the number RHB 17220). On 4 January 2007, the Issuer changed its name from Softbank S.A. to Asseco Poland S.A., and moved its registered office from 72a, 17 Stycznia St., Warsaw to 80 Armii Krajowej Av., Rzeszów. On 8 March 2010, the Issuer moved its registered office from 80 Armii Krajowej Av., Rzeszów to 14 Olchowa St., Rzeszów. Since 1998, the Company s shares have been listed on the main market of the Warsaw Stock Exchange S.A. The Company has been assigned the statistical ID number REGON The period of the Company s operations is indefinite. Asseco Poland S.A. is the second largest IT company listed on the Warsaw Stock Exchange. The Company is also a major player in the European software producers market. As a leader of the Group, Asseco Poland S.A. is actively engaged in business acquisitions both in the domestic and foreign markets, seeking to strengthen its position across Europe and worldwide. Now the Company is expanding its investment spectrum for software houses, with an eye to gain insight into their local markets and customers, as well as access to innovative and unique IT solutions. Our comprehensive offering includes products dedicated for the sectors of banking and finance, public institutions, as well as industry, trade, and services. The Group has got a wide-range portfolio of proprietary products, unique competence and experience in the execution of complex IT projects, and a broad customer base, including the largest financial institutions, major industrial enterprises as well as public administration bodies. All figures in millions of PLN, unless stated otherwise 17

18 II. BASIS FOR THE PREPARATION OF FINANCIAL STATEMENTS 1. Basis for preparation These consolidated financial statements have been prepared in accordance with the historical cost convention, except for financial assets carried at fair value through profit or loss, financial assets available for sale which are carried at fair value, investment property, as well as financial liabilities carried at fair value through profit or loss. The presentation currency of these consolidated financial statements is the Polish zloty (PLN), and all figures are presented in millions of PLN (), unless stated otherwise. These consolidated financial statements have been prepared on a going-concern basis, assuming the Group will continue its business operations over a period not shorter than 12 months from 31 December Till the date of approving these consolidated financial statements, we have not observed any circumstances that would threaten the Group companies ability to continue as going concerns. 2. Compliance statement These financial statements have been prepared in compliance with the International Financial Reporting Standards ( IFRS ) as endorsed by the European Union ( EU IFRS ). IFRS include standards and interpretations accepted by the International Accounting Standards Board ( IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ). As at the date of approving publication of these financial statements, given the ongoing process of implementing IFRS in the European Union as well as the Group s operations, in the scope of accounting policies applied by the Group there is no difference between IFRS that came into force and IFRS endorsed by the EU. IFRS include standards and interpretations accepted by the International Accounting Standards Board ( IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ). Some of the Group companies maintain their accounting books in accordance with the accounting policies set forth in their respective local regulations. The consolidated financial statements include adjustments not disclosed in the accounting books of the Group s entities, which were introduced to adjust the financial statements of those entities to IFRS. 3. Estimates In the year ended 31 December 2017, our approach to making estimates was not subject to any substantial change. 4. Professional judgement and estimates Preparation of consolidated financial statements in accordance with IFRS requires making estimates and assumptions which have an impact on the data disclosed in such financial statements. Although the adopted assumptions and estimates have been based on the Group management s best knowledge on the current activities and occurrences, the actual results may differ from those anticipated. Presented below are the main areas which in the process of applying our accounting policies were subject not only to accounting estimates, but also to the management s professional judgement. Therefore, a change in estimates made for the following areas might have a significant impact on the Group s future results. i. Consolidation of entities in which the Group holds less than 50% of voting rights The Group has concluded that despite the lack of an absolute majority of voting rights at the general meeting of shareholders of Formula Systems (1985) Ltd (hereinafter Formula ), Sapiens International Corporation N.V. (hereinafter Sapiens ), Magic Software Enterprises Ltd (hereinafter Magic ), Matrix IT Ltd (hereinafter Matrix ), Asseco Business Solutions S.A., Asseco Resovia S.A., as well as Gdyński Klub Koszykówki Arka S.A., in accordance with IFRS 10, these companies are still controlled by the Group. During the first seven months of 2017, the Parent Company maintained control over Formula Systems (1985) Ltd despite holding less than 50% in its share capital. The conclusion regarding the existence of control resulted from the fact that as at 3 August 2017 the Company was entitled to voting rights at the general meeting with respect to 46.33% of shares. In addition, during this period Asseco Group was authorized to exercise voting rights attached to shares that were acquired by Mr. Guy Bernstein, the Chief Executive Officer of Formula Systems. All figures in millions of PLN, unless stated otherwise 18

19 Consequently, taking into account the principles of voting, despite the lack of an absolute majority of shares in Formula Systems (1985) Ltd in the first seven months of 2017, Asseco Poland S.A. retained an absolute majority of voting rights at the general meeting of shareholders of that company. The Management s judgement regarding the existence of control over Formula Systems changed in August This was related to the below mentioned transactions, as a result of which the Management made a conclusion that the Group lost control over Formula Group. On 3 August 2017, Asseco Poland S.A. concluded a transaction to sell 2,356,605 shares in its subsidiary Formula Systems (1985) Ltd seated in Tel Aviv, representing 16% of the share capital and total voting rights at the General Meeting of Formula Systems. In connection with concluding the transaction to sell this 16% stake in Formula Systems, the CEO of Formula Systems notified the Management Board of Asseco Poland S.A. about his will to terminate the authorization for the exercise of voting rights by Asseco Poland with respect to all of his shares held in Formula Systems, which was previously granted to the Company on 3 November The Management Board accepted this termination notice, and thus the said authorization expired as of 3 August Moreover, on 22 August 2017, the Company finalized a transaction to sell 589,151 shares in Formula Systems, representing 4% of the share capital and total voting rights at the General Meeting of Formula Systems. Following this transaction, the Company s shareholding in Formula Systems dropped to 26.31%. As a consequence of the above-mentioned transactions of selling a total 20% stake in Formula Systems, our Management deemed that the Parent Company lost control over Formula Systems (1985) Ltd. The fact of losing control over Formula Systems meant that we simultaneously lost control over all subsidiary companies of Formula Systems, including in particular: Sapiens International Corporation NV, Magic Software Enterprises Ltd, and Matrix IT Ltd. With regard to the above, in these consolidated financial statements, the financial data of Formula Systems Group for the first 7 months of 2017 have been fully consolidated, whereas its financial results for the subsequent two months of the third quarter of 2017 have been accounted for using the equity method. A detailed description of the financial result recognized on the loss of control as well as its consequences to the statement of financial position have been presented in explanatory note 8 to these consolidated financial statements of Asseco Group for the period of 12 months ended 31 December In October 2017, Management s judgement regarding the existence of control over Formula Systems changed again. It resulted from the following circumstances. On 11 October 2017, the Management of Asseco Poland signed a Shareholders Agreement (hereinafter: the Agreement) between Asseco and the second largest shareholder in Formula, namely Mr. Guy Bernstein (the CEO of Formula Group), and his controlled entity Emil Sharvit (2001) Consulting and Project Management Ltd. Under this Agreement, Mr. Guy Bernstein granted an authorization for the exercise of voting rights by Asseco Poland S.A. with respect to all of his shares (13.4%) held in Formula Systems. The Agreement was concluded for a period of 36 months and with the possibility of being automatically renewed for further 12-month periods. Pursuant to this authorization, when exercising voting rights attached to all shares held by Mr. Guy Bernstein, Mr. Marek Panek, Vice President of the Management Board of Asseco Poland S.A., who has been designated as the Voting Nominee, is obligated to vote as recommended by the Management Board of Asseco Poland S.A. at each general meeting of Formula Systems. The Agreement makes a reservation that the authorization granted to Asseco shall be valid as long as: - Mr. Adam Góral continues to serve as President of the Management Board or Chairman of the Supervisory Board of Asseco, and - Asseco Poland holds more than 20% equity interest in Formula Systems. In the event any of the above-mentioned conditions is no longer satisfied, the Agreement obligates Asseco Poland to grant an authorization to Mr. Guy Bernstein for the exercise of voting rights at the general meeting of Formula Systems with respect to all shares held by Asseco Poland. Consequently, the Management of Asseco Poland S.A. believes that as at the reporting date the Company has sufficient rights to ensure the exercise of control over Formula Systems. In the Management s opinion, Asseco has the practical ability to direct the relevant activities of Formula unilaterally. All figures in millions of PLN, unless stated otherwise 19

20 The Management s assessment was made taking into account all the facts and circumstances, including in particular: - the fact that, due to shares held by itself and the concluded Agreement, Asseco controls a 39.7% interest in the share capital of Formula which, relative to the size and dispersion of other shareholdings, is sufficient to give it the current ability to direct the relevant activities of Formula. Such conclusion was drawn based on the following factors: 1. the fact that other shareholders exceeding 5% in the share capital of Formula include just Israeli investment funds whose strategy does not assume active participation in the current management of the relevant activities of companies therefore they can be perceived as basically passive investors; 2. the fact that the Management is not aware of any contractual arrangements between minority shareholders in Formula; 3. the fact that in order to outvote the stake of shares held by Asseco, at least 8 investment funds would have to make an arrangement and agree on specific voting at the general meeting; however, such an arrangement should be previously announced; 4. the fact that in recent years the company s general meetings were attended by shareholders representing the following aggregate percentages of total voting rights: 74% in 2016, 74% in 2015, 75% in 2014, and respectively 77% and 70% at the two general meetings held in 2013; 5. the fact that the distribution of votes during the general meetings held over the years indicates that in all the votes, where the major shareholder exclusion clause was not applicable, more than 90% of all shareholders present at the general meeting voted the same way as Asseco; and moreover 99.9% of minority shareholders present at the general meeting voted for the appointment of Asseco s representatives to the Board of Directors, which is the key body responsible for making important decisions in the company, including decisions to pay out dividends. Considering all the above-mentioned facts and circumstances, the Management of Asseco deemed that since the date of signing the Agreement with the second largest shareholder, i.e. as of 11 October 2017, Asseco Group has again maintained control over Formula Systems. In the case of Sapiens, Magic and Matrix, the discussion concerning the exercise of control comes down to determining whether, pursuant to IFRS 10, these companies were controlled by Formula Systems (1985) Ltd, their direct shareholder, in the period of 12 months ended 31 December In the case of Sapiens International Corporation NV (hereinafter Sapiens ), the conclusion regarding the existence of control in line with IFRS 10 in the period of 12 months ended 31 December 2017 was made considering the following factors: 1. Governing bodies of Sapiens: decisions of the general meeting are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general meeting adopts resolutions to appoint individual directors, choose the company s financial auditors for the next year, as well as to approve the company s financial statements and the management s report on operations; in accordance with the company s articles of association, the board of directors of Sapiens is responsible for managing the company s current business operations and is authorized to take substantially all decisions which are not specifically reserved to shareholders by the articles of association, including decisions to pay out dividends; the company s board of directors is composed of 6 members, 4 of whom are independent directors. For the last 6 years, Formula Systems has consistently reappointed the same members of the board of directors. Likewise, the previous composition of the board of directors was re-elected during the general meeting that was held in May 2016, this is when Formula s equity interest in Sapiens was already below 50%. All figures in millions of PLN, unless stated otherwise 20

21 2. Shareholder structure of Sapiens: the company s shareholder structure is dispersed because, apart from Formula Systems, just two major shareholders hold more than 5% of voting rights at the general meeting; there is no evidence that any shareholders have or had any agreement for common voting at the general meeting; over the last five years (i.e ), the company s general meetings were attended by shareholders representing in aggregate between 70% and 79.3% of total voting rights. This means that the level of activity of the company s shareholders is relatively moderate or low. Bearing in mind that Formula presently holds approx % of total voting rights, the attendance from shareholders would have to be higher than 96.3% in order to deprive Formula of an absolute majority of votes at the general meeting. The Management believes that achieving such high attendance seems unlikely. With regard to the above, the Group has determined that Formula Systems, despite the lack of an absolute majority of shares in Sapiens during the year 2017, has still been able to influence the appointment of directors at Sapiens, and therefore may affect the directions of development as well as current business operations of that company. Therefore, Formula has power over the company of Sapiens and is able to use that power to affect the amount of generated returns, and is also exposed to such variable returns. In the case of Magic Software Enterprises Ltd (hereinafter Magic, a subsidiary of Formula Systems (1985) Ltd), the conclusion regarding the existence of control in line with IFRS 10 was made considering the following factors: 1. Governing bodies of Magic: decisions of the general meeting are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general meeting adopts resolutions to appoint individual directors, choose the company s financial auditors for the next year, as well as to approve the company s financial statements and the management s report on operations; in accordance with the company s articles of association, the board of directors of Magic is responsible for managing the company s current business operations and is authorized to take substantially all decisions which are not specifically reserved to shareholders by the articles of association, including decisions to pay out dividends; the company s board of directors is composed of 5 members, 2 of whom are independent directors. In recent years, Formula Systems has consistently reappointed the same members of the board of directors. 2. Shareholder structure of Magic: the company s shareholder structure may be considered as dispersed because, apart from Formula Systems, just investment funds hold more than 5% of voting rights (yet the shareholding of none of them exceeds 6%), and the next major shareholder holds approx. 3.2% of votes; there is no evidence that any shareholders have or had any agreement for common voting at the general meeting; over the last five years (i.e ), the company s general meetings were attended by shareholders representing in aggregate not more than 77% of total voting rights. This means that the level of activity of the company s shareholders is relatively moderate or low. Bearing in mind that Formula presently holds approx % of total voting rights, the attendance from shareholders would have to be higher than 94.3% in order to deprive Formula of an absolute majority of votes at the general meeting. The Management believes that achieving such high attendance seems unlikely. With regard to the above, the Group has determined that Formula Systems, despite the lack of an absolute majority of shares in Magic, is still able to influence the appointment of directors at Magic, and therefore may affect the directions of development as well as current business operations of that company. All figures in millions of PLN, unless stated otherwise 21

22 In the case of Matrix IT Ltd (hereinafter Matrix IT ), in which the Group held 49.5% of total voting rights as at 31 December 2017, the conclusion regarding the existence of control in line with IFRS 10 was made considering the following factors: 1. Governing bodies of Matrix IT: decisions of the general meeting are taken by a simple majority of votes represented at the general meeting; the annual (ordinary) general meeting adopts resolutions to appoint individual directors, choose the company s financial auditors for the next year, as well as to approve the company s financial statements and the management s report on operations; in accordance with the company s articles of association, the board of directors of Matrix IT is responsible for managing the company s current business operations and is authorized to take substantially all decisions which are not specifically reserved to shareholders by the articles of association, including the decision to pay out dividends; the company s board of directors is composed of 6 members, 4 of whom are independent directors. In recent years, Formula Systems has consistently reappointed the same members of the board of directors. 2. Shareholder structure of Matrix IT: the shareholder structure of Matrix IT may be considered as dispersed because, apart from Formula, just one shareholder holds more than 5% of voting rights (9.92%); there is no evidence that any shareholders have or had any agreement for common voting at the general meeting; over the last three years (i.e ), the company s general meetings were attended by shareholders representing in aggregate not more than 82% of total voting rights. This means that the level of activity of the company s shareholders is relatively moderate. Bearing in mind that Formula presently holds approx. 49.5% of total voting rights, the attendance from shareholders would have to be higher than 99% in order to deprive Formula of an absolute majority of votes at the general meeting. The Management believes that achieving such high attendance seems unlikely. With regard to the above, the Group has determined that Formula Systems, despite the lack of an absolute majority of shares in Matrix IT, is still able to influence the appointment of directors at Matrix IT, and therefore may affect the directions of development as well as current business operations of that company. In the case of Asseco Business Solutions S.A., the conclusion regarding the existence of control in line with IFRS 10 in the period of 12 months ended 31 December 2017 was made considering the following factors: decisions of the general meeting are taken by a simple majority of votes represented at the general meeting; the company s shareholder structure is dispersed because, apart from Asseco Enterprise Solutions, a.s. (a subsidiary of Asseco Poland), just two shareholders hold more than 5% of voting rights at the general meeting, and the next major shareholder holds approx. 13.5% of votes; there is no evidence that any shareholders have or had any agreement for common voting at the general meeting; over the last five years (i.e ), the company s general meetings were attended by shareholders representing in aggregate between 58.77% and 76.2% of total voting rights. This means that the level of activity of the company s shareholders is relatively moderate or low. Bearing in mind that Asseco presently holds approx % of total voting rights, the attendance from shareholders would have to be higher than 92.93% in order to deprive Asseco of an absolute majority of votes at the general meeting. The Management believes that achieving such high attendance seems unlikely. With regard to the above, the Group has determined that Asseco Poland, despite the lack of an absolute majority of shares in Asseco Business Solutions S.A., is still able to influence the directions of development as well as current business operations of that company. Hence, in these consolidated financial statements, the financial data of Asseco Business Solutions have been accounted for using the acquisition method. All figures in millions of PLN, unless stated otherwise 22

23 Moreover, the Group has analyzed its relationships with entities related through the key management personnel and concluded that, in accordance with IFRS 10, as at 31 December 2017 it has maintained control over Asseco Resovia S.A. and Gdyński Klub Koszykówki Arka S.A. Such decision resulted from the following factor: both those companies are to a large extent dependent on financing obtained from Asseco Poland S.A. or Asseco Group companies. Hence, in these consolidated financial statements, the financial data of Asseco Resovia and Arka Gdynia have been accounted for using the acquisition method. ii. Valuation of IT contracts and measurement of their completion The Group executes a number of contracts for construction and implementation of information technology systems. Additionally, some of those contracts are denominated in foreign currencies. Valuation of IT contracts requires that future operating cash flows are determined in order to arrive at the fair value of income and expenses and to provide the fair value of the embedded currency derivatives, as well as it requires measurement of the progress of contract execution. The percentage of contract completion shall be measured as the relation of costs already incurred (provided such costs contribute to the progress of work) to the total costs planned, or as a portion of man-days worked out of the total work effort required. Budgeted future operating cash flows are not always consistent with agreements concluded originally with our customers or suppliers due to modifications of IT projects implementation schedules. As at 31 December 2017, receivables arising from valuation of IT contracts amounted to PLN million, while liabilities arising from such valuation equalled PLN 29.4 million. iii. Rates of depreciation and amortization The level of depreciation and amortization rates is determined on the basis of anticipated period of useful economic life of the components of tangible and intangible assets. The Group verifies the adopted periods of useful life on an annual basis, taking into account the current estimates. In 2017 the rates of depreciation and amortization applied by the Group were not subject to any substantial modifications. iv. Goodwill and intangible assets with indefinite useful life impairment testing In line with the Group s policy, each year as at 31 December, the Parent Company s Management performs an annual impairment test on cashgenerating units to which goodwill, costs of development projects in progress, and intangible assets with an indefinite period of useful life have been allocated. Whereas, at the end of each interim reporting period, the Management Board of the Parent Company performs a review of the indications of possible impairment of cashgenerating units to which goodwill and/or intangible assets with indefinite useful life have been allocated. In the event such indications are identified, an impairment test should be carried out at the end of the interim reporting period. Each impairment test requires making estimates of the value in use of cash-generating units or groups of cash-generating units to which goodwill and/or intangible assets with indefinite useful life have been allocated. The value in use is estimated by determining both the future cash flows expected to be achieved from the cash-generating unit or units and a discount rate to be subsequently used in order to calculate the net present value of those cash flows. The impairment test has been described in detail in explanatory note 13 to these consolidated financial statements. v. Liabilities under put options granted to non-controlling shareholders As at 31 December 2017, the Group recognized liabilities resulting from future payments to noncontrolling shareholders. Determination of the amounts payable under such liabilities required making estimates of future financial results of our subsidiaries. As at 31 December 2017, such liabilities amounted to PLN million (see explanatory note 26 to these consolidated financial statements). vi. Liabilities for deferred conditional payments for controlling interests in subsidiaries As at 31 December 2017, the Group recognized liabilities for deferred conditional payments for controlling interests in subsidiaries in the amount of PLN 54.7 million. Determination of the amounts payable under such liabilities required making estimates of future financial results of our subsidiaries (see explanatory note 26 to these consolidated financial statements). All figures in millions of PLN, unless stated otherwise 23

24 vii. Classification of lease contracts (the Group as a lessee) The Group classifies its lease contracts as operating or financial depending on whether substantially all the risks and rewards incidental to ownership of leased assets are retained by the lessor or transferred to the lessee. Such assessment is based on the economic substance of each leasing transaction. viii. Classification of lease contracts (the Group as a lessor) The Group generates revenues, among others, from lease contracts whereby the Group s assets are leased to clients for a fee. The analysis of such agreements showed that the lease terms are shorter than the estimated useful lives of leased assets, and that significant risks and rewards incidental to ownership of leased assets have not been transferred to the Group s clients. Hence, the Group concluded that these agreements shall be treated as operating leases. ix. Internally generated intangible assets The costs of internally generated intangible assets are measured and capitalized in line with the Group s accounting policy. The determination of when to begin the capitalization of such costs is subject to the management s professional judgement as to the technological and economic feasibility of completing the development project. This moment is determined by reaching a stage (milestone) of the project, at which the Group is reasonably certain of being able to complete the intangible asset so that it will be available for use or sale, and that future economic benefits to be obtained from use or sale of such intangible asset will exceed its production cost. Thus, when determining the amount of capitalizable expenditures, the Management Board needs to estimate the present value of future cash flows to be generated by the intangible asset. In the period of 12 months ended 31 December 2017, the Group capitalized PLN 74.1 million of project development costs (see explanatory note 10 to these consolidated financial statements). The Company recognizes deferred tax assets presuming that the future taxable income will enable utilization of those deferred tax assets. Any deterioration in taxable income to be achieved in the future might cause the above assumption to become unjustified. 5. Accounting policies applied The accounting policies adopted in the preparation of these consolidated financial statements are consistent with those followed when preparing the Group s annual consolidated financial statements for the year ended 31 December 2016, which were published on 16 March The Group did not decide on early adoption of any other standard, interpretation or amendment which has been published but has not yet become effective. 6. New standards and interpretations published but not in force yet The following standards and interpretations were issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC), but have not yet come into force: IFRS 9 Financial Instruments (issued on 24 July 2014) effective for annual periods beginning on or after 1 January 2018; IFRS 14 Regulatory Deferral Accounts (issued on 30 January 2014) the European Commission has decided not to initiate the process of endorsement of this standard until the release of its final version not yet endorsed by the EU till the date of approval of these financial statements effective for annual periods beginning on or after 1 January 2016; IFRS 15 Revenue from Contracts with Customers (issued on 28 May 2014), including the amendment to IFRS 15 Effective Date of IFRS 15 (issued on 11 September 2015) effective for annual periods beginning on or after 1 January 2018; Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture (issued on 11 September 2014) work for the endorsement of these amendments has been postponed by the EU the effective date of these amendments has been deferred indefinitely by the IASB; IFRS 16 Leases (issued on 13 January 2016) effective for annual periods beginning on or after 1 January 2019; Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (issued on 12 September 2016) effective for annual periods beginning on or after 1 January 2018; All figures in millions of PLN, unless stated otherwise 24