Mercator Medical S.A. Group of Companies

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS for 2016 DRAWN UP IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS Kraków, 16 March 2017

2 TABLE OF CONTENTS p. CONSOLIDATED STATEMENT OF FINANCIAL POSITION 3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 5 CONSOLIDATED STATEMENT OF CASH FLOWS 6 ADDITIONAL INFORMATION AND ADDITIONAL NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DRAWN UP FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER A. GENERAL INFORMATION 7 I. Parent Entity's data 7 II. Duration of the Group of Companies 7 III. Presented periods 7 IV. Composition of the Parent Entity governing bodies 7 V. Major shareholders of the Parent Entity 31 December VI. Group of Companies 8 VII. Affiliated companies 9 VIII. Certified Auditor 9 IX. Statement of the Management Board 9 X. Approval of the consolidated financial statements 9 B. DESCRIPTION OF THE ADOPTED FINANCIAL REPORTING PRINCIPLES (POLICY), INCLUDING METHODS OF VALUATION OF ASSETS AND EQUITY & LIABILITIES AND REVENUE AND COSTS 10 I. Compliance with financial reporting regulations 10 II. Functional currency and unit of presented data 10 III. Description of key accounting principles 10 IV. Financial Risk Management 21 V. Opinions and estimates 23 VI. Principles adopted with respect to conversion of financial data 23 VII. Changes in the financial reporting principles and IFRS 26 C. OPERATING SEGMENTS 32 D. NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS 35 I. Explanatory notes to the annual consolidated statement of financial position Property, plant and equipment Carrying amount of property, plant and equipment leased under financial lease Finance lease liabilities Intangibles Deferred tax assets Deferred tax provisions 40 1

3 7. Financial assets classified into categories in accordance with IAS 39 p Fair value of financial assets and liabilities Financial instrument classes Inventories Trade and other receivables Other assets Cash and cash equivalents Issued share capital Capital management Provisions Non-current liabilities Current liabilities Accruals and deferred income Credit liabilities Financial liabilities classified into categories in accordance with IAS Contingent liabilities 51 II. Explanatory notes to the annual consolidated statement of comprehensive income Products and services sales revenue structure Goods and materials sales revenue structure Operating activities performance based on the function of expenses Other operating revenue Other operating costs Financial revenue Financial expenses Income tax Earnings per share share value 55 III. Other explanatory notes Explanatory notes to the consolidated statement of cash flows Employment in the Group of Companies Senior management remuneration Information on transactions with the entity auditing the statements Information on related party transactions Assets/liabilities other than derivatives exposed to foreign exchange risk Foreign exchange risk sensitivity analysis Interest rate risk sensitivity analysis Financial liabilities other than derivatives exposed to liquidity risk Comparability of financial statements and events occurring after the date of the balance sheet 63 2

4 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Note Property, plant and equipment 1. 77,735 62,269 Intangibles 4. 2,575 2,045 Deferred tax assets 5. 3,604 4,441 Non-current receivables Total fixed assets 84,173 68,862 Inventories ,490 41,155 Trade and other receivables ,670 38,669 Corporate income tax receivables Other assets Cash and cash equivalents ,102 8,785 Total current assets 123,678 89,128 Non-current assets classified as held for sale - - Total assets 207, ,990 EQUITY AND LIABILITIES Issued share capital ,589 8,643 Supplementary capital 70,991 39,595 Revaluation reserve capital 4,767 4,767 Other reserve capitals 5,006 5,661 Currency translation differences 7,008 2,736 Retained earnings 23,710 11,266 Capital of parent entity shareholders 122,071 72,668 Equity attributable to non-controlling interest 1, Total equity 123,462 72,702 Deferred tax provisions 6. 2,898 3,148 Long-term provisions Non-current liabilities ,352 28,107 Accruals and deferred income Total non-current liabilities 14,828 31,796 Short-term provisions Current liabilities ,313 51,658 Corporate income tax liabilities Accruals and deferred income ,224 Total short-term liabilities 69,561 53,492 Total liabilities and provisions for liabilities 84,389 85,288 Liabilities related to assets classified as held for sale - - Total liabilities 207, ,990. Wiesław Żyznowski President of the Management Board. Monika Sitko Vice President of the Management Board. Leszek Michnowski Vice President of the Management Board. Witold Kruszewski Member of the Management Board Kraków, 16 March Agnieszka Dziewulska Writer 3

5 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME period period Note Net revenue from the sale of products and services ,568 74,815 Net revenue from sale of goods and materials , ,778 Other operating revenue 26. 1,262 2,121 Revenue from operating activities 264, ,714 Change in the state of products 7,727 7,295 Depreciation (7,478) (6,268) Materials and energy consumption (61,128) (56,474) External services (11,304) (11,075) Taxes and fees (750) (458) Remunerations (2,025) (19,975) Social insurance and other benefits (3,161) (2,605) Other costs by type (2,159) (2,074) Value of goods and materials sold (143,906) (119,142) Other operating costs 27. (1,439) (1,445) Costs of operating activities (246,623) (212,221) Operating profit (loss) 18,230 16,493 Financial revenue 28. 1, Financial expenses 29. (2,435) (6,036) Profit (loss) before tax 17,023 10,604 Income tax 30. (2,182) (297) - current (1,754) (708) - deferred (428) 411 Continuing operations net profit (loss) 14,841 10,307 Discontinued operations - - Net profit (loss) 14,841 10,307 Net profit/(loss) attributable to: 14,841 10,307 - parent entity's shareholders 13,904 10,273 - non-controlling interest Other total income 4,134 (799) - Differences from translation of foreign entities 4,272 (937) - deferred tax provision related to valuation of an incentive programme (138) 138 Total income for the period 18,975 9,508 Earnings per share attributable to shareholders of the parent entity Continuing operations net profit (loss) 13,904 10,273 Profit per 1 share (in PLN) Total income per share attributable to shareholders of the parent entity Total income for the period 18,038 9,474 Total income per 1 share (in PLN) Wiesław Żyznowski President of the Management Board. Monika Sitko Vice President of the Management Board. Leszek Michnowski Vice President of the Management Board. Witold Kruszewski Member of the Management Board Kraków, 16 March Agnieszka Dziewulska Writer 4

6 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Issued share capital Supple mentary capital Revaluation capital Equity 1 January ,643 35,331 4,767 4,033 3,705 7,972 64,451-64,451 Total of changes in equity: - 4,264-1,628 (969) 3,294 8, ,251 Net profit ,273 10, ,307 Profit or loss allocation - 4, (4,850) Dividend distribution (2,161) (2,161) - (2,161) Incentive programme Currency translation differences (969) 32 (937) (6) (943) Fair value adjustment Other adjustments Total equity 31 December ,643 39,595 4,767 5,661 2,736 11,266 72, ,702 Equity 01 January ,643 39,595 4,767 5,661 2,736 11,266 72, ,702 Total of changes in equity: 1,946 31,396 - (655) 4,272 12,444 49,403 1,357 50,760 Net profit ,904 13, ,841 Issuance of parent company's shares 1, ,946-1,946 Share premium - 29, ,309-29,309 Profit or loss allocation - 1, (1,570) Dividend distribution (29) (29) Incentive programme (866) - - (138) - (138) Equity contribution Currency translation differences ,272-4, ,407 Other adjustments Total equity 31 December ,589 70,991 4,767 5,006 7,008 23, ,071 1, ,462 Other reserve capital Currency translation differences Retained earnings Equity attributable to parent entity shareholders Equity attributable to noncontrolling interest Total equity. Wiesław Żyznowski President of the Management Board. Monika Sitko Vice President of the Management Board. Leszek Michnowski Vice President of the Management Board. Witold Kruszewski Member of the Management Board Kraków, 16 March Agnieszka Dziewulska Writer

7 Mercator Medical S.A. Group of Companies CONSOLIDATED STATEMENT OF CASH FLOWS OPERATING ACTIVITIES (indirect method) Note period period Net profit (loss) 14,841 10,307 Total adjustments 1,773 (2,429) Depreciation 32. 7,478 6,268 Interest and shares in profits 32. 1,318 1, 406 Exchange rate difference (profit)/loss - - Profit (loss) on investment activities (139) (74) Change in provisions 32. (180) 217 Change in inventories 32. (13,335) (2,480) Change in receivables 32. (7,895) (10,445) Change in current liabilities, excluding loans and credits 32. 9,759 6,040 Change in accruals and prepayments (1,218) Other adjustments 4,752 (2,143) Net operating cash flow 16,614 7,878 INVESTMENT ACTIVITY Inflows Inflows from sales of fixed assets and intangible assets From financial assets (interest) Other inflows - - Expenses (24,501) (11,414) Acquisition of fixed assets and intangible assets (20,101) (11,414) Acquisition of assets in related entities (4,400) - - Net cash flows from investment activities (24,274) (11,194) FINANCIAL ACTIVITY Inflows 39,885 21,814 Net inflows from issuance of shares and other capital instruments as well as from equity contributions 31,256 - Proceeds from credits and loans 8,629 21,814 Expenses (18,908) (16,559) Dividends (29) (2,161) Repayment of credits and loans (16,886) (12,412) Payments due to finance lease obligations (587) (434) Interest (1,406) (1,552) Financial activity net cash flows 20,977 5,255 Increase (decrease) of net cash and cash equivalents 13,317 1,939 Cash and cash equivalents at the beginning of the period 13. 8,785 6,846 Cash and cash equivalents at the end of the period ,102 8,785. Wiesław Żyznowski President of the Management Board. Monika Sitko Vice President of the Management Board. Leszek Michnowski Vice President of the Management Board. Witold Kruszewski Member of the Management Board Kraków, 16 March Agnieszka Dziewulska Writer 6

8 ADDITIONAL INFORMATION AND ADDITIONAL NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DRAWN UP FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2016 A. GENERAL INFORMATION I. Parent Entity's data 1. 1 Company's name, legal form Mercator Medical S.A Registered office of the Company, Country of registration ul. Heleny Modrzejewskiej 30, Kraków, Poland 1. 3 Registration in the National Court Register Registered seat of the court: District Court for Kraków Śródmieście, 11th Commercial Division of the National Court Register. Date: 31 August 2001 Registration number: II. Duration of the Group of Companies The Parent Entity Mercator Medical S.A. (hereinafter: parent entity) and other entities of the Mercator Medical S.A. Group of Companies have been established for an indefinite period of time. III. Presented periods The consolidated financial statements cover the period from: 1 January 2016 to 31 December 2016 together with comparative information, i.e. from 1 January 2015 to 31 December The transition to IAS/IFRS took place on 1 January IV. Composition of the Parent Entity governing bodies Management Board ( 31 December 2016) Wiesław Żyznowski - President of the Management Board Monika Sitko - Vice President of the Management Board Leszek Michnowski - Vice President of the Management Board, Managing Director of the Group Witold Kruszewski - Member of the Management Board Changes in the composition of the Management Board: There were no changes in the composition of the Management Board in the period between 1 January 2016 and 31 December Pursuant to the Resolution of the Supervisory Board of 2 March 2016 Leszek Michnowski has held the position of the Managing Director of the Issuer's Group since 1 April Composition of the Management Board has not changed until the date of this statement's publication. Supervisory Board ( 31 December 2016) Urszula Żyznowska - Chairperson of the Supervisory Board Piotr Solorz - Vice Chairperson of the Supervisory Board Marian Słowiaczek - Member of the Supervisory Board Jarosław Karasiński - Member of the Supervisory Board Marek Dietl - Member of the Supervisory Board Changes in the composition of the Supervisory Board: Until 29 June 2016 the Supervisory Board's composition was the following: Urszula Żyznowska (Chairperson), Piotr Solorz (Vice Chairperson), Magda Baran, Jarosław Karasiński, Marian Słowiaczek. During the General Meeting held on 29 June 2016 appointed Urszula Żyznowska, Piotr Solorz, Marek Dietl, Jarosław Karasiński and Marian Słowiaczek for the new tenure of the Supervisory Board. Composition of the Supervisory Board has not changed until the date of this statement's publication. 7

9 V. Major shareholders of the Parent Entity 31 December 2016 (over 5% share in total number of votes at General Meeting) Shareholder Number of shares Share in the share Share in the total number of capital Number of votes votes at general meeting Anabaza Ltd. (*) 5,740, % 9,215, % Wiesław Żyznowski (**) 806, % 1,438, % (*) Anabaza Ltd. is controlled by Wiesław Żyznowski who holds 100% of shares of Anabaza Ltd. and the same number of votes in the General Meeting of Shareholders of the company. (**)Taking into account also the shares held by the controlled entity (Anabaza Ltd.) and persons with respect to whom it is deemed that there exists the agreement referred to in Article 87 Section 1.5 in conjunction with Article 87 Section 4 of the Public Offering Act and the Conditions for Admitting Financial Instruments to the Regulated System of Trading and on Publicly Traded Companies, Wiesław Żyznowski holds, directly and indirectly, 62.13% of shares in the Issuer's share capital, giving him in total 72.71% of the total number of votes in the General Meeting. VI. Group of Companies As on the balance sheet date the Group of Companies consists of the following entities: Entity's name Registered office Business activity Consolidation method Company's share in the share capital Mercator Medical S.A. parent entity Poland Distribution of disposable gloves, dressings and non-woven fabric products - - Mercator Medical (Thailand) Ltd. Thailand Production and sale of disposable latex gloves full % Merkator Medikal TOB Ukraine Distribution of disposable gloves full % Merkator Medikal OOO (*) Russia Distribution of disposable gloves full 55.00% Mercator Medical s.r.l Romania Distribution of disposable gloves, dressings and nonwoven fabric products full % Mercator Medical Kft. Hungary The entity does not conduct operating activities full % Brestia sp. z o.o. Poland Distribution of disposable gloves full % Plakentia Holdings Limited Cyprus Holding activity full % LeaderMed B.V. Netherlands Holding activity full % Mercator Medical s.r.o. Czech Republic Distribution of disposable gloves, dressings and nonwoven fabric products full % Mercator Opero sp. z o.o. (***) Poland Construction of a non-woven fabric medical products plant full % Trino sp. z o.o.(****) Poland Lease of intellectual property and similar products full % Mercator Medical LLC (**) USA The entity does not conduct operating activities % The parent company includes a branch with its registered office in Budapest. The branch is an internal organizational unit which draws up independent financial statements which are subject to consolidation. (*) Shares held indirectly through LeaderMed B.V. (**) An entity not subject to consolidation due to its insignificant character and the fact that it does not run any operating activities. (***) Entity incorporated in 2016 (****) Entity incorporated in 2016, holds 50% of shares indirectly through Plakentia Holdings Limited which took over the shares in return of the contributed trademarks. 8

10 VII. Affiliated companies None. VIII. Certified Auditor Separate financial statements and consolidated financial statements for the year ended on 31 December 2016 were audited by BDO Sp. Z o.o., Warszawa, ul. Postępu 12. The entity auditing the financial statements for the year ended on 31 December 2016 was appointed pursuant to the Resolution of the Supervisory Board of 21 July The Agreement on Auditing Services with Respect to the Review of the Company's Half-Yearly Financial Statement and Consolidated Financial Statements Drawn up 30 June 2016 and Audit of the Company's Annual Separate Financial Statement and Consolidated Financial Statements Drawn up 31 December 2016 was signed on 25 July The appointed entity (BDO sp. z o.o.) is authorised to audit financial statements and has been entered in the list of entities authorised to audit financial statements kept by the National Chamber of Statutory Auditors at no The Company has already availed of that entity's services with respect to review of the Company's half-yearly separate and consolidated financial statements drawn up 30 June 2015 and audit of the Company's annual separate and consolidated financial statements drawn up 31 December IX. Statement of the Management Board In accordance with the requirements of the Regulation of the Minister of Finance of 19 February 2009 on current and periodical information disclosed by issuers of securities the Management Board of Mercator Medical S.A. hereby represents that: - to the best of their knowledge the annual, consolidated financial statement and comparative information were drawn up in accordance with applicable accounting regulations and that they present the assets, finances and financial result of the Group in a true, fair and transparent manner and that the statement of the Management Board's report on the Group's operations for the year ended on 31 December 2016 presents a true picture of the Group's development and achievements and of its standing, including the description of the basic risk and threats; - the entity authorised to audit financial statements and auditing the annual, consolidated financial statement for the year ended on 31 December 2016 was appointed in accordance with the regulations of law. The said entity and expert auditors performing the audit met the requirements necessary to express an unbiased and independent opinion, in accordance with applicable provisions of law and professional standards. X. Approval of the consolidated financial statements This consolidated financial statement for the accounting year ended 31 December 2016 was adopted by the Parent Entity's Management Board on 16 March

11 B. DESCRIPTION OF THE ADOPTED FINANCIAL REPORTING PRINCIPLES (POLICY), INCLUDING METHODS OF VALUATION OF ASSETS AND EQUITY & LIABILITIES AND REVENUE AND COSTS I. Compliance with financial reporting regulations These consolidated financials have been prepared in compliance with the International Accounting Standards and International Financial Reporting Standards adopted for application in the European Union. II. Functional currency and unit of presented data The Parent Entity's functional currency is Polish złoty (PLN). Financial statements of individual entities of the Group are drawn up in the functional currency of the given entity and afterwards items from those statements are converted into Polish złoty in accordance with the principles described below in section III. 2. The consolidated financial statements of Mercator Medical S.A. Group of Companies is presented in thousands of Polish złoty (PLN '000), taking into consideration rounding up consistent with generally accepted rules. III. Description of key accounting principles The accounting regulations (policy) presented below have been applied with respect to all periods presented by the Group in the financial statements. III. 1. Principles of consolidation The consolidated financial statements include the financial statements of the Company and of the entities controlled by the Company and the Company's subsidiaries. Consolidation of a subsidiary begins as of the moment when the Company takes over control over such a subsidiary and ends with the loss of such a control. The income and costs of a subsidiary acquired or disposed of in the course of a year are recognised in the consolidated statement of profit and loss and other comprehensive income in the period starting on the date on which the Company took over control over such a subsidiary and ending on the date on which the Company lost control over such a subsidiary. Financial result and all components of other comprehensive income are attributed to the Company's owners and non-controlling interest. Comprehensive income of subsidiaries is attributed to the Company's owners and non-controlling interest even if it results in a deficit in non-controlling interest. Business combinations Business combinations are accounted for by applying a purchase method the date on which the Group takes control over the entity being acquired. Control is defined as the ability to manage the financial and operational policy of the entity in order to benefit from its operation. When determining whether control exists the Group takes into account potential voting rights which may be currently exercised. The group recognises goodwill the date of acquisition as: transferred consideration at fair value; increased by settlement of the pre-existing relationships and recognised value of non-controlling interest in the entity being taken over; increased by the fair value of the previously held equity-interest in the acquiree, if the acquisition is achieved in stages; reduced by recognised net (fair value) of the identifiable assets acquired and liabilities assumed. If the difference is negative the bargain purchase gain is recognised in profit or loss of the current period the date of acquisition. The costs of acquisition other than those relating to the issue of debt or equity instruments incurred by the Group in connection with business combination is accounted for as the cost of the period in which they were incurred. With respect to every acquisition the Group recognises non-controlling interest in the acquiree at fair value or at the value per non-controlling interest which is proportionate to the part of identifiable net assets of the acquiree measured at fair value. 10

12 Changes of interest in the equity of subsidiaries not resulting in a loss of control Any changes of Group's interest in the equity of subsidiaries which do not result in a loss of control over such entities by the Group are accounted for as equity transactions. The carrying amount of the Group's interest and non-controlling interest is corrected in order to take into account changes of interest in the given subsidiaries. Differences between the amount of adjustment of non-controlling interest and fair value of the consideration transferred or received are recognised directly in equity and attributed to Company's owners. Loss of control At the moment of a loss of control the Group stops recognising subsidiary's assets and liabilities, non-controlling assets and other equity components related to the subsidiary. Any possible excess or shortage resulting from a loss of control are recognised in profit or loss of the current period. If the Group retains any interest in the previous subsidiary it is measured at fair value the date of the loss of control. After initial recognition the interest is treated as interest accounted for by the equity method or as available-for-sale financial assets, depending on the degree of impact on the entity's activity retained by the Group. Consolidation adjustments During consolidation all intragroup assets, liabilities, equity, unrealised gains and losses, income, costs and cash flows related to the transactions effected between members of the Group of Companies are totally eliminated. III. 2. Foreign currencies Transactions in foreign currencies Transactions expressed in foreign currencies the date of effecting the transaction are recognised in the functional currency of Group Entities, with application of the exchange rate of the functional currency into a foreign currency applicable the date of the transaction. Cash items of assets and liabilities denominated in foreign currency are converted at the end of the reporting period using the exchange rate applicable the balance sheet date. Currency translation differences are presented in profit or loss of the current period. Non-monetary balance sheet items expressed in a foreign currency measured at fair value are converted using the National Bank of Poland's mean exchange rate of the functional currency applicable the date of fair value measurement. The Group converts non-monetary items carried at historical cost in foreign currency using the exchange rate applicable as at the date of the transaction. Conversion of financial data of an entity operating abroad Assets and liabilities of entities operating abroad are converted using the National Bank of Poland's mean exchange rate applicable as at the end of the reporting period. Revenue and costs of entities operating abroad are converted using the exchange rate which is an arithmetic mean of the National Bank of Poland's mean exchange rates the day ending every month of the reporting period. Differences occurring at translation are recognised in other comprehensive income and are presented as differences from translation of foreign entities. III. 3. Financial instruments Financial instruments other than derivatives exposed to Loans, receivables and deposits are recognised at the date of their establishment. All other financial assets (including the assets measured at fair value through profit or loss) are recognised as at the date of the transaction in which the Group becomes a party to a mutual liability with respect to a given financial instrument. 11

13 The group stops recognising financial assets at the time of expiration of the rights, arising from the contract, to receive cash flows from such an asset or at the time when the rights to receive cash flows from a financial asset are transferred in a transaction which generally transfers all significant risks and benefits arising from their ownership. Every interest in a transferred financial asset which has been established or remains in the Group's possession is treated as a separate asset or liability. Financial assets and liabilities are set off against each other in the statement of financial position in a net amount only if the Group holds a legally enforceable right to set off specific assets and financial liabilities or intends to settle a given transaction on the basis of the net amount of the offset assets and financial liabilities or intends to simultaneously realise the assets and settle the financial liabilities subject to setoff. The Group classifies financial instruments, other derivative financial assets into the following categories: financial assets measured at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and financial assets available for sale. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are initially recognised at fair value plus transaction costs that can be directly attributed to their acquisition. Loans and receivables are measured at a later time at amortised cost based on the effective interest rate method, after deduction of impairment write-offs, if any. Loans and receivables include cash and cash equivalents, trade receivables and other receivables. Cash and cash equivalents Cash and cash equivalents include cash on hand, cash in transit and cash in bank available on demand with initial maturity up to three months. Cash and cash equivalents shown in the cash flow statement comprise the above-mentioned cash and cash equivalents and are not reduced by outstanding revolving facilities. Financial liabilities other than derivatives Financial liabilities are recognised at transaction date on which the Group becomes a party to a contract under which it is obliged to issue a financial instrument. The Group excludes a financial liability from the books upon payment, extinguishment or prescription of the debt. Other financial liabilities include loans, overdraft, trade and other liabilities. Such financial liabilities are initially recognised at fair value increased by directly attributable transaction costs. Upon initial recognition such liabilities are measured at amortised cost using the effective interest rate method. Equity and treasury shares Ordinary shares are recognised in equity. The costs immediately related to the issue of ordinary shares, corrected by tax receipts, reduce the value of equity. 12

14 Treasury shares buyback If a Group entity buys back the shares which make up its basic capital (treasury shares), the payment amount which includes the costs directly related to purchase (taking into consideration tax effects) reduces the equity attributable to entity's owners until the shares are retired or sold. Bought back treasury shares are presented as a component of other capitals. If such shares are then sold the payment received for them, after deduction of all transaction costs and tax effects, increases the shareholders' equity while the excess or loss on transaction is presented in the item Share premium capital. Derivative financial instruments The derivatives owned by the Group are held only for hedging purposes although hedge accounting is not applied. Derivative financial instruments are initially recognised at fair value. Transaction costs are recognised at the time when they are borne in profit or loss of the current period. Any changes of such instruments' fair value are recognised in profit or loss of the current period. III. 4. Property, plant and equipment Recognition and valuation Items of property, plant and equipment are recognised as assets when it is probable that the future economic benefits associated with the asset will flow to the Company and the cost of the asset can be measured reliably. Initially the item of property, plant and equipment is recognised at its cost (purchase price) which includes all costs necessary to bring the asset to working condition for its intended use. The purchase cost includes the asset's purchase price and the costs immediately related to the purchase and to making the asset usable, including costs of transport and also loading, unloading and storage. Discounts, price reductions and similar reductions reduce the asset's purchase price. The cost of production of an asset or construction in progress asset includes all costs incurred during the period of its construction, assembly, adaptation and improvement incurred until the date on which such an asset is handed over for use (or until the end of a reporting period if the asset has not been handed over for use yet). The production cost includes also, when required, initial valuation of the costs of disassembly and removal of the items of property, plant and equipment and the costs of restoring the place where the asset is to be located to its initial condition. Items of property, plant and equipment are accounted for the balance sheet date at reassessed value (lands, buildings) or purchase price or production cost (other) less depreciation and impairment write-offs. If the revaluation model is used, the entire group is subject to that. Valuation of property, plant and equipment is repeated frequently enough to ensure that the carrying amount does not differ materially from the revaluation amount. If the carrying amount of an asset increases due to revaluation, the increase is recognised in other comprehensive income and accumulated in equity as revaluation surplus. If the revaluation value decreases, it is recognised directly as an expense of a given period. As on the balance sheet date, when establishing new fair values and carrying out initial revaluation, if the previous revaluation surplus was recognised in equity, increases are still credited to other comprehensive income and recognised in equity, whilst decreases are accounted for with previous surplus until the total amount of surplus is accounted for. Other decreases are accounted for as a cost of the given period. Whereas if the previous revaluation difference was recognised as an expense of a given period, revaluation increases are recognised as revenue of the period up to the amount of the costs previously accounted for. With respect to the listed groups of the Group's tangible property which are presented in revalued amounts, depreciation at revaluation date is removed from the gross carrying amount of the asset whilst the net carrying amount is adjusted to the revaluation amount. 13

15 Revaluation surplus recognised in equity (in the item revaluation reserve) is transferred from retained earnings at the time of disposal or liquidation of the revalued item from Group's assets. Purchased software necessary for correct functioning of the equipment with which it is associated is activated as a part of such equipment. If the specific asset consists of separate and important parts with different useful life, those parts are treated as separate assets. An asset is removed from the balance sheet at the time of sale or when it is expected that the entity will not receive any economic benefits from its use. Any gain or loss on assets' disposal or withdrawal from use is recognised as other operating revenue/expenses in the result of the period in which such assets were removed from the balance sheet (calculated as a difference between the proceeds from sale and such asset's carrying amount). Construction in progress assets are valued at the total amount of expenses directly related to their acquisition or manufacturing, including financial expenses, less any impairment write-offs. Depreciation of property, plant and equipment begins when the asset is put to use, in accordance with the principles applicable to other fixed assets of the Group. Expenditures incurred at a later date Further expenditures are recognised in carrying amount of the given asset or as a separate fixed asset (when appropriate) only when it is probable that the future economic benefits associated with the asset will flow to the Group and the cost of such an asset can be measured reliably. The costs of replacing parts of an item of property, plant and equipment incurred subsequently, which can be reliably measured and where it is probable that the future economic benefits associated with the replaced components of the item will flow to the Group, are activated. The carrying amount of the removed parts of the item of property, plant and equipment is derecognised. Expenditures incurred for ongoing maintenance of items of property, plant and equipment are recognised as profit or loss of the given period at the time they are incurred. The costs of ongoing maintenance include labour costs and costs of materials used and may include the costs of minor replacement parts. Such costs are usually incurred for maintenance and overhauls of individual items of property, plant and equipment. Depreciation Depreciation write-offs are calculated based on the depreciable amount, that is the revaluation amount, purchase price or cost of creation of the given item less the item's residual value. The Group starts depreciation in the subsequent month, when the given item of property, plant and equipment is made available for use. The Group evaluates also the useful life of significant components of individual items of property, plant and equipment and, if the useful life of the given component is different than the useful life of the remaining part of the item, such a component is depreciated separately. The costs of depreciation are recognised in the statement of comprehensive income using the straight line method with reference to the useful life of the item of property, plant and equipment estimated by the Group which in the most precise way reflects the way of realisation of future economic benefits related to utilisation of the given item. The Group has assumed the following useful lives with respect to individual categories of property, plant and equipment: Land Buildings and structures Technical equipment, machines Means of transport Other property, plant and equipment not subject to depreciation years 3 22 years 5 7 years 2 10 years 14

16 Correctness of the applied useful lives, depreciation methods and residual values of property, plant and equipment is verified at the end of every reporting year and, when necessary, corrected. III. 5. Intangibles Goodwill Goodwill, which arises as a result of acquisition of subsidiaries, is recognised as separate item in the statement of financial position. Goodwill arises in connection with acquisition of subsidiary entities and is a surplus of the consideration transferred, amount of non-controlling interest in the acquiree and fair value of the acquirer's previously-held equity interest in the acquiree at the acquisition date over the fair value of acquired recognisable net assets. Valuation after initial recognition: After initial recognition the goodwill is presented at purchase price less aggregate impairment write-offs. Goodwill is tested for impairment once a year (or more frequently if there are any grounds which make the possibility of impairment likely). Software and other intangible assets Software and other intangible assets acquired by the Group and having a specified economic useful life are recognised at purchase price less depreciation write-offs and impairment write-offs. Expenditures incurred at a later date Subsequent expenditures for items of existing intangible assets are subject to activation only if they increase future economic benefits associated with such an item. Other expenditures, including the expenditures on independently developed trademarks, goodwill and brand are recognised in profit or loss of the current period at the time they are incurred. Depreciation Depreciation write-offs are calculated based on the depreciable amount, that is the purchase price of the given item of intangible assets less the item's residual value. The Group starts depreciation in the subsequent month, when the given item of intangible assets is made available for use. The costs of depreciation are recognised in the statement of comprehensive income using the straight line method with reference to the useful life of the item of intangible assets, other than goodwill, estimated by the Group, starting at the time of establishing that it is fit for use, which in the most precise way reflects the way of realisation of future economic benefits related to utilisation of the given item. Intangible assets in the form of software are depreciated over the estimated useful life, that is 2 to 10 years. Correctness of the applied useful lives, depreciation methods and residual values of intangible assets is verified at the end of every reporting period and, when necessary, corrected. III. 6. Investment property Investment property is held to earn rentals or for capital appreciation or both. Investment properties are not intended for sale under normal Group's operation or for being used for production, delivery of goods or services of for administration purposes. 15

17 Investment property, at the time of initial recognition is measured at cost, and remeasured at fair value. Any gains or losses arising from a change in fair value are recognised in the profit or loss of the current period. The cost includes the price of purchase of the investment property item and the costs directly related to the purchase of the investment property. The cost of construction or development of an investment property includes the costs of materials and the costs of remuneration for the employees directly involved in the construction or development of such investment property and other costs directly related to adaptation of the investment property for the intended purpose as well as external financing costs. Investment property is derecognised on disposal or withdrawal from use or if no future economic benefits are expected from its disposal. Gains or losses arising from derecognition of property (calculated as a difference between disposal proceeds and the carrying amount of such an item) are recognised as a result of the period in which the item was derecognised. III. 7. Items of fixed assets used under lease contracts The lease contracts under which the Group incurs substantially all risks and draws substantially all benefits incident to ownership are classified as finance leases. The assets acquired as a result of a finance lease are initially recorded at the lower of the fair value of the asset and the present value of the minimum lease payments, and then reduced by depreciation write-offs and impairment write-offs. Leases other than finance leases are treated as operating lease and are not recognised in the Group's statement of financial situation. III. 8. Inventories Inventory items are measured at purchase cost or at production cost, not higher than the net realisable value. The value of inventories is determined using the first-in first-out (FIFO) method. The purchase cost includes the purchase price increased by the costs directly related to purchase and to making the item usable or marketable. The realisable net sales value is the estimated selling price of inventory less the costs necessary to make the sale. III. 9. Asset impairment write-offs Financial assets (including receivables) At the end of every reporting period the Group estimates whether there is any objective evidence indicating impairment on financial assets not measured at fair value through profit or loss. It is assumed that an item of financial assets has been impaired if after its initial recognition there are any objective grounds for occurrence of an event which would result in impairment and which might have a negative, reliably estimated impact on the value of future cash flows related to such asset. Objective grounds for impairment of financial assets include non-payment or delay in payment of a debt by a debtor, restructuring of a debtor's debt to which the Group consented for economic or legal reasons resulting from the debtor's financial problems and which would not have been given otherwise, circumstances indicating high probability of debtor's bankruptcy, economic conditions conducive to infringing a contract. 16

18 The Group evaluates the grounds indicating the impairment of loans granted and receivables or investments held-tomaturity, both on the level of an individual item of assets as well as with respect to groups of assets. In the case of individually significant loans granted and receivables and investments held-to-maturity, a test for impairment of an individual item of assets is conducted. When assessing impairment of a group of assets the Group uses historical trends for estimating probability of occurrence of arrears and time of payment and the value of incurred losses, corrected with estimates of the Management Board evaluating whether the current economic and credit conditions indicate that the real level of losses will differ significantly from the level of losses that results from assessment of historical trends. Impairment of the financial assets measured at amortised cost is estimated as a difference between their book value (the value presented in the statement on financial standing) and the current value of estimated future cash flows discounted using the initial effective interest rate. Any losses are recognised as profit or loss of the current period and they reduce the book value of loans granted and receivables, whereas the Company continues to charge interest on revalued assets. If subsequent circumstances indicate that the grounds resulting in impairment have ceased to exist, then reversal of the impairment write-off is recognised in the profit or loss of the current period. Non-financial assets The carrying amount of non-financial assets other than investment property, inventories and deferred tax assets is appraised at the end of every reporting period in order to establish whether there are any indications of its impairment. If such grounds exist the Group determines the recoverable amount of individual assets. The recoverable amount of goodwill, intangible assets with an indefinite useful life and intangible assets not yet available for use is measured annually, at the same time of year. Impairment loss is recognised if the book value of an asset or a related cashgenerating unit exceeds its estimated recoverable amount. Recoverable amount of assets or CGUs is defined as the higher of an asset's net selling price and its value in use. In measuring value in use future cash flows are discounted using the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit. For the purpose of conducting impairment tests assets are grouped into the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or cash-generating units. The group tests goodwill for impairment by grouping cash-generating units in such a way that the level of organisation, not higher than a separate operating segment, on which the test is being conducted reflects the lowest level of organisation on which the Group monitors goodwill for internal purposes. For the purposes of impairment tests the goodwill acquired in the process of business combination is allocated to cash-generating units that are expected to benefit from the synergies of the combination. Common (corporate) assets of the Group do not generate separate cash inflows and are utilised by more than one CGU. Common assets are allocated to cash-generating units on the basis of uniform and reasonable criteria and are subject to impairment tests as an element of the tested cash-generating units to which they are allocated. Impairment write-offs are recognised in profit or loss of the current period. Impairment of a cash-generating unit is in the first place recognised as impairment of the goodwill attributed to such unit (group of units) and afterwards as an impairment of book value of other assets of that unit (group of units) on a pro rata basis. Property, plant and equipment and intangible assets valuation allowances are presented in the statement of comprehensive income in the item Other operating expenses. 17

19 An impairment loss is irreversible. With respect to other assets, impairment write-offs recognised in previous periods are reviewed, at every end of the reporting period, to find out whether there have been any grounds indicating impairment loss or total reversal of impairment loss. Impairment loss is reversed if the estimates applied to calculation of the recoverable amount have changed. Impairment loss is reversed only up to the carrying amount of the asset reduced by depreciation write-offs that would be recommendable if the impairment loss had not been recognised. III. 10. Employee benefits Long-term employee benefits Group's net liabilities resulting from long-term employee benefits refer to future retirement benefit liabilities arising from provisions of the Labour Code to which the employees became entitled for their service in the current period and in previous periods. The carrying value of future retirement benefit liabilities depends on a number of factors and is determined using actuarial valuation methods. The factors taken into account in calculating retirement benefits include: length of service, structure of employment, probability of payment of retirement benefits. The value of those benefits is discounted in order to determine their current value. Discount rate is determined by reference to market yields on government bonds at the end of the reporting period the redemption date of which is close to the date of liability realisation. The value of benefits is determined using the method of projected individual entitlements at the end of every reporting year (projected unit credit method). Actuarial gains and losses are recognised in profit or loss of the period in which they arose. Short-term employee benefits Short-term employee benefits include for example: wages, salaries, paid holidays, bonus payments, non-monetary benefits for employees provided for in the labour code pursuant to the provisions of IAS 19. The Group calculates the costs of employee holidays on an accrual basis using the liability method. The value of unused holiday equivalent estimated in such a way is recognised in the Group's books based on the difference between the actual use of holidays by employees and the situation that would result from pro rata use of holidays over time and is recognised in the financial statements as short-term liability arising from other employee benefits during employment. Payment in the form of shares Fair value of the parent entity stock option granted to an employee is recognised as remuneration costs in association with increase of equity. Fair value is determined the date of granting the employee stock option and is distributed over the period in which the employees will unconditionally get the right to exercise the option. The amount charged to costs is adjusted to reflect the current number of granted options with respect to which the conditions of providing service and non-market conditions of acquiring the rights have been met. III. 11. Provisions A provision is recognised when the Group has a legal or customarily expected obligation resulting from past events which can be reliably measured and it is probable that settlement of that obligation will involve outflow of economic benefits. Provisions are recognised at the amount of the best estimate of expenditure necessary to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties that surround the underlying events. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Changes of provisions resulting from adjustments are recognised in the statement of comprehensive income. 18