Financial Statements and Independent Auditors' Report. Post and Telecommunication of Kosovo J.S.C. As of and for the year ended 31 December 2014

Transcription

1 Financial Statements and Independent Auditors' Report Post and Telecommunication of Kosovo J.S.C As of and for the year ended 31 December

2 Contents Independent Auditor s Report 1 Statement of financial position 3 Statement of comprehensive income 4 Statement of changes in equity 5 Statement of cash flows 6 Notes to the financial statements 7

3 Independent Auditors Report Grant Thornton LLC Rr. Rexhep Mala Prishtina Kosovo T T F To the Board of Directors of the Post and Telecommunication of Kosovo J.S.C We have audited the accompanying financial statements of Post and Telecommunication of Kosovo J.S.C ( the Company ) which comprise the statement of financial position as at, and the statement of comprehensive income, statement of changes in equity, and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Chartered Accountants Member firm of Grant Thornton International Ltd

4 2 Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Post and Telecommunication of Kosovo J.S.C as at, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of Matter As disclosed in the note 5 the company connects international fixed calls to foreign administration through lines managed by Telekom Serbia. Since there is no interconnection agreement between PTK and Telekom of Serbia that would regulate mutual relationships with regard to telecommunication traffic the financial effect of the interconnection cannot be reliable measured and quantified. Other Matter The financial statements of the Company as at and for the year ended, were audited by another auditor whose report dated May 20, expressed unqualified opinion on those financial statements. Chartered Accountants Member firm of Grant Thornton International Ltd

5 Statement of Financial Position as at, Note ASSETS Property, plant and equipment 6 86,937 71,817 Intangible assets 7 16,449 17,747 Available-for-sale financial assets Deferred tax assets Total non-current assets 103,990 89,827 Current assets Inventories 10 5,286 4,681 Trade receivables 11 10,704 14,326 Income tax receivable 24 2,223 - Prepaid expenses and other receivables 12 2,272 2,218 Short-term deposit with banks 13 18,066 - Cash and cash equivalents 13 30,375 54,708 Total current assets 68,926 75,933 TOTAL ASSETS 172, ,760 EQUITY AND LIABILITIES Equity Shared capital 14 4,475 4,475 Reserves 55,000 55,000 Retained earnings 84,291 82,735 Total equity 143, ,210 Liabilities Trade payables 15 9,848 3,849 Income tax payable Other payables and accruals 16 16,754 16,486 Deferred income 17 2,548 2,263 Total liabilities 29,150 23,550 TOTAL EQUITY AND LIABILITIES 172, ,760 Authorized to issue by the Board of Directors of Post and Telecommunications of Kosovo J.S.C. on 22 May 2015 signed on their behalf. Rexhë Gjonbalaj Agron Mustafa Nuredin Krasniqi The accompanying notes from 1 to 28 form an integral part of these financial statements 3

6 Statement of Comprehensive Income for the year ended, Note Revenue 18 99, ,851 Operational costs 20 (19,739) (23,179) Staff costs 21 (27,816) (28,342) Depreciation 6 (12,295) (13,186) Amortization 7 (3,990) (3,978) Provisions for litigations 22 (256) (1,361) Other operating costs 23 (17,636) (19,564) Operating Profit 17,779 39,241 Other income Interest income ,385 Income from release of impairment loss Profit before tax 18,646 40,833 Income tax expense 24 (2,090) (4,724) Net profit for the year 16,556 36,109 Other comprehensive income for the year - - Total comprehensive income for the year 16,556 36,109 The accompanying notes from 1 to 28 form an integral part of these financial statements 4

7 Statement of Changes in Equity for the year ended, Note Share capital Reserves Retained earnings Total Balance at January 1, 4,475 55,000 86, ,101 Comprehensive income for the year Profit for the year ,109 36,109 Other comprehensive income Total comprehensive income for the year ,109 36,109 Distributions to the owner Dividends paid (40,000) (40,000) Total distributions to the owner - - (40,000) (40,000) Balance at, 4,475 55,000 82, ,210 Balance at January 1, 4,475 55,000 82, ,210 Comprehensive income for the year Profit for the year ,556 16,556 Other comprehensive income Total comprehensive income for the year 16,556 16,556 Distributions to the owner Dividends paid (15,000) (15,000) Total distributions to the owner - - (15,000) (15,000) Balance at, 4,475 55,000 84, ,766 The accompanying notes from 1 to 28 form an integral part of these financial statements 5

8 Statement of Cash Flows for the year ended, Cash flows from operating activities Note Net profit for the year 16,556 36,109 Adjustments for: Depreciation 6 12,295 13,186 Amortization 7 3,990 3,978 Impairment losses on doubtful debts 23 1,311 3,583 Release of impairment provision bank deposits 13 (12) - Interest income 13 (529) (1,385) Impairment of available for sale financial assets Current income tax expense 24 2,632 5,447 Deferred tax credit 24 (542) (723) Operating profit before changes in working capital and provisions 35,902 60,195 Changes in inventories (605) 456 Changes in trade receivables 2,311 (191) Changes in prepaid expenses and other receivables 53 (1,453) Changes in trade payables 5,999 (2,862) Changes in accruals and other payables 268 2,051 Changes in deferred income Cash generated from operations 44,213 58,207 Income taxes paid (5,807) (5,292) Net cash generated from operating activities 38,406 52,915 Cash flows from investing activities Interest received 422 1,532 Purchase of property, plant and equipment (30,107) (7,519) Net investments in bank deposits (18,054) - Net cash used in investing activities (47,739) (5,987) Cash flows from financing activities Dividends paid (15,000) (40,000) Net cash used in investing activities (15,000) (40,000) Net change in cash and cash equivalents (24,333) 6,928 Cash and cash equivalents at the beginning of the year 54,708 47,780 Cash and cash equivalents at the end of the year 13 30,375 54,708 The accompanying notes from 1 to 28 form an integral part of these financial statements 6

9 Notes to the Financial Statements for the year ended, 1 INTRODUCTION 1.1 General Post and Telecommunications of Kosovo J.S.C. ( the Company ) is a Joint Stock Company incorporated in the Republic of Kosovo. The Company's head office is located at Dardania Street, Prishtina, Republic of Kosovo. The Company provides telecommunication services, such as mobile and fixed telephony, postal services, internet services and IPTV services. As at, the Company has 2,339 employees (: 2,371). On August 1, 2012 by the decision of the Government of Kosovo postal services were transferred to Post of Kosovo a newly formed Company where 926 staff has left. 1.2 Background information PTK enterprise was an enterprise within the meaning of UNMIK Regulation No. 2005/18, amending UNMIK Regulation No. 2002/12 On the Establishment of the Kosovo Trust Agency ( KTA ). Regulation 2005/18 has given to KTA the authority to transform enterprises into corporations. At a meeting dated May 9, 2005 the Board of Directors of the KTA resolved to transform PTK enterprise into a joint stock Company, named Post and Telecommunications of Kosovo Holding, J.S.C. On the incorporation date June 22, 2005 PTK Holding effectively substituted the former enterprise formerly doing business as Post and Telecommunications of Kosovo on a continuing basis, without liquidation. PTK enterprise was the first enterprise that was transformed into a Corporation under the KTA Regulation and Administrative Directive 2005/6. KTA acted as trustee for the ultimate owners of Kosovo s enterprises pursuant to the KTA Regulation, was the current holder of 100 percent of the shares of PTK Holding. The issued share capital upon incorporation amounts to Euro 260 million. Shortly after its incorporation, PTK Holding formed an operating Company, Post and Telecommunications of Kosovo J.S.C. ( PTK ) and transferred certain of its assets to PTK as a capital contribution. PTK Holding was the 100% shareholder of Post and Telecommunications of Kosovo J.S.C. The registered capital of the wholly owned subsidiary amounts to Euro 250 million, and the shares of the subsidiary were issued in exchange for certain net assets contributed in kind by PTK Holding. Given the practical effect of the transformation and of incorporation, the Tax Administration has approved the restructuring process of PTK enterprise as reorganization for the purposes of Section 24.1 of UNMIK Regulation No. 2004/51 On Corporate Income Taxes. On June 13, 2008 the Assembly of the Republic of Kosovo approved the Law on Publicly owned Enterprises (Law No.03/L-087), and based on provision of section 3 of this Law, Central publicly owned Enterprises including PTK JSC are declared to be assets of the Republic of Kosovo. Government of the Republic of Kosovo has through the Ministry of Economy and Finance the exclusive authority to exercise the shareholder rights over the publicly owned Enterprises. On October 13, 2009 the Government has issued a decision for merging of these two companies PTK Holding and PTK JSC into one company Post and Telecommunications of Kosovo J.S.C. ( the Company ) with registered capital of Euro 5,000,000, composed of five million common shares with nominal value of Euro 1 per share. All shares are issued in the name of Republic of Kosovo. On December 21, 2011, the Government has issued a decision on the establishment of the Public Central Enterprise Post of Kosovo JSC. The Public Central Enterprise Post of Kosovo JSC established the separation of the Postal Unit from the current division of Public Enterprise Post and Telecommunications of Kosovo J.S.C.. 7

10 Notes to the Financial Statements for the year ended, 1.3 Business activities At, the Company has three business units, two of which are licensed by Telecommunication Regulation Authority of Kosovo ( TRA ), one of them is also authorized by the TRA for offering internet services and one is licensed by the Ministry of Transport and Communications: In accordance with Government of Kosovo starting from August 1, 2012 Post of Kosovo has started the separate operations as separate unit from PTK. Process of division of Post of Kosovo has started in 2012 in accordance with Government of Kosovo decision No. 16/53 dated December 21, 2011 for division of Post of Kosovo. This division will be done in accordance with independent advisor report dated July 2011 which was then approved by Management of PTK. Fixed Telecommunications Unit ( Fixed Telecommunications ) The Fixed Telecommunications Unit is the licensed network and service provider of fixed telecommunication services to retail and business customers in the territory of Kosovo. Fixed Telecommunications Unit also offered internet services from 2001 and today is on of operators offering internet services in Kosovo, authorized by the TRA. Mobile Telephony Unit ( Vala ) Vala is the GSM mobile operating unit and is currently one of licensed network and service providers of mobile telecommunication services in Kosovo. PTK enterprise entered into an agreement in 2000, to provide mobile services in Kosovo, with Monaco Telecom International ( MTI ) which entitles PTK to use the MTI international dialing code and enables PTK to connect its mobile network to international networks. As a component of this agreement PTK compensate MTI with a share of revenues and pay certain international traffic costs. During 2006, the contract between MTI and PTK J.S.C. has been renegotiated and amended. The new framework Agreement covers the use of Monaco s International Dialing Code, International traffic, Roaming and technical know-how transfer. In addition the framework Agreement provides for a termination clause in the event that Kosovo acquires an International Dialing Code (IDC) of its own. Also in May of 2009, the contract between MTI and PTK JSC was re-negotiated and changed, again. New Annex of the Framework Contract covers the use of the Monaco International dialing code, international traffic, roaming and transfer technical knowledge, which came into force on January 1, In addition, the annex of the new framework contract covers a provision for termination of contract if Kosovo provides / receives its own code as well as international calls for reduction of tariff code. 8

11 Notes to the Financial Statements for the year ended, 2. ADOPTION OF NEW AND REVISED STANDARDS 2.1 New standards, interpretations and amendments effective from January 1, (a) New and revised standards that are effective for annual periods beginning on or after January 1, A number of new and revised standards are effective for annual periods beginning on or after 1January. Information on these new standards is presented below. IFRIC 21 Levies IFRIC 21 clarifies that: the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by the government s legislation. If this activity arises on a specific date within an accounting period then the entire obligation is recognized on that date the same recognition principles apply in the annual and interim financial statements. IFRIC 21 has no material effect on the Company financial statements. Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) These amendments clarify the application of certain offsetting criteria in IAS 32, including: the meaning of currently has a legally enforceable right of set-off that some gross settlement mechanisms may be considered equivalent to net settlement. The amendments have been applied retrospectively in accordance with their transitional provisions. As the Company does not currently present any of its financial assets and financial liabilities on a net basis using the provisions of IAS 32, these amendments had no material effect on the Company financial statements for any period presented. Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36) These amendments clarify that an entity is required to disclose the recoverable amount of an asset (or cash generating unit) whenever an impairment loss has been recognised or reversed in the period. In addition, they introduce several new disclosures required to be made when the recoverable amount of impaired assets is based on fair value less costs of disposal, including: additional information about fair value measurement including the applicable level of the fair value hierarchy, and a description of any valuation techniques used and key assumptions made the discount rates used if fair value less costs of disposal is measured using a present value technique. The amendments are applied retrospectively in accordance with their transitional provisions. The application of IAS 36 does not impact Company financial statements. Early adoption of Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) The amendments to IAS 19 made a number of changes to the accounting for employee benefits. These amendments are effective for annual periods beginning on or after July 1, and: clarify the requirements of IAS 19 relating to contributions from employees or third parties Introduce a practical expedient such that contributions that are independent of the number of years of service may be treated as a reduction of service cost in the period in which the related service is rendered. The application of IAS 19 does not impact Company financial statements. 9

12 Notes to the Financial Statements for the year ended, 2. ADOPTION OF NEW AND REVISED STANDARDS (CONTINUED) 2.1 New standards, interpretations and amendments effective from January 1, (b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by Company At the date of authorisation of these financial statements, certain new standards, and amendments to existing standards have been published by the IASB that are not yet effective, and have not been adopted early by the Company. Information on those expected to be relevant to the Company financial statements is provided below. Management anticipates that all relevant pronouncements will be adopted in the Company accounting policies for the first period beginning after the effective date of the pronouncement. New standards, interpretations and amendments not either adopted or listed below are not expected to have a material impact on the Company financial statements. IFRS 9 Financial Instruments () The IASB recently released IFRS 9 Financial Instruments (), representing the completion of its project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard introduces extensive changes to IAS 39 s guidance on the classification and measurement of financial assets and introduces a new expected credit loss model for the impairment of financial assets. IFRS 9 also provides new guidance on the application of hedge accounting. The Company management has yet to assess the impact of IFRS 9 on these financial statements. The new standard is required to be applied for annual reporting periods beginning on or after 1 January IFRS 15 Revenue from Contracts with Customers IFRS 15 presents new requirements for the recognition of revenue, replacing IAS 18 Revenue, IAS 11 Construction Contracts, and several revenue-related Interpretations. The new standard establishes a control-based revenue recognition model and provides additional guidance in many areas not covered in detail under existing IFRSs, including how to account for arrangements with multiple performance obligations, variable pricing, customer refund rights, supplier repurchase options, and other common complexities. IFRS 15 is effective for reporting periods beginning on or after January 1, The application of IFRS 15 does not impact Company financial statements. Amendments to IFRS 11 Joint Arrangements These amendments provide guidance on the accounting for acquisitions of interests in joint operations constituting a business. The amendments require all such transactions to be accounted for using the principles on business combinations accounting in IFRS 3 Business Combinations and other IFRSs except where those principles conflict with IFRS 11. Acquisitions of interests in joint ventures are not impacted by this new guidance. The amendments are effective for reporting periods beginning on or after January 1, The application of IFRS 11 does not impact Company financial statements. 10

13 Notes to the Financial Statements for the year ended, 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). 3.2 Basis of measurement The financial statements have been prepared using the measurement bases specified by IFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies below. 3.3 Functional and presentation currency These financial statements are presented in Euro, which is the Company s functional currency. All financial information presented in Euro has been rounded to the nearest thousand. 3.4 Use of estimates and judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in the Note 5 Accounting estimates and judgments. The accounting policies set out below have been applied consistently to all years presented in these financial statements, unless otherwise stated. The financial statements are prepared as of and for the years ended, and. Where necessary comparative figures have been reclassified to conform to the changes in presentation for the current year 3.5 Foreign currency Transactions in foreign currencies are translated to the functional currency at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation of available-for-sale equity instruments (if any). 11

14 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.6 Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment provisions. Deemed cost represents revalued cost of certain items of property, plant and equipment revalued on January 1, 2005 the date of transition to IFRS, to fair value in relation to the initiated incorporation of PTK Holding. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor (if involved), any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Capital expenditure on assets in the course of construction is carried forward under Assets under construction and is capitalized and transferred to the appropriate asset category once completed, from which time depreciation is applied at the rate applicable to the category concerned. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognized in statement of comprehensive income as incurred. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining the operating result for the period. (iii) Depreciation Depreciation is recognized in statement of comprehensive income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land and assets under construction are not depreciated. The estimated useful lives for the major classes of assets are as follows (in both and ): Buildings (from date of valuation) 20 years Post offices (wooden structure) 10 years Network lines 20 years Cable duct and Towers 20 years Base Stations 5 years Machinery and equipment 5 to 10 years The useful lives, deprecation methods and residual values, if not insignificant, of property, plant and equipment are reassessed at the reporting date. 12

15 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.7 Intangible assets (i) Recognition and measurement Intangible assets are measured at cost less accumulated amortization and accumulated impairment losses, if any. (ii) Subsequent expenditure Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss when incurred. (ii) Amortization Amortization is recognized in statement of comprehensive income on a straight-line basis over the estimated useful lives of intangible assets from the date they are available for use. The estimated useful lives are as follows (in both and ): Software 5 years Telecom Licenses 15 years 3.8 Impairment of non-financial assets Property, plant and equipment, as well as intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in statement of comprehensive income. The recoverable amount is the higher of an asset s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit. 3.9 Financial assets The Company classifies its financial assets in the following categories: loans and receivables and available for sale financial assets. Management determines the classification of its investments at initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. Company s loans and receivables at the statement of financial position date consist of trade and other receivables, short term deposits with banks and cash and cash equivalents. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the statement of financial position date. Purchases and sales of financial assets are recognized on trade-date the date on which the Company commits to purchase or sell the asset. 13

16 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.9 Financial assets (continued) Recognition and measurement All financial assets other than assets at fair value through profit or loss are initially recognized at fair value plus transaction costs. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method. Changes in the fair value of monetary securities classified as available-for-sale are recognized in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the statement of comprehensive income as gains and losses from investment securities. Interest on available-for-sale securities calculated using the effective interest method is recognized in the statement of comprehensive income as part of other income. Dividends on available for sale equity instruments are recognized in the statement of comprehensive income as part of other income when the group s right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Company establishes fair value by using valuation techniques. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Company establishes fair value by using valuation techniques. In case of available for sale investments, significant or prolonged decline in the fair value of the assets below their cost is considered in determining whether the assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the statement of comprehensive income. Impairment losses recognized in the statement of comprehensive income on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in this Note Inventories Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. The cost of inventories consumed is based on the weighted average formula. 14

17 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.11 Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Assets with a short maturity are not discounted. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the statement of comprehensive income. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are recognized as current income in the statement of comprehensive income Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less Share capital Share capital and retained earnings (i) Shareholders capital Share capital represents the nominal value of shares that have been issued. (ii) Retained earnings Retained earnings comprise of non-distributed earnings from the current and past periods Trade payables Trade payables are carried at their fair value and subsequently measured at their amortized cost by applying the effective interest rate method. 15

18 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.15 Employee benefits Mandatory pensions The Company, in the normal course of its business, makes payments on its own behalf and on behalf of its employees to contribute to the mandatory pensions according to the local legislation. The costs incurred on behalf of the Company are charged to statement of comprehensive income as incurred. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under a short-term cash bonus if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability Recognition of revenue Mobile service revenue Mobile service revenue from prepaid scratch and sim cards is recognized based on usage. Unused airtime is included in deferred income in the Statement of financial position. Upon the expiration of pre-paid scratch cards, any unused airtime is recognized as income. Revenue from post-paid traffic is recognized based on the actual traffic generated by the caller in the current period. Revenue from international roaming air time and incoming calls is recognized on a per-minute basis in accordance with the periodic financial reports provided by its network services provider, Monaco Telecom International. Fixed line revenue Fixed line revenue is recognized on a per-impulse basis related to the current period. Internet service revenue Internet service revenue is recognized on a straight-line basis over the customer subscription period. Other revenue Revenue from the sale of goods is recognized in the statement of comprehensive income when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognized in the statement of comprehensive income in proportion to the stage of completion of the transaction at the financial position date. 16

19 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.18 Expenses Commissions due to Monaco Telecom International Commission costs to Monaco Telecom International are recognized on an accrual basis when incurred. Operating lease payments Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease Finance income and expenses Finance income comprises interest income on funds invested in bank deposits, gains on the disposal of available-for-sale financial assets, and foreign currency gains. Interest income is recognized as it accrues, using the effective interest method. Finance expenses comprise foreign currency losses, unwinding of the discount on provisions, if material, and impairment losses recognized on financial assets Dividend distribution Distribution of dividends to the Company s shareholders is recognized as a liability in the financial statements in the period when they are approved by the Company s shareholders Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. The tax currently payable is calculated and paid in accordance with Income Corporate Law No 03/L-162 entered into force commencing on January 1, Final tax on profit at a rate of 10% is payable based on the annual profit shown in the statutory statement of income as adjusted for items, which are non-assessable or disallowed. According to the current tax legislation, tax losses may be carried forward within a period seven years following the year in which the tax loss was incurred. Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 17

20 Notes to the Financial Statements for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.22 Commitments and contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. The amount of a contingent loss is recognized as a provision if it is probable that future events will confirm that, a liability incurred as at the financial position date and a reasonable estimate of the amount of the resulting loss can be made Related parties Related parties are those where one of the parties is controlled by the other or has significant influence in making financial or business decisions of the other party Events after reporting date Post-year-end events that provide additional information about a Company s position at the statement of financial position date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 18

21 Notes to the Financial Statements for the year ended, 4 FINANCIAL RISK MANAGEMENT 4.1 Financial risk factors The Company s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. This note presents information about the Company s exposure to each of the above risks, the Company s objectives, policies and processes for measuring and managing risk, and the Company s management of capital. Further quantitative disclosures are included throughout these financial statements. The management has overall responsibility for the establishment and oversight of the Company s risk management framework. The Company s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market and legislative conditions and the Company s activities. 4.2 Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company s receivables from customers and investments in bank deposits. Trade receivables The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a collective loss component established for similar customers in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Investments in bank deposits The Company has significant current and investment accounts with all of Kosovo s bank institutions. Guarantees The Company s policy is to provide financial guarantees only upon a decision of authorized directors or other key management personnel. The process of managing the credit risk from operating activities includes preventive measures such as creditability checking and prevention barring, corrective measures during legal relationship for example reminding and disconnection activities, collaboration with collection agencies and collection after legal relationship as litigation process, court proceedings, involvement of the executive unit and factoring. The overdue payments are followed through a debt escalation procedure based on customer s type, credit class and amount of debt. 19

22 Notes to the Financial Statements for the year ended, 4 FINANCIAL RISK MANAGEMENT (CONTINUED) 4.2 Credit risk (continued) The Company s maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position as summarized below: Classes of financial assets - carrying amounts: Available for sale Available for sale financial assets Loans and receivables Trade receivables 10,704 14,326 Short-term deposit with banks 18,066 - Cash and cash equivalents 30,375 54,708 59,184 69,274 The credit risk for cash and cash equivalents and deposits is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. The age structure of trade receivables is as follows: Gross Net Gross Net amount Impair. Amount amount Impair. amount Up to 30 days 3,918 (109) 3,809 3,786 (350) 3,436 From 1-3 months 3,398 (154) 3,244 8,354 (291) 8,063 From 3-6 months 2,377 (229) 2,148 2,582 (1,044) 1,538 From 6-12 months 2,087 (913) 1,174 2,229 (1,161) 1,068 Over 1 year 45,609 (45,280) ,749 (42,528) ,389 (46,685) 10,704 59,700 (45,374) 14,326 As of, and, the credit quality of Company s trade receivables is as follows: Neither past due nor impaired 3,918 3,786 Past due but not impaired From 1-3 months 3,398 8,354 From 3-6 months 2,377 2,582 From 6-12 months 2,087 2,229 Impaired 45,609 42,749 Gross 57,389 59,700 Provision for impairment (46,685) (45,374) Trade Receivables, net 10,704 14,326 20

23 Notes to the Financial Statements for the year ended, 4 FINANCIAL RISK MANAGEMENT (CONTINUED) 4.3 Liquidity risk Liquidity risk is defined as the risk that the Company could not be able to settle or meet its obligations on time. The Company s policy is to maintain sufficient cash and cash equivalents to meet its commitments in the foreseeable future. Finance sector is preparing cash flow forecasting for liquidity requirements to ensure that there is sufficient cash to meet operational needs at any time. The forecasting takes into consideration the Company s debt financing plans and compliance with internal balance sheet ratio targets. Any surplus cash held by the Company over and above balance required for working capital needs is usually deposited in commercial banks. The table below analyses the Company s financial liabilities into relevant maturity based on the remaining period at the financial position date to the contractual maturity date. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. Great part of the trade payables has maturity within one year. At, Less than 1 year Between 1 and 2 years Between 2 and 5 years Above 5 years Trade payables 9, Total 9, At, Less than 1 year Between 1 and 2 years Between 2 and 5 years Above 5 years Trade payables 3, Total 3,

24 Notes to the Financial Statements for the year ended, 4 FINANCIAL RISK MANAGEMENT (CONTINUED) 4.4 Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Foreign exchange risk As a whole, the Company is not exposed to currency risk because: revenue is earned in Euro purchases of main assets and materials used in the Company s investment activities are denominated in Euro financial assets are denominated in Euro. Price risk The Company is not significantly exposed to equity securities price risk since beside the available-for-sale financial assets disclosed in Note 8, there are no other investments classified as available-for-sale, which could be affected by risk variables such as stock exchange prices. Cash flow and fair value interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company s exposure to the risk of changes in market interest rates relates primarily to the Company s investments in bank deposits. Company s bank deposit accounts earn interest at commercial rates fixed at the date of the respective contract and mature upon fixed dates. The Company had no interest-bearing borrowings in both and. 22

25 Notes to the Financial Statements for the year ended, 4 FINANCIAL RISK MANAGEMENT (CONTINUED) 4.4 Market risk (continued) The table below summarizes the Company s exposure to interest rate risk. Assets Non-interest bearing: Available-for-sale financial assets Trade receivables 10,704 14,326 10,743 14,566 With fixed interest rate: Cash and cash equivalents 30,375 54,708 Short term deposits with banks 18,066-48,441 54,708 59,184 69,274 Liabilities Non-interest bearing: Trade and other payables 9,848 3,849 9,848 3, Capital risk management The management s policy is to maintain a strong capital base so as to maintain market confidence and to sustain future development of the business. Due to the external restrictions imposed by the environment (e.g. inability to place deposits abroad, lengthy procurement processes, etc.) the management of the Company cannot implement an efficient capital management specific to liberalized economies. There were no changes in the Company s approach to capital management during the year. The Company is not subject to contractual or legally imposed capital requirements. 4.6 Fair value estimation Fair value represents the amount at which an asset could be replaced or a liability settled on an arm s length basis. Fair values have been based on management assumptions according to the profile of the asset and liability base Financial instruments presented at fair value The financial assets measured according to the fair value in the Statement of financial position in accordance with the hierarchy of the fair value are shown in the next table. This hierarchy groups the financial assets and liabilities into three levels that are based on the significance of the incoming data used during the measurement of the fair value of the financial assets. The hierarchy according to the fair value is determined as follows: Level 1: quoted prices (not adjusted) on the active markets for identical assets or liabilities; Level 2: other incoming data, aside from the quoted prices, included in Level 1 which are available for asset or liability observing, directly (i.e. as prices), or indirectly (i.e. made of prices) and Level 3: incoming data on the asset or liability that are not based on data available for market observing. 23