TELEKOMUNIKACIJE REPUBLIKE SRPSKE A.D., BANJA LUKA

Transcription

1 TELEKOMUNIKACIJE REPUBLIKE SRPSKE A.D., BANJA LUKA Consolidated Financial Statements For the Year Ended and Independent Auditors Report

2 CONTENTS Page Independent Auditors Report 1-2 Consolidated Financial Statements: Consolidated Statement of Comprehensive Income 3 Consolidated Statement of Financial Position 4 Consolidated Statement of Changes in Equity 5 Consolidated Statement of Cash Flows 6 Notes to the Consolidated Financial Statements 7-62

3 Deloitte d.o.o. Banja Luka Braće Mažar i majke Marije 58 i Banja Luka Republic of Srpska Bosnia and Herzegovina Tel: ; Fax: Municipal Court Banja Luka, Registry File Identification No: ; Business accountsi: ; ; Inscribed and paid capital: BAM 5.000,00 INDEPENDENT AUDITORS REPORT To the Management Board and Shareholders of Telekomunikacije Republike Srpske a.d., Banja Luka We have audited the accompanying consolidated financial statements (pages 3 to 62) of Telekomunikacije Republike Srpske a.d., Banja Luka and its subsidiaries (the Company ), which comprise the consolidated statement of financial position as at, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these consolidated 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 whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated 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 entity'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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (Continued)

4

5 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME () Year Ended Year Ended Note Operating income Sales of goods and services 5 476,178, ,693,788 Other operating income 6 12,157,106 8,935, ,335, ,628,947 Operating expenses Cost of telephones and other commercial goods sold (4,996,009) (6,330,329) Direct materials consumed 7 (1,128,553) (1,371,498) Other materials, energy and fuel 8 (8,398,109) (8,430,799) Staff costs 9 (83,574,443) (76,738,601) Depreciation and amortization charge 11, 12 (99,031,744) (82,773,943) Indirect taxes and contributions (1,236,368) (1,605,463) Other operating expenses 10 (173,927,876) (161,036,094) (372,293,102) (338,286,727) Profit from operations 116,042, ,342,220 Finance income/(expenses) Interest income 5,446,632 3,443,783 Other finance income, net 238, ,627 Interest expense (7,723,521) (6,295,651) Other finance expenses - (15) Foreign exchange gains/(losses), net 72,666 (130,539) (1,966,008) (2,575,795) Profit before taxation 114,076, ,766,425 Income taxes 33 (11,624,686) (13,793,061) Net profit 102,451, ,973,364 Other comprehensive income: Losses on available-for-sale financial assets, net of tax (7,693) 9,800 Other comprehensive income for the period, net of tax (7,693) 9,800 Total comprehensive income for the year 102,443, ,983,164 Earnings per share - Basic earnings per share The accompanying notes form an integral part of these consolidated financial statements. The accompanying consolidated financial statements of the Company were approved for issuance by the Company s Management Board on March 16, Signed on behalf of the Company by: Predrag Ćulibrk General Director Vesna Labus Acting Executive Director of Finance 3

6 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of () Note ASSETS Non-current assets Intangible assets ,410,750 96,297,716 Property and equipment ,075, ,290,489 Advances for property and equipment 13 3,220,704 2,857,189 Equity investments Other financial assets , ,112 Long-term receivables and borrowings 16 11,737,699 6,960,272 Deferred tax assets 33c) 705, , ,267, ,312,354 Current assets Inventories 17 20,857,331 24,887,602 Accounts receivable 18 44,236,441 46,139,975 Other receivables 19 2,493, ,211 Short-term financial placements 21 26,561,016 30,474,631 Prepayments 22 5,863,876 9,344,721 Cash and cash equivalents 23 91,932, ,346, ,944, ,911,661 Total assets 964,212,230 1,027,224,015 LIABILITIES AND EQUITY Equity 24 Share capital 491,383, ,383,755 Statutory reserves 587, ,046 Legal reserves 35,351,179 29,390,704 Investments revaluation reserve 2,107 9,800 Other reserves - reserves arising on the execution of the investment commitment 97,791,500 97,791,500 Retained earnings 93,452, ,095, ,568, ,258,333 Long-term liabilities and provisions Long-term liabilities ,561,428 99,485,688 Deferred income 26 7,772,705 8,295,675 Employee benefits 27 10,096,779 11,374,456 Provisions 28 1,281,826 1,341, ,712, ,497,645 Current liabilities Current portion of long-term liabilities 25 40,984,767 41,991,473 Short-term borrowings , ,090 Accounts payable 30 46,207,690 50,918,702 Accruals 31 11,458,694 14,821,650 Dividend payable 35 6,843,078 3,861,803 Income tax payable 33 d) - 5,914,825 Other current liabilities 32 8,953,815 10,476, ,931, ,468,037 TOTAL LIABILITIES AND EQUITY 964,212,230 1,027,224,015 The accompanying notes form an integral part of these consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY () Other Revaluation Reserves Reserves Arising on Share Statutory Legal From Commitment Retained Capital Reserves Reserves Investments to Invest Earnings Total Balance at January 1, 491,383, ,046 25,436, ,626, ,033,627 Profit allocation: - dividends to shareholders (22,541,239) (22,541,239) - legal reserves - - 3,954, (3,954,604) - Payments of the investment commitment by the majority owner of the Company (Note 24) ,791,500-97,791,500 Adjustment for prior year expenses (8,719) (8,719) Total comprehensive income for the year , ,973, ,983,164 Balance, 491,383, ,046 29,390,704 9,800 97,791, ,095, ,258,333 Balance at January 1, 491,383, ,046 29,390,704 9,800 97,791, ,095, ,258,333 Profit allocation (Note 35): - dividends to shareholders (143,249,028) (143,249,028) - Interim dividend paid to shareholders (Note 3.19) (18,884,770) (18,884,770) - legal reserves - - 5,960, (5,960,475) - Total comprehensive income for the year (7,693) - 102,451, ,443,823 Balance, 491,383, ,046 35,351,179 2,107 97,791,500 93,452, ,568,358 The accompanying notes form an integral part of these consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS () Year Ended Year Ended Cash flows from operating activities Cash receipts from customers 467,083, ,800,428 Other cash receipts 3,355, ,285,156 Cash paid to suppliers (176,828,073) (169,127,762) Cash paid to and on behalf of employees (87,296,423) (73,622,203) Interest paid (6,914,559) (6,239,355) Income taxes paid (18,991,969) (10,030,683) Other taxes and duties paid (1,316,479) (1,777,862) Net cash provided by operating activities 179,091, ,287,719 Cash flows from investing activities Purchases of property, equipment and intangible assets (74,210,692) (86,904,964) Interest received 4,974,771 2,804,888 Cash provided by/(used for) long-term financial placements 379,032 (712,532) Cash provided/(used in) by short-term financial placements 3,950,000 (30,000,000) Net cash used in investing activities (64,906,889) (114,812,608) Cash flows from financing activities Cash used for long-term financial liabilities (45,445,719) (31,363,263) Dividends and interim dividends paid to the shareholders (159,152,523) (29,848,193) Net cash used in financing activities (204,598,242) (61,211,456) Net (decrease)/increase in cash and cash equivalents (90,414,037) 123,263,655 Cash and cash equivalents at the beginning of year 182,346,521 59,082,866 Cash and cash equivalents at the end of year 91,932, ,346,521 The accompanying notes form an integral part of these consolidated financial statements. 6

9 1. FOUNDATION AND ACTIVITY The basic public company ( JODP ) Telekom Srpske, Banja Luka (hereinafter: the Company ) was registered on December 20, 1996 and it operated as an enterprise entirely owned by the State, until December 12, 2002, when it was organizationally transformed into a shareholding company and changed its name into Telekomunikacije Republike Srpske a.d., Banja Luka. The Company s principal business activity is the provision of telecommunication services the most significant of which are domestic and international telephony traffic. In addition, the Company offers a wide range of other telecommunication services, including other fixed telephone services, data transfer, line leases, private conduits, services throughout the entire network area, additional services in the area of mobile telephony, as well as internet and multimedia services. The Company also provides services in the area of leasing, construction, management and security of the telecommunication infrastructure. During 2000, the Company introduced GSM network mobile telephony. As of, the Company provided telecommunication services in fixed telephony to 354,800 legal entities and private individuals on the territory of the Republic of Srpska ( : 359,784 subscribers), as well mobile telephony services to 1,231,489 subscribers on the territory of Bosnia and Herzegovina ( : 1,109,686 subscribers). In addition, as of, the Company provided services to 95,556 internet users ( : 65,416 users). The Company is domiciled in Banja Luka, in the Republic of Srpska at the following street address: 93 Kralja Petra I Karađorđevića. At, the Company had 2,464 employees (: 2,504 employees). At, the Company had sixteen Working and Operating Units on the territory of Bosnia and Herzegovina. In 2002, in accordance with the RS Law on Privatization, and the Decision of the Republic of Srpska Government, 20 percent of the state-owned capital in the Company was transformed into private ownership via voucher privatization offerings. Based on the information provided by the Privatization Agency, 10.5 percent of the Company s state-owned capital was privatized via vouchers sold to various investment funds, whereas private investors purchased the remaining 9.5 percent of the offering. In accordance with the December 12, 2002 Decision of the Basic Court of Banja Luka numbered U/I 3077/02, the Company registered a change of name to Telekomunikacije RS a.d., Banja Luka, as well as the change in the ownership status reflecting its organizational transformation following the aforedescribed sale of a portion of its state-owned equity. Based on a Decision issued by the Basic Court in Banja Luka dated June 28, 2007, a status change the ownership transformation through the sale of the total state-owned capital to Telekom Srbija a.d., Beograd (Note 24), was registered. 7

10 1. FOUNDATION AND ACTIVITY (Continued) At, the Company was the sole owner of two subsidiaries, as follows: 1. TT Inženjering d.o.o., Banja Luka, and 2. M:TEL, Multimedijalne komunikacije d.o.o., Zagreb (Republic of Croatia). On June 26,, the Shareholding Assembly of the Company enacted a Decision on the consent to the merger and acquisition of Telekard, Telefonske usluge d.o.o., Banja Luka, fully owned by the Company. The registration of the forgoing status change was inscribed in the registers maintained by the Basic Court in Banja Luka on September 30,, whereby the process of merger and acquisition of the aforementioned subsidiary was officially completed. 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION 2.1. Basis for Consolidation The accompanying consolidated financial statements for the year ended are comprised of the financial statements of the parent company - Telekomunikacije Republike Srpske a.d., Banja Luka, and its two subsidiaries - TT Inženjering d.o.o., Banja Luka (hereinafter: TT Inženjering ) and M:TEL, Multimedijalne komunikacije d.o.o, Zagreb (hereinafter: МТЕL Zagreb ) entirely in the Company s ownership. From its establishment until, there were no business transactions registered in the subsidiary M:TEL, Multimedijalne komunikacije d.o.o, Zagreb except from the payment of the initial capital. All materially significant amounts of transactions arising from the intercompany operations between the parent company and the subsidiaries have been eliminated in the consolidation Basis of Preparation and Presentation of the Consolidated financial statements These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The accompanying consolidated financial statements have been prepared at cost principle, except for the revaluation of certain financial instruments. The consolidated financial statements are stated in convertible marks (BAM), which is the functional and reporting currency of the Republic of Srpska. In the preparation of the statement of cash flows for the year ended, the Company applied direct method in reporting on cash flows. In the preparation of the accompanying consolidated financial statements, the Company has adhered to the accounting policies described in Note 3 to the consolidated financial statements. 8

11 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued) 2.2. Basis of Preparation and Presentation of the Consolidated financial statements (Continued) Standards and Interpretations in Effect in the Current Period The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are effective for the current period: IFRS 8 Operating Segments (effective for annual periods beginning on or after January 1, ), Amendments to IFRS 4 Insurance contracts and IFRS 7 Financial Instruments: Disclosures - Improving disclosures about financial instruments (effective for annual periods beginning on or after January 1, ), Amendments to IFRS 1 First-time Adoption of IFRS and IAS 27 Consolidated and Separate Financial Statements Cost of investment in a subsidiary, jointly-controlled entity or associate (effective for annual periods beginning on or after January 1, ), Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on May 22, (IAS 1, IFRS 5, IAS 8, IAS 10, IAS 16, IAS 19, IAS 20, IAS 23, IAS 27, IAS 28, IAS 29, IAS 31, IAS 34, IAS 36, IAS 38, IAS 39, IAS 40, IAS 41) primarily with a view to removing inconsistencies and clarifying wording (most amendments are to be applied for annual periods beginning on or after January 1, ), Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable financial instruments and obligations arising on liquidation (effective for annual periods beginning on or after January 1, ), IAS 1 (revised) Presentation of Financial Statements A revised presentation (effective for annual periods beginning on or after January 1, ), IAS 23 (revised) Borrowing Costs (effective for annual periods beginning on or after January 1, ), Amendments to IFRS 2 Share-based Payment Vesting conditions and cancellations (effective for annual periods beginning on or after January 1, ), Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement -Embedded Derivatives (effective for annual periods ending on or after June 30, ), IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after July 1, ), IFRIC 15 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after January 1, ), IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after October 1, ). The adoption of these amendments to the existing standards and interpretations has not led to significant changes in the Company s accounting policies. 9

12 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued) 2.2. Basis of Preparation and Presentation of the Consolidated financial statements (Continued) Standards and Interpretations in Issue not yet Adopted At the date of authorization of these consolidated financial statements the following standards, revisions and interpretations were in issue but not yet effective: IFRS 9 Financial Instruments (effective for annual periods beginning on or after January 1, 2013), IFRS 3 (revised) Business Combinations (effective for annual periods beginning on or after July 1, ), IFRS 1 (revised) First-time Adoption of IFRS (effective for annual periods beginning on or after July 1, ), Amendments to IFRS 2 Share-based Payment - Group cash-settled share-based payment transactions (effective for annual periods beginning on or after January 1, 2010), Amendments to IAS 24 Related Party Disclosures - Simplifying the disclosure requirements for government-related entities and clarifying the definition of a related party (effective for annual periods beginning on or after January 1, 2011), Amendments to IAS 27 Consolidated and Separate Financial Statements (effective for annual periods beginning on or after July 1, ), Amendments to IAS 32 Financial Instruments: Presentation Accounting for rights issues (effective for annual periods beginning on or after February 1, 2010) Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Eligible hedged items (effective for annual periods beginning on or after July 1, ), Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on April 16, (IFRS 2, IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 18, IAS 36, IAS 38, IAS 39, IFRIC 9, IFRIC 16) primarily with a view to removing inconsistencies and clarifying wording, (most amendments are to be applied for annual periods beginning on or after January 1, 2010), Amendments to IFRIC 14 IAS 19 The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction - Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after January 1, 2011), IFRIC 17 Distributions of Non-Cash Assets to Owners (effective for annual periods beginning on or after July 1, ), IFRIC 18 Transfers of Assets from Customers (effective for transfer of assets from customers received on or after July 1, ), IFRIC 19 Extinguishing Liabilities with Equity Instruments (effective for annual periods beginning on or after July 1, 2010). 10

13 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued) 2.2. Basis of Preparation and Presentation of the Consolidated financial statements (Continued) Standards and Interpretations in Issue not yet Adopted (Continued) The Company s management has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. The management anticipates that the adoption of these standards, revisions and interpretations will have no material impact on the consolidated financial statements of the Company in the period of initial application. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Revenue Recognition Income from the sale is presented at invoiced value, less any effective discounts and sales taxes. Income is recognized and recorded concurrently with rendering the contracted services. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate Fixed Telephony Income a) Telephone Traffic Income from telephony traffic is billed to the subscribers of the Company, and is recorded at invoiced value, less effective discounts and sales taxes at the moment upon which services have been provided. b) Telecommunication Subscription The telecommunication subscription to fixed telephony is invoiced on a monthly basis, one month in arrears. The telecommunication subscription includes a tax for the possession of a radio or television signal receiver (referred to as the RTV fee ) which the Company collects on behalf of the Radio and Television of the Republic of Srpske ( RT RS ) and the Public Radio-Television Service of Bosnia and Herzegovina ( JS BiH ), pursuant to the Law on the Basis of the Public Radio- Television system of Bosnia and Herzegovina and the Law on the Radio-Television Service of the Republic of Srpska. In addition, on November 22, 2005, the Company and the other two telecommunication service operators in Bosnia and Herzegovina (BH Telekom d.d., Sarajevo and Hrvatske Telekomunikacije d.d., Mostar, hereinafter referred to as: the Telekom Operators ), entered into an Agreement on the Collection of the RTV Fees with the three Public Broadcasters in Bosnia and Herzegovina (namely, RT RS, JS BiH and Radio Televizija Federacije Bosne i Hercegovine ). Under the terms of the aforecited agreement, the Telekom Operators are to perform the RTV Fees billing of, and collection from, their own fixed telephony users, on behalf of the Public Broadcasters. Pursuant to this agreement, the Public Broadcasters are under an obligation to pay a monthly fee to each Telekom Operator in the amount of 4 percent of the collected income from the RTV Fees. The terms of the aforecited Agreement have been applied commencing as of January 1, 2006 and are effective up to

14 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.1. Revenue Recognition (Continued) Fixed Telephony Income (Continued) b) Telecommunication Subscription (Continued) Television subscription fees, except for the fee on the collected income, are not included in the Company s income. The risk of collection of television subscriptions rests with RT RS and JS BiH. c) New Subscribers Income from the connection of new subscribers to fixed telephony represents income earned on invoiced fees for the connection of new subscribers and installation costs. The bills for new customer connections are recorded in the period in which the user is connected. d) Other Income from Telecommunication Services Other income primarily includes the lease of telephony capacities (i.e., telephone lines, call listings, voice mail and other services). Such income is recognized and recorded in the accounting period during which it arises Mobile Telephony Income Mobile telephony income is associated with the income earned from users who use prepaid and postpaid services (i.e., impulses spent, messages, income from subscriptions, mobile telephones sold, etc.). Income is recorded at the invoiced value, less any applicable sales taxes, at the moment in which the services have been provided. Uninvoiced income earned on mobile telephony services provided in the period from the invoice date up to the end of the period of calculation is accrued up to the end of the calculation period. Prepaid services are recognized and recorded at the moment of sale of the prepaid cards, and at the end of the accounting period, whereas any unbilled revenue is deferred Multi-Element Agreements (МЕA) Multi-element agreements (MEA) are treated as agreements the components of which are independent and to which different accounting treatments are applied, if the following conditions are met: Each agreement element has the value for the beneficiary, independently of other elements to the agreement: The Company mostly does not sell devices separately from the agreement for other services; Devices are sold by any other seller (other operators or dealers) and the dealers can purchase devices directly from the manufacturer; There is secondary market for the aforementioned devices, where there is no obligation that such market is observable. 12

15 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.2. Multi-Element Agreements (МЕA), (Continued) The fair value of each separate agreement element can be reliably determined (the relative fair value or residual value). A mobile phone is recognized as an expense, and the income earned on the sale of a mobile phone is credited to income when the sale is realized, i.e., when the device is delivered to the package user. The discounts granted for the sold mobile phones are treated as an expense in the period it was incurred and is recognized when the device is delivered. The revenue from the activation is also stated in the moment of delivery of the appliance up to the amount of discount granted. Other income from rendering services to users as agreed in the multi-element agreements (МЕA), are deferred in the period defined in the agreement Income and Expenses from International Settlements a) Income and Expenses from International Traffic The Company has entered into various agreements for international traffic in fixed and mobile telephony. The respective income (expense) and receivables (payables) that have originated under these agreements are presented in the accompanying consolidated financial statements, and are associated with the income generated on all incoming and outgoing international calls realized in countries maintaining direct international traffic and accounting. A portion of the income earned or expenses incurred is recorded on the basis of an estimate made in accordance with the internal settlements for realized traffic. The Company recognizes income (receivables) only when it can be measured with reasonable certainty. Where evidence exists that an expense (payables) may be incurred, a full provision is recognized, in the instance in which such an estimate is possible. When it is not possible to estimate the extent of a liability, an appropriate disclosure is made in the consolidated financial statements. b) Income and Expenses from Roaming Income and expenses arising from roaming with foreign operators are recorded at the values set by the clearing house - Mach, Luxemburg. Income and expenses arising on roaming are recognized in the gross amount based on the traffic realized throughout the period Maintenance and Repairs The maintenance and repairs of property and equipment are expensed as incurred at the effective amounts. Maintenance and repairs primarily relate to the maintenance of telecommunication equipment, local networks and computer software. 13

16 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.5. Operating Leases Operating leases relate to the rental of internet service, telephone lines, business premises, warehouses and other rental expenses. Such expenses are recorded in the statement of comprehensive income at the moment in which such expenses arise, on an accrual basis, in accordance with the relevant operating lease agreements Foreign Currencies Assets and liabilities denominated in foreign currencies have been restated at the exchange rate in effect at the statement of financial position. Transactions in foreign currencies are translated into BAM by applying the exchange rate in effect on the date of each transaction. The foreign exchange gains or losses arising upon the translation of transactions, and assets and liabilities components denominated in foreign currencies are included in the statement of comprehensive income Taxes and Contributions Current Income Tax Current income tax relates to the amount payable in accordance with the Income Tax Law, which came into effect as of January 1, Current income tax is payable at the rate of 10% on the tax base reported in the annual corporate income tax return, being the profit before taxation as reduced by any effects of reconciliation of income and expenses. The tax regulations effective in the Republic of Srpska do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carry-back period. However, current year losses may be used to reduce or eliminate taxes to be paid in future periods, but only for a duration of no longer than five ensuing years. Deferred Income Taxes Deferred income tax is provided using the balance sheet liability method, for the temporary differences arising between the tax bases of assets and liabilities and their carrying values in the consolidated financial statements. The currently-enacted tax rates or the substantively-enacted rates at the statement of financial position date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized for all taxable, temporary differences. Deferred tax assets are recognized for all deductible temporary differences, and for the tax effects of income tax losses available for carryforwards, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and the tax loss carryforwards can be utilized. Indirect Taxes and Contributions Indirect taxes and contributions represent the amounts paid under republic and municipal laws in order to finance various municipal and republic public expenditure requirements. These taxes and contributions are included under Other operating expenses. 14

17 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.7. Taxes and Contributions (Continued) Value Added Tax Pursuant to the Value Added Tax Law, system for the payment of value added tax (VAT) was introduced on territory of Bosnia and Herzegovina, commencing on January 1, 2006, by which previously-applied taxation system for payment of sales tax on products and services was changed Intangible Assets As of the balance sheet date, intangible assets include the telecommunications licenses, rights to the permanent use of land, acquired computer softwares and other licenses. Intangible assets are recorded at cost less accumulated depreciation and accumulated impairment losses, if any. The cost of an item of intangible assets comprises its purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The telecommunications licenses are amortized on a straight-line basis over their useful lives as delineated under IAS 38 Intangible Assets. The rights to the open-ended beneficial use of land relate to the land property that was granted to the Company by the Government of the Republic of Srpska, in accordance with the provisions of the Law on the Opening Balance Sheet in the Process of Privatization of the State-Owned Capital in Enterprises. In accordance with the applicable accounting regulations, the aforementioned land is not subject to amortization Property and Equipment Items of property and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses, if any. The cost is comprised of the purchase price or expenses incurred in construction, including import duties and non-refundable taxes, and any directly attributable costs of bringing the asset to working condition for its intended use. Any trade discounts and/or rebates received are deducted in arriving at the purchase price. The cost of the constructed fixed assets represents their costs as of the date of construction or development. Fixed assets represent assets with an expected useful economic life of over one year. Gains on the disposal of fixed assets are credited directly to the statement of comprehensive income within Other income, whereas any losses arising upon their disposal are charged to Other expenses. Capital improvements, renewals and repairs that extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred and are presented as operating expenses. 15

18 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Depreciation and Amortization The depreciation and amortization of property, equipment and intangible assets are provided at the rates correlating with the estimated useful life, cost and estimated value of the assets on a straightline basis. The estimated useful lives of particular classes of property and equipment, as well as intangible assets used in the calculation of depreciation and amortization, and prescribed annual depreciation and amortization rates in use for the year ended are as follows: Estimated Useful Life (in Years) Rate (%) GSM and UMTS licenses Intangible assets, except for GSM and UMTS licenses Buildings Network construction and cabling Switches Transmission devices Telephone booths Telephone hoods Trucks and motor vehicles Computers 4 25 Office furniture and other equipment Impairment of Property, Equipment and Intangible Assets At each balance sheet date, the Company s management reviews the carrying amounts of the Company s fixed assets in order to determine the indications of impairment loss. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. In cases where it is impossible to assess the recoverable amount of an individual asset, the Company assess the recoverable value of the cash generating unit to the asset belongs. The recoverable value of an asset is the higher of net selling price and value in use. The estimate of the value in use comprises the assessment of future cash inflows and outflows discounted to their present value by applying the pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the estimated recoverable amount of assets (or cash generating unit) is below their carrying value, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognized as an expense of the current period under operating expenses, except in case of land and buildings that are not used as investment property which is stated at revalued amount in which case impairment loss is presented as a loss on revaluation of assets. 16

19 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment of Fixed Assets (Continued) Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable value. However, this is performed so that the increased carrying amount does not exceed the carrying value that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately, unless the respective asset is carried at a revalued amount, in which instance, the reversal of the impairment loss is treated as a revaluation increase. At, based on the management s assessment, there are no indications that the values of intangible assets, property, plant and equipment have suffered impairment Financial Assets Investments are recognized and derecognized on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs. Financial assets are classified into the following specified categories:, held-tomaturity investments, available-for-sale (AFS) financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognized on an effective interest basis for debt instruments other than those financial assets designated as at FVTPL. Held to maturity investments Bills of exchange and debentures with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity are classified as held-tomaturity investments. Held-to-maturity investments are recorded at amortized cost using the effective interest method less impairment, with revenue recognized on an effective yield basis. 17

20 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial assets (Continued) Available for Sale Investments Unlisted shares and listed redeemable notes held by the Company that are traded in an active market are classified as being AFS and are stated at fair value. For such investments a reasonable estimate of fair value is determined by reference to the current market value of another instrument which is substantially the same or is based on the expected cash flows or the underlying net asset base of the investment. Investments whose fair value cannot be reliably measured are carried at cost. Gains and losses arising from changes in fair value are recognized directly in equity in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognized directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in the investments revaluation reserve is included in profit or loss for the period. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the balance sheet date. The change in fair value attributable to translation differences, that result from a change in amortized cost of the asset, is recognized in the statement of comprehensive income, and other changes are recognized in equity. Loans and Receivables Trade receivables, loans, and other receivables, that have fixed or determinable payments that are not quoted in an active market, are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables, when the recognition of interest would be immaterial. Allowance for Impairment Accounts receivable are stated at their nominal value less allowance for impairment of receivables deemed irrecoverable. The provisions are formed for accounts receivable which are past their due date (over 60 days), and such accounts receivable are written off if their uncollectability is certain and documented. The estimate of the amount of uncollectible receivables is based on the historical evidence on the amount of the losses incurred thereof. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held in commercial banks and any other highly-liquid investments that are readily convertible to known amounts of cash, and are subject to an insignificant risk of changes in value. 18

21 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial assets (Continued) Impairment of Financial Assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For unlisted shares classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. For all other financial assets, including redeemable notes classified as AFS and finance lease receivables, objective evidence of impairment could include: significant financial difficulty of the issuer or counterparty; or default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organization. For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company s past experience of collecting payments, delays in collecting payments after maturity period, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets, with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the statement of comprehensive income. With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through the statement of comprehensive income to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In respect of AFS equity securities, impairment losses previously recognized through profit or loss (the statement of comprehensive income) are not reversed through the statement of comprehensive income. Any increase in fair value subsequent to an impairment loss is recognized directly in equity. 19

22 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial assets (Continued) Derecognition of Financial Assets The Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes its retained interest in the asset and an associated liability for amounts it may have to pay Financial Liabilities Financial liabilities comprise long-term liabilities (long-term borrowings and other long-term liabilities), short-term operating liabilities and other liabilities. Financial liabilities are initially recognized in the amounts of funds received. Once recognized, financial liabilities are measured at amortized value and increased by the amounts of capitalized interest, net of any amount of write-off as approved by a creditor. Financial liabilities were stated at amortized cost by applying the effective interest rate. Interest accrued on financial liabilities is charged to expenses of the respective period and is presented within other short-term liabilities. Financial liabilities cease to be recognized when the Company fulfills the respective obligations, or when the contractual repayment obligation has either been cancelled or has expired Inventories Inventories are primarily stated at the lower of cost or net realizable value. The net realizable value is the price at which inventories may be realized throughout the normal course of business, after allowing for the costs of realization. Materials, spare parts and supplies are valued at cost, using the weighted-average methodology. Cost includes the invoiced value, transport and other attributable expenses. Small tools are fully written off when issued into use. Inventories of goods shall be measured at the lower of the average cost and net realizable value. The cost of inventories shall comprise all costs of purchase. The inventories mostly relate to the inventories of mobile and fixed line phones purchased with the intention to sell them further to the customers within special sale packages or separately. Provisions that are charged to Other operating expenses are made where appropriate in order to reduce the carrying value of such inventories to the management s best estimate of their net realizable value. Inventories found to be damaged, or of a substandard quality are written off in full. 20

23 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories (Continued) Valuation of Mobile Telephones on Stock The sale of mobile phones in the Company is mostly realized through MEAs (multi-element agreements). The sale of mobile phones within MEA is an activity which is executed with a view to stimulate and increase the sale volume of certain services (packages) to the users. The mobile phones are sold at lower prices as a part of the Company s business strategy. The Company, in return, enters agreements with the package users for a certain periods of time which ensure future economic benefits to the Company. The Company expects to compensate for the cost of a mobile telephone which it sells at lower prices, at the same time stimulating and enhancing sale of different services to the package user. The valuation of inventories is carried at cost whereas the expense (cost of commercial goods sold) is realized when the mobile phone is sold, i.e., delivered to the user based on a multi-element agreement. The sale of mobile phones performed at lower prices is treated as an expense of the accounting period, and is recognized through the statement of comprehensive income as discounts granted in the moment of sale/delivery of a device (Note 10) Accrual and Prepayments Accruals are primarily comprised of the computed and unbilled income from international traffic for services performed during the current year, which are billed in the subsequent year due to the long reconciliation period of mutual liabilities and receivables between the international traffic operators. Estimated expenses in international traffic for services received in the current, but invoiced in next accounting period are recorded within accruals Provisions Provisions are recognized and calculated when the Company has a pending present legal or contractual obligation as a result of a past event, and when it is probable that an outflow of resources will be required to settle the obligation, and when a reliable estimate of the amount can be made. Provisions are comprised of provisions for litigation filed against the Company, employee benefits, contingent liabilities and provisions for future likely events, based on the guidance and recommendations of the Supreme Office for the Republic of Srpska Sector Auditing. Provisions for litigations represent the Company management s best estimates of the probable expenditures required to settle such liabilities Deferred Income Deferred income relates to the deferred income arising from grants received as in accordance with the requirements of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Movements in deferred income arising on grants received in the period are presented in Note