JSC MICROFINANCE ORGANIZATION FINCA GEORGIA. Financial Statements. Together with the Auditors Report. Year ended 31 December 2011

Transcription

1 JSC MICROFINANCE ORGANIZATION FINCA GEORGIA Financial Statements Together with the Auditors Report Year ended 31 December 2011

2 JSC MICROFINANCE ORGANIZATION FINCA Georgia FINANCIAL STATEMENTS Contents: FINANCIAL STATEMENTS STATEMENT OF COMPREHENSIVE INCOME... 5 STATEMENT OF FINANCIAL POSITION... 6 STATEMENT OF CHANGES IN EQUITY... 7 STATEMENT OF CASH FLOWS General information Summary of significant accounting policies Critical accounting estimates and judgments Prior period reclassifications Net interest income Other operating income Loss from exchange rate difference Salaries and other employee benefits General and administrative expenses Income tax expense Cash and cash equivalents Loans to customers Amounts due from credit institutions Other assets Property, plant and equipment Intangible assets Deferred tax asset Notes payable Other liabilities Statutory capital and retained earnings Commitments and Contingencies Financial instruments risk management Management of capital Transactions with related parties Post balance sheet events... 36

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9 1. General information Microfinance Organization FINCA Georgia is a closed Joint Stock Company (the Company ) which was established on December 20, 2007 in Tbilisi, Georgia with the registration number The founder of the Company was FINCA International Inc., a network of microfinance institutions based in Washington, D.C., with affiliates/subsidiaries operating in 21 countries around the world. On October 11, 2011 FINCA INTERNATIONAL, INC. transferred the 100% of issued shares (933 shares) of Joint Stock Company Microfinance Organization FINCA Georgia to FINCA Microfinance Coöperatief U.A. (a cooperative with exclusion on liability, having its official seat in Amsterdam, the Netherlands) as a member contribution to the Cooperative. As of December 31, 2011, the members of the Cooperative were: 1. FINCA MICROFINANCE HOLDING COMPANY LLC, a limited liability company registered under the laws of the State of Delaware, United States of America and having its registered address at 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, United States of America. FINCA MICROFINANCE HOLDING COMPANY LLC holds 99 voting rights as a Member A and 1 voting right as a Member B of the Cooperative. 2. FINCA INTERNATIONAL LLC, a limited liability company registered under the laws of the State of Maryland, United States of America and having its registered address at 11 East Chase Street, Baltimore, Maryland 21202, United States of America. FINCA INTERNATIONAL LLC holds 1 voting right as a Member B of the Cooperative. The Shareholders of FINCA MICROFINANCE HOLDING COMPANY LLC are as follows: Shareholder Percentage interest FINCA International, Inc % International Finance Corporation 14.99% KfW 7.18% Nederlandse Financierings Maatschappij voor Ontwikkelingslanden N.V. 6.71% Credit Suisse Microfinance Fund Management Company 2.39% ASN-NOVIB FONDS 2.39% The Company is regulated by National Bank of Georgia and conducts its business under the Law on Microfinance Activity. The Company s main activity is to provide micro and small loans to individuals. The loans are disbursed both in local and foreign currencies. JSC FINCA Georgia serves over 36,000 clients and represents one of the largest microfinance organizations throughout the country. As at 31 December, 2011 the organization has 30 branches in major cities of Georgia. The Company had an average of 385 employees during The registered office is located on 71 Vazha Pshavela Avenue, 0186, Tbilisi, Georgia. 2. Summary of significant accounting policies Principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated Basis of preparation a) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC Interpretations applicable to companies reporting under IFRS. Page 9 of 36

10 2. Summary of significant accounting policies (continued) The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the most appropriate application in applying the accounting policies. The areas where significant judgments and estimates have been made in preparing the financial statements and their effect are disclosed in note 3. b) Basis of measurement The financial statements have been prepared under the historical cost bases. The reporting period for the Company is the calendar year from January 1 to December 31. c) Going concern These financial statements have been prepared on the assumption that the Company is a going concern and will continue its operations for the foreseeable future. The management and shareholder have the intention to further develop the business of the Company in Georgia. The management believes that the going concern assumption is appropriate for the Company Adoption of new IFRSs Standards issued but not yet effective up to the date of issuance of the Company s preliminary financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date. The Company intends to adopt those standards when they become effective: IAS 1 Financial Statement Presentation Presentation of Items of Other Comprehensive Income The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has there no impact on the Company s financial position or performance. The amendment becomes effective for annual periods beginning on or after 1 July IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The completion of this project is expected over the course of The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Company s financial assets and liabilities. The Company will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture. Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January The Company has not yet analysed the likely impact of the improvements on its financial position or performance Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). Financial statements are presented in Georgian lari, which is the company s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are premeasured. Foreign Page 10 of 36

11 2. Summary of significant accounting policies (continued) exchange gains and losses resulting from the settlement of such transactions and from the trans lation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses that relate to notes payables and cash and cash equivalents are presented in the statement of comprehensive income within Loss from exchange rate differences with other foreign exchange gains and losses. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. At 31 December 2011 and 2010 the closing rate of exchange used for translating foreign currency balances was: Official rate of the National Bank of Georgia Exchange rate as at ,6703 2,1614 Exchange rate as at Average exchange rate for ,6860 2,3473 Average exchange rate for USD EUR 2. 4 Financial Instruments Financial assets Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available for sale financial assets. The Company determines the classification of its financial assets upon initial recognition. Fair value through profit or loss Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss. They are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The company does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss. Held to maturity investments Non derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to maturity when the company has positive intention and ability to hold them upon maturity. The company does not have any assets classified as held to maturity. Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Page 11 of 36

12 2. Summary of significant accounting policies (continued) Available-for-sale Non-derivative financial assets not included in the above categories are classified as available for sale and comprise principally the company's strategic investments in entities not qualifying as subsidiaries, associates or jointly controlled entities as well as corporate bonds. They are carried at fair value with changes in fair value generally recognised in other comprehensive income and accumulated in the available-for-sale reserve; Where there is a significant or prolonged decline in the fair value of an available for sale financial asset (which constitutes objective evidence of impairment), the full amount of the impairment, including any amount previously recognised in other comprehensive income, is recognised in profit or loss. Purchases and sales of available for sale financial assets are recognised on s ettlement date with any change in fair value between trade date and settlement date being recognised in the available-for-sale reserve. On sale, the cumulative gain or loss recognised in other comprehensive income is reclassified from the available-for-sale reserve to profit or loss. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transactio n costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financia l assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, are not presented separately and are included in the carrying values of related balance sheet items. Derecognition of financial assets The Company derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Company has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass -through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Financial liabilities Financial liabilities are classified as notes payable, subordinated debt and other financial liabilities. Financial liabilities are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that Page 12 of 36

13 2. Summary of significant accounting policies (continued) exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Company derecognises financial liabilities when, and only when, the Company s obligations are discharged, cancelled or they expire. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are subs tantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit and loss. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneous ly. IFRS 7 fair value measurement hierarchy IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels Impairment of financial assets carried at amortised cost Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The primary factors that the company considers whether a financial asset is impaired is its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred: - Any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - The borrower experiences a significant financial difficulty as evidenced by borrower s financial information that the organisation obtains; - The borrower considers bankruptcy or a financial reorganisation; - There is adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; - The value of collateral significantly decreases as a result of deteriorating market conditions. Page 13 of 36

14 2. Summary of significant accounting policies (continued) The impairment is calculated based on the analysis of assets subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding financial assets being material individually and on the basis of an individual or joint evaluation of financial assets not being material individually. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience and the success of recovery of overdue amounts. Historical experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to reduce the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. It should be noted that the evaluation of losses includes a subjective factor. The management of the Company believes that the amount of recorded impairment is sufficient to cover losses incurred on assets subject to risks at the reporting date, although it is probable that in certain periods the Company can incur losses greater than recorded impairment Cash and cash equivalents Cash and cash equivalents include cash on hand, non-restricted cash on current accounts in banks, and non-restricted cash on bank deposits with original maturity of less than 3 months Held for sale assets Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets are carried at historical cost less accumulated depreciation and recognized impairment loss, if any. Depreciation is charged on the carrying value of property, plant and equipment and is designed to write off assets over their useful economic lives. Depreciation is calculated on a straight line basis at the following useful lives: Page 14 of 36

15 2. Summary of significant accounting policies (continued) Group Useful life (year) Furniture and computer equipment 3-5 IT equipment 3-6 Leasehold improvement According to lease contracts Intangible assets 3 Vehicles 5 Other 2-5 Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of property, plant and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount. Impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge property, plant and equipment is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life Taxation The tax expense for the period comprises current and deferred tax. Tax is recognized in the statement of comprehensive income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the country where the company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carr ying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rate (and laws) that has been enacted or substantially enacted by the balance sheet date and is expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity where there is an intention to settle the balances on a net basis. Page 15 of 36

16 2. Summary of significant accounting policies (continued) Notes payable Notes payable are initially recognized at fair value. Subsequently, amounts due are s tated at amortized cost and any difference between net proceeds and the redemption value is recognized in the statement of operations over the period of the notes payable, using the effective interest method Temporary restricted revenue from received grants Temporary restricted revenue from received grants are recorded as temporary restricted revenue (deferred revenue) and an amount equal to the period s loan issue from the grant funds (which should be in accordance with grant agreement terms) is transferred to income as unrestricted revenue Recognition of income and expense Interest income and expense are recorded in the income statement for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. When loans and other debt instruments become doubtful of collection, they are written down to present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided Post balance-sheet events Post-balance sheet events and events before the date of financial statements authorization for issue that provide additional information about the Company s financial statements are reported in the financial statements. Post-balance sheet events that do not affect the financial position of the Company at the balance sheet date are disclosed in the notes to the financial statements when material Staff costs and related contributions Wages, salaries, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Company Provisions, Contingent Liabilities and Contingent Assets Contingent liabilities are not reflected in the financial statements, except for the cases when the outflow of economic benefits is likely to origin and the amount of such liabilities can be reliably measured. The information on contingent liabilities is disclosed in the Notes to the financial statements with the exception of cases, when the outflow of economic benefits is unlikely. Contingent assets are not reflected in the financial statements, but the information on them is disclosed when inflow of economic benefits is possible. If economic benefits are sure to occur, an asset and related income are recognized in the financial statements for the period, when the evaluation change occurred. A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity Page 16 of 36

17 2. Summary of significant accounting policies (continued) arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from: (a) A contract (through its explicit or implicit terms); (b) Legislation; or (c) Other operation of law. A constructive obligation is an obligation that derives from an entity's actions where: (a) By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. 3. Critical accounting estimates and judgments The Company makes certain estimates and assumptions regarding the future. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair value of financial instruments. Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, there are determined using variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but if it is not feasible, a degree of judgment is required in establishing a fair value. Determination of collateral value. Management monitors market value of collateral on a regular basis. Management uses its experienced judgment to adjust the fair value to reflect current circumstances. The amount and type of collateral depends on the assessment of credit risk of the counterparty. Allowance for impairment of loans and receivables. The Company regularly reviews its loan portfolio to assess impairment. In determining whether an impairment loss should be recorded in the income statement, the Company makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers, or national or local economic conditions that correlate with defaults on assets in the company. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Initial recognition of related party transactions. In the normal course of business the Company enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or nonmarket interest rates, where there is no active market for such transactions. The basis for judgement is Page 17 of 36

18 3. Critical accounting estimates and judgments (continued) pricing for similar types of transactions with unrelated parties and effective interest rate analysis. In management judgment, at December 31, 2010 and 2009, there were no loans and advances at other then market conditions. Terms and conditions of related party balances are disclosed in Note 24. Income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the company s belief that its tax return positions are supportable, the company believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities. As a result company minimizes the risks related to this fact. The company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made. Legal proceedings. The Company only recognizes a provision where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Realization of any contingent liabilities not currently recognized or disclosed in the financial statements could have a material effect on the Company s financial position. Application of these accounting principles to legal cases requires the Company s management to make determinations about various factual and legal matters beyond its control. The Company reviews outstanding legal cases following developments in the legal proceedings and at each balance sheet date, in order to assess the need for provisions in its financial statements. Among the factors considered in making decisions on provisions are the nature of litigation, claim or assessment, the legal process and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including the progress after the date of the financial statements but before those statements are issued), the opinions or views of legal advisers, experience on similar cases and any decision of the Company s management as to how it will respond to the litigation, claim or assessment. 4. Prior period reclassifications The following reclassifications were made to 31 December 2010 balances to conform to the presentation of the current year amounts: Statement of Financial Position Caption As previously stated As reclassified Comment Notes payable 45,143,365 39,762,744 Subordinated debt is now Subordinated debt - 5,380,621 disclosed separately. General and administrative expenses (2,258,041) (2,483,089) Other operating expenses are now included in the general and administrative expenses. Other operating expenses (225,048) - Page 18 of 36

19 5. Net interest income Net interest income for the year ended December 31, 2011 and 2010 can be presented as follows: Interest income comprises: Interest income on financial assets recorded at amortized cost comprises: Loans to customers 21,020,314 13,676,784 Placements within banks 903, ,594 Other interest income 147,201 38,518 Total interest income on financial assets recorded at amortized cost 22,071,469 14,607,896 Interest expense comprises: Interest expense on financial liabilities recorded at amortized cost comprise: Notes payable (4,134,291) (2,921,745) Subordinated debt (647,715) (684,663) Total interest expense (4,782,006) (3,606,408) Net interest income 17,289,463 11,001, Other operating income Other operating income for the year ended December 31, 2011 and 2010 can be presented as follows: Penalties and fines 1,096, ,774 Other 55,457 38,808 1,151, ,582 The Company charges clients with penalties on a daily basis in case of overdue payments. Clients are also charged with fines, if they close the loan earlier than the date indicated in the agreement. 7. Loss from exchange rate difference Loss from exchange rate difference for the year ended December 31, 2011 and 2010 can be presented as follows: Realized foreign exchange loss 493,556 86,876 Unrealized foreign exchange loss 73,332 27, , ,731 Page 19 of 36

20 8. Salaries and other employee benefits Salaries and other employer benefits for the year ended December 31, 2011 and 2010 can be presented as follows: Salaries and bonuses 7,677,390 5,499,248 Health Insurance 111,935 95,641 Other benefits 4,786 64,776 7,794,111 5,659,665 Salaries and Bonuses include the fixed salaries as well as bonuses for the personnel, including the loan officers and the management. Refer to Note 24 for the disclosures regarding key management compensations. 9. General and administrative expenses General and administrative expenses for the year ended 31 December, 2011 and 2010 can be presented as follows: Rent expenses 1,068,579 1,010,261 Communication 179, ,055 Legal and other professional services 254, ,803 Consumables and office supplies 226, ,355 Fuel expenses 203, ,012 Security expenses 151, ,798 Business trips 187,266 97,675 Utilities 116,976 92,719 Marketing and advertising 207,792 75,673 Bank charges 90, ,062 Personnel training and recruitment 80,649 35,430 Corporate hospitality and entertainment 56,744 14,610 Lawsuit expenses related to doubtful debts 53,643 43,555 Repair and maintenance 16,548 12,726 Taxes other than income tax 10,111 4,302 Other 39,114 52,053 2,944,270 2,483, Income tax expense Income tax expense for the year ended December 31, 2011 and 2010 can be presented as follows: Current income tax expense (1,156,421) (650,970) Deferred income tax benefit 129,602 39,613 Income tax expense (1,026,819) (611,357) Page 20 of 36

21 10. Income tax expense (continued) Reconciliation of the income tax expense based on statutory rate with actual is as follows: Profit before tax 6,921,064 3,665,466 Applicable tax rate 15% 15% Theoretical income tax (1,038,160) (549,820) Effect of permanent differences 11,241 (61,537) Income tax expense (1,026,819) (611,357) 11. Cash and cash equivalents Cash and cash equivalents as at December 31, 2011 and 2010 can be presented as follows: Cash on hand 367,604 96,877 Cash on current accounts with banks in Georgian Lari 1,260,876 1,547,682 Cash on current accounts with banks in other currencies 1,285,931 1,083,042 Interest receivable on deposits 140,946-3,055,357 2,727,601 Cash and cash equivalents distribution by currency as at 31 December 2011 can be presented as follows: in GEL in USD in EUR Total Cash on hand 215, , ,605 Cash on current accounts with banks 1,260,876 1,283,387 2,544 2,546,807 Interest receivable from deposits - 140, ,945 1,476,091 1,576,722 2,544 3,055,357 Cash and cash equivalents distribution by currency as at 31 December 2010 can be presented as follows: in GEL in USD in EUR Total Cash on hand 54,102 42,774-96,877 Cash on current accounts with banks 1,547,682 1,082, ,630,724 1,601,785 1,125, ,727,601 Page 21 of 36

22 12. Loans to customers Loans to customers as at December 31, 2011 and 2010 can be presented as follows: Originated loans to customers 63,412,609 41,949,055 Accrued interest 1,275, ,170 64,688,572 42,779,225 Less: allowance for impairment losses (94,754) (51,689) Total loans to customers 64,593,818 42,727,536 Portfolios distribution by loan type is as follows: Individual Express Loan 37,574,561 24,489,403 Group Rural Loan 13,837,890 11,354,616 Solidarity Credit Group Loan 5,967,988 4,849,091 Individual Micro Loan 3,525,736 2,086,115 Individual Rural Loan 3,782,397-64,688,572 42,779,225 Less: allowance for impairment (94,754) (51,689) Total Loans to customers 64,593,818 42,727,536 Movements on allowance for impairment are as follows: At 1 January 51, ,064 Reversal for the year (net) (49,504) (107,709) Recoveries of previously off loans 236, ,617 Amount written off (143,975) (586,283) At 31 December 94,754 51,689 Individual impairment - - Collective impairment 94,754 51,689 94,754 51,689 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance - - The Company s exposure to impairment losses related to loan portfolio is disclosed in note 22. Information about collateral at 31 December 2011 is as follows: Page 22 of 36

23 12. Loans to customers (continued) Individual Express Loan Group Rural Loan Solidarity Credit Group Loan Individual Micro Loan Individual Rural Loan Total Unsecured loans 36,015,280 13,822,888 5,955,882 1,172,825 3,515,868 60,482,743 Loans collateralized by: Real estate 1,492, ,352, ,466 4,111,075 37,507,978 13,822,888 5,955,882 3,525,736 3,781,334 64,593,818 Information about collateral at 31 December 2010 is as follows: Individual Express Loan Group Rural Loan Solidarity Credit Group Loan Individual Micro Loan Individual Rural Loan Unsecured loans 24,448,307 11,349,459 4,843, ,641,421 Loans collateralized ,086,115 by: Real estate 2,086,115 24,448,307 11,349,459 4,843,655 2,086,115-42,727,536 Total Analysis by credit quality of loans outstanding at 31 December 2011 is as follows: Individual Express Loan Group Rural Loan Solidarity Credit Group Loan Individual Micro Loan Individual Rural Loan Current and not impaired 37,349,114 13,759,090 5,906,510 3,525,736 3,782,398 64,322,848 Past due but not impaired Loans collectively determined to be impaired: Less than 30 days overdue 61,223 17,144 19, , days overdue 37,939 9,342 16, , days overdue 23,539 14,177 6, , days overdue 102,745 38,137 19, ,282 37,574,560 13,837,890 5,967,988 3,525,736 3,782,398 64,688,572 Less impairment provisions (66,582) (15,002) (12,106) - (1,064) (94,754) Total Loans to customers 37,507,978 13,822,888 5,955,882 3,525,736 3,781,334 64,593,818 Total Page 23 of 36

24 12. Loans to customers (continued) Analysis by credit quality of loans outstanding at 31 December 2010 is as follows: Individual Express Loan Group Rural Loan Solidarity Credit Group Loan Individual Micro Loan Individual Rural Loan Current and not impaired 24,348,859 11,337,321 4,821,521 2,070,380-42,578,081 Past due but not impaired Loans collectively determined to be impaired: Less than 30 days overdue 43,673 10,697 11,168 15,735-81, days overdue 28,239 1,945 5, , days overdue 12,419-1, , days overdue 56,213 4,653 8, ,784 24,489,403 11,354,616 4,849,091 2,086,115-42,779,225 Less impairment provisions (41,096) (5,157) (5,436) - - (51,689) Total Loans to customers 24,448,307 11,349,459 4,843,655 2,086,115-42,727,536 Total The primary factors that the company considers whether a loan is impaired are its overdue status, financial position of a borrower and realisability of related collateral, if any. As at 31 December 2011 and 2010 no individual loan balances exceeded 10% of equity. 13. Amounts due from credit institutions Amounts due from credit institutions as at December 31, 2011 and 2010 can be presented as follows: Currency Maturity TBC Bank USD 29-Jul ,505,450 - TBC Bank USD 29-Jul ,505,450 - TBC Bank USD 29-Jul ,670,300 - TBC Bank USD 12-Apr ,091,200 TBC Bank USD 31-May ,659,200 Bank Republic USD 21-Dec ,670,300 1,772,800 8,351,500 11,523,200 Amounts due from credit institutions include time deposits placed in local banks with effective maturities of more than 90 days. Those amounts were pledged to the counterparty as security for open commitment. The Interest rates on the time deposits placed within local banks range from 8.0% to 10.5% per annum. Page 24 of 36

25 14. Other assets Other assets as at December 31, 2011 and 2010 can be presented as follows: Prepaid rent 149,502 83,710 Other prepayments 83,480 22,913 Prepaid taxes 44,595 10,354 Other assets 10,738 12,124 Interest receivable from deposits - 48, , , Property, plant and equipment Property, plant and equipment as at December 31, 2011 and 2010 can be presented as follows: Leasehold Improvements IT equipment Furniture and office equipment Vehicles Other Total Cost: Balance at January 1, ,598 59,043 40,683-21, ,834 Acquisitions 80, , ,002-69, ,510 Disposals (320) (1,265) (1,645) - - (3,230) Balance at December 31, , , ,040-91, ,114 Balance at January 1, , , ,040-91, ,114 Acquisitions 50, ,272 92, , , ,896 Disposals Balance at December 31, , , , , ,071 1,447,010 Depreciation: Balance at January 1, ,478 16,827 7,117-4,752 38,174 Depreciation for the period 19,663 37,212 38,694-15, ,632 Accumulated depreciation on disposals (303) (925) (628) - - (1,856) Balance at December 31, ,838 53,114 45,183-19, ,950 Balance at January 1, ,838 53,114 45,183-19, ,950 Depreciation for the period 29,105 82,388 65,128 10,054 34, ,495 Accumulated depreciation on disposals Balance at December 31, , , ,312 10,054 54, ,445 Carrying amounts: Balance at December 31, , , ,857-71, ,164 Balance at December 31, , , , , ,437 1,078,565 Page 25 of 36

26 16. Intangible assets Intangible assets as at December 31, 2011and 2010 can be presented as follows: Cost: Computer Software Balance at January 1, ,295 Acquisitions - Disposals - Balance at December 31, ,295 Balance at January 1, ,295 Acquisitions 177,360 Disposals - Balance at December 31, ,655 Amortization and impairment: Balance at January 1, ,840 Amortization for the period 73,791 Disposals/Impairment loss - Balance at December 31, ,631 Balance at January 1, ,631 Amortization for the period 42,664 Disposals/Impairment loss - Balance at December 31, ,295 Carrying amounts: Balance at January 1, ,664 Balance at December 31, ,360 During 2011 new software with a cost of GEL 177,360 was contributed to the Company s capital by the shareholder. The new software will be used by the Company for accounting and other reporting purposes, which is under the testing mode and is not therefore amortized. The Company is still using the current software with two modules: Loan Management System and B The current software was fully amortized by the end of Page 26 of 36

27 17. Deferred tax asset Deferred tax assets as at December 31, 2011 and 2010 can be presented as follows: At 1 January 164, ,321 Recognised in profit and loss Tax income (expense) 129,602 39,613 Recognised in other comprehensive income - - At 31 December 294, ,934 Temporary differences as at December 31, 2011 can be presented as follows: Asset Liability Net (Charged)/ credited to profit or loss (Charged)/ credited to equity Property plant and equipment - (53,870) (53,870) (20,834) - Loans to customers 259, ,351 75,761 - Intangible assets 17,196-17,196 20,026 - Other liability 98,274-98,274 69,002 - Notes payable - (26,415) (26,415) (14,353) - Tax asset/(liabilities) 374,821 (80,285) 294, ,602 - Set off of tax (80,285) 80, Net tax assets/(liabilities) 294, , ,602 - Temporary differences as at December 31, 2010 can be presented as follows: Asset Liability Net (Charged)/ credited to profit or loss (Charged)/ credited to equity Property plant and equipment - (33,036) (33,036) (24,325) - Loans to customers 183, ,590 71,143 - Intangible assets - (2,830) (2,830) (9,162) - Other liability 29,272-29,272 29,272 - Notes payable - (12,062) (12,062) (2,281) - Tax asset/(liabilities) 212,862 (47,928) 164,934 39,613 - Set off of tax (47,928) 47, Net tax assets/(liabilities) 164, ,934 39,613 - Page 27 of 36

28 18. Notes payable Notes payable as at December 31, 2011 and 2010 can be presented as follows: Loans from financial institutions 54,439,833 39,762,744 Subordinated debt* 5,074,311 5,380,621 59,514,144 45,143,365 Current Non-current Notes payable and subordinated debt Originated loans 16,238,310 22,305,240 42,288,124 22,342,437 Accrued interest 987, ,688-17,226,020 22,800,928 42,288,124 22,342,437 The Company s major lenders include: JSC TBC Bank, European Bank for Reconstruction and Development (EBRD), Triple Jump, FINCA Microfinance Fund B.V., Incofin, Ministry of Finance of Georgia (World Bank loan), Blue Orchard, Global Microfinance Fund, Eolo Investments B.V., JSC Bank Republic, Sybiotic, FINCA Capital Fund and ResponsAbility. The interest rates on the notes payable and subordinated debt range from 6.05% to 14.5% per annum. The majority of the Company's long-term loan contracts contain different financial and other covenants, covenants include: PAR over 30 days to be less than 5% loan write-offs for the year over gross loan portfolio to be less than 3 % Total liabilities over Equity to be less than 5/1 Total gross loan portfolio over Equity to be over 25% Open short foreign currency positions to be less than 20% of capital Operating expenses over operating results to be less than 85% Positive year-end and Return on Equity to be at least 5% Short term unhedged foreign currency liabilities not to exceed 30% of the total equity Difference between foreign currency assets and foreign currency liabilities over Equity to be between -50% and 150% There is a regular communication between the lenders and the Company regarding the Covenants and JSC FINCA Georgia is in compliance with all the financial and other covenants as agreed with the lenders, except for several cases, which are listed below and are in fact immaterial: - LLP/(PAR>30+rescedualed) to be more than 100% - LLP Coverage of PAR > 90 to be more than 100% Management board agreed with the lenders that actual covenants are satisfactory and loan agreements will be amended in near future in order the covenants to be in compliance with actual figures. Therefore abovementioned breaches represent no threat for the Company. Page 28 of 36