ISTRATURIST UMAG d.d. MANAGEMENT BOARD S REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2009

Transcription

1 ISTRATURIST UMAG d.d. MANAGEMENT BOARD S REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2009 This version of the report is a translation from the original, which was prepared in Croatian language. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

2 Contents Page Management Board s report 1-2 Statement of the Management and Supervisory Board s responsibilities 3 Independent auditor's report to the shareholders of Istraturist Umag d.o.o 4 Statement of comprehensive income 5 Statement of financial position 6 Statement of changes in equity 7 Statement of cash flows 8 Notes (forming part of financial statements) 9-52

3 Management Board s report It is my pleasure to present the Annual Report to the shareholders. The Report comprises a financial review, a business review and the Company's audited financial statements. Development Istraturist is the leading Croatian tourist company in terms of quality of tourist accommodation and service in hotels, tourist villages and camps. The Company s expansion has had a significant impact on the image of the City of Umag. Umag today is perceived as a tourist destination of high quality accommodation. The Umag ATP tournament, which has been successfully organized by Istraturist for the 20 th time in a row, also contributes to the recognition of Umag as a tourist destination. Last year Istraturist completed an eight year long investment cycle worth EUR 120 million to raise 72% of its capacity to four and five star quality. The Company's portfolio consists of 1,444 four star and five star accommodation units in hotels and resorts, 3,373 four star accommodation units in camps and 1,848 accommodation units in other capacities. The Company s portfolio is prominent in concept and innovation in Croatia and, for the second consecutive year, the Sol Garden Istra Hotel and the Kamp Park Umag campgrounds have been pronounced the best in their categories. Furthermore, the Kamp Park Umag campground, also for the second year in a row, has been awarded the "Superplatz", camp title by ADAC with and classified among the best European campgrounds. In 2009 Istraturist categorized the Coral Hotel, its first 5-star hotel, and further strengthened the quality of its range of services. Financial results According to audited financial statements, Istraturist Umag d.d. achieved a net profit of HRK 37.6 million in 2009 as a result of sustainable profit from operations and lower financial expenses. During 2009 Istraturist achieved 1.8 million overnight stays, or 3% less than in the same period last year. In the current conditions of slowing economic activity, reduced disposable household income and growing unemployment in all significant markets, the achieved results are satisfactory. Operating revenues amounted to HRK million, or 2% less than for the same period last year. Through the restructuring of distribution channels in favour of direct sales channels, price growth was achieved in all portfolio segments, which had a positive impact on the movement of income. Operating expenses in the amount of HRK million are at the level of last year. Istraturist achieved a lower level of material and staff costs. Throughout the entire period, the Company improved the efficiency of operations while maintaining high levels of service quality. The net financial income and expenses had a positive impact on the total result for the period. Financial income in the amount of HRK 3.5 million is the result of positive foreign exchange rates in the amount of HRK 1.5 million, IRSwap interest income in the amount of HRK 1.2 million and other income in the amount of HRK 800 thousand. Financial expenses amount to HRK 20.0 million and are significantly lower in comparison to last year and are result of lower interest and foreign exchange rates on loans. Assets and liabilities Total assets amount to HRK million at 31 December Equity and reserves amount to HRK 733 million with recorded growth compared to the previous period as a result of realized net income. Total Group liabilities amount to HRK million. Liabilities decreased by HRK million, or 10.8% compared to the previous year due to decreased loan liabilities. 1

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6 Independent Auditors Report to the shareholders of Istraturist Umag d.d. We have audited the accompanying financial statements of Istraturist Umag d.d. (the ''Company'') and accompanying consolidated financial statements of Istraturist Umag d.d. and its subsidiary (the ''Group'') which comprise the statements of financial position as at 31 December 2009, and the statements of comprehensive income, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Company and Group as at 31 December 2009 and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. KPMG Croatia d.o.o. za reviziju 5 March 2010 Croatian Certified Auditors Eurotower, 17th floor Ivana Lučića 2a Zagreb Croatia 4 This version of the report is a translation from the original, which was prepared in Croatian language. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

7 STATEMENT OF COMPREHENSIVE INCOME Istraturist Umag Istraturist Group Umag d.d. In thousands of HRK Note Sales revenue 7 368, , , ,043 Other income 8 6,812 3,485 6,516 3,442 Cost of materials and services 9 (123,195) (132,341) (115,482) (124,660) Staff costs 10 (103,046) (103,685) (101,160) (102,215) Depreciation and amortisation 17 (57,230) (56,251) (56,956) (56,007) Other operating expenses 11 (30,807) (18,663) (29,544) (18,108) Other (losses)/gains net 12 3,787 (2,901) 3,803 (2,754) Operating profit 64,781 63,825 65,447 63,741 Finance income 13 3,451 1,423 3,448 1,410 Finance costs 13 (20,064) (62,971) (19,997) (62,955) Finance costs net 13 (16,613) (61,548) (16,549) (61,545) Profit before tax 48,168 2,277 48,898 2,196 Income tax expense 14 (10,591) (1,162) (10,591) (1,082) Profit for the year 37,577 1,115 38,307 1,114 Other comprehensive income Total comprehensive income for the year 37,577 1,115 38,307 1,114 Earnings per share (in HRK) The notes set out on pages 9 to 52 form part of these financial statements. 5

8 STATEMENT OF FINANCIAL POSITION Istraturist Group Umag Istraturist Umag d.d. In thousands of HRK Note ASSETS Non-current assets Property, plant and equipment 17 1,225,472 1,249,877 1,223,814 1,248,348 Intangible assets 17 1,675 1,928 1,649 1,898 Loans and deposits Receivables Investment in subsidiaries Deferred tax assets 19 13,230 23,821 13,230 23,821 Total non-current assets 1,241,458 1,276,894 1,239,810 1,275,372 Current assets Inventories 20 1,553 1,752 1,552 1,750 Trade and other receivables 22 21,746 14,560 18,504 13,657 Financial assets at fair value through profit or loss 23 8,773 2,878 8,773 2,878 Deposits 21 8,725 12,800 8,725 12,800 Loans given ,317 1,208 Income tax receivable 1,123 3,183 1,030 3,100 Cash and cash equivalents 24 3,408 3,914 3,289 3,784 Total current assets 45,477 39,203 45,190 39,177 TOTAL ASSETS 1, 286,935 1,316,097 1,285,000 1,314,549 EQUITY AND LIABILITIES Equity Share capital , , , ,500 Legal reserves 25 23,375 23,375 23,375 23,375 Retained earnings 242, , , ,272 Total equity 733, , , ,147 Liabilities Non-current liabilities Borrowings , , , ,998 Total non-current liabilities 434, , , ,998 Current liabilities Borrowings 26 72,502 72,580 72,502 72,580 Trade and other payables 27 25,441 23,479 23,747 22,679 Employee payables 12,397 11,735 12,185 11,564 Derivative financial instruments , ,084 Income tax payable Other current liabilities 4,044 2,990 3,869 2,997 Provisions 29 4, , Total current liabilities 119, , , ,404 Total liabilities 553, , , ,402 TOTAL EQUITY AND LIABILITIES 1,286,935 1,316,097 1,285,000 1,314,549 The notes set out on pages 9 to 52 form part of these financial statements. 6

9 STATEMENT OF CHANGES IN EQUITY Consolidated Group In thousands of HRK Note Share capital Treasury shares Legal reserves Retained earnings Total Balance at 1 January ,500-23, , ,616 Profit for the year ,115 1,115 Other comprehensive income Total comprehensive income ,115 1,115 Purchase of treasury share - (2,214) - - (2,214) Distribution of treasury shares 25-2, ,214 Balance at 31 December ,500-23, , ,731 Profit for the year ,577 37,577 Other comprehensive income Total comprehensive income ,577 37,577 Balance at 31 December ,500-23, , ,308 Parent Company In thousands of HRK Note Share capital Treasury shares Legal reserves Retained earnings Total Balance at 1 January ,500-23, , ,033 Profit for the year ,114 1,114 Other comprehensive income Total comprehensive income ,114 1,114 Purchase of treasury share - (2,214) - - (2,214) Distribution of treasury shares 25-2, ,214 Balance at 31 December ,500-23, , ,147 Profit for the year ,307 38,307 Other comprehensive income Total comprehensive income ,307 38,307 Balance at 31 December ,500-23, , ,454 The notes set out on pages 9 to 52 form part of these financial statements. 7

10 CASH FLOW STATEMENT In thousands of HRK Istraturist Group Umag Istraturist Umag d.d. Note Cash flow from operating activities: Profit before tax 48,168 2,277 48,898 2,196 Adjustments for: Depreciation and amortisation 57,230 56,251 56,956 56,007 Impairment of property, plant and equipment (PPE) (Gain)/loss on sale PPE 27 (11) 27 (11) Impairment loss on receivables 5,708-5,708 - Recovery of receivables written-off (5) (63) (5) (63) (Decrease)/increase in provisions 3,946 (3,639) 3,946 (3,639) Change in fair value of financial assets through profit and loss (1,918) 149 (1,918) 149 Dividend income (104) (1,059) (104) (1,059) Interest income (1,915) (163) (1,911) (163) Financial expense-net 18,528 61,548 18,528 61,545 Change in fair value of forward foreign exchange contracts (1,339) 1,448 (1,339) 1,448 Other non -cash items - 2,214-2,266 Operating profit before working capital changes 128, , , ,332 Trade and other receivables (12,676) 3,822 (10,338) 3,103 Trade and other payables 1,456 (3,828) 340 (4,671) Inventories 199 (476) 198 (476) Cash generated from operations 117, , , ,288 Income tax paid 2,060 (7,193) 2,070 (7,193) Interest paid (19,959) (23,034) (19,959) (23,034) Cash flow from operating activities 99,721 88, ,382 87,061 Cash flow from investing activities Purchase of PPE (30,518) (143,247) (30,088) (142,911) Purchase of intangible assets (167) (756) (167) (756) Proceeds from sale of PPE Interest received 1, , Loans and deposits granted (1,341) (8,362) (3,417) (8,212) Loan repayments 5,488 1,214 5,488 2,674 Proceeds from sale of financial assets through profit and loss (3,977) 11,423 (3,977) 11,423 Cash flow used in from investing activities (28,598) (139,026) (30,248) (137,080) Cash flow from financing activities Proceeds from borrowings 56, ,751 56, ,751 Repayment of borrowings (128,289) (446,097) (128,289) (446,094) Purchase treasury shares - (2,214) - (2,214) Cash flow from financing activities (71,629) 52,440 (71,629) 52,443 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period (506) 2,313 (495) 2, ,914 1,601 3,784 1, ,408 3,914 3,289 3,784 The notes set out on pages 9 to 52 form part of these financial statements. 8

11 NOTE 1 GENERAL INFORMATION Istraturist Umag d.d. is a joint stock company registered and domiciled in Umag, Croatia. These financial statements present together the consolidated Group and the parent Company standing alone. The Istraturist Group ( Group ) comprises Istraturist Umag d.d. (the Parent Company or Company ), a joint stock company for catering and tourism and its 100% owned subsidiary Istra DMC d.o.o., a limited liability company which organizes the annual ATP tennis tournament in Umag. According to the laws of the Republic of Croatia and with the approval of the Croatian Privatisation Fund, the parent Company was transformed from state ownership into a joint stock company in the year The parent Company and its subsidiary are registered at the Commercial Court in Rijeka. The Company's registered office is in Umag, Jadranska 66. The Istraturist Group is controlled by Zagrebačka banka d.d., Zagreb. The ownership structure as at 31December 2009 is disclosed in Note 25. The Company s shares are listed on the primary listing of the Zagreb Stock Exchange. The ultimate parent Company is UniCredito Italiano S.p.A.. NOTE 2 BASIS OF PREPARATION a) Statement of compliance The consolidated and separate unconsolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements were approved by the Management Board on 5 March b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through profit or loss are measured at fair value. c) Functional and presentation currency These financial statements are presented in the Croatian currency, Kuna (HRK), which is also the functional currency, rounded to the nearest thousand. d) Critical accounting estimates The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 6. 9

12 NOTE 2 BASIS OF PREPARATION (continued) e) Changes in accounting policies (i) Determination and presentation of operating segments As of 1 January 2009 the Group determines and presents operating segments based on the information that internally is provided to the CEO, who is the Group s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows. Comparative segment information has been represented in conformity with the transitional requirements of such standard. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on earnings per share. (ii) Presentation of financial statements The Group applies revised IAS 1 Presentation of Financial Statements (2007), which became effective as of 1 January As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. NOTE 3 SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in note 2(e), which addresses changes in accounting policies. (a) Consolidation (i) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date of sale. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. In the separate financial statements of parent Company investments in subsidiaries are stated at cost. 10

13 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Foreign currencies (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated and non-consolidated financial statements are presented in Croatian kuna (HRK), which is the Company s functional and the Group s 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. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign exchange gains and losses relating to borrowings and cash and cash equivalents are recorded in the income statement within finance costs net. All other foreign exchange losses and gains are recorded in the income statement within 'other (losses)/gains net'. (c) Financial instruments (i) Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for sale financial assets. (ii) Loans and receivables Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables, including service concession receivables. 11

14 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Financial instruments (continued) (iii) Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Other Other non-derivative financial instruments are measured at amortised cost using effective interest rate less any impairment losses. (d) Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Subsequent expenditure The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the assets. Land and assets under construction are not depreciated since they have indefinite useful lives. The expected useful life is following: Buildings Plant and equipment Depreciation methods and useful lives, as well as residual values, are reassessed annually. 12

15 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Intangible assets Software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation of intangible assets is calculated using the straight-line method over their estimated useful lives of 5 years (rate of 20%). (f) Impairment Non financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets are reviewed for possible reversal of the impairment at each reporting date. Financial Assets A financial asset is considered to be impaired if objective evidence indicates that one or more event have had a negative effect on the estimated future cash flows of that asset. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit characteristics. (g) Derivative financial instruments Derivative financial instruments include foreign exchange forward contracts and IRSwap contracts. Derivative financial instruments are recognised in the balance sheet at fair value. Fair values are determined according to market prices on stock exchanges or through pricing models, if appropriate. All derivatives are recognised in the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. These derivatives do not meet the conditions for hedge accounting and are therefore treated as derivatives held for trading. Gains and losses arising from the forecast transaction are recognised in the income statement. (h) Inventories Inventories are valued at the lower of cost, using the weighted average method, and net realisable value. Cost includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location decreased by any discounts received. Net realisable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. The value of slow moving and obsolete inventory is reduced and charged to the income statement. 13

16 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Cash and cash equivalents Cash and cash equivalents comprise cash on account with banks and other similar institutions and cash in hand, deposits held at call with banks and other short-term highly liquid instruments with original maturities of three months or less. (j) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When assets are leased out under an operating lease, the asset is included in the balance sheet based on the nature of the assets. Assets are depreciated on the straight-line basis equal to similar assets. Lease income is recognised over the period of the lease. (k) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Where the Company purchases its equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company s equity holders. (l) Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. (m) Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. The Group capitalises borrowing costs. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 14

17 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Current and deferred income tax The current income tax charge is calculated at a rate of 20% according to Croatian laws and regulations. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and consider establishing provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying 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 or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (o) Employee benefits (a) Pension obligations and post-employment benefits In the normal course of business through salary deductions, the Group makes payments to mandatory pension funds on behalf of its employees as required by law. All contributions made to the mandatory pension funds are recorded as salary expense when incurred. The Group does not have any other pension scheme and consequently, has no other obligations in respect of employee pensions. In addition, the Group is not obliged to provide any other post-employment benefits. (b) Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to their present value. (c) Short-term employee benefits The Group recognises a provision for bonuses where contractually obliged or where there is a past practice that has created a constructive obligation. In addition, the Group recognises a liability for jubilee awards, accumulated compensated absences based on unused vacation days at the balance sheet date, as well as labour hours realised from the reorganisation of working hours not utilised up to the balance sheet date. 15

18 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (p) Provisions Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions for future operating losses are not recognised. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. (q) Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of services in hotels and apartments, campsites and restaurants of the Group. Revenue is shown net of agency commissions and value-added tax and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group s activities as described below. (a) Sales of services The Group sells hotel and tourism services. These services are provided based on fixed-price contracts. Revenue from hotel and tourism services are recognised when the services are provided. Revenue from fixed-price contracts with contracted deadlines ranging to 12 months are concluded mainly with tourist agencies and tour operators. Revenue from services provided are based on prescribed tariffs (usually for individual guests that pay in cash or credit cards credit card commission is recognised as an expense). If circumstances arise that may change the original estimate of revenues, costs or extent of progress toward completion estimates are revised. These revisions may result in increase or decrease in estimated revenues or costs and are reflected in income in the period in which the circumstances that give rise to revision become known by management. 16

19 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) q) Revenue recognition (continued) (b) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (r) Earnings per share Earnings per share is determined by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of participating shares outstanding during the reporting year. (s) Dividend distribution Dividend distribution to the Company s shareholders is recognised as a liability in the financial statements in the period in which the dividends are approved by the Company s shareholders. (t) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations have been released and are not yet effective for the year ended 31 December 2009, and have not been applied in preparing these financial statements: Revised IAS 24 Related Party Disclosure (effective for annual periods beginning on or after 1 January 2011). The amendment exempts government-related entity from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with (a) a government that has control, joint control or significant influence over the reporting entity; and (b) another entity that is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity. The revised Standard requires specific disclosures to be provided if a reporting entity takes advantage of this exemption. The revised Standard also amends the definition of a related party which resulted in new relations being included in the definition, such as, associates of the controlling shareholder and entities controlled, or jointly controlled, by key management personnel. Revised IAS 24 is not relevant to the Company s/group s financial statements as they are not a government-related entity and the revised definition of a related party is not expected to result in new relations requiring disclosure in the financial statements. 17

20 NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (continued) (t) New standards and interpretations not yet adopted (continued) IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013, early adoption is permitted). This Standard replaces the guidance in IAS 39, Financial Instruments: Recognition and Measurement, about classification and measurement of financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivable. Financial assets will be classified into one of two categories on initial recognition: - financial assets measured at amortized cost; or - financial assets measured at fair value. A financial asset is measured at amortized cost if the following two conditions are met: the assets is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and, its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. Gains and losses on remeasurement of financial assets measured at fair value are recognised in profit or loss, except that for an investment in an equity instrument which is not held for trading, IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in other comprehensive income (OCI). The election is available on an individual share-byshare basis. No amount recognised in OCI is ever reclassified to profit or loss at a later date. It is not expected that IFRS 9 will materially impact the Company s/group s financial statements because it is expected that, due to the nature of their operations and the types of financial assets they holds, the classification and measurement of the Company s/group s financial assets will not change significantly under IFRS 9. Amendment to IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items (effective for annual periods beginning on or after 1 July 2009) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). The amended Standard clarifies the application of existing principles that determine whether specific risks or portions of cash flows are eligible for designation in a hedging relationship. In designating a hedging relationship the risks or portions must be separately identifiable and reliably measurable; however inflation cannot be designated, except in limited circumstances. The amendments to IAS 39 are not relevant to the Group s financial statements as the Group does not apply hedge accounting. 18

21 NOTE 4 FINANCIAL RISK MANAGEMENT Financial risk factors The Group s activities expose it to variety of financial risks: market risk (including currency risk, cash flow and fair value interest rate risk and price risk), credit risk and liquidity risk. The Group does not have a written risk management programme, but overall risk management in respect of these risks is carried out by the Group s Management. (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the EURO and CHF. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities. The majority of foreign sales revenue and long-term debt is denominated in EUROs or since 2008 the majority of foreign long-term debt is denominated in CHF (Note 26) Therefore, movements in exchange rates between the EURO and CHF and Croatian kuna (HRK) may have an impact on the results of future operations and future cash flow. The Group uses forward contracts on an occasional basis. As at 31 December 2009 there were no forward contracts and as at 31 December 2008 forward exchange foreign contracts were denominated in EURO. At 31 December 2009, if the EURO had weakened/strengthened by 1.3% and 1% for 2008 against the HRK, with all other variables held constant, the net profit for the reporting period would have been HRK 1,995 thousand (2008: HRK 527 thousand), higher/lower, mainly as a result of foreign exchange gains/(losses) on translation of EURO-denominated trade receivables, borrowings and foreign cash funds, considering the effect of forward foreign exchange contracts. At 31 December 2009, if the CHF had weakened/strengthened by 2% and 6% for 2008 against the HRK, with all other variables held constant, the net profit for the reporting period would have been HRK 6,205 thousand (2008: HRK 25,724 thousand) higher/(lower), mainly as a result of foreign exchange gains/(losses) on translation of CHF-denominated borrowings and foreign cash funds. The Group manages foreign currency risk through protective derivative instruments, forward contracts, throughout the year. (ii) Cash flow and fair value interest rate risk As the Group has no significant interest-bearing assets, except short-term deposits at variable rates (Note 21), the Group s income and operating cash flows are substantially independent on changes in market interest rates. The Group s interest rate risk arises from long-term borrowings (Note 26). With the aim of managing interest risk, in March 2009 the Group entered into protective cash flow derivative instrument IR Swap interest rate swap replacing a variable interest rate (3 months Libor for CHF) with a fixed interest rate (1.78% annually) for the entire duration of the loan, until

22 NOTE 4 FINANCIAL RISK MANAGEMENT (continued) (a) Market risk (continued) (iii) Price risk The Group owns equity securities and is exposed to price risk of listed equity securities, which are classified as financial assets through profit and loss. The Group invests in securities listed on the Zagreb Stock Exchange. The Group is not exposed to commodity price risk. As at 31 December 2009 and 2008, if the indices of the stated stock exchange had been higher/lower by 16.4% for 2009 and 25% for 2008 (which was the average index movement), with all other variables held constant, net profit would have been HRK 373 thousand (2008: HRK 594 thousand) higher/lower, as a result of gains/losses on financial assets through profit and loss. (b) Credit risk Credit risk arises from cash and cash equivalents, time deposits and trade receivables. It has policies in place to ensure that sales of products are made to customers with an appropriate credit history, i.e. the Group s policy ensures that sales to customers are settled through advance payments, in cash or by major credit cards (individual customers). Provisions for impairment of trade, loan and other receivables have been made based on credit risk assessment. Management monitors the collectability of receivables through weekly reports on individual balances of receivables. Impairment of trade receivables is performed when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of all trade and other receivables has been written down to their recoverable amount. The Group has policies that limit the amount of credit exposure to any financial institution. Cash transactions are carried out through high quality Croatian banks, or with the parent Company. The Group has only short-term highly liquid instruments with maturity periods of three months or less. See note 21 and 22 for further disclosure on credit risk. 20

23 NOTE 4 FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to meet all obligations. The Group aims to maintain flexibility in funding by keeping committed credit lines available. Management daily monitors available cash resources based on reports on the balance of cash and liabilities. The table below analyses financial liabilities of the Group according to contracted maturities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. As at 31 December 2009 Up to 1 year 1-2 years 2-5 years Over 5 years Carrying amount Trade and other payables 25, ,441 Derivative financial instruments Borrowings 72,502 72, , , ,554 As at 31 December 2008 Trade and other payables 23, ,479 Derivative financial instruments 70, ,084 Borrowings 72,580 72, , , ,578 NOTE 5 FAIR VALUE ESTIMATION A number of the Company s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Trade and other receivables/trade and other liabilities Trade and other receivables, trade and other payables, stated at cost less impairment losses are approximately equal to their fair value, since these receivables and payables are current receivables and payables. (ii) Non- derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. 21

24 NOTE 6 CRITICAL ACCOUNTING ESTIMATES Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. 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. (a) Estimated useful life and impairment of -Property, plant and equipment By using a certain asset, the Group uses the economic benefits contained in this asset, which diminish more intensely with economic and technological ageing. Consequently, in the process of determining the useful life of an asset, in addition to assessing the expected physical utilisation, it is necessary to consider the changes in demand on the tourism market, which will cause a faster economic obsolescence as well as a more intense development of new technologies. Current business operations in the hotel industry impose the need for more frequent investments, and this circumstance contributes to the fact that the useful life of an asset is decreasing. According to the technical department, the useful life of buildings of 35 years was assessed to be appropriate for undisturbed operations. The useful lives of equipment and other assets have also been reassessed as disclosed in Note 3(d). The useful lives will periodically be revised to reflect any changes in circumstances since the previous assessment. Changes in estimate, if any, will be reflected prospectively in a revised depreciation charge over the remaining, revised useful life. If the depreciation rates on property, plant and equipment had been 5% higher/lower, with all other variables held constant, the net profit for the year and the net carrying value of property, plant and equipment would have been HRK 2,862 thousand (2008: HRK 2,812 thousand) lower/higher. (b) Land ownership Problems with respect to land ownership disputes are common for the majority of the tourism companies in the Republic of Croatia. Their resolution is expected after the definition and enactment of the Law on Tourist Land (See Note 31). c) Contingent liabilities See Note