C Faktoring Anonim Şirketi. Financial Statements As at and for the Year Ended 31 December 2017 With Independent Auditors Report

Transcription

1 C Faktoring Anonim Şirketi Financial Statements As at and for the Year Ended 31 December 2017 With Independent Auditors Report

2

3

4

5 TABLE OF CONTENTS Page Independent Auditors Report Statement of Financial Position 1 Statement of Profit or Loss 2 Statement of Profit or Loss and Comprehensive Income 3 Statement of Changes in Equity 4 5 Notes to the Financial Statements 6-28

6 Notes to the financial statements Pages Note 1 Reporting entity 6 Note 2 Basis of preparation 6-7 Note 3 Summary of significant accounting policies 7-23 Note 4 Determination of fair values 13 Note 5 Financial risk management Note 6 Salaries and employee benefits 15 Note 7 Administrative expenses 15 Note 8 Income tax expense 16 Note 9 Cash and cash equivalents 17 Note 10 Factoring receivables Note 11 Tangible assets 19 Note 12 Intangible assets 20 Note 13 Investments in equity-accounted investees 21 Note 14 Financial assets available for sale 21 Note 15 Deferred tax assets and liabilities 22 Note 16 Bank borrowings 22 Note 17 Employee benefits 23 Note 18 Other liabilities 23 Note 19 Capital and Reserves 24 Note 20 Financial instruments Note 21 Commitments and contingencies 27 Note 22 Related party disclosures 28 Note 23 Subsequent events 28

7 Statement of Financial Position as at 31 December 2017 Assets Notes Cash and cash equivalents 9 2, Factoring receivables 10 69,349 58,219 Investments in equity-accounted investee , ,417 Financial assets available for sale 14 4,713 4,456 Tangible assets 11 4,612 4,723 Intangible assets Deferred tax assets Other assets Total assets 196, ,912 Liabilities Bank borrowings 16 61,361 48,650 Employee benefits Other liabilities Total liabilities 62,766 49,775 Equity Share capital 19 90,076 90,076 Share premium 19 9,900 9,900 Reserves 19 2,425 1,313 Retained earnings 31,585 29,848 Total equity 133, ,137 Total equity and liabilities 196, ,912 The accompanying notes are an integral part of these financial statements. 1

8 Statement of Profit or Loss Notes Factoring interest income 12,294 10,680 Factoring commission income 1,570 1,407 Income from factoring operations 13,864 12,087 Interest expense on funds borrowed (8,271) (6,172) Fees and commissions paid (291) (177) Foreign exchange gains /(losses), net Provision for impaired factoring receivables (110) (486) Income/(expense) after finance costs and provision for impaired factoring receivables 5,294 5,284 Interest income on bank deposits 21 4 Share of profit/(loss) of equity accounted investee 13 1,548 4,374 Dividend income Other income Operating profit 8,448 10,347 Salaries and employee benefits 6 (4,030) (3,843) Administrative expenses 7 (2,372) (2,287) Depreciation and amortization expenses 11,12 (251) (225) Profit before income tax 1,795 3,992 Income tax expense 8 (73) (61) Profit/(loss) for the year 1,722 3,931 The accompanying notes are an integral part of these financial statements. 2

9 Statement of Profit or Loss and Other Comprehensive Income Notes Profit for the year 1,722 3,931 Other comprehensive income Share of other comprehensive income of equity accounted investee 13 1,112 (583) Remeasurement of reserve for employee benefits Other comprehensive income/(expense) for the year 1,127 (553) Total comprehensive income for the year 2,849 3,378 The accompanying notes are an integral part of these financial statements. 3

10 Statement of Changes in Equity Notes Share capital Adjustment to share capital Share premium Reserves Retained earnings Total Balance at 1 January ,800 22,276 9,900 1,896 25, ,759 Total comprehensive income Profit ,931 3,931 Other comprehensive income and expense Share of other comprehensive income of equity accounted investee (583) -- (583) Remeasurement of reserve for employee benefits Total comprehensive income and expense (583) 3,961 3,378 Contributions by and distributions to owners Share capital increase Total contributions by and distributions to owners Balance at 31 December ,800 22,276 9,900 1,313 29, ,137 Balance at 1 January ,800 22,276 9,900 1,313 29, ,137 Total comprehensive income Profit ,722 1,722 Other comprehensive income and expense Share of other comprehensive income of equity accounted investee , ,112 Remeasurement of reserve for employee benefits Total comprehensive income and expense ,112 1,737 2,849 Contributions by and distributions to owners Share capital increase Total contributions by and distributions to owners Balance at 31 December ,800 22,276 9,900 2,425 31, ,986 The accompanying notes are an integral part of these financial statements. 4

11 Notes Cash flows from operating activities Profit for the period 1,722 3,931 Adjustments for: Depreciation Amortization of intangible assets Net finance expense 8,541 6,345 Net operating income (546) -- Provision for impaired factoring receivables Share of profit of investments in equity-accounted investee (2,660) (3,791) Change in investments in associate 1,112 (583) Income tax benefit Provision for employee termination benefits and vacation pay liability Financial assets available for sale (257) -- 8,502 6,761 Factoring receivables (11,240) (12,934) Dividend received Other assets (307) (151) Employee benefits paid -- (34) Other liabilities Net cash provided by / (used in) operating activities (2,358) (6,291) Cash flows from investing activities Acquisition of tangible and intangible assets 11,12 (288) (41) Financial assets available for sale -- (4,456) Net cash used in investing activities (288) (4,497) Cash flows from financing activities Proceeds from issuance of long and short term interest-bearing loans and borrowings 12,711 17,505 Interest paid (8,541) (6,345) Net cash provided by / (used in) financing activities 4,170 11,160 Effect of change in foreign exchange rate on cash and cash equivalents Net increase in cash and cash equivalents 1, Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 9 2, The accompanying notes are an integral part of these financial statements. 5

12 1. Reporting entity C Faktoring Anonim Şirketi (formerly named Elit Finans Faktoring Hizmetleri A.Ş.) ( the Company ) was incorporated in Turkey on 31 March 2000 to provide factoring services primarily with recourse to industrial and commercial companies. On 27 September 2002, Damla Cıngıllıoğlu acquired the 99.14% of shares of the Company. On 9 December 2002, the trade name of the Company was changed to C Faktoring Anonim Şirketi. The Company s head office is located at Rüzgarlıbahçe Mahallesi, Kayın Sokak, No:3 Kat:1 Kavacık İstanbul -Turkey. The Company has 31 employees as at 31 December 2017 (2016: 32 employees). 2. Basis of preparation (a) Statement of compliance The Company maintains its books of account and prepares its statutory financial statements in Turkish Lira ( TL ) in accordance with the Turkish Accounting Standards as promulgated by the Banking Regulation and Supervision Agency ( BRSA ) and also the Turkish Commercial Code (collectively, Turkish GAAP ). The accompanying financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ). The financial statements of the Company as at and for the year ended 31 December 2017 were approved on 20 April 2018 by the management for issuance. Although, there is no such intention, the General Assembly and certain regulatory bodies have power to amend the statutory financial statements of the Company after issuance. (b) Basis of measurement The financial statements are based on the statutory records, with adjustments and reclassifications for the purpose of fair presentation in accordance with IFRS. They have been prepared on the historical cost basis. The methods used to measure fair values are discussed further in Note 4. (c) Functional and presentation currency These financial statements are presented in TL, which is the Company s functional currency. All financial information presented in TL is rounded to the nearest thousand. (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. (e) Changes in accounting policies The accounting policies adopted in the preparation of the financial statements are consistent with those of the accounting policies adopted in the financial statements as at 31 December

13 3. Summary of significant accounting policies Standards issued but not yet effective and not early adopted Standards, interpretations and amendments to existing standards that are issued but not yet effective up to the date of issuance of the financial statements are as follows. The Company will make the necessary changes if not indicated otherwise, which will be affecting the financial statements and disclosures, after the new standards and interpretations become in effect. IFRS 9 Financial Instruments IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. It also carries forward the guidance on recognition, classification, measurement and derecogniton of financial instruments from IAS 39 to IFRS 9. The last version of IFRS 9 includes a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements and also includes guidance issued in previous versions of IFRS 9. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The Company recognizes factoring receivables accounted accordance with the BRSA regulations. Adoption of IFRS 9 within the scope of the relevant legislation. IFRS 15 Revenue from Contracts with customers The new standard replaces existing IFRS and US GAAP guidance and introduces a new control-based revenue recognition model for contracts with customers. In the new standard, total consideration measured will be the amount to which the Company expects to be entitled, rather than fair value and new guidance have been introduced on separating performance obligations for goods and services in a contract and recognition of revenue over time. IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Company is assessing the potential impact of the standard on the financial position or performance of the Company. IFRS 16 Leases On 13 January 2016, IASB issued the new leasing standard which will replace IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases Incentives, and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease and consequently changes to IAS 40 Investment Properties. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, onbalance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice. IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted provided that an entity also adopts IFRS 15 Revenue from Contracts with Customers. The Company is assessing the potential impact of the standard on the financial position or performance of the Company. IFRIC 22 Foreign Currency Transactions and Advance Consideration On 8 December 2016, IASB issued IFRIC 22 Foreign Currency Transactions and Advance Consideration to clarify the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognises a non-monetary asset or nonmonetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income. The date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. IFRIC 22 is effective for annual reporting periods beginning on or after 1 January 2018 with earlier application is permitted. The Company is assessing the potential impact of the standard on the financial position or performance of the Company. 7

14 3. Summary of significant accounting policies (continued) Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions IFRS 2 Share-Based Payment has been amended by IASB to improving consistency and resolve some longstanding ambiguities in share-based payment accounting. The amendments cover three accounting areas: i) measurement of cash-settled share-based payments, ii) classification of share-based payments settled net of tax withholdings; and iii) accounting for modification of a share-based payment from cash-settled to equity-settled. Also, same approach has been adopted for the measurement of cash-settled share-based payments as equity-settled share-based payments. If certain conditions are met, share-based payments settled net of tax withholdings are accounted for as equity-settled share-based payments. The amendments are effective for periods beginning on or after 1 January 2018, with earlier application permitted. The Company is assessing the potential impact of the standard on the financial position or performance of the Company. Improvements to IFRSs IASB issued Annual Improvements to IFRSs Cycle. The amendments are effective as of 1 January Earlier application is permitted. The Company is assessing the potential impact of the standard on the financial position or performance of the Company. Annual Improvements to IFRSs Cycle IAS 12 Income Taxes IAS 12 is amended to clarify that all income tax consequences of dividends (including payments on financial instruments classified as equity) are recognised consistently with the transactions that generated the distributable profits i.e. in profit or loss, other comprehensive income (OCI) or equity. IAS 23 Borrowing Costs IAS 23 is amended to clarify that the general borrowings pool used to calculate eligible borrowing costs excludes only borrowings that specifically finance qualifying assets that are still under development or construction. Borrowings that were intended to specifically finance qualifying assets that are now ready for their intended use or sale or any non-qualifying assets are included in that general pool. Investments in associates Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method and are recognized initially at cost. The Company s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The financial statements include the Company s share of the income and expenses and equity movements of investments in associate, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases. When the Company s share of losses exceeds its interest in an investments in associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. The Company s investments in equity accounted investee as at 31 December 2017 and 2016 is Bankpozitif Kredi ve Kalkınma Bankası Anonim Şirketi ( Bankpozitif ). 8

15 3. Summary of significant accounting policies (continued) Investments in associates (continued) (a) Foreign Currency Transactions Transactions in foreign currencies are translated to the respective functional currency of Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Foreign currency differences arising on translation of foreign currency transactions are recognized in profit or loss. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Foreign exchange rates used by the Company at the dates below are as follows: (b) EUR / TL (full) USD / TL (full) 31 December December Accounting in hyperinflationary economies Turkey was a hyperinflationary economy until 31 December was a monitoring year for the inflation in Turkey. Due to the decreasing trend in inflation rate and the sustained positive trends in qualitative factors such as the economic growth for the last three years, financial and economic stabilization, and the decreasing interest rates, Turkey is considered non-hyperinflationary economy under International Accounting Standard ( IAS ) No 29 starting from 1 January Therefore, the application of IAS 29 was ceased in (c) (i) Financial instruments Non-derivative financial assets All financial assets are recognized initially on the trade date at which the Company becomes a party to the contractual provision of the instrument. The Company derecognizes 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 Company is recognized 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 Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Company has the following non-derivative financial assets: Loans and receivables which include availablefor-sale investments, factoring receivables and cash and cash equivalents. Available-for-sale investments are those non-derivative investments that were designated as available-for-sale or are not classified as another category of financial assets. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. All other available-for-sale investments are carried at fair value. Cash and cash equivalents comprise cash on hand and cash at banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. Factoring receivables are measured at amortized cost less specific allowances for uncollectibility and unearned interest income. Specific allowances are made against the carrying amount of factoring receivables and that are identified as being impaired based on regular reviews of outstanding balances to reduce factoring receivables to their recoverable amounts. When a factoring receivable is known to be uncollectible, all the necessary legal procedures have been completed, and the final loss has been determined, receivable is written off immediately. 9

16 3. Summary of significant accounting policies (continued) Investments in associates (continued) (ii) Non-derivative financial liabilities All financial liabilities are recognized initially in the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Company classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Other financial liabilities comprise bank borrowings and debt securities and other liabilities. Bank borrowings are recognized initially at cost, net of any transaction costs incurred. Subsequent to initial recognition, bank borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in profit or loss over the period of the borrowings. Other non-derivatives financial instruments are measured at cost. Accounting for financial income and expense is discussed in note 3(j). (ii) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity. (iii) Derivative financial instruments The Company holds derivative financial instruments to manage its foreign currency risk exposure arising from financing activities. In accordance with its treasury policy, the Company engages in option contracts. However, these derivatives do not qualify for hedge accounting and are accounted for as trading derivatives. Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss. All the derivatives are disclosed as level 2. (d) (i) Tangible assets Recognition and measurement Items of tangible assets are stated at cost adjusted for the effects of inflation during the hyperinflationary period lasted by 31 December 2005 less accumulated depreciation (see below) and accumulated impairment losses (see note 3(g)(ii)). Cost includes expenditures that are directly attributable to the acquisition of the assets. When parts of an item of tangible assets have different useful lives, they are accounted for as separate items (major components) of tangible assets. Gains/losses on disposal of an item of tangible assets are determined by comparing the proceeds from disposal with the carrying amount of tangible assets and are recognized net within other income or other expenses in profit or loss. (ii) Subsequent costs The cost of replacing part of an item of tangible assets is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of tangible assets are recognized in profit or loss as incurred. 10

17 3. Summary of significant accounting policies (continued) (iii) Depreciation Depreciation is recognized in profit or loss on double declining depreciation method over the estimated useful lives of each part of an item of tangible assets, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets. The estimated useful lives for the current and comparative periods are as follows: Buildings Office equipment, furniture and fixtures Motor vehicles Leasehold improvements 50 years 5 years 5 years Shorter of the lease or useful life Leasehold improvements are amortized over the periods of the respective leases on double declining depreciation method. (e) Intangible assets Intangible assets represent computer software licences. Intangible assets acquired before 1 January 2006 are measured at cost restated for the effects of inflation in TL units current at 31 December 2005 pursuant to IAS 29, less accumulated amortization, and impairment losses. Intangible assets acquired after 31 December 2005 are measured at cost, less accumulated amortization, and impairment losses. Amortization is charged to profit or loss on a double declining method over the estimated useful lives of intangible assets which is 5 years. (f) (i) Impairment Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in Company that share similar credit risk characteristics. All impairment losses are recognized in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortised cost, the reversal is recognized in profit or loss to the extent that the impairment loss in respect of a financial asset was not recognized in the previous year. The Company assess its impairment based on their past experience considering the collections and discounted cash flows. (ii) Non-financial assets The carrying amounts of the Company s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. For intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognized in profit or loss. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or group of assets ( cash-generating unit ). 11

18 3. Summary of significant accounting policies (continued) (ii) Non-financial assets (continued) An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount, impairment losses are recognized in the profit or loss. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (g) Employee benefits Reserve for employee severance payments In accordance with existing labor law in Turkey, Turkish entities are required to make lump-sum payments to employees who have completed one year of service and whose employment is terminated without cause or who retire, are called up for military service or die. Such payments are calculated on the basis of 30 days pay maximum full TL 4, as at 31 December 2017 (31 December 2016: full TL 4,297.21) per year of employment at the rate of pay applicable at the date of retirement or termination. Reserve for retirement pay is computed and reflected in the financial statements on a current basis. The reserve has been calculated by estimating the present value of future probable obligation of the Turkish entities arising from the retirement of the employees. The calculation was based upon the retirement pay ceiling announced by the government. IFRS require actuarial valuation methods to be developed to estimate the entity s obligation under defined benefit plans. The principal statistical assumptions used in the calculation of the total liability in the accompanying financial statements at 31 December are as follows: Discount rate 4.21% 4.21% Expected salary / limit increase 7.00% 7.00% Expected severance payment benefit ratio 95% 95% The above rate for salary/limit increase was determined based on the government s future targets for annual inflation. The carrying value of employee termination benefit as at 31 December 2017 is TL 532 (2016: TL 468). (i) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (j) Revenue and cost recognition (i) Factoring interest and commission income Factoring revenue consists of factoring interest and commission income collected or accrued on advances given to the customers. Commission income is a certain percentage of the total amount of invoices subject to factoring. (ii) Factoring commission expense Factoring commission charges are recognized on accrual basis. (iii) Other income and expenses Other income and expenses are recognized on accrual basis. (iv) Financial expenses Financial expenses include interest expense on borrowings calculated using the effective interest rate method, foreign exchange losses and other financial expenses. 12

19 3. Summary of significant accounting policies (continued) (v) Interest income other than factoring operations Such interest income includes interest income from time deposits using the effective interest rate method. (k) Related parties A related party is essentially any party that controls or can significantly influence the financial or operating decisions of the Company to the extent that the Company may be prevented from fully pursuing its own interests. For reporting purposes, associates and their shareholders, key management personnel and the shareholders of the Company are considered to be related parties. (l) Income tax Income tax expense comprises current and deferred tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 4. Determination of fair values A number of the Company s accounting policies and disclosures require the determination of fair values, 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. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (ie an exit price). The estimated fair values of financial instruments have been determined using available market information by the Company, and where it exists, appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. While management has used available market information in estimating the fair values of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances. Management has estimated that the fair value of certain balance sheet instruments is not materially different than their recorded values due to their short nature. Carrying amounts of floating rate liabilities; which are repriced on dates closer to balance sheet date, are assumed to reflect their fair values. These balance sheet instruments include bank deposits, factoring receivables, bank borrowings, other assets and other liabilities. The fair value of option contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by option pricing models. 13

20 5. Financial risk management Overview The Company has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risk This note presents information about the Company s exposure to each of the above risks, the Company s objectives, policies and processes for measuring and managing risk, and the Company s management of capital. Further quantitative disclosures are included throughout these financial statements. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework. The Board of Directors implemented risk management policy contents of which are very comprehensive and mostly driven from the banking practices. In this risk management policy document, credit risk is defined as the major risk to be taken and the risk appetite is defined where market and liquidity risks are required not to be taken. Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company s receivables from customers and bank deposits. The operations of the Company mainly expose it to credit risk; therefore Company has a credit risk management organization. The structure of the credit organization and the procedures to be followed is described in the Credit Policy document of the Company. Factoring receivables The Company is subject to credit risk through its factoring operations. The Company requires a certain amount of collateral in respect of its financial assets. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Company does not enter into factoring transactions with the firms which do not meet the predetermined criteria for credit approval. Credit evaluations are performed on all customers by the Credit Risk Committee based on their authorization limits. The Credit Risk Committee meets every week regularly and performs credit evaluations. The Company has early warning controls with respect to the monitoring of on-going credit risks and the Company regularly performs scoring of the creditworthiness of the customers. A special software program has been developed to monitor the credit risk of the Company. Bank deposits Credit risk on bank deposits is limited because the counterparties are banks with high credit ratings. The Company has procedures in place to ensure that services are provided to customers with an appropriate credit history. The carrying amount of factoring receivables, net of provision for impairment of factoring receivables, and the total of bank deposits, represents the maximum amount exposed to credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Company beyond the provisions already recorded due to reputation and type of customers. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company has access to funding sources from banks. The Company continuously assesses liquidity risk by identifying and monitoring changes in funding required in meeting business goals and targets set in terms of the overall Company strategy. The Company s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company s reputation. 14

21 5. Financial risk management (continued) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. (i) Currency risk Currency risk is the risk of loss caused by the changes in the value of financial instruments due to changes in foreign exchange rates. As at 31 December 2017, the Company has balances that are denominated in currencies other than the local currency of the Company (TL), EUR and USD which are disclosed within the relevant notes to these financial statements. The Company manages this currency risk by maintaining foreign currency cash balances and also by use of derivative financial instruments as mentioned in Note 20 as at 31 December (ii) Interest rate risk The Company matches the maturity and pricing terms of assets and liabilities. Short term assets are either funded by short term liabilities, or funded by long term liabilities with a maximum repricing period of six months which eliminates interest rate risk. 6. Salaries and employee benefits For the years ended 31 December, salaries and employee benefits comprised the following: Wages and salaries 3,274 3,009 Social security premiums Employee severance provision Bonuses Other Total 4,030 3, Administrative expenses For the years ended 31 December, administrative expenses comprised the following: Car rent expense Traveling and transportation expenses Consultancy expenses Office rent expense Depreciation and amortization expenses Stationary expenses Insurance expense Taxes and duties expense Representation expenses Communication expenses Other Total 2,372 2,287 15

22 8. Income tax expense While the corporate tax rate was at the rate of 20% since 1 January 2016, for all companies, such rate has been set as 22% for the tax bases of the years 2018, 2019, and 2020 based on the legislation of the Amendment on Certain Tax Laws and Other Laws no Furthermore, the Council of Ministers has been authorized to reduce the rate of 22% down to 20%. There is also a withholding tax levied at a certain rate on the dividends paid and is accrued only at the time of such payments. Some of the deduction rates included in the 15th and 30th articles of the Law no on the Corporate Tax, has been redefined according to the cabinet decision numbered 2006/10731, which was announced at Trade Registry Gazette of 23 July In this context, withholding tax rate on dividend payments, which are made to the companies, except those settled in Turkey or generate income in Turkey via a business or a regular agent, was increased to 15% from 10%. Under the Turkish taxation system, tax losses can be carried forward up to five years. In Turkey, the transfer pricing provisions have been stated under the Article 13 of Corporate Tax Law with the heading of disguised profit distribution via transfer pricing. The General Communiqué on disguised profit distribution via Transfer Pricing, dated 18 November 2007 sets details about implementation. If a taxpayer enters into transactions regarding sale or purchase of goods and services with related parties, where the prices are not set in accordance with arm's length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposes. The income tax expense for the years ended 31 December comprised the following items: Deferred tax expense (73) (61) Income tax expense (73) (61) Reconciliation of effective tax rate The reported income tax expense for the years ended 31 December are different than the amounts computed by applying the statutory tax rate to profit/(loss) before income tax of the Company, as shown in the following reconciliation: % 2017 % 2016 Profit/(loss) before income tax 1,795 3,992 Income tax using the domestic tax rate (359) (798) Tax effects of: - non-taxable expenses Total income tax benefit/(expense) (73) (61) 16

23 9. Cash and cash equivalents As at 31 December, cash and cash equivalents comprised the following: Banks: -Demand deposits Time deposits 1, Cash and cash equivalents 2, At 31 December 2017, the Company has time deposits at banks amounting to TL 1,547 (2016: None). At 31 December 2017 and 2016, there is not any blockage on bank deposits. The Company s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note Factoring receivables At 31 December, factoring receivables comprised the following: Domestic factoring receivables 71,712 60,056 Impaired factoring receivables 9,106 9,312 Factoring receivables, gross 80,818 69,368 Unearned factoring interest income (2,849) (2,496) Allowance for impaired factoring receivables (8,620) (8,653) Factoring receivables, net 69,349 58,219 The Company has obtained the following collaterals for its receivables at 31 December carrying amount of collaterals are as follows: Customer cheques obtained as collateral 78,287 68,118 Customer notes obtained as collateral 5,103 4,092 83,390 72,210 Movements in the allowance for impaired factoring receivables during the years ended 31 December were as follows: Balance at 1 January 8,653 8,239 Allowance for the year Recoveries of amounts previously provided for (143) (72) Balance at 31 December 8,620 8,653 17

24 10. Factoring receivables (continued) At 31 December, aging analysis of the impaired factoring receivables is as follows: Overdue 3 to 6 months Overdue 6 to 12 months Overdue over 1 year 9,106 9,014 9,106 9,312 18

25 11. Tangible assets Movement of tangible assets and related accumulated depreciation during the year ended 31 December 2017 is as follows: 1 January 2017 Additions Disposals 31 December 2017 Cost Buildings 4, ,894 Motor vehicles Furniture and office equipment Leasehold improvements Total cost 6, ,773 1 January 2017 Current year charge Disposals 31 December 2017 Less: Accumulated depreciation Buildings Motor vehicles Furniture and office equipment Leasehold improvements Total accumulated depreciation 2, ,161 Net carrying value 4,723 4,612 Movement of tangible assets and related accumulated depreciation during the year ended 31 December 2016 is as follows: 1 January 2016 Additions Disposals 31 December 2016 Cost Buildings 4, ,894 Motor vehicles Furniture and office equipment Leasehold improvements Total cost 6, ,736 1 January 2016 Current year charge Disposals 31 December 2016 Less: Accumulated depreciation Buildings Motor vehicles Furniture and office equipment Leasehold improvements Total accumulated depreciation 1, ,013 Net carrying value 4,911 4,723 19

26 12. Intangible assets Movement of intangible assets and related accumulated amortisation during the year ended 31 December 2017 is as follows: 1 January 2017 Additions Disposals 31 December 2017 Cost Computer software Total cost January 2017 Current year charge Disposals 31 December 2017 Less: Accumulated Amortization Computer software Total accumulated amortization Net carrying value Movement of intangible assets and related accumulated amortisation during the year ended 31 December 2016 is as follows: 1 January 2016 Additions Disposals 31 December 2016 Cost Computer software Total cost January 2016 Current year charge Disposals 31 December 2016 Less: Accumulate Amortization Computer software Total accumulated amortization Net carrying value

27 13. Investments in equity-accounted investees The Company s share of profit in its equity-accounted investee is amounting to TL 1,548 for the year ended 31 December 2017 (2016: TL 5,059 profit). Summary financial information for equity-accounted investees, not adjusted for the percentage ownership held by the Company, is as follows: Total Total Ownership assets liabilities Revenues Expenses Profit 2017 Bankpozitif 30.17% 1,423,295 1,069, ,551 65,405 5, Bankpozitif 30.17% 1,680,675 1,335, ,416 64,217 14,498 The Company s investment in Bankpozitif amounts to TL 112,417 as at 31 December 2017 (2016: TL 112,417). On 13 December 2005, C Faktoring A.Ş. and Bankpozitif Kredi ve Kalkınma Bankası A.Ş. ( Bankpozitif or the Bank ) signed a final share subscription agreement with Tarshish-Hapoalim Holdings and Investments Ltd ( Tarshish ), a wholly-owned subsidiary of Bank Hapoalim B.M. ( Bank Hapoalim ), Israel's largest bank. Under this agreement, Bank Hapoalim B.M. was acquired a 57.55% stake in Bankpozitif by means of a capital injection to be made through Tarshish. Necessary legal approvals have been obtained from Israeli and Turkish authorities in 2006 and Extraordinary General Assembly of the Bank was convened at 31 October 2006 concerning the new partnership. At the Extraordinary General Assembly meeting, the Bank s share capital was increased by TL 64,396,348 (full TL) to TL 111,896,348 (full TL) and the share premium amount for the new issued shares paid by Tarshish was decided to be equal to TL 70,701,000 (full TL). Tarshish deposited TL 135,097,348 (full TL) in the Bank s account on 2 November Banking Regulatory and Supervision Agency ( BRSA ) approved the transfer of capital payment amount by Tarshish on 16 November 2006 and the share capital increase was finalized. After this transaction, the shareholding percentage of the Company in Bankpozitif has decreased to 42.45%. By the decision of the Board of Directors dated 21 March 2008, it has been decided not to exercise the stock warrant of the Company related to the capital increase of Bankpozitif amounting to TL 59,195,002 (full TL) with premium from TL 278,097,348 (full TL) to TL 337,292,350 (full TL) based on the share subscription agreement between the Company and Tarshish, Bankpozitif, Halit Cıngıllıoğlu, Damla Cıngıllıoğlu and Kemal Has Cıngıllıoğlu. According to this decision, the shareholding percentage of the Company in Bankpozitif has decreased to 35%. On 7 April 2009, the Company sold its 4.825% shares in Bankpozitif Kredi ve Kalkınma Bankası A.Ş to Tarshish. As a result of this, the Company s ownership in Bankpozitif Kredi ve Kalkınma Bankası A.Ş decreased to 30.17%. 14. Financial assets available for sale Financial assets available for sale as at 31 December 2017 and 2016, are attributable to the following: Main area of activity Location Ownership Demir Kyrgyz International Bank CJSC Finance Kyrgyzstan 5 4,713 4,456 4,713 4,456 Demir Kyrgyz International Bank CJSC pieces of share each corresponding to 5% of the bank capital are purchased by the Company on the total amount of USD thousand on 4 November 2016 Demir Kyrgyz International Bank CJSC issued bonus shares from prior period profit. 21