Lider Faktoring Hizmetleri Anonim Şirketi

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2 Lider Faktoring Hizmetleri Anonim Şirketi Table of contents Independent Auditors Report Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements

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4 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010 Notes 31 December December 2009 Assets Cash and cash equivalents 8 409,438 2,397,373 Factoring receivables 9 357,982, ,849,772 Property and equipment 10 11,780,588 10,877,710 Intangible assets , ,339 Other assets , ,047 Total assets 370,901, ,987,241 Liabilities Factoring payables 9 207, ,082 Loans and borrowings ,091, ,767,776 Debt securities 14 47,465, Current tax liabilities 7 503, ,997 Other liabilities ,875 1,034,704 Employee benefits , ,208 Deferred tax liabilities 7 265, ,753 Total liabilities 312,441, ,956,520 Equity Share capital 17 35,873,808 35,873,808 Asset revaluation reserve 17 6,466,576 5,450,791 Retained earnings 16,119,656 10,706,122 Total equity 58,460,040 52,030,721 Total liabilities and equity 370,901, ,987,241 The notes on pages 6 to 30 are an integral part of these financial statements. 1

5 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2010 Notes Interest income Interest income on factoring receivables 38,232,024 51,407,966 Interest income on cash and cash equivalents 36, ,896 Total interest income 38,268,517 51,720,862 Interest expense Interest expense on loans and borrowings (27,854,853) (34,296,540) Interest expense on debt securities (3,147,169) -- Total interest expense (31,002,022) (34,296,540) Net interest income 7,266,495 17,424,322 Fee and commission income on factoring transactions 18,908,421 16,270,505 Fee and commission expense on banking transactions (1,460,659) (758,769) Fee and commission income, net 17,447,762 15,511,736 Foreign exchange gains / (losses), net (203,805) 107,891 Other operating income 85,307 99,221 Operating income 24,595,759 33,143,170 Recoveries of impaired factoring receivables 9 704,451 1,130,452 Personnel expenses 6 (14,534,845) (13,155,622) Administrative expenses 5 (3,538,893) (3,009,174) Depreciation and amortisation 10, 11 (508,435) (524,443) Impairment losses on property and equipment, net 10 (201,908) (471,511) Profit before income tax 6,516,129 17,112,872 Income tax expense 7 (1,102,595) (3,447,061) Profit for the year 5,413,534 13,665,811 Other comprehensive income for the year, net of income tax 17 1,015, ,334 Total comprehensive income for the year 6,429,319 14,247,145 The notes on pages 6 to 30 are an integral part of these financial statements. 2

6 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010 Nominal share capital Inflationary effect on share capital Prepaid share reserve Asset revaluation reserve Retained earnings Total Equity Balances at 1 January ,000,000 5,873,808 11,573,516 4,869,457 4,466,795 37,783,576 Total comprehensive income for the year Profit for the year ,665,811 13,665,811 Other comprehensive income Revaluation of buildings (Note 10) , ,667 Tax effect of revaluation of buildings (145,333) -- (145,333) Transactions with owners, recorded directly to equity Share capital increase 19,000, (11,573,516) -- (7,426,484) -- Balances at 31 December ,000,000 5,873, ,450,791 10,706,122 52,030,721 Balances at 1 January ,000,000 5,873, ,450,791 10,706,122 52,030,721 Total comprehensive income for the year Profit for the year ,413,534 5,413,534 Other comprehensive income Revaluation of buildings (Note 10) ,269, ,269,731 Tax effect of revaluation of buildings (253,946) -- (253,946) - Transactions with owners, recorded directly to equity Share capital increase Balances at 31 December ,000,000 5,873, ,466,576 16,119,656 58,460,040 The notes on pages 6 to 30 are an integral part of these financial statements. 3

7 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2010 Notes Cash flows from operating activities: Net profit for the year 5,413,534 13,665,811 Components of net profit not generating or using cash Depreciation and amortisation 10, , ,443 Provision for employee severance payments , ,895 Provision for vacation pay liability 16 15,152 37,035 Net interest income (6,969,975) (17,424,322) Impairment losses on property and equipment , ,511 Income tax expense 7 1,102,595 3,447,061 Provision for doubtful receivables 9 580,134 1,418,785 Gain on sale of property and equipment -- (17,228) Changes in operating assets and liabilities Change in factoring receivables (65,713,273) (112,089,167) Change in factoring payables (470,389) 210,177 Change in other assets 118, ,850 Change in other liabilities (38,829) (583,969) Interest received 57,176,938 51,720,862 Interest paid (32,865,535) (36,268,901) Income tax paid (1,597,591) (2,630,304) Net cash used in operating activities (42,253,331) (97,039,461) Investing activities: Purchase of property and equipment 10 (206,300) (90,475) Purchase of intangible assets 11 (16,165) (61,040) Proceeds from disposal of property and equipment -- 17,228 Proceeds from disposal of intangible assets -- 4,545 Net cash used in investing activities (222,465) (129,742) Financing activities: Proceeds from loans and borrowings 235,035, ,146,743 Repayment of loans and borrowings (241,716,485) (119,270,648) Proceeds from debt securities 47,168, Net cash provided by financing activities 40,487,861 84,876,095 Net decrease in cash and cash equivalents (1,987,935) (12,293,108) Cash and cash equivalents at 1 January 2,397,373 14,690,481 Cash and cash equivalents at 31 December 8 409,438 2,397,373 The notes on pages 6 to 30 are an integral part of these financial statements. 4

8 Notes to the financial statements 1. Reporting entity 11. Intangible assets 2. Basis of preparation 12. Other assets 3. Significant accounting policies 13. Loans and borrowings 4. Financial assets and liabilities 14. Debt securities 5. Administrative expenses 15. Other liabilities 6. Personnel expenses 16. Employee benefits 7. Taxation 17. Equity 8. Cash and cash equivalents 18. Financial instruments 9. Factoring receivables and payables 19. Commitments and contingencies 10. Property and equipment 20. Related party disclosures 5

9 1 Reporting entity Şetat Faktoring A.Ş. was incorporated on 20 September 1992 in Turkey to provide factoring services to industrial and commercial firms. The name of Şetat Faktoring A.Ş. was changed to Lider Faktoring Hizmetleri A.Ş. (the Company ) and the change was announced on the Trade Registry Gazzette dated 12 June 2002 and numbered The Company s head office is located at Büyükdere Caddesi 100 Maya Akar Center K: 25 Esentepe Istanbul. The Company has 132 employees as at 31 December 2010 (31 December 2009: 123). The Company s principal activity is to provide factoring services substantially in Turkey. 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 ) as issued by International Accounting Standards Board and are based on the statutory records, with adjustments and reclassifications for the purpose of fair presentation in accordance with IFRS. The Company adopted all IFRS, which were mandatory as at 31 December (b) (c) (d) Basis of measurement The financial statements have been prepared on the historical cost basis adjusted for the effects of inflation during the hyperinflationary period ended at 31 December 2005, except for buildings which are measured at fair value The methods used to measure fair values are discussed further in Note 4. 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 digit. Use of estimates and judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Note 3 (d,e) Useful lives of assets Note 4 Financial assets and liabilities Determination of fair values Note 6 Taxation Note 15 Employee benefits Note 17 Financial instruments Note 18 Commitments and contingencies 6

10 2 Basis of preparation (continued) (e) Change in accounting policies (i) Overview Starting as of 1 January 2009, the Company has changed its accounting policies in the following areas: Presentation of financial statements (ii) Presentation of Financial Statements The Company applies revised IAS 1 Presentation of Financial Statements (2007), which becomes effective as at 1 January As a result the Company presents in the statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the statement of comprehensive income. Additionally total comprehensive income effectively combines both the statement of income and all non-owner changes in equity in a single statement. 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Foreign currency transactions Transactions in foreign currencies are translated to TL at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to TL at the foreign exchange rates ruling at that date. Foreign currency differences arising on retranslation are recognised in profit or loss. (b) Financial instruments The Company s financial instruments are all non-derivative instruments. (i) Non-derivative financial assets The Company has the following non-derivative financial assets: cash and cash equivalents and factoring receivables. All financial assets are recognized initially on the trade date at which the Company becomes a party to the contractual provisions 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. 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 financial assets with fixed or determinable payments that are not quoted in an active market. The Company initially recognizes factoring receivables on the date that they are originated. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, factoring receivables are measured at amortized cost using the effective interest method, less any impaired losses. 7

11 3 Significant accounting policies (continued) (b) Financial instruments (continued) (ii) Non-derivative financial liabilities The Company has the following non-derivative financial liabilities: loans and borrowings (including debt securities), factoring and other payables. All financial liabilities are recognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition the financial liabilities are measured at amortized cost using the effective interest method The Company derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (iii) Offsetting 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 realise the asset and settle the liability simultaneously. (c) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as deduction from equity, net of any tax effects. (d) (i) Property and equipment Recognition and measurement Items of property and equipment except buildings 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 depreciation and impairment losses. Property and equipment except buildings acquired after 1 January 2006 are measured at cost, less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Buildings are measured at fair value less accumulated depreciation and impairment losses recognised after the date of the revaluation. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Any revaluation surplus is credited to the asset revaluation reserve included in the equity section of the statement of financial position, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the statement of comprehensive income, in which case the increase is recognised in the statement of comprehensive income. A revaluation deficit is recognised in the statement of comprehensive income, except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation reserve. 8

12 3 Significant accounting policies (continued) (d) (i) Property and equipment (continued) Recognition and measurement (continued) Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognised in profit or loss. (ii) Subsequent costs The cost of replacing part of an item of property 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 and equipment are recognised in the statement of comprehensive income as incurred. (iii) Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost. Depreciation is recognised in the statement of comprehensive income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. The estimated useful lives for the current and comparative periods are as follows: Buildings 50 years Furniture and fixtures 5 years Motor vehicles 5 years Leasehold improvements are amortised over the periods of the respective leases on a straightline basis. (e) (f) Intangible assets Intangible assets represent computer software licenses and rights. 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 amortisation and impairment losses. Intangible assets acquired after 1 January 2006 are measured at cost, less accumulated amortisation and impairment losses. Amortisation is charged to the statement of comprehensive income on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives for the current and comparative periods are between 3 and 5 years. Leased assets Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. 9

13 3 Significant accounting policies (continued) (g) (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 amortised 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. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Financial assets are tested for impairment on an individual basis. All impairment losses are recognised in the statement of comprehensive income. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost that are equity securities, the reversal is recognised in the statement of comprehensive income. (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 recognised 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 recognised in the statement of comprehensive income. 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. Impairment losses recognised 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 amortisation, if no impairment loss had been recognised. 10

14 3 Significant accounting policies (continued) (h) (i) Employee benefits Reserve for employee severance payments In accordance with the existing social legislation in Turkey, the Company is required to make certain lump-sum severance indemnity to each employee who has completed one year of service with the Company and whose employment is terminated due to retirement or for reasons other than resignation or misconduct. In the accompanying financial statements, the Company has reflected a reserve for employee severance using statistical method and discounted by using the current market yield at the reporting date on government bonds, in accordance with International Accounting Standards (IAS) No.19-Revised Employee Benefits. (ii) (i) (j) (k) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related benefit is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Company has a legal or constructive obligation to pay this amount as a result of past service provided by the employee, and an obligation can be estimated reliably. Provisions A provision is recognised 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. Related parties For the purpose of accompanying financial statements, the shareholders, key management personnel and the Board members, and in each case, together with their families and companies controlled by/affiliated with them are considered and referred to as the related parties. Interest income and expense recognition Interest income and expense are recognised in the statement of comprehensive income using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense presented in the statement of comprehensive income include interest on financial assets and liabilities at amortised cost on an effective interest rate basis. 11

15 3 Significant accounting policies (continued) (l) Fees and commissions Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. (m) Income tax Income tax comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the tax payable or receivable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised 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 measured at 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. (n) A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised. New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2010, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Company, except for IFRS 9 Financial Instruments, which becomes mandatory for the Company s 2013 financial statements and could change the classification and measurement of the financial assets. The Company does not plan to adopt this standards early and the extent of the impact has not been determined. 12

16 4 Financial assets and liabilities Accounting classification and fair values A number of the Company s accounting policies and disclosures require the determination of fair value, for both financial assets and liabilities. Fair values have been determined for 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. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market 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 necessary 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 values of certain financial instruments are not materially different than their carrying values due to their short nature, including, bank deposits, factoring receivables, factoring payables and fixes rate bank borrowings. Carrying amounts of floating rate bank borrowings, which are reprised on dates closer to the balance date are assumed to reflect their fair values. Fair value of debt securities is determined with reference to their quoted bid price at the reporting date. As at 31 December, the carrying amounts and fair values of financial instruments are as follows: Carrying amount Carrying Fair value amount Fair value Financial assets Cash and cash equivalents 409, ,438 2,397,373 2,397,373 Factoring receivables 357,982, ,982, ,849, ,849,772 Financial liabilities Loans and borrowings 262,091, ,091, ,767, ,558,185 Debt securities 47,465,405 50,895, Factoring payables 207, , , ,082 13

17 5 Administrative expenses For the years ended 31 December, administrative expenses comprised the following: Travelling expenses 853, ,650 Consultancy expenses 779, ,761 Office supplies expenses 420, ,487 Communication expenses 308, ,260 Rent expenses 236, ,387 Taxes and duties other than on income 290, ,856 Advertising expenses 200, ,015 Registration fee for Capital Markets Board of Turkey ( CMB ) 150, Maintenance expenses 53,164 44,925 Others 245, ,833 6 Personnel expenses For the years ended 31 December, personnel expenses comprised the following: 3,538,893 3,009,174 Salary expenses 8,294,841 7,032,659 Board of directors salary expense 4,318,647 4,305,474 Social security premium employer s share 1,028, ,253 Provision for employee severance payments 265, ,895 Meal expenses 419, ,901 Counsel fees 180, ,243 Audit committee salary expense 9,485 6,162 Other 18,162 37,035 14,534,845 13,155,622 14

18 7 Taxation In Turkey, corporate income tax is levied at the rate of 20 % on the statutory corporate income tax base, which is determined by modifying accounting income for certain exclusions and allowances for tax purposes. There is also a withholding tax on the dividends paid and is accrued only at the time of such payments. The withholding tax rate on the dividend payments other than the ones paid to the non-resident institutions generating income in Turkey through their operations or permanent representatives and the resident institutions is 15 percent. In applying the withholding tax rates on dividend payments to the non-resident institutions and the individuals, the withholding tax rates covered in the related Double Tax Treaty Agreements are taken into account. Appropriation of retained earnings to capital is not considered as profit distribution and therefore is not subject to withholding tax. In Turkey, there is no procedure for a final and definitive agreement on tax assessments. Companies file their tax returns within four months following the close of the accounting year to which they relate. Tax returns are open for five years from the beginning of the year that follows the date of filing during which time the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue reassessments based on their findings. 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 Communique on disguised profit distribution via transfer pricing dated November 18, 2007 sets details about implementation. If a tax payer 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 basis, 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 a tax deductible for corporate income tax purposes. The income tax expense for the years ended 31 December comprised the following items: Current tax expense Current period (1,638,565) (3,093,301) Tax correction of prior year (*) 164, (1,474,004) (3,093,301) Deferred tax benefit/(expense) Origination and reversal of temporary differences 371,409 (353,760) 371,409 (353,760) Income tax expense (1,102,595) (3,447,061) (*) In year 2009, tax inspections covering the whole factoring sector on accounting period of year 2008 has been initiated by the Revenue Administration Department of Ministry of Finance of the Turkish Republic. It is stated that the inspections are carried out in accordance with current tax regulations. Based on the inspections on the accounts of factoring companies, the administration levied tax and penalty for loss of tax on tax treatment of unearned revenues and provision for impaired factoring receivables. In this context, the Company has also been subject to inspection and related assessments have been declared. With regard to the mentioned assessment, settlement has been requested from tax authorities by the Company management and the Company has paid the settlement amount of TL 1,867,818. Additionally, the Company has revised its tax declaration of 2009, according to the comments of tax authorities on unearned revenue and recorded prepaid expense amounting to TL 2,032,379. The difference has been recorded as tax income amounting TL 164,561 in the accompanying statement of comprehensive income. 15

19 7 Taxation (continued) The reported tax expense for the years ended 31 December are different than the amounts computed by applying the statutory tax rate to profit before tax as shown in the following reconciliation: Amount % Amount % Profit for the period 5,413,534 13,665,811 Total income tax expense 1,102,595 3,447,061 Profit excluding income tax 6,516,129 17,112,872 Income tax using the domestic tax rate 1,303, ,422, Non-taxable expenses 34, , Tax exempt revenue (70,296) (1.07) Tax correction of prior year (164,561) (2.52) Income tax expense 1,102, ,447, In accordance with the related regulation for prepaid taxes on income, advance payments during the year are being deducted from the final tax liability computed over current period operations. Accordingly, the income tax expense is not equal to the final tax liability appearing on the statement of financial position. The current tax liabilities as at 31 December comprised the following: Taxes on income 1,638,565 3,093,301 Less: Corporation taxes paid in advance (1,134,594) (2,630,304) Current tax liabilities 503, ,997 Deferred income tax is provided, using the statement of financial position method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except for the initial recognition of assets and liabilities which effect neither accounting nor taxable profit. Deferred tax assets and deferred tax liabilities at 31 December were attributable to the items detailed in the table below: Assets Liabilities Net Factoring receivables 942, , , ,425 Property and equipment and intangible assets 285, ,924 (1,603,494) (1,349,548) (1,318,480) (1,142,624) Loans and borrowings - 334,261 (110,136) (347,031) (110,136) (12,770) Employee benefits 182, , , ,042 Others 38,595 6, ,595 6,174 Deferred tax assets/(liabilities) 1,448,340 1,313,826 (1,713,630) (1,696,579) (265,290) (382,753) 16

20 7 Taxation (continued) Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The movement of deferred assets / (liabilities) are as follows: Balance at 1 January (382,753) 116,340 Deferred tax income / (expense) recognised in the statement of comprehensive income 371,409 (353,760) Deferred tax expense recognised in equity (Note 17) (253,946) (145,333) 8 Cash and cash equivalents As at 31 December, cash and cash equivalents comprised the following: (265,290) (382,753) Cash at bank - Demand deposits 405,555 1,497,788 - Time deposits ,000 Cash on hand 3,883 4, ,438 2,397,373 As at 31 December 2009, time deposits amounting to TL 895,000 have maturity of 4 January 2010 and interest rates between 5.5% and 6.5%. As at 31 December 2010 and 2009, there is no blockage on cash and cash equivalents. 17

21 9 Factoring receivables As at 31 December, factoring receivables comprised the following: Domestic factoring receivables 364,673, ,465,263 Doubtful receivables 9,750,289 10,605,146 Factoring receivables, gross 374,423, ,070,409 Allowance for doubtful factoring receivables (9,750,289) (10,605,146) Unearned income on factoring transactions (6,690,483) (7,615,491) Factoring receivables, net 357,982, ,849,772 As at 31 December 2010 and 2009, all factoring receivables mature within one year. The Company has obtained the following collaterals for its receivables at 31 December: Customer notes and cheques obtained as collateral 365,257, ,961,469 Movements in the allowance for doubtful receivables for the years ended 31 December, are as follows: Balance at 1 January 10,605,146 11,949,246 Net recovery (704,451) (1,130,452) - Allowance for the year 580,134 1,418,785 - Recoveries of amounts previously provided for (1,284,585) (2,549,237) Written-off during the year (150,406) (213,648) Balance at 31 December 9,750,289 10,605,146 As at 31 December 2010, factoring payables amounting to TL 207,693 represent the amounts collected on behalf of but not yet paid to the factoring customers at the statement of financial position date (31 December 2009: TL 678,082). 18

22 10 Property and equipment The movements of property and equipment for the years ended 31 December are as follows: Buildings Motor vehicles Furniture and fixtures Leasehold improvements Total Cost Balance at 1 January ,312, ,322 1,049, ,532 12,020,133 Additions ,885 3,590 90,475 Offset of accumulated depreciation (1) (229,156) (229,156) Revaluations (Note 17) 726, ,667 Disposals -- (36,890) (36,890) Balance at 31 December ,809, ,432 1,136, ,122 12,571,229 Balance at 1 January ,809, ,432 1,136, ,122 12,571,229 Offset of accumulated depreciation (1) (255,900) (255,900) Revaluations (Note 17) 1,269, ,269,731 Additions 104, ,863 10, ,217 Balance at 31 December ,928, ,432 1,332, ,559 13,896,277 Depreciation and impairment losses Balance at 1 January , , , ,338 Depreciation for the year 229,156 28, ,291 73, ,716 Offset of accumulated depreciation (1) (229,156) (229,156) Impairment loses 471, ,511 Disposals -- (36,890) (36,890) Balance at 31 December , , , ,661 1,693,519 Balance at 1 January , , , ,661 1,693,519 Depreciation for the year 255,900 6, ,365 41, ,162 Offset of accumulated depreciation (1) (255,900) (255,900) Impairment loses 201, ,908 Balance at 31 December , , , ,796 2,115,689 Carrying amounts At 1 January ,312,000 35, , ,654 11,027,795 At 31 December ,338,000 6, ,487 93,461 10,877,710 At 31 December ,254, ,985 62,763 11,780,588 (1) This offset relates to the accumulated depreciation as at the revaluation date that was eliminated against the gross carrying amount of the revalued asset. 19

23 10 Property and equipment (continued) At 31 December 2008, the Company has changed its accounting policy for the measurement of buildings to the revaluation model. The Company engaged TSKB Gayrimenkul Değerleme A.Ş., a Capital Market Board ( CMB ) accredited independent valuer, to determine the fair value of its buildings. Fair value is determined by reference to market based evidence. This means that valuations performed by the valuer are based on active market prices, adjusted for any difference in the nature, location or condition of the specific property. The date of the last revaluation was 31 December If buildings were measured using the cost model, the carrying amounts would be as follows: Cost 4,929,728 4,824,810 Accumulated depreciation and impairment losses (1,519,488) (1,300,297) 3,410,240 3,524,513 As at 31 December 2010, there is a mortgage on the buildings of the Company amounting to JPY 290,000,000, equivalent of TL 5,490,570 (31 December 2009: JPY 290,000,000, equivalent of TL 4,727,580) set as collateral for loans and borrowings. 11 Intangible assets The movements of intangible assets for the years ended 31 December are as follows: Software Cost Balance at 1 January ,444 Additions 61,040 Disposals (5,829) Balance at 31 December ,655 Balance at 1 January ,655 Additions 16,165 Balance at 31 December ,820 Amortisation Balance at 1 January ,873 Amortisation for the year 28,727 Disposals (1,284) Balance at 31 December ,316 Balance at 1 January ,316 Amortisation for the year 32,273 Balance at 31 December ,589 Carrying amounts At 1 January ,571 At 31 December ,339 At 31 December ,231 20

24 12 Other assets As at 31 December, other assets comprised the following: Advances given 421, ,009 Prepaid expenses 109,688 73,203 Other 84, , , ,047 As at 31 December 2010, TL 250,404 (31 December 2009: 459,162) of advances given relates to the advance payment to the lawyers to be paid to legal authorities in relation to the legal follow up of doubtful receivables and remaining TL 171,383 (31 December 2009: TL 28,847) relates to other various job advances. 13 Loans and borrowings As at 31 December, loans and borrowings comprised the following: Original amount Nominal interest rate (%) 2010 Up to 1 year TL amount 1 year and over Total loans and borrowings Bank Loans- TL 260,177, ,177, ,177,001 Bank Loans- JPY 101,139, ,060, ,839 1,914,569 Total 262,091,570 Original Amount Nominal interest rate (%) 2009 Up to 1 year TRL amount 1 year and over Total loans and borrowings Bank Loans- TL 249,266, ,046,059 36,220, ,266,835 Bank Loans- JPY 153,431, ,360 1,587,581 2,500,941 Total 251,767,776 21

25 13 Loans and borrowings (continued) At 31 December 2010, the Company has given customer cheques and notes amounting to TL 365,257,606 (31 December 2009: TL 289,961,469) as collateral against the bank borrowings. In addition, at 31 December 2010, the Company s shareholders have given notes as collateral amounting to TL 4,000,000 to the creditor banks against the borrowings (31 December 2009: TL 19,191,632). 14 Debt securities As at 31 December, debt securities comprised the following: Original amount Nominal interest rate (%) 2010 Up to 1 year TL amount 1 year and over Total loans and borrowings Floating Rate Notes 47,465, (*) 4,641,739 42,823,666 47,465,405 Total 47,465,405 (*) Represents the semi-annual interest rate applicable for the second coupon payment term. On 15 June 2010, the Company has issued Floating Rate Notes due 2012 ( Notes ) amounting TL 50,000,000. The Notes have maturity date of 8 June 2012 and bear interest on the second interest payment date (14 June 2011) at a rate equal to 5.14% and will reset on each following semi-annual interest payment date based on the ten-day daily weighted average compound rate of the benchmark yield. The Notes are listed on the Istanbul Stock Exchange. 15 Other liabilities As at 31 December, other liabilities comprised the following: Taxes and duties other than on income 844, ,993 Others 151, , ,875 1,034,704 22

26 16 Employee benefits As at 31 December, employee benefits comprised the following: Reserve for employee severance payments 724, ,680 Vacation pay liability 186, , , ,208 Reserve for employee severance payments In accordance with existing social legislation in Turkey, the Company is required to make lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such payments are calculated on the basis of 30 days pay, maximum of TL 2,517 at 31 December 2010 (31 December 2009: TL 2,365) per year of employment at the rate of pay applicable at the date of retirement or termination. The principal assumption used in the calculation of the total liability is that the maximum liability for each year of service will increase in line with inflation semi-annually. The liability is not funded, as there is no funding requirement. International Accounting Standard No. 19 ( IAS 19 ) requires actuarial valuation methods to be developed to estimate the enterprise s obligation under defined benefit plans. The reserve has been calculated by estimating the present value of future probable obligation of the Company arising from the retirement of the employees. Accordingly, the following statistical assumptions were used in the calculation of the following liability as at 31 December: Discount rate 4.66% 5.92% Expected rate of salary/limit increase 4.00% 4.80% Turnover rate to estimate the probability of retirement 100% 100% For the years ended 31 December, movements in the reserve for employee severance payments are as follows: Balance at 1 January 458, ,785 Increase during the period 265, ,895 Balance at 31 December 724, ,680 23

27 16 Employee benefits (continued) Vacation pay liability In accordance with current labour law, the Company makes payments for unused vacations of employees. The liability is calculated by the remaining vacation days multiplied by one day s pay. For the years ended 31 December, movements in the vacation pay liability were as follows: Balance at 1 January 171, ,493 Increase during the period 15,152 37, Equity 186, , Paid-in capital As at 31 December 2010 and 2009, the nominal value of the Company s authorised and paid-in share capital amounts to TL 30,000,000 comprising 30,000,000 registered shares of par value of 1 TL. Adjustment to share capital represents the restatement effect of the contributions to share capital equivalent to purchasing power of TL at 31 December As at 31 December, the composition of the authorised and paid-in share capital was as follows: Share (%) Group A Group B Group C Total Share (%) Total Yuda Elenkave ,000 11,925, ,945, ,945,130 Nedim Menda ,000 10,445, ,455, ,455,000 Jak Sucaz ,000 3,050, ,060, ,060,000 Raşel Elenkave ,000 1,520, ,530, ,530,000 Credit Suisse Investments (Netherlands) B.V ,970,000 2,970, ,970,000 Can Güney , , ,290 Ayşe Bayoğlu , , ,290 İbrahim Betil , , ,290 Nominal share capital ,000 26,980,000 2,970,000 30,000, ,000,000 Adjustment to share capital 5,873,808 5,873,808 Total paid-in share capital 35,873,808 35,873,808 According to the share agreement of the Company, Group A shareholders have the right to appoint a simple majority of the members of the Board. Group B shareholders have economic rights to dividends/distributions and pre-emptive rights with respect to future share issuances as well as the ordinary rights of a shareholder. Group C shareholders have the right to appoint one member of the Board and have extensive veto rights over strategic and financial decisions of the Company including: (a) approval of annual budgets and financial statements; (b) material acquisitions/disposals; (c) amount of total indebtedness; (d) appointment of senior management; and (e) related party transactions and changes to the Company s share capital structure. 24

28 17 Equity (continued) 17.1 Paid-in capital (continued) According to the General Assembly Meeting decision dated 7 December 2009, extraordinary reserves amounting to TL 7,426,484 have been transferred to share capital and decision was announced on the Trade Registry Gazette 16 December 2009 dated and 7459 numbered Legal reserves The legal reserves are established by annual appropriations amounting to 5% of income disclosed in the Company s statutory accounts until it reaches 20% of paid-in share capital (first legal reserve). Without limit, a further 10% of dividend distributions in excess of 5% of paid-in capital are to be appropriated to increase legal reserves (second legal reserve). The first legal reserve is restricted and is not available for distribution as dividend unless it exceeds 50% of share capital. In the accompanying financial statements, the total of the nominal legal reserves is TL 3,222,159 included in retained earnings at 31 December 2010 (31 December 2009: TL 2,609,493) Asset revaluation reserve The asset revaluation reserve is used to record increases in the fair value of buildings and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity. For the years ended 31 December, the movements in the revaluation fund are as follows: Balance at 1 January 5,450,791 4,869,457 Revaluation of buildings (Note 9) 1,269, ,667 Tax effect of revaluation of buildings (Note 6) (253,946) (145,333) 6,466,576 5,450,791 25

29 18 Financial instruments Credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is: 31 December December 2009 Factoring receivables 357,982, ,849,772 Cash and cash equivalents (*) 405,555 2,392, ,388, ,242,560 (*) Cash on hand is excluded from cash and cash equivalents. The Company is mainly subject to credit risk through its factoring operations. The Risk Management and Analysis Department of the Company is responsible to manage the credit risk. 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. Credit evaluations are performed on all customers. As at 31 December 2010 and 2009, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position. As at 31 December, the breakdown of factoring receivables by industrial groups is as follows: 2010 % 2009 % Textile 58,618, ,782, Other production 42,119, ,413, Construction 39,756, ,577, Iron and steel 36,270, ,023, Machinery 29,484, ,797,453 9 Food 24,316, ,431,159 8 Paper and printing 20,939, ,251,646 8 Rubber and plastics 17,701, ,091,188 6 Tourism 15,172, ,111,900 6 Wood products 13,588, ,488,555 5 Chemicals 12,752, ,039,217 4 Electrics and electronics 9,093, ,361,663 2 Automotive 9,035, ,124,929 3 Leather products 6,304, ,877,645 1 Agricultural products 5,383, , Others 17,447, ,250, ,982, ,849,