BAKU STOCK EXCHANGE CLOSED JOINT STOCK COMPANY. Financial Statements and Independent Auditor s Report For the year ended 31 December 2017

Transcription

1 BAKU STOCK EXCHANGE CLOSED JOINT STOCK COMPANY Financial Statements and Independent Auditor s Report For the year ended 2017

2 Table of Contents Financial Statements Statement of Management s Responsibilities... 1 Independent Auditor s Report... 2 Statement of Comprehensive Income... 4 Statement of Financial Position... 5 Statement of Changes in Equity... 6 Statement of Cash Flows... 7 Notes to the Financial Statements 1. Background Significant Accounting Policies Adoption of New or Revised Standards and Interpretations Transaction Fee Income Other Services Income General and Administrative Expenses Interest Income Income Taxes Cash and Cash Equivalents Amounts Due from Credit Institutions Investments available for sale Other Assets Property, Equipment and Intangible Assets Other Liabilities Share Capital Financial Commitments and Contingencies Transactions with Related Parties Fair Value of Financial Instruments Management of Capital Risk Management Policies... 27

3 Statement of Management s Responsibilities for the Preparation and Approval of the Financial Statements for the year ended 2017 The following statement, which should be read in conjunction with the independent auditor s responsibilities stated in the independent auditor s report set out on pages 2-3, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the financial statements of Closed Joint Stock Company Baku Stock Exchange (the Company ). Management is responsible for the preparation of the financial statements that present fairly the financial position of the Company at 2017, and the results of its operations, cash flows and changes in equity for the year then ended, in accordance with International Financial Reporting Standards ( IFRS ). In preparing the financial statements, management is responsible for: Selecting suitable accounting principles and applying them consistently; Making judgments and estimates that are reasonable and prudent; Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and Preparing the financial statements on a going concern basis, unless it is inappropriate to presume that the Company will continue in business for the foreseeable future. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Company; Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Company, and which enable them to ensure that the financial statements of the Company comply with IFRS; Maintaining statutory accounting records in compliance with legislation and accounting standards of the Republic of Azerbaijan; Taking such steps as are reasonably available to them to safeguard the assets of the Company; and Detecting and preventing fraud and other irregularities. The financial statements for the year ended 2017 were authorized for issue on 18 April 2018 by the Management Board. On behalf of the Management Board: Mr. Vuqar Namazov Chairman of the Management Board Baku, the Republic of Azerbaijan Mrs. Dilara Babayeva Finance Director Baku, the Republic of Azerbaijan 18 April April

4 ANR Audit LLC Qara Qarayev avenue 84/38, Baku AZ1096, Azerbaijan Tel: Independent auditor s report To the Shareholders and Board of Directors of Closed Joint Stock Company Baku Stock Exchange Report on the audit of the financial statements Opinion We have audited the financial statements of CJSC Baku Stock Exchange (the Company), which comprise the statement of financial position as at 2017, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in the Republic of Azerbaijan, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. AT/113 license which gives right to provide audit services was issued by the Chamber of Auditors of Azerbaijan Republic on 25 July

5 ANR Audit LLC Qara Qarayev avenue 84/38, Baku AZ1096, Azerbaijan Tel: As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor s report is Namiq Abbasli. Namiq Abbasli Licensed auditor (lisence no ) ANR Audit LLC 18 April 2018 Baku, the Republic of Azerbaijan AT/113 license which gives right to provide audit services was issued by the Chamber of Auditors of Azerbaijan Republic on 25 July

6 Statement of Comprehensive Income for the year ended 2017 Notes Year ended 2017 Year ended 2016 Transaction fee income 4 2,712, ,137 Other services income 5 51,300 63,400 Total revenue 2,764, ,537 Salaries and other employee benefits (696,224) (814,037) General and administrative expenses 6 (197,958) (283,868) Depreciation of property and equipment 13 (72,082) (74,834) Amortization of intangible assets 13 (41,679) (42,064) Gain / (loss) on disposal of property, equipment and intangible assets 83 (4,265) Total operating expenses (1,007,860) (1,219,068) Operating profit / (loss) 1,756,140 (510,531) Interest income 7 163, ,853 Interest expense - (1,483) Foreign exchange (loss) / gain (76,472) 224,400 Profit / (loss) before income tax 1,843,352 (116,761) Income tax (expense) / benefit 8 (372,070) 480 Profit / (loss) for the year 1,471,282 (116,281) On behalf of the Management Board: Mr. Vuqar Namazov Chairman of the Management Board Baku, the Republic of Azerbaijan Mrs. Dilara Babayeva Finance Director Baku, the Republic of Azerbaijan 18 April April 2018 The accompanying notes on pages 8 to 32 form an integral part of these financial statements 4

7 Statement of Financial Position as at 2017 Notes ASSETS Current assets Cash and cash equivalents 9 263,666 21,639 Commission receivable 316,667 45,532 Amounts due from credit institutions 10 3,225,184 2,550,432 Investments available for sale ,270 - Prepaid taxes 28,727 12,366 Other assets 12 6,500 5,245 Total current assets 4,566,014 2,635,214 Non-current assets Property and equipment , ,982 Intangible assets , ,924 Total non-current assets 482, ,906 TOTAL ASSETS 5,048,073 3,210,120 LIABILITIES AND EQUITY LIABILITIES Current liabilities Current income tax liability 374,640 - Other liabilities 14 20,368 25,767 Total current assets 395,008 25,767 Non-current liabilities Deferred tax liabilities 8 11,505 14,075 Total non-current liabilities 11,505 14,075 TOTAL LIABILITIES 406,513 39,842 EQUITY Share capital 15 1,260,000 1,260,000 Share premium 151, ,800 Retained earnings 3,229,760 1,758,478 TOTAL EQUITY 4,641,560 3,170,278 TOTAL LIABILITIES AND EQUITY 5,048,073 3,210,120 On behalf of the Management Board: Mr. Vuqar Namazov Chairman of the Management Board Baku, the Republic of Azerbaijan Mrs. Dilara Babayeva Finance Director Baku, the Republic of Azerbaijan 18 April April 2018 The accompanying notes on pages 8 to 32 form an integral part of these financial statements 5

8 Statement of Changes in Equity for the year ended 2017 Share capital Share premium Retained earnings Total equity ,260, ,800 1,874,759 3,286,559 Total loss for the year - - (116,281) (116,281) ,260, ,800 1,758,478 3,170,278 Total income for the year - - 1,471,282 1,471, ,260, ,800 3,229,760 4,641,560 On behalf of the Management Board: Mr. Vuqar Namazov Chairman of the Management Board Baku, the Republic of Azerbaijan Mrs. Dilara Babayeva Finance Director Baku, the Republic of Azerbaijan 18 April April 2018 The accompanying notes on pages 8 to 32 form an integral part of these financial statements 6

9 Statement of Cash Flows for the year ended 2017 Notes Year ended 2017 Year ended 2016 Cash flows from operating activities Profit / (loss)before income tax 1,843,352 (116,761) Adjustments to reconcile profit before income tax to net cash provided by operating activities: Depreciation of property and equipment 13 72,082 74,833 (Gain) / loss on disposal of property, equipment and intangible assets (83) 4,265 Amortization of intangible assets 13 41,679 42,064 Foreign exchange loss / (gain) 76,472 (224,400) Cash flows from operating activities before changes in operating assets and liabilities 2,033,502 (219,999) Changes in operating assets and liabilities: (Increase) / decrease in other assets (1,256) 865 Increase in commission receivable (271,134) (8,903) Increase in prepaid tax (16,361) (11,273) Decrease in other liabilities (5,399) (33,425) Cash inflow / (outflow) from operating activities before taxation 1,739,352 (272,735) Income tax paid - - Net cash inflow / (outflow) from operating activities 1,739,352 (272,735) Cash flows used in investing activities Purchases of property and equipment 13 (21,596) (11,642) Purchases of intangible assets 13 (1,734) (2,726) Proceeds on disposal of property and equipment 2,500 24,300 (Increase) / decrease in amounts due from credit institutions (674,753) 29,201 Purchases of investments available for sale (725,270) - Net cash (outflow) / inflow from investing activities (1,420,853) 39,133 Cash flows from financing activities Issue of ordinary shares - - Effect of exchange rate changes on cash and cash equivalents (76,472) 224,400 Net cash (outflow) / inflow from financing activities (76,472) 224,400 Net increase / (decrease) in cash and cash equivalents 242,027 (9,202) CASH AND CASH EQUIVALENTS, beginning of the year 21,639 30,841 CASH AND CASH EQUIVALENTS, end of the year 8 263,666 21,639 On behalf of the Management Board: Mr. Vuqar Namazov Chairman of the Management Board Baku, the Republic of Azerbaijan Mrs. Dilara Babayeva Finance Director Baku, the Republic of Azerbaijan 18 April April 2018 The accompanying notes on pages 8 to 32 form an integral part of these financial statements 7

10 Notes to the Financial Statements for the year ended Background Organization and its principal activity Baku Stock Exchange Closed Joint Stock Company (the Company ) was incorporated on July 21, 2000 and is domiciled in the Republic of Azerbaijan. The Company s principal business activity is the organization of trading operations with all types of securities within the Republic of Azerbaijan. The Company operates under a license issued by the State Committee for Securities under the auspices of the President of the Republic of Azerbaijan ( SCS ) since February Registered address and place of business The address of Company s registered legal address is 19 Bul-Bul Avenue, Baku, AZ1000, Republic of Azerbaijan. Shareholders of the Company As at 2017 and 2016, the shareholders of the Company were as follows: 2017, % 2016, % Azerbaijan Industry Bank OJSC Demir Investment Company CJSC Kapital Partners LLC Brokdil-Az LLC Azer-Turk Bank OJSC BoB Broker LLC Kapital Bank OJSC Global Securities Corporation Istanbul Stock Exchange Mars Investment LLC Respublika Invest LLC Standard Capital LLC Capital Management Investment Company OJSC International Bank of Azerbaijan OJSC UniCapital Investment Company OJSC United Credit Bank OJSC Yapi Kredi Invest LLC Yapi Kredi Bank Azerbaijan OJSC Caspian Financial LLC Xalq Kapital LLC Invest-AZ Investment Company CJSC Total Operating Environment of the Company Whilst there have been improvements in economic trends in the country, the Republic of Azerbaijan continues to display certain characteristics of an emerging market. These characteristics include, but are not limited to the existence of a currency that is not freely convertible in most countries outside of the Republic of Azerbaijan, restrictive currency controls, and relatively high inflation. The tax, currency and customs legislation within the Republic of Azerbaijan is subject to varying interpretations, and changes, which can occur frequently. The future economic direction of the Republic of Azerbaijan is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory, and political developments. 8

11 Notes to the Financial Statements for the year ended 2017 (Continued) 2. Significant Accounting Policies Statement of compliance These financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board and Interpretations issued by the International Financial Reporting Interpretations Committee. Going concern These financial statements have been prepared on the assumption that the Company is a going concern and will continue in operation for the foreseeable future. Other basis of presentation criteria These financial statements are presented in Azerbaijani Manats ( AZN ), unless otherwise indicated. These financial statements have been prepared under the historical cost convention, as modified by initial recognition of financial instruments at fair value and the revaluation of available-for-sale financial assets. The Company maintains its accounting records in accordance with the laws of the Republic of Azerbaijan. These financial statements have been prepared from the statutory accounting records and have been adjusted to conform to IFRS. These adjustments include certain reclassifications to reflect the economic substance of underlying transactions including reclassifications of certain assets and liabilities, income and expenses to appropriate financial statement captions. The principal accounting policies are set out below: Recognition of income and expense Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Expenses are recognized when incurred. The following specific recognition criteria must also be met before revenue is recognized: Transaction (trading-related and service) fee income is recognized when the related services are rendered; Interest income and expense are recognized in the income statement on an accrual basis using effective interest rates; All fees and other income and expense items are generally recognized on an accrual basis. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. 9

12 Notes to the Financial Statements for the year ended 2017 (Continued) Financial instruments The Company recognizes financial assets and liabilities in its statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit and loss accounts) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit and loss accounts are recognized immediately in profit and loss accounts. Financial assets Financial assets are classified into the following specified categories: financial assets at fair value through profit and loss accounts (FVTPL), held-to-maturity investments, loans and receivables and available-forsale (AFS) financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Determination of fair value The fair value for financial instruments traded in active market at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Cash and cash equivalents Cash and cash equivalents include unrestricted balances on correspondent and time deposit accounts with the CBAR and other banks having original maturity up to 90 days. Amounts due from credit institutions Amounts due from credit institutions are loans originated by the Company by providing money directly to banks. All amounts due from credit institutions are recognized when cash is advanced to counterparties. They are carried at amortized cost less provision for impairment. Amortized cost is based on the fair value of cash consideration given determinable by reference to market prices at origination date. A credit risk provision for impairment of amounts due from credit institutions is established if there is objective evidence that the Company will not be able to collect the amounts due according to the original contractual terms. The amount of the provision is the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows, discounted at the instrument s original effective interest rate. If the amount of the provision for impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited to the provision for impairment in the income statement. When amounts due from credit institutions are uncollectible, they are written off against the related provision for impairment. Such amounts are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are treated as income and included in other income. Interest earned on deposits with banks is calculated by effective interest method and reflected in the statement of comprehensive income as interest income. 10

13 Notes to the Financial Statements for the year ended 2017 (Continued) Reclassification of financial assets If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the near term, it may be reclassified out of the fair value through profit and loss accounts category in one of the following cases: A financial asset that would have met the definition of loans and receivables above may be reclassified to loans and receivables category if the Company has the intention and ability to hold it for the foreseeable future or until maturity; Other financial assets may be reclassified to available-for-sale or held-to-maturity investments categories only in rare circumstances. A financial asset classified as available-for-sale that would have met the definition of loans and receivables may be reclassified to loans and receivables category of the Company has the intention and ability to hold it for the foreseeable future or until maturity. Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognized in profit and loss accounts is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. Impairment of financial assets The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Derecognition of financial assets The Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit and loss accounts. 11

14 Notes to the Financial Statements for the year ended 2017 (Continued) On derecognition of a financial asset other than in its entirety (for example when the Company retains an option to repurchase part of the transferred asset or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the Company retains control), the Company allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit and loss accounts. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts. Financial liabilities Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. FVTPL Financial liabilities are classified as FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit and loss accounts. The net gain or loss recognised in profit and loss accounts incorporates any interest paid on the financial liability and is included in the other income/(loss) line item in the statement of comprehensive income. Other financial liabilities Other financial liabilities are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Company derecognizes financial liabilities when, and only when, the Company s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit and loss accounts. Offset of financial assets and liabilities Financial assets and liabilities are offset and reported net on the statement of financial position when the Company has a legally enforceable right to set off the recognized amounts and the Company intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the Company does not offset the transferred asset and the associated liability. 12

15 Notes to the Financial Statements for the year ended 2017 (Continued) Property, equipment and intangible assets Property, equipment and intangible assets are carried at historical cost less accumulated depreciation and amortization and any recognized impairment loss. Depreciation on assets under construction and those not placed in service commences from the date the assets are ready for their intended use. Depreciation and amortization are charged on the carrying value of property, equipment and intangible assets and is designed to write off assets over their useful economic lives. The estimated useful lives, residual values and depreciation/amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis at the following annual rates: Vehicles Computer equipments Furniture and fixtures Intangible assets 7 to 8 years 5 to 6 years 5 to 7 years 5 to 10 years Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. At the end of each reporting period, the Company reviews the carrying amounts of its property, equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit and loss accounts, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit and loss accounts, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. An item of property, equipment and intangible assets is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit and loss accounts. 13

16 Notes to the Financial Statements for the year ended 2017 (Continued) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax expense. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company s current tax expense is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred income tax assets and deferred income tax liability are offset and reported net on the statement of financial position if: The Company has a legally enforceable right to set off current income tax assets against current income tax liability; and Deferred income tax assets and the deferred income tax liability relate to income taxes levied by the same taxation authority on the same taxable entity. The Republic of Azerbaijan also has various other taxes, which are assessed on the Company s activities. These taxes are included as a component of operating expenses in the statement of comprehensive income. Retirement and other benefit obligations In accordance with the requirements of the legislation of the Republic of Azerbaijan state pension system provides for the calculation of current payments by the employer as a percentage of current total payments to staff. This expense is charged in the period the related salaries are earned. Upon retirement all retirement benefit payments are made by pension funds selected by employees. The Company does not have any pension arrangements separate from the State pension system of the Republic of Azerbaijan. In addition, the Company has no post-retirement benefits or other significant compensated benefits requiring accrual. Contingencies Contingent liabilities are not recognized in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the statement of financial position but disclosed when an inflow of economic benefits is probable. 14

17 Notes to the Financial Statements for the year ended 2017 (Continued) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects. Dividends on ordinary shares are recognized in equity as a reduction in the period in which they are declared. Dividends that are declared after the reporting date are treated as a subsequent event under International Accounting Standard 10 Events after the Reporting Date ( IAS 10 ) and disclosed accordingly. Foreign currency translation The functional currency of the Company is the currency of the primary economic environment, in which it operates. The Company s functional currency is AZN. Monetary assets and liabilities denominated in foreign currencies are translated into AZN at the appropriate spot rates of exchange of the CBRA ruling at the end of reporting date. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transaction. Profits and losses arising from these translations are included in net gain/(loss) on foreign exchange operations. Rates of exchange The exchange rates at reporting date used by the Company in the preparation of the financial statements are as follows: USD 1 = AZN USD 1 = AZN EUR 1 = AZN EUR 1 = AZN GBP 1 = AZN GBP 1 = AZN RUR 1 = AZN RUR 1 = AZN Critical accounting judgements and key sources of estimation uncertainty The preparation of the Company s financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the reporting date and the reported amount of income and expenses during the period ended. Management evaluates its estimates and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The following estimates and judgments are considered important to the portrayal of the Company s financial condition. 3. Adoption of New or Revised Standards and Interpretations Сertain new standards and interpretations became effective for the Company from 1 January 2017: Disclosure Initiative Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017). The amended IAS 7 requires disclosure of a reconciliation of movements in liabilities arising from financing activities. Recognition of Deferred Tax Assets for Unrealized Losses Amendments to IAS 12 (issued on 19 January 2016 and effective for annual periods beginning on or after 1 January 2017). The amendment has clarified the requirements on recognition of deferred tax assets for unrealized losses on debt instruments. The entity will have to recognize deferred tax asset for unrealized losses that arise as a result of discounting cash flows of debt instruments at market interest rates, even if it expects to hold the instrument to maturity and no tax will be payable upon collecting the principal amount. The economic benefit embodied in the deferred tax asset arises from the ability of the holder of the debt instrument to achieve future gains (unwinding of the effects of discounting) without paying taxes on those gains. 15

18 Notes to the Financial Statements for the year ended 2017 (Continued) Annual Improvements to IFRSs cycle Amendments to IFRS 12 (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2017). The amendments clarify the scope of the disclosure requirements in IFRS 12 by specifying that the disclosure requirements in IFRS 12, other than those relating to summarised financial information for subsidiaries, joint ventures and associates, apply to an entity's interests in other entities that are classified as held for sale or discontinued operations in accordance with IFRS 5. The above mentioned new or amended standards and interpretations effective from 1 January 2017 did not have a material impact on the accounting policies, financial position or performance of the Company. New Accounting Pronouncements Certain new standards and interpretations have been published that become effective for the accounting periods beginning on or after 1 January 2018 or later periods and which are relevant to the Company but not early adopted by the Company. IFRS 9 Financial Instruments: Classification and Measurement (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018 with early application permitted). In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. Key features of the new standard are: Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL). Classification for debt instruments is driven by the entity s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. IFRS 9 introduces a new model for the recognition of impairment losses the expected credit losses (ECL) model. There is a three stage approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables. Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. 16

19 Notes to the Financial Statements for the year ended 2017 (Continued) The adoption of IFRS 9 will have an effect on the classification and measurement of the Company s financial assets, but is not expected to have an impact on classification and measurements of the Company s financial liabilities. IFRS 15 Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. IFRS 16 Leases (issued In January 2016 and effective for the annual periods beginning on or after 1 January 2019). IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 Leases. Lessees will recognise a right of use asset and a corresponding financial liability on the balance sheet. The asset will be amortized over the length of the lease and the financial liability measured at amortized cost. Lessor accounting remains substantially the same as in IAS 17 Leases. Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Amendments to IFRS 10 and IAS 28 (issued in September 2014 with latest changes on 15 December 2015; effective date is not set). The amendments address the acknowledged inconsistency between the requirements in IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is contributed to an associate or a joint venture. The amendments clarify that an investor recognizes a full gain or loss on the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture. The gain or loss resulting from the re measurement at fair value of an investment retained in a former subsidiary is recognized only to the extent of unrelated investors interests in that former subsidiary. Amendments to IFRS 15 Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018). The amendments do not change the underlying principles of the Standard but clarify how those principles should be applied. The amendments clarify how to identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract; how to determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and how to determine whether the revenue from granting a license should be recognized at a point in time or over time. In addition to the clarifications, the amendments include two additional reliefs to reduce cost and complexity for a company when it first applies the new Standard. Amendments to IFRS 2 Share based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018). The amendments mean that non market performance vesting conditions will impact measurement of cash settled share based payment transactions in the same manner as equity settled awards. The amendments also clarify classification of a transaction with a net settlement feature in which the entity withholds a specified portion of the equity instruments, that would otherwise be issued to the counterparty upon exercise (or vesting), in return for settling the counterparty's tax obligation that is associated with the share based payment. Such arrangements will be classified as equity settled in their entirety. Finally, the amendments also clarify accounting for cash settled share based payments that are modified to become equity settled, as follows (a) the share based payment is measured by reference to the modification date fair value of the equity instruments granted as a result of the modification; (b) the liability is derecognized upon the modification, (c) the equity settled share based payment is recognized to the extent that the services have been rendered up to the modification date, and (d) the difference between the carrying amount of the liability as at the modification date and the amount recognized in equity at the same date is recorded in profit or loss immediately. 17