METALAC A.D., GORNJI MILANOVAC. Consolidated Financial Statements Year Ended December 31, 2010 and Independent Auditors Report

Transcription

1 Consolidated Financial Statements Year Ended and Independent Auditors Report

2 CONTENTS Page Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Income Statement 2 Consolidated Balance Sheet 3 Consolidated Statement of Changes in Equity 4 Consolidated Cash Flow Statement 5 Notes to the Consolidated Financial Statements 6-37

3 Translation of the Independent Auditors Report issued in the Serbian language INDEPENDENT AUDITORS REPORT To the Owner and Management of Metalac a.d., Gornji Milanovac We have audited the accompanying consolidated financial statements (pages 3 to 37) of Metalac a.d., Gornji Milanovac (the Company ) and its subsidiaries, which comprise the consolidated balance sheet as at December 31, 2010, and the related consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of the significant accounting policies and other explanatory notes. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the accounting regulations of the Republic of Serbia, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and the Law on Accounting and Auditing of the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements of Metalac a.d., Gornji Milanovac for the year ended have been prepared, in all material respects, in accordance with the accounting regulations of the Republic of Serbia. Belgrade, April 18, 2011 Zoran Nešić Certified Auditor

4 CONSOLIDATED INCOME STATEMENT Year Ended (thousands of RSD) Notes OPERATING INCOME Sales revenues 5 4,437,727 3,889,642 Own-work capitalized 26,010 15,654 (Decrease)/Increase in inventories (12,653) 14,919 Other operating income 7 107,479 93,307 4,558,563 4,013,522 OPERATING EXPENSES Cost of goods sold (1,153,099) (1,099,952) Materials, fuel and energy 8 (1,281,319) (1,047,020) Staff costs 9 (940,033) (818,810) Depreciation, amortization and provisions 10 (210,742) (201,402) Other operating expenses 11 (373,522) (323,924) (3,958,715) (3,491,108) OPERATING PROFIT 599, ,414 Finance income , ,238 Finance expenses 13 (219,638) (243,217) Other income 14 93,650 78,968 Other expenses 15 (197,022) (191,776) (101612) (203,787) PROFIT BEFORE TAX 498, ,627 INCOME TAXES 17 - current tax expense (39,721) (21,136) - deferred tax benefits 6,237 5,858 (33,484) (15,278) NET PROFIT 464, ,349 NET PROFIT/(LOSS) ATTRIBUTABLE TO: Equity holders of the parent company 467, ,423 Minority shareholders (2,607) (1,074) 464, ,349 Basic/diluted earnings per share (in RSD) The accompanying notes on the following pages are an integral part of these consolidated financial statements. These consolidated financial statements were approved by the management of Metalac a.d., Gornji Milanovac and filed with the Serbian Business Registers Agency on April 18, Signed on behalf of Metalac A.D., Gornji Milanovac by: Petrašin Jakovljević General Director Radmila Todosijević Executive Director 2

5 CONSOLIDATED BALANCE SHEET As at (thousands of RSD) Notes ASSETS Non-current assets Intangible assets 18 2,153 3,262 Property, plant and equipment 18 1,892,259 1,969,567 Investment property 18 95,864 96,891 Long term financial placements 19 58,523 75,846 2,048,799 2,145,566 Current assets Inventories 20 1,316,836 1,281,340 Accounts receivable 21 1,167,248 1,031,042 Receivables for prepaid income tax 17,030 11,386 Short-term financial placements , ,542 Cash and cash equivalents , ,703 Value added tax and prepayments 35,937 42,506 3,561,571 3,142,519 Total assets 5,610,370 5,288,085 EQUITY AND LIABILITIES Capital and reserves Share capital , ,000 Other capital 25 33,899 33,899 Share premium 4,256 4,256 Reserves 25 90,623 90,623 Unrealized gains on securities 17,423 31,697 Translation reserves 8,038 2,394 Retained earnings 2,802,431 2,544,845 Majority interests 3,364,670 3,115,714 Minority interests 116, ,944 3,481,388 3,231,658 Long-term liabilities and provisions Long-term provisions , ,520 Long-term borrowings , ,681 Other long-term liabilities 28 5,112 5, , ,808 Current liabilities Short-term financial liabilities , ,737 Accounts payable , ,267 Other current liabilities ,100 94,926 Value added tax and other duties payable and accruals 70,609 51,210 Income tax payables 3,154 1,717 1,551,588 1,229,957 Deferred tax liabilities 17 42,421 48,662 Total equity and liabilities 5,610,370 5,288,085 Off-balance-sheet items 33 70, ,973 The accompanying notes on the following pages are an integral part of these consolidated financial statements. 3

6 METALAC A.D., GORNjI MILANOVAC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year Ended (thousands of RSD) Share Capital Other Capital Share Premium Reserves Unrealized Gains on Securities Translation Reserves Retained Earnings Majority Interests Minority Interests Total Balance at January 1, ,000 33,899 4,256 90,623 45, ,436,673 3,019, ,528 3,138,994 Opening balance adjustment (47) 40 Unrealized gains on securities (13,382) - - (13,382) - (13,382) Foreign exchange gains and losses ,458-1,458-1,458 Bonuses to management and employees (94,338) (94,338) (265) (94,603) Dividends paid (102,000) (102,000) (2,198) (104,198) Net profit for the year , ,423 (1,074) 303,349 Balance at ,000 33,899 4,256 90,623 31,697 2,394 2,544,845 3,115, ,944 3,231,658 Balance at January 1, ,000 33,899 4,256 90,623 31,697 2,394 2,544,845 3,115, ,944 3,231,658 Opening balance adjustment (226) (226) (20) (246) Unrealized gains on securities (14,274) - - (14,274) - (14,274) Foreign exchange gains and losses ,644-5, ,963 Bonuses to management and employees (107,547) (107,547) (353) (107,900) Dividends paid (102,000) (102,000) (2,198) (104,198) Net profit for the year , ,359 (2,607) 464,752 Change in the scope of consolidation ,633 5,633 Balance at 408,000 33,899 4,256 90,623 17,423 8,038 2,802,431 3,364, ,718 3,481,388 The accompanying notes on the following pages are an integral part of these consolidated financial statements. 4 consolidated financial statements.this draft Auditor s Report is a subject of changes due to not completed Quality

7 METALAC A.D., GORNjI MILANOVAC CONSOLIDATED CASH FLOW STATEMENT Year Ended (thousands of RSD) CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers 5,009,416 4,691,354 Other cash receipts from operations 174, ,043 Cash paid to suppliers (3,376,129) (2,845,511) Cash paid to and on behalf of employees (926,466) (827,830) Interest paid (45,861) (64,716) Income taxes paid (24,172) (26,007) Other public duties payable (338,965) (268,446) Net cash provided by operating activities 472, ,887 CASH FLOWS FROM INVESTING ACTIVITIES Sale of shares and equity investments (net inflows) 1,213 - Sale of property, plant and equipment 10, Interest received 17,730 11,020 Purchase of intangible assets, property and equipment (65,872) (109,643) Other financial placements (net outflows) (461,756) (4,608) Net cash used in investing activities (498,574) (103,140) CASH FLOW FROM FINANCING ACTIVITIES Increase in core capital 5,634 - Long-term and short-term borrowings, net (outflows) (116,409) (158,023) Finance lease (1,410) (1,277) Cash used to pay dividends and bonuses (154,305) (198,444) Net cash (used in)/provided by financing activities (266,490) 357,744 Net cash decrease (292,262) (361,003) Cash and cash equivalents at beginning of year 613, ,143 Foreign exchange gains, net 13,204 13,557 Cash and cash equivalents at end of year 334, ,703 The accompanying notes on the following pages are an integral part of these consolidated financial statements. 5

8 1. ESTABLISHMENT AND ACTIVITY Until 2003, Metalac a.d., Gornji Milanovac (the Company ) was a mixed-ownership entity (with a portion of capital socially-owned and portion in the form of share capital), and ever since it has been 100% shareholding company. The Company was initially established in 1959 as a socially-owned enterprise. On December 8, 1990, based on the Labor Council s decision, the Company was transformed into a mixed-ownership shareholding company, and its capital was increased by means of a share offering to its employees. On July 27, 1998, the Company fulfilled all of the legal and statutory requirements of the Ownership Transformation Act that outlined and governed its privatization. During 2003, further ownership transformation was executed whereby the Company s entire socially-owned capital was fully privatized whereas during 2004 the Company performed a second issue of ordinary shares. The Company is primarily involved in the production and sale of a wide range of enamel, Teflon-coated, aluminum and stainless-steel cookware; production and sale of accumulation water heaters of 30, 50, 80 and 120 liters with enameled or stainless steel tank, and small capacity water heaters of 5 and 10 liters; production and sale of all types of transport and luxurious cardboard packing materials; production and sale of stainless-steel sinks and products of cast polymers and trading in goods from the production program, as well as other segments. During December 2005, the Company underwent reorganization and established six business entities entirely in the Company s ownership and, ever since 2006, the Company has operated as a decentralized company, which in its scope of business retains holding activities management and finances, and it also temporarily retains the rights to render services in connection with the transport, restaurant, protection, safety and the factory area maintenance. Other activities, being the primary activities from the prior scope of business, have been transferred to the newly founded enterprises. As of, the Company had 1,515 employees (2009: 1,595 employees). The decrease in the headcount resulted from a reduced engagement in temporary and seasonal operations, as well as employee regular retirement. The head office of the Company is in Gornji Milanovac, 212 Knez Aleksandar Street. 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING METHOD 2.1. Basis for Consolidation The consolidated financial statements comprise the financial statements of Metalac a.d., Gornji Milanovac, as the parent company, and the following domestic and foreign subsidiaries: % of Equity Interests 1 Metalac Posuđe d.o.o., Gornji Milanovac 100% 2 Metalac Market d.o.o., Gornji Milanovac 100% 3 Metalac Trade d.o.o., Gornji Milanovac 100% 4 Metalac Print d.o.o., Gornji Milanovac 100% 5 Metalac Inko d.o.o., Gornji Milanovac 100% 6 Metalac Bojler d.o.o., Gornji Milanovac 100% 7 Metalac Proleter a.d., Gornji Milanovac % 8 Proleter Trgovina d.o.o., Gornji Milanovac % 9 Metalac Metalurgija a.d., Novi Sad % 10 Metpor d.o.o., Beograd 100% 11 Promo Metal d.o.o., Republic of Croatia 100% 12 Metalac Market d.o.o., Republic of Montenegro 100% 13 Metrot o.o.o. Moscow, Russia 100% 14 Metalac group, America 50% 6

9 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued) 2.1. Basis for Consolidation (Continued) All materially significant intercompany balances and transactions among and between the aforelisted subsidiaries have been eliminated upon consolidation. The unrealized gains included within the inventories as of and 2009 were not eliminated in the accompanying consolidated financial statements, since, in the opinion of management, they to not materially influence the consolidated financial statements. Assets and liabilities of foreign subsidiaries have been translated to dinars by applying the official exchange rate as of the balance sheet. The income statement and cash flows have been translated at the median exchange rate. The effects arising from the recalculation of consolidated financial statements denominated in a foreign currency into a reporting currency are presented within equity Consolidated Financial Statements The Company s consolidated financial statements include its consolidated balance sheet prepared as of, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year ended that day, and a summary of the significant accounting policies and other explanatory notes. The consolidated financial statements were prepared at historical cost principle, unless otherwise stipulated in the accounting policies presented hereunder. In the preparation of the accompanying consolidated financial statements, the Company adhered to the accounting policies described in Note 3. These accounting policies have been consistently applied to all presented reporting periods. The Company s consolidated financial statements are stated in thousands of dinars (RSD). The dinar is the official reporting currency in the Republic of Serbia Basis of Preparation and Presentation of Consolidated Financial Statements Pursuant to the Law on Accounting and Auditing (Official Gazette of the Republic of Serbia no. 46 of June 2, 2006 and no. 111 as of December 29, 2009), legal entities and entrepreneurs incorporated in Serbia are required to maintain their books of account, to recognize and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity with the prevailing legislation and professional rules which include: the Framework for the Preparation and Presentation of Financial Statements (the Framework ), International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), as well as the related interpretations representing an integral part of these standards which were in effect as at The amendments to IAS, as well as the newly-issued IFRS and the related interpretations issued by the International Accounting Standards Board ( IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ), in the period between 2002 and January 1, 2009, were officially adopted pursuant to a Decision enacted by the Ministry of Finance of the Republic of Serbia ( Ministry ) and published in the Official Gazette of the Republic of Serbia number 77 of October 25, However, until the preparation date of the accompanying consolidated financial statements, not all amendments to IAS/IFRS and IFRIC in effect for annual periods beginning on or after January 1, 2009 had been translated. In addition, the accompanying consolidated financial statements are presented in the format prescribed under the Guidelines on the Prescribed Form and Content of the Financial Statements of Enterprises, Cooperatives and Entrepreneurial Ventures (Official Gazette of the Republic of Serbia, no. 114 of December 22, 2006, no. 119 as of December 26, 2008, no. 9 as of February 6, 2009 and no. 4 as of January 29, 2010). Such statements represent the complete set of financial statements as defined under the law, which differ from those defined under the provisions of IAS 1, Presentation of Financial Statements, and differ in some respects, from the presentation of certain amounts as required under the aforementioned standard. Standards and interpretations in issue, but not yet officially translated and adopted and standards and interpretations in issue but not yet in effect are disclosed in Notes 2.4 and

10 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued) 2.3. Basis of Preparation and Presentation of Consolidated Financial Statements (Continued) In addition, the accounting regulations of the Republic of Serbia depart from IAS and IFRS in respect to the provisions of IAS 19 Employee Benefits given that employee share in profit is recorded in accordance with the opinion issued by the Ministry as charged to retained earnings, and not to the net profit of the period. In accordance with the aforedescribed, and given the potentially material effects which the departures of accounting regulations of the Republic of Serbia from IAS and IFRS may have on the fairness presentations made in the consolidated financial statements, the accompanying consolidated financial statements cannot be treated as a set of consolidated financial statements prepared in accordance with IAS and IFRS. The consolidated financial statements were prepared at historical cost principle, unless otherwise stipulated in the accounting policies presented hereunder. In the preparation of the accompanying consolidated financial statements, the Company adhered to the accounting policies described in Note 3. The Company s consolidated financial statements are stated in thousands of dinars (RSD). The dinar is the official reporting currency in the Republic of Serbia Standards and Interpretations in Issue, but not yet Translated and Adopted As of the consolidated financial statements issuance date, the following standards, amendments were issued by the International Accounting Standards Board and Interpretations issued by the International Financial Reporting Interpretations Committee but were not officially adopted and translated in the Republic of Serbia for the annual accounting periods commencing on or after January 1, 2010: Amendments to IFRS 7 Financial Instruments: Disclosures Amendments improving fair value and liquidity risk disclosures (revised in March 2009, effective for annual periods beginning on or after January 1, 2009); Amendments to IFRS 1 First-time Adoption of IFRS Additional Exemptions for First-time Adopters. The amendments relate to assets in oil and gas industry and determining whether an arrangement contains a lease (revised in July 2009, effective for annual periods beginning on or after January 1, 2010); Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on April 16, 2009 (IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36, IAS 39, IFRIC 16) primarily with a view to removing inconsistencies and clarifying wording, (amendments are to be applied for annual periods beginning on or after 1 January 2010, while the amendment to IFRIC is to become effective as of July 1, 2009); Amendments to IAS 38 Intangible Assets (revised in July 2009, effective for annual periods beginning on or after July 1, 2009); Amendments to IFRS 2 Share-based Payment : Amendments resulting from the Annual quality improvement project of IFRS (revised in April 2009, effective for annual periods beginning on or after July 1, 2009) and amendments relating to group cash-settled share-based payment transactions (revised in June 2009, effective for annual periods beginning on or after January 1, 2010); Amendments IFRIC 9 Reassessment of Embedded Derivatives effective for annual periods beginning on or after July 1, 2009 and IAS 39 Financial Instruments: Recognition and Measurement Embedded Derivatives (effective for annual periods ending on or after June 30, 2009); IFRIC 18 Transfers of Assets from Customers (effective for annual periods ending on or after July 1, 2009). 8

11 2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued) 2.5. Standards and Interpretations in Issue not yet in Effect At the date of issuance of these consolidated financial statements the following standards, revisions and interpretations were in issue but not yet effective: Conceptual Framework for Financial Reporting 2010 being an amendments to Framework for the Preparation and Presentation of Financial Statements (effective for transfer of assets from customers received on or after September 2010); IFRS 9 Financial Instruments (effective for annual periods beginning on or after January 1, 2013); Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (effective for annual periods beginning on or after July 1, 2010); Amendments to IFRS 1 First-time Adoption of IFRS - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for annual periods beginning on or after July 1, 2011); Amendments to IFRS 7 Financial Instruments: Disclosures Transfer of Financial Assets (effective for annual periods beginning on or after July 1, 2011); Amendments to IAS 12 Income Taxes Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after January 1, 2012); Amendments to IAS 24 Related Party Disclosures Simplifying the disclosure requirements for government-related entities and clarifying the definition of a related party (effective for annual periods beginning on or after January 1, 2011); Amendments to IAS 32 Financial Instruments: Presentation Accounting for rights issues (effective for annual periods beginning on or after February 1, 2010); Amendments to various standards and interpretations Improvements to IFRSs resulting from the Annual quality improvement project of IFRS published on May 6, 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily with a view to removing inconsistencies and clarifying wording, (most amendments are to be applied for annual periods beginning on or after January 1, 2011); Amendments to IFRIC 14 IAS 19 The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after January 1, 2011); IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after July 1, 2010). 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Income and Expense Recognition Sales revenues are recognized when the risk and rewards associated with the rights of ownership are transferred to the customer, which is considered to be upon the delivery of goods to the customer. Income is measured at the fair value of the consideration received or receivable, net of discounts and value added tax (VAT). At the moment in which income is recognized, the related expenditure is also recognized (referred to as the matching principle of accounting). Maintenance and repairs of fixed assets are expensed as incurred. 9

12 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.2. Borrowing Costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are recognized as a part of the cost of that asset starting from the period when all activities necessary to prepare the asset for its intended use or sale are substantially completed. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. Investment income realized from the temporary placement of funds borrowed is netted against borrowing costs intended to finance qualifying assets. All other borrowing costs are recognized on the profit and loss account in the period to which these relate Foreign Exchange Gains and Losses Foreign currency transactions are translated into dinars at the official exchange rates in effect at the date of each transaction. Assets and liabilities denominated in foreign currencies are translated into dinars at the official exchange rates prevailing at the balance sheet date. Foreign exchange gains or losses arising upon the translation of transactions and upon the translation of assets and liabilities components denominated in foreign currencies, are credited or debited to the income statement. For the needs of preparing the consolidated financial statements, assets and liabilities of foreign subsidiaries have been recalculated into dinars at the rate effective as of the balance sheet date. The income statement and cash flow statement have been recalculated into dinars applying the median exchange rate of the period unless movements in exchange rates were significant. The foreign exchange gains and losses are recognized as a special equity component Employee Benefits a) Employee Taxes and Contributions for Social Security In accordance with local regulations, the Company is obligated to pay contributions to the State Social Security and Pension Funds. This obligation involves the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific percentages defined under the effective tax regulations. The Company is also obligated to withhold contributions from gross payments to employees, on behalf of employees, to the same funds. These contributions, payable on behalf of both the employee and the employer are charged to expenses in the period to which they relate. b) Obligations for Retirement Benefits and Jubilee Awards Pursuant to the provisions of the Labor Law, the Company is under obligation to pay retirement benefits to an employee in the amount of three average wages earned in the Republic of Serbia according to the most recent data published by the Republic Statistical Office. To employees determined to be redundant with no other entitlements defined by the Law, the employer will pay severance pays in the amount of one third of an employee salary for each of the first ten years of service with the Company as increased by a quarter of a salary for each year of service following the first 10 years. The salary within the meaning of the previous paragraph is considered to be the average salary of the employee paid in the three months preceding the payment of retirement benefits. 10

13 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Employee Benefits (Continued) b) Obligations for Retirement Benefits and Jubilee Awards (Continued) Also, based on the Collective Bargaining Agreement, the Company is under obligation to pay jubilee awards in accordance with the years of service with the Company in the amount of an average salary earned in the Company in the month preceding the disbursement of a jubilee award for 20 years of continued service with the Company, and two such salaries for 30 years of continued service with the Company Taxes and Contributions Income Taxes Current Income Tax Current income tax represents an amount that is calculated and paid in accordance with the effective Republic of Serbia Income Tax Law. Income tax is payable at the rate of 10% on the tax base reported in the annual corporate income tax return as reduced by any applicable tax credits. The taxable base stated in the income tax return includes the profit shown in the statutory statement of income, as adjusted for differences that are specifically defined under statutory tax rules. The Income Tax Law of the Republic of Serbia does not envisage that any tax losses of the current period be used to recover taxes paid within a specific carryback period. However, tax losses stated in tax returns filed by 2009 may be used to reduce or eliminate taxes to be paid in future periods, but only for a duration of no longer than ten ensuing years, and the losses stated in the income tax returns filed for the year 2010 and after, are available for carryforward, but only for a duration of no longer than five ensuing years. Deferred Income Tax Deferred income tax are provided using the balance sheet liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying values in the financial statements. The currently-enacted tax rates or the substantively-enacted rates at the balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized on all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, and the tax effects of income tax losses and credits are available for carryforward, to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences and the tax loss/credits of the carryforwards can be utilized. Deferred income tax are either charged or credited to the income statement, except in so far as they relate to items that are directly credited or charged to capital, and in that instance, the deferred taxes are then also recognized under equity Indirect Taxes and Contributions Indirect taxes and contributions include property taxes and other taxes and contributions paid pursuant to republic and municipal regulations Provisions A provision are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 11

14 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.7. Property, Plant and Equipment The initial measurement of plant, property and equipment fulfilling the asset recognition criteria, is stated at cost. Cost represents the prices billed by suppliers together with all costs incurred in bringing new assets into use net of any trade discounts and rebates. Subsequent expenditure such as modification to property, plant and equipment, or adaptation is recognized as an increase in the cost of respective assets, when it is probable that future economic benefits, in excess of the originally assessed standard of performance will flow to the Company. All other subsequent expenditures are charged to profit and loss account in the period they incurred. After initial recognition an item of property, plant and equipment is carried at its cost less accumulated depreciation and impairment losses, if any. The gain or loss arising as a result of disposals or write-offs are either credited to income, or charged to expenses Investment Property Investment property is property held by the Company to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes or sale in the ordinary course of business. An investment property is measured initially at its cost. After its recognition, an investment property is carried at fair value Depreciation The depreciation of property, plant and equipment is computed using the straight-line method, during the estimated useful life of these assets. The useful life and rate of depreciation for the main classes of fixed assets are as follows: Useful Life in Years Rate Buildings - Administrative and apartment buildings % - Factory workshops % - Other buildings % Equipment - Production and transfer equipment and plant % - 10% - Transport vehicles % - Office and retail store furniture % % - Factory furniture, small tools, fixtures, devices and telecommunication equipment % - Office and computers equipment % - Other assets, not mentioned % Intangible Assets Intangible assets are comprised of software rights stated at cost less accumulated amortization charged over a period of five years Impairment of Tangible and Intangible Assets At each balance sheet date, the Company s management reviews the carrying amounts of the Company s property, plant, equipment and intangible assets in order to determine the indications of impairment loss. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. In cases where it is impossible to assess the recoverable amount of an individual asset, the Company assesses the recoverable value of the cash generating unit to which the asset belongs. 12

15 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment of Tangible and Intangible Assets (Continued) Leases Recoverable amount is based on the higher of net selling price and value in use. The estimate of the value in use comprises the assessment of future cash inflows and outflows discounted to their present value by applying the pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the estimated recoverable amount of assets (or cash generating unit) is below their carrying value, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognized as an expense of the current period under operating expenses. At, according to the Company s management, there were no indications of impairment in intangible assets, property, plant and equipment. Leases are classified as finance leases whenever the terms of the lease transfer substantially all risks and rewards of ownership to the Company. All other leases are classified as operating leases. The Company as a Lessor Lease income from operating leases (rentals) is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by lessors in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income. The Company as a Lessee Assets held under finance leases are initially recognized as the assets of the Company at the present value of the minimum lease payments, which is determined at the inception of the particular lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease liability. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Company s general policy on borrowing costs (see 3.2 below). Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user s benefit. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed Inventories Inventories are primarily stated at the lower of cost and net realizable value. The net realizable value is the price at which inventories can be realized throughout the normal course of business, after allowing for the costs of realization. The cost of materials is determined using the standard costing method. At the end of the accounting period, the carrying value is adjusted to cost by an apportionment of the related price variances, which are calculated on an average basis, between the cost of sales and the inventories held at the year end. Work in progress and finished goods include all production-related costs and an attributable portion of production overhead. 13

16 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories (Continued) Merchandise held in warehouses is stated at cost, and merchandise in retail outlet is stated at their sales price. At the end of the accounting period, their value is adjusted to cost by an apportionment of the related selling margin, calculated on an average basis, between the cost of merchandise sold and the inventories held at the year end. Provisions that are charged to Other expenses are made where appropriate (including the slowmoving, excessive and obsolete inventories) in order to reduce the value of inventories to management s best estimate of net realizable value. Inventories found to be damaged or of a substandard quality are written off in full Financial Instruments Financial assets and liabilities are recognized on the Company s balance sheet at the moment in which the Company has become a party to the contractual provisions of a particular financial instrument. Purchase or sale of financial assets is recognized by applying the settlement date accounting, i.e. based on the date when the relevant asset is delivered to the counterparty. Financial assets cease to be recognized when the Company loses control of the contractual rights governing such instruments, which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded. Financial liabilities cease to be recognized when the Company fulfills the obligations, or when the contractual repayment obligation has either been cancelled or has expired. Long-Term Financial Placements Long-term financial placements comprise equity investments in commercial banks, insurance companies and enterprises, as well as other long-term placements. Equity investments in banks listed on the stock exchange are initially measured at cost. Subsequent measurement is performed at each balance sheet date, for the purpose of remeasuring these assets to their market value. Other long-term financial placements are stated in accordance with cost method as decreased by the impairment estimated by the management, for the purpose of adjusting these placements to their recoverable value. Accounts Receivable, Short-Term Financial Placements and Other Short-Term Receivables Accounts receivable, short-term financial placements and other short-term receivables are stated at nominal value as decreased by the allowance for impairment made based on their recoverability assessed by management. Cash and Cash Equivalents Cash and cash equivalents in the Company s consolidated financial statements include cash on hand and balances per current and foreign exchange bank accounts, short-term deposits with up to threemonth maturities and cheques of retail customers for sale with payments deferred up to three months. Financial Liabilities Classification as Debt or Equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the relevant contractual arrangements. Financial Liabilities Financial liabilities are classified either as financial liabilities at fair value through profit and loss or other financial liabilities. 14

17 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Instruments (Continued) Financial Liabilities (Continued) Financial Liabilities at Fair Value through Profit and Loss ( at FVTPL ) Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: it has been acquired principally for the purpose of repurchasing it in the near term; or on initial recognition it is part of a portfolio of identified financial instruments that the Company manages and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement are recognised in profit or loss. Net gains and losses recognized in the income statement includes interest paid thereof. Other Financial Liabilities Other financial liabilities (including borrowings and accounts payable) are initially recognized at fair value net of transaction costs. Loans and other financial liabilities are subsequently measured at amortized cost using the contractually agreed interest rate which approximates the effective interest rate. Derecognition of Financial Liabilities The Company derecognizes financial liabilities when, and only when, the Company s obligations are discharged, cancelled or they expire. 15

18 4. SUMMARY OF SIGNIFICANT ACCOUNTING ESTIMATES The presentation of the consolidated financial statements requires the Company s management to make best estimates and reasonable assumptions that influence the assets and liabilities amounts, as well as the disclosure of contingent liabilities and receivables as of the financial statements preparation date, and income and expenses arising during the accounting period. These estimations and assumptions are based on information available to us at the financial statements preparation date. The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year Depreciation and Amortization Charge and Rates Applied The calculation of depreciation and amortization, as well as depreciation and amortization rates is based on the economic useful life of property, plant, equipment and intangible assets. Once a year, the Company assesses the economic useful life based on the current estimates Allowance for Impairment of Receivables and Short-Term Financial Placements The Company calculates the allowance for impairment of doubtful receivables and short-term financial placements based on the estimated losses arising from customer s default. The Company s assessment of impairment loss is based on aging analysis of accounts receivable, historical write-offs, customer creditworthiness and changes in the terms of sale. This includes the assumptions on the future customer behavior and the resultant future collections Fair Value It is a policy of the Company to disclose the fair value information of those components of assets and liabilities for which published or quoted market prices are readily available, and of those for which the fair value may be materially different than their recorded amounts. In the Republic of Serbia, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. As a result of this, fair value cannot readily or reliably be determined in the absence of an active market. The Company s management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may not have been realized, it recognizes a provision. In the opinion of management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions. 5. SALES REVENUES Year Ended Domestic market Sales of products and services 1,264,644 1,034,089 Sales of commercial goods 1,536,246 1,500,580 2,800,890 2,534,669 Foreign markets 1,636,837 1,354,973 4,437,727 3,889, BUSINESS AND MARKET SEGMENTS Products and Services within Business Segments For management purposes, the Company is organized in six business segments. These segments are a base upon which the Company provides primary segment information. Basic products and services of each of these segments are as follows: Enamel cookware Production and sale of all types of cookware enameled, Teflon-coated, aluminum and stainless-steel cookware. 16

19 6. BUSINESS AND MARKET SEGMENTS (Continued) Products and Services within Business Segments Water heaters Production and sale of accumulation water heaters of 30, 50, 80 and 120 liters with enameled or stainless steel tank, and small capacity water heaters of 5 and 10 liters. Packaging Production and sale of all types of transport and luxurious cardboard packing materials. Sinks Production and sale of single and double bowl stainless-steel sinks and products of cast polymers. Trade Retail and wholesale of goods mostly from the range of products of other segments. Holding services the Parent Company in its operations retains holding services management and finances, and, in addition to transport services, restaurant activity, protection, safety and maintenance of the factory premises. In addition, the greatest portion of property, plant and equipment that is in the Company s ownership is rented to the newly-established subsidiaries. Revenue per business segments External sale Internal sale Total Enamel cookware 1,100, , , ,196 2,063,135 1,761,743 Water heaters 204, ,895 90,765 58, , ,226 Packaging material 101,044 80, , , , ,541 Sinks 147, ,976 49,594 50, , ,766 Trade 2,810,069 2,495, , ,474 3,170,837 2,725,673 Services 73,979 52, , , , ,397 Total for all segments 6,608,682 5,382,346 Intercompany sale elimination (2,170,953) (1,492,704) Consolidated revenue 4,437,727 3,889,642 Results per business segments Year Ended Enamel cookware 269, ,972 Water heaters (6,355) (13,052) Packaging material 16,490 2,619 Sinks (4,013) (13,035) Trade 123,873 32,301 Holding services 285, ,446 Total for all segments 685, ,251 Intercompany balance elimination (187,044) (159,624) Profit before taxation 498, ,627 Current tax expense (39,721) (21,136) Deferred tax benefits 6,237 5,858 Net profit 464, ,349 17

20 6. BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued) Results per business segments (Continued) The accounting policies of reporting segments are identical to the accounting policies of the Company described in Note 3. The segment results refer to the profit/(loss) of each segment including the allocation of all expenses based on income earned by each segment individually, before the elimination of internal balances. This is a criteria being reported to the managers competent to make critical decisions for the purpose of allocating adequate resources to individual segments, as well as the analysis of their results. Assets and liabilities per business segments Assets Liabilities Enamel cookware 2,229,707 1,969,902 1,640,629 1,478,814 Water heaters 190, , , ,618 Packaging material 119,802 85,192 94,190 73,836 Sinks 138, , , ,589 Trade 1,497,345 1,391,852 1,146,938 1,099,577 Holding services 752, , , ,282 Total for all segments 4,928,150 4,406,443 3,992,179 4,010,716 Intercompany balance elimination (1,366,579) (1,263,924) (1,905,618) (2,002,951) Consolidated 3,561,571 3,142,519 2,086,561 2,007,765 For the purpose of keeping track over segment results and allocation of adequate resources between segments, the Company allocated current assets and total liabilities into business segments, given that these data are being delivered to persons making business decisions. Assets being jointly used by reporting segments are allocated within the base of realized income of each reporting segment separately. Other information per segments Acquisition of Fixed and Depreciation Intangible Assets and Amortization Enamel cookware 31,162 20,799 17,124 14,919 Water heaters 6,875 22,746 10,991 9,335 Packaging material Sinks 3,693 8,314 12,608 11,870 Trade 22,183 21,037 27,103 32,203 Holding services 51,103 49, , , , , , ,834 18