Financial Statements and Independent Auditor's Report KOSOVO TELECOM J.S.C. 31 December 2016

Transcription

1 Financial Statements and Independent Auditor's Report KOSOVO TELECOM J.S.C. 31 December

2 Contents Page Independent Auditor s Report 1 Statement of financial position 4 Statement of comprehensive income 5 Statement of changes in equity 6 Statement of cash flows 7 Notes to the financial statements 8 Chartered Accountants Member firm of Grant Thornton International Ltd

3 Independent Auditor s Report Grant Thornton LLC Rr. Rexhep Mala Prishtina Kosovo To the Board of Directors of the KOSOVO TELECOM J.S.C T T F Opinion We have audited the accompanying financial statements of KOSOVO TELECOM J.S.C. (the Company ), which comprise the Statement of financial position as at 31 December, 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 KOSOVO TELECOM J.S.C. as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 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 of the Company, 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. Material Uncertainty Related to Going Concern We draw attention to Note 3.3 in the financial statements, which indicates that the Company incurred a net loss of EUR 50,931 thousands during the year ended 31 December and, as of that date the accumulated losses are in amount of EUR 4,544 thousand. In addition, as of 31 December current liabilities exceed current assets for amount of EUR 38,553 thousands. The major part of the losses incurred during arises from provision for potential losses from legal proceedings amounting EUR 28,750 thousands which case is explained in more details in Note Chartered Accountants Member firm of Grant Thornton International Ltd

4 2 As stated in Note 3.3, these events and conditions, indicate that a material uncertainty exists that may cast significant doubt on the Company s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Emphasis of matter i. As disclosed in Note 5 to the accompanying financial statements, the Company connects international fixed calls to foreign administration through lines managed by Telekom Serbia. Since there is no interconnection agreement between KOSOVO TELECOM J.S.C. and Telekom of Serbia that would regulate mutual relationships with regard to telecommunication traffic, the financial effect of the interconnection cannot be measured with any reasonable accuracy. ii. As disclosed in Note 26 to the accompanying financial statements, during, tax authorities started another tax inspection on Company s financial statements for financial years 2013 and The final report was issued on 20 April with modified opinion and liabilities were imposed in the amount of EUR 1,520 thousand. The Company filed a complaint to department of complains with tax authorities on 27 May. Until the completion of the tax authorities inspection, tax expenses, liabilities and prepayments as disclosed in these financial statements may not be considered finalized. A provision for additional taxes and penalties, if any, that may be levied, cannot be determined with any reasonable accuracy, at this stage. Our opinion is not modified in respect of the matters as detailed in paragraphs i to ii above. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management of the Company is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In preparing the financial statements, the 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 International Standards on Auditing 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. Chartered Accountants Member firm of Grant Thornton International Ltd

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7 Statement of Comprehensive Income for the year ended, Note Year ended December 31 Year ended Revenue 18 75,254 84,488 Other income ,447 Operational costs 20 (22,871) (20,451) Staff costs 21 (26,826) (26,927) Depreciation 6 (13,705) (13,534) Amortization 7 (9,741) (7,299) Release of/provisions for litigations 16.1 (28,750) (1,953) Other operating costs 22 (24,786) (24,117) Operating (Loss) (51,095) (8,346) Interest income (Loss) before tax (51,095) (8,122) Income tax income /(expense) Net (Loss) for the year (50,931) (7,904) Other comprehensive income for the year - - Total comprehensive (loss) for the year (50,931) (7,904) (Loss) attributable to the owners (50,931) (7,904) Total comprehensive (loss) attributable to the owners (50,931) (7,904) The accompanying notes from 1 to 27 form an integral part of these financial statements 5

8 Statement of Changes in Equity for the year ended, Note Share capital Reserves Accumulated (losses) / Retained earnings Total Balance at January 1, 4,475 55,000 46, ,862 Comprehensive income for the year (Loss) for the year - - (50,931) (50,931) Other comprehensive income Total comprehensive income for the year - - (50,931) (50,931) Transactions with owners Balance at, 4,475 55,000 (4,544) 54,931 Balance at January 1, 4,475 55,000 84, ,766 Comprehensive income for the year (Loss) for the year - - (7,904) (7,904) Other comprehensive income Total comprehensive income for the year - - (7,904) (7,904) Transactions with owners Dividends paid (30,000) (30,000) Total transactions with owners - - (30,000) (30,000) Balance at, 4,475 55,000 46, ,862 The accompanying notes from 1 to 27 form an integral part of these financial statements 6

9 Statement of Cash Flows for the year ended, Year ended Year ended Note Cash flows from operating activities (Loss) profit before tax (51,095) (8,122) Adjustments for: Depreciation 6 13,705 13,534 Amortization 7 9,741 7,299 Provision for litigation / (release) of provisions 22,19 28,750 (1,329) Impairment losses on doubtful debts 22 2,866 1,389 Release of impairment provision bank deposits 19 - (20) Interest income - (224) Income tax expense 23 (244) - Deferred tax expense (164) - Loss from write off of property plant and eq Operating profit before changes in working capital and provisions 3,559 12,670 Changes in inventories (1,583) (881) Changes in trade receivables 182 (1,985) Changes in prepaid expenses and other receivables 1,524 (327) Changes in trade payables 597 (4,568) Changes in provisions, accruals and other payables 1,430 (7,598) Changes in deferred income 396 (99) Cash generated from operations 6,105 (2,788) Income taxes paid 655 (3,629) Net cash generated from operating activities 6,760 (6,417) Cash flows from investing activities Interest received Purchase of property, plant and equipment (10,663) (22,860) Proceeds from / (investments in) bank deposits - 18,086 Net cash used in investing activities (10,663) (4,369) Cash flows from financing activities Dividends paid - (15,000) Net cash used in investing activities - (15,000) Net change in cash and cash equivalents (3,903) (25,786) Cash and cash equivalents at the beginning of the year 4,589 30,375 Cash and cash equivalents at the end of the year ,589 The accompanying notes from 1 to 27 form an integral part of these financial statements 7

10 Notes to the Financial Statements for the year ended, 1 INTRODUCTION 1.1 General Kosovo Telecom J.S.C ( the Company ) is a Joint Stock Company incorporated in the Republic of Kosovo. The Company's head office is located at Dardania Street, Prishtina, Republic of Kosovo. The Company provides telecommunication services, such as mobile and fixed telephony, postal services, internet services and IPTV services. As at, the Company has 2,279 employees (: 2,339). On August 1, 2012 by the decision of the Government of Kosovo postal services were transferred to Post of Kosovo a newly formed Company where 926 staff has left. Based on the Board decision and approval from the shareholder dated 22 July the Company changed its legal name from Post and Telecommunications of Kosovo J.S.C. into Kosovo Telecom J.S.C. The new legal entity name was updated with the Kosovo Business Registration Agency on 12 August. In order for the financial statements to be more understandable previous name of the Company will be used where necessary. 1.2 Background information Kosovo Telecom J.S.C (TK) previously Post and Telecommunications of Kosovo J.S.C (PTK) enterprise was an enterprise within the meaning of UNMIK Regulation No. 2005/18, amending UNMIK Regulation No. 2002/12 On the Establishment of the Kosovo Trust Agency ( KTA ). Regulation 2005/18 has given to KTA the authority to transform enterprises into corporations. At a meeting dated May 9, 2005 the Board of Directors of the KTA resolved to transform PTK enterprise into a joint stock Company, named Post and Telecommunications of Kosovo Holding, J.S.C. On the incorporation date June 22, 2005 PTK Holding effectively substituted the former enterprise formerly doing business as Post and Telecommunications of Kosovo on a continuing basis, without liquidation. PTK enterprise was the first enterprise that was transformed into a Corporation under the KTA Regulation and Administrative Directive 2005/6. KTA acted as trustee for the ultimate owners of Kosovo s enterprises pursuant to the KTA Regulation, was the current holder of 100 percent of the shares of PTK Holding. The issued share capital upon incorporation amounts to Euro 260 million. Shortly after its incorporation, PTK Holding formed an operating Company, Post and Telecommunications of Kosovo J.S.C. ( PTK ) and transferred certain of its assets to PTK as a capital contribution. PTK Holding was the 100% shareholder of Post and Telecommunications of Kosovo J.S.C. The registered capital of the wholly owned subsidiary amounts to Euro 250 million, and the shares of the subsidiary were issued in exchange for certain net assets contributed in kind by PTK Holding. Given the practical effect of the transformation and of incorporation, the Tax Administration has approved the restructuring process of PTK enterprise as reorganization for the purposes of Section 24.1 of UNMIK Regulation No. 2004/51 On Corporate Income Taxes. On June 13, 2008 the Assembly of the Republic of Kosovo approved the Law on Publicly owned Enterprises (Law No.03/L-087), and based on provision of section 3 of this Law, Central publicly owned Enterprises including PTK JSC are declared to be assets of the Republic of Kosovo. Government of the Republic of Kosovo has through the Ministry of Economy and Finance the exclusive authority to exercise the shareholder rights over the publicly owned Enterprises. 8

11 Notes to the Financial Statements for the year ended, 1.2 Background information (continued) On October 13, 2009 the Government has issued a decision for merging of these two companies PTK Holding and PTK JSC into one company Post and Telecommunications of Kosovo J.S.C. ( the Company ) with registered capital of Euro 5,000,000, composed of five million common shares with nominal value of Euro 1 per share. All shares are issued in the name of Republic of Kosovo. On December 21, 2011, the Government has issued a decision on the establishment of the Public Central Enterprise Post of Kosovo JSC. The Public Central Enterprise Post of Kosovo JSC established the separation of the Postal Unit from the current division of Public Enterprise Post and Telecommunications of Kosovo J.S.C. Onn 22 July the shareholder government of the republic of Kosovo approved the Bod request to change the legal name of the Company from Post and Telecommunications of Kosovo J.S.C. into Kosovo Telecom J.S.C. The new legal entity name was updated with the Kosovo Business Registration Agency on 12 August. 1.3 Business activities At, the Company has three business units, two of which are licensed by Regulatory Authority for Electronic and Postal Communications ( RAEPC ), one of them is also authorized by the RAEPC for offering internet services and one is licensed by the Ministry of Transport and Communications: In accordance with Government of Kosovo starting from August 1, 2012 Post of Kosovo has started the separate operations as separate unit from PTK. Process of division of Post of Kosovo has started in 2012 in accordance with Government of Kosovo decision No. 16/53 dated December 21, 2011 for division of Post of Kosovo. This division was done in accordance with independent advisor report dated July 2011 which was then approved by Management of PTK. Fixed Telecommunications Unit ( Fixed Telecommunications ) The Fixed Telecommunications Unit is the licensed network and service provider of fixed telecommunication services to retail and business customers in the territory of Kosovo. Fixed Telecommunications Unit also offered internet services from 2001 and today is on of operators offering internet services in Kosovo, authorized by the RAEPC. Mobile Telephony Unit ( Vala ) Vala is the GSM mobile operating unit and is currently one of licensed network and service providers of mobile telecommunication services in Kosovo. PTK enterprise entered into an agreement in 2000, to provide mobile services in Kosovo, with Monaco Telecom International ( MTI ) which entitles PTK to use the MTI international dialing code and enables PTK to connect its mobile network to international networks. As a component of this agreement PTK compensate MTI with a share of revenues and pay certain international traffic costs. During 2006, the contract between MTI and PTK J.S.C. has been renegotiated and amended. The new framework Agreement covers the use of Monaco s International Dialing Code, International traffic, Roaming and technical know-how transfer. In addition the framework Agreement provides for a termination clause in the event that Kosovo acquires an International Dialing Code (IDC) of its own. Also in May of 2009, the contract between MTI and PTK JSC was re-negotiated and changed, again. New Annex of the Framework Contract covers the use of the Monaco International dialing code, international traffic, roaming and transfer technical knowledge, which came into force on January 1, In addition, the annex of the new framework contract covers a provision for termination of contract if Kosovo provides / receives its own code as well as international calls for reduction of tariff code. 9

12 Notes to the Financial Statements for the year ended, 2. ADOPTION OF NEW AND REVISED STANDARDS 2.1 New and revised standards that are effective for annual periods beginning on or after 1 January The Company has not adopted any new standards or amendments that have a significant impact on the Company s results or financial position. The standards and amendments that are effective for the first time in are: Annual Improvements to IFRSs cycle Disclosure Initiative (Amendments to IAS 1) Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16 and IAS 38) Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) Equity Method in Separate Financial Statements (Amendments to IAS 27) Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 27). These amendments do not have a significant impact on these financial statements and therefore disclosures have not been made. In addition, IFRS 14 Regulatory Deferral Accounts is also effective from 1 January. However it is only applicable to first time adopters of IFRS and therefore is not applicable to the Company. 2.2 Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company At the date of authorization of these financial statements, certain new standards, and amendments to existing standards have been published by the IASB that are not yet effective, and have not been adopted early by the Company. Information on those expected to be relevant to the Company s financial statements is provided below. Management anticipates that all relevant pronouncements will be adopted in the Company s accounting policies for the first period beginning after the effective date of the pronouncement. New standards, interpretations and amendments not either adopted or listed below are not expected to have a material impact on the Company s financial statements. IFRS 9 Financial Instruments The new standard for financial instruments (IFRS 9) introduces extensive changes to IAS 39 s guidance on the classification and measurement of financial assets and introduces a new expected credit loss model for the impairment of financial assets. IFRS 9 also provides new guidance on the application of hedge accounting. 10

13 Notes to the Financial Statements for the year ended, 2. ADOPTION OF NEW AND REVISED STANDARDS (CONTINUED) Management has started to assess the impact of IFRS 9 but is not yet in a position to provide quantified information. At this stage the main areas of expected impact are as follows: the classification and measurement of the Company s financial assets will need to be reviewed based on the new criteria that considers the assets contractual cash flows and the business model in which they are managed an expected credit loss-based impairment will need to be recognized on the Company s trade receivables in accordance with the new criteria it will no longer be possible to measure equity investments at cost less impairment and all such investments will instead be measured at fair value. Changes in fair value will be presented in profit or loss unless the Company makes an irrevocable designation to present them in other comprehensive income. if the Company elect the fair value option for certain financial liabilities, fair value movements will be presented in other comprehensive income to the extent those changes relate to the Company s own credit risk. IFRS 9 is effective for annual reporting periods beginning on or after 1 January IFRS 15 Revenue from Contracts with Customers IFRS 15 presents new requirements for the recognition of revenue, replacing IAS 18 Revenue, IAS 11 Construction Contracts and several revenue-related Interpretations. The new standard establishes a control-based revenue recognition model and provides additional guidance in many areas not covered in detail under existing IFRSs, including how to account for arrangements with multiple performance obligations, variable pricing, customer refund rights, supplier repurchase options, and other common complexities. IFRS 15 is effective for annual reporting periods beginning on or after 1 January Management intends to adopt the Standard retrospectively, recognizing the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings on the initial date of application. Under this method, IFRS 15 will only be applied to contracts that are incomplete as at 1 January Management has started to assess the impact of IFRS 15 but is not yet in a position to provide quantified information. IFRS 16 Leases IFRS 16 will replace IAS 17 and three related Interpretations. It completes the IASB s longrunning project to overhaul lease accounting. Leases will be recorded on the statement of financial position in the form of a right-of-use asset and a lease liability. IFRS 16 is effective from periods beginning on or after 1 January Management is assess the Standard will not have a significant impact on the financial statements. 11

14 Notes to the Financial Statements as at and for the year ended, 3. ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. The accounting policies set out below have been applied consistently to all years presented in these financial statements, unless otherwise stated. 3.1 Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). 3.2 Basis of preparation The financial statements have been prepared under the historical cost convention, as modified by available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) if any, at fair value through profit or loss. The measurement bases are more fully described in the accounting policies below. The financial statements are prepared as of and for the years ended, and. Where necessary comparative figures have been reclassified to conform to the changes in presentation for the current year. 3.3 Going concern assumption These financial statements have been prepared on the going concern basis which presumes that the Company will be able to collect its receivables and settle its liabilities in the normal course of its business activities. As such these financial statements do not reflect possible adjustments and reclassifications of the assets and liabilities which would be required in case the Company would not be able to continue with its business activities as a going concern. The Company incurred loss from its operations in in the amount of EUR 50,931 thousands (: EUR 7,904 thousand) and on the reporting date, the accumulated losses are in amount of EUR 4,544 thousand. In addition, as of 31 December current liabilities exceed current assets for amount of EUR 38,553 thousands (: EUR 241 thousands).the major part of the losses incurred during arises from provision for potential losses from legal proceedings amounting EUR 28,750 thousands which case is explained in more details in Note Based on these events and conditions, there is a material uncertainty that may cast significant doubt on the Company s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business. Management believes it is taking all necessary measures to support the sustainability and development of the Company s business. Herewith with the next 12 month will take the following activities: increasing the revenues as result of investments made during the year, improvement of the debt collection strategy, reducing some categories of expenditures, etc. Regarding the arbitration case disclosed in Note 16.1, based on the government public declaration, the Company will not be charged with the full amount of expense which may result the legal proceedings being taken. 3.4 Functional and presentation currency These financial statements are presented in Euro, which is the Company s functional currency. All financial information presented in Euro has been rounded to the nearest thousand. 12

15 Notes to the Financial Statements as at and for the year ended, 3. ACCOUNTING POLICIES (CONTINUED) 3.5 Use of estimates and judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in the Note 5 Accounting estimates and judgments. 3.6 Foreign currency Transactions in foreign currencies are translated to the functional currency at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are recognized in profit or loss, except for differences arising on the translation of available-for-sale equity instruments (if any). 3.7 Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment provisions. Deemed cost represents revalued cost of certain items of property, plant and equipment revalued on January 1, 2005 the date of transition to IFRS, to fair value in relation to the initiated incorporation of PTK Holding. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor (if involved), any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Capital expenditure on assets in the course of construction is carried forward under Assets under construction and is capitalized and transferred to the appropriate asset category once completed, from which time depreciation is applied at the rate applicable to the category concerned. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognized in statement of comprehensive income as incurred. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining the operating result for the period. 13

16 Notes to the Financial Statements as at and for the year ended, 3 ACCOUNTING POLICIES (CONTINUED) (iii) Depreciation Depreciation is recognized in statement of comprehensive income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land and assets under construction are not depreciated. The estimated useful lives for the major classes of assets are as follows (in both and ): Buildings (from date of valuation) 20 years Post offices (wooden structure) 10 years Network lines 20 years Cable duct and Towers 20 years Base Stations 5 years Machinery and equipment 5 to 10 years The useful lives, deprecation methods and residual values, if not insignificant, of property, plant and equipment are reassessed at the reporting date. 3.8 Intangible assets (i) Recognition and measurement Intangible assets are measured at cost less accumulated amortization and accumulated impairment losses, if any. (ii) Subsequent expenditure Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss when incurred. (ii) Amortization Amortization is recognized in statement of comprehensive income on a straight-line basis over the estimated useful lives of intangible assets from the date they are available for use. The estimated useful lives are as follows (in both and ): Software 5 years Telecom Licenses 15 years 3.9 Impairment of non-financial assets Property, plant and equipment, as well as intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in statement of comprehensive income. The recoverable amount is the higher of an asset s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit. 14

17 Notes to the Financial Statements as at and for the year ended, 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.10 Financial assets The Company classifies its financial assets in the following categories: loans and receivables and available for sale financial assets. Management determines the classification of its investments at initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. Company s loans and receivables at the statement of financial position dates consist of trade and other receivables, short term deposits with banks and cash and cash equivalents. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the statement of financial position date. Recognition and measurement Purchases and sales of financial assets are recognized on trade-date the date on which the Company commits to purchase or sell the asset. All financial assets other than assets at fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method. Changes in the fair value of monetary securities classified as available-for-sale are recognized in other comprehensive income. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the statement of comprehensive income as gains and losses from investment securities. Interest on available-for-sale securities calculated using the effective interest method is recognized in the statement of comprehensive income as part of other income. Dividends on available for sale equity instruments are recognized in the statement of comprehensive income as part of other income when the group s right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Company establishes fair value by using valuation techniques. Impairment of financial assets The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. 15

18 Notes to the Financial Statements as at and for the year ended, 3 ACCOUNTING POLICIES (CONTINUED) Evidence of impairment may include indications that the debtors or a group of debtors 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. a. Assets carried at amortized cost For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. Assets with a short maturity are not discounted. The carrying amount of the asset is reduced and the amount of the loss is recognized in the statement of comprehensive income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Company may measure impairment on the basis of an instrument s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the reversal of the previously recognized impairment loss is recognized in the statement of comprehensive income. Impairment testing of trade receivables is described in this Note b. Assets classified as available for sale In case of available for sale investments, significant or prolonged decline in the fair value of the assets below their cost is considered in determining whether the assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the statement of comprehensive income. Impairment losses recognized in the statement of comprehensive income on equity instruments are not reversed through the income statement Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. Individually significant debtors are tested for impairment on an individual basis. The remaining debtors are assessed collectively in groups that share similar credit risk characteristic. 16

19 Notes to the Financial Statements as at and for the year ended, 3 ACCOUNTING POLICIES (CONTINUED) 3.12 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously Inventories Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. The cost of inventories consumed is based on the weighted average formula Share capital Share capital and retained earnings (i) Shareholders capital Share capital represents the nominal value of shares that have been issued. (ii) Retained earnings Retained earnings comprise of non-distributed earnings from the current and past periods. (iii) Dividends Dividends are recognized as liabilities in the periods in which are declared and approved by the shareholders Financial liabilities Financial liabilities are classified in accordance with the substance of the contractual arrangement. All financial liabilities of the company at the reporting dates are classified as other financial liabilities at amortized cost. Financial liabilities at amortized cost consist of trade payables Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are carried at their fair value and subsequently measured at their amortized cost by applying the effective interest rate method. 17

20 Notes to the Financial Statements as at and for the year ended, 3 ACCOUNTING POLICIES (CONTINUED) 3.17 Employee benefits Mandatory pensions The Company, in the normal course of its business, makes payments on its own behalf and on behalf of its employees to contribute to the mandatory pensions according to the local legislation. The costs incurred on behalf of the Company are charged to statement of comprehensive income as incurred. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under a short-term cash bonus if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability Recognition of revenue Mobile service revenue Mobile service revenue from prepaid scratch and sim cards is recognized based on usage. Unused airtime is included in deferred income in the Statement of financial position. Upon the expiration of pre-paid scratch cards, any unused airtime is recognized as income. Revenue from post-paid traffic is recognized based on the actual traffic generated by the caller in the current period. Revenue from international roaming air time and incoming calls is recognized on a per-minute basis in accordance with the periodic financial reports provided by its network services provider, Monaco Telecom International. Fixed line revenue Fixed line revenue is recognized on a per-impulse basis related to the current period. Internet service revenue Internet service revenue is recognized on a straight-line basis over the customer subscription period. Other revenue Revenue from the sale of goods is recognized in the statement of comprehensive income when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognized in the statement of comprehensive income in proportion to the stage of completion of the transaction at the financial position date. 18

21 Notes to the Financial Statements as at and for the year ended, 3 ACCOUNTING POLICIES (CONTINUED) 3.20 Expenses Commissions due to Monaco Telecom International Commission costs to Monaco Telecom International are recognized on an accrual basis when incurred. Operating lease payments Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease Finance income and expenses Finance income comprises interest income on funds invested in bank deposits, gains on the disposal of available-for-sale financial assets, and foreign currency gains. Interest income is recognized as it accrues, using the effective interest method. Finance expenses comprise foreign currency losses, unwinding of the discount on provisions, if material, and impairment losses recognized on financial assets Dividend distribution Distribution of dividends to the Company s shareholders is recognized as a liability in the financial statements in the period when they are approved by the Company s shareholders Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. The tax currently payable is calculated and paid in accordance with Income Corporate Law No Law no.05/l -029 entered into force commencing from 01 September. Final tax on profit at a rate of 10% is payable based on the annual profit shown in the statutory statement of income as adjusted for items, which are non-assessable or disallowed. According to the current tax legislation, tax losses may be carried forward within a period seven years following the year in which the tax loss was incurred. Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized Commitments and contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. The amount of a contingent loss is recognized as a provision if it is probable that future events will confirm that, a liability incurred as at the financial position date and a reasonable estimate of the amount of the resulting loss can be made. 19

22 Notes to the Financial Statements as at and for the year ended, 3 ACCOUNTING POLICIES (CONTINUED) 3.25 Related parties Related parties are those where one of the parties is controlled by the other or has significant influence in making financial or business decisions of the other party Events after reporting date Post-year-end events that provide additional information about a Company s position at the statement of financial position date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 20

23 Notes to the Financial Statements as at and for the year ended, 4 FINANCIAL RISK MANAGEMENT 4.1 Financial instruments by categories The carrying amounts of the Company s financial assets and liabilities as recognised at the statement of financial position date may also be categorised as follows: 21 Assets Available for sale Equity interest in foreign legal entities Loans and receivables Trade receivables 8,253 11,300 Cash and cash equivalents 686 4,589 8,939 15,889 8,978 15,928 Liabilities Other liabilities at amortized cost Trade payables 5,876 5,280 5,876 5, Financial risk factors The Company s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. This note presents information about the Company s exposure to each of the above risks, the Company s objectives, policies and processes for measuring and managing risk, and the Company s management of capital. Further quantitative disclosures are included throughout these financial statements. The management has overall responsibility for the establishment and oversight of the Company s risk management framework. The Company s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market and legislative conditions and the Company s activities. 4.3 Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company s receivables from customers and investments in bank deposits. Trade receivables The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a collective loss component established for similar customers in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.

24 Notes to the Financial Statements as at and for the year ended, 4 FINANCIAL RISK MANAGEMENT (CONTINUED) 4.3 Credit risk (continued) Investments in bank deposits The Company has significant current and investment accounts with all of Kosovo s bank institutions. Guarantees The Company s policy is to provide financial guarantees only upon a decision of authorized directors or other key management personnel. The process of managing the credit risk from operating activities includes preventive measures such as creditability checking and prevention barring, corrective measures during legal relationship for example reminding and disconnection activities, collaboration with collection agencies and collection after legal relationship as litigation process, court proceedings, involvement of the executive unit and factoring. The overdue payments are followed through a debt escalation procedure based on customer s type, credit class and amount of debt. The Company s maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position as summarized below: Classes of financial assets - carrying amounts: Equity interest in foreign legal entities Trade receivables 8,253 11,300 Cash and cash equivalents 686 4,589 8,978 15,928 The credit risk for cash and cash equivalents and deposits is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. The age structure of trade receivables is as follows: Gross Net Gross Net amount Impair. Amount amount Impair. amount Up to 30 days 3,404 (380) 3,024 3,796 (97) 3,699 From 1-3 months 3,180 (449) 2,731 3,487 (169) 3,318 From 3-6 months 2,909 (1,124) 1,785 2,966 (309) 2,657 From 6-12 months 2,241 (1,847) 394 2,285 (910) 1,375 Over 1 year 47,459 (47,140) ,840 (46,589) ,193 (50,940) 8,253 59,374 (48,074) 11,300 As of, and, the age structure of past due, not impaired receivables are as follows: From 1-3 months 2,731 3,318 From 3-6 months 1,785 2,657 From 6-12 months 394 1,375 Over 1 year ,229 7,601 22