ACTIVITY REPORT 31 DECEMBER 2011
TABLE OF CONTENTS INTRODUCTION... 2 LEGAL FRAMEWORK... 2 1. CHANGES IN NATIONAL LEGISLATION... 2 2. CHANGES IN THE RULES AND REGULATIONS OF THE CENTRAL DEPOSITORY... 3 3. GENERAL MEETING OF SHAREHOLDERS... 4 INTERNATIONAL RELATIONS... 4 1. TARGET2-SECURITIES PROJECT /T2S/... 4 2. RELATIONS WITH OTHER DEPOSITORY INSTITUTIONS... 5 3. EUROPEAN CODE OF CONDUCT FOR CLEARING AND SETTLEMENT... 6 4. SWIFT... 6 5. ISO 9001:2000... 7 6. OTHER ACTIVITIES... 7 TRADING... 8 SERVICES TO ISSUERS AND SERVICING CORPORATE ACTIONS... 11 SERVICING OF SPECIAL PLEDGES AND OTHER COLLATERAL... 13 INFORMATION SYSTEM... 13 SERVICES TO GOVERNMENTAL INSTITUTIONS AND JUDICIAL BODIES... 15 FINANCIAL STATEMENTS STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN EQUITY NOTES TO THE FINANCIAL STATEMENTS REPORT AS AT 31 DECEMBER 2011 1
Introduction This report has been prepared in accordance with Article 139, paragraph 2, of the Public Offering of Securities Act and Article 48 of Ordinance No 8 of the Financial Supervision Commission on the Central Securities Depository. It contains data on the activity and the financial statements of the Central Depository for 2011. The report provides information about Central Depository AD s performance in 2011, specific data, analyses and conclusions. The report outlines the main trends in the development of the capital market, as well as the fulfillment of company s objectives and priorities. Legal Framework 1. Changes in national legislation In 2011, the Central Depository took part in the process of coordination of the draft Law on the Activities of Collective Investment Schemes and Other Collective Investment Undertakings (LACISOCIU) which aimed at implementing into Bulgarian law the requirements of Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). With the coming into effect of the LACISOCIU in 2011, new opportunities were introduced for the management company of a Collective Investment Scheme (CIS) to pursue business through: - introducing of a single passport valid throughout the entire EU; - establishing new structures of a Master Feeder CIS type; - diminishing administrative barriers in relation to cross-border offering of CIS units; - enhancing the requirements concerning transformation of CIS; - facilitating cross-border transformations; - improving investor protection, including through the introduction of a single model document referred to as Key Investor Information. REPORT AS AT 31 DECEMBER 2011 2
On 26 July 2011, the Law of Amendment and Supplementation of the Public Offering of Securities Act was promulgated whereby amendments to the legal requirements concerning the Central Depository were introduced, in particular regarding: - the requirements for distribution of company s capital shares; - the ability to distribute dividends to shareholders; - the liability for payment of corporate tax; - the procedure for funding of company s Guarantee Fund and Reserve Fund; - the preliminary approval by the Financial Supervision Commission of the changes in Central Depository s Rules and Regulations. In view of the participation of the Central Depository in Working Group 26 Financial Services under the Council for European Affairs, the Central Depository provides on an ongoing basis its advice regarding the following legislative initiatives at an European Union level: - A draft legislation on the legal certainty regarding acquisition and disposal of securities; - A draft legislation on central securities depositories; - A proposal on Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories; - A proposal on Regulation of the European Parliament and of the Council on short sales and some aspects of CDSs. 2. Changes in the Rules and Regulations of the Central Depository In January 2011, the Board of Directors of the Central Depository approved a new Service Price Tariff, implementing Resolution No 1629/22.12.2010 of the Commission on Protection of Competition (CPC). The new Tariff reflected all the requirements of the CPC ensuring a separate payment by Central Depository clients for each individual service. In August 2011, the Rules and Regulations of the Central Depository were adapted and supplemented in accordance with the effective amendments and supplementations of the Payment Services and Payment Systems Act. In December 2011, changes in Enclosure 23 Completion of Transactions in Securities through the Gross Settlement in Real Time System to Central Depository s Rules and Regulations were approved. REPORT AS AT 31 DECEMBER 2011 3
3. General Meeting of Shareholders On 9 March 2011, an extraordinary General Meeting of Central Depository s Shareholders was held which approved the following decisions: Decision on the early dismissal of Mrs Milena Boikova as a Board of Directors Member, effective from the date of entry of the General Meeting s decision in the Commercial Register. Decision on the election of Vasil Golemanski as a new Board of Directors Member as a representative of the Ministry of Finance. On 28 June 2011, the regular Annual General Meeting of Shareholders of the Central Depository was held and it approved the following decisions: Decision on the approval of Board of Directors activity report for 2010; Decision on approval of the Annual Financial Statements of the Company for 2010 and the Auditor s Report of AFA OOD; Decision to approve the allocation of the excess of income over the expense for the accounting 2010; Decision on the exoneratation of the Board of Directors members from liability for their activities in 2010; Decision on the election of specialised audit firm AFA OOD to audit and certify the Annual Financial Statements of the Company for 2011; Decision to approve amendments to the Articles of Association of Central Depository AD in compliance with the amendments to POSA. The decisions of the extraordinary and regular General Meetings of Shareholders have been entered into the Commercial Register with the Registry Agency. International Relations 1. TARGET2-Securities Project /T2S/ In the first half of 2011, the Central Depository submitted information on the request of T2S Corporate Actions Sub-Group regarding the level of compliance and implementation of international market standards for servicing corporate actions. In this respect, as well as with regard to the necessity to design a detailed plan for their implementation in national practice, an REPORT AS AT 31 DECEMBER 2011 4
internal expert group has been established. An analysis of the procedures complying with the standards and the procedures requiring implementation of a harmonization process to remove the discrepancies has been carried out. The necessity to establish, at the next stage, an interinstitutional working group to pool the efforts for elimination of Giovannini Barrier 3 of all stakeholders, i.e. professional organizations, supervisors, the Bulgarian Stock Exchange, was outlined. The Central Depository decided, as a member of the European Central Securities Depositories Association (ECSDA), which in its turn is represented in the Broad Stakeholder Group, to take the initiative for the establishment of the group. In relation to the survey and the subsequent analysis carried out by the special-purpose working group with T2S (established on the initiative of T2S Advisory Group) regarding disclosure of investor information and registration of legal title, and the completed questionnaire, the Central Depository received for final coordination Market Analysis of Shareholders Transparency Regimes in Europe paper. After reviewing the document for applicability of data regarding the Central Depository, a confirmation on the information contained in the report has been sent. The aim of the above mentioned surveys has been to provide an overall assessment of the readiness of the individual depository institutions to comply with the standards and the requirements of the Eurosystem in joining the T2S. The Central Depository had not undertaken to sign the Memorandum of Understanding proposed by the ECB in 2009, but keeps on monitoring project development, the work of project subgroups to the ECB, as well as the other initiatives in this field. 2. Relations with other depository institutions In 2011, the Central Depository maintained its securities and cash account with Clearstream, Luxemburg in view of providing a technical feasibility for Bulgarian market participants for cross-border trades and access to European markets. At the end of 2008, the Central Depository established a link with the Romanian depository of corporate securities RoClear and became its member. In October 2011, the Romanian depository expressed its wish to become a member of the Central Depository and consequently the Central Depository sent a draft membership agreement and a draft contract for establishing the link. Technical comments have been sent and the Central Depository has, as of now, replied to them. In the meantime, in cooperation with the Bulgarian Stock Exchange, technical meetings, REPORT AS AT 31 DECEMBER 2011 5
information sharing, legal consultations, test communications via SWIFT messages, etc have been carried out, in view of the successful finalization of the project in the nearest future. In 2012, a framework agreement and a contract will be signed whereby the dual listing of Bulgarian companies on the Bulgarian and the Bucharest Stock Exchanges would become possible. 3. European Code of Conduct for Clearing and Settlement The European Code of Conduct for Clearing and Settlement, signed by the Central Depository in February 2007, set out certain requirements which the Central Depository follows and strictly complies with. In accordance with the principles of the Code of Conduct for Clearing and Settlement, the Central Depository should prepare on an annual basis two self-assessment reports on the implementation and the level of compliance with the requirements of the Code: Self-Assessment Report on Service Unbundling and Accounting Separation which ascertains whether the services provided by the Central Depository are unbundled from each other and customers may use particular service without being obliged to purchase any other service, as well as whether each service is offered at a particular fixed price. General Implementation Report on Compliance with Code of Conduct requirements which assesses the overall compliance with the requirements imposed thereby, based on the following three principals: price transparency, access and interoperability, and service unbundling and accounting separation. The General Implementation Report for 2010 has been prepared and submitted to ECSDA and the European Commission and posted on the website of the Central Depository. The report has been audited by the certified audit firm AFA OOD. Based on the review and the analysis performed on the compliance of the methodology designed by the Central Depository for unbundling, allocation and accounting for the income and expense by group of services with the principles of the Code, the auditors have prepared an unqualified auditor s report. In relation to the new Tariff of the Central Depository, the ECSDA Conversion Table, which forms an integral part of the Code, has been revised and updated. In compliance with the requirements set out, the Table is available on the website of the Central Depository. 4. SWIFT REPORT AS AT 31 DECEMBER 2011 6
In relation to the establishment of direct links with other European depositories and the need to ensure the security and reliability of financial data transmission, in 2011, the Central Depository maintained its membership in SWIFT, ensuring thereby full compatibility with the other participants in the international capital market. 5. ISO 9001:2000 In September 2011, the renewed certification for a further three-year period of the Quality Management System under ISO 9001:2000 was successfully completed certificate No HU08/3498 issued by SGS United Kingdom Ltd Systems & Services Certification. 6. Other activities In 2011, the Central Depository prepared and submitted information on a number of questionnaires and surveys launched by ECSDA. Their scope encompassed issues related to the rules on synchronization of settlement instructions (ECSDA/ESSF Standards), ownership limits imposed on CSDs, and a survey on emission rights. The Central Depository also supported the Matching and Settlement Failures Discipline Measures paper prepared by WG 3 of ECSDA. The Central Depository supported also the advice provided by ECSDA to the consultation paper of CPSS IOSCO * on Principles for financial market infrastructures. The Central Depository submitted also information in relation to enquiries from various international institutions: Banker`s Almanach, Financial Calendar, as well as to DTCC, Estonian Swedbank AS, NSD, etc. Information has also been prepared and submitted in relation to the preparation of reports by international organizations Thomas Murray and the World Bank, as well as under questionnaires of the Association of Global Custodians, etc. In 2011, meetings were held with representatives of Morgan Stanley, The Northern Trust Company, State Street Bank and Trust, Pictet and Cie Banquirees, J.P. Mogran in the course of the review performed by those institutions of the capital market in Bulgaria. * CPSS Committee on Payment and Settlement Systems IOSCO International Organization of Securities Commissions REPORT AS AT 31 DECEMBER 2011 7
In relation to the membership of the institution with ANNA /Association of National Numbering Agencies/ and execution of the commitments arising from the status of National Numbering Agency, in 2011, the Central Depository submitted information upon the request of the Association with regard to the Country Repor paper in respect of Status of ISIN, CFI and Standardization and updated its profile posted on the website of ANNA. In the beginning of 2011, a meeting was also held with a representative of the international media organization European Times. The meeting was held within the review and assessment of the business environment and the opportunities for investments in Bulgaria - EU Readiness Assessment Analysis. In 2011, the Central Depository held meetings with representatives of the World Bank and the International Monetary Fund as a result of which the Central Depository took part in the process of coordination of the prepared report Capital Market Integration and Implementation of MiFID: the Experience of Bulgaria, which aimed at analyzing and providing recommendations on the application of the Markets in Financial Instruments Directive in Bulgaria by the institutions involved in the functioning of the capital market. Trading Market has reached the bottom and started picking up this is the expression which characterizes most objectively and concisely the year 2011. An increase by 4.83% in the number of executed trades and an increase by more than 80.13% in transfers of financial instruments are indicators which are already in line with the analyses according to which Bulgaria is coming out of the crisis. TRANSFERS / TRADES YEAR EXCHANGE OTC TRADES TOTAL TRADES 2009 207,244 9,577* 216,821 2010 111,858 8,559* 120,417 2011 110,993 15,240* 126,233 * OTC transfers do not include patrimony transfers, donation transfers, and transfers from own account to client sub-account at an intermediary REPORT AS AT 31 DECEMBER 2011 8
OTC TRADES BY MONTH FOR THE PERIOD 01.2009-12.2011 1 900 1 800 1 700 1 600 1 500 1 400 1 300 number 1 200 1 100 1 000 900 800 700 600 500 400 01.09 03.09 05.09 07.09 09.09 11.09 01.10 03.10 05.10 07.10 09.10 11.10 01.11 03.11 05.11 07.11 09.11 11.11 Despite reported increase however, the levels of trading are comparable to those of 7-8 years ago and this is of no surprise to anybody recovering lost confidence in the capital market will take much longer time than the recovery of other areas of the economy. NUMBER OF EXCHANGE TRADES BY MONTH 01.2009-12.2011 27 500 25 000 22 500 20 000 number 17 500 15 000 12 500 10 000 7 500 5 000 01.0902.0903.0904.0905.0906.0907.0908.0909.0910.0911.0912.0901.1002.1003.1004.1005.1006.1007.1008.1009.1010.1011.1012.1001.1102.1103.1104.1105.1106.1107.1108.1109.1110.1111.1112.11 TRANSFERRED SECURITIES YEAR NUMBER 2009 612,531,163 2010 349,197,817 2011 629,009,302 REPORT AS AT 31 DECEMBER 2011 9
Regarding transactions and payments in compensatory instruments, data indicates diverging changes a decrease by 31.70% was reported in the number of trades, while the number of registered payments in compensatory instruments to state institutions recorded an increase by more than 33%. The inheritance related transfers, as well as the issuance of depository receipt duplicates, registered a decrease but those amounts do not represent criteria for the assessment of the capital market. YEAR TRANSACTIONS IN COMPENSATORY INSTRUMENTS REGISTERED PAYMENTS IN COMPENSATORY INSTRUMENTS TO STATE INSTITUTIONS PATRIMONY TRANSFERS DEPOSITORY RECEIPT DUPLICATES 2009 4,748 469 1,139 2,944 2010 4,423 434 1,685 2,882 2011 3,021 579 1,019 1,982 In contrast to 2010, when in respect to transactions in rights a decrease was recorded, both with regard to the number of trades and to the number of securities transferred, in 2011, the number of trades dropped by 57.42%, but the number of rights transferred jumped more than three times. EXCHANGE TRADES IN RIGHTS YEAR NUMBER OF TRADES TRANSFERRED RIGHTS 2009 2,845 30,468,828 2010 1,172 41,352,081 2011 499 140,155,741 On the basis of the analysis performed, it could be concluded that the amounts in respect of the reporting period are a pleasant surprise as compared with those for 2010, and the figures reflecting most adequately the actual dynamics of the capital market, i.e. the number of executed trades, evidence positive development. REPORT AS AT 31 DECEMBER 2011 10
Services to issuers and servicing corporate actions Against the background of the crisis in 2011, the activity of the Registries Unit maintained levels not lower than those in previous years. As compared with 2010, an increase could even be noticed in the payments through Central Depository s system. The amount of dividend payments was twice as large as the amount of dividends paid in the previous year. The number of received requests for registration of new issues of securities and requests for information from the register remained at almost the same level. For the reporting period, a total of 73 issues of dematerialized financial instruments, i.e. 27 issues of shares, 23 issues of bonds, 2 mutual funds and 21 rights, were registered. For 2010, the figures respectively were 27 issues of shares, 13 issues of bonds, 9 mutual funds and 15 issues of rights. Requests for processing of a significant number of corporate actions were received, with the more important among them being: The procedure related to the registration of the issue of preference shares of MEKOM AD; The procedure related to the registration of the issue of ordinary and preference shares of HEALTH INSURANCE FUND FiHEALTH AD; During the reporting period, changes in the capital of 112 issues of securities were registered, the most important of them being the increase of the capital of SOFIA HOTEL BALKAN AD and BULSTRAD VIENA INSURANCE GROUP JSC, EUROHOLD BULGARIA, TBI BANK AD, RAIFFEISEN BANK BULGARIA AD; The issues of the electricity distribution companies were registered in the registry of the Depository and subsequently the changes in their capital were entered; At the end of 2011, changes related to the issue of AROMA AD were entered and subsequently entries of the new companies AROMA REAL ESTATE AD and AROMA COSMETICS AD were made. The work related to elaboration of new services to issuers of securities and facilitation of the access of the companies which had issued dematerialized financial instruments to those services continued. These included: REPORT AS AT 31 DECEMBER 2011 11
Improvement of the communication with the security issuer companies in receiving information from the register via the website of the Central Depository. Companies use those services with a valid electronic signature and this new way of communication facilitates the access to the register of the Central Depository and enhances security. As a result, companies can already search information about their financial liabilities and receive in electronic form a document for the services paid; Sending regular information to the companies about their financial obligations when receiving information reports from the register and information about payments made under bond issues and dividend payments via the system of the Central Depository. In 2011, 263 dividend payments and payments under bond issues were made. As a number, the payments remained at the same level but the amount of the dividend payments through the system of the Central Depository increased twofold. The number of information reports, prepared for the companies which have issued dematerialized financial instruments for purposes related to the activity of governmental and other institutions, remained at a significant level. In 2011, 1,041 security holder registers were provided. During the period the number of assigned ISIN was 104, as compared with 111 in 2010. In 2011, the Central Depository undertook actions to update information about the companies which have issued dematerialised financial instruments consistent with data entered into the Commercial Register with the Registry Agency. This was due to the circumstance that changes have been entered into the registry record of some companies while the information thereon has not been sent to the Central Depository. Issues of companies which have been deleted from the Commercial Register were deregistered from the register of the Central Depository. On the basis the synchronization being carried out, a more secure system for the collection of the obligations of the companies which have issued dematerialized financial instruments to the depository would be established, while, on the other hand, issues of companies which have been deleted from the Commercial Register with the Registry Agency would be deregistered from the register with the Central Depository REPORT AS AT 31 DECEMBER 2011 12
Servicing of special pledges and other collateral The activity related to servicing special pledges is performed in compliance with the requirements of the Special Pledges Act, the Regulation on the Structure and Activity of the Central Register of Special Pledges at the Ministry of Justice, the Financial Collateral Agreements Act and the Rules and Regulations of the Central Depository. In compliance with the effective changes to the Private Enforcement Agents Act, the new Service Price Tariff of the Central Depository, effective as of 31 January 2011, introduced a fee for the provision of services to enforcement agents, namely: distraint registration fee; discharge of distraint fee; fee for preparing report on financial instrument holdings requested by an enforcement agent; fee for preparing report on registered liens on debtor s financial instruments. In 2011, a total of 370 entries were made in the Special Pledges Register, of which: 66 entries of special pledges; 170 distraints; 134 entries of other circumstances (deletion of a pledge, discharge of a distraint, entry of changes, etc.). For this period, in 31 cases securities were blocked and in 9 cases unblocked. A total of 15 entries were made in the register of financial collateral agreements. Information system In 2011, the Central Depository continued its work on the improvement of the information system in compliance with the objectives set out in the Development Strategy of the Central Depository to improve the ongoing servicing of Depository s clients. Information system changes and implementation of new modules are being agreed on an ongoing basis with market participants (representatives of investment intermediaries organizations) aiming directly at satisfying in full their requirements and needs. Two meeting and a training seminar were held in relation to the designing of company s new information system. The scope of the information reports which can be ordered and received by issuers via the Central Depository s official website was expanded. Software for automatic processing of requests for information reports submitted by private enforcement agents is also being developed. REPORT AS AT 31 DECEMBER 2011 13
In compliance with the objectives set out in the Development Strategy, the Central Depository carried out tests and accepted the application software for the new information system: Registries module, Corporate Actions module, Clearing module, Settlement module, Custodian Services module and Securities Lending module. This expansion of system functionalities corresponds to the needs of market participants and ensures compliance with the standards for technical and operational compatibility with the EU depository institutions. In 2010, the Central Depository took part in an open application procedure BG161PO003-2.1.08 Fulfilling Internationally Recognised Standards under Operational Program Development of the Competitiveness of Bulgarian Economy with the project Raising the competitiveness of the Central Depository under the conditions of integration of EU national capital markets through ensuring continuity and safety of data flows and assets and certification under ISO 27001:2005. Project costs amounted to BGN 202,114 while the amount of awarded grant which could be obtained by the Central Depository under the requirements of the procedure and the particular project proposal amounts to BGN 148,318. In 2011, the Central Depository commenced the implementation of the project and in June 2011, Financial Grant Agreement No ZMS-02-186/01.06.2011 was signed. In 2011, part of the activities related to the implementation of the project were carried out, i.e.: Selection of a Contractor within the meaning of Art. 12, para 2(2) of Regulation of the Council of Ministers No 55 of 12 March 2007 to provide services with a subject Consultation Services to Design and Implement an Information Security Management System under ISO 27001:2005, and Approval and coordination of documentation for the open application procedure with a subject Supply, Installation and Putting into Operation of Equipment and Software for the Central Depository AD within the Framework of Financial Grant Agreement No ZMS-02-186/01.06.2011 with the Bulgarian Small and Medium Enterprises Promotion Agency. In the course of project execution, the Central Depository will be certified under ISO/IEC 27001:2005, one of the main standards for information security, will implement the information security system under ISO 27001:2005, and will purchase IT equipment /servers and software/, facilitating the efficient implementation of the management system. REPORT AS AT 31 DECEMBER 2011 14
ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 STATEMENT OF COMPREHENSIVE INCOME 1 STATEMENT OF FINANCIAL POSITION 2 STATEMENT OF CASH FLOWS 3 STATEMENT OF CHANGES IN EQUITY 4 NOTES TO THE ANNUAL FINANCIAL STATEMENTS 1. BACKGROUND CORPORATE INFORMATION 5 3. OPERATING REVENUE 26 4. OTHER OPERATING INCOME 26 5. MATERIALS AND CONSUMABLES USED 26 6. HIRED SERVICES EXPENSE 27 7. EMPLOYEE BENEFITS EXPENSE 27 8. OTHER OPERATING EXPENSES 28 9. FINANCE INCOME 28 10. INCOME TAX EXPENSE 29 11. MACHINERY AND EQUIPMENT 30 12. INTANGIBLE ASSETS 31 13. DEFERRED TAX ASSETS 31 14. TRADE RECEIVABLES 32 15. OTHER CURRENT ASSETS 32 16. CASH AND CASH EQUIVALENTS 34 17. EQUITY 34 18. RETIREMENT BENEFIT OBLIGATIONS 35 19. TRADE PAYABLES 37 20. PAYABLES TO THIRD PARTIES 37 21. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 38 22. GUARANTEE FUND PAYABLES 38 23. TAX PAYABLES 38 24. OTHER CURRENT LIABILITIES 38 25. FINANCIAL RISK MANAGEMENT 39 26. RELATED PARTIES AND RELATED PARTY TRANSACTIONS 44 27. CONTINGENT LIABILITIES AND COMMITMENTS 45
1. BACKGROUND CORPORATE INFORMATION Central Depository AD is a business entity established in 1996 to maintain the national registration system and the system for settlement of corporate dematerialised securities. Company s seat and address of management is at 10, Tri Ushi Street, Sofia. It was registered by Decision No. 1/29 August 1996 of the Corporate Department at Sofia City Court under Company File No. 109211 of 1996 Registry. 1.1. Ownership, legal status and governance Central Depository AD (the Depository) is a non-public joint-stock company. Company s capital as at 31 December 2011 was distributed in 10,000 dematerialised registered shares with par value of BGN 100 each. By a decision of the General Meeting of Shareholders, held on 22 June 2009, by virtue of Art. 246, par. 4 of the Commercial Act, the capital was increased from BGN 100,000 to BGN 1,000,000 through an increase of the par value of shares from BGN 10 to BGN 100. The capital increase is part of the Reserve Fund amount. The structure of the joint-stock (share) capital is as follows: 31.12.2011 31.12.2010 % interest % interest The State through: Ministry of Finance 43.70 21.90 Privatisation and Post-privatisation Control Agency - 1.80 Bulgarian National Bank - 20.00 Banks 37.01 38.41 Other 19.29 17.89 100.00 100.00 Because of the special functions (Note 1.2) assigned to the Central Depository its legal status has specific characteristics stipulated in the Public Offering of Securities Act. Amendments to the Public Offering of Securities Act (POSA) were passed in 2011 whereby certain characteristic features of Central Depository status were changed as follows: The pre-amendment provisions of POSA were effective until 29 July 2011, namely: The Reserve Fund shall be set aside from the excess of revenue over the expenses for the respective period; The Company shall not form profit for taxation purposes nor for distribution in favour of its shareholders, i.e. no dividend shall be distributed; 5
Funds for the Guarantee Fund shall be raised from half of the excess of revenue over the expenses in line with the terms and procedures set out in the Rules and Regulations of the Central Depository; A shareholder in Central Depository AD may not hold directly or indirectly through related parties more than 5% of its shares. This restriction is not applicable to the participation of the Ministry of Finance; Bulgarian National Bank; regulated markets, respectively, market operators in cases where they are persons other than regulated markets; foreign depository or clearing institutions. The post-amendment provisions of POSA were effective as of 30 July 2011, namely: The Reserve Fund shall be set aside following the general procedure of the Commercial Act; The Company shall form profit for taxation purposes and for distribution to its shareholders; Funds for the Guarantee Fund shall be raised as deductions from the operating revenue in line with the terms and procedures set out in the Rules and Regulations of the Central Depository; Up to 10% of the Central Depository capital may be held by shareholders other than the Ministry of Finance; Bulgarian National Bank; regulated markets, respectively, market operators in cases where they are persons other than regulated markets; foreign depository or clearing institutions. No insolvency proceedings may be started with regard to the Central Depository and the latter may not be wound-up solely based on a decision of the General Meeting. Central Depository AD has one-tier management system with a Board of Directors. As at 31 December 2011 the Board of Directors was composed as follows: Penka Kratunova Chair-person; Ivan Dimov member; Nikolay Borisov member; Vasil Golemanski member; Kalinka Kirova member. The Company is represented by Ivan Dimov Executive Director. As at 31 December 2011, the total number of Company s personnel was 26 employees (31 December 2010: 26 employees). 1.2. Principal activities 6
The Central Depository maintains the national registration system for dematerialised securities and performs: registration of dematerialised securities and transfers of dematerialised securities as well as storage and maintenance of data on dematerialised securities by opening and keeping accounts of their issuers and holders; clearing and settlement of transactions with dematerialised securities including keeping of cash accounts and making payments in relation with these transactions; administration of dematerialised securities including maintenance of a register of dematerialised securities holders, distribution of dividends, interest and other payments; registration of special pledges on dematerialised securities; blocking and unblocking of dematerialised securities; other services provided for in its Rules and Regulations. The Central Depository ensures the efficient operation of the national registration system for dematerialised securities in an environment of reliability and safety of transactions performance and storage of information as well as full transparency of the terms and conditions of the services provided. 1.3. Main indicators of the economic environment The main economic indicators of the business environment that have affected the Company s activities throughout the period 2009 2011, are presented in the table below: Indicator 2009 2010 2011 GDP in million levs 68,322 70,511 75,265 Actual growth of GDP -5.50% 0.40% 1.70% Year-end inflation 0.60% 4.50% 2.80% Average exchange rate of USD for the year 1.40 1.4779 1.4065 Exchange rate of the USD at the year-end 1.36 1.4728 1.5116 Unemployment rate at the year-end 9.10% 9.24% 10.40% Basic interest rate at the year-end 0.55% 0.18% 0.22% Source: BNB 1.4. Effects of the financial crisis in the period 2008-2011 and measures undertaken by the Company The financial crisis affects adversely the capital market activities and respectively, the volume of services provided by the Central Depository. The negative trend is observed in the following main directions: decrease in the volume of exchange trade; 7
increase in the number of investment intermediaries who voluntarily suspend their activities; difficulties in servicing the payments under bond issues; general decrease in companies abilities for dividends payment; increase in the activities of enforcement agents for compulsory collection of receivables undertaking of particular actions for optimisation of indirect operating expenses on ordinary activities. In addition, the Depository started investing significant resources for upgrading of its information system and establishing direct connection to an international depository institution. 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 2.1. Basis for the preparation of the financial statements The financial statements of Central Depository AD have been prepared in accordance with all International Financial Reporting Standards (IFRS), which comprise Financial Reporting Standards and the International Financial Reporting Interpretations Committee (IFRIC) interpretations, approved by the International Accounting Standards Board (IASB), as well as the International Accounting Standards (IAS) and the Standing Interpretations Committee (SIC) interpretations, approved by the International Accounting Standards Committee (IASC), which are effectively in force on 1 January 2011 and have been accepted by the Commission of the European Union. For the current financial year the Company has adopted all new and/or revised standards and interpretations, issued by the International Accounting Standards Board (IASB) and respectively, by the International Financial Reporting Interpretations Committee (IFRIC), which are relevant to its activities. The accounting policy of the Company for the financial year 2010 included early application of the amended standard IAS 24 Related Party Disclosures (in force for annual periods beginning on or after 1 January 2011 - endorsed by EC). The amendments are focused on improvement of the definition for the scope and types of related parties and introduce a specific rule for a partial exemption from full disclosure regarding related parties government bodies at international, national and local level and other entities owned thereby types of relations, accounts and balances and transactions with them. The effects of this application had a general impact on the scope and disclosure approach in Company s financial statements with regard to transactions and balances with related parties with government participation in ownership. The adoption of the other standards and/or interpretations, effective for annual periods beginning on 1 January 2011, has not resulted in changes in Company s accounting policies, except for some new disclosures and expanding of those already established, however, not resulting in other changes in the classification or valuation of individual reporting items and transactions. 8
These standards and interpretations include: IFRS Improvements (May 2010) - improvements in IAS 1, 27, 28, 34, IFRS 1, 3 and 7 and IFRIC 13 (in force for annual period beginning on or after 1 January 2011 (or 1 July 2010) endorsed by EC). These improvements introduce partial amendments in the respective standards primarily with a view to remove existing inconsistency in the application rules and requirements of individual standards as well as to set up more precise terminology with regard to: (a) presentation of the analysis of other comprehensive income (by item in a separate note or in the statement of changes in equity); (b) the approach for a measurement choice of the non-controlling interest, the presentation of the contingent consideration and all share-based payment transactions, which are part of business combinations from the amendment of IFRS 3 (2008); (c) improvement of the qualitative disclosures on the risks associated with financial instruments together with the quantitative ones and the disclosures on the collateral held; (d) enhanced disclosure requirements for interim financial reporting regarding all significant events and transactions, including changes in fair values, transfers and classification of financial instruments, and financial information update compared to the most recent annual financial statements; (e) corresponding changes for prospective application in associates and joint ventures according to the amendments to IAS 27 (2008); (f) clarification of the term 'fair value' for the purpose of measuring the award credits in customer loyalty programmes. With regard to the other standards and interpretations, stated below, the management has assessed their possible effect and has decided that they would not have an impact on the accounting policies and respectively, on Company s assets, liabilities, transactions and performance due to the fact that the Company does not possess/operate such items and/or does not perform similar deals and transactions: IAS 32 (amended) Financial Instruments: Presentation (in force for annual periods beginning on or after 1 February 2010 endorsed by EC as from 1 February 2010) regarding the classification of issued rights. The amendment is aimed as a clarification of the treatment of rights, options and warrants for acquisition of a fixed number of entity s equity instruments for a fixed amount of any currency as equity instruments if they are offered on pro rata basis to all existing owners of the same class non-derivative equity instruments. IFRIC 14 Prepayments of a Minimum Funding Requirement under IAS 19 (in force for annual periods beginning on or after 1 January 2011 endorsed by EC as from 1 January 2011). The amendment provides clarifications on defining the existing economic benefit of prepayments of minimum funding requirements, available as a reduction in future contributions in the two cases of existence or non-existence of a minimum funding requirement for contributions relating to future service and the possibility such prepayments to be recognised as an asset. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (in force for annual periods beginning on or after 1 July 2010 endorsed by EC as from 1 July 2010). This interpretation sets out clarifications on the accounting treatment of transactions related to 9
settlement, in full or in part, of financial liabilities to creditors through the issue of equity instruments by debtor measurement of the equity instruments as a consideration paid and treatment of the resulting differences between the measurement of the equity instruments and that of the financial liability, as well as certain limitations of application. At the date when these financial statements were approved for issue, there had been several new standards, amended/revised standards and interpretations issued but not yet in force (and/or not endorsed by EC) for annual periods beginning on or after 1 January 2011, which were not adopted by the Company for early application. Some of them are accepted as effective for 2011 but for annual periods beginning after 1 January 2011 while others for annual periods beginning on or after 1 January 2012. Out of these, the management has concluded that the following is likely to have potential impact in the future resulting in changes in the accounting policies and the financial statements of the Company for subsequent periods: IAS 19 (amended) Employee Benefits (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC). The amendment changes the accounting for defined benefit plans and termination benefits. The fundamental change is the elimination of the 'corridor' approach and the introduction of the rule that all subsequent remeasurements (referred to so far as actuarial gains or losses) of defined benefit obligations and plan assets shall be recognised when occurred in a component of 'other comprehensive income', as well as the accelerated recognition of past service costs. In addition, with regard to the stated below new standards, amended/revised standards and new interpretations that have been issued but not yet in force for annual periods beginning on or after 1 January 2011, the management has judged that they are unlikely to have potential impact resulting in changes in the accounting policies and the financial statements of the Company for subsequent reporting periods: IAS 1 (amended) Presentation of Financial Statements (in force for annual periods beginning on or after 1 July 2012 not endorsed by EC); IFRS 7 (amended) Financial Instruments: Disclosures" regarding the relief from the requirement to restate comparatives and the related thereto disclosures when applying IFRS 9 (in force for annual periods beginning on or after 1 January 2015 not endorsed by EC); IFRS 9 (issued in November 2009 and October 2010) "Financial Instruments: Classification and Measurement" (in force for annual periods beginning on or after 1 January 2013 and revised effective date for annual periods beginning on or after 1 January 2015 not endorsed by EC); IAS 12 (amended) Income Taxes (in force for annual periods beginning on or after 1 January 2012 not endorsed by EC); IFRS 13 Fair Value Measurement (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC). 10
IAS 27 (as revised in 2011) Separate Financial Statements (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC); IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC); IAS 32 (amended) Financial Instruments: Presentation" (in force for annual periods beginning on or after 1 January 2014 not endorsed by EC); IFRS 7 (amended) Financial Instruments: Disclosures regarding the offsetting of financial assets and financial liabilities (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC); IFRS 10 Consolidated Financial Statements (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC); IFRS 11 Joint Arrangements (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC); IFRS 12 Disclosing of Interest in Other Entities (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC); IFRIC 20 "Stripping Costs in the Production Phase of a Surface Mine" (in force for annual periods beginning on or after 1 January 2013 not endorsed by EC). The financial statements of the Company have been prepared on a historical cost basis. The Company keeps its accounting books in Bulgarian lev (BGN), which is accepted as being its presentation currency. The data in the financial statements and the notes thereto is presented in thousand Bulgarian levs (BGN 000) except where it is explicitly stated otherwise. The presentation of financial statements in accordance with International Financial Reporting Standards requires the management to make best estimates, accruals and reasonable assumptions that affect the reported values of assets and liabilities, the amounts of income and expenses and the disclosure of contingent receivables and payables as at the date of the financial statements. These estimates, accruals and assumptions are based on the information, which is available at the date of the financial statements, and therefore, the future actual results might be different from them (whereas in the conditions of financial crisis the uncertainties are more significant). The items presuming a higher level of subjective assessment or complexity or where the assumptions and accounting estimates are material for the financial statements, are disclosed in Note 2.18. 2.2. Comparatives The accompanying financial statements of the Company include comparative information for one prior year. Where necessary, comparative data is reclassified for the purpose of achieving comparability in view of the current year presentation changes. 11
2.3. Functional currency and recognition of exchange differences The functional and presentation currency of the Company is the Bulgarian Lev. Starting from 1 July 1997 the Bulgarian Lev was fixed under the Bulgarian National Bank Act to the German Mark at the ratio of BGN 1 : DEM 1, and with the introduction of the Euro as the official currency of the European Union, it was fixed to the Euro at a ratio of BGN 1.95583 : EUR 1. Upon its initial recognition, a foreign currency transaction is recorded in the functional currency whereas the exchange rate to BGN at the date of the transaction or operation is applied to the foreign currency amount. Cash and cash equivalents, receivables and payables, as monetary reporting items, denominated in foreign currency, are recorded in the functional currency by applying the exchange rate as quoted by the Bulgarian National Bank (BNB) for the last working day of the respective month. At 31 December, these amounts are valued in BGN at the closing exchange rate of BNB. The non-monetary items in the statement of financial position, which are initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the date of the transaction and are not subsequently revalued at the closing exchange rate. Foreign exchange gains or losses arising on the settlement or recording of foreign currency commercial transactions at rates different from those, at which they were converted on initial recognition, are recognised in the statement of comprehensive income (within profit or loss for the year) in the period in which they arise and are presented under other operating income or losses, net. 2.4. Revenue Revenue is recognised on accrual basis and to the extent and in the way the economic benefits will flow to the Company and respectively, the business risks are born thereby, and as far as revenue can be reliably measured. Upon rendering of services, revenue is recognised by reference to the stage of completion of the transaction at the end of each reporting period, if this stage as well as the transaction and completion costs, can be measured reliably. Service revenue usually includes: fees for maintenance of the registry of shareholders/bond holders; annual membership fees for the Depository; fees for registration/deregistration of securities issue; fees for investment intermediary services, etc. and are recognised for the period of service rendering. Upon sale of non-current assets, revenue is recognised when all significant risks and rewards of ownership have passed to the buyer. Finance income is included in the statement of comprehensive income (within profit or loss for the year) when earned and is comprised of interest income on placed investment-purpose deposits. foreign exchange gains on foreign currency transactions and loans, net. They are presented separately from finance costs in the statement of comprehensive income (within profit or loss for the year). 12
Interest income is recognised as accrued and is included in current profit or loss proportionally with the time of the existence of the respective interest-bearing asset based on the effective interest method. Interest income on current accounts is included in the statement of comprehensive income (within profit or loss for the year) when earned and is presented in the item other operating income or losses, net. Net foreign exchange differences related to cash, trade receivables and payables, denominated in foreign currency, are recognised in the statement of comprehensive income (within profit or loss for the year) when they arise and are presented net under other operating income or losses, net. Dividend income is recognised in current profits or losses and is presented in the statement of comprehensive income on the date that the Company s right to receive payment is established as a result of a decision taken by shareholders for the distribution of accumulated profits and reserves. Dividends and interest from investment in shares and securities are treated and presented in the statement of comprehensive income (within profit or loss for the year) as finance income. 2.5. Expenses Expenses are recognised as they are incurred, following the accrual and matching concepts (to the extent that this would not cause items unsatisfying the definitions of assets and liabilities to be recognised in the statement of financial position). Deferred expenses are put off and recognised as current expenses in the period when the contracts, whereto they refer, are performed. Finance costs are included in the statement of comprehensive income (within profit or loss for the year) when incurred and are comprised of interest expense, including bank charges and other direct expenses on loans and bank guarantees, exchange differences on loans denominated in foreign currency (net). Expenses related with deductions from Company's operating revenue for setting aside a Guarantee Fund are presented on the line 'other expenses' in the statement of comprehensive income (within profit or loss for the year). 2.6. Machinery and equipment Machinery and equipment (tangible fixed assets) are presented in the financial statements at historical cost of acquisition (cost) less the accumulated depreciation and any impairment losses in value. Initial measurement Upon their initial acquisition machinery and equipment are valued at cost, which comprises the purchase price, including customs duties and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site 13