Financial Statements Translated from the Czech original
Financial Statements Contents Independent Auditor s Report 3 Balance Sheet 5 Income Statement 6 Statement of Changes in Equity 7 Statement of Cash Flows 8 9-2 -
Income Statement 1 Apr 31 Dec 2007 1 Apr 2006 31 Mar 2007 Note Interest income 16 1,879,330 2,371,361 Interest expense 16 (308,944) (328,032) Net interest income 1,570,386 2,043,329 Fee and commission income 17 240,125 314,745 Fee and commission expense 18 (239,990) (283,213) Net fee and commission income 135 31,532 Other operating income 19 24,466 21,815 Operating income 1,594,987 2,096,676 Impairment losses 20 (242,486) (319,335) Net expense related to credit risk insurance 21 (204,786) (335,874) General administrative expenses 22 (666,756) (815,117) Operating expenses (1,114,028) (1,470,326) Profit before tax 480,959 626,350 Income tax expense 23 (119,320) (142,062) Net profit for the period 361,639 484,288-6 -
Statement of Changes in Equity Share Statutory Retained capital Other capital reserve fund earnings Total Balance as at 1 April 2006 300,000 344,068 27,000 480,802 1,151,870 Transfers - - 25,000 (25,000) - Net profit for the period - - - 484,288 484,288 Balance as at 31 March 2007 300,000 344,068 52,000 940,090 1,636,158 Share Statutory Retained capital Other capital reserve fund earnings Total Balance as at 1 April 2007 300,000 344,068 52,000 940,090 1,636,158 Transfers - - 25,000 (25,000) - Dividends to shareholders - - - (250,005) (250,005) Net profit for the period - - - 361,639 361,639 Balance as at 31 December 2007 300,000 344,068 77,000 1,026,724 1,747,792-7 -
Statement of Cash Flows 1 Apr 31 Dec 2007 1 Apr 2006 31 Mar 2007 Note Operating activities Profit before tax 480,959 626,350 Adjustments for: Depreciation and amortization 22 22,332 36,675 Gain on disposal of property, equipment and intangible assets (1,161) (2,434) Impairment losses 20 242,486 319,335 Interest expense 16 308,944 328,032 Net operating cash flow before changes in working capital 1,053,560 1,307,958 Change in due from banks and other financial institutions 279,643 189,160 Change in loans to customers (1,447,518) (1,272,258) Change in other assets 85,645 (67,181) Change in other liabilities 366,475 90,337 Cash flows from operations 337,805 248,016 Income tax paid (197,782) (44,920) Interest paid (241,987) (364,807) Cash flows used in operating activities (101,964) (161,711) Investing activities Proceeds from sale of property, equipment and intangible assets 1,161 4,513 Acquisition of property, equipment and intangible assets (24,276) (28,300) Cash flows used in investing activities (23,115) (23,787) Financing activities Dividends paid to shareholders (250,005) - Proceeds from the issue of debt securities - 5,043,789 Proceeds from due to banks and other financial institutions 1,100,000 5,175,000 Repayment of debt securities issued (720,000) (3,898,830) Repayment of due to banks and other financial institutions (450,000) (5,815,000) Cash flows (used in)/from financing activities (320,005) 504,959 Net (decrease)/increase in cash and cash equivalents (445,084) 319,461 Cash and cash equivalents at 1 April 5 805,959 486,498 Cash and cash equivalents at 31 December 2007 (31 March 2007) 5 360,875 805,959-8 -
1. Description of the Company Home Credit a.s. ( the Company ) was established through demerger of its legal predecessor, Home Credit Finance a.s. The demerger was recorded in the Commercial Register in October 2005 and for financial reporting purposes is effective from 3 January 2005. Registered office Home Credit a.s. Moravské náměstí 249/8 602 00 Brno Czech Republic Shareholders Country of incorporation Ownership interest (%) 31 December 2007 31 March 2007 Home Credit B.V. Netherlands 100.00 100.00 The ultimate controlling entity is PPF Group N.V. registered in the Netherlands. Board of Directors Supervisory Board Erich Čomor Chairman Pavel Pfauser Chairman Ladislav Chvátal Deputy Chairman Karla Henčlová Member Martin Vetýška Member Pavel Vyhnálek Member Luboš Berkovec Member (since 1 May 2007) Milan Dočkal Member (until 30 April 2007) Principal activities The principal activity of the Company is the provision of consumer financing to private individual customers in the Czech Republic. 2. Basis of preparation (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ), including International Accounting Standards ( IASs ), promulgated by the International Accounting Standards Board ( IASB ) and interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) of the IASB as adopted by the European Union. (b) Basis of measurement The financial statements have been prepared on the historical cost basis. The Company does not hold or issue financial instruments at fair value through profit or loss or financial instruments classified as available-for-sale which would be otherwise measured at fair value. Other financial assets and liabilities and non financial assets and liabilities which are measured at historical cost are stated at amortized cost or historical cost, as appropriate, net of any relevant impairment. - 9 -
2. Basis of preparation (continued) (c) Presentation and functional currency These financial statements are presented in Czech Crowns ( CZK ), which is the Company s functional currency. Financial information presented in CZK has been rounded to the nearest thousand ( ). (d) Reporting period The financial statements are presented. The comparative figures are presented for the period from 1 April 2006 to 31 March 2007. Reporting period was changed to be consistent with reporting period of the parent and simplify the consolidation process. (e) Comparative figures The comparative figures have been regrouped or reclassified, where necessary, on a basis consistent with the current period. Financial information related to the income statement are not fully comparable with the previous period as the current reporting period was changed from 12 to 9 months. (f) Use of estimates and judgments The preparation of the financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgments about the carrying values of assets and liabilities that cannot readily be determined from other sources. The actual values 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 made by the management in preparing these financial statements in respect of impairment recognition is described in Note 3(c). 3. Significant accounting policies The following significant accounting policies have been applied in the preparation of the financial statements. (a) Foreign currency transactions A foreign currency transaction is a transaction that is denominated in or requires settlement in a currency other than the functional currency. The functional currency is the currency of the primary economic environment in which an entity operates. For initial recognition purposes, a foreign currency transaction is translated into the functional currency using the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to at the foreign exchange rate ruling at the date of the transaction. Foreign exchange differences arising on retranslation are recognized in profit or loss. (b) Cash and cash equivalents The Company considers cash in hand, current accounts and balances with banks and other financial institutions due within one month to be cash and cash equivalents. - 10 -
3. Significant accounting policies (continued) (c) Financial instruments (i) Classification The Company classifies all its financial instruments as loans and receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Company intends to sell immediately or in the near term, those that the Company upon initial recognition designates as at fair value through profit or loss, or those where its initial investment may not be substantially recovered, other than because of credit deterioration. The Company does not hold or issue financial instruments at fair value through profit or loss, held-to-maturity investments nor financial instruments classified as available for sale. (ii) Recognition Financial assets and liabilities are recognized in the balance sheet when the Company becomes a party to the contractual provisions of the instrument. (iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, loans and receivables are measured at amortized cost less impairment losses. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. (iv) Amortized cost measurement principles The amortized cost of a financial asset or liability is the amount in which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, net of any relevant impairment. (v) Gains and losses on subsequent measurement For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in the income statement when the financial asset or liability is derecognized or impaired, and through the amortization process. - 11 -
3. Significant accounting policies (continued) (c) Financial instruments (continued) (vi) Identification and measurement of impairment Financial assets not carried at fair value consist principally of loans, balances with financial institutions and other receivables ( loans and receivables ). The Company assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired on a regular basis. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets, and that the loss event as an impact on the future cash flows on the asset that can be estimated reliably. The Company considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortized cost) with similar risk characteristics. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial assets, whether significant or not, it includes the assets in a group of financial assets with similar risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a financial asset has been incurred, the amount of the loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the financial asset s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. Financial assets with a short duration are not discounted. In some cases the observable data required to estimate the amount of an impairment loss on a financial asset may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Company uses its experience and judgment to estimate the amount of any impairment loss. All impairment losses in respect of financial assets are recognized in the income statement and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount of the asset that would have been determined, net of amortization, if no impairment loss had been recognized. (vii) Derecognition The Company derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized separately as asset or liability. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. - 12 -
3. Significant accounting policies (continued) (c) Financial instruments (continued) (viii)offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. (ix) Net investment in finance lease When the Company provides finance under a finance lease, the present value of the lease payments is recognized as net investment in finance leases in the balance sheet. Lease payments include repayment of the finance lease principal and interest income. The recognition of the interest is based on a variable interest rate, which is applied to the net investment (principal) outstanding in respect of the finance lease. Income from finance leases is allocated over the lease term on a systematic basis. (d) Intangible assets (i) Other intangible assets Intangible assets, which are acquired by the Company, are stated at cost less accumulated amortization and accumulated impairment losses (refer to Note 3(g) below). Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. (ii) Amortization Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Other intangible assets are amortized from the date the asset is available for use. The depreciation methods, useful lives and residual values, if not insignificant, are reassessed annually. If a material technical improvement is made to an asset during the period, its useful life and a residual value is reassessed at the time a technical improvement is recognized. The estimated useful lives for the current and comparative periods are as follows: Software Other intangible assets 4 years 6 years (e) Property and equipment (i) Owned assets Items of property and equipment are stated at cost less accumulated depreciation (refer below) and accumulated impairment losses (refer to Note 3(g) below). Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost for self-constructed assets includes the cost of materials, direct labor and an appropriate proportion of production overheads. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. - 13 -
3. Significant accounting policies (continued) (e) Property and equipment (continued) (ii) Leased assets Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation (refer below) and accumulated impairment losses (refer to Note 3(g) below). Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Property and equipment used by the Company under operating leases, whereby the risks and benefits relating to ownership of the assets remain with the lessor, are not recorded in the Company s balance sheet. Payments made under operating leases to the lessor are charged to the income statement over the period of the lease. (iii) Subsequent expenditure Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditure is recognized in the income statement as an expense as incurred. (iv) Depreciation Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of the individual assets. Leased assets are depreciated over the shorter of the lease term and their useful lives. Property and equipment are depreciated from the date the asset is available for use. The depreciation methods, useful lives and residual values, if not insignificant, are reassessed annually. If a material technical improvement is made to an asset during the period, its useful life and a residual value is reassessed at the time a technical improvement is recognized. The estimated useful lives for the current and comparative periods are as follows: Buildings Office equipment Vehicles 30 years 4-12 years 4 years (f) Inventories Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to complete the sale. Where the net realizable value is below cost, inventories are written down to the lower value, and the impairment loss is recorded in the income statement. Cost of merchandise is determined using the first-in first-out method and include expenditures incurred in acquiring the inventories and bringing them to their existing condition and location. - 14 -
3. Significant accounting policies (continued) (g) Impairment of non-financial assets The carrying amounts of Company s non-financial assets, other than deferred tax assets, are revised at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognized in the income statement and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (h) Provisions A provision is recognized in the balance sheet if, as a result of a past event, the Company has a present or legal obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, 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, where appropriate, the risks specific to the liability. (i) Other payables Accounts payable arise when the Company has a contractual obligation to deliver cash or another financial asset. Accounts payable are measured at amortized cost, which is normally equal to their nominal or repayment value. (j) Equity Share capital represents the nominal value of shares issued by the Company. To the extent such shares remain unpaid as of the balance sheet date a corresponding receivable is presented as an other asset. Dividends on share capital are recognized as a liability provided that they are declared before the balance sheet date. Dividends declared after the balance sheet date are not recognized as a liability but are disclosed in the notes. The statutory reserve fund represents a fund required by the Czech Commercial Code to cover future adverse financial conditions. The Company is obliged to contribute an amount to the fund each period which is not less than 5% of its annual net profit (calculated in accordance with Czech accounting regulations) until the aggregate amount reaches a minimum level equal to 20% of the issued share capital. The statutory reserve fund is not readily distributable to shareholders. - 15 -
3. Significant accounting policies (continued) (k) Interest income and interest expense Interest income and expense are recognized in the income statement using the effective interest method. The effective interest rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition and is not revised subsequently. The calculation of the effective interest rate includes all fees and point paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. (l) Fee and commission income and expenses Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income and expense relate mainly to transaction and service fees, which are expensed as the services are received. (m) Penalty fees Penalty income is recognized in the income statement when penalty is charged to a customer, taking into account its collectability. (n) Revenue from sale of goods Revenue from sale of goods is recognized when the significant risks and rewards of ownership have been transferred to the buyer, and no significant uncertainties remain regarding the derivation of consideration, associated costs or the possible return of goods. (o) Operating lease payments Payments made under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Granted lease incentives are recognized as an integral part of the total lease expense. (p) Pensions The Government of the Czech Republic is responsible for providing pensions and retirement benefits to the Company's employees. A regular contribution linked to employees salaries is made by the Company to the Government to fund the national pension plans. Payments under these pension schemes are charged as expenses as they fall due. - 16 -
3. Significant accounting policies (continued) (q) Taxation Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries, branches and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (r) Securitization funding Securitized assets are not derecognized as the Company retains benefits and a substantial part of the risk associated with such assets. Revenues and impairment losses attributable to securitized assets as well as expenses incurred by special purpose entities involved in the securitization structure which are effectively borne by the Company are recognized in the Company s income statement. Debt securities issued by the special purpose entities are recognized as a liability of the Company. Amounts receivable from and payable by the Company to the special purpose entities are eliminated. (s) Segment reporting The Company operates in one business and geographical segment. Therefore separate segment reporting is not presented. - 17 -
3. Significant accounting policies (continued) (t) New standards and interpretations not yet adopted A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2007, and have not been applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the Company s operations. The Company plans to adopt these pronouncements when they become effective. The Company has not yet analyzed the likely impact of these new standards on its financial statements. IFRS 8 Operating Segments, which is effective for annual periods beginning on or after 1 January 2009. The Standard will require segment disclosure based on the components of the entity that management used to make decisions about operating matters. IAS 23 Borrowing costs (revised March 2007), which is effective for annual periods beginning on or after 1 January 2009. The Standard will remove the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. IFRIC 11 IFRS 2 Group and Treasury Share Transactions, which is effective for annual periods beginning on or after 1 March 2007. The Interpretation and the Standard will require a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. IFRIC 12 Service Concession Arrangements, which is effective for annual periods beginning on or after 1 January 2008. The Interpretation will provide guidance on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. IFRIC 13 Customer Loyalty Programmes, which is effective for annual periods beginning on or after 1 July 2008. The Interpretation will address the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, which is effective for annual periods beginning on or after 1 January 2008. The Interpretation and the Standard will clarify when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provide guidance on the impact of minimum funding requirements (MFR) on such assets. It will also address when a MFR might give rise to a liability. 4. Financial risk management The Company has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risks operational risks. The Board of Directors 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 conditions, products and services offered. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. - 18 -
4. Financial risk management (continued) (a) Credit risk Credit risk is the risk of financial loss occurring as a result of default by a borrower or counterparty on their obligation to the Company. The majority of the Company s exposure to credit risk arises in connection with the provision of consumer financing to private individual customers, which is the Company s principal business. As the Company s loan portfolio consists of large amount of loans with relatively low outstanding amounts, the loan portfolio does not comprise any significant individual items. The Board of Directors has delegated responsibility for the management of credit risk to the Credit Committee. A separate credit risk department, reporting to the Credit Committee, is responsible for oversight of the Company s credit risk, including: Formulating credit policies in consultation with business departments; Establishing the authorization structure for the approval and renewal of credit facilities; Reviewing and assessing credit risk; Limiting concentrations of credit exposures; Developing and maintaining the Company s risk gradings; Reviewing compliance of business departments with agreed exposure limits; Providing advice, guidance and specialist skills to business departments to promote best practice throughout the Company in the management of credit risk. Exposure to credit risk Note Loans to customers 31 Dec 2007 31 Mar 2007 Individually impaired Gross amount 7,708 12,178 Allowance for impairment 7 (129) (115) Carrying amount 7,579 12,063 Collectively impaired Gross amount 11,726,765 10,285,300 Current 8,357,558 7,155,896 Past due 1 90 days 1,194,903 1,112,968 Past due 91 360 days 443,960 465,437 Past due more than 360 days 1,730,344 1,550,999 Allowances for impairment 7 (2,089,160) (1,886,182) Carrying amount 9,637,605 8,399,118 Not impaired 14,648 25,667 Total carrying amount 7 9,659,832 8,436,848 The Company does not require a collateral for the customer loans. From the beginning of 2002 the Company has obtained insurance to cover the credit risk arising from loans to customers. New consumer and cash loan contracts are currently entering into insurance while revolving loan contracts are not being insured. The balance of insured receivables amounts to 4,154,190 (31 March 2007: 2,805,234). - 19 -
4. Financial risk management (continued) (b) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations from its financial liabilities. The Company s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company s reputation. Finance department collects information from other departments regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Portfolio of short-term liquid assets is maintained to ensure sufficient liquidity. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. - 20 -
4. Financial risk management (continued) Home Credit a.s. (b) Liquidity risk (continued) Exposure to liquidity risk The following table shows assets and liabilities by remaining contractual maturity dates. Less than 1 month 1 to 3 months 3 months to 1 year 31 Dec 2007 31 Mar 2007 More 1 to 5 than 5 No Less than 1 to 3 3 months years years maturity Total 1 month months to 1 year 1 to 5 years No maturity Total Assets Cash and cash equivalents 360,875 - - - - - 360,875 805,959 - - - - 805,959 Due from financial institutions - - 814,746 - - - 814,746-1,094,389 - - - 1,094,389 Loans to customers 494,515 942,136 3,459,412 4,510,717 253,052-9,659,832 455,247 942,120 3,422,555 3,616,926-8,436,848 Intangible assets - - - - - 13,382 13,382 - - - - 14,725 14,725 Property and equipment - - - - - 35,660 35,660 - - - - 32,143 32,143 Deferred tax asset - - - 270 - - 270 - - - - - - Other assets 103,336 32,989 20,006 25,616 24,170 8,060 214,177 85,001 36,738 95,356 76,634 24,045 317,774 Total assets 958,726 975,125 4,294,164 4,536,603 277,222 57,102 11,098,942 1,346,207 2,073,247 3,517,911 3,693,560 70,913 10,701,838 Due to financial institutions (351,300) (456,701) (626,616) - - - (1,434,617) (200) (697,974) (2,572) (108) - (700,854) Debt securities issued (98,984) - - (7,063,449) - - (7,162,433) - - (35,023) (7,794,678) - (7,829,701) Current income tax payable - - (92,187) - - - (92,187) - - (139,016) - - (139,016) Deferred tax liability - - - - - - - - - - (31,266) - (31,266) Other liabilities (583,914) (71,227) (6,772) - - - (661,913) (293,027) (32,512) (20,456) (18,848) - (364,843) Total liabilities (1,034,198) (527,928) (725,575) (7,063,449) - - (9,351,150) (293,227) (730,486) (197,067) (7,844,900) - (9,065,680) Net position as at 31 December 2007 (31 March 2007) (75,472) 447,197 3,568,589 (2,526,846) 277,222 57,102 1,747,792 1,052,980 1,342,761 3,320,844 (4,151,340) 70,913 1,636,158-21 -
4. Financial risk management (continued) (c) Market risk Market risk is the risk that changes in market prices, such as interest rates or foreign exchange rates will affect the Company s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters. The Company does not maintain trading portfolio. The majority of the Company s exposure to market risk arises in connection with the funding of the Company s operations with liabilities denominated in foreign currencies, and to the extent the term structure of interest bearing assets differs from that of liabilities. Exposure to interest rate risk The principal risk to which the Company is exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands. The Finance department is the monitoring body for compliance with these limits. A summary of the Company s interest rate gap position is provided below. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Company s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered include a 100 basis point parallel fall or rise in all yield curves worldwide. In such case, the net interest income would be approximately 54,233 higher/lower (the period from 1 April 2006 to 31 March 2007: 69,659). Exposure to foreign currency risk The Company has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecast assets in a foreign currency are either greater or less than the liabilities in that currency. Foreign currency risk is managed principally through monitoring foreign currency mismatches in the structure of assets and liabilities. It is the Company s policy to hedge such mismatches by derivative financial instruments to eliminate the foreign currency exposure. As a result, the Company's exposure to foreign exchange risk is limited. The Finance department is the monitoring body for compliance with this rule. A summary of the Company s foreign currency position is provided below. - 22 -
4. Financial risk management (continued) Home Credit a.s. (c) Market risk (continued) Interest rate gap position Effective interest rate Interest bearing financial assets Less than 3 months 3 to 12 months 31 Dec 2007 31 Mar 2007 More Effective 1 to 2 2 to 5 than 5 interest Less than 3 to 12 1 to 2 years years years Total rate 3 months months years 2 to 5 years Total Cash and cash equivalents* 0.0% 358,754 - - - Due from banks and other financial institutions* 6.6% - 814,746 - - - - 358,754 0.3% 804,156 - - - 804,156 814,746 5.5% 1,094,389 - - - 1,094,389 Loans to customers* 25.0% 1,422,003 3,459,412 2,990,270 1,520,447 253,052 9,645,184 26.4% 1,397,367 3,422,555 2,824,871 792,055 8,436,848 Interest bearing financial liabilities Due to banks and other financial institutions 5.2% (885,691) (548,926) - - - (1,434,617) 3.6% (698,174) (2,572) (108) - (700,854) Debt securities issued 4.7% (7,162,433) - - - *These assets bear interest at a fixed rate. - (7,162,433) 4.3%(4,794,678) (3,035,023) - - (7,829,701) - 23 -
4. Financial risk management (continued) (c) Market risk (continued) Foreign currency position 31 Dec 2007 31 Mar 2007 Other currencies Total CZK Other currencies CZK Total Assets Cash and cash equivalents 359,280 1,595 360,875 805,067 892 805,959 Due from financial institutions 814,746-814,746 1,094,389-1,094,389 Loans to customers 9,659,832-9,659,832 8,436,848-8,436,848 Intangible assets 13,382-13,382 14,725-14,725 Property and equipment 35,660-35,660 32,143-32,143 Deferred tax asset 270-270 - - - Other assets 214,177-214,177 317,774-317,774 Total assets 11,097,347 1,595 11,098,942 10,700,946 892 10,701,838 Liabilities Due to financial institutions (1,434,617) - (1,434,617) (700,854) - (700,854) Debt securities issued (7,162,433) - (7,162,433) (7,829,701) - (7,829,701) Current income tax payable (92,187) - (92,187) (139,016) - (139,016) Deferred tax liability - - - (31,266) - (31,266) Other liabilities (569,407) (92,506) (661,913) (364,843) - (364,843) Total liabilities (9,258,644) (92,506) (9,351,150) (9,065,680) - (9,065,680) Net position as at 31 December 2007 (31 March 2007) 1,838,703 (90,911) 1,747,792 1,635,266 892 1,636,158 (d) Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Company s operations and are faced by all business entities. The Company s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. - 24 -
4. Financial risk management (continued) (d) Operational risk (continued) The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management of the Company. This responsibility is supported by the development of standards for the management of operational risk in the following areas: requirements for appropriate segregation of duties, including the independent authorization of transactions; requirements for the reconciliation and monitoring of transactions; compliance with regulatory and other legal requirements; documentation of controls and procedures; requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; requirements for the reporting of operational losses and proposed remedial action; development of contingency plans; training and professional development; ethical and business standards; risk mitigation, including insurance where this is effective. (e) Capital management The Company considers share capital, other capital, statutory reserve fund and retained earnings as a part of the capital. The Company s policy is to maintain an adequate capital base so as to maintain investor, creditor and market confidence, sustain future development of the business and meet the capital requirements related to its funding operations. There are no regulatory capital requirements for the Company and there have been no material changes in the Company s management of capital during the period. (f) Fair values of financial instruments The Company has performed an assessment of fair values of its financial instruments. Fair values have been estimated either by reference to the market value at the balance sheet date or by discounting the relevant cash flows using current interest rates for similar instruments. The Company believes that it is able to estimate fair values for the majority of its financial instruments. The Company s estimates of fair values of these instruments are not materially different from their carrying values. 5. Cash and cash equivalents 31 Dec 2007 31 Mar 2007 Cash 2,121 1,802 Current accounts 358,713 659,316 Placements with financial institutions due within one month 41 144,841 360,875 805,959-25 -
6. Due from banks and other financial institutions 31 Dec 2007 31 Mar 2007 Term deposits 814,746 1,094,389 814,746 1,094,389 Term deposits of 814,746 (31 March 2007: 1,094,389) were pledged as security for a bank loan facility drawn by a related party. 7. Loans to customers 31 Dec 2007 31 Mar 2007 Gross amount Revolving loan receivables 6,982,823 7,087,233 Cash loan receivables 2,671,275 1,453,904 Consumer loan receivables 2,060,592 1,731,424 Loans to corporations 22,356 37,845 Other 12,075 12,739 11,749,121 10,323,145 Collective allowances for impairment Revolving loan receivables (1,998,094) (1,792,525) Consumer loan receivables (67,535) (79,664) Cash loan receivables (12,333) (2,293) Other (11,198) (11,700) (2,089,160) (1,886,182) Specific allowances for impairment on loans to corporations (129) (115) (2,089,289) (1,886,297) 9,659,832 8,436,848 Consumer loan receivables and cash loan receivables in gross amount of 3,880,614 (31 March 2007: 2,787,372) were pledged as security for a bank loan facility (refer to Note 12). Furthermore, revolving loan receivables of 4,536,492 (31 March 2007: 5,015,741) represent the securitized receivables pool (refer to Note 13). Analysis of movements in allowances for impairment Note 1 Apr 31 Dec 2007 1 Apr 2006 31 Mar 2007 Balance at the beginning of the period 1,886,297 1,577,817 Impairment losses recognized in the income statement 20 224,534 322,095 Amount related to loans written off (21,542) (13,615) Balance at the end of the period 2,089,289 1,886,297 Management has estimated the impairment on loans to customers in accordance with the accounting policy described in Note 3(c). Changes in collection estimates could significantly affect the impairment losses recognized. - 26 -
8. Intangible assets Software Intangible assets not yet put in use Total Acquisition cost Balance at 1 April 2007 62,386-62,386 Additions 3,388 229 3,617 Disposals (3,766) - (3,766) Balance at 31 December 2007 62,008 229 62,237 Accumulated amortization Balance at 1 April 2007 47,661-47,661 Charge for the period 4,960-4,960 Disposals (3,766) - (3,766) Balance at 31 December 2007 48,855-48,855 Carrying amount at 1 April 2007 14,725-14,725 at 31 December 2007 13,153 229 13,382 Software Intangible assets not yet put in use Total Acquisition cost Balance at 1 April 2006 57,774 233 58,007 Additions 5,173-5,173 Transfers 233 (233) - Disposals (794) - (794) Balance at 31 March 2007 62,386-62,386 Accumulated amortization Balance at 1 April 2006 40,760-40,760 Charge for the period 7,461-7,461 Disposals (560) - (560) Balance at 31 March 2007 47,661-47,661 Carrying amount at 1 April 2006 17,014 233 17,247 at 31 March 2007 14,725-14,725-27 -
9. Property and equipment Buildings Office equipment Vehicles Other tangible assets Tangible assets not yet put in use Total Acquisition cost Balance at 1 April 2007 502 102,991 34,171 340 87 138,091 Additions 764 2,685 17,440 - - 20,889 Transfers - 87 - - (87) - Disposals - (34,865) (8) - - (34,873) Balance at 31 December 2007 1,266 70,898 51,603 340-124,107 Accumulated depreciation Balance at 1 April 2007 69 87,091 18,788 - - 105,948 Charge for the period 20 7,866 9,486 - - 17,372 Disposals - (34,865) (8) - - (34,873) Balance at 31 December 2007 89 60,092 28,266 - - 88,447 Carrying amount at 1 April 2007 433 15,900 15,383 340 87 32,143 at 31 December 2007 1,177 10,806 23,337 340-35,660 Buildings Office equipment Vehicles Other tangible assets Tangible assets not yet put in use Total Acquisition cost Balance at 1 April 2006 625 83,027 28,289 340 617 112,898 Additions - 21,651 12,008-87 33,746 Transfers - 617 - - (617) - Disposals (123) (2,304) (6,126) - - (8,553) Balance at 31 March 2007 502 102,991 34,171 340 87 138,091 Accumulated depreciation Balance at 1 April 2006 66 68,793 15,254 - - 84,113 Charge for the period 17 20,562 8,635 - - 29,214 Disposals (14) (2,264) (5,101) - - (7,379) Balance at 31 March 2007 69 87,091 18,788 - - 105,948 Carrying amount at 1 April 2006 559 14,234 13,035 340 617 28,785 at 31 March 2007 433 15,900 15,383 340 87 32,143-28 -
10. Deferred tax assets and liabilities The Company s applicable tax rate for deferred tax is 21% (31 Mar 2007: 24%). Deferred tax assets and liabilities are attributable to the following items: Assets Liabilities Net 31 Dec 2007 31 Mar 2007 31 Dec 2007 31 Mar 2007 31 Dec 2007 31 Mar 2007 Loans to customers and effect of securitization - - (6,037) (34,859) (6,037) (34,859) Finance leases - - (505) - (505) - Carrying value of property and equipment 1,907 960 - - 1,907 960 Other assets 4,905 2,430 - - 4,905 2,430 Other - 203 - - - 203 Total deferred tax assets/(liabilities) 6,812 3,593 (6,542) (34,859) 270 (31,266) Net deferred tax asset/(liability) 270 (31,266) 11. Other assets 31 Dec 2007 31 Mar 2007 Settlements with suppliers 111,955 94,087 Prepaid expenses (other than insurance) 102,747 104,918 Goods held for resale, supplies and other inventories 24,414 34,170 Insurance receivable, net 16,348 108,374 Other 1,535 1,512 256,999 343,061 Specific allowances for impairment losses on settlement with suppliers (26,480) (15,162) Specific allowances for impairment losses on goods held for resale (16,342) (10,125) (42,822) (25,287) 214,177 317,774 Analysis of movements in allowances for impairment Note 1 Apr 31 Dec 2007 1 Apr 2006 31 Mar 2007 Balance at the beginning of the period 25,287 28,933 Impairment losses recognized in the income statement 20 17,952 (2,760) Amount related to receivables written off (417) (886) Balance at the end of the period 42,822 25,287-29 -