Board of Directors (BD): Chairman of BD: Member of BD: Member of BD: Member of BD: Member of BD: Apostol Apostolov Vasil Golemanski Ivan Takev Teodora Angelova Angel Rabadzhiyski Executive Director: Vasil Golemanski Director Finance and Administration: Iskren Nikolov Chief Accountant: Galina Beleva Registered Address: 6, Tri Ushi St., floor 4, Sofia Auditors: AFA OOD
ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 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 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 7 3. OPERATING REVENUE 31 4. OTHER OPERATING INCOME 31 5. MATERIALS AND CONSUMABLES USED 31 6. HIRED SERVICES EXPENSE 32 7. EMPLOYEE BENEFITS EXPENSE 32 8. OTHER OPERATING EXPENSES 33 9. FINANCE INCOME AND COSTS 33 10. INCOME TAX EXPENSE 34 11. MACHINERY AND EQUIPMENT 35 12. INTANGIBLE ASSETS 36 13. AVAILABLE-FOR-SALE INVESTMENTS 37 13. AVAILABLE-FOR-SALE INVESTMENTS 37 14. INVESTMENTS IN ASSOCIATES 38 15. OTHER LONG-TERM RECEIVABLES 38 16. DEFERRED TAX ASSETS 40 17. TRADE RECEIVABLES 41 18. OTHER CURRENT ASSETS 42 19. CASH AND CASH EQUIVALENTS 42 20. EQUITY 43 21. GOVERNMENT GRANTS 44 22. RETIREMENT BENEFIT OBLIGATIONS 44 23. TRADE PAYABLES 47 24. PAYABLES TO THIRD PARTIES 47 25. GUARANTEE FUND PAYABLES 48 26. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 48 27. TAX PAYABLES 49 28. OTHER CURRENT LIABILITIES 49 29. FINANCIAL RISK MANAGEMENT 49 30. RELATED PARTIES AND RELATED PARTY TRANSACTIONS 55 31. CONTINGENT LIABILITIES AND COMMITMENTS 56 32. EVENTS AFTER THE REPORTING PERIOD 57
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 registered address is: 6, 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/the Company) is a non-public joint-stock company. Company s capital as at 31 December 2015 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: 31.12.2015 31.12.2014 % interest % interest Ministry of Finance 43.70 43.70 Bulgarian Stock Exchange Sofia AD 6.61 6.61 Banks 37.01 37.01 Other 12.68 12.68 100.00 100.00 The special functions (Note 1.2) assigned to the Central Depository designate also the specific characteristics of its legal status stipulated in the Public Offering of Securities Act (POSA) as follows: The Reserve Fund shall be set aside following the general procedure of the Commercial Act; The Company shall make profit for taxation purposes (as from 30 July 2011) and for distribution to its shareholders; Funds for the Guarantee Fund shall be raised as deductions from the operating revenue (as from 30 July 2011) 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. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 5
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 a one-tier management system with a Board of Directors. As at 31 December 2015 the Board of Directors was composed as follows: Apostol Apostolov Chairman; Vasil Golemanski member; Ivan Takev member; Teodora Angelova member; Angel Rabadzhiyski member. The Company is represented by Vasil Golemanski Executive Director. As at 31 December 2015, the total number of Company's personnel was 26 employees (31December 2014: 26 employees). 1.2. Principal activities The Central Depository maintains the national registration system for dematerialised securities and performs: registration of dematerialised financial instruments and transfers of dematerialised financial instruments as well as storing and maintaining of data about dematerialised financial instruments by opening and keeping accounts of their issuers and holders; clearing and settlement of transactions in dematerialised financial instruments including keeping of cash settlement accounts and making payments in relation with transactions in dematerialised financial instruments; administration of dematerialised financial instruments including maintenance of a register of holders of dematerialised financial instruments, distribution of dividends, interest and other payments; registration of special pledges on dematerialised financial instruments; blocking and unblocking of dematerialised financial instruments; other services provided for in its Rules and Regulations. In accordance with the amendments to Ordinance No 8 of the Financial Supervision Commission (FSC) on the Central Depository (SG, issue 24 of 12/03/2014), the Depository shall assume the functions of an operator of the system with settlement finality of transactions in financial instruments This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 6
within the meaning of the Payment Services and Payment Systems Act (PSPSA) in order to ensure the settlement of transactions in dematerialised financial instruments. The Central Depository shall ensure the efficient functioning of the national registration system for dematerialised financial instruments and the operated thereby settlement system in an environment of reliability and security of transactions performance and information storage as well as full transparency of the terms and conditions of the services it provides. 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 2013 2015, are presented in the table below: Indicator 2013 2014 2015 GDP in million levs* 81,971 83,612 86,650 Actual growth of GDP ** 1.3% 1.6% 3% Year-end inflation (0.9)% (2.0)% (0.9)% Average exchange rate of USD for the year 1.47 1.47 1.76 Exchange rate of the USD at year-end 1.42 1.61 1.80 Basic interest rate at year-end 0.02 0.02 0.01 Unemployment rate at year-end 11.8% 10.7% 10.0% Source: BNB * Preliminary data for year 2015 ** Preliminary data as at 30 September 2015 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 2.1. Basis for 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 beginning from 1 January 2015 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 have been relevant to its activities. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 7
The adoption of these standards and/or interpretations, effective for annual periods beginning on 1 January 2015, has not caused changes in Company s accounting policies, neither in the adopted disclosures and the classification or valuation of individual reporting items and transactions. These standards and interpretations include: Annual Improvements to IFRSs 2011-2013 Cycle (December 2013) improvements to IFRS 1, IFRS 3, IFRS 13, IAS 40 (in force for annual periods beginning on or after 1 July 2014 endorsed by EC as of 1 January 2015). These improvements introduce partial amendments to and editions of the respective standards primarily with a view to remove the existing inconsistency or ambiguities in the application rules and requirements of individual standards as well as to set out more precise terminology. These amendments are basically focused on the following items or transactions: (a) clarification that a first-time adopter of IFRS may apply standards that are not yet effective provided that the standards themselves permit early application (IFRS 1); (b) clarification that IFRS 3 excludes from its scope the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself (IFRS 3); (c) clarification regarding the scope of contracts that fall within the scope of the exception for a group of financial assets and financial liabilities with offsetting positions in market and credit risk (IFRS 13); (d) clarification that in the treatment of a transaction, which simultaneously meets the criteria of IFRS 3 and refers to investment properties under IAS 40, requires the separate application of both standards independently of each other (IAS 40). IFRIC 21 "Levies" (in force for annual periods beginning on or after 1 January 2014 endorsed by EC for annual periods as of 17 June 2014) regarding levies imposed by a government. This interpretation provides guidance about the criteria for recognising a liability to pay a levy (charge, tax or other similar amount) imposed by the government in accordance with laws and regulations that are outside the scope of IAS 12. At the date when these financial statements have been approved for issue, there are several new standards and interpretations as well as amended standards and interpretations, issued but not yet in force for annual periods beginning on or after 1 January 2015, which have not been adopted by the Company for early application. The management has decided that out of them the following are likely to have a potential impact in the future for changes in the accounting policies, and in the classification and value of reporting items in Company's financial statements for subsequent periods, namely: IFRS 9 "Financial Instruments" (in force for annual periods beginning on or after 1 January 2018 not endorsed by EC); This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 8
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 2018 not endorsed by EC); Annual Improvements to IFRSs 2010-2012 Cycle (December 2013) improvements to IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24, IAS 38 (in force for annual periods beginning on or after 1 July 2014 endorsed by EC for annual periods as of 1 February 2015). IFRS 15 "Revenue from Contracts with Customers" (in force for annual periods beginning on or after 1 January 2018 not endorsed by EC). IAS 7 (amended) "Statement of Cash Flows" regarding disclosure initiative (in force for annual periods beginning on or after 1 January 2017 not endorsed by EC). IAS 12 (amended) "Income Taxes" (in force for annual periods beginning on or after 1 January 2017 not endorsed by EC) recognition of deferred tax assets for unrealised losses. IAS 1 (amended) "Presentation of Financial Statements" regarding disclosure initiative (in force for annual periods beginning on or after 1 January 2016 endorsed by EC). In addition, with regard to the stated below new standards, amended/revised standards and new interpretations, issued but not yet in force for annual periods beginning on 1 January 2015, the management has judged that they are unlikely to have a potential impact for changes in the accounting policies, and in the classification and value of reporting items in Company's financial statements, namely: IAS 19 (as revised in 2011) "Employee Benefits" (in force for annual periods beginning on or after 1 July 2014 endorsed by EC for annual periods as of 1 February 2015); IFRS 14 "Regulatory Deferral Accounts" (in force for annual periods beginning on or after 1 January 2016 EC has postponed the endorsement process for this interim standard until the issue of the final standard); IFRS 16 "Leases" (in force for annual periods beginning on or after 1 January 2019 not endorsed by EC); Annual Improvements to IFRSs 2012-2014 Cycle (September 2014) improvements to IFRS 5, IFRS 7, IAS 19, IAS 34 (in force for annual periods beginning on or after 1 January 2016 endorsed by EC); This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 9
IFRS 10 (amended) "Consolidated Financial Statements" and IAS 28 (amended) "Investments in Associates and Joint Ventures" regarding the sale or contribution of assets between an investor and its associate or joint venture (in force for annual periods beginning on or after 1 January 2016 the EC endorsement procedure has been postponed for an indefinite period). IAS 27 (amended) "Separate Financial Statements" regarding the equity method in separate financial statements (in force for annual periods beginning on or after 1 January 2016 endorsed by EC); IAS 16 (amended) "Property, Plant and Equipment" and IAS 41 (amended) "Agriculture" regarding bearer plants (in force for annual periods beginning on or after 1 January 2016 endorsed by EC); IAS 16 (amended) "Property, Plant and Equipment" and IAS 38 (amended) "Intangible Assets" regarding the acceptable methods of depreciation and amortisation (in force for annual periods beginning on or after 1 January 2016 endorsed by EC); IFRS 11 (amended) "Joint Arrangements" regarding acquisitions of interests in joint operations (in force for annual periods beginning on or after 1 January 2016 endorsed by EC); IFRS 10 (amended) "Consolidated Financial Statements", IFRS 12 (amended) "Disclosure of Interests in Other Entities" and IAS 28 (amended) "Investments in Associates and Joint Ventures" regarding exemptions from consolidation for investment entities (in force for annual periods beginning on or after 1 January 2016 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 Levs (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 2.20. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 10
2.2. Comparatives In these financial statements the Company presents comparative information for one prior year. Where necessary, comparative data is reclassified (and restated) in order to achieve comparability in view of the current year presentation changes. 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 a 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 have been initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the transaction date 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 to the extent, and in the way, the economic benefits 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. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 11
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). 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 from foreign currency loans (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). This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 12
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. Directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, professional fees for people involved in the project, non-refundable taxes etc. The Company has set a value threshold of BGN 700, below which the acquired assets, regardless of having the features of non-current assets, are treated as current expense at the time of their acquisition. Subsequent measurement The chosen by the Company approach for subsequent measurement of machinery and equipment, is the cost model under IAS 16, i.e. acquisition cost (cost) less any accumulated depreciation and any accumulated impairment losses in value. Subsequent costs Repair and maintenance costs are recognised as current expenses as incurred. Subsequent expenses incurred in relation to machinery and equipment having the nature of replacement of certain components, significant parts and aggregates or improvements and restructuring, are capitalised to the carrying amount of the respective asset whereas the residual useful life is reviewed at the capitalisation date. At the same time, the non-depreciated part of the replaced components is derecognised from the carrying amount of the assets and is recognised in the current expenses for the period of restructure. Depreciation methods The Company applies the straight-line depreciation method for tangible fixed assets. Depreciation of an asset begins when it is available for use. The useful life per group of assets has been determined considering: the physical wear, the characteristic features of the equipment, the intentions for future use and the expected obsolescence, and is as follows: computer hardware, mobile phones from 2 to 4 years; motor vehicles 4 years; furniture and fixtures 7 years. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 13
The useful life, set for any tangible fixed asset, is reviewed at the end of each year and in case of any material deviation from the future expectations on the period of use, the latter is adjusted prospectively. Impairment of assets The carrying amounts of machinery and equipment are reviewed for impairment when events or changes in circumstances indicate that they might significantly differ from their recoverable amount. If any indications exist that the estimated recoverable amount of an asset is lower than its carrying amount, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of an item of tangible fixed assets is the higher of the fair value less costs to sell or the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market conditions and assessments of the time value of money and the risks, specific to the particular asset. Impairment losses are recognised in the statement of comprehensive income (within profit or loss for the year). Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale. The gains or losses arising from the sale of an item of machinery and equipment are determined as the difference between the consideration received and the carrying amount of the asset at the date of sale. They are stated net under 'other operating income or losses, net' in the statement of comprehensive income (within profit or loss for the year). 2.7. Intangible assets Intangible assets are stated in the financial statements at acquisition cost (cost) less accumulated amortisation and any impairment losses in value. They include mainly licences for the software used by the Company. Amortisation methods The Company applies the straight-line amortisation method for the intangible assets with determined useful life from 3 to 7 years. Impairment of assets The carrying amount of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying amount might exceed their recoverable amount. Then impairment is recognised in the statement of comprehensive income (within profit or loss for the year). This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 14
Gains and losses on disposal (sale) Intangible assets are derecognised from the statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale. The gains or losses arising from the sale of an item of intangible assets are determined as the difference between the consideration received and the carrying amount of the asset at the date of sale. They are stated net under 'other operating income or losses, net' on the face of the statement of comprehensive income (within profit or loss for the year). 2.8. Available-for-sale investments Long-term investments in available-for-sale financial assets are non-derivative financial assets, which represent (a) debt securities with fixed or determinable payments and fixed maturity, and (b) shares of other companies (minority interest). Initial measurement Available-for-sale investments (financial assets) are initially recognised at cost, being the fair value of the consideration given including the direct expenses associated with the investment (financial asset) acquisition. Subsequent measurement The available-for-sale investments (financial assets), held by the Company, are subsequently measured at fair value (Note 2.19).Long-term investments, representing debt securities with fixed or determinable payments and fixed maturity, are subsequently measured and presented in the statement of financial position at fair value while complying with the following policy: setting up the fair value directly on market price basis (dealer prices) 'last bid price' at the last business day of the respective reporting period (year), i.e. direct (unadjusted) prices (Level 1). As an exception, for closed-end companies/entities for which it is difficult to find analogous market transactions data and/or due to the circumstance that the future operation of these companies is related to certain doubts so that reasonable and justifiable long-term assumptions are not possible for the calculation of the fair value of their shares through other alternative valuation methods, the measurement is made at cost. The effects of subsequent revaluation of securities to fair value are presented in a separate component of the statement of comprehensive income (within other comprehensive income) and are recognised in the statement of comprehensive income (within profit or loss for the year) on disposal (sale) of the respective investment by being stated as finance income or 'finance costs'. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 15
Interest income, associated with long-term available-for-sale investments (financial assets) representing debt securities with fixed or determinable payments and fixed maturity, is recognised and presented based on the effective income in the statement of comprehensive income (within profit or loss for the year) within the item 'finance income'. Dividend income associated with long-term investments (financial assets) representing shares in other companies (minority interest) is recognised as current income and presented in the statement of comprehensive income (within profit or loss for the year) within the item 'finance income'. The available-for-sale investments are reviewed at the end of each reporting period and if conditions for permanent impairment are identified, the impairment is recognised in the statement of comprehensive income (within profit or loss for the year) under 'finance costs'. Where conditions for impairment are identified, the latter is determined as the difference between the carrying amount and the recoverable value of the investment and is recognised in the statement of comprehensive income (within profit or loss for the year) unless a positive reserve for this investment was formed in prior periods then the impairment is at first covered at the account of this reserve and is presented net in the statement of comprehensive income (within other comprehensive income). 2.9. Investments in associates Long-term investments representing shares in associates are presented in the financial statements at acquisition cost (cost) being the fair value of the consideration paid for the investment including any directly attributable costs incurred on the acquisition less accumulated impairment. The investments in associates, held by the Company, are subject to review for impairment. Where conditions for impairment are identified, the impairment is recognised in the statement of comprehensive income (within profit or loss for the year) under 'finance costs'. In purchases and sales of investments in associates the trade date (conclusion of the deal) is applied. Dividend income associated with investments in associates is recognised as current income and presented in the statement of comprehensive income (within profit or loss for the year) within the item 'finance income' when the entitlement thereto is identified.. Investments are derecognised when the rights related thereto are transferred to third parties as a result of occurrence of legal grounds for that and thus the significant influence of the specific investment type over the economic benefits is being lost. Gain/(loss) on disposal is presented respectively as 'finance income' or 'finance costs' in the statement of comprehensive income (within profit or loss for the year). This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 16
2.10. Trade and other receivables Trade receivables are accounted for and recognised in the financial statements at fair value based on the original invoice amount (cost) less any allowance for uncollectable debts. An estimate allowance for doubtful and bad debts is made when significant uncertainty exists as to the collectability of the full amount or a part of it. Bad debts are written-off when the legal grounds for this are available. When a particular receivable is assessed as uncollectable, it is written-off against the allowance account (Note 2.16.1). 2.11. Cash and cash equivalents Cash and cash equivalents include cash in hand, current accounts and term bank deposits, or such with original maturity of up to 3 months, the funds which are freely available to the Company in accordance with the terms and conditions agreed with the banks within the deposit term regardless of the original maturity of the respective deposit. (Note 2.16.1). Bank deposits represent receivables from banks under invested free cash resources placed as term deposits with original maturity of up to 3 months, the funds of which are not freely available to the Company during the term of the respective deposit and/or the conditions are restrictive. Deposits are valued and presented in the statement of financial position at amortised cost. The Settlement Guarantee Fund includes available amounts at accounts of the Central Depository, which are due to the settlement system participants upon membership termination. (Notes 2.11 and 19). The following rules are applied for the purposes of the statement of cash flows: the following are excluded from cash and cash equivalents: (a) interest accrued on term deposits placed with banks if and as far as on eventual earlier termination of a contract with a bank, the Company would lose the interest accrued as at 31 December; (b) cash in term bank deposits with original maturity of more than 3 months for which the Company has limits or significant penalties and restrictions for free access over the deposit term; as well as (c) cash in permanently blocked accounts; cash proceeds from customers and cash paid to suppliers are presented at gross amount, including value added tax (20%) under the movements in assets and liabilities participating in operating activities; paid refundable VAT amounts paid on supply of machinery and equipment and intangible assets are presented as cash paid to suppliers within the changes of trade and other payables under the movements in assets and liabilities participating in operating activities; interest received on current accounts are presented under the movements in assets and liabilities participating in operating activities; This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 17
interest received on term deposits with banks is presented under investment activities as far as in their substance these operations represent investment of Company's free resources; the cash flows of the Settlement Guarantee Fund are included in the cash flows from operating activities and respectively, their change is presented also separately from the change in the total cash flows. 2.12. Guarantee funds Guarantee Fund for Compensation of Damages The Central Depository sets aside a specific guarantee fund to compensate damages arising in the course of its operation and caused to issuers and holders of securities as a result of culpable actions or inactivity on the part of its employees as well as damages caused by loss of data on dematerialised securities. This fund is set aside based on the provisions of the Public Offering of Securities Act (POSA, Art. 132). The resources of the guarantee fund are as follows: up to 29 July 2011: from (a) contributions from Central Depository members; and (b) 50% of the excess of revenue over the expenses for the respective period; and for the period 30 July 2011 31/12/2015: from (a) contributions from Central Depository members; and (b) 1% of the operating revenue earned for the respective period. Each member of the Central Depository shall be obliged to make an initial (entry) contribution to this guarantee fund as well as an annual cash contribution at an amount set by the Rules and Regulations of the Depository. The amounts of the guarantee fund, resultant from contributions made by Depository members, have the nature of and are presented as a liability as far as they are payable and reimbursable to the Depository members at the time of their voluntary membership termination (Note 25). Other sources added to this guarantee fund of the Central Depository include loans, donations, foreign aid, etc. These amounts as well as the deductions from Company's income/revenue (as per item "b" above) are not refundable to Depository members and are therefore presented as a separate component of equity (Note 19). The amounts of this guarantee fund are invested mainly in bank deposits and in securities issued or guaranteed by the Bulgarian state. The current control on the investment of these funds is performed by the Board of Directors of the Depository and the decisions thereof are operationally executed by the Executive Director of the Company. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 18
Guarantee Fund for Settlement of Financial Instruments The Central Depository also establishes a Guarantee Fund for Settlement of Financial Instruments (Settlement Guarantee Fund - SGF), which to ensure the net settlement of liabilities under transactions in financial instruments concluded in a regulated market of financial instruments. It is set aside within the Company on the grounds of an amendment to Ordinance No 8 of FSC, promulgated in State Gazette, issue 24 of 12 March 2013, leading to a relevant amendment to the Rules and Regulations on the operation of the Central Depository, approved by FSC Decision No 537 of 10 July 2014. The sources of find raising include the initial (entry) and monthly contributions of the participants to the settlement system, the amounts imposed under transactions in financial instruments as penalties for delay and other sources. The amounts of the guarantee fund, resultant from contributions made by Depository members, have the nature of and are presented as a liability (Note 25). In case of fund liquidation, after the payment of its obligations, if any, the remaining assets are distributed between the fund members, which are participants in the settlement system, in accordance with their monthly contributions and the accumulated investment income after deducting the incurred maintenance costs. The amounts in this guarantee fund may be invested only in securities, issued or guaranteed by the Bulgarian state, in bank deposits and in debt securities, issued by member states of the Eurozone with a credit rating not less than the highest credit rating of the Republic of Bulgaria. There are specific requirements to the investment approach: (a) not less than 50 (fifty) percent of the fund assets shall be maintained in a separate current account with the depository bank; (b) up to 50 (fifty) percent of the fund amount shall be kept in separate bank deposits; whereas, (c) up to 20 (twenty) percent may be invested in securities (in a separate portfolio); and (d) not less than 10 (ten) percent of the fund assets should be cash placed in bank deposits (on demand or at 3 month term) or debt securities issued or guaranteed by the Bulgarian state with residual term to maturity of up to 90 (ninety) days. The investment income from accumulated amounts shall be used to cover direct administrative or other expenses related with the activities of the fund. The total annual amount of administrative expenses may not exceed the income from fund management for the same period. The control on the process of investing the fund resources is performed currently by the SGF Governance Committee and the decisions thereof are operationally executed by Company s Executive Director. This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 19
2.13. Trade and other payables Trade and other current amounts payable are accounted for and presented in the financial statements at original invoice amount (acquisition cost), which is the fair value of the consideration to be paid in the future for goods and services received. In case of payments deferred over a period exceeding the common credit terms, where no additional interest payment has been envisaged or the interest considerably differs from the common market interest rates, the payables are initially valued at their fair value and subsequently at amortised cost, after deducting the interest incorporated in their nominal value and determined following the effective interest method (Note 2.16.2). 2.14. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with the workers and employees of the Company are based on the provisions of the Labour Code and the effective social security legislation in Bulgaria. Short-term benefits Short-term benefits in the form of remuneration, bonuses and social payments and benefits (due for payment within 12 months after the end of the period when the employees have rendered the service or have satisfied the required terms) are recognised as an expense in the statement of comprehensive income (within profit or loss for the year) for the period when the service thereon has been rendered and/or the requirements for their receipt have been met, unless a particular IFRS requires capitalisation thereof to the cost of an asset, and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. At the end of each reporting period, the Company measures the estimated costs on the accumulating compensated absences, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the estimated amounts of employee's remuneration and the statutory social security and health insurance contributions due by the employer thereon. Long-term retirement benefits Defined contribution plans The major duty of the Company as an employer in Bulgaria is to make the mandatory social security contributions for the hired employees to the Pensions Fund, the Supplementary Mandatory Pension Security (SMPS) Fund, to the General Diseases and Maternity (GDM) Fund, the Unemployment Fund, the Labour Accident and Professional Diseases (LAPD) Fund, the Guaranteed Receivables of Workers and Employees (GRWE) Fund and for health insurance. The rates of the social security and health insurance contributions are defined annually in the Law on the Budget of State Social Security and the Law on the Budget of National Health Insurance Fund for the respective year. The contributions are This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 20
split between the employer and employee in line with rules of the Social Security Code (SSC) at the ratio 60:40 (2014: 60:40). These pension plans, applied by the Company in its capacity as an employer, are defined contribution plans. Under these plans, the employer pays defined monthly contributions to the government funds as follows: Pensions Fund, GDM Fund, Unemployment Fund, LAPD Fund as well as to universal and professional pension funds on the basis of rates fixed by law, and has no legal or constructive obligation to pay further contributions if the funds do not hold sufficient means to pay the respective individuals the benefits they have worked-out over the period of their service. The obligations referring to health insurance are analogous. There is no established and functioning private voluntary social security fund at the Company. The contributions, payable by the Company under defined contribution plans for social security and health insurance, are recognised as a current expense in the statement of comprehensive income (within profit or loss for the year) unless a particular IFRS requires this amount to be capitalised to the cost of an asset, and as a current liability at their undiscounted amount along with the accrual of the respective employee benefits to which the contributions refer and in the period of rendering the underlying service. Defined benefit plans In accordance with the Labour Code, the Company in its capacity as an employer in Bulgaria is obliged to pay an indemnity to its personnel when coming of age for retirement, at an amount which, depending on the length of service with the entity, varies between two and six gross monthly salaries at the employment termination date. In their nature these are unfunded defined benefit schemes. The calculation of the amount of these liabilities necessitates the participation of qualified actuaries in order to determine their present value at the date of the financial statements, at which they shall be presented in the statement of financial position, and respectively, the change in their value in the statement of comprehensive income as follows: (a) current and past service costs, interest costs and the gains/losses on a curtailment and settlements are recognised immediately when incurred and are presented in current profit or loss under 'employee benefits expense'; and (b) effects from remeasurement of obligations that in substance represent actuarial gains and losses are recognised immediately when occurred and are presented to other comprehensive income in the item 'remeasurements of defined benefit pension plans'. Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. At the end of each reporting period, the Company assigns certified actuaries who issue a report with their calculations about the long-term retirement benefit obligations to personnel. For this purpose, they apply the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows, which are expected to be paid within the This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 21
maturity of this obligation, and using the interest rates of long-term government bonds of similar term, quoted in Bulgaria where the Company itself operates. Termination benefits In accordance with the local provisions of the employment and social security regulations in Bulgaria, the Company as an employer is obliged, upon termination of the employment contracts prior to retirement, to pay certain types of indemnities. The Company recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, based on a publicly announced plan, including for restructuring, to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents for voluntary redundancy. Termination benefits due more than 12 months are discounted and presented in the statement of financial position at their present value. 2.15. Share capital and reserves Central Depository AD is a joint-stock company and is obliged to register with the Commercial Register a specified share capital, which should serve as a security to the Company's creditors. The shareholders are liable for the obligations of the Company up to the amount of the share of the capital held by each of them and may claim refunding of this share only in case of winding-up of the Company (specific legal status Note 1.1). The Company reports its share capital at the nominal value of the shares registered in the court. According to the requirements of the Commercial Act and the Articles of Association, the Company is obliged to set aside a Reserve Fund by using the following sources: for the period 1 January 2011 29 July 2011: 50% of the excess of revenue over expenses for the period; other sources as provided for by the Articles of Association or under a decision of the General Meeting. for the period 30 July 2011 31 December 2015: at least one tenth of the profit, which should be allocated to the Fund until its amount reaches one tenth of the share capital or any larger amount as may be decided by the General Meeting of Shareholders; any premium received in excess of the nominal value of shares upon their issue (share premium reserve); This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 22
other sources as provided for by a decision of the General Meeting. The Reserve Fund may be used to cover the losses incurred in the current or prior years. When the amount of the Fund reaches the minimal value specified in the Articles of Association the excess may be used for increasing the share capital. The Guarantee Fund is a specific component of equity set aside until 29 July 2011 at the account of mandatory distribution of the generated by the Company gains/income (excess of revenue over expenses 50%) and as from 30 July 2011 1% of (based on) Company's operating revenue. Other reserves are set aside at the account of generated profit distribution by virtue of the General Meeting of Shareholders decision. Until 29 July 2011, according to the law, Central Depository AD did not distribute dividends to its shareholders. 2.16. Financial instruments 2.16.1. Financial assets The Company classifies its financial assets in two categories: (a) 'loans and receivables', which represent trade and other receivables, bank deposits and cash and cash equivalents, and (b) 'availablefor-sale financial assets'. The classification depends on the nature and purpose (designation) of the financial assets at the date of their acquisition. The management determines the classification of Company's financial assets at the time of their initial recognition on the statement of financial position. The Company usually recognises its financial assets on the statement of financial position on the trade date, being the date on which the Company commits (undertakes an ultimate engagement) to purchase the respective financial assets. All financial assets are initially measured at their fair value plus the directly attributable transaction costs. Financial assets are derecognised from the Company's statement of financial position when the rights to receive cash (flows) from these assets have expired or have been transferred, and the Company has transferred substantially all the risks and rewards of ownership of the asset to another entity (person). If the Company retains substantially all risks and rewards associated with the ownership of a particular transferred financial asset, it continues to recognise the transferred asset in its statement of financial position but also recognises a secured liability (a loan) for the consideration received. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are measured in the statement of financial position at their amortised cost using the effective interest method less any allowance for impairment. These assets are included in the group of current assets when having maturity within 12 months or within a common This is a translation from Bulgarian of the financial statements of Central Depository AD for year 2015. 23