ALMA MARKET SA CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR Kraków, 21 April

Transcription

1 ALMA MARKET SA CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR Kraków, 21 April

2 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET CONSOLIDATED INCOME STATEMENT STATEMENT OF CHANGES IN CONSOLIDATED EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE FINANCIAL STATEMENTS GENERAL INFORMATION ACCOUNTING POLICIES ADOPTED IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR FINANCIAL RISK MANAGEMENT CRITICAL ASSESSMENTS AND ASSUMPTIONS BUSINESS SEGMENT INFORMATION RESTATEMENT OF EQUITY RECONCILIATION OF EQUITY DISCLOSED IN ACCORDANCE WITH THE PREVIOUSLY APPLIED ACCOUNTING STANDARDS WITH THE EQUITY DISCLOSED IN ACCORDANCE WITH IFRS FOR THE SAME PERIOD EXPLANATION OF ADJUSTMENTS DUE TO TRANSITION TO IFRS RECONCILIATION OF THE PROFIT FOR THE PERIOD FROM 1 JANUARY 2004 TO 31 DECEMBER PROPERTY, PLANT AND EQUIPMENT CONSOLIDATED INVESTMENT PROPERTIES INTANGIBLE ASSETS INVENTORIES TRADE RECEIVABLES AND OTHER RECEIVABLES FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS CASH AND CASH EQUIVALENTS SHARE CAPITAL OTHER RESERVES RETAINED EARNINGS TRADE PAYABLES AND OTHER PAYABLES BORROWINGS DEFERRED INCOME TAX DERIVATIVE FINANCIAL INSTRUMENTS PROVISIONS FOR OTHER LIABILITIES AND CHARGES TRANSACTIONS WITH RELATED ENTITIES SALES OTHER NET OPERATING INCOME /EXPENSES EMPLOYEE BENEFIT EXPENSES TOTAL COSTS BY TYPE NET FINANCIAL INCOME (COSTS) NET FOREIGN EXCHANGE GAINS/(LOSSES) INCOME TAX EARNINGS PER SHARE LIST OF ITEMS COMPRISING THE RESULT ON DISCONTINUED OPERATIONS CONTINGENT LIABILITIES OFF-BALANCE SHEET LIABILITIES... d! Nie zdefiniowano zak adki. 37. NET CASH INFLOWS FROM OPERATING ACTIVITIES

3 CONSOLIDATED BALANCE SHEET Note ASSETS Non-current assets Property, plant and equipment Investment properties Intangible assets Financial assets available-for-sale Current assets Inventories Trade receivables and other receivables Current income tax receivables Financial assets available-for-sale Other financial assets at fair values through profit or loss Cash and cash equivalents Total assets EQUITY Equity attributable to the Company s equity holders Share capital Other reserves 18 (498) 20 Retained earnings Minority interests Total equity LIABILITIES Non-current liabilities Borrowings Deferred income tax liability Provisions for other liabilities and charges Security deposit liabilities Current liabilities Trade payables and other payables Current income tax liability Borrowings Derivative financial instruments Provisions for other liabilities and charges Total liabilities Total equity and liabilities The Notes on pages 7-54 constitute an integral part of the financial statements

4 CONSOLIDATED INCOME STATEMENT Year ended 31 December Note Continued operations Sales Cost of sales of finished goods, goods for resale and materials 29 ( ) ( ) Profit before tax Selling costs and marketing expenses 29 (42 581) (21 240) Administrative expenses 29 (10 407) (10 397) Other net operating income /expenses Operating profit Net financial costs 30 (186) (1 205) Profit before tax Income tax 32 (2 784) (4 230) Profit on continued operations Discontinued operations: Profit/(loss) on discontinued operations 34 - (611) Net profit including: attributable to the Company s equity holders Earnings per share from continued activities, attributable to the Company s equity holders during the period (in PLN per share) - basic 33 2,68 5,32 - diluted 33 2,68 5,32 Earnings per share from discontinued activities, attributable to the Company s equity holders during the period (in PLN per share) - basic 33 - (0.17) - diluted 33 - (0.17) The Notes on pages 7-54 constitute an integral part of the financial statements

5 STATEMENT OF CHANGES IN CONSOLIDATED EQUITY Attributable to the Company s equity holders Share capital (Note 17) Other reserves (Note 18) Retained earnings (Note 19). Attributable to minority interests Total equity Balance as at 1 January Revenue recognized in equity profit on disposal of treasury shares Income tax on disposal of treasury shares (394) (394) Net profit for the year Total sales recognized for Proceeds from issuance of shares Employee incentive program value of employee benefits Sale of Treasury shares December Attributable to the Company s equity holders Share capital Other reserves Retained earnings Attributable to minority interests Total equity Balance as at 1 January Losses on changes in fair value, in consideration of tax - financial assets available-for-sale - (678) - - (678) - deffered tax arising from changes in fair value of availablefor-sale investments Income (costs) recognized directly in equity - (549) - - (549) The net profit for the year ended 31 December Total sales recognized for the 12 months ended 31 December (549) Employee incentive program value of employee benefits Balance as at 31 December (498) The Notes on pages 7-54 constitute an integral part of the financial statements

6 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December Note Cash flows from operating activities Continued activities: Cash inflows from operating activities Interest paid Corporate income tax paid (3 648) (1 634) Net cash from continued operating activities Net cash from discontinued operating activities Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (23 762) (17 496) Proceeds from sales of property, plant and equipment Purchase of intangible assets (579) (188) Purchase of investment properties (36) - Purchase of financial assets available for sale (7 735) (9 802) Proceeds from sales of financial assets Loans granted to other entities - (1 000) Repayment of loans granted to other entities Interest received - 10 Dividends received 1 - Net cash from continued investing activities (2 923) Net cash from investing activities (2 923) Cash flows from financing activities Proceeds from issuance of ordinary shares Proceeds from sale of own shares Borrowings received Payment of finance lease liabilities (135) (355) Repayment of borrowings - (18 841) Interest paid (174) (1 377) Net cash from continued financing activities (309) Net cash from financing activities (309) Net change in cash and cash equivalents and bank overdraft on continued operations Net change in cash and cash equivalents and bank overdraft on discontinued operations Net change in cash and cash equivalents and bank overdraft during the period Net cash and cash equivalents and bank overdraft at the beginning of the period (5 951) Net cash and cash equivalents and bank overdraft as at 31 December The Notes on pages 7-54 constitute an integral part of the financial statements

7 NOTES TO THE FINANCIAL STATEMENTS 1. GENERAL INFORMATION ALMA MARKET SA commenced activity on 2 January 1991 under the name F.H. KrakChemia SA as a result of the transformation of the state-owned chemical enterprise Przedsi biorstwo Handlu Chemikaliami Chemia in Kraków. The Company was formed on the basis of a Notarial Deed drawn up on 21 December 1990 at the Notary Public s Office of Pawe B aszczyk in Warsaw and registered with Rep. A No. X-2112/90. On 22 June 2001 the District Court for Kraków- ródmie cie in Kraków, 11th Business Department of the National Court Register entered the Company into the Register of Businesses with the number KRS On 20 May 2004 the District Court for Kraków- ródmie cie in Kraków, 11th Business Department of the National Court Register entered the change in the name of the Parent Company: ALMA MARKET SA. Company name: Registered office: Address: Kraków, ul. Pilotów 6 tel: +48(12) fax no.: +48(12) info@almamarket.pl Alma Market Spó ka Akcyjna (joint stock Company) Kraków, Poland REGON statistical identification number: NIP tax identification number: National Court Register (KRS): Auditor: PricewaterhouseCoopers Sp. z o.o. Management Board: Chairman of the Board Deputy Chairman of the Board Deputy Chairman of the Board Supervisory Board: Chairman of the Supervisory Board Deputy Chairman of Supervisory Board Secretary of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board - Jerzy Mazgaj - Grzegorz Pilch - Mariusz Wojdon - Barbara Mazgaj - Wojciech Mazgaj - Mariusz Kaczmarczyk - Marek Dybalski - Jan Jakub Tropi o ALMA MARKET SA is the Parent Company of the ALMA MARKET S.A. Group. ALMA MARKET SA is listed on the Warsaw Stock Exchange (Gie da Papierów Warto ciowych w Warszawie SA). Subsidiary: 1. Company name: Firma Handlowa "Krakchemia Spó ka Akcyjna Registered office: Kraków Address: Kraków, ul. P k. D bka 10 tel: +48(12) fax no.: +48(12) REGON statistical identification number: NIP tax identification number: National Court Register (KRS): Auditor: PricewaterhouseCoopers Sp. z o.o

8 2. Company name: ALMA DEVELOPMENT Spó ka z ograniczon odpowiedzialno ci Registered office: Kraków Address: Kraków, ul. Pilotów 6 tel: +48(12) fax no.: +48(12) REGON statistical identification number: NIP tax identification number: National Court Register (KRS): Role of ALMA MARKET SA within the Group and changes in Group structure ALMA MARKET SA is the Parent Company of the Group. The composition of the subsidiaries covered by the annual consolidated financial statements has not changed compared with the same period of the prior year. Currently ALMA MARKET SA holds 100% shares in two subsidiaries: Krakchemia SA and ALMA DEVELOPMENT Spó ka z o.o. registered on 12 December The first reporting period of this company will end on 31 December The Group is engaged in wholesale and retail trading. The dominating business segment of operations of ALMA MARKET SA is retail trade, whereas the dominating segment of the subsidiary Krakchemia SA is wholesale trade, and ALMA DEVELOPMENT Spó ka z o.o. was established to support the Group s and other business entities operations in the area of servicing real estate and respective rental activities, as well as for the purpose of carrying out developer projects; however until 31 December 2005 it has not realized any significant transactions which would have an impact on the Group s financial results. 2. ACCOUNTING POLICIES ADOPTED IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR Basis of preparation The consolidated financial statements for 2005 were prepared on the basis of the following regulations: a) International Financial Reporting Standards and International Accounting Standards. b) Decree of the Council of Ministers dated 21 March 2005 on current and periodic information to be prepared by issuers of securities (Journal of Laws No. 49, item 463). The Management Board approves the financial statement on the day when the consolidated financial statement is signed by all members of the Management Board of the parent company. If after the preparation of financial statements the Group receives information on circumstances with material impact on these financial statements, the ALMA s Management Board is approved to introduce adjustments up till the date of the consolidated financial statements approval by General Shareholders Meeting. It does not exclude possibility to introduce any adjustments with retrospective effect when required by IAS 8 (correction of fundamental errors and changes in accounting policies) Declaration of compliance The consolidated financial statements of the ALMA MARKET SA Group were prepared in accordance with International Financial Reporting Standards (IFRS) adopted by EU for the first time. The consolidated financial statements of ALMA MARKET SA for the 12 months ended 31 December 2005 were prepared in accordance with our best knowledge of the standards and interpretations, facts and - 8 -

9 circumstances, and accounting principles applicable to the first-time preparation of IFRS financial statements as at 31 December In preparing the IFRS data, the provisions of IFRS 1 were taken into consideration. the date of these financial statements, due to the process of the EU adopting IFRSs and the companies type of operations, there are no differences between the accounting policies adopted by the Group which follow from IFRS and those IFRSs which have been adopted by the EU. IFRS financial statements require making assessments and assumptions which have an impact on the amounts shown in the financial statements and in the respective notes. Although the adopted assumptions and assessments are based on the Management Board s best knowledge of the actions and events, the actual results may differ from the expected results. The financial statements have been prepared in accordance with the historical cost concept, with the exception of the remeasurement of financial assets and liabilities valued at fair value in correspondence with the income statement. The key accounting policies applied by the Group are presented below Consolidation Subsidiaries Subsidiaries are all entities whose financial and operating policy the Group is capable of managing, which usually accompanies the ownership of the majority of the total number of votes in the company s authorities. In assessing whether the Group controls a given entity the existence and impact of potential voting rights which may be realized or exchanged at a given time is taken into consideration. Subsidiaries are consolidated under the acquisition method as of the date of the Group taking over control. They cease to be consolidated as at the date the control ceases. The acquisition of subsidiaries is accounted for by the Group under the purchase method. The acquisition cost is determined at the fair value of the transferred assets, issued equity instruments and liabilities incurred or taken over as at the date of transfer, increased by the costs directly related to the acquisition. Identifiable assets acquired, and liabilities and contingent liabilities taken over as a result of a business combination are initially measured at fair value as at the date of their acquisition, irrespective of the amount of the potential minority interests. The excess of the acquisition cost over the fair value of the Group s share in identifiable net assets acquired is disclosed as goodwill. If the acquisition cost is lower than the fair value of net assets of the subsidiary acquired, the difference is recognized directly in the income statement. Transactions, settlements and unrealized gains on Group transactions are eliminated. Unrealized losses are also eliminated unless the transaction proves that a given asset has been impaired. The accounting principles applied by subsidiaries were changed where necessary to ensure compliance with the accounting principles used by the Group Transformation of the financial statements and comparability of data in the presented financial statements The accounting policies described below have been applied consistently in all the presented periods. Until 31 December 2004, consolidated financial statements were prepared in accordance with the requirements of the Accounting Act and the Decree of the Finance Minister on detailed rules for preparing financial statements of related entities by entities other than banks and insurers. In some areas these regulations differ from the regulations of IAS/IFRS

10 In preparing the consolidated financial statements for 2005 some settlement and measurement methods were changed compared with the accounting policies which had been applied previously, in order to comply with IFRS. The comparative data for the presented period was appropriately restated. The description and reconciliation of adjustments on the transition from PAR to IAS/IFRS accounting policies is presented in Notes 6-9 to these financial statements Estimated values Preparing the financial statements in accordance with IFRS required adopting some assumptions and estimates which had an impact both on the presented values of assets and liabilities, and on the presented income and expenses for the financial period. Despite the fact that the estimates and assumptions were made in accordance with the Management Board s best knowledge of the current events and operations, the future results of the events may differ from the assessments Discontinued operations Discontinued operations are recognized and disclosed in the financial statements only when a decision is made to sell, in accordance with a plan, a separate important operation of the Group Companies whose assets, liabilities and financial results may be separated in terms of operations or in terms of financial reporting. Net profit or loss on discontinued operations and the profit or loss on their sale is disclosed separately in the income statement. Net cash flows which may be attributed to discontinued operations are presented separately in the cash flow statement Intangible assets Computer software Purchased licenses in respect of computer software are valued at the amount of costs incurred in the purchase of specific software and preparing it for use net of accumulated amortization. Capitalized costs are amortized on a straight line basis over the period in use of 3 to 5 years (Note 12) Property, plant and equipment Property, plant and equipment are measured at cost of purchase or manufacture net of accumulated depreciation, taking into consideration impairment write-downs.(note 2.11) Manufacturing costs include expenses directly connected with the manufacture of the said assets. Gains and losses on the sale or scrapping of tangible fixed assets comprise the difference between the net sales revenues (if applicable) and the carrying amounts of the items disposed of. Subledger records relating to property, plant and equipment are maintained in terms of volume and value. Property, plant and equipment are counted in accordance with the rules specified in the Accounting Act. Depreciation is charged on a straight line basis at rates reflecting the assessed periods in use of the respective assets: Buildings and structures Plant and machinery Vehicles Other fixed assets years years 3 5 years 2 5 years The assets residual values and useful lives are reviewed on a yearly basis, and adjusted if appropriate, at each balance sheet date. Land is not depreciated (Note 10). Rights to perpetual usufruct are not recorded in the balance sheet as in accordance with IAS 17 they are recognised as operating lease. (Note 36)

11 2.9. Investment properties Investment properties comprise buildings or their parts owned by the Group Companies, treated as a source of income from rent and/or maintained due to an increase in their value. Investment properties are not used in the Companies everyday operations or administrative activities. The Group measures all its investment properties at cost of purchase or manufacture net of accumulated depreciation. Depreciation of buildings is charged on a straight-line basis over a period of 40 years (Note 11). Land is not depreciated. Rights to perpetual usufruct are not recorded in the balance sheet as in accordance with IAS 17 they are recognised as operating lease. (Note 36) Leases Lease contracts on the basis of which basically all risks and rewards following from the transfer of ownership rights to the assets are classified as finance leases. Lease contracts in which the Group is the lessee result in disclosing leased assets and the relative Group balance sheet liabilities at the lower of amounts equivalent to the fair value of the leased assets as at the inception of the lease and amounts equivalent to the minimum lease payments as at the date of the inception of the lease. Lease payments are classified into decreases in the unpaid balance of the outstanding lease liabilities and financial costs. Financial costs are settled and disclosed in the income statement over the period of the lease contract. Leased assets are depreciated at rates reflecting the shorter of two periods: the assessed useful lives of those assets and the term of the lease. Other lease contracts in which the Company acts as the lessee are treated as operating leases. The respective lease payments are recognized in the income statement over the period of the lease Impairment of assets Assets with an infinite useful life are not depreciated, but each year they are tested in terms of potential impairment. Depreciable assets are reviewed for impairment whenever events or circumstances indicate the possibility that their carrying values may not be realizable. Impairment losses are recognized in the amount of the excess of the carrying value over the net realizable value of an asset. Realizable value is the higher of two amounts: fair value net of the costs of getting the assets ready for sale and their useful value. For the purpose of impairment reviews, assets are grouped at the lowest level enabling identification of separate cash flows (cash generating units) Investments Investments in securities are classified as held for trading or available for sale and stated at fair value as at the balance sheet date. In case of the securities classified as held for trading stated at fair value, the respective impairment gains and losses are recognized in the income statement for the accounting period. In respect of assets available for sale, gains and losses resulting from changes in their fair values are recognized directly in equity until the assets are sold or impairment is recognized. Then accumulated profits or losses which had been previously recognized in equity are transferred to the income statement for the accounting period (Note 15) Trade receivables and other receivables Trade receivables are initially recognized at fair value, and then measured at amortized cost using the effective interest rate, net of impairment. Impairment losses in respect of trade receivables are recognized when there is objective evidence that the Group will not be able to recover all the amounts receivable resulting from the initial

12 terms of the receivables. Impairment losses are recognized in the amount of the difference between the carrying value of an asset and the current value of estimated future cash flows discounted using the effective interest rate. Impairment losses are charged to the income statement (Note 14) Inventories Inventories of goods for resale are valued at the lower of cost and net realizable value. Cost is determined on the basis of the weighted average for retail and wholesale goods. Inventories of materials are valued at the lower of cost and net realizable value. The cost of materials is determined on a FIFO basis. Net realizable value is the difference between the estimated selling prices applied in ordinary business activities and the estimated costs to completion and effective sale. If the cost (acquisition or purchase price) of inventories exceeds the net realizable value, the Company records impairment losses (Note 13) Prepayments, accruals and deferred income The Group records both short-term accruals and prepayments. Prepayments include expenses or use of assets relating to periods following the period in which they were incurred and in consequence increase the costs of such later periods. Accruals constitute liabilities payable in respect of goods or services which were received/provided but were not paid for, invoiced or officially agreed with the supplier, including amounts due to employees. Liabilities recorded as accruals decrease the costs of the reporting period in which it was determined that the liabilities arose Cash and cash equivalents Cash and cash equivalents comprise cash in hand, bank deposits payable on demand and short-term investments with initial maturities of up to three months and high liquidity. In the cash flow statement, cash and cash equivalents also include the bank overdraft presented in current borrowings in the balance sheet (Note 16) Equity Equity comprises capitals established by the Group Companies in accordance with the binding regulations, i.e. the respective acts and the Companies Memoranda of Association (Note 17,18,19). Share capital is established in respect of shares taken up by the Parent Company s shareholders and is recognized at its nominal value, in the amount constituting the product of the number of shares issued and appropriately paid up and the nominal value of one share as per the Parent Company s Memorandum of Association and the entry to the National Court Register. Share issue expenses incurred on the further share capital increases reduce equity to the amount of share premium, whereas the remaining amount is recognised as financial costs Liabilities the balance sheet date, liabilities are stated at amounts due. Overdue or forgiven liabilities increase other operating income or financial income. Liabilities are classified as current when they mature in a period of twelve months of the balance-sheet date (Note 20)

13 2.19. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date Income tax Current income tax receivables or liabilities result from the calculation of tax payable or refundable on taxable income (tax loss) according to the general rules and rates specified in the Corporate Income Tax Act, in force in the given tax year. Deferred tax liabilities are recognized in the full amount on a liability basis, in respect of timing differences between the tax value of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred tax arose as a result of the initial recognition of assets or liabilities under a transaction other than a business combination and which does not have an impact on the financial result or on the tax profit (loss), it is not disclosed. Deferred income tax is determined using the legally or actually binding tax rates (and regulations) as at the balance sheet date which, in accordance with expectations, will be binding when the respective deferred tax assets crystallize or the deferred tax liabilities become payable. Deferred tax assets are recognized when it is probable that taxable profit will be earned in the future which will enable the timing differences to be offset (Note 22). The tax charge recognized in the income statement comprises the current and deferred portion of income tax Provisions Provisions are set up when the following conditions are met: - the Group has a current obligation (contractual or construed) following from past events; - it is probable that fulfilling the obligation will necessitate the outflow of funds embodying economic benefits; and - expenditure necessary to meet the obligation may be reliably assessed. The amount of the provision set up accounts for future events which may have an impact on the amount necessary to meet the obligation if it is sufficiently probable that the events will occur. The balances of provisions are verified as at each balance sheet date and adjusted to reflect the current most appropriate estimate. Changes in provisions resulting from the adjustments are recognized in the income statement. Provisions are released when the outflow of funds embodying the economic benefits necessary to meet the obligation cease to be probable or when liabilities relating to the obligation in respect of which the provision was set up arise. The Group sets up provisions for employee retirement benefits stipulated in the Labour Code, and for unused holiday pay (Note 24). The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (ZUS). The Group has no further payment obligations once the contributions have been paid

14 The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability Contingent assets and liabilities Information on contingent liabilities is disclosed in the notes to the financial statements when as a result of past events the outflow of funds embodying economic benefits may be expected in order to fulfil: - a possible obligation whose existence will be confirmed only when one or more uncertain future events occur, over which the Group does not have full control; or - a current obligation where the outflow of funds is improbable or a reliable valuation of the obligation (liability) is impossible (Note 35). Information on contingent assets is disclosed in the notes to the financial statements only when as a result of past events a possible asset arises whose existence will only be confirmed when one or more uncertain future events occur over which the Group does not have full control Equity instruments granted under the incentive program The equity instruments are accounted for by the Parent Company in accordance with IFRS 2, in such a manner that the value of the services received and the respective increase in equity are measured indirectly by reference to the fair value of the awarded equity instruments as at the date of awarding those instruments. The costs of the incentive program are recognized in the vesting period irrespective of whether or not the program is realized. If the condition for achieving certain goals is not a market condition (growth ratios, such as EBITDA and net profit), the estimated costs of the incentive program relating to the vesting period are adjusted on a current basis. If the condition for achieving certain goals is a market condition (a specific growth in the value of quoted shares), the fair value of the awarded equity instruments is assessed as at the date of taking the decision on the incentive program and the costs are accounted for over the vesting period irrespective of the whether or not the market condition is met, and the costs are not adjusted thereafter. ALMA MARKET SA is in the process of realizing a 3-year incentive program for supervisors, managers, and employees key to the Parent Company. The purpose of the incentive program is to further motivate and mobilize the people responsible for the realization of the new strategy being implemented in ALMA MARKET SA. The maximum number of people entitled to participate in the program is 13 (the Chairman of the Company does not participate in the program). The program is based on the issuance of 100,000 bonds with an issue price of PLN 0.01 each. The bonds will grant pre-emptive rights to purchasing ordinary E-series shares in the total amount of 100,000 shares with a nominal value of PLN 1 each. The program is a three-year program and will last from 2005 to 2007, and the right to subscribe to the E-series shares expires on The bonds will be assigned depending on a specific rate of growth being achieved in respect of three ratios: the quoted share price, EBITDA (consolidated) and net profit (consolidated). Meeting one of these three conditions gives entitlement to the purchase of 1/3 of the pool of bonds relating to the given year. If the specific pool of bonds is not awarded in a given year, it may be awarded in subsequent years of the program, if the accumulated rate of increase in a given ratio is achieved. The Group did not issue any bonds on 30 June 2005 or up to the date of approving these financial statements. (Note 18)

15 2.24. Revenue recognition Sales revenue is recognised at the time the goods are delivered (if the company transferred significant risks and benefits resulting from ownership rights to the goods) or services are provided. Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Revenue is determined at the fair value of the payment received or receivable taking into consideration the respective discounts. VAT is not taken into consideration in determining revenues. The fair value of the revenues is usually equal to the amount of cash and cash equivalents received or receivable. Interest and dividend income is taken into consideration on condition that: - their collection is probable; - the amount of income may be reliably valued. Interest income is recognized using the effective interest rate in accordance with IAS 39. Dividend income is recognized upon receipt Valuation of transactions in foreign currencies Transactions in foreign currencies are translated into PLN at the rate in force as at the date of concluding the transaction. Receivables and liabilities in foreign currencies are translated using the average rates as at the balance sheet date. Foreign exchange gains and losses on business transactions are classified into respective income statement items in compliance with the nature of the transactions in the period in which they arise. Foreign exchange gains and losses relating to external financing are included in financial costs New accounting standards and IFRIC interpretations Below are the new published standards, amendments and IFRIC interpretations appropriate for the reporting periods beginning on 1 January 2006 and after that date, and the Company s Management Board s assessment of the impact of the new standards and interpretations on the Company s financial position. IFRS 6 Exploration for and Evaluation of Mineral Resources The Group has no assets related to exploration for and evaluation of mineral resources. The provisions of this standard have no impact on the financial statements of the Group. Amendments to IFRS 1 First-time application of International Financial Reporting Standards and IFRS 6 Exploration for and evaluation of mineral resources Amendments to IFRS 1 and IFRS 6 were published to explain the intentions of IASB relating to the exclusions provided for the entities which apply IFRS for the first time and which decide on the early adoption of IFRS 6. These amendments have no impact on the financial statements of the Group IFRIC 4 Determining Whether an Arrangement Contains a Lease IFRIC 4 applies for the first time to annual periods beginning on 1 January The interpretation gives guidelines as to whether arrangements which do not have the legal form of a lease should be disclosed in accordance with IAS 17 Leases". The Group has not decided on the early adoption of IFRIC 4. It will apply the interpretation and its temporary provisions to the financial statements for This means that the Company will apply IFRIC 4 to the facts and circumstances which exist as at 1 January The Management Boards are currently assessing the impact of IFRIC 4 on the Company s operations

16 IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds The Group does not have any interests arising from decommissioning, restoration and environmental funds. The interpretation does not have any impact on the financial statements of the Group. Amendments to IAS 39 Financial instruments, recognition and measurement. Fair value measurement option. The amendment relates to the definition of financial instruments measured at fair value through profit or loss and limits the ability to classify instruments to this category. However, the amendment allows the use of the fair value option to contracts with embedded derivatives if this significantly limits inconsistencies in the valuation of assets and liabilities. Entities which already prepare their financial statements in accordance with IFRS may, thanks to the amendments, classify each previously recognized financial liability or asset at fair value no later than as at 1 September The Company decided not to use the option to measure its financial assets and liabilities at fair value. Amendments to IAS 39 Financial instruments, recognition and measurement. Hedge accounting hedging expected cash flows from intercompany transactions. This amendment applies to annual periods beginning on 1 January It allows the risk of expected intercompany transactions to be classified as hedged items in the consolidated financial statements. It is not expected that the interpretation will have any impact on the financial statement of the Group. Amendments to IAS 39 Financial instruments recognition and measurement and IFRS 4 Insurance contracts. Financial guarantee agreements. The amendments relate to financial guarantee agreements and require that the parties to the agreements which grant financial guarantees recognize the respective liabilities resulting from such agreements in their balance sheets. The provisions of this standard will have no impact on the Company s financial statements.. IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment. IFRIC 6 provides guidelines on the recognition of waste management and explains when particular manufacturers of electrical and electronic equipment should disclose liabilities in respect of the costs of managing waste in connection with scrapping used electrical and electronic equipment delivered to households. The interpretation does not have any impact on the financial statements of the Group. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 7 provides guidelines relating to the application of IAS 29 in the reporting period in which an entity determines hyperinflationary conditions in the country of its functional currency where the economy was not a hyperinflationary economy in the prior period, therefore the entity is obliged to adjust its financial statements in accordance with IAS 29. The interpretation has no impact on the financial statements of the Group. IFRIC 8, scope of IFRS 2 IFRIC 8 was issued on 12 January 2006 to explain that IFRS 2 Share based payments applies to contracts whereby the remuneration paid by the entity in the form of Treasury shares is an apparently nil or insufficient consideration. The interpretation does not have any impact on the Company s financial statements. IFRS 7 Financial instruments, Disclosure IFRS 7 was issued on 18 August 2005 together with an additional amendment to IAS 1 Presentation of financial statements, Capital disclosures. IFRS 7 applies to annual periods starting on 1 January 2007 or after that date. It introduces additional requirements relating to the disclosure of financial instruments. It replaces IAS 30 Disclosures in the financial statements of banks and similar financial institutions and some requirements of IAS 32 Financial instruments, disclosure and presentation. The Company will comply with the new requirements relating to the disclosure of such information. Amendments to IAS 1 Presentation of financial statements, Capital disclosures

17 This amendment should be applied to annual periods starting on 1 January 2007 or after that date. It supplements IFRS 7 Financial instruments: Disclosure and introduces requirements relating to disclosing, by all entities: - the goals of the entity, capital management principles and processes; - quantitative data relating to what an entity deems to be capital; - whether an entity has met the potential capital requirements, and if not, what are the consequences of the noncompliance. The Company will comply with the new requirements relating to the disclosure of such information. Amendments to IAS 19 Employee benefits This amendment introduces an option of another approach to actuarial gains and losses. It may impose additional requirements relating to the disclosure of multi-company schemes where there is insufficient information to apply defined benefit accounting. It also imposes new disclosure obligations. The interpretation will not have an impact on the Company s financial statements. In the opinion of the Management Board of Group, the newly published standards, amendments and interpretations relating to the reporting periods beginning on and after will not have a significant impact on the financial statements and financial position of the Company Mandatory and optional exemptions IFRS 1 determines two categories of exemptions from the retrospective application of IFRS: mandatory and optional. The Group analyzed its obligation and its ability to apply the above exemptions in the first-time preparation of its IFRS financial statements. Mandatory exemptions All four mandatory exemptions were used in the IFRS consolidated financial statements. Due to the fact that in 2004 the Company sold real property in which it engaged in trade activities and had all the respective information required by IFRS 5, the Group decided on the early application of IFRS 5, at the same time restating comparative income statement data for At the same time the Group met the requirement for not transforming comparative data relating to fixed assets which met the criteria of classification to assets held for trading before 1 January Optional exemptions The Company availed itself of an optional exemption in respect of valuing the business combination which took place before the date of transition to IFRS (1 January 2004); the business combination was not restated in the financial statements. In respect of tangible fixed assets, the cost of purchase/manufacture was applied in accordance with IFRS, and in respect of fixed assets owned or controlled by the Company until the end of 1996 and as at the date of transition to IFRS, the gross values and the accumulated depreciation were remeasured to reflect the impact of the hyperinflationary economy on their values in the period until the end of FINANCIAL RISK MANAGEMENT The operations conducted by the Group are exposed to the following financial risks: - market risk, including the risk of change in the foreign exchange rates (mainly the rate of the EUR to the PLN), the fair value risk related to changes in interest rates and the price risk; - credit risk; - liquidity risk; - risk of cash flow fluctuations resulting from changes in interest rates. The Companies are trying to minimize the potential unfavourable impact of those risks on the financial results. The Management Boards of the Companies directly manage risk, analyzing the scale of the risk on a current basis and taking appropriate decisions

18 a) Market risk - Risk of changing foreign exchange rates The Group engages in international operations consisting mainly of importing goods from the European Economic Area which exposes it to a risk of changes in exchange rates (and specifically the euro). The risk of changing foreign exchange rates results from purchases of goods for resale which are paid for at later dates than the orders are placed. ALMA MARKET SA has signed agreements for the rental of commercial space where both the rent and other charges paid on behalf of the landlords are translated at currently binding exchange rates of the PLN to the EUR. This risk is partly limited by the Company s subletting the commercial and service space to other entities, also on the basis of rent and charges in the PLN equivalent of amounts in EUR. However, ultimately, there is a net currency risk in this respect which has not been hedged to date. Due to the fact that the rental agreements are usually long-term, the Company s general policy in this respect consists of monitoring the PLN/EUR rate fluctuations and their trends on a current basis. In the event of a risk of a significant depreciation in the functional currency compared to the euro, which would indicate the possibility of a long-term increase in the costs of operating commercial facilities and a significant drop in their profitability, hedging decisions in respect of the payments would be taken. - Price risk In respect of purchasing equity securities classified as available for sale in the balance sheet by the companies, the Group is exposed to price risk. Nevertheless, in the presented periods such transactions did not take place and therefore no such risk was incurred. Due to the type of operations in which they engage, the Group companies are not exposed to price risk on bulk goods. b) Credit risk Due to the type of operations in which it engages, the Company is not significantly exposed to the risk of deferred payments in respect of its sales. Sales are made to retail customers on a cash basis or with the use of credit cards. Currently the Company s policy is to limit credit exposure to particular financial institutions; however, due to development plans the policy is temporary and, in the future, the credit risk connected with the Company s use of financial leverage will increase significantly. c) Liquidity risk The Group stipulates maintaining an appropriate level of liquid assets and available finance thanks to a sufficient amount of hedged credit instruments and the ability to close its market positions. The Company s financial services will maintain appropriate financing flexibility using the available financial funds and the credit facilities. d) Risk of changes in cash flows and fair values as a result of changes in interest rates The Company has interest-bearing assets which depend on the market fluctuations of interest rates. However, these assets are not sufficiently material for any potential fluctuations in interest rates to impact cash flows on operating activities. For the Group, the risk of interest rate fluctuations is connected with debt instruments. If any loans or advances bear variable interest rates, the Company is exposed to a risk of changes in cash flows due to fluctuations in interest rates. On the other hand, debt instruments with a fixed interest rate expose the Company to a risk of changes in the fair value as result of changes in interest rates. The Company s policy is to maintain its loans and

19 advances in the form of instruments bearing a variable interest rate; therefore, it should rather be exposed to a risk of changes in cash flows as a result of interest rate fluctuations. The subsidiary Krakchemia S.A. uses forward transactions to hedge its foreign trade payables denominated in EUR. These contracts are valued by co-operating banks at fair value as at the balance sheet date. Result on valuation is charged to profit and loss account of the accounting period and disclosed in the position of net financial cost/income. The subsidiary hedges for % of all import purchases and inter-ue purchase transactions. 4. CRITICAL ASSESSMENTS AND ASSUMPTIONS All assessments and assumptions made by the Group are verified on a current basis. The said assumptions and assessments follow from the Company s experience to date and from other factors such as expected future events which seem justified in given circumstances. The Group companies make assessments and assumptions relating to the future. Such accounting estimates often deviate from actual results. The assessments and assumptions relate to the revaluation of slow-moving inventories made by the Company on a current basis, and expected inventory deficits. Only the final stock counts and revaluations of goods or their scrapping show the actual discrepancies compared to the assessments and may have a negative or positive impact on the Group s results. 5. BUSINESS SEGMENT INFORMATION The Group companies key segments are business segments, with retail and wholesale sales, and to a small extent also lease of commercial space, and as of 12 December 2005 also real estate activities in connection with expanding the Group by Alma Development Sp. z o.o., which was established to engage in support activities on behalf of the Group and other business entities in the area of real estate maintenance and rental, and real estate development projects. Due to the fact that until 31 December 2005 Alma Development Sp. z o.o. has not realized any material transactions, the above segment is not presented in the consolidated financial statements. The Company engages in retail sales in respect of a differentiated assortment of goods, mainly in the commercial facilities of the Parent Company. The Group engages in wholesale activities mainly via the Subsidiary where the following assortment is mainly traded: domestic chemical articles, plastic granulates, foils, plastics, paints, lacquers, chemical reagents, and other. The subsidiary also engages in goods exports immaterial from the point of view of reporting. Other operations of the Parent Company comprise marketing and advertising services, as well as rental of commercial space. Each of the segments constitutes a business entity which offers other products or services. The Group engages in sales on the domestic market

20 Segment results for the 12 months ended 31 December 2005 are as follows: Retail sales Wholesale sales Other activities Discontinued operations Group Total gross sales of the segment Sales between segments (14) (868) (2 037) (2 117) - (5 036) Sales Operating profit (578) Net financial costs (1 205) (1 205) Profit before tax (578) Income tax (33) (4 230) Net profit for the 12-month period ended 31 December 2004 (611) The segment results include income and costs directly and indirectly attributable to a given segment. The above amounts also include intercompany transactions accounted for at selling prices which include a profit margin. - Amounts subject to eliminations are shown separately. - Administrative expenses not attributed to any segment include general administrative expenses and other expenses which arise in the Group and which cannot be directly attributed to a segment. Other items relating to segments, recognized in the income statement Retail sales Wholesale sales Other activities Discontinued operations Group Depreciation (1 704) (150) (88) (1 366) (506) (3 814) Amortization (8) - - (1) (27) (36) Depreciation of investment properties (16) (16) Write-downs of inventories (336) - - (93) - (429) Reversals of inventory write-downs Write-downs of receivables (361) (869) (43) - (209) (1 482) Reversals of receivable write-downs Segment results for the 12 months ended 31 December 2005 are as follows: Profit before tax Income tax (2 784) Net profit for the year Other items relating to segments, recognized in the income statement Nonallocated items Nonallocated items Retail sales Wholesale sales Other activities Nonallocated items Group Segment income Sales between segments (18) (254) (1 114) - (3 136) Sales Operating profit (982) Net financial costs (152) (186) The period of 12 months 2005 Retail sales Wholesale sales Other activities Nonallocated items Group Depreciation (4 633) (155) (19) (449) (5 313) Amortization (117) (15) - (68) (200) Depreciation of investment properties - - (17) - (17) Write-downs of inventories (960) (36) - - (996) Reversals of inventory write-downs Write-downs of receivables (315) (572) - (21) (908) Reversals of trade receivable write-downs