Doğuş Holding Anonim Şirketi and its Subsidiaries

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2 Table of Contents Independent Auditors Report Consolidated Balance Sheet Consolidated Income Statement Consolidated Statement of Recognised Income and Expense Consolidated Statement of Cash Flows Appendix: Supplementary Information Convenience Translation to US Dollar

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5 Consolidated Balance Sheet As at 31 December 2008 Currency: Thousands of New Turkish Lira ( YTL ) Notes Assets Property and equipment 13 2,575,568 2,240,202 Intangible assets 14 1,197,110 1,005,876 Investments in debt securities 15 7,972,673 5,389,836 Investments in equity securities 16 48,269 51,790 Investment property 17 1,052, ,508 Other non-current assets ,445 1,581,276 Deferred tax assets , ,642 Total non-current assets 13,839,727 11,011,130 Inventories , ,900 Accounts receivable 20 1,214, ,350 Due from related parties 38 14,998 26,821 Other current assets , ,133 Banking loans and advances to customers 23 16,560,166 12,559,710 Banking loans and advances to banks 24 2,418,882 1,525,820 Financial assets at fair value through profit or loss 25 76, ,383 Cash and cash equivalents 26 2,256,649 1,102,373 Total current assets 24,055,233 16,880,490 Total assets 37,894,960 27,891,620 Equity Paid-in capital 2,010,192 2,010,192 Capital stock held by subsidiaries (53,655) (53,655) Share premium 159, ,350 Fair value reserves 36,490 47,346 Translation reserve 49,421 4,048 Hedging reserve 7,362 8,044 Revaluation surplus 1,024, ,603 Retained earnings 2,322,134 1,897,556 Total equity attributable to equity holders of the Company 5,556,161 4,899,484 Minority interest Şahenk Family 100,530 85,344 Others 100, ,898 Total minority interest 200, ,242 Total equity 27 5,756,798 5,111,726 Liabilities Long-term bank borrowings 28 4,535,307 2,669,875 Deferred tax liabilities ,297 57,831 Retirement benefit obligations 30 31,006 49,742 Other non-current liabilities , ,659 Total non-current liabilities 5,078,521 2,907,107 Short-term bank borrowings 31 1,969,524 1,166,012 Short-term portion of long-term bank borrowings 28 1,435,814 1,011,857 Banking deposits from banks , ,187 Banking customers deposits 33 16,809,305 12,442,193 Obligations under repurchase agreements 34 3,370,491 2,596,489 Accounts payable 35 1,332, ,397 Due to related parties 38 3,695 5,921 Taxes payable on income 12 39,028 2,015 Other current liabilities 36 1,458,756 1,220,716 Total current liabilities 27,059,641 19,872,787 Total liabilities 32,138,162 22,779,894 Total equity and liabilities 37,894,960 27,891,620 The accompanying notes are an integral part of these consolidated financial statements. 1

6 Consolidated Income Statement For the Year Ended 31 December 2008 Notes Revenues 6,962,589 5,682,177 Cost of revenues (4,968,267) (4,050,094) Gross profit 7 1,994,322 1,632,083 Administrative expenses 8 (965,799) (726,949) Selling, marketing and distribution expenses (193,827) (165,556) Impairment losses, net 9 (181,974) (75,671) Trading gain / (loss), net ,504 (105,737) Other operating income, net , ,922 Results from operating activities 1,040, ,092 Finance income 873, ,520 Finance expense (1,410,442) (450,335) Net finance costs 11 (537,243) (34,815) Other non-operating expense -- (25,482) Share of profit of equity accounted investees 5,592 2,754 Profit before income tax 508, ,549 Income tax expense 12 (98,486) (70,772) Profit for the period 410, ,777 Attributable to: Equity holders of the Company 437, ,097 Minority interest 27 (27,099) 19,680 -Şahenk Family (6,998) 6,468 -Others (20,101) 13,212 Profit for the period 410, ,777 The accompanying notes are an integral part of these consolidated financial statements. 2

7 Consolidated Statement of Recognised Income and Expense For the Year Ended 31 December 2008 Notes Revaluation of property and equipment , ,606 Change in fair value of available-for-sale financial assets 27 (10,856) 17,086 Change in translation reserve 27 45,373 (532) Effective portion changes in fair value of cash flow hedges 27 (682) 7,240 Deferred tax on income and expenses recognized directly in equity 12 (49,439) (2,460) Income and expense recognised directly in equity 239, ,940 Profit for the period 410, ,777 Total recognised income and expense for the period 649,568 1,139,717 Attributable to: Equity holders of the Company 677,531 1,118,264 Minority interest (27,963) 21,453 Total recognised income and expense for the period 649,568 1,139,717 The accompanying notes are an integral part of these consolidated financial statements. 3

8 Consolidated Statement of Cash Flows For the Year Ended 31 December 2008 Notes Cash flows from operating activities Profit for the period 410, ,777 Adjustments for: Impairment losses 9 181,974 75,671 Impairment of investment property -- 25,482 Fair value change in tangible assets held for sale (35) Fair value change in investment property 10 (134,574) (2,795) Provision for employee severance indemnity 6, 29 15,851 6,911 Provision for retirement benefit obligation 6, 30 (18,735) 49,742 Depreciation and amortisation 6 137, ,401 Technical reserves relating to insurance operations 6 7,124 8,109 Gain on sales of property and equipment (8,024) (44,906) Share of (profit)/loss of equity accounted investees 6 (5,592) (2,754) Change in accrued interest expense/(income), net 6 (206,053) (14,349) Provision for taxes on income ,555 92,814 Deferred tax charge/(benefit) 12 (37,069) (22,042) Gain on sale of founder shares 10 (232,444) -- Warranty expense 24,744 32, , ,875 Changes in operating assets and liabilities Change in banking customer deposits 5,417,373 3,197,405 Change in banking deposits from banks (49,008) 268,303 Change in banking loans and advances to banks (572,176) (624,288) Change in balances with the Central Bank 947,255 (599,504) Change in banking loans and advances to customers (5,815,617) (2,647,761) Change in financial assets at fair value through profit or loss 91,354 (63,479) Change in other assets (395,631) 180,392 Change in inventories (368,499) 126,775 Change in accounts receivable (455,609) 73,197 Change in due from related parties 11,823 (12,835) Change in obligations under repurchase agreement 1,004,854 1,013,842 Change in accounts payable 641,185 12,709 Change in due to related parties (2,226) (179,596) Change in other liabilities 332, ,524 1,057,907 1,937,559 Interest paid (2,026,638) (1,277,696) Interest received 3,060, ,408 Taxes paid (98,542) (125,060) Dividend paid 27 (22,279) (22,417) Employee termination indemnity paid 29 (8,928) (3,065) Net cash from operating activities 1,962,457 1,032,729 Cash flows from investing activities Proceeds from sales of investments in equity securities -- (7,792) Increase in interest in consolidated subsidiaries (24,024) (65) Decrease in interest in consolidated subsidiaries 40,371 4,874 Proceeds from sale of founder shares 272, Acquisitions of investment property (20,835) (3,016) Increase in investments in debt securities (3,606,682) (1,180,032) Acquisition of property and equipment and intangible assets (750,616) (604,764) Proceeds from sale of property and equipment 95,582 61,927 Cash paid on acquisitions, net of cash acquired -- (928,704) Cash flows (used in)/from investing activities (3,994,142) (2,657,572) Cash flows from financing activities Change in short-term bank borrowings, net 1,470,641 (221,196) Change in long-term bank borrowings, net 2,239,115 1,305,231 Cash flows (used in)/provided by financing activities 3,709,756 1,084,035 Net increase/(decrease) in cash and cash equivalents 1,678,071 (540,808) Cash and cash equivalents at 1 January 1,537,606 2,078,414 Cash and cash equivalents at 31 December 26 3,215,677 1,537,606 The accompanying notes are an integral part of these consolidated financial statements. 4

9 31 December 2008 Notes to the consolidated financial statements Note Description Pages 1 Reporting entity 6 2 Basis of preparation 6 3 Significant accounting policies 7 4 Determination of fair values 32 5 Financial risk management 34 6 Segment reporting 47 7 Revenues and cost of revenues 52 8 Administrative expenses 52 9 Impairment losses Other operating income, net Net finance costs Taxation Property and equipment Intangible assets Investments in debt securities Investments in equity securities Investment property Other non-current assets Inventories Accounts receivable Due from/due to customers for contract work Other current assets Banking loans and advances to customers Banking loans and advances to banks Financial assets at fair value through profit or loss Cash and cash equivalents Capital and reserves Long-term bank borrowings Other non-current liabilities Retirement benefit obligation Short-term bank borrowings Banking deposits from banks Banking customer deposits Obligations under repurchase agreements Accounts payable Other current liabilities Commitments and contingencies Related party disclosures Financial instruments Use of estimates and judgments Group enterprises Significant events Subsequent events 117 Appendix: Supplementary information 5

10 1 Reporting entity Doğuş Holding Anonim Şirketi ( Doğuş Holding or the Company ) was established in 1975 to invest in and coordinate the activities of companies operating in different industries including banking and finance, automotive, construction, tourism, media and real estate and is registered in Turkey. Doğuş Holding is owned and managed by the members of Şahenk Family. As at 31 December 2008, Doğuş Holding has 53 (2007: 52) subsidiaries (the Subsidiaries ), 32 (2007: 31) joint ventures (the Joint Ventures ) and 8 (2007: 7) associates (the Associates ) (referred to as the Group or Doğuş Group herein and after). The consolidated financial statements of Doğuş Group as at and for the year ended 31 December 2008 comprises Doğuş Holding and its subsidiaries and the Group s interest in associates and jointly controlled entities as explained in more detail in note 41, Doğuş Holding holds controlling interest directly or indirectly via other companies owned and/or exercising the control over the voting rights of the shares held by the members of the Şahenk Family, in all its subsidiaries included in the Group. The Group operates partnerships and has distribution, management and franchise agreements with internationally recognised brand names, such as General Electric Consumer Finance, Volkswagen AG, Volkswagen Finance AG, Audi AG, Porsche AG, Bentley Motors Limited, Seat SA, Scania, Krone, Meiller Fahrzeug&Maschinenfabrik-GMBH&Co KG, Lamborghini S.p.A., Thermo King, ITT Sheraton, Neckerman Reisen, Hyatt International Ltd., HMS International Hotel GMBH, Emporio Armani, Guccio Gucci Spa, CNBC, Loro Piana, Aldiana GMBH and Starwood Hotel & Resort Worldwide Inc. The address of the registered office of Doğuş Holding is as follows: Eski Büyükdere Caddesi Oycan Plaza No: Maslak/ İstanbul-Turkey The number of employees of the Group at 31 December 2008 is approximately 20,000 (2007: 20,395). 2 Basis of preparation (a) Statement of compliance Doğuş Group entities operating in Turkey maintain their books of account and prepare their statutory financial statements in New Turkish Lira ( YTL ) in accordance with the Accounting Practice Regulations as promulgated by the Banking Regulatory and Supervision Agency ( BRSA ) applicable to Türkiye Garanti Bankası Anonim Şirketi ( Garanti Bank ), Turkish insurance legislation and accounting principles applicable to insurance business, and accounting principles per Turkish Uniform Chart of Accounts and per Capital Market Board of Turkey applicable to entities operating in other businesses. Doğuş Group s foreign entities maintain their books of account and prepare their statutory financial statements in accordance with the generally accepted accounting principles and the related legislation applicable in the countries they operate. The accompanying consolidated financial statements are based on these statutory records with adjustments and reclassifications for the purpose of fair presentation in accordance with International Financial Reporting Standards ( IFRS ). 6

11 2 Basis of preparation (continued) (b) Basis of measurement (c) (d) The consolidated financial statements have been prepared on the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the following: derivative financial instruments are measured at fair value, available-for-sale financial assets are measured at fair value, financial instruments at fair value through profit and loss are measured at fair value, investment property is measured at fair value, certain tangible assets are measured at fair value. The methods used to measure the fair values are discussed further in note 4. Functional and presentation currency These consolidated financial statements are presented in YTL which is Doğuş Holding s functional currency. All financial information presented in YTL has been rounded to the nearest thousand. Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Note 4 - Determination of fair values Note 14 Intangible assets Note 15 Investment in debt securities Note 23 Banking loans and advances to customers Note 25 Financial assets at fair value through profit or loss Note 30 Retirement benefit obligation Note 32 Banking deposits from banks Note 39 Financial instruments Note 40 Use of estimates and judgements 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. Certain comparative amounts have been reclassified to conform with the current year s presentation as summarised below: For the year ended 31 December 2007, foreign exchange gain related to derivative transactions amounting to YTL 67,488 thousand which were previously reported under trading gain/(loss), net were reclassified to finance income, net. 7

12 3 Significant accounting policies (continued) (a) Basis of consolidation The accompanying consolidated financial statements include the accounts of the parent company, Doğuş Holding, its subsidiaries, joint ventures and associates on the basis set out in sections below. The financial statements of the entities included in the consolidation have been prepared as of the date of the consolidated financial statements. (i) (ii) (iii) (iv) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Special purpose entities The Group has established a number of special purpose entities ( SPEs ) to accomplish a narrow and well defined objective such as securitisation of particular assets, or the execution of specific borrowing or lending transactions. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE s risks and rewards, the Group concludes that it controls the SPE. SPEs controlled by the Group were established under terms that impose strict limitations on the decision-making powers of the SPEs management and that result in the Group receiving the majority of the benefits related to the SPEs operations and net assets, being exposed to risks incident to the SPEs activities, and retaining the majority of the residual or ownership risks related to the SPE or its assets. Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The consolidated financial statements include the Group s share of the income and expenses and equity movements of associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. Joint ventures Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the proportionate consolidation method. The consolidated financial statements include the Group s proportionate share of the enterprises assets, liabilities, revenues and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. 8

13 3 Significant accounting policies (continued) (a) (v) (b) Basis of consolidation (continued) Transactions eliminated on consolidation Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Accounting in hyperinflationary economies Until 31 December 2005, the financial statements of the Turkish entities have been restated for the changes in the general purchasing power of the New Turkish Lira based on IAS 29 Financial Reporting in Hyperinflationary Economies. Beginning from January 2006, it was declared that Turkey should be considered a nonhyperinflationary economy under IAS 29. Therefore, IAS 29 has not been applied to the accompanying consolidated financial statements since 1 January (c) (i) (ii) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments or a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognised directly in equity (see (iii) below). Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to YTL at exchange rates at the reporting date. The income and expenses of foreign operations are translated to YTL at average exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in equity. Such differences are recognised in the translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss. Foreign currency gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the translation reserve. 9

14 3 Significant accounting policies (continued) (c) (iii) (d) (i) Foreign currency (continued) Hedge of net investment in foreign operation Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in foreign operation are recognised directly in equity, in the translation reserve, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged net investment is disposed of, the cumulative amount in equity is transferred to profit or loss as an adjustment to the profit or loss on disposal. Financial instruments Non-derivative financial instruments Non derivative financial instruments comprise investments in debt and equity securities, accounts receivable, due from related parties, banking loans and advances to customers and banks, financial assets at fair value through profit or loss, cash and cash equivalents, accounts payable, bank borrowings, banking deposits from banks, banking deposits from customers, obligations under repurchase agreements, due to related parties, certain purchased loans and derivative contracts that are not designated as effective hedging instruments, liabilities from short-term sales of financial instruments. In general, the fair values of financial instruments are based on their quoted market prices at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, fair value of an instrument is estimated using the available market information and the appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to develop the estimated fair value. Accordingly, the estimates made are not necessarily indicative of the amounts that could be realised in current market exchange. The fair values of derivatives that are not exchange-traded are the estimated amounts that the Group would receive or pay to terminate the contracts at the balance sheet date taking into account current market conditions and the current creditworthiness of the counter parties. Non-derivative financial instruments are recognised initially at fair value plus, directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below: Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, balances with Central Bank of Turkey ( CBT ) and other central banks and other liquid assets. Money market placements are classified in banking loans and advances to banks. Accounting for interest income and expenses for banking and finance segment is discussed in note 3 (q). Accounting for finance income and expenses for segments other than banking and finance is discussed in note 3 (t). Held to maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to-maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Premiums and discounts, including initial transaction costs are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. These include certain banking loans and advances to banks and customers and certain debt instruments. 10

15 3 Significant accounting policies (continued) (d) Financial instruments (continued) (i) Non-derivative financial instruments (continued) Available-for-sale financial assets The Group s certain debt and equity instruments are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein are recognised directly in equity, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at amortised cost. When an instrument is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. Financial assets at fair value through profit or loss An instrument is classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. These include investments, certain purchased loans and derivative contracts that are not designated as effective hedging instruments, and liabilities from short-term sales of financial instruments. Financial instruments are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. All trading derivatives in a net receivable position (positive fair value) as well as options purchased, are reported as trading assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as trading liabilities. Banking loans and receivables Banking loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the banking and finance segment jointly controlled entity and its subsidiaries provide money, goods and services directly to a debtor with no intention of trading the receivable. Banking loans and receivables comprise banking loans and advances to banks and customers. Banking loans and receivables are measured at amortised cost less impairment losses. Banking loans and receivables provided by the banking and finance segment jointly controlled entities are classified as banking loans and advances, and reported net of allowances to reflect the estimated recoverable amounts. Amortised cost is calculated on the effective interest rate method. Premium discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. 11

16 3 Significant accounting policies (continued) (d) (i) Financial instruments (continued) Non-derivative financial instruments (continued) Finance lease receivable Leases where the entire risks and rewards incident to ownership of an asset are substantially transferred to the lessee are classified as finance leases. A receivable at an amount equal to the present value of the lease payments, including any guaranteed residual value, is recognised. The difference between the gross receivable and the present value of the receivable is unearned finance income and is recognised over the term of the lease using the effective interest rate method. Finance lease receivables are included in banking loans and advances to customers. Other Other non derivative financial instruments are measured at amortised cost using the effective interest rate method, less any impairment losses (see accounting policy 3m). Change in accounting policy In October 2008, the IASB issued Reclassification of Financial Assets (Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. The amendment to IAS 39 permits an entity to reclassify non-derivative financial assets, other than those designated at fair value through profit or loss upon initial recognition, out of the fair value through profit or loss category if they are no longer held for the purpose of being sold or repurchased in the near term, as follows: If the financial asset would have met the definition of loans and receivables, if the financial asset had not been required to be classified as fair value through profit or loss at initial recognition, then it may be reclassified if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of loans and receivables, then it may be reclassified out of the financial assets at fair value through profit or loss category only in rare circumstances. The amendments are effective retrospectively from 1 July Gains and losses on subsequent measurement Gains and losses arising from changes in the fair values of financial instruments at fair value are recognised in profit or loss, whereas gains and losses arising from changes in the fair value of cash flow hedges and available-for-sale assets are deferred as a separate component of equity. Derecognition A financial asset is derecognised when the control over the contractual rights that comprise that asset is lost. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Available-for-sale assets and assets held for trading that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Group commits to sell the assets. The specific identification method is used to determine the gain or loss on derecognition. Held-to-maturity instruments and banking loans and advances are derecognised on the day they are transferred by the Group. 12

17 3 Significant accounting policies (continued) (d) Financial instruments (continued) (ii) Derivative financial instruments held for risk management purposes The Group holds derivative financial instruments to hedge its certain risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash flow hedges Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss. Economic hedges Hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies. Changes in the fair value of such derivatives are recognised in profit or loss as part of foreign currency gains and losses. (iii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Repurchase of share capital (Treasury shares) When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is net off any tax effects, and is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and resulting surplus or deficit on the transaction is transferred to/from retained earnings. 13

18 3 Significant accounting policies (continued) (e) (i) Property and equipment Recognition and measurement The costs of items of property and equipment purchased before 31 December 2005 are restated for the effects of inflation in YTL units current at 31 December 2005 pursuant to IAS 29. Property and equipment purchased after this date are recorded at their historical costs. Accordingly, property and equipment are carried at cost, less accumulated depreciation and accumulated impairment losses (see accounting policy 3m), except as explained below: In the first year of application of IAS 29, the construction machineries owned by a consolidated entity, Doğuş İnşaat ve Ticaret Anonim Şirketi ( Doğuş İnşaat ), were reflected at their replacement costs on the basis of publicly available information on their quoted prices or on the prices of the comparable items as of 31 December 1997; and such replacement costs were restated for the effects of inflation in YTL units current at 31 December 2005 pursuant to IAS 29. In 2006, Doğuş İnşaat has assigned a third party appraisal company to count and evaluate the market prices of its construction machineries and motor vehicles. Based on the report of the appraisal company Doğuş İnşaat has adjusted its construction machineries and motor vehicles. In 2001, the Group started to reflect the land and buildings at their fair values as appraised by independent third party appraisers. Any increase arising on the revaluation of such land and buildings is credited to the properties revaluation surplus account under equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to profit or loss to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation surplus relating to a previous revaluation of that asset. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognised net within other operating income, net in profit or loss. When revalued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings. 14

19 3 Significant accounting policies (continued) (e) (ii) (iii) (iv) Property and equipment (continued) Reclassification to investment property Property that is being constructed for future use as investment property is accounted for as property and equipment until construction or development is complete, at which time it is remeasured to fair value and reclassified as investment property. Any gain or loss arising on remeasurement is recognised in profit or loss. When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on remeasurement is recognised directly in the equity. Any loss is recognised immediately in profit or loss. Subsequent costs The cost of replacing part of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Description Year Buildings 50 Furniture and equipment 4-20 Motor vehicles 5-10 Leasehold improvements are amortised over the periods of the respective leases, also on a straight-line basis. Depreciation methods, useful lives and residual values are reassessed at each reporting date. Tangible assets purchased before 2005 at Garanti Bank and its subsidiaries are depreciated over their estimated useful lives on a straight line basis from the date of their acquisition. Assets acquired after this date are depreciated based on the declining balance method, one of the accelerated depreciation methods. 15

20 3 Significant accounting policies (continued) (f) (i) (ii) (iii) (iv) (g) Intangible assets Goodwill Goodwill (negative goodwill) arises on the acquisition of subsidiaries, associates and joint ventures. Goodwill represents the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses (see accounting policy 3m). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment. Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses (see accounting policy 3m). Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. Securities borrowing and lending business Investments lent under securities lending arrangements continue to be recognised in the consolidated balance sheet and are measured in accordance with the accounting policy for the related assets as appropriate. Cash collateral received in respect of securities lent is recognised as liabilities to either banks or customers. Investments borrowed under securities borrowing agreements are not recognised. Cash collateral placements in respect of securities borrowed are recognised under banking loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognised on an accrual basis over the period of the transactions and are included in Revenues or Cost of revenues. 16

21 3 Significant accounting policies (continued) (h) Repurchase and resale agreements over investments The Group enters into purchases of investments under agreements to resell ( reverse repo ) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised in banking loans to either banks or customers. The receivables are shown as collateralised by the underlying security. Investments sold under repurchase agreements ( repo ) continue to be recognised in the consolidated balance sheet and are measured in accordance with the accounting policy for the related assets as appropriate. The proceeds from the sale of the investments are reported as obligations under repurchase agreements, a liability account. Income and expenses arising from the repurchase and resale agreements over investments are recognised on an accrual basis over the period of the transactions and are included in Revenues or Cost of revenues. (i) Investment property Investment property is property held either to earn rental income or for capital appreciation or for both but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at fair value with any change therein recognised in profit or loss. When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. (j) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Lease liabilities are reduced through repayments of principal, while the finance charge component of the lease payment is charged directly to profit or loss. Other leases are operating leases and, except for investment property, the leased assets are not recognised on the Group s consolidated balance sheet. Investment property held under an operating lease is recognised on the Group s consolidated balance sheet at its fair value. (k) Inventories Inventories are measured at the lower of cost and net realisable value. Except as discussed in the following paragraphs, the cost of inventories is mainly based on the moving weighted average, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories cost includes an appropriate share of production overheads based on normal operating capacity. Cost of trading goods and trading properties are determined on specific identification basis by the entities operating in automotive and construction businesses. Trading properties comprised land and buildings that are held for trading purposes. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 17

22 3 Significant accounting policies (continued) (l) Construction work in progress Construction work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognised to date less progress billings and recognised losses. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group s contract activities based on normal operating capacity. Construction work in progress is presented as part of accounts receivable in the consolidated balance sheet. If payments received from customers exceed the income recognised, then the difference is presented as deferred income in the consolidated balance sheet. The asset, Due from customers for contract work represents revenues recognised in excess of amounts billed. The liability, Due to customers for contract work represents billings in excess of revenues recognised. (m) (i) (ii) Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an availablefor-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity. Loans and receivables and held-to-maturity investments The recoverable amounts of banking loans and receivables and held-to-maturity instruments are calculated as the present values of the expected future cash flows discounted at the instrument s original effective interest rate. Short-term balances are not discounted. 18

23 3 Significant accounting policies (continued) (m) Impairment (continued) (ii) Loans and receivables and held-to-maturity investments (continued) Loans and receivables are presented net of specific and portfolio basis allowances for uncollectibility. Specific allowances are made against the carrying amounts of loans and receivables that are identified as being impaired based on regular reviews of outstanding balances to reduce these banking loans and receivables to their recoverable amounts. In assessing the recoverable amounts of banking loans and receivables, the estimated future cash flows are discounted to their present value. Portfolio basis allowances are maintained to reduce the carrying amount of portfolios of similar banking loans and receivables to their estimated recoverable amounts at the balance sheet date. The expected cash flows for portfolios of similar assets are estimated based on previous experience and considering the credit rating of the underlying customers and late payments of interest or penalties. Increases in the allowance account are recognised in profit or loss. When a banking loan is known to be uncollectible, all the necessary legal procedures have been completed, and the final loss has been determined, the loan is written off directly. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after the write down, the writedown or allowance is reversed through profit or loss. (iii) Financial assets remeasured to fair value The recoverable amount of an equity instrument is its fair value. The recoverable amount of debt instruments and purchased loans remeasured to fair value is calculated as the present value of the expected future cash flows discounted at the current market rate of interest. Where an asset remeasured to fair value is impaired, the write-down is recognised in profit or loss. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through profit or loss. (iv) Non-financial assets The carrying amounts of the Group s non-financial assets, other than investment property, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets ( the cash generating unit ). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. 19