MICROFINANCE ORGANIZATION B.I.G. LLC. Financial Statements. Together with the Independent Auditors Report. Year ended 31 December 2013

Transcription

1 MICROFINANCE ORGANIZATION B.I.G. LLC Financial Statements Together with the Independent Auditors Report Year ended 31 December 2013

2 FINANCIAL STATEMENTS CONTENTS: INDEPENDENT AUDITORS REPORT... 3 STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS 4 FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION... 5 STATEMENT OF COMPREHENSIVE INCOME... 6 STATEMENT OF CHANGES IN EQUITY... 7 STATEMENT OF CASH FLOWS General information Summary of significant accounting policies Critical accounting estimates and judgments Cash and cash equivalents Loans to customers Other assets Property and equipment Intangible assets Investment property Deferred tax assets/(liabilities) Borrowed funds Other liabilities Charter capital Net interest income Other operating income Personnel expenses Rent expenses Other administrative and operating expenses Loss from exchange rate difference, net Income tax expense Commitments and Contingencies Financial instruments risk management Management of capital Transactions with related parties Post balance sheet events... 37

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9 1. General information Microfinance Organization B.I.G LLC (MFO B.I.G LLC) was founded in 2008 as a limited liability company. The Company s charter capital is GEL1,135,714. The legal address of the Company is: # 15 Marjanishvili Str., Tbilisi, Georgia. The supreme governing body of the Company is the General Meeting of Partners. A supervision of the Company s operations is conducted by the Supervisory Board, members of which are appointed by the General Meeting of Partners. Daily management of the Company is carried out by CEO appointed by the Supervisory Board. The Company s mission is to support sustainable development of micro and small entrepreneurial activities by offering optimal financing solutions tailored to the financial position of our clients. The Company aspires to become one of the leading micro lenders in Georgia by leveraging its customer tailored product mix, experience and dedicated staff. Main pillars of the Company s strategy at this stage are to expand geographically to Georgia s five largest regional centers, thus establishing a strong foundation for further development and full-scale entry into rural areas. The main activity of the Company is satisfying the rural populations increasing demand on credit product. The Company s financial products are: individual business loans, agro loans and consumer loans. The Company has a head office and four service centers in Tbilisi and one service centers in Kutaisi as well. 2. Summary of significant accounting policies Principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 2.1 Basis of preparation a) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC Interpretations applicable to companies reporting under IFRS. The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the most appropriate application in applying the accounting policies. The areas where significant judgments and estimates have been made in preparing the financial statements and their effect are disclosed in note 3. b) Basis of measurement The financial statements have been prepared under the historical cost bases as modified by the initial recognition of financial instruments based on fair value. The reporting period for the Company is the calendar year from January 1 to December 31. c) Going concern These financial statements have been prepared on the assumption that the Company is a going concern and will continue its operations for the foreseeable future. The management and shareholder have the intention to further develop the business of the Company in Georgia. The management believes that the going concern assumption is appropriate for the Company. Page 9 of 37

10 2. Summary of significant accounting policies (continued) 2.2 Adoption of new IFRSs a) New standards, interpretations and amendments effective from 1 January 2013 A number of new standards, interpretations and amendments effective for the first time for periods beginning on (or after) 1 January 2013, have been adopted in these financial statements. The nature and effect of each new standard, interpretation and amendment adopted by the Company is detailed below: IAS 1 - Presentation of Items of Other Comprehensive Income Amendments to IAS 1 The amendment requires that items of other comprehensive income must be grouped together into two sections: - Those that will or may be reclassified into profit or loss - Those that will not. As the amendment only affects presentation, there is no effect on the Company s financial position or performance. IAS 1 - Clarification of the requirement for comparative information Amendments to IAS 1 These amendments clarify the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The amendments clarify that the opening statement of financial position, presented as a result of retrospective restatement or reclassification of items in financial statements does not have to be accompanied by comparative information in the related notes. The amendments affect presentation only and have no impact on the Company s financial position or performance. IFRS 10 Consolidated Financial Statements IFRS 10 supersedes IAS 27 (2008) Consolidated and Separate Financial Statements and SIC-12 Consolidation Special Purpose Entities, and introduces a single control model for all entities, including special purpose entities (SPEs), whereby control exists when all of the following conditions are present: - Power over investee - Exposure, or rights, to variable returns from investee - Ability to use power over investee to affect the entity s returns from investee. Other changes introduced by IFRS 10 include: - The introduction the concept of de facto control for entities with less than a 50% ownership interest in an entity, but which have a large shareholding compared to other shareholders - Potential voting rights are only considered when determining if there is control when they are substantive (holder has practical ability to exercise) and the rights are exercisable when decisions about the investees activities that affect the investors return will or can be made Page 10 of 37

11 2. Summary of significant accounting policies (continued) - Specific guidance for the concept of silos, where groups of assets (and liabilities) within one entity are ring-fenced, and each group is considered separately for consolidation. The adoption of IFRS 10 had no effect on the Company s financial statements. IFRS 11 Joint Arrangements IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Nonmonetary Contributions by Venturers, and requires joint arrangements to be classified as either: - Joint operations - where parties with joint control have rights to assets and obligations for liabilities, or - Joint ventures - where parties with joint control have rights to the net assets of the investee. Joint arrangements that are structured through a separate vehicle will generally be treated as joint ventures, unless the terms of the contractual arrangement, or other facts and circumstances indicate that the parties have rights to assets and obligations for liabilities of the arrangement, rather than rights to net assets. Joint ventures are accounted for using the equity method (proportionate consolidation is not permitted by IFRS 11). Parties to a joint operation account for their share of assets, liabilities, revenues and expenses in accordance with their contractual rights and obligations. The adoption of IFRS 11 had no effect on the Company s financial statements. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 sets out the disclosure requirements relating to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. The standard requires a reporting entity to disclose information that helps users to assess the nature and financial effects of the reporting entity s relationship with other entities. As the new standard affects only disclosure, there is no effect on the Company s financial position or performance. IFRS 13 Fair Value Measurement IFRS 13 sets out the framework for determining the measurement of fair value and the disclosure of information relating to fair value measurement, when fair value measurements and/or disclosures are required or permitted by other IFRSs. As a result, the guidance and requirements relating to fair value measurement that were previously located in other IFRSs have now been relocated to IFRS 13. While there has been some rewording of the previous guidance, there are few changes to the previous fair value measurement requirements. Instead, IFRS 13 is intended to clarify the measurement objective, harmonise the disclosure requirements, and improve consistency in application of fair value measurement. IFRS 13 did not materially affect any fair value measurements of the Company s assets or liabilities, with changes being limited to presentation and disclosure, and therefore has no effect on the Company s financial position or performance. Page 11 of 37

12 2. Summary of significant accounting policies (continued) IAS 19 Employee Benefits (Revised 2011) The main changes as a consequence of the revision of IAS 19 include: - Elimination of the corridor approach for deferring gains/losses for defined benefit plans - Actuarial gains/losses on remeasuring the defined benefit plan obligation/asset to be recognised in other comprehensive income rather than in profit or loss, and cannot be reclassified in subsequent periods - Amendments to the timing of recognition for liabilities for termination benefits - Employee benefits expected to be settled (as opposed to due to be settled ) wholly within 12 months after the end of the reporting period are short-term benefits, and are not discounted. These amendments in IAS 19 had no effect on the Company s financial statements as the Company has no any amounts of other employee benefits expected to be settled beyond 12 months. b) New standards, interpretations and amendments not yet effective The following new standards, interpretations and amendments, which are not yet effective and have not been adopted early in these financial statements, will or may have an effect on the Company's future financial statements: IFRS 9 Financial instruments This standard addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Company is yet to assess IFRS 9 s full impact. The Company will also consider the impact of the remaining phases of IFRS 9 when completed by the Board. IFRIC 21, Levies, This IFRIC sets out the accounting for an obligation to pay a levy that is not income tax. The interpretation addresses what the obligating event is that gives rise to pay a levy and when should a liability be recognised. The Company is not currently subjected to significant levies so the impact on the Company is not material. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. Recoverable Amount Disclosures for Non-Financial Assets Amendments to IAS 36 Impairment of Assets These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognized or reversed during the period. These amendments are Page 12 of 37

13 2. Summary of significant accounting policies (continued) effective retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted, provided IFRS 13 is also applied. The Company is yet to assess full impact of this amendment in IAS Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). Financial statements are presented in Georgian lari, which is the Company s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are premeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses that relate to borrowed funds and cash and cash equivalents are presented in the statement of comprehensive income within gain/(loss) from exchange rate differences with other foreign exchange gains and losses. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the transactions. At 31 December 2013 and 2012 the closing rate of exchange used for translating foreign currency balances was: Official rate of the National Bank of Georgia Exchange rate as at ,7363 Exchange rate as at USD 2.4 Financial Instruments Financial assets Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available for sale financial assets. The Company determines the classification of its financial assets upon initial recognition. Fair value through profit or loss Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss. They are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The Company does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss. Page 13 of 37

14 2. Summary of significant accounting policies (continued) Held to maturity investments Non derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to maturity when the Company has positive intention and ability to hold them upon maturity. The Company does not have any assets classified as held to maturity. Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Available-for-sale Non-derivative financial assets not included in the above categories are classified as available for sale and comprise principally the Company's strategic investments in entities not qualifying as subsidiaries, associates or jointly controlled entities as well as corporate bonds. They are carried at fair value with changes in fair value generally recognised in other comprehensive income and accumulated in the available-for-sale reserve; Where there is a significant or prolonged decline in the fair value of an available for sale financial asset (which constitutes objective evidence of impairment), the full amount of the impairment, including any amount previously recognised in other comprehensive income, is recognised in profit or loss. The Company does not have any assets classified as available for sale. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, are not presented separately and are included in the carrying values of related balance sheet items. Derecognition of financial assets The Company derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Company has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring Page 14 of 37

15 2. Summary of significant accounting policies (continued) nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Financial liabilities Financial liabilities are classified as borrowed funds and other financial liabilities. Financial liabilities are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Company derecognises financial liabilities when, and only when, the Company s obligations are discharged, cancelled or they expire. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit and loss. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. IFRS 7 fair value measurement hierarchy IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels: (a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and (c) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels. Impairment of financial assets carried at amortised cost Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The primary factors that the Company considers whether a financial asset is impaired is its overdue status and realisability of related collateral, if any. Page 15 of 37

16 2. Summary of significant accounting policies (continued) The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred: - Any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - The borrower experiences a significant financial difficulty as evidenced by borrower s financial information that the Company obtains; - The borrower considers bankruptcy or a financial reorganisation; - There is adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; - The value of collateral significantly decreases as a result of deteriorating market conditions. The impairment is calculated based on the analysis of assets subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding financial assets being material individually and on the basis of an individual or joint evaluation of financial assets not being material individually. The Company makes individual estimation of mortgage and auto loan impairment and collective estimation for other loan groups. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience and the success of recovery of overdue amounts. Historical experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to reduce the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. It should be noted that the evaluation of losses includes a subjective factor. The management of the Company believes that the amount of recorded impairment is sufficient to cover losses incurred on assets subject to risks at the reporting date, although it is probable that in certain periods the Company can incur losses greater than recorded impairment. 2.5 Cash and cash equivalents Cash and cash equivalents include cash on hand, non-restricted cash on current accounts in banks, and non-restricted cash on bank deposits with original maturity of less than three months. Page 16 of 37

17 2. Summary of significant accounting policies (continued) 2.6 Repossessed collateral Repossessed collateral represents non-financial assets acquired by the Company in settlement of overdue loans. The assets are initially recognised at fair value when acquired and included in property and equipment, investment property or inventories within other assets depending on their nature and the intention in respect of recovery of these assets and are subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets. Inventories of repossessed assets are recorded at the lower of cost or net realisable value. 2.7 Property, equipment and intangible assets Property, equipment and intangible assets are carried at historical cost less accumulated depreciation and recognized impairment loss, if any. Depreciation (amortization) is charged on the carrying value of property and equipment and is designed to write off assets over their useful economic lives. Depreciation (amortization) is calculated on a straight line basis at the following useful lives: Group Useful life (year) Office equipment 5 Fixtures and furniture 5 Vehicles 5 Lease hold improvement According to lease contracts Intangible assets 5-10 Investment property 50 Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of property and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount. Impairment is recognized in the respective period and is included in operating expenses. 2.8 Taxation The tax expense for the period comprises current and deferred tax. Tax is recognized in the statement of comprehensive income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the country where the Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Page 17 of 37

18 2. Summary of significant accounting policies (continued) Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rate (and laws) that has been enacted or substantially enacted by the balance sheet date and is expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity where there is an intention to settle the balances on a net basis. 2.9 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 initially measured at cost, including transaction costs. Subsequent to initial recognition, investment property is carried at historical cost less accumulated depreciation Recognition of income and expense Interest income and expense are recorded in the income statement for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. All other fees, commissions and other income and expense items are generally recorded on an accrual basis 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 Post balance-sheet events Post-balance sheet events and events before the date of financial statements authorization for issue that provide additional information about the Company s financial position are reported in the financial statements. Post-balance sheet events that do not affect the financial position of the Company at the balance sheet date are disclosed in the notes to the financial statements when material Staff costs and related contributions Wages, salaries, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Company. Page 18 of 37

19 2. Summary of significant accounting policies (continued) 2.13 Provisions, contingent ciabilities and contingent assets Contingent liabilities are not reflected in the financial statements, except for the cases when the outflow of economic benefits is likely to origin and the amount of such liabilities can be reliably measured. The information on contingent liabilities is disclosed in the Notes to the financial statements with the exception of cases, when the outflow of economic benefits is unlikely. Contingent assets are not reflected in the financial statements, but the information on them is disclosed when inflow of economic benefits is possible. If economic benefits are sure to occur, an asset and related income are recognized in the financial statements for the period, when the evaluation change occurred. A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from: (a) A contract (through its explicit or implicit terms); (b) Legislation; or (c) Other operation of law. A constructive obligation is an obligation that derives from an entity's actions where: (a) By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. 3. Critical accounting estimates and judgments The Company makes certain estimates and assumptions regarding the future. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair value of financial instruments. Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, there are determined using variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but if it is not feasible, a degree of judgment is required in establishing a fair value. Determination of collateral value. Management monitors market value of collateral on a regular basis. Management uses its experienced judgment to adjust the fair value to reflect current circumstances. The amount and type of collateral depends on the assessment of credit risk of the counterparty. Allowance for impairment of loans and receivables. The Company regularly reviews its loan portfolio to assess impairment. In determining whether an impairment loss should be recorded in the income statement, the Company makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the Page 19 of 37

20 3. Critical accounting estimates and judgments (continued) decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers, or national or local economic conditions that correlate with defaults on assets in the Company. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Initial recognition of related party transactions. In the normal course of business the Company enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or nonmarket interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. In management judgment, at 31 December 2013 and 2012, there were no loans at other than market conditions. Terms and conditions of related party balances are disclosed in Note 24. Income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the Company s belief that its tax return positions are supportable, the Company believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities. As a result the Company minimizes the risks related to this fact. The Company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made. Legal proceedings. The Company only recognizes a provision where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Realization of any contingent liabilities not currently recognized or disclosed in the financial statements could have a material effect on the Company s financial position. Application of these accounting principles to legal cases requires the Company s management to make determinations about various factual and legal matters beyond its control. The Company reviews outstanding legal cases following developments in the legal proceedings and at each balance sheet date, in order to assess the need for provisions in its financial statements. Among the factors considered in making decisions on provisions are the nature of litigation, claim or assessment, the legal process and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including the progress after the date of the financial statements but before those statements are issued), the opinions or views of legal advisers, experience on similar cases and any decision of the Company s management as to how it will respond to the litigation, claim or assessment. Page 20 of 37

21 4. Cash and cash equivalents Cash and cash equivalents as at 31 December 2013 and 2012 can be presented as follows: Cash on current accounts with banks in Georgian Lari 127, ,850 Cash on current accounts with banks in other currencies 292, ,311 Restricted cash on current accounts with banks in other currency* 347, , ,161 As at 31 December 2013 restricted cash was pledged for the JSC TBC bank s borrowing. Additional information of cash and cash equivalents is disclosed in Note Loans to customers Loans to customers as at 31 December 2013 and 2012 can be presented as follows: Originated loans to customers 15,755,698 10,901,389 Accrued interest 349, ,102 16,105,146 11,255,491 Less: allowance for impairment losses (105,605) (56,167) Total loans to customers 15,999,541 11,199,324 Portfolio distribution by loan type is as follows: Mortgage 5,108,617 3,869,733 Business 8,810,777 5,638,244 Auto 1,314,671 1,141,472 Agriculture 871, ,042 Less: impairment provisions (105,605) (56,167) Total Loans to customers 15,999,541 11,199,324 Movements on allowance for impairment are as follows: At 1 January (56,167) (35,486) Charge/Reversal for the year (337,732) (159,998) Amount written off 288, ,317 At 31 December (105,605) (56,167) Individual impairment (79,273) (56,167) Collective impairment (26,332) - (105,605) (56,167) Page 21 of 37

22 5. Loans to customers (continued) The Company s exposure to impairment losses related to loan portfolio is disclosed in note 22. Analysis by credit quality of loans outstanding at 31 December 2013 is as follows: Mortgage Business Auto Agriculture Total Current and not impaired 4,751,958 8,700,807 1,099, ,114 15,416,227 Past due but not impaired Less than 30 days overdue 33,014-1,405-34, days overdue 70,991-52, ,393 More than 180 days overdue 11,751 41,602 71, ,598 Loans individually determined to be impaired: Less than 30 days overdue days overdue 16,481-3,689-20,170 More than 180 days overdue 224,422-86, ,004 Loans collectively determined to be impaired: Less than 30 days overdue - 6, , days overdue - 20,349-6,967 27,316 More than 180 days overdue - 41, ,126 5,108,617 8,810,777 1,314, ,081 16,105,146 Less impairment provisions (52,025) (24,286) (27,248) (2,046) (105,605) Total Loans to customers 5,056,592 8,786,491 1,287, ,035 15,999,541 Analysis by credit quality of loans outstanding at 31 December 2012 is as follows: Mortgage Business Auto Agriculture Total Current and not impaired 3,580,476 5,582, , ,042 10,676,822 Past due but not impaired: - Less than 30 days overdue 33,827 27,151 19,379-80, days overdue 141,822 13,654 29, ,592 More than 180 days overdue 113,608 15, , ,241 Loans individually determined to be impaired: Less than 30 days overdue days overdue More than 180 days overdue ,479-65,479 3,869,733 5,638,244 1,141, ,042 11,255,491 Less impairment provisions - - (56,167) - (56,167) Total Loans to customers 3,869,733 5,638,244 1,085, ,042 11,199,324 The primary factors that the Company considers whether a loan is impaired are its overdue status, financial position of a borrower and realisability of related collateral, if any. Page 22 of 37

23 5. Loans to customers (continued) Information about collateral at 31 December 2013 is as follows: Mortgage Business Auto Agriculture Total Unsecured loans 3,674 4,862,464 1, ,143 5,522,302 Loans collateralized by: Real estate 5,104,943 3,933, ,938 9,254,138 Movable property - 15,056 1,313,650-1,328,706 5,108,617 8,810,777 1,314, ,081 16,105,146 Less impairment provisions (52,025) (24,286) (27,248) (2,046) (105,605) Total Loans to customers 5,056,592 8,786,491 1,287, ,035 15,999,541 Information about collateral at 31 December 2012 is as follows: Mortgage Business Auto Agriculture Total Unsecured loans 4,281 3,759,026 4, ,904 4,295,411 Loans collateralized by: - Real estate 3,865,452 1,866,548-78,138 5,810,138 Movable property - 12,670 1,137,272-1,149,942 3,869,733 5,638,244 1,141, ,042 11,255,491 Less impairment provisions - - (56,167) - (56,167) Total Loans to customers 3,869,733 5,638,244 1,085, ,042 11,199, Other assets Other assets as at 31 December 2013 and 2012 can be presented as follows: Advance payment 28,823 48,732 Receivable from penalty 14,899 87,897 Other 56,568 18, , ,191 Page 23 of 37

24 7. Property and equipment Property and equipment as at 31 December 2013 and 2012 can be presented as follows: Historical cost Building Office equipment Leasehold Fixtures and improvements furniture Vehicles Total Balance at 31 December , ,524 78,843 39,827 17, ,181 Additions - 94,455 70,546 27,044 19, ,745 Transfer to investment property (250,000) (250,000) Disposals Balance at 31 December , ,389 66,871 37, ,926 Additions - 59,241 45,291 13, ,436 Disposals Balance at 31 December , ,680 80,775 37, ,362 Accumulated depreciation Balance at 31 December 2011 (16,952) (27,349) (9,304) (8,495) (2,916) (65,016) Depreciation charge for the year (12,534) (44,227) (30,979) (10,250) (6,446) (104,436) Transfer to investment property 29, ,486 Disposals Balance at 31 December (71,576) (40,283) (18,745) (9,362) (139,966) Depreciation charge for the year - (57,306) (50,382) (14,338) (7,537) (129,563) Disposals Balance at 31 December (128,882) (90,665) (33,083) (16,899) (269,529) Net book value At 31 December , ,106 48,126 28, ,960 At 31 December , ,015 47,692 20, ,833 Page 24 of 37

25 8. Intangible assets Intangible assets as at 31 December 2013 and 2012 can be presented as follows: Historical cost Operating software Other software Total Balance at 31 December ,720 2,000 92,720 Additions 69,643 6,241 75,884 Disposals Balance at 31 December ,363 8, ,604 Additions - 3,800 3,800 Disposals Balance at 31 December ,363 12, ,404 Accumulated amortization Balance at 31 December 2011 (8,515) (700) (9,215) Amortization charge for the year (12,836) (970) (13,806) Disposals Balance at 31 December 2012 (21,351) (1,670) (23,021) Amortization charge for the year (16,495) (1,256) (17,751) Disposals Balance at 31 December 2013 (37,846) (2,926) (40,772) Net book value Balance at 31 December ,012 6, ,583 Balance at 31 December ,517 9, , Investment property Investment property includes building on the Company's balance sheet. Total area of the building is 100 square meters. The building is located: # 15 Marjanishvili Str., Tbilisi, Georgia. The historical cost of investment property is GEL250,000 accumulated depreciation is GEL33,897. Asset s fair value equals to its book value. As at 31 December 2013 investment property was pledged for the JSC TBC Bank s borrowing. 10. Deferred tax assets/(liabilities) Deferred tax assets/(liabilities) as at 31 December 2013 and 2012 can be presented as follows: At 1 January 4,895 (7,505) Recognized in profit and loss Tax benefit 33,180 12,400 Recognized in other comprehensive income - - At 31 December 38,075 4,895 Page 25 of 37

26 10. Deferred tax assets/(liabilities) (continued) Temporary differences as at 31 December 2013 can be presented as follows: Asset Liability Net (Charged)/ credited to profit or loss (Charged)/ credited to equity Property, Plant and Equipment - (12,281) (12,281) 4,353 - Intangible assets - (2,942) (2,942) (303) - Loans to customers 51,700-51,700 18,501 - Other Assets - (2,235) (2,235) 10,950 - Borrowed Funds Other liabilities 3,216-3,216 (938) - Tax asset/(liabilities) 55,533 (17,458) 38,075 33,180 - Set off of tax (17,458) 17, Net tax assets/(liabilities) 38,075-38,075 33,180 - Temporary differences as at 31 December 2012 can be presented as follows: Asset Liability Net (Charged)/ credited to profit or loss (Charged)/ credited to equity Property and Equipment - (16,634) (16,634) (3,538) - Intangible assets - (2,639) (2,639) (1,317) - Loans to customers 33,199-33,199 23,486 - Other Assets - (13,185) (13,185) (9,440) - Other liabilities 4,154-4,154 3,209 - Tax asset/(liabilities) 37,353 (32,458) 4,895 12,400 - Set off of tax (32,458) 32, Net tax assets/(liabilities) 4,895-4,895 12, Borrowed funds Borrowed funds as at 31 December 2013 and 2012 can be presented as follows: Loans from financial institutions 1,075, ,877 Loans from individuals: Shareholder 11,692,361 8,735,666 Other 1,149, ,934 13,917,422 9,706,477 Current Non-current Current Non-current Originated loans 1,704,368 12,200,403 1,055,938 8,650,539 Accrued interest 12, ,717,019 12,200,403 1,055,938 8,650,539 Page 26 of 37

27 11. Borrowed funds (continued) The Company s major lenders are shareholders. The interest rates on the borrowed funds vary from 11.5% to 14.5%. The majority of the Company's long-term loan contracts contain different financial and other covenants, key covenants include: PAR over 30 days to be less than 4.5% Loans to customers to be more than GEL4,000,000 There is a regular communication between the lenders and the Company regarding the covenants and the Company is in compliance with all the financial and other covenants as agreed with the lenders. Additional information of borrowed funds is disclosed in Note Other liabilities Other liabilities as at 31 December 2013 and 2012 can be presented as follows: Trade payables 27,667 35,910 Salaries 21,441 27,694 Property 4,025 1,249 Other 2, ,310 65, Charter capital Charter capital as at 31 December 2013 and 2012 can be presented as follows: Shareholders % 2013 % 2012 Simon Chetrit 51.0% 579, % 521,292 Davit Asanishvili 9.8% 111, % 111,300 Zurab Davlianidze 9.8% 111, % 111,300 Giorgi Akhvlediani 9.8% 111, % 111,300 Aleksandre Sokolovski 9.8% 111, % 111,300 Natela Kekelidze 9.8% 111, % 111,300 Natalia Kvantaliani % 28,961 Avi Miller % 28, % 1,135, % 1,135,714 In 2013 Shareholder Simon Chetrit acquired 5.2% and became owner of the Company s 51% shares. According to the Company s charter, voting rights is granted proportionally of the company s shares and at least 75% of votes are required for making decision. Page 27 of 37