Aktif Yatırım Bankası Anonim Şirketi and Its Subsidiaries

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2 Aktif Yatırım Bankası Anonim Şirketi and Its Subsidiaries TABLE OF CONTENTS Page Independent Auditors Report Consolidated Statement of Financial Position 1 Consolidated Statement of Comprehensive Income 2 Consolidated Statement of Changes in Equity 3 Consolidated Statement of Cash Flows 4 Notes to the Consolidated Financial Statements 5 52

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5 Consolidated Statement of Financial Position As of 31 December 2009 Note 31 December December 2008 ASSETS Cash and cash equivalents ,927 54,499 Reserve deposits at Central Bank 16 8,395 4,897 Trading assets Trade and other receivables 18 1,366 1,000 Inventories 19 3,295 1,288 Loans and advances to customers , ,523 Investment securities ,624 50,197 Investment in associate 22 19,958 17,542 Property and equipment 23 14,047 2,572 Intangible assets 24 21,850 17,803 Deferred tax assets Other assets 25 2,541 3,685 Total assets 577, ,090 LIABILITIES Trading liabilities Trade and other payables 26 5,339 1,042 Obligations under repurchase agreements 27 85,792 1,528 Financial lease liabilities 2, Debt securities issued 28 51,395 - Funds borrowed 29 97,471 75,698 Provisions Deferred tax liabilities 14 1,940 2,624 Other liabilities ,353 13,884 Total liabilities 403,864 95,649 EQUITY Share capital , ,663 Reserves 32 5,070 2,272 Retained earnings 6,936 23,772 Total equity attributable to equity holders of the Bank 172, ,707 Non-controlling interest 699 (266) Total equity 173, ,441 Total liabilities and equity 577, ,090 Commitments and contingencies 34 The accompanying notes are an integral part of these consolidated financial statements. 1

6 Consolidated Statement of Comprehensive Income For the Year Ended 31 December 2009 Note 31 December December 2008 Interest income 8 37,134 16,757 Interest expense 8 (8,385) (3,346) Net interest income 28,749 13,411 Fees and commission income 9 5,718 3,000 Fees and commission expense 9 (491) (180) Net fee and commission income 5,227 2,820 Net trading income 10 5,330 1,659 Income from fare collection services 11 11,340 5,658 Cost of fare collection services 11 (4,107) (2,471) Other operating income - 54 Operating income 46,539 21,131 Net impairment on financial assets 20, 30 (1,000) (444) Personnel expenses 12 (25,088) (16,323) Depreciation and amortisation 23, 24 (4,669) (2,588) Administrative expenses 13 (13,211) (5,706) Other operating expense (585) - Total operating expenses (44,553) (25,061) Negative goodwill on acquisition of subsidiary 7-1,039 Share of profit of equity accounted investee 22 2,416 7,514 Profit before income tax 4,402 4,623 Income tax 14 (1,247) 330 Net profit for the year 3,155 4,953 Other comprehensive income Net change in fair value of available-for-sale financial assets 3, Income tax on other comprehensive income (376) (35) Other comprehensive income for the year, net of income tax 2, Total comprehensive income for the year 5,874 5,095 Profit attributable to: Equity holders of the Bank 5,068 5,219 Non-controlling interest (1,913) (266) Profit for the year 3,155 4,953 Total comprehensive income attributable to: Equity holders of the Bank 7,787 5,361 Non-controlling interest (1,913) (266) Total comprehensive income for the year 5,874 5,095 The accompanying notes are an integral part of these consolidated financial statements. 2

7 Consolidated Statement of Changes in Equity For the Year Ended 31 December 2009 Note Share capital Adjustment to share capital Fair value reserve Other reserves Retained earnings Total Noncontrolling interest Total Equity At 1 January ,000 24,663-1,996 18,687 65,346-65,346 Total comprehensive income for the year Profit for the year ,219 5,219 (266) 4,953 - Other comprehensive income Net change in fair value of available-for-sale financial assets Total other comprehensive income Total comprehensive income for the year ,219 5,361 (266) 5,095 Transactions with owners, recorded directly in equity - Contributions by and distributions to owners Share capital increase 94, ,000-94,000 Transfer to legal reserves (134) At 31 December ,000 24, ,130 23, ,707 (266) 164,441 Total comprehensive income for the year Profit for the year ,068 5,068 (1,913) 3,155 - Other comprehensive income Net change in fair value of available-for-sale financial assets , ,719-2,719 Total other comprehensive income - - 2, ,719-2,719 Total comprehensive income for the year - - 2,719-5,068 7,787 (1,913) 5,874 Transactions with owners, recorded directly in equity - Contributions by and distributions to owners Capital contribution by non-controlling interest ,878 2,878 Transfer to share capital 41,040 (19,215) - - (21,825) Transfer to legal reserves (79) At 31 December ,040 5,448 2,861 2,209 6, , ,193 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 2009 Note 31 December December 2008 Cash flows from operating activities Net profit for the year 3,155 4,953 Adjustments for: Depreciation and amortisation 23, 24 4,669 2,588 Net impairment on financial assets 20, 30 1, Net interest income (28,749) (13,411) Share of profit of equity investee 22 (2,416) (7,514) Negative goodwill on acquisition of subsidiary 7 - (1,039) Gain on sale on property and equipment - (49) Income tax 14 1,247 (330) (21,094) (14,358) Change in reserve deposit at Central Bank (3,498) (4,278) Change in trading assets 29 (346) Change in trade and other receivables (366) 950 Change in inventories (2,007) 216 Change in loans and advances to customers (175,015) (28,316) Change in other assets 1,333 2,836 Change in trade and other payables 4,297 (113) Change in obligations under repurchase agreements 84,264 1,493 Change in other liabilities and provisions 144,449 1,304 32,392 (40,612) Interest received 37,335 14,937 Interest paid (8,417) (2,273) Income tax paid (2,266) (353) Net cash provided from / (used in) operating activities 59,044 (28,301) Cash flows from investing activities Purchase of investment securities (216,193) (50,055) Sales of investment securities 145,018 - Purchase of property and equipment 23 (12,694) (2,168) Proceeds from the sale of property and equipment Purchase of intangible assets 24 (3,546) (4,659) Development expenditure 24 (3,967) (581) Acquisition of subsidiary, net of cash acquired 7 - (15,696) Capital contribution by minority shareholders 2,878 - Net cash used in investing activities (88,488) (73,096) Cash flows from financing activities Change in financial lease liabilities 2, Proceeds from debt securities issued 51,018 - Proceeds from funds borrowed 23, ,872 Repayment of borrowings (1,072) (298,109) Proceeds from share capital increase 31-94,000 Net cash provided from financing activities 75, ,900 Net increase in cash and cash equivalents 46,428 31,503 Cash and cash equivalents on 1 January 15 54,499 22,996 Cash and cash equivalents on 31 December ,927 54,499 The accompanying notes are an integral part of these consolidated financial statements. 4

9 Notes to the consolidated financial statements 1. Corporate information 6 2. Basis of preparation 7 3. Significant accounting policies Financial risk management Use of estimates and judgements Financial assets and liabilities Acquisition of subsidiary Net interest income Net fee and commission income Net trading income Income from / (cost of) fare collection services Personnel expenses Administrative expenses Taxation Cash and cash equivalents Reserve deposits at Central Bank Trading assets and liabilities Trade and other receivables Inventories Loans and advances to customers Investment securities Investment in associate Property and equipment Intangible assets Other assets Trade and other payables Obligations and under repurchase agreements Debt securities issued Funds borrowed Provisions Other liabilities Capital and reserves Related parties Commitments and contingencies 52 Page 5

10 1. Corporate information Aktif Yatırım Bankası Anonim Şirketi (the Bank ) was incorporated under the name of Çalık Yatırım Bankası A.Ş. in Turkey in July The Bank changed its name as Aktif Yatırım Bankası A.Ş. on 1 August The Bank operates as an investment bank and is mainly involved in corporate services such as cash or non-cash, financial leasing, factoring, corporate lending. As an investment bank, the Bank borrows funds from other banks, financial markets, partners and credit customers, but is not entitled to receive deposits from customers. The head office of the Bank is located at Büyükdere Cad. No: 163 Zincirlikuyu / Istanbul, and the Bank have also two branches in Istanbul. On 8 May 2008, the Bank has established Çalık Yönetim Sistemleri A.Ş. ( ÇYS ) with a 75% of ownership. ÇYS provides consultancy services in the issues of the evaluation, organisation and restructuring of the general management of the companies established or to be established, the alteration, project and quality management thereof, the strategic planning and the preparation of the feasibilities related thereto, the management of company systems, reduction of costs and company management, industrial relations, manpower planning, production management, productivity, strategic decisions, information technology, financial, accounting and commercial matters, human resources, acquisitions and mergers, quality development, risk management, information technology management and system development and evaluation, as well as preparing computer software and databases regarding these issues. On 30 May 2008, ÇYS acquired 100% of E-Kent Elektronik Ücret Toplama A.Ş. ( E-Kent ) which was established in 2002 to TL 17,000 (see Note 7). E-Kent is a provider of high-technology solutions and services for modern urban management. E-Kent sells, installs and operates electronic fare collection solutions and electronic payment systems, and provides consulting services for planning and efficiency of public transport services. E-Kent is an electronic fare collection operating company, and currently operates services in four provinces of Turkey. E-Kent has tailored its systems to meet the individual customer requirements of various railway networks, municipalities, public transport companies, car parks, cultural parks, zoos and museums located in major cities in Turkey. E-Kent is a member of the International Association of Public Transport (UITP). E-Kent has 98% of ownership in E-Tik Elektronik Transfer Kup. Ltd. Şti. ( E-Tik ). The Bank and its consolidated subsidiaries are referred as the Group hereafter. 6

11 1. Corporate information (continued) The Bank has cooperation with Çalık Holding A.Ş. in their project of investing a foreign oriented bank in Çalık Finansal Hizmetler A.Ş. The share of the Bank in this company is 24%. The main establishment purpose of Çalık Finansal Hizmetler A.Ş. is the transactions related with purchase of Bank Kombatare Tregtare in Albania. The subsidiaries included in consolidation and effective shareholding percentages of the Group at 31 December 2009 and 31 December 2008 are as follows: 7 Place of incorporation Effective shareholding and voting rights (%) 31 December 31 December ÇYS Turkey E-Kent Turkey E-Tik Turkey Çalık Finansal Hizmetler A.Ş. Turkey ÇYS established with TL 3,000 of registered capital. The share capital is registered to the Bank and GAP İnşaat Yatırım ve Dış Ticaret A.Ş. ( GAP İnşaat ) with shareholding percentage of 75% and 25%, respectively. As at 31 December 2009, ÇYS increased its share capital from 3,000 TL to 11,500 TL. The share capital increase was paid by the Bank and GAP İnşaat respectively their shareholding percentage. The Bank employs 236 people as of 31 December 2009 (31 December ). 2. Basis of preparation 2.1 Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The Bank maintains its books of account and prepares its statutory financial statements in accordance with Turkish Accounting Standards, Financial Reporting Standards and other regulations on accounting and reporting standards promulgated by the Banking Regulation and Supervision Agency ( BRSA ). The consolidated subsidiaries maintain their books of account and prepare their statutory financial statements in accordance with the regulations of Turkish Commercial Code and Tax Legislation. The consolidated financial statements have been prepared from statutory financial statements of the Bank and its subsidiaries and presented in accordance with IFRS in Turkish Lira ( TL ) with adjustments and certain reclassifications for the purpose of fair presentation in accordance with IFRS. The accompanying consolidated financial statements as of 31 December 2009 are authorised for issue by the management on 11 March The General Assembly and certain regulatory bodies have the power to amend the statutory financial statements after issue. 2.2 Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: derivative financial instruments are measured at fair value financial instruments at fair value through profit or loss are measured at fair value available-for-sale financial instruments.

12 2. Basis of preparation (continued) 2.3 Functional and presentation currency These consolidated financial statements are presented in TL, which is the Group s functional currency. Except as indicated, financial information presented in TL has been rounded to the nearest thousand. 2.4 Use of estimates and judgements The preparation of the consolidated financial statements in conformity with IFRSs 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. 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 consolidated financial statements are described in notes 4 and Change in accounting policies Effective 1 January 2009, the Group has changed its accounting policies in the following area: Presentation of financial statements The Group applies revised IAS 1 Presentation of Financial Statements (2007), which became effective as of 1 January As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. The change in accounting policy only impacts presentation aspects. 8

13 2. Basis of preparation (continued) 2.6 Other accounting developments Disclosures pertaining to fair values and liquidity risk for financial instruments The Group has applied Improving Disclosures about Financial Instruments (Amendments to IFRS 7), issued in March 2009, that require enhanced disclosures about fair value measurements and liquidity risk in respect of financial instruments. The amendments require that fair value measurement disclosures use a three-level fair value hierarchy that reflects the significance of the inputs used in measuring fair values of financial instruments. Specific disclosures are required when fair value measurements are categorised as Level 3 (significant unobservable inputs) in the fair value hierarchy. The amendments require that any significant transfers between Level 1 and Level 2 of the fair value hierarchy be disclosed separately, distinguishing between transfers into and out of each level. Furthermore, changes in valuation techniques from one period to another, including the reasons therefore, are required to be disclosed for each class of financial instruments. Revised disclosures in respect of fair values of financial instruments are included in note 5. Further, the definition of liquidity risk has been amended and it is now defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The amendments require disclosure of a maturity analysis for non-derivative and derivative financial liabilities, but contractual maturities are required to be disclosed for derivative financial liabilities only when contractual maturities are essential for an understanding of the timing of cash flows. For issued financial guarantee contracts, the amendments require the maximum amount of the guarantee to be disclosed in the earliest period in which the guarantee could be called. Revised disclosures in respect of liquidity risk are included in note 4. 9

14 3. Significant accounting policies 3.1 Accounting in hyperinflationary economies The financial statements of the Turkish entities have been restated for the changes in the general purchasing power of the Turkish Lira based on International Accounting Standard ( IAS ) No. 29 Financial Reporting in Hyperinflationary Economies as of 31 December IAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current on the balance sheet date, and that corresponding figures for prior periods be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three-year inflation rate approaching or exceeding 100%. The cumulative three-year inflation rate in Turkey has been 35.61% as of 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by the Turkish Statistical Institute ( TURKSTAT ). By taking this into consideration, together with the sustained positive trend in quantitative factors, such as the stabilisation in financial and monetary markets, decrease in interest rates and the appreciation of TL against USD and other hard currencies, it was declared that Turkey should be considered a nonhyperinflationary economy under IAS 29 from 1 January 2006 as stated in International Standards Alert No. 2006/17 issued on 8 March Therefore, IAS 29 has not been applied to the accompanying financial statements starting from 1 January Basis of consolidation (i) 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 financial statements have been prepared using uniform accounting policies for like transactions and other events in similar circumstances. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement (Note 3.19). 10

15 3. Significant accounting policies (continued) 3.2 Basis of consolidation (ii) Associate (equity accounted investee) The Bank s investment in associate is subsidiary for under the equity method of accounting. This is entity in which the Bank has significant influence but not control and which are neither affiliate nor joint ventures of the Bank. The investment in subsidiary is carried in the balance sheet at cost plus post-acquisition changes in the Bank s share of net assets of the subsidiary, less any impairment in value. The income statement reflects the Bank s share of the results of operations of the subsidiary. Where there has been a change recognised directly in the equity of a subsidiary, the Bank recognises its share of any changes and discloses this when applicable, in the statement of changes in equity. The subsidiary s accounting policies conform to those by the Bank for like transactions and events. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees 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. 3.3 Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Group at exchange rates on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies on the reporting date are retranslated to the functional currency at the exchange rate on that date. Foreign currency differences arising on retranslation are recognised in profit or loss. Foreign currency translation rates used by the Group are as follows: EUR / TL (full) USD / TL (full) 31 December December Interest income / expense Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and commissions paid or received transaction costs, and discounts or premiums that are integral part of the effective interest rate. Interest income and expense on all trading assets and liabilities are considered to be incidental to the Group s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income. Interest income and expense presented in the consolidated income statement include the interest income on financial assets and liabilities at amortised cost on an effective interest rate basis. 11

16 3. Significant accounting policies (continued) 3.5 Fees and commission Fees and commissions income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income are recognised as the related services are provided. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. 3.6 Net trading income Net trading income comprises gains less loss related to trading assets and liabilities, and includes all realised and unrealised fair value changes and foreign exchange differences. 3.7 Income from fare collection service (i) Goods sold Revenue from the sale of goods is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue from the sale of goods is stated net of discounts and returns. Revenue is recognised when the significant risks and rewards of ownership of the goods have passed on to the buyer and the amount of revenue can be measured reliably. (ii) Commissions When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognised is the net amount of commission made by the Group. (iii) Services Revenue from services rendered is recognised in profit or loss as the service has been rendered. 3.8 Dividends Dividend income is recognised when the right to receive income is established. 3.9 Lease payments made Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. 12

17 3. Significant accounting policies (continued) 3.10 Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted on the balance sheet date, and any adjustment to tax payable in respect of prior years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed on each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised Financial assets and liabilities Recognition The Group initially recognises trade and other receivables, loans and advances to customers, held-tomaturity investment securities, trade and other payables, funds borrowed and customer accounts on the date that they are originated. Regular way purchases and sales of financial assets are recognised on the trade date at which the Group commits to purchase or sell the asset. All other financial assets and liabilities are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Offsetting Financial assets and liabilities are set off and the net amount presented in the balance sheet when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group s trading activity. 13

18 3. Significant accounting policies (continued) 3.11 Financial assets and liabilities (continued) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations for financial instruments traded in active markets. For all other financial instruments fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models. Identification and measurement of impairment On each balance sheet date, the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably. Since the Group s loan portfolio does not consist of many transactions, the Group considers evidence of impairment at only specific asset level. All financial assets are assessed for specific impairment. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments by more than 90 days; the Group granting to the borrower, for economic or legal reasons relating to the borrower s financial difficulty, a concession that the lender would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Group, including: adverse changes in the payment status of borrowers; or national or local economic conditions that correlate with defaults on the assets in the Group. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount. 14

19 3. Significant accounting policies (continued) 3.11 Financial assets and liabilities (continued) Identification and measurement of impairment (continued) Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, met of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances held with Central Bank and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. When the Group purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date ( reverse repo or stock borrowing ), the arrangement is accounted for as cash and cash equivalents, and the underlying asset is not recognised in the Group s consolidated financial statements. Cash and cash equivalents are carried at amortised cost in the consolidated balance sheet Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Group acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the balance sheet with transaction costs taken directly to income statement. All changes in fair value are recognised as part of net trading income in income statement. Trading assets and liabilities are not reclassified subsequent to their initial recognition Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment Inventories Inventories are stated at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is determined on weighted average principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. 15

20 3. Significant accounting policies (continued) 3.16 Loans and advances to customers Loans and advances to customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term. When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of an asset to the lessee, the arrangement is presented within loans and advances to customers. Loans and advances to customers are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method Investment securities Investment securities are initially measured at fair value plus, incremental direct transaction costs, and subsequently accounted for depending on their classification as either held-to-maturity or availablefor-sale. (i) Held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold to maturity, and which are not designated as at fair value through profit or loss or as available-for-sale. Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as availablefor-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years. (ii) Available-for-sale Available-for-sale investments are non-derivative investments that are designated as available-for-sale or are not classified as another category of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost. All other available-for-sale investments are carried at fair value. Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Group becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments except the equity securities are recognised in profit or loss. Other fair value changes are recognised directly in equity until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in equity are recognised in profit or loss. 16

21 3. Significant accounting policies (continued) 3.18 Property and equipment Recognition and measurement Items of property and equipment are restated for the effects of inflation to the end of 31 December 2005, less accumulated depreciation and impairment losses. Property equipment acquired after 31 December 2005 is reflected at cost, less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs The cost of replacing part of an item of property or 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 costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is recognised in the income statement 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. The estimated useful lives for as at 31 December 2009 and 31 December 2008 are as follows: machinery and equipment 4-8 years furniture and fixtures 4-8 years motor vehicles 5 years other fixed assets 4-50 years Leasehold improvements are depreciated on a straight-line method over a period of time of their lease contract. 17

22 3. Significant accounting policies (continued) 3.19 Intangible assets (i) Goodwill Goodwill (negative goodwill) arises on the acquisition of subsidiaries. Acquisition 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. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. (ii) Service agreements Service agreements acquired in a business combination are recognised at fair value at the acquisition date. The service agreements have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the service agreements. (iii) Software Software acquired by the Group is restated for the effects of inflation to the end of 31 December 2005, less accumulated amortisation and impairment losses. Intangible assets acquired after 31 December 2005 are reflected at cost, less accumulated amortisation and impairment losses. Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and impairment. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in income statement on a straight-line basis over the estimated useful life of the software, from the date that it is available for use. The estimate useful life of software is 3 to 14 years. 18

23 3. Significant accounting policies (continued) 3.20 Leased assets lessee 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. Other leases are operating leases and, the leased assets are not recognised on the Group s balance sheet Impairment of non-financial assets The carrying amounts of the Group s non-financial assets, other than deferred tax assets, are reviewed on 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. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in income statement. 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. 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. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised Funds borrowed and debt securities issued Funds borrowed and debt securities issued are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective interest method Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. 19

24 3. Significant accounting policies (continued) 3.24 Employee benefits (i) Reserve for employee severance payments In accordance with the existing social legislation in Turkey, the Group is required to make certain lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such payments are calculated on the basis of an agreed formula, are subject to certain upper limits and are recognised in the accompanying financial statements as accrued. The reserve has been calculated by estimating the present value of the future obligation of the Group that may arise from the retirement of the employees. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 20

25 3. Significant accounting policies (continued) 3.26 New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at and for the year ended 31 December 2009, and have not been applied in preparing these consolidated financial statements. None of these will have an effect on the consolidated financial statements of the Group, with the exception of: IFRS 9 Financial Instruments, published on 12 November 2009 as part of phase I of the IASB s comprehensive project to replace IAS 39, deals with classification and measurement of financial assets. The requirements of this standard represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivables. For an investment in an equity instrument which is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual share-by-share basis, to present all fair value changes from the investment in other comprehensive income. No amount recognised in other comprehensive income would ever be reclassified to profit or loss at a later date. However, dividends on such investments are recognised in profit or loss, rather than other comprehensive income unless they clearly represent a partial recovery of the cost of the investment. Investment in equity securities in respect of which an entity does not elect to present fair value changes in other comprehensive income would be measured at fair value witch changes in fair value recognised in profit or loss. The standard requires that derivatives embedded in contracts with a host that is a financial asset within the scope of the standard are not separated; instead the hybrid financial instrument is assessed in its entirety as to whether it should be measured at amortised cost or fair value. The standard is effective for annual periods beginning on or after 1 January Earlier application is permitted. The Group is currently in the process of evaluating the potential effect of this standard. Given the nature of the Group s operations, this standard is expected to have a pervasive impact on the Group s financial statements. 21