SATHAPANA LIMITED (FORMERLY KNOWN AS CAMBODIAN ENTREPRENEUR BUILDING LIMITED) FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008

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1 FINANCIAL STATEMENTS

2 FINANCIAL STATEMENTS CONTENTS PAGES Report of the Board of Directors 1-4 Independent auditor s report 5-6 Balance sheet 7 Income statement 8 Statement of changes in equity 9 Statement of cash flow 10 Notes to the financial statements APPENDIX: Notes on compliance with the Central Bank s Prakas * i - viii * The Appendix does not form part of the audited financial statements.

3 REPORT OF THE BOARD OF DIRECTORS The Board of Directors ( the Directors ) hereby submits its report together with the audited financial statements of Sathapana Limited, formerly known as Cambodian Entrepreneur Building Limited ( the Company ) for the year ended 31 December PRINCIPAL ACTIVITY The principal activity of the Company is to provide micro-finance services to the entrepreneurial poor, especially women in urban and rural areas of Cambodia through its head office in Phnom Penh and its various provincial and district offices in the Kingdom of Cambodia. The Company was granted an indefinite life license on 19 April 2006 to operate micro-finance services. FINANCIAL PERFORMANCE AND DIVIDENDS The financial performance for the year ended 31 December 2008 is set out in the income statement on page 8. On 23 April 2008, dividends amounting to US$291,007 were declared and paid from the Company s net income for the year ended 31 December SHARE CAPITAL On 23 April 2008, the Company increased its share capital by US$800,000 through conversion from retained earnings. The share capital of the Company as at 31 December 2008 is US$3,033,510. BAD AND DOUBTFUL LOANS Before the financial statements of the Company were drawn up, the Directors took reasonable steps to ascertain that actions had been taken in relation to the writing off of bad loans and the making of allowance for bad and doubtful loans, and satisfied themselves that all known bad loans had been written off and adequate allowance had been made for bad and doubtful loans. At the date of this report, the Directors are not aware of any circumstances which would render the amount written off for bad loans or the amount of allowance for doubtful loans in the financial statements of the Company, inadequate to any material extent. 1

4 ASSETS Before the financial statements of the Company were drawn up, the Directors took reasonable steps to ensure that any assets which were unlikely to be realised in the ordinary course of business at their values as shown in the accounting records of the Company have been written down to an amount which they might be expected to realise. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the assets in the financial statements of the Company misleading in any material respect. VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which would render adherence to the existing method of valuation of assets and liabilities in the financial statements of the Company misleading or inappropriate in any material respect. CONTINGENT AND OTHER LIABILITIES At the date of this report, there is: (a) (b) no charge on the assets of the Company which has arisen since the end of the financial year which secures the liabilities of any other person; and no contingent liability in respect of the Company that has arisen since the end of the financial year other than in the ordinary course of its business operations. No contingent or other liability of the Company has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may have a material effect on the ability of the Company to meet its obligations as and when they become due. CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or the financial statements of the Company which would render any amount stated in the financial statements misleading in any material respect. ITEMS OF AN UNUSUAL NATURE The financial performance of the Company for the year ended 31 December 2008 was not, in the opinion of the Directors, materially affected by any items, transactions or events of a material and unusual nature. There has not arisen in the interval between the end of the year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to materially affect the financial performance of the Company for the year for which this report is made. SIGNIFICANT EVENTS At the date of this report, no significant events have occurred after the balance sheet date which would require adjustments or disclosure other than as disclosed in the financial statements. 2

5 THE BOARD OF DIRECTORS The members of the Board of Directors during the year and as at the date of this report are: Dr. Bun Mony, Chairman (executive) Mr. Var Muth, Director (executive) Mr. Davis Golding, Director (non-executive) Mr. Eelco Baan, Director (non-executive) Mr. Michael Th. Moormann, Director (non-executive) Dr. Phai Touch, Director (non-executive) Mr. Hun Monivann, Director (non-executive) DIRECTORS INTERESTS The interests of the Directors in shares of the Company during the year and as at the date of this report are as follows: Directors Holding % Number of shares of US$10 each Dr. Bun Mony 1.30% 3,939 Mr. Var Muth 0.45% 1,379 DIRECTORS BENEFITS During and at the end of the year, no arrangement existed, to which the Company was a party, with the object of enabling the Directors of the Company to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other corporate body. No Director of the Company has received or become entitled to receive any benefit (other than a benefit included in the aggregate amount of emoluments received or due and receivable by the Directors as disclosed in the financial statements) by reason of a contract made by the Company or with a firm of which the Director is a member, or with a company in which the director has a material financial interest other than as disclosed in the financial statements. 3

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7 Independent auditor s report To the Shareholders of Sathapana Limited We have audited the accompanying financial statements of Sathapana Limited, formerly known as Cambodian Entrepreneur Building Limited ( the Company ) which comprise the balance sheet as of 31 December 2008 and the statement of income, statement of changes in equity and statement of cash flow for the year then ended, a summary of significant accounting policies and other explanatory notes on pages 7 to 47. Management s Responsibility for the Financial Statements The management is responsible for the preparation and fair presentation of these financial statements in accordance with guidelines issued by the National Bank of Cambodia and Cambodian Accounting Standards. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 5

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9 BALANCE SHEET AS AT 31 DECEMBER 2008 Note ASSETS Cash on hand 4 521, ,663 2,129,115 1,071,455 Balances with the Central Bank 5 255, ,813 1,040, ,749 Balances with other banks 6 1,760, ,488 7,185,690 1,246,887 Loans to customers 7 37,125,862 22,174, ,510,643 88,764,195 Other receivables 8 980, ,250 4,003,423 2,366,774 Property and equipment 9 785, ,078 3,206,850 1,621,527 Intangible assets 10 11,789 18,578 48,111 74,368 Total assets 41,441,994 23,934, ,124,777 95,808,955 LIABILITIES AND EQUITY LIABILITIES Deposits from customers 11 1,854,786 1,401,342 7,569,382 5,609,572 Borrowings 12 29,900,285 16,402, ,023,063 65,659,208 Subordinated debts 13 2,200,000 1,000,000 8,978,200 4,003,000 Other liabilities , ,512 3,089,472 1,895,468 Current income tax liabilities , ,565 1,724,618 1,003,012 Provident fund obligations ,756 76,554 1,243, ,446 Total liabilities 35,439,462 19,604, ,628,444 78,476,706 EQUITY Share capital 17 3,033,510 2,233,510 12,379,754 8,940,740 Share premium 174, , , ,365 Retained earnings 2,794,062 1,921,345 11,402,567 7,691,144 Total equity 6,002,532 4,329,815 24,496,333 17,332,249 Total liabilities and equity 41,441,994 23,934, ,124,777 95,808,955 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 7

10 INCOME STATEMENT Note Interest income 18 8,731,753 4,828,055 35,634,284 19,326,704 Interest expense 19 (2,824,780) (1,549,047) (11,527,927) (6,200,835) Net interest income 5,906,973 3,279,008 24,106,357 13,125,869 Other operating income , ,153 2,504,493 1,829,983 General and administrative expenses 21 (3,820,682) (2,132,097) (15,592,203) (8,534,784) Operating income 2,699,987 1,604,064 11,018,647 6,421,068 Provision for bad and doubtful loans 7 (203,122) (139,256) (828,941) (557,442) Profit before income tax 2,496,865 1,464,808 10,189,706 5,863,626 Income tax expense 15 (508,829) (300,785) (2,076,531) (1,204,042) Net profit for the year 1,988,036 1,164,023 8,113,175 4,659,584 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 8

11 STATEMENT OF CHANGES IN EQUITY Share Share Retained capital premium earnings Total US$ US$ US$ US$ Balance as at 1 January ,233, , ,322 3,165,792 Net profit for the year - - 1,164,023 1,164,023 Balance at 31 December ,233, ,960 1,921,345 4,329,815 Equivalent in KHR 000 (Unaudited) 8,940, ,365 7,691,144 17,332,249 Balance as at 1 January ,233, ,960 1,921,345 4,329,815 Conversion of retained earnings into share capital 800,000 - (800,000) - Net profit for the year - - 1,988,036 1,988,036 Dividends paid - - (291,007) (291,007) Currency revaluation - - (24,312) (24,312) Balance as at 31 December ,033, ,960 2,794,062 6,002,532 Equivalent in KHR 000 (Unaudited) 12,379, ,012 11,402,567 24,496,333 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 9

12 STATEMENT OF CASH FLOW Note Cash flows from operating activities Cash used in operations 22 (11,659,118) (7,572,393) (47,580,862) (30,312,289) Income tax paid 15 (336,797) (126,570) (1,374,469) (506,660) Provident fund paid 16 (8,117) - (33,125) - Net cash used in operating activities (12,004,032) (7,698,963) (48,988,456) (30,818,949) Cash flows from investing activities Purchase of property and equipment (704,572) (352,588) (2,875,358) (1,411,410) Purchase of intangible assets (5,000) (14,804) (20,405) (59,260) Proceeds from disposal of property and equipment 14,414 7,880 58,824 31,543 Net cash used in investing activities (695,158) (359,512) (2,836,939) (1,439,127) Cash flows from financing activities Proceeds from borrowings 17,237,785 10,600,000 70,347,401 42,431,800 Repayments of borrowings (2,540,000) (2,430,000) (10,365,740) (9,727,290) Dividends paid (291,007) - (1,187,600) - Net cash generated from financing activities 14,406,778 8,170,000 58,794,061 32,704,510 Net increase in cash and cash equivalents 1,707, ,525 6,968, ,434 Cash and cash equivalents at beginning of year 580, ,263 2,324,894 1,903,800 Currency translation ,302 (25,340) Cash and cash equivalents at end of year 23 2,288, ,788 9,338,862 2,324,894 The accompanying notes on pages 11 to 47 form an integral part of these financial statements. 10

13 1. GENERAL INFORMATION Sathapana Limited formerly known as Cambodian Entrepreneur Building Ltd ( the Company ) is engaged in providing micro-financing activities through 14 provincial branches located in Phnom Penh, Siem Reap, Kampong Cham, Kampong Thom, Kandal, Banteay Meanchey, Battambang, Pursat, Kampong Chhnang, Kampong Speu, Kampot, Takeo, Prey Veng and Sihanouk Ville provinces. The Company was incorporated with the Ministry of Commerce on 19 February 2003 as a result of the Memorandum and Articles of Association signed on 27 December 2002 between Cambodia Community Building ( CCB ), a local NGO established in 1996, and the Company staff. The Company obtained its license to operate as a micro-finance institution from the National Bank of Cambodia ( NBC or Central Bank ) on 23 April Under the microfinance license, the Company is authorised to grant credit and offer saving services for poor and low-income households and small enterprises operating in the Kingdom of Cambodia. The NBC granted an indefinite life micro-finance license to the Company effective from 19 April The Company s mission is to empower entrepreneurial poor, especially women, in urban and rural areas to develop their income-generating activities and micro-enterprises through access to micro-financing services, including credit and savings, at reasonable rates. The registered office of the Company is located at No. 831C, Monivong Boulevard, Sangkat Phsar Daeumthkov, Khan Chamkarmon, Phnom Penh, Kingdom of Cambodia As at 31 December 2008, the Company had 653 employees (31 December 2007: 466 employees). The financial statements were authorised for issue by the Board of Directors on 17 April The Board of Directors has the power to amend and reissue the financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The Company s financial statements have been prepared in accordance with the guidelines issued by the National Bank of Cambodia and Cambodian Accounting Standards ( CAS ). In applying CAS, the Company also applies CFRS 4: Insurance Contracts and CFRS 7: Financial Instruments: Disclosures. The accounting principals applied may differ from generally accepted accounting principals adopted in other countries and jurisdictions. The accompanying financial statements are not intended to present the financial position, financial performance and cash flows in accordance with jurisdictions other than the Kingdom of Cambodia. 11

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Consequently, these financial statements are addressed only to those who are informed about Cambodian accounting principles, procedures and practices. The financial statements have been prepared in United States dollars ( US$ ) using the historical cost convention. The preparation of financial statements in accordance with the guidelines issued by the Central Bank and CAS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of current event and actions, actual results ultimately may differ from those estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note New accounting standards and interpretations (a) New standards and amendments effective in 2008 CAS 1 (Revised), Presentation of Financial Statements (effective 1 January 2008). The Standard (i) provides a framework within which an entity assesses how to present fairly the effects of transactions and other events, and assesses whether the result of complying with a requirement in a standard would be so misleading that it would not give a fair presentation; (ii) bases the criteria for classifying liabilities as current or non-current solely on the conditions existing at the balance sheet date; (iii) prohibits the presentation of items of income and expense as extraordinary items ; (iv) specifies disclosures about the judgements management has made in the process of applying the entity s accounting policies, apart from those involving estimations, that have the most significant effect on the amounts recognised in the financial statements; and (v) specifies disclosures about key sources of estimation uncertainty at the balance sheet date which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. It also requires additional disclosures on the entity s objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. Management applies the amendment to CAS 1 and has made those disclosures from annual periods beginning 1 January CFRS 7, Financial Instruments: Disclosures, and a complementary amendment to CAS 1, Presentation of Financial Statements Capital Disclosures (effective from 1 January 2008). CFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, and sensitivity analysis to market risk. It replaces CAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions. It is applicable to all entities that report under CAS. The amendment to CAS 1 introduces disclosures about the level of an entity s capital and how it manages capital. 12

15 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 New accounting standards and interpretations (continued) Management assessed the impact of CFRS 7 and the amendment to CAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of CAS 1. Management applies CFRS 7 and the amendment to CAS 1 from annual periods beginning 1 January The following standards and revisions to existing standards (effective from 1 January 2008) did not result in substantial changes to the Company s accounting policies: CAS 7, Cash Flow Statements CAS 8, Accounting Policies, Changes in Accounting Estimates and Errors CAS 10, Events After Balance Sheet Date CAS 12, Income Taxes CAS 16, Property, Plant and Equipment CAS 17, Leases CAS 18, Revenue CAS 21, The Effects of Changes in Foreign Exchange Rates CAS 23, Borrowing Costs CAS 24, Related Party Disclosures CAS 37, Provisions, Contingent Liabilities and Contingent Assets CAS 38, Intangible Assets (b) Standards and amendments effective in 2008 but not relevant The following standards and amendments are mandatory for accounting periods beginning on or after 1 January 2008 but are not relevant to the Company s operations: CAS 2, Inventory CAS 11, Construction Contracts CAS 27, Consolidated and Separate Financial Statements CAS 40, Investment Property CAS 41, Agriculture CFRS 4, Insurance 2.3 Foreign currencies (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 ). The United States dollars ( US$ ) reflects the economic substance of underlying events and circumstances of the entity. The financial statements are presented in US$, which is the Company s functional and presentation currency. 13

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Foreign currencies (continued) (b) Transactions and balances Transactions in currencies other than US$, the functional and presentation currency, are translated into US$ at the exchange rate prevailing at the date of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rate of monetary assets and liabilities denominated in currencies other than US$ are recognised in the income statement. (c) Presentation currency For the sole purpose of complying with Prakas No. B dated 13 December 2007 of the National Bank of Cambodia, a translation to Khmer Riel ( KHR ) is provided for the balance sheet, the income statement, the statement of changes in equity, the cash flow statement and the notes to the financial statements as of and for the year ended 31 December 2008 using the average official exchange rate regulated by the National Bank of Cambodia as at the reporting date, which was US$1 equal to KHR 4,081 (31 December 2007: US$1 equal to KHR 4,003). Such translation amounts are unaudited and should not be construed as representations that the US$ amounts represent, or have been or could be converted into KHR at that or any other rate. 2.4 Basis of aggregation The financial statements comprise the financial statements of the head office and the 14 provincial branches located in Phnom Penh, Kandal, Kampong Cham, Kampong Thom, Siem Reap, Banteay Meanchey, Battambang, Pursat, Kampong Chhnang, Kampong Speu, Kampot, Takeo, Prey Veng and Sihanouk Ville provinces, after the elimination of all inter-branch balances and transactions. 2.5 Segment information The Company operates within one business segment, commercially oriented microfinance services, and within one geographical segment, the Kingdom of Cambodia. 2.6 Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash on hand, non-restricted balances with the Central Bank and balances with other banks. 2.7 Loans to customers Loans to customers are stated in the balance sheet at the amount of the principal outstanding less any amounts written off and provision for bad and doubtful loans. Short-term loans are those with a repayment date within one year of the date the loan was advanced. Medium and long-term loans are those with a final repayment date more than one year from the date the loan was advanced. 14

17 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 Loans to customers (continued) Loans are written off when there is no realistic prospect of recovery. Recovery of loans to customers previously written off is recognised in the income statement. 2.8 Provision for bad and doubtful loans The adequacy of the provision for bad and doubtful loans is evaluated monthly by management. Factors considered in evaluating the adequacy of the provision include the size of the portfolio, previous loss experience, current economic conditions and their effect on clients, the financial situation of clients and the performance of loans in relation to contract terms. In accordance with Prakas B dated 13 September 2002, the Company is required to classify its loan portfolio into the following four classes, depending on the financial situation of the borrowers and the timeliness of principal and interest payments. Classification Number of days past due Provision Short-term loans (less than one year) Standard Less than 30 days 0% Substandard Equal to or more than 30 days 10% Doubtful Equal to or more than 60 days 30% Loss Equal to or more than 90 days 100% Long-term loans (more than one year) Standard Less than 30 days 0% Substandard Equal to or more than 30 days 10% Doubtful Equal to or more than 180 days 30% Loss Equal to or more than 360 days 100% The specific provision is calculated as a percentage of the loan outstanding at the time the loan is classified, excluding accrued interest and is charged as an expense. In addition to the specific provision, an additional general provision for bad and doubtful loans is made at the rate of 1.25% (31 December 2007: 1.25%) of all outstanding performing loans, net of the specific provision as at year-end, which has been approved by the Board of Directors. 2.9 Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is possible that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. 15

18 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Property and equipment (continued) The Company adopted the provisions of the new Article 13 of the Law on Taxation which allows the following rates and methods of depreciation: Office furniture and equipment declining 25% Computers declining 50% Motor vehicles declining 25% Leasehold improvement straight-line 16% Gains or losses on disposals are determined by comparing proceeds with carrying amount. Gains or losses on disposals are recognised in the income statement. The carrying amounts of property and equipment are reviewed for impairment when there is an indication that the assets might be impaired. Impairment is measured by comparing the carrying values of the assets with their recoverable amounts. An impairment loss is charged to the income statement immediately Intangible assets Intangible assets consist of computer software and are stated at cost less accumulated amortisation and accumulated impairment losses. Acquired computer software is capitalised on the basis of the cost incurred to acquire the specific software and bring it into use. Intangible assets are amortised on a declining basis method at the rate of 50% per annum Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identified cash flows (cash-generating units) Borrowings Borrowings are stated at cost. Fees paid on the establishment of borrowing facilities are recognised as transaction costs of the borrowings to the extent that it is probable that some or all of the facility will be drawn down. The fee is capitalised as a pre-payment for liquidity services and amortised over the period of the borrowings Subordinated debts Subordinated debts are treated as part of the Company s liabilities and included in the Company s net worth computation under the NBC s regulations. Foreign exchange differences on the subordinated debts of the Company are taken through the income statement. 16

19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14 Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. When there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are re-measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense Provident fund The Company provides its employees with benefits under the provident fund policy. Employees who complete the probationary period have the option of participating in the provident fund scheme. The fund is sourced from the following: Employees may contribute up to 5% of their monthly salary, and the Company contributes twice that amount. This contribution is charged to the income statement. The Company contributes interest on the cumulative balance of the provident fund computed at 6.5% per annum. This contribution is charged to the income statement. The provident fund will be paid to an employee (who has contributed to the fund) upon retirement, resignation or termination due to permanent disability or death. The portion of the employee s contribution and interest is paid in full accordingly, while the portion of the Company s contribution is paid in accordance with the following conditions: Years of service (*) Percentage of contribution by the Company Equal to or less than 1 year 0% More than 1 year 20% More than 2 years 40% More than 3 years 60% More than 4 years 80% More than 5 years 100% (*): Years of service are exclusive of the probationary period. Those who have been terminated due to serious misconduct are entitled to his/her contribution plus interest only, regardless of how long they have been employed by the Company. 17

20 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.16 Interest income and expense Interest income on loans to customers, balances with the Central Bank and balances with other banks are recognised on an accrual basis. Where a loan becomes non-performing, the recording of interest income on loans to customers is suspended until it is realised on a cash basis. Interest expenses on deposits from customers, borrowings and subordinated debt are recognised on an accrual basis Leases Leases in which a significant portion of risks and rewards of ownership of assets are retained by the leaser are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the leases Current and deferred income tax The current income tax charge is calculated on the basis of the tax law enacted or substantively enacted at the reporting date in Cambodia where the Company operates and generates taxable income. Deferred tax is provided using the balance sheet liability 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 measured at the tax rates expected to be applied to temporary differences when they reverse, based on laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised Related parties Parties are considered to be related to the Company if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions, or where the Company and the other party are subject to common control or significant influence. Related parties may be individuals or corporate entities and include close family members of any individual considered to be a related party. In accordance with the Law on Banking and Financial Institutions, related parties are defined as parties who hold, directly or indirectly, at least 10% of the entity s capital or voting rights and include any individual who participates in the administration, direction, management or internal control of the Company. 18

21 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.20 Rounding of amounts The presenting amounts in the financial statements have been rounded off to the nearest dollars and thousand Khmer Riel amounts, respectively Comparative figures Certain comparative figures have been reclassified to conform with the current year s presentation of the financial statements. As per As per reported Reclassification reclassified US$ US$ US$ Balance sheet Deposits and placements with banks 313,125 (313,125) - Statutory deposits 164,176 (164,176) - Balances with the Central Bank - 165, ,813 Balances with other banks - 311, ,488 Borrowings 17,402,500 (1,000,000) 16,402,500 Subordinated debts - 1,000,000 1,000,000 Other liabilities 550,066 (76,554) 473,512 Provident fund obligations - 76,554 76,554 Income statement Provision for bad and doubtful loans 139,433 (177) 139,256 Printing and office expenses 1, , ,639 Legal and professional fees 15,400 27,280 42,680 Utilities expenses - 62,378 62,378 Repairs and maintenance 8,117 26,474 34,591 Transportation costs - 71,694 71,694 Communication expenses 8,696 30,848 39,544 Marketing and advertising costs - 8,435 8,435 Other expenses 361,242 (341,723) 19,519 19

22 3. CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGMENTS The Company makes estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Impairment losses on loans to customers The Company is required to follow the mandatory credit classification and provisioning in accordance with Prakas No. B dated 13 September 2002 on the classification and provisioning for bad and doubtful debts. The National Bank of Cambodia requires microfinance institutions to classify their loan portfolios into four classes and a minimum mandatory level of specific provision is made depending on the classification concerned and regardless of the assets (except for cash) pledged as collateral. For the purpose of loan classification, the Company is required to take into account the borrower s historical payment experience and financial condition. (b) Income tax Taxes are calculated on the basis of current interpretation of the tax regulations. However, these regulations are subject to periodic variation and the ultimate determination of tax expenses will be made following inspection by the tax authorities. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. 4. CASH ON HAND Head office 18,712 4,726 76,364 18,918 Branches 503, ,937 2,052,751 1,052, , ,663 2,129,115 1,071, BALANCES WITH THE CENTRAL BANK Statutory capital deposit 151, , , ,039 Reserve deposit 97,500 52, , ,158 Current accounts 5,895 1,637 24,057 6, , ,813 1,040, ,749 20

23 5. BALANCES WITH THE CENTRAL BANK (continued) (i) Statutory capital deposit In compliance with Prakas B and Prakas B on the Licensing of Microfinance Institutions, the Company is required to maintain a statutory capital deposit with the NBC of 5% of registered capital. This deposit is refundable should the Company voluntarily liquidate and have no deposit liabilities. (ii) Reserve deposit The reserve deposit represents the minimum reserve requirement which is calculated at 5% of the total deposits from customers as required by Prakas B on the Maintenance of Reserve Requirement for Microfinance Institutions. (ii) Interest rates Reserve deposit and current accounts are non-interest bearing. The statutory capital deposit in US$ earns interest at 3/8 SIBOR ranging from 1.17% to 1.77%. The interest payment is settled semi-annually. 6. BALANCES WITH OTHER BANKS Current accounts: Acleda Bank Plc Ltd 190, ,169 2,730 Savings accounts: Acleda Bank Plc Ltd 1,569, ,677 6,404,052 1,231,631 Canadia Bank Plc ,373 Cambodia Asia Bank Ltd ,143 2,050 Rural Development Bank of Cambodia 325 2,274 1,326 9,103 1,760, ,488 7,185,690 1,246,887 Current accounts do not earn interest. The annual interest rates on savings accounts with other banks are summarised as follows: Acleda Bank Plc Ltd 2.00% 2.00% Canadia Bank Plc % % Cambodia Asia Bank Ltd 2.50% 2.50% Rural Development Bank of Cambodia 1.00% % 1.00% % 21

24 7. LOANS TO CUSTOMERS Group loans 435, ,352 1,779,067 1,462,504 Individual loans 37,159,879 22,089, ,649,466 88,425,289 37,595,818 22,455, ,428,533 89,887,793 Provision for bad and doubtful loans Specific (17,582) (7,150) (71,752) (28,621) General (452,374) (273,539) (1,846,138) (1,094,977) (a) Provision for bad and doubtful loans (469,956) (280,689) (1,917,890) (1,123,598) 37,125,862 22,174, ,510,643 88,764,195 The movements in provision for bad and doubtful loans to customers are as follows: At beginning of the year 280, ,472 1,145, ,351 Provision for the year 203, , , ,442 Bad debts written-off (13,121) (13,216) (53,547) (52,904) Currency revaluation (734) 177 (2,996) 709 At end of the year 469, ,689 1,917,890 1,123,598 (b) Analysis by maturity Less than 1 month 3,148,491 2,037,256 12,848,992 8,155,136 1 month and less than 3 months 6,464,192 4,078,304 26,380,368 16,325,451 3 months and less than 12 months 20,990,667 13,837,478 85,662,912 55,391,424 1 year and less than 5 years 6,992,468 2,502,069 28,536,261 10,015,782 37,595,818 22,455, ,428,533 89,887,793 22

25 7. LOANS TO CUSTOMERS (continued) (c) Analysis by currency US Dollars 31,198,577 19,380, ,321,393 77,578,556 Khmer Riel 6,397,241 3,075,003 26,107,140 12,309,237 (d) Analysis by economic sector 37,595,818 22,455, ,428,533 89,887,793 Agriculture 8,390,859 6,263,638 34,243,096 25,073,343 Building and construction 1,381,414 1,306,390 5,637,551 5,229,479 Small trade and commerce 14,898,495 9,114,497 60,800,758 36,485,331 Services 7,048,598 5,564,628 28,765,328 22,275,206 Others 5,876, ,954 23,981, ,434 (e) Analysis by relationship 37,595,818 22,455, ,428,533 89,887,793 External customers 37,227,058 22,293, ,923,623 89,239,127 Staff loans 368, ,045 1,504, ,666 37,595,818 22,455, ,428,533 89,887,793 23

26 7. LOANS TO CUSTOMERS (continued) (f) Analysis by location Head Office 315,274 44,930 1,286, ,855 Phnom Penh 8,662,932 5,392,472 35,353,425 21,586,065 Kandal 7,925,211 5,142,334 32,342,786 20,584,763 Kampong Thom 3,191,452 1,929,833 13,024,316 7,725,121 Kampong Cham 6,234,557 3,979,783 25,443,227 15,931,071 Siem Reap 5,490,605 3,489,399 22,407,159 13,968,064 Kampong Chhnang 585, ,025 2,390,944 1,509,232 Pursat 592, ,050 2,419,470 1,417,262 Battambang 860, ,671 3,510,476 1,844,066 Banteay Meanchey 611, ,241 2,495,731 1,578,147 Kampong Speu 900, ,635 3,676,112 2,132,138 Kampot 544, ,734 2,220,382 1,432,009 Takao 592,556-2,418,221 - Peam Ro 359,233-1,466,030 - Sihanouk Ville 728,650-2,973,621 - (g) Analysis by security on performing and non-performing loans 37,595,818 22,455, ,428,533 89,887,793 Standard loans: Secured 37,531,664 22,424, ,166,721 89,764,741 Unsecured Sub-standard loans: Secured 42,005 20, ,422 82,438 Unsecured Doubtful loans: Secured 12,515 7,275 51,074 29,122 Unsecured Loans loss: Secured 9,634 2,871 39,316 11,492 Unsecured ,595,818 22,455, ,428,533 89,887,793 24

27 7. LOANS TO CUSTOMERS (continued) (h) Loans to related parties Refer to Note 25 Related Party Transactions and Balances for details of loans to related parties. (i) Interest rate The annual interest rates that were in operation during the year are as follows: External customers 18% - 42% 24% - 42% Staff loans 12% 12% 8. OTHER RECEIVABLES Interest receivable 572, ,497 2,334,589 1,322,980 Prepayments and deposits 406, ,753 1,659,261 1,043,794 Others 2,346-9, , ,250 4,003,423 2,366,774 25

28 9. PROPERTY AND EQUIPMENT Office furniture & Motor Leasehold equipment Computers vehicles improvement Total US$ US$ US$ US$ US$ At 1 January 2007 Cost 126,179 87, , ,731 Accumulated depreciation (52,548) (58,866) (118,000) - (229,414) Net book value 73,631 29, , ,317 Year ended 31 December 2007 Opening net book value 73,631 29, , ,317 Additions 84, , , ,588 Disposals - net - - (1,480) - (1,480) Depreciation charge (39,368) (64,646) (74,333) - (178,347) Closing net book value 118,281 64, , ,078 At 31 December 2007 Cost 210, , , ,203 Accumulated depreciation (91,916) (123,512) (183,697) - (399,125) Net book value 118,281 64, , ,078 Equivalent in KHR 000 (Unaudited) 473, , ,270-1,621,527 Year ended 31 December 2008 Opening net book value 118,281 64, , ,078 Additions 300, , ,170 24, ,572 Disposals - net (652) - (12,188) - (12,840) Depreciation charge (104,595) (82,652) (122,299) (1,464) (311,010) Closing net book value 313,251 82, ,834 23, ,800 At 31 December 2008 Cost 507, , ,523 24,531 1,455,160 Accumulated depreciation (194,043) (206,164) (267,689) (1,464) (669,360) Net book value 313,251 82, ,834 23, ,800 Equivalent in KHR 000 (Unaudited) 1,278, ,286 1,497,050 94,136 3,206,850 26

29 10. INTANGIBLE ASSETS Computer software US$ At 1 January 2007 Cost 52,280 Accumulated amortisation (29,929) Net book value 22,351 Year ended 31 December 2007 Opening net book value 22,351 Additions 14,804 Amortisation charge (18,577) Closing net book value 18,578 At 31 December 2007 Cost 67,084 Accumulated amortisation (48,506) Net book value 18,578 Equivalent in KHR 000 (Unaudited) 74,368 Year ended 31 December 2008 Opening net book value 18,578 Additions 5,000 Amortisation charge (11,789) Closing net book value 11,789 At 31 December 2008 Cost 72,084 Accumulated amortisation (60,295) Net book value 11,789 Equivalent in KHR 000 (Unaudited) 48, DEPOSITS FROM CUSTOMERS Compulsory savings 194, , , ,184 Voluntary savings Savings deposits 1,178, ,887 4,810,528 3,386,086 Term deposits 481, ,330 1,966,569 1,310,302 1,854,786 1,401,342 7,569,382 5,609,572 27

30 11. DEPOSITS FROM CUSTOMERS (continued) The compulsory savings are a deposit required as a condition of granting loans by the Company. 2% and 5% of the principal loan amount disbursed in US Dollar and Khmer Riel, respectively, are recorded as compulsory savings. The compulsory savings bears interest at 4% per annum (31 December 2007: 4% per annum). The compulsory savings are be refunded at the end of the loan cycle. The voluntary savings are available for all customers and bear interest at the rate of 4% per annum (31 December 2007: 4% per annum). The term deposits bear interest at the following rates: US$ Riel US$ Riel 1-month term 4.5% 5% 4.5% 4.5% 3-month term 5% 6% 5% 5% 6-month term 5.5% 7% 5.5% 5.5% 12-month term 7.5% 9.5% 6.5% 6.5% The deposits from customers are analysed as follows: (a) Analysis by maturity Less than 1 month 1,392, ,895 5,611,383 1,864,978 1 month and less than 3 months 56, ,002 30,118 1,909,439 3 months and less than 12 months 406, ,351 1,927,881 1,734,704 1 year and less than 5 years - 25, ,451 (b) Analysis by currency 1,854,786 1,401,342 7,569,382 5,609,572 US Dollars 1,666,315 1,277,582 6,800,232 5,114,161 Khmer Riel 188, , , ,411 1,854,786 1,401,342 7,569,382 5,609,572 28

31 12. BORROWINGS Related parties: Nederlandse Financierings - Maatschappij voor Ontwikkelingslanden N.V ("FMO") 4,143,148 2,500,000 16,908,187 10,007,500 Triodos & Doen 2,500,000 2,500,000 10,202,500 10,007,500 ShoreCap International Ltd 125, , ,125 2,001,500 6,768,148 5,500,000 27,620,812 22,016,500 Non-related parties: Asian Development Bank s Loan through Rural Development Bank ( RDB ) - 87, ,263 Blue Orchard 2,325, ,000 9,488,325 2,501,875 Belgische Investerings - Maatschappij voor Ontwikkelings-landen N.V 2,625, ,000 10,712,625 1,361,020 Global Microfinance Facility 3,000,000 3,000,000 12,243,000 12,009,000 Oikocredit 3,682,137 2,850,000 15,026,801 11,408,550 Global Commercial Microfinance Consortium, Ltd. (c/o Deutsche Bank Ltd.) 3,500,000 3,000,000 14,283,500 12,009,000 Dual Return Fund SICAV 2,000,000 1,000,000 8,162,000 4,003,000 DWM 3,000,000-12,243,000 - Norfund 3,000,000-12,243,000-23,132,137 10,902,500 94,402,251 43,642,708 29,900,285 16,402, ,023,063 65,659,208 The borrowings mature until 15 April 2012 and bear interest rates ranging from 6.21% to 12.94% (2007: 7.10% to 12.57%). None of the Company s borrowings are secured. The Company has not had any defaults of principal, interest or redemption amounts during the year on its borrowings (2007: nil). 29

32 13. SUBORDINATED DEBTS Related party: Triodos & Doen a 2,000,000 1,000,000 8,162,000 4,003,000 Non-related party: DWM b 200, ,200 - (a) Tridos & Doen 2,200,000 1,000,000 8,978,200 4,003,000 On 19 December 2007, the NBC approved the Company s subordinated debt from Tridos & Doen, amounting to US$2,000,000. This subordinated debt has a 10-year term maturing on 1 January 2018 and bears an interest rate of 10% for the first five years, and from 1 January 2013 bears a rate of 12-month LIBOR plus 6% with a minimum of 10.5%. (b) DWM On 28 October 2008, the NBC approved the Company s subordinated debt from DWM, amounting to US$1,000,000. As at 31 December 2008, the Company drew down its borrowing from DWM amounting to US$200,000. This subordinated debt has an eight-year term maturing on 31 October 2016 and bears an interest rate of 11% per annum. 14. OTHER LIABILITIES Accrued interest payable 546, ,516 2,230,479 1,166,939 Staff benefits payable 128,992 86, , ,278 Accrued other taxation 59,682 63, , ,608 Other liabilities 21,812 32,886 89, , , ,512 3,089,472 1,895,468 30

33 15. TAXATION (a) Current income tax liability At beginning of the year 250,565 76,350 1,022, ,630 Expenses charged during the year 508, ,785 2,076,531 1,204,042 Payments during the year (336,797) (126,570) (1,374,469) (506,660) At end of the year 422, ,565 1,724,618 1,003,012 (b) Income tax expense In accordance with Cambodian tax law, the Company has an obligation to pay corporate income tax on the higher of either the Tax on Profit at the rate of 20% of taxable profit or the minimum tax at 1% of turnover, whichever is higher. The reconciliation of income tax expense computed at the statutory tax rate to the income tax expense shown in the income statement is as follows: Profit before income tax 2,496,865 1,464,808 10,189,706 5,863,626 Tax calculated at a rate of 20% 499, ,962 2,037,941 1,172,727 Tax effect of non-deductible expenses 9,456 7,823 38,590 31,315 Income tax expense 508, ,785 2,076,531 1,204,042 c) Other tax matters The Company s tax returns are subject to periodic examination by the Tax Department. Some areas of tax laws and regulations may be open to different interpretation; therefore the tax amounts reported in the financial statements could be changed at a later date upon final determination by the Tax Department. 31

34 16. PROVIDENT FUND OBLIGATIONS Provident fund obligations 304,756 76,554 1,243, ,446 The movement in the provident fund obligations for the year is as follows: At beginning of the year 76, ,417 - Additions for the year: Employer contributions 148,524 51, , ,251 Employee contributions 77,124 24, ,743 97,893 Interest (Note 19) 10, ,548 1,302 Payments (8,117) - (33,125) - At end of the year 304,756 76,554 1,243, , SHARE CAPITAL % Cambodia Community Building NGO 23% 710, ,790 2,897,685 2,092,728 CEB Employee Company Limited 6% 184, , , ,126 Nederlandse Financierings Maatschappij voor Ontwikkelingslanden ( FMO ) 18% 560, ,520 2,286,490 1,651,318 ShoreCap International Limited 34% 1,018, ,000 4,157,050 3,002,250 Stichting Triodos-Doen 18% 560, ,520 2,286,490 1,651, % 3,033,510 2,233,510 12,379,754 8,940,740 On 23 April 2008, the Company increased its share capital by US$800,000 through conversion from retained earnings. The increase in share capital was approved by the NBC on 19 June 2008 and the Company by-law registered with the Ministry of Commerce was amended on 9 October The total authorised number of shares is 303,351 shares (2007: 223,351 shares) with a par value of US$10 per share (2007: US$10 per share). All issued shares are fully paid. 32