FINANCIAL STATEMENTS TOGETHER WITH INDEPENDENT AUDITOR S REPORT
FINANCIAL STATEMENTS CONTENTS PAGES BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)... 1 STATEMENT OF COMPREHENSIVE INCOME... 2 STATEMENT OF CHANGES IN EQUITY... 3 STATEMENT OF CASH FLOWS... 4... 5-36 NOTE 1 ORGANISATION AND NATURE OF OPERATIONS... 5 NOTE 2 BASIS OF PRESENTATION OF FINANCIAL STATEMENTS... 5-17 NOTE 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS... 17-18 NOTE 4 FINANCIAL RISK MANAGEMENT... 18-23 NOTE 5 CASH AND CASH EQUIVALENTS... 23 NOTE 6 FACTORING RECEIVABLES, NET... 23-25 NOTE 7 ASSET HELD FOR SALE... 25-26 NOTE 8 BORROWINGS... 26 NOTE 9 FINANCIAL LEASE PAYABLES... 27 NOTE 10 ISSUED DEBT SECURITIES... 27 NOTE 11 OTHER ASSETS AND PREPAID EXPENSES... 27 NOTE 12 PROPERTY AND EQUIPMENT... 28-29 NOTE 13 INTANGIBLE ASSETS... 29 NOTE 14 TAXES ON INCOME... 30-31 NOTE 15 EMPLOYMENT BENEFIT OBLIGATIONS... 32 NOTE 16 OTHER LIABILITIES AND ACCRUED EXPENSES... 33 NOTE 17 SHARE CAPITAL... 33-34 NOTE 18 RETAINED EARNINGS AND LEGAL RESERVES... 34 NOTE 19 OTHER OPERATING INCOME/(EXPENSES), NET... 34 NOTE 20 OPERATING EXPENSES... 35 NOTE 21 FACTORING REVENUES... 35 NOTE 22 FOREIGN EXCHANGE GAINS/(LOSSES), NET... 35 NOTE 23 TRANSACTIONS AND BALANCES WITH RELATED PARTIES... 36 NOTE 24 COMMITMENTS AND CONTINGENT LIABILITIES... 36 NOTE 25 SUBSEQUENT EVENTS... 36
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) (Amounts expressed in thousands of Turkish lira ( TL ) unless otherwise indicated.) ASSETS Notes Cash and cash equivalents 5 14,972 19,363 Factoring receivables, net 6 371,550 296,639 Assets held for sale 7 116 116 Other assets and prepaid expenses 11 1,957 1,246 Property and equipment, net 12 3,152 7,829 Intangible assets, net 13 245 135 Deferred tax asset, net 14 6,427 5,598 Total assets 398,419 330,926 LIABILITIES AND EQUITY Bank borrowings 8 203,639 193,306 Lease payables, net 9 165 226 Issued debt securities 10 101,697 50,466 Factoring payables 517 520 Current income taxes payable, net 14 690 663 Other liabilities and accrued expenses 16 1,447 1,035 Employment benefit obligations 15 578 824 Total liabilities 308,733 247,040 EQUITY Share capital 17 55,000 21,026 Adjustment to share capital 17 424 424 Total paid-in share capital 17 55,442 21,450 Share premiums - 16,410 Revaluation fund - 1,337 Remeasurements of employee termination benefits, net of tax 18 - Retained earnings 34,244 44,689 Total equity 89,686 83,886 Total liabilities and equity 398,419 330,926 The accompanying notes set out on pages 5 to 36 form an integral part of these financial statements. 1
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013 Notes Factoring interest income 21 63,686 67,149 Factoring commissions 21 7,927 7,335 Income from factoring operations 71,613 74,484 Interest expenses (25,780) (28,271) Foreign exchange gains and losses, net 22 70 (132) Impairment loss on factoring receivables 6 (13,129) (7,771) Recoveries from impaired factoring receivables 6 478 1,050 Income after foreign exchange gains and losses, net and provision for impaired factoring receivables 33,252 39,360 Interest income other than factoring 186 33 Other income/(expense), net 19 5,082 (315) Operating profit 38,520 39,078 Operating expenses 20 (25,674) (18,201) Income before taxes from operations 12,846 20,877 Taxation on income - Current year tax expense 14 (3,563) (4,976) - Deferred tax income 14 835 710 Net profit for the year 10,118 16,611 Remeasurements of employee termination benefits, net of tax 23 - Revaluation differences of tangible assets 12-716 Deferred tax effect 14 (5) (80) Total comprehensive income for the year 10,136 17,247 The accompanying notes set out on pages 5 to 36 form an integral part of these financial statements 2
STATEMENT OF CHANGES IN EQUITY Adjustment Actuarial Share to share Share gain / (losses), Revaluation Retained Total capital capital premium net of tax fund earnings equity 1 January 2012 21,026 424 16,410-701 30,368 68,929 Capital increase from internal resource - - - - - - - Dividend paid - - - - - (2,290) (2,290) Revaluation fund - - - - 636-636 Net profit for the year - - - - - 16,611 16,611 31 December 2012 21,026 424 16,410-1,337 44,689 83,886 1 January 2013 21,026 424 16,410-1,337 44,689 83,886 Capital increase from internal resource 33,974 - (16,410) - - (17,564) - Dividend paid - - - - - (2,999) (2,999) Revaluation fund - - - - (1,337) - (1,337) Net profit for the year - - - - - 10,118 10,118 Other comprehensive income - - - 18 - - 18 31 December 2013 55,000 424-18 - 34,244 89,686 The accompanying notes set out on pages 5 to 36 form an integral part of these financial statements. 3
STATEMENT OF CASH FLOWS Cash flows from operating activities Notes Net profit for the year 10,118 16,611 Adjustments to reconcile net income for the year to net cash provided from operating activities: Depreciation of property and equipment 12 818 437 Amortization of intangible assets 13 96 30 Reserve for employment benefit obligations 15 213 455 Provision for impaired factoring receivables 6 13,129 7,771 Interest income, net (38,092) (38,909) Interest paid (22,303) (26,338) Interest received 63,872 67,180 Current year taxation expense 14 2,728 4,266 Other - 72 Cash flows from operating profit before changes in operating assets and liabilities 30,579 31,576 Net decrease/ (increase) in restricted cash 5-50 Net increase in factoring receivables (91,439) (64,340) Net increase/ (decrease) in other assets and prepaid expenses (717) (984) Net decrease in asset held for sale - 36 Net increase/ (decrease) in other liabilities and accrued expenses (1,335) 188 Income taxes paid 14 (2,884) (4,729) Employment termination benefit paid 15 (36) (95) Net cash used in operating activities (65,832) (38,298) Cash flows from investing activities: Purchase of property, plant and equipment 12 (2,514) (1,343) Purchases of intangible assets-net of disposals 13 (206) (85) Proceeds from sale of property, plant and equipment 12,041 2 Net cash used in investing activities 9,321 (1,426) Cash flows from financing activities: Proceeds/ (payments) of borrowings 6,856 5,039 Issuance of debt securities 48,262 48,840 Increase in finance lease payables (3) 226 Dividends paid (2,999) (2,290) Net cash provided from financing activities 52,116 51,815 Net increase in cash and cash equivalents (4,395) 12,091 Effect of foreign exchange rate changes on cash and cash equivalents - - Cash and cash equivalents at beginning of the year 5 19,361 7,270 Cash and cash equivalents at end of the year 5 14,966 19,361 The accompanying notes set out on pages 5 to 36 form an integral part of these financial statements. 4
NOTE 1 - ORGANISATION AND NATURE OF OPERATIONS Eko Faktoring A.Ş. ( the Company ) was established in 1994. The Company provides domestic factoring services. The company has 114 employees at 31 December 2013 (2012: 99). The registered office address of the Company is Eski Büyükdere Asfaltı, Ayazağa Yolu Cad., No: 9 Kat: 4 İz Plaza Giz Maslak, Istanbul/Turkey. The financial statements as of and for the year ended 31 December 2013 have been approved for issue by the Board of Directors on 19 March 2014. NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS The principal accounting policies adopted in the preparation of the financial statements at 31 December 2013 are set out below. These policies have been consistently applied to the year presented, unless otherwise stated. Accounting standards The Company maintains its books of account and prepares its financial statements in Turkish Lira ( TL ) in accordance with the Communiqué on the Uniform Chart of Accounts, Disclosures and Form and Nature of Financial Statements to be Issued By Leasing, Factoring and Consumer Finance Companies ( Financial Statement s Communiqué ) issued by the Banking Regulation and Supervision Agency ( BRSA ) in Official Gazette No. 28861, dated 24 December 2013, and in accordance with Turkish Accounting Standards/Turkish Financial Reporting Standards ( TAS/TFRS ) and their additions and comments issued by the Turkish Accounting Standards Board ( TASB ) and with the Communiqué: on Procedures Regarding Provisions to be Provided for Loans of Leasing, Factoring and Consumer Finance Companies ( Provisions Communiqué ) issued by the BRSA in Official Gazette No. 28861, dated 24 December 2013. These financial statements are derived from statutory financial statements with adjustments and reclassifications and the financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). IFRS comprise accounting standards issued by the International Accounting Standards Board ( IASB ) and its predecessor body and interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) and its predecessor body. The financial statements have been prepared on the historical cost basis except for, if applicable, certain financial instruments which are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company s accounting policies. 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 the respective accounting policy disclosures. Although the estimations and assumptions are based on the best estimates of the management s existing incidents and operations, they may differ from the actual results Company s going concern The Company has prepared the financial statements according to the going concern assumption. 5
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) Accounting for the effects of hyperinflation Prior to 1 January 2006, International Accounting Standard 29 ( IAS29 ), Financial Reporting in Hyperinflationary Economies, requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the purchasing power of this currency at balance sheet date and restatement of the financial statements of the comparative periods within same terms. As the characteristics of the economic environment of Turkey indicate that hyperinflation has ceased, effective from 1 January 2006, the Company has no longer applied IAS 29. Accordingly, the measuring unit current at 31 December 2005 is treated as the basis for the valuation of the amounts in these financial statements. Amendments in standards and interpretations The Company adopted the standards, amendments and interpretations published by the International Accounting Standards Board ( IASB ) and International Financial Reporting Interpretation Committee ( IFRIC ) and which are mandatory for the accounting periods beginning on or after 1 January 2013 which are related to the Company s operations. Standards, amendments and IFRICs applicable to 31 December 2013 year ends - Amendment to IAS 1, Financial statement presentation, regarding other comprehensive income; is effective for annual periods beginning on or after 1 July 2012. The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. - Amendment to IAS 19, Employee benefits ; is effective for annual periods beginning on or after 1 January 2013. These amendments eliminate the corridor approach and calculate finance costs on a net funding basis. - Amendment to IFRS 1, First time adoption, on government loans; ; is effective for annual periods beginning on or after 1 January 2013. This amendment addresses how a first-time adopter would account for a government loan with a below-market rate of interest when transitioning to IFRS. It also adds an exception to the retrospective application of IFRS, which provides the same relief to first-time adopters granted to existing preparers of IFRS financial statements when the requirement was incorporated into IAS 20 in 2008. - Amendment to TFRS 7, Financial instruments: Disclosures on asset and liability offsetting is effective for annual periods beginning on or after 1 January 2013. This amendment includes new disclosures to facilitate comparison between those entities that prepare TFRS financial statements to those that prepare financial statements in accordance with US GAAP. - Amendment to TFRS 10, 11 and 12 on transition guidance is effective for annual periods beginning on or after 1 January 2013. These amendments provide additional transition relief to TFRSs 10, 11 and 12, limiting the requirement to provide adjusted comparative information to only the preceding comparative period. For disclosures related to unconsolidated structured entities, the amendments will remove the requirement to present comparative information for periods before TFRS 12 is first applied. 6
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) - Annual Improvements 2011: It is effective for annual reporting periods beginning from 1 January 2013 or after this period. These annual improvements include five titles in reporting period of 2009-2011. These amendments are: IFRS 1, First-time Adoption of International Financial Reporting Standards IAS 1, Presentation of Financial Statements IAS 16, Tangible Assets IAS 32, Financial instruments: Presentation IAS 34, Interim Period Financial Reporting - IFRS 10, Consolidated financial statements, is effective for annual periods beginning on or after 1 January 2013. The standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. This new standard might impact the entities that a group consolidates as its subsidiaries. - IFRS 11, Joint arrangements is effective for annual periods beginning on or after 1 January 2013. IFRS 11 is a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement rather than its legal form. There are two types of joint arrangement: joint operations and joint ventures. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and therefore accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and therefore equity accounts for its interest. Proportional consolidation of joint ventures is no longer allowed. - IFRS 12, Disclosures of interests in other entities, is effective for annual periods beginning on or after 1 January 2013. The standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. - IFRS 13, Fair value measurement ; is effective for annual periods beginning on or after 1 January 2013. IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. - IAS 27 (revised 2011), Separate financial statements ; is effective for annual periods beginning on or after 1 January 2013. IAS 27 (revised 2011) includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. - IAS 28 (revised 2011), Associates and joint ventures ; is effective for annual periods beginning on or after 1 January 2013. IAS 28 (revised 2011) includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11. 7
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) New IFRS standards, amendments and IFRICs effective after 1 January 2014 - Amendment to IAS 32, Financial instruments: Presentation on asset and liability offsetting is effective for annual periods beginning on or after 1 January 2014. These amendments are to the application guidance in IAS 32 Financial instruments: Presentation, and the clarification of some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. - Amendments to IFRS 10, 12 and IAS 27 on consolidation for investment entities is effective for annual periods beginning on or after 1 January 2014. These amendments mean that many funds and similar entities will be exempt from consolidating most of their subsidiaries. Instead, they will measure them at fair value through profit or loss. The amendments give an exception to entities that meet an investment entity definition and which display particular characteristics. Changes have also been made in IFRS 12 to introduce disclosures that an investment entity needs to make. - Amendment to IAS 36, Impairment of assets on recoverable amount disclosures is effective for annual periods beginning on or after 1 January 2014. This amendment addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. - Amendment to IAS 39 Financial Instruments: Recognition and Measurement - Novation of derivatives is effective for annual periods beginning on or after 1 January 2014. This amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument to a central counterparty meets specified criteria. - IFRIC 21, Levies is effective for annual periods beginning on or after 1 January 2014. This is an interpretation of IAS 37 Provisions, contingent liabilities and contingent assets. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. - IFRS 9 Financial instruments - classification and measurement; is effective for annual periods beginning on or after 1 January 2015. This standard on classification and measurement of financial assets and financial liabilities will replace IAS 39 Financial instruments: Recognition and measurement. IFRS 9 has two measurement categories: amortised cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. For liabilities, the standard retains most of the IAS 39 requirements. These include amortised-cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. This change will mainly affect financial institutions. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. This change will mainly affect financial institutions. 8
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) New IFRS standards, amendments and IFRICs effective after 1 January 2014 (continued) - Amendments to IFRS 9 Financial instruments regarding general hedge. These amendments to TFRS 9 Financial instruments bring into effect a substantial overhaul of hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. - Amendment to IAS 19 regarding defined benefit plans; is effective for annual periods beginning on or after 1 July 2014. These narrow scope amendments apply to contributions from employees or third parties to defined benefit plans. The objective of the amendments is to simplify the accounting for contributions that are independent of the number of years of employee service, for example, employee contributions that are calculated according to a fixed percentage of salary. - Annual Improvements 2012: It is effective for annual reporting periods beginning from 1 July 2013 or after this period. This annual improvements include six titles in reporting period of 2010-2012. These amendments are: IFRS 2, Share Based Payment IFRS 3, Business Combinations IFRS 8, Operating Segments IAS 16, Tangible Fixed Assets and IAS 38, Intangible Fixed Assets IFRS 9, Financial Instruments: IAS 37, Provisions, Contingent Assets and Liabilities IAS 39, Financial Instruments - Recognition and Measurement - Annual Improvements 2013: It is effective for annual reporting periods beginning from 1 July 2014 or after this period. This annual improvements include four titles in reporting period of 2011-12-13. These amendments: IFRS 1, First time adoption, on government loans IFRS 3 Joint arrangements, IFRS 13, Fair value measurement IAS 40, Investment Property Standards Except IFRS 9, changes shown above does not have a serious impact on company s financial condition and performance. Early adoption of standards The Company did not early-adopt new or amended standards at 31 December 2013. Considering the financial statement items of the Company, it is deemed that the prospective changes would have no significant effect to over the financial position and performance of the Company. Cash and cash equivalents Cash and cash equivalents are initially recognised at cost in the balance sheet. Cash and cash equivalents consist of cash on hand, deposits at banks, defined amounts those are convertible to cash and highly liquid investments not significantly exposed to revaluation risk with maturities three months or less than three months (Note 5). 9
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) Related parties In these financial statements, major shareholders of the Company, the organizations directly or indirectly financially related to the Company, key management personnel, board members of the Company and their families, in each case together with, companies controlled by or affiliated with them are considered and referred to as related parties (Note 23). Financial instruments Financial assets and liabilities are included in the balance sheet of the Company in case the Company is a legal party to those financial instruments. Financial assets a. Effective interest rate method Effective interest rate method is the validation of the financial asset through amortized cost and the distribution of the related interest income to the related period. Effective interest ratio is the rate that reduces the estimated cash total to be collected during the expected life of the financial instrument or within a shorter period of time, when applicable, to the current net value of the financial instrument. The incomes related to the financial assets classified apart from the financial assets at fair value through profit or loss, and available-for-sale equity instruments are calculated using the effective interest method. The financial assets other than the ones classified as financial assets at fair value through profit or loss and recorded on the fair value are recognized over the total amount of expenditures that can be directly linked to the call transaction. The related assets are quoted or unquoted on the trading date depending on the result of the trading of the financial assets based on a contract which stipulates that the investment instruments are delivered in line with the time set by the related market. The financial assets are classified into "financial assets at fair value through profit or loss, "held-to-maturity investments", "available-for-sale financial assets" and loans and receivables". Classification is based on the quality and purpose of the financial assets and determined during the first recognition. 10
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) b. Financial assets at fair value through profit or loss In the event that the Company acquires the financial assets primarily in order to sell them in the near term, the financial assets are a part of a financial instrument portfolio defined and managed by the Company, and as in all the derivative products not designated as effective hedging instruments, the short-term profits of the financial assets are realized, the stated financial assets are classified as the financial assets at fair value through profit or loss. Losses or profits arising from the fair value validation of the financial assets at fair value through profit or loss are recognized in profit/loss. Net gains or losses recognized in profit or loss include the interest and/or dividend amount acquired from the stated financial asset. c. Held-to-maturity investments They are classified as the held-to-maturity investments that have either fixed or determinable payments, or fixed-term debt instruments and for which an entity has both the ability and the intention to hold to maturity. The held-to-maturity investments are recognized deducting the impairment amount from the amortized cost based on the effective interest model and the related incomes are calculated using the effective interest method. The Company has no held-to-maturity investments as of the balance sheet date. d. Available-for-sale financial assets They are classified as the publicly quoted equity instruments held by the Company and traded in an active market and the financial assets some of the debt securities of which are ready to be sold and they are shown at fair value. The Company has equity instruments classified as the financial assets not publicly quoted and not traded in an active market but ready to be sold; and their fair values cannot be measured reliably; therefore, they are shown at amortized costs. Impairments on the statement of income and the gains and losses arising from the changes in the fair value, except for the exchange difference profit/loss amount regarding the interest and monetary instruments calculated using the effective interest method are recognized within the other comprehensive income and accumulated in the financial assets appreciation fund. In case the investment is sold or subjected to impairment, the total profit/loss accumulated in the financial assets appreciation fund are classified in the statement of income. Dividends associated with the available-for-sale equity instruments are recognized in profit/loss when the Company is vested to receive the related payments. The fair value of the available-for-sale financial assets in foreign currency is calculated by converting the current value in the related foreign currency to the reported currency using the conversion rate valid on the reporting date. The changes in the fair value of the asset that arise from the conversion rate are recognized in profit/loss, while other changes are recognized under equity. The Company does not have any available-for-sale investments as of the balance sheet date. 11
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) e. Impairment in financial assets The financial assets other than the ones at fair value through profit or loss are evaluated to find some indicators on whether a financial asset or a group of financial assets is impaired or not on each balance sheet date. In the event that one or more than one incidents happen after the first recognition of the financial assets and there is an objective indicator showing that the stated loss having an impact on the estimated cash flows of the related financial asset or the financial asset group, which can be reliably estimated, has caused the financial asset to be impaired, the impairment occurs and the impairment loss arises. The impairment amount for the loans and receivables is the difference between the current value of the anticipated cash flows calculated discounting over the basic interest rate of the financial asset and the book value. Except the trade receivables the book value of which is decreased using an allowance account, the impairment in all the financial assets is deducted from the quoted value of the asset directly. In case the trade receivable cannot be collected, this amount is written off by being deducted from the allowance account. The changes in the allowance account are recognized in profit or loss. Except the available-for-sale equity instruments, if the impairment loss decreases in the next term and can be associated with an event that happens after the recognition of the impairment loss, the impairment loss recognized before is cancelled in profit / loss not to exceed the amortized cost to reach in the event that the impairment of the investments is never recognized on the date of cancellation for the impairment. The increase in the fair value of the available-for-sale equity instruments after the impairment is recognized directly in equities. f. Financial liabilities The financial liabilities and equity instruments of the Company are classified based on contractual arrangements and the definition basis of a financial liability and equity-based instrument. The contract representing the right in the remaining assets after deducting all the debt of the Company is the equity financial instrument. The financial liabilities are classified as the financial liabilities at fair value through profit or loss or as other financial liabilities. g. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss, is recognized in their fair values and in each reporting term, revaluated in their fair values on the balance sheet date. A change in the fair values is recognized in the statement of income. Net gains or losses recognized in the statement of income include the interest rate paid for the stated financial liability. 12
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) h. Derivative financial instruments The operations of the Company mainly establish the entity and expose it to the financial risks based on the changes in the interest rates. Derivative financial instruments (basically foreign exchange swap contracts) are used sometimes in order to manage the financial risks associated with the exchange rate fluctuations based on the future foreign exchange and loan transactions. Derivative financial instruments are calculated at the fair value on the contract date and then recalculated at their fair value in the next reporting terms. The Company does not indicate the derivative financial instruments as hedging and therefore, the change in the current values of these derivative transactions is associated with the income and expenditure of the current year. As on 31 December 2013 and 31 December 2012, the Company does not have any ongoing derivative transactions. Factoring receivables and provision for impaired factoring receivables Factoring receivables originated by the Company by providing money directly to the borrower are considered as factoring receivables and are carried at amortised cost. All factoring receivables are recognised when cash is advanced to borrowers against their domestic and foreign receivables. A credit risk provision for impairment of the factoring receivables is established if there is objective evidence that the Company will not be able to collect all amounts due as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the receivables. The amount of the provision for impaired factoring receivables is the difference between the carrying amount and recoverable amount, being the present value of expected cash flows, including the amount recoverable from guarantees and collateral, discounted based on the interest rate at inception. For restructured receivables, the Company initially determines as to whether there has been an impairment as a result of the restructuring, and if so, a provision for impairment is recorded representing the difference between the recoverable amount, being the present value of expected cash flows from restructured receivables discounted using the interest rate of the original receivables, and the carrying amount. The provision also covers losses where there is objective evidence that probable losses are present in components of the portfolio at the balance sheet date. These have been estimated based upon historical loss experience which is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The provision made during the year is charged against the income for the period. Receivables that cannot be recovered are written off and charged against the provision for impaired factoring receivables. These receivables are written off after all the necessary legal procedures have been completed and the amount of the loss is finally determined. Recoveries of amounts previously provided for are treated as a reduction of the charge for provision for impaired factoring receivables for the period (Note 6). 13
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) Property and equipment The Company has chosen the revaluation method as defined in (IAS 16) Plant, property and equipment in subsequent measurement of its buildings stated in its properties. The Company presents the buildings at the fair value based on valuation report of an independent licensed valuation company. Valuations are performed with sufficient regularity to ensure that fair value of buildings does not differ materially from its carrying amounts. Accumulated depreciation concerning the buildings is restated proportionate to the change in the gross carrying amount of the asset such that the net book value of the asset after revaluation equals its revaluated amount. All other property and equipment is stated at their net value which is their historical costs less any accumulated depreciation and impairment (Note 12). If a revaluation results in an increase in value, it should be credited to as other comprehensive income under the Statement of Comprehensive Income and accumulated in equity under the heading revaluation funds unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income. Property and equipment are presented at recorded amount after the deduction of impairment and accumulated depreciation (Note 12). Depreciation is calculated on the booked amounts of property and equipment using the straight-line method. The ranges of estimated useful lives are as follows: Buildings 50 years Office equipment, furniture and fixtures Leasehold improvements 4-5 years 4-5 years Estimated useful life and depreciation method is checked for every year in order to determine the probable effects of the changes in estimation and these changes are recorded. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount and the impairment provision is accounted for related to the income statement. Gains or losses on disposal of property and equipment are determined with the comparison of restated amounts and sales amounts and recorded to the related income or expense accounts. Intangible assets Intangible assets are comprised of software expenses and amortized over their estimated useful lives of five years. Expenses for the repair and maintenance of computer software are accounted for in the income statement. However, the expenses are capitalized if they result in an enlargement or substantial improvement of the respective assets (Note 13). Impairment of assets At each reporting date, the Company evaluates whether there is any impairment indication on the asset. When an indication of impairment exists, the Company estimates the recoverable values of such assets. Impairment exists if the carrying value of an asset or a cash generating unit is greater than its recoverable amount which is the higher of value in use or fair value less costs to sell. 14
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) Assets held for sale A tangible asset (or a disposal Company of tangible assets) classified as asset held for sale is measured at lower of carrying value or fair value less costs to sell. An asset (or a disposal group of assets) is regarded as asset held for sale only when the sale is highly probable and the asset (disposal group) is available for immediate sale in the frame of the common conditions for sale of assets. Financial liabilities and issued debt securities Financial liabilities are recognized initially at fair value, including the transaction costs incurred. Subsequently, financial liabilities are measured at amortized cost using the effective yield method. Any difference between initial amount after transaction costs and the amortized value is recognized in the income statement as finance cost over the redemption period of the financial liability. Accounting for finance lease (where the Company is lessee ) Under the finance leases, the Company recognizes the assets, with the fair value of the leased asset or, if lower, the present value of the minimum lease payments each determined at the inception of the lease. The assets that are obtained with finance lease agreements are classified as property and equipment. The useful life of an asset leased under a finance lease is considered equal to the lease term and leased assets are depreciated over the period of lease term. The finance lease liabilities are presented in the balance sheet as Finance lease payables and related interest expenses and exchange gains and losses are charged to the income statement in the period that they occur (Note 9). Income taxes a. Income taxes currently payable Income taxes ( corporation tax ) currently payable are calculated based in accordance with the Turkish tax legislation (Note 14). Taxes other than on income are recorded within operating expenses (Note 20). b. Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The rates enacted, or substantively enacted, at the balance sheet date are used to determine deferred income tax. The principal temporary differences arise from the provision for impaired factoring receivables, property and equipment, reserve for annual leave and provision for employment termination benefits (Note 14). Deferred tax liabilities and assets are recognised when it is probable that the future economic benefit resulting from the reversal of temporary differences will flow to or from the Company. Deferred tax assets resulting from temporary differences in the recognition of expense for income tax, and for financial reporting purposes are recognised to the extent that it is probable that future taxable profit will be available against which the deferred tax asset can be utilised. 15
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Continued) Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. If mentioned criteria are not formed, then the Company presents these cases in the related financial notes. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. The discount rate reflects current market assessments of the time value of money and the risks specific to the liability. The contingent assets are not accounted for in the financial statements unless they are realized and disclosed in the related notes to the financial statements. Employment termination benefits Provision for employment termination benefits represents the present value of the future probable obligation of the Company. According to the labour laws and regulations in Turkey, the Company is required to provide compensation payments to employees who retires, leaves or is dismissed due to any inappropriate act defined in Turkish Labour Law. In this context, provision for employment termination benefits that represents the present value of the future probable obligation of the Company, is calculated with defined actuarial estimations which arise from the changes in the actuarial assumptions or the differences between actuarial assumptions and outturns and accrued to the financial statements (Note 15). Revenue recognition Factoring service revenues are the interest income collected from the customers and accrued on the cash advances paid to these customers. Commission income is composed of a percentage of the amounts on invoices subject to factoring. All income and expenses are recognised on the accrual basis. In finance leasing, the asset subject to leasing is accounted for in financial statements at a receivable amount equal to the net leasing investment. Finance income under finance lease is identified by applying a constant rate of return to the net investment subject to lease. Received lease payments are deducted from the gross lease investment by decreasing the cost and unearned finance income. The unearned finance income represents the difference between the gross amount of the leasing investment and the present value of the investment calculated by a rate of return used in leasing. Rate of return represents the rate that equalizes the sum of the minimum lease payments and the non-guaranteed remaining balance to the sum of the fair value and initial cost of the leased asset. Commissions and fees, resulted from factoring and finance lease operations, are accrued on a time basis. Foreign currency transactions Foreign currency transactions are translated into Turkish Lira using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are accounted for in the income statement. Translation of those balances is performed with the year-end exchange rates. 16