CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013 NIS IN THOUSANDS INDEX Page Auditors' Reports 2-4 Consolidated Statements of Financial Position 5-6 Consolidated Statements of Comprehensive Income 7 Consolidated Statements of Changes in Equity 8-10 Consolidated Statements of Cash Flows 11-13 Notes to Consolidated Financial Statements 14 96 - - - - - - - - - - -
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION MATRIX IT LTD. AND ITS SUBSIDIARIES ASSETS Note December 31, 2013 2012 CURRENT ASSETS: Cash and cash equivalents 4 148,761 153,655 Short-term deposit 2,333 - Financial assets at fair value through profit or loss 5, 25 59,361 52,172 Trade receivables 6, 9 587,185 588,109 Income taxes receivable 28,485 39,475 Other accounts receivable 7 62,768 52,581 Inventories 8 8,239 7,899 897,132 893,891 NON-CURRENT ASSETS: Investments and other loans 10 6,528 6,303 Investments in associated company 11 3,102 6,950 Long term prepaid expenses 21,150 8,549 Property, plant and equipment, net 12 61,404 64,845 Goodwill 13 458,114 461,907 Intangible assets, net 13 24,621 28,114 Deferred taxes 21 40,071 39,758 614,990 616,426 1,512,122 1,510,317 The accompanying notes are an integral part of the consolidated financial statements. - 5 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME MATRIX IT LTD. AND ITS SUBSIDIARIES Note Year ended December 31, 2013 2012 2011 (except per share data) Revenues 26b 1,931,650 1,983,952 1,758,230 Costs of revenues 26c 1,602,219 1,651,371 1,442,847 Gross profit 329,431 332,581 315,383 Selling and marketing expenses 26d 74,231 75,703 69,213 General and administrative expenses 26e 114,661 116,467 108,452 Operating income 140,539 140,411 137,718 Financial expenses 26f 26,611 26,867 24,801 Financial income 26f 3,627 4,271 5,917 Company's share in losses of associated company (3,848) (158) (1,263) Income before taxes on income 113,707 117,657 117,571 Taxes on income 21 24,575 26,985 24,136 Net income 89,132 90,672 93,435 Other comprehensive income: Actuarial gain (loss) from defined benefit plans (3,054) (2,299) 2,617 Foreign currency translation adjustments (8,722) (2,509) 2,176 Total comprehensive income 77,356 85,864 98,228 Net income attributable to: Equity holders of the Company 85,973 86,424 93,590 Non-controlling interests 3,159 4,248 (155) 89,132 90,672 93,435 Total comprehensive income attributable to: Equity holders of the Company 74,197 81,616 98,383 Non-controlling interests 3,159 4,248 (155) 77,356 85,864 98,228 Net earnings per share attributable to equity holders of the Company: 27 Basic net earnings 1.43 1.44 1.56 Diluted net earnings 1.43 1.44 1.56 The accompanying notes are an integral part of the consolidated financial statements. - 7 -
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued share capital Share premium Treasury shares Attributed to the Company's shareholders Foreign currency Retained translation earnings reserve Reserve- Transaction With a Former Controlling Shareholder Reserve from share-based payment Total Noncontrolling interests Total equity Balance as of January 1, 2013 65,104 260,426 (7,982) 233,698 (5,860) 10,186 10,123 565,695 144 565,839 Net income - - - 85,973 - - - 85,973 3,159 89,132 Foreign currency translation reserve - - - - (8,722) - - (8,722) - (8,722) Actuarial gain (loss) from defined - - - benefit plans (3,054) - - - (3,054) - (3,054) Total other comprehensive loss - - - (3,054) (8,722) - - (11,776) - (11,776) Total comprehensive income (loss) - - - 82,919 (8,722) - - 74,197 3,159 77,356 Exercise of options 75 - - - - - (75) - - - Dividend paid at 27% per NIS 1 par value of Ordinary shares - - - (63,031) - - - (63,031) - (63,031) Reserve from put options to noncontrolling interests - (599) - - - - - (599) (1,066) (1,665) Purchase of non-controlling interests - (65) - - - - - (65) 45 (20) Share-based payment - - - - - - 3,367 3,367-3,367 Balance as of December 31, 2013 65,179 259,762 (7,982) 253,586 (14,582) 10,186 13,415 579,564 2,282 581,846 The accompanying notes are an integral part of the consolidated financial statements. - 8 -
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued share capital Share premium Treasury shares Attributed to the Company's shareholders Retained earnings Foreign currency translation reserve Reserve- Transaction With a Former Controlling Shareholder Reserve from share-based payment Total Noncontrolling interests Total equity Balance as of January 1, 2012 65,018 300,513 (7,982) 219,159 (3,351) 10,186 4,693 588,236 (193) 588,043 Net income - - - 86,424 - - - 86,424 4,248 90,672 Foreign currency translation reserve - - - - (2,509) - - (2,509) - (2,509) Actuarial gain (loss) from defined benefit plans - - - (2,299) - - - (2,299) - (2,299) Total other comprehensive loss - - - (2,299) (2,509) - - (4,808) - (4,808) Total comprehensive income (loss) - - - 84,125 (2,509) - - 81,616 4,248 85,864 Exercise of options 86 63 - - - - (149) - - - Dividend paid at 30% per NIS 1 par value of Ordinary shares - - - (69,586) - - - (69,586) - (69,586) Purchase of non-controlling interests - (40,150) - - - - - (40,150) (3,911) (44,061) Share-based payment - - - - - - 5,579 5,579-5,579 Balance as of December 31, 2012 65,104 260,426 (7,982) 233,698 (5,860) 10,186 10,123 565,695 144 565,839 The accompanying notes are an integral part of the consolidated financial statements. - 9 -
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued share capital Share premium Treasury shares Attributed to the Company's shareholders Retained earnings Foreign currency translation reserve Reserve- Transaction With a Former Controlling Shareholder Reserve from share-based payment Total Noncontrolling interests Total equity Balance as of January 1, 2011 64,890 298,619 (7,982) 190,028 (5,527) 10,186 637 550,851 520 551,371 Net income (loss) - - - 93,590 - - - 93,590 (155) 93,435 Foreign currency translation reserve - - - - 2,176 - - 2,176-2,176 Actuarial gain from defined benefit plans - - - 2,617 - - - 2,617-2,617 Total other comprehensive income - - - 2,617 2,176 - - 4,793-4,793 Total comprehensive income (loss) - - - 96,207 2,176 - - 98,383 (155) 98,228 Exercise of options 128 1,894 - - - - (2,022) - - - Dividend paid at 28% per NIS 1 par value of Ordinary shares - - - (67,076) - - (67,076) - (67,076) Purchase of non-controlling interests - - - - - - - - (558) (558) Share-based payment - - - - - - 6,078 6,078-6,078 Balance as of December 31, 2011 65,018 300,513 (7,982) 219,159 (3,351) 10,186 4,693 588,236 (193) 588,043 The accompanying notes are an integral part of the consolidated financial statements. - 10 -
CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Year ended December 31, 2013 2012 2011 Net income 89,132 90,672 93,435 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,375 29,861 21,144 Taxes on income 24,575 26,985 24,136 Revaluation of debentures 2,012 7,982 9,066 Gain from available-for-sale financial assets - - (75) Change in employee benefit liabilities, net (4,192) (7,801) (2,490) Loss (gain) from change in value and sale of financial assets at fair value through profit or loss (1,705) (1,449) 5,269 Other financial expenses (income), net 16,283 12,991 (1,053) Revaluation of long-term loans from banks (235) 1,266 742 Company's share of losses of associated company 3,848 158 1,263 Gain from sale of subsidiaries - - (2,206) Revaluation of liabilities in respect of business combinations (7,049) 454 968 Capital loss (gain) from sale of property, plant and equipment 10 100 (42) Share-based payment 3,367 5,579 6,078 Decrease (increase) in value of put options of noncontrolling interests (2,708) 3,000 (993) Changes in asset and liability items: 60,581 79,126 61,807 Increase in trade receivables (96) (2,892) (44,366) Decrease (increase) in other accounts receivable (23,172) 7,585 (18,594) Decrease (increase) in inventories (340) 1,461 10,519 Increase (decrease) in trade payable 6,590 3,949 (37,382) Increase in employee benefit liabilities, deferred revenues and other payable 35,404 7,625 12,077 Cash paid and received during the year for: 18,386 17,728 (77,746) Interest paid (15,979) (14,059) (5,762) Interest received 1,770 2,126 4,068 Taxes paid (44,301) (57,774) (45,539) Taxes received 19,092 10,719 4,607 (39,418) (58,988) (42,626) Net cash provided by operating activities 128,681 128,538 34,870 The accompanying notes are an integral part of the consolidated financial statements. - 11 -
CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from investing activities: Year ended December 31, 2013 2012 2011 Proceeds from sale of property, plant and equipment 152-152 Purchase of property, plant and equipment (12,917) (12,144) (28,811) Proceeds (payments) from sale (for purchase) of financial assets at fair value through profit or loss, net (5,484) (645) 71,396 Proceeds from sale of available-for-sale financial assets - - 300 Other investments - - (2,185) Proceeds from long-term loan - 38 300 Purchase of business operations - - (8,283) Capitalization of development costs (1,830) - (5,178) Payment for business acquisitions (a) 23 (58,899) (36,916) Proceeds from sale of investments in subsidiaries (b) - - 1,811 Investment in long-term deposits (2,273) (1,086) - Net cash used in investing activities (22,329) (72,736) (7,414) Cash flows from financing activities: Short-term credit from banks and other credit providers, net 8,478 1,630 17,365 Proceeds from long-term loans from banks 66,000 160,000 120,000 Repayment of debentures and interest (60,752) (127,300) - Repayment of long-term loans from banks (49,056) (34,658) (23,132) Dividend paid to Matrix's shareholders (63,031) (69,586) (67,076) Payment of liabilities in respect of business combinations (2,034) (2,676) (3,140) Repayment of capital lease obligation (1,645) (724) (763) Dividend paid to non-controlling interests (5,378) (7,212) (7,602) Payment of liability for put option to non-controlling interests - (18,445) - Net cash provided by (used in) financing activities (107,418) (98,971) 35,652 Exchange differences on balances of cash and cash equivalents (3,828) (1,609) 3,093 Increase (decrease) in cash and cash equivalents (4,894) (44,778) 66,201 Cash and cash equivalents at the beginning of the year 153,655 198,433 132,232 Cash and cash equivalents at the end of the year 148,761 153,655 198,433 The accompanying notes are an integral part of the consolidated financial statements. - 12 -
CONSOLIDATED STATEMENTS OF CASH FLOWS (a) Payment for business acquisitions: The acquiree's assets and liabilities at date of acquisition: Year ended December 31, 2013 2012 2011 Working capital (excluding cash and cash equivalents) 2,537 (7,484) (7,273) Cash held for distribution to previous controlling shareholder - - (17,255) Long-term deferred taxes - (2,144) (84) Property, plant and equipment, net (53) (2,629) (4,474) Goodwill (5,735) (76,223) (69,698) Intangible assets (1,400) (20,669) (14,389) Other long-term liabilities - - 307 Employee benefit liabilities - 5,142 2,722 Deferred taxes 744 5,170 4,757 Liability to previous controlling shareholder - 6,428 24,857 Non-controlling interests - 23,562 - Liability in respect of business combinations 3,930 9,958 43,614 23 (58,899) (36,916) (b) Proceeds from sale of investments in subsidiary: Working capital (excluding cash and cash equivalents) - - (428) Long-term deferred taxes - - 82 Property, plant and equipment - - 25 Goodwill - - 466 Other long-term liabilities - - (31) Non-controlling interests - - (558) Receivables for sale of investment in subsidiary - - 49 Gain from sale of subsidiary - - 2,206 - - 1,811 (c) Significant non-cash transaction: Purchase of property, plant and equipment against payables - - 9,650 The accompanying notes are an integral part of the consolidated financial statements. - 13 -
NOTE 1:- GENERAL a. Matrix IT Ltd. ("the Company") was incorporated in Israel and began its business operations on September 12, 1989. The Company is considered an Israeli resident. The Company's registered address is 3 Abba Even Boulevard, Herzliya, Israel. The controlling shareholder in the Company is Formula Systems (1985) Ltd. ("Formula Systems"). In November 2010, the control in Formula Systems was acquired by Asseco Poland S.A., a Polish public company, traded on the Warsaw Stock Exchange. The Company operates in four operating segments as follows (see detail in note 29): 1. Software solutions and services. 2. Software product marketing and support. 3. Computer infrastructure and integration solutions. 4. Learning and integration. The Company has been traded on the Tel-Aviv Stock Exchange ("the TASE") since May 1993. b. Definitions: In these financial statements: The Company The Group Subsidiaries Associates Affiliates companies The parent company The ultimate parent company Interested parties and controlling shareholder - Matrix IT Ltd. - The Company and its affiliates companies - Companies that are controlled by the Company (as defined in IAS 27 (2008)) and whose accounts are consolidated with those of the Company. - Companies in which the Company has significant influence and that are not subsidiaries. The Company's investment therein is accounted for in the consolidated financial statements of the Company using the equity method. - Subsidiaries and associates. - Formula Systems (1985) Ltd. - Asseco Poland S.A. - As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010. Related parties - As defined in IAS 24. - 14 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been applied consistently in the financial statements for all periods presented, unless otherwise stated. a. Basis of presentation of the financial statements: 1. Measurement basis: The Group's financial statements have been prepared on a cost basis, except for liability in respect of certain financial instruments at fair value through profit or loss, income taxes receivable and income taxes payable, deferred tax assets and deferred tax liabilities, employee benefit assets and employee benefit liabilities, provisions and investments which are accounted for at equity. The Group has elected to present the statement of comprehensive income using the function of expense method. 2. Basis of preparation of the financial statements: These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Furthermore, the financial statements have been prepared in conformity with the provisions of the Israeli Securities Regulations (Annual Financial Statements), 2010.b. In the process of applying the significant accounting policies, the Group has made the following judgments, estimates and assumptions which have the most significant effect on the events recognized in the financial statements. Judgments: - Classification of leases: In order to determine whether to classify a lease as a finance lease or an operating lease, the Group evaluates whether the lease transfers substantially all the risks and benefits incidental to ownership of the leased asset. In this respect, the Group evaluates such criteria as the existence of a bargain purchase option, the lease term in relation to the economic life of the asset and the present value of the minimum lease payments in relation to the fair value of the asset. - Recognizing revenue on a gross or net basis: In cases where the Group acts as agent or broker bearing the risks and rewards derived from the transaction, revenue is presented on a gross basis. - Determining the fair value of non-controlling interests: When the Group measures the non-controlling interests in a business combination at fair value, the Group determines the fair value based on a valuation technique, generally the discounted cash flow method. - 15 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Determining the fair value of share-based payment transactions: The fair value of share-based payment transactions is determined using an acceptable option-pricing model. The inputs to the model include share price, exercise price, expected volatility, expected life, expected dividend and risk-free interest rate. Estimates and assumptions: The preparation of the financial statements requires management to make estimates and assumptions that have an effect on the application of the accounting policies and on the reported amounts of assets, liabilities, revenues and expenses. These estimates and underlying assumptions are reviewed regularly. Changes in accounting estimates are reported in the period of the change in estimate. The key assumptions made in the financial statements concerning uncertainties at the end of the reporting period and the critical estimates computed by the Group that may result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. - Legal claims: In estimating the likelihood of outcome of legal claims filed against the Company and its investees, the companies rely on the opinion of their legal counsel. These estimates are based on the legal counsel's best professional judgment, taking into account the stage of proceedings and legal precedents in respect of the different issues. Since the outcome of the claims will be determined in courts, the results could differ from these estimates. - Impairment of goodwill: The Group reviews goodwill for impairment at least once a year. This requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit to which the goodwill is allocated and also to choose a suitable discount rate for those cash flows (see additional information in p below). - Deferred tax assets: Deferred tax assets are computed regarding unused carryforward tax losses and temporary differences to the extent that their utilization is probable. Management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing and level of expected future taxable profits, its source and the tax planning strategy. See additional information in q below. - 16 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Pension and other post-employment benefits: The liability in respect of post-employment defined benefit plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about, among others, the discount rate, future salary increases and forfeiture rates. The carrying amount of the liability may be highly sensitive out of changes in these estimates. See additional information in s below. - Revenues from construction contracts: Revenues from construction contracts are recognized by the percentage of completion method. The percentage of completion is determined based on the ratio of the actual costs related to contact performance incurred to date to the estimated total costs. c. Consolidated financial statements: The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control exists when a company has the power, directly or indirectly, to govern the financial and operating policies of an entity. The effect of potential voting rights that are exercisable at the end of the reporting period is considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases. The financial statements of the Company and of the Subsidiaries are prepared as of the same dates and periods. The accounting policies in the financial statements of the Subsidiaries have been applied consistently and uniformly with those applied in the financial statements of the Company. Significant intragroup balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements. Non-controlling interests of Subsidiaries represent the non-controlling shareholders' share of the total comprehensive income (loss) of the Subsidiaries and their share of the net assets at fair value upon the acquisition of the Subsidiaries. The non-controlling interests are presented in equity separately from the equity attributable to the equity holders of the Company. Losses are attributed to non-controlling interests even if they result in a negative balance of non-controlling interests in the consolidated statements of financial position. d. Functional currency, presentation currency and foreign currency: 1. Functional currency and presentation currency: The presentation currency of the financial statements is the NIS. The functional currency, which is the currency that best reflects the economic environment in which the Group operates and conducts its transactions, is - 17 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) separately determined for each Group entity, including an associate accounted for using the equity method, and is used to measure its financial position and operating results. The functional currency of the Group is the NIS. When an investee's functional currency differs from the Company's functional currency, that investee represents a foreign operation whose financial statements data are translated so that they can be included in the consolidated financial statements as follows: a) Assets and liabilities at the end of each reporting period (including comparative data) are translated at the closing rate at the end of the reporting period. Goodwill and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate at the end of the reporting period, in each reporting date. b) Income and expenses for each period included in the statement of comprehensive income (including comparative data) are translated at average exchange rates for the relevant periods; however, if exchange rates fluctuate significantly, income and expenses are translated at the exchange rates at the date of the transactions. c) Share capital, capital reserves and other changes in capital are translated at the exchange rate prevailing at the date of incurrence. d) Retained earnings are translated based on the opening balance translated at the exchange rate at that date and other relevant transactions (such as dividend) during the period are translated as described in b) and c) above. e) All resulting translation differences are recognized as a separate component of other comprehensive income (loss) in equity "foreign currency translation reserve". Intragroup loans for which settlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in that foreign operation and are accounted for as part of the investment and the exchange differences arising on these loans (net of their tax effect) are recognized in the same component of equity as discussed in e) above. 2. Transactions, assets and liabilities in foreign currency: Transactions denominated in foreign currency are recorded on initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at the end of each reporting period into the functional currency at the exchange rate at that date. Exchange differences, other than those capitalized to qualifying assets or recorded in equity in hedging transactions, are recognized in the statement of comprehensive income. Non-monetary assets and liabilities measured at cost in a foreign currency - 18 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined. 3. Index-linked monetary items: e. Cash equivalents: Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index ("Israeli CPI") are adjusted at the relevant index at the end of each reporting period according to the terms of the agreement. Linkage differences arising from the adjustment as above are recognized in the statement of comprehensive income. Cash equivalents are considered as highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three months or less from the date of acquisition or with a maturity of more than three months, but which are redeemable on demand without penalty and which form part of the Group's cash management. f. Short-term deposits: Short-term deposits are bank deposits, with an original maturity period of more than three months from the investment date which do not meet the definition of cash equivalents. The deposits are presented according to the deposit terms. g. Allowance for doubtful accounts: The allowance for doubtful accounts is determined in respect of specific debts whose collection, in the opinion of the Group's management, is doubtful. Bad debts are derecognized when they are assessed as uncollectible. h. Inventories: Inventories are measured at the lower of cost and net realizable value. The cost of inventories comprises costs of purchase and costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs. The subsidiaries hold inventories of purchased merchandise and products which consist of educational software kits, computers, peripheral equipment and spare parts, cost of the inventories is determined using the first-in, first-out method. The Group periodically evaluates the condition and age of inventories and makes provisions for slow moving inventories accordingly. i. Receivables for construction contracts: Income receivable from construction contracts is separately calculated for each construction contract and presented in the statement of financial position at the aggregate - 19 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) amount of total costs incurred, and total recognized profits, less total recognized losses and progress billings. Progress billings are amounts billed for work performed up to the end of the reporting period, whether settled or not settled. If the amount is due from the customer, it is recorded in the statement of financial position as an asset under receivables for construction contracts. If the amount is due to the customer, it is recorded in the statement of financial position as a liability for construction contracts. The financial asset, receivables for construction contracts, is reviewed for impairment and derecognition as discussed below regarding impairment of financial assets presented at amortized cost and the derecognition of financial assets, respectively. The costs of projects based on construction contracts are recognized at cost that includes identifiable direct costs and shared indirect costs. Shared indirect costs are allocated between the projects using a relevant basis. j. Financial instruments: 1. Financial assets: Financial assets within the scope of IAS 39 are initially recognized at fair value plus directly attributable transaction costs, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded in profit or loss. After initial recognition, the accounting treatment of investments in financial assets is based on their classification into one of the following two categories: financial assets at fair value through profit or loss loans and receivables a) Financial assets at fair value through profit or loss: The group of financial assets at fair value through profit or loss comprises financial assets designated upon initial recognition as at fair value through profit or loss. b) Loans and receivables: The Group has loans and receivables that are financial assets (nonderivative) with fixed or determinable payments that are not quoted in an active market. After initial recognition, loans are measured based on their terms at cost (less directly attributable transaction costs) using the effective interest method and less any impairment losses. Short-term receivables (such as trade and other receivables) are measured based on their terms, normally at nominal value. Gains and losses are recognized in the statement of comprehensive income when the loans and receivables - 20 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) are derecognized or impaired, as well as through the periodic amortizations. 2. Financial liabilities: a) Financial liabilities measured at amortized cost: Interest-bearing loans and borrowings are initially recognized at fair value less directly attributable transaction costs (such as loan raising costs). After initial recognition, loans, including debentures, are measured based on their terms at amortized cost using the effective interest method taking into account directly attributable transaction costs. Short-term borrowings (such as trade and other payables) are measured based on their terms, normally at nominal value. b) Financial liabilities at fair value through profit or loss: Financial liabilities at fair value through profit or loss include financial liabilities classified as held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. 2. Fair value measurement: Fair value is the price that would be received to sell an asset or paid to transfer a liability in transaction between market participants at the measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset's or the liability's principal market, or in the absence of a principal market, in the most advantageous market. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The group uses valuation techniques that are considered suitable given the circumstances and for which enough data is available to measure fair value, while maximizing the use of relevant foreseeable data and minimizing the use of unforeseeable data. All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement: Level 1 Level 2 Level 3 - quoted prices (unadjusted) in active markets for identical assets or liabilities. - inputs other than quoted prices included within Level 1 that are observable either directly or indirectly. - inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data). - 21 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 4. Offsetting financial instruments: Financial assets and financial liabilities are offset and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. 5. Put option granted to non-controlling interests: When the Group grants non-controlling interests a put option to sell part or all of their interests in a subsidiary during a certain period, on the date of grant, the noncontrolling interests are classified as a financial liability. The Group remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise of the put option. If the Group has present ownership of the non-controlling interests, these noncontrolling interests are accounted for as if they are held by the Group and changes in the amount of the liability are carried to profit and loss. If the Group does not have present ownership, the interests are accounted for using the partial recognition method. Accordingly, the Group grants the non-controlling interests their share of the profits in each period but at the end of the reporting period subtracts the noncontrolling interests against the liability whereby the difference between noncontrolling interests at the end of the reporting period and the present value of the liability is recognized against the premium. If the option is exercised in subsequent periods, the consideration paid upon exercise is treated as settlement of the liability. If the option expires, the liability is settled and it is a portion of the investment in the subsidiary disposed of, without loss of control therein. 6. Derecognition of financial instruments: a) Financial assets: A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or the Group has transferred its contractual rights to receive cash flows from the financial asset or assumes an obligation to pay the cash flows in full without material delay to a third party, and in addition it has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A transaction involving factoring of accounts receivable and credit card vouchers is derecognized when the abovementioned conditions are met. If the Group transfers its rights to receive cash flows from an asset and neither transfers nor retains substantially all the risks and rewards of the asset nor transfers control of the asset, a new asset is recognized to the extent of the Group's continuing involvement in the asset. When continuing involvement takes the form of guaranteeing the transferred asset, the extent of the continuing involvement is measured as the lower of the original - 22 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) carrying amount of the asset and the maximum amount of consideration received that the Group could be required to repay. As of December 31, 2013, the Group has no open factoring transactions. b) Financial liabilities: A financial liability is derecognized when it is extinguished, that is when the obligation is discharged or cancelled or expires. A financial liability is extinguished when the debtor (the Group) discharges the liability by paying in cash, other financial assets, goods or services or is legally released from the liability. When an existing financial liability is exchanged with another liability from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is accounted for as an extinguishment of the original liability and the recognition of a new liability. The difference between the carrying amount of the above liabilities is recognized in the statement of comprehensive income. If the exchange or modification is not substantial, it is accounted for as a change in the terms of the original liability and no gain or loss is recognized on the exchange. 7. Impairment of financial assets: The Group evaluates at the end of each reporting period whether there is any objective evidence of impairment of a financial asset or group of financial assets as follows. a) Financial assets carried at amortized cost: There is objective evidence of impairment of debt instruments, loans and receivables carried at amortized cost as a result of one or more events that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows. Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including liquidity difficulty and default in interest or principal payments. The amount of the loss recorded in profit or loss is measured as the difference between the assets' carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred) discounted at the financial assets' original effective interest rate (the effective interest rate computed at initial recognition). If the financial asset has a variable interest rate, the discount rate of capitalization, is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (see allowance for doubtful accounts above). In a subsequent period, the amount of the impairment loss is reversed if the recovery of the asset can be related objectively to an event occurring after the impairment was recognized. The amount of the reversal, up to the amount of any previous impairment, is recorded in profit or loss. - 23 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) k. Leases: The criteria for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception of the lease in accordance with the following principles as set out in IAS 17. The Group as lessee: 1. Finance leases: Finance leases transfer to the Group substantially all the risks and benefits incidental to ownership of the leased asset (property, plant and equipment). At the commencement of the lease term, the leased assets are measured at the lower of the fair value of the leased asset or the present value of the minimum lease payments. The liability for lease payments is presented at its present value and the lease payments are apportioned between finance charges and a reduction of the lease liability using the effective interest method. After initial recognition, the leased asset is accounted for based on the accounting policies practiced for such assets. 2. Operating leases: Lease agreements are classified as an operating lease if they do not transfer substantially all the risks and benefits incidental to ownership of the leased asset. Lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term. l. Business combinations and goodwill: Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the date of acquisition including for non-controlling interests in the acquiree. In each business combination, the Group chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the date of acquisition or at their proportionate share in the fair value of the acquirees' net identifiable assets. Direct acquisition costs are carried to the statement of comprehensive income as incurred. Upon the acquisition of a business, the assets acquired and liabilities assumed are classified and designated in accordance with the contractual terms, economic circumstances and other pertinent conditions that exist at the acquisition date, including separation of embedded derivatives from the host contract of the acquiree. In a business combination achieved in stages, equity interests in the acquiree that had been held by the acquirer prior to obtaining control are measured at the - 24 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) acquisition date at fair value while recognizing a gain or loss resulting from the revaluation of the prior investment on the date of gaining control. Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IAS 39. Subsequent changes in the fair value of the contingent consideration are recognized in the statement of comprehensive income. Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of evaluation of impairment of goodwill, goodwill purchased in a business combination is evaluated and attributed to the cash-generating units to which it had been allocated. m. Investments in associate using the equity method: Associates are companies in which the Group has significant influence over the financial and operating policies without having control. The investment in an associate is accounted for using the equity method. Under the equity method, the investment in the associate is presented at cost with the addition of post-acquisition changes in the Group's share of net assets, including other comprehensive income of the associate. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The equity method is applied until the loss of significant influence or classification as an asset held-for-sale. Goodwill relating to the acquisition of an associate is presented as part of the investment in the associate, measured at cost and not systematically amortized. Goodwill is evaluated for impairment as part of the investment in the associate as a whole. The financial statements of the Group and of the associate are prepared as of the same dates and periods. The accounting policies applied in the financial statements of the associate are uniform and consistent with the policies applied in the financial statements of the Group. Losses of an associate in amounts which exceed its equity are recognized by the Group to the extent of its investment in the associate plus any losses that the Group may incur as a result of a guarantee or other financial support provided in respect of the associate. For this purpose, the investment includes long-term receivables (such as loans granted) for which settlement is neither planned nor likely to occur in the foreseeable future. - 25 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) n. Property, plant and equipment, net: Property, plant and equipment are measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment losses and any related investment grants and excluding day-to-day servicing expenses. The cost includes spare parts and peripheral equipment that are used in connection with plant and equipment. Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows: Building 2-4 Computers, furniture and equipment 7-33 Motor vehicles 15 Leasehold improvements 10 Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term (including the extension option held by the Group and intended to be exercised) and the expected life of the improvement. The useful life, depreciation method and residual value of an asset are reviewed at least each year-end and any changes are accounted for prospectively as a change in accounting estimate. As for testing the impairment of property, plant and equipment, see p below. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. An asset is derecognized on disposal or when no further economic benefits are expected from its use. The gain or loss arising from derecognition of the asset (determined as the difference between the net disposal proceeds and the carrying amount in the financial statements) is included in profit or loss when the asset is derecognized. o. Intangible assets: Separately acquired intangible assets are measured on initial recognition at cost including directly attributable costs. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets, excluding capitalized development costs, are recognized in the statement of comprehensive income when incurred. After initial recognition, intangible assets are carried at their cost less any accumulated amortization and any accumulated impairment losses. According to management's assessment, intangible assets that have a finite useful life, are amortized over their useful life using the straight-line method and reviewed for impairment whenever there is an indication that the asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the - 26 - %
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) asset are accounted for prospectively as changes in accounting estimates. The amortization of intangible assets with finite useful lives is recognized in the statement of comprehensive income. The useful life of intangible assets is as follows: Years Customer base and backlog 5-6 Brand names 5 Licenses and franchises 2-4 Intangible assets under development 3-10 Capitalized courses development costs 3 Gains or losses arising from the derecognition of an intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the statement of comprehensive income, see p below. p. Impairment of non-financial assets: The Group evaluates the need for an impairment of non-financial assets (property, plant and equipment, intangible assets, goodwill, investments in associate) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale, and value in use. In measuring value in use, the expected cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the statement of comprehensive income. An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the assets' recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in the statement of comprehensive income. The following unique criteria are applied in assessing impairment of these specific assets: 1. Goodwill in respect of acquired businesses: For the purpose of impairment testing, goodwill acquired in a business combination is allocated, at the acquisition date, to each of the Group's cash-generating units that is expected to benefit from the synergies of the combination. - 27 -
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The Company performs its own tests and uses third party valuation specialists to test goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is impairment. Goodwill is tested for impairment by assessing the recoverable amount of the cashgenerating unit (or group of cash-generating units) to which the goodwill has been allocated, compared to the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods. 2. Investment in associate company using the equity method: q. Taxes on income: After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the investment in associates. The Company determines at the end of each reporting period whether there is objective evidence that the carrying amount of the investment in the associate is impaired. The test of impairment is carried out with reference to the entire investment, including the goodwill attributed to investment in the associate company. If there is objective evidence, an impairment loss is recognized in the amount of the difference between the recoverable amount of the investment in the associate and its carrying amount. The recoverable amount is the higher of value in use and fair value less costs to sell based on the estimated net cash flows to be generated by the associate. Impairment loss, as above, is not allocated specifically to goodwill that forms part of the investment and, accordingly, any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases. The loss, or its reversal, is recognized in the statement of comprehensive income in the line item, Company's share in losses of associated company". Taxes on income in the statement of comprehensive income comprise current and deferred taxes. Current or deferred taxes are recognized in profit or loss, except to the extent that the tax arises from items which are recognized directly in other comprehensive income or in equity. In such cases, the tax effect is also recognized in the relevant item. 1. Current taxes: The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the end of reporting period as well as adjustments required in connection with the tax liability in respect of previous years. - 28 -