Table of Contents Independent Auditors Report Consolidated Balance Sheet Consolidated Income Statement Consolidated Statement of Recognised Income and Expense Consolidated Statement of Cash Flows Appendix: Supplementary Information Convenience Translation to US Dollar
Consolidated Balance Sheet As at 31 December 2007 Currency: Thousands of New Turkish Lira ( YTL ) Notes Assets Property and equipment 14 2,240,202 1,966,242 Intangible assets 15 1,005,876 169,941 Investments in debt securities 16 5,389,836 3,862,366 Investments in equity securities 17 51,790 39,840 Investment property 18 631,508 35,335 Other non-current assets 19 1,581,276 840,141 Deferred tax assets 13 110,642 63,095 Total non-current assets 11,011,130 6,976,960 Inventories 20 359,900 486,675 Accounts receivable 21 765,350 766,677 Due from related parties 38 26,821 13,986 Other current assets 23 362,133 200,153 Banking loans and advances to customers 24 12,559,710 7,718,754 Banking loans and advances to banks 25 1,525,820 647,560 Financial assets at fair value through profit or loss 26 178,383 107,664 Cash and cash equivalents 27 1,102,373 1,641,438 Total current assets 16,880,490 11,582,907 Total assets 27,891,620 18,559,867 Equity Paid-in capital 2,010,192 2,010,192 Capital stock held by subsidiaries (53,655) (53,655) Share premium 159,350 159,350 Fair value reserves 47,346 30,260 Translation reserve 4,048 4,580 Hedging reserve 8,044 804 Revaluation surplus 826,603 376,789 Retained earnings 1,897,556 1,277,537 Total equity attributable to equity holders of the Company 4,899,484 3,805,857 Minority interest Şahenk Family 85,344 71,892 Others 126,898 115,003 Total minority interest 212,242 186,895 Total equity 28 5,111,726 3,992,752 Liabilities Long-term bank borrowings 29 2,669,875 1,602,681 Deferred tax liabilities 13 57,831 29,866 Other non-current liabilities 30 179,401 95,724 Total non-current liabilities 2,907,107 1,728,271 Short-term bank borrowings 31 1,166,012 822,312 Short-term portion of long-term bank borrowings 29 1,011,857 448,470 Banking deposits from banks 32 736,187 402,403 Banking customers deposits 33 12,442,193 8,128,292 Obligations under repurchase agreements 34 2,596,489 1,354,070 Accounts payable 35 691,397 686,306 Due to related parties 38 5,921 177,106 Taxes payable on income 13 49,909 34,261 Other current liabilities 36 1,172,822 785,624 Total current liabilities 19,872,787 12,838,844 Total liabilities 22,779,894 14,567,115 Total equity and liabilities 27,891,620 18,559,867 The accompanying notes are an integral part of these consolidated financial statements. 1
Consolidated Income Statement For the Year Ended 31 December 2007 Notes Revenues 5,682,177 5,283,298 Cost of revenues (4,050,094) (3,852,483) Gross profit 8 1,632,083 1,430,815 Administrative expenses 9 (726,949) (634,572) Selling, marketing and distribution expenses (165,556) (164,836) Impairment losses, net 10 (75,671) (41,189) Trading loss, net 26 (38,249) (9,780) Other operating income, net 11 212,922 69,450 Results fom operating activities 838,580 649,888 Finance income 348,032 635,926 Finance expense (450,335) (645,733) Net finance expense 12 (102,303) (9,807) Other non operating expense (25,482) (7,220) Share of profit of equity accounted investees 2,754 1,515 Profit before income tax 713,549 634,376 Income tax expense 13 (70,772) (159,119) Profit for the year 642,777 475,257 Attributable to: Equity holders of the Company 623,097 470,003 Minority interest 28 19,680 5,254 -Şahenk Family 6,468 (1,957) -Others 13,212 7,211 Profit for the period 642,777 475,257 The accompanying notes are an integral part of these consolidated financial statements. 2
Consolidated Statement of Recognised Income and Expense For the Year Ended 31 December 2007 Notes Revaluation of property and equipment 28 475,606 66,095 Net change in fair value of available-for-sale financial assets 17,086 (20,485) Foreign currency translation differences for foreign operations Cash flow hedges: (532) 4,580 Effective portion of changes in fair value 7,240 (305) Income tax on income and expense recognized directly in equity 13 (2,460) (29,358) Income and expense recognised directly in equity 496,940 20,527 Profit for the year 642,777 475,257 Total recognised income and expense for the year 1,139,717 495,784 Attributable to: Equity holders of the Company 1,118,264 509,563 Minority interest 21,453 (13,779) Total recognised income and expense for the year 1,139,717 495,784 The accompanying notes are an integral part of these consolidated financial statements. 3
Consolidated Statement of Cash Flows For the Year Ended 31 December 2007 Notes Cash flows from operating activities Profit for the year 642,777 475,257 Adjustments for: Impairment on loans and receivables 10 75,671 41,189 Impairment of investment property 25,482 7,220 Fair value change in tangible assets held for sale 11 (35) 5,269 Provision for employee severance indemnity 9 6,911 5,566 Depreciation and amortisation 6 138,762 124,060 Technical reserves relating to insurance operations 6 8,109 13,686 Gain on sales of tangible assets (41,718) (771) Share of (profit)/loss of equity accounted investees 6 (2,754) (1,515) Change in accrued interest expense/(income), net 6 (14,349) (147,705) Provision for taxes on income 13 92,814 82,588 Deferred tax charge/(benefit) 13 (22,042) 76,531 909,628 681,375 Changes in operating assets and liabilities Change in banking customer deposits 3,197,405 1,659,586 Change in banking deposits from banks 268,303 109,508 Change in banking loans and advances to banks (624,288) (84,591) Change in balances with the Central Bank (599,504) -- Change in banking loans and advances to customers (2,647,761) (1,819,982) Change in financial assets at fair value through profit or loss (63,479) 64,175 Change in other assets 114,756 (42,775) Change in inventories 126,775 (43,627) Change in accounts receivable 73,197 (147,123) Change in due from related parties (12,835) 8,445 Change in obligations under repurchase agreement 1,013,842 745,802 Change in accounts payable 12,709 163,734 Change in due to related parties (179,596) (36,390) Change in other liabilities 291,115 (344,728) 1,880,267 913,409 Interest paid (1,277,696) (1,025,392) Interest received 523,408 453,823 Taxes paid (70,784) (79,690) Dividend paid (22,417) -- Employee termination indemnity paid (3,065) (4,242) Net cash from operating activities 1,029,713 257,908 Cash flows from investing activities Proceeds from sales of investments in equity securities (7,792) -- Increase in interest in consolidated subsidiaries (65) (86,136) Decrease in interest in consolidated subsidiaries 4,874 6,789 Increase in investments in debt securities (1,180,032) (545,113) Acquisition of property and equipment and intangible assets (604,764) (361,455) Proceeds from sale of property and equipment 61,927 76,212 Cash paid on acquisitions, net of cash acquired (928,704) -- Cash flows (used in)/from investing activities (2,654,556) (909,703) Cash flows from financing activities Change in short-term bank borrowings, net (221,196) (304,998) Change in long-term bank borrowings, net 1,305,231 218,599 Cash flows (used in)/provided by financing activities 1,084,035 (86,399) Net increase/(decrease) in cash and cash equivalents (540,808) (738,194) Cash and cash equivalents at 1 January 2,078,414 2,816,608 Cash and cash equivalents at 31 December 27 1,537,606 2,078,414 The accompanying notes are an integral part of these consolidated financial statements. 4
31 December 2007 Notes to the consolidated financial statements Note Description Pages 1 Reporting entity 6 2 Basis of preparation 6 3 Significant accounting policies 7 4 Determination of fair values 28 5 Financial risk management 29 6 Segment reporting 42 7 Acquisition of subsidiaries 47 8 Revenues and cost of revenues 49 9 Administrative expenses 49 10 Impairment losses 49 11 Other operating income, net 50 12 Net finance expense 50 13 Taxation 51 14 Property and equipment 56 15 Intangible assets 58 16 Investments in debt securities 59 17 Investments in equity securities 60 18 Investment property 61 19 Other non-current assets 61 20 Inventories 62 21 Accounts receivable 62 22 Due from/due to customers for contract work 63 23 Other current assets 63 24 Banking loans and advances to customers 64 25 Banking loans and advances to banks 66 26 Financial assets at fair value through profit or loss 66 27 Cash and cash equivalents 67 28 Capital and reserves 68 29 Long-term bank borrowings 71 30 Other non-current liabilities 73 31 Short-term bank borrowings 77 32 Banking deposits from banks 78 33 Banking customer deposits 78 34 Obligations under repurchase agreements 79 35 Accounts payable 79 36 Other current liabilities 80 37 Commitments and contingencies 80 38 Related party disclosures 84 39 Financial instruments 87 40 Use of estimates and judgments 100 41 Group enterprises 102 42 Subsequent events 110 Appendix: Supplementary information 5
1 Reporting entity Doğuş Holding Anonim Şirketi ( Doğuş Holding or the Company ) was established in 1975 to invest in and coordinate the activities of companies operating in different industries including banking and finance, automotive, construction, tourism, media and real estate and is registered in Turkey. Doğuş Holding is owned and managed by the members of Şahenk Family. As at 31 December 2007, Doğuş Holding has 52 (2006: 47) subsidiaries (the Subsidiaries ), 31 (2006: 23) joint ventures (the Joint Ventures ) and 7 (2006: 6) associates (the Associates ) (referred to as the Group or Doğuş Group herein and after). As explained in more detail in note 41, Doğuş Holding holds controlling interest directly or indirectly via other companies owned and/or exercising the control over the voting rights of the shares held by the members of the Şahenk Family, in all its subsidiaries included in the Group. The Group operates partnerships and has distribution, management and franchise agreements with internationally recognised brand names, such as General Electric Consumer Finance, Volkswagen AG, Volkswagen Finance AG, Audi AG, Porsche AG, Bentley Motors Limited, Seat SA, Scania, Krone, Meiller Fahrzeug&Maschinenfabrik-GMBH&Co KG, Lamborghini S.p.A., ITT Sheraton, Neckerman Reisen, Hyatt Regency, HMS International Hotel GMBH, Giorgio Armani, Guccio Gucci Spa And CNBC. The address of the registered office of Doğuş Holding is as follows: Doğuş Grubu Binaları Büyükdere Caddesi No: 65 34390 Maslak/ İstanbul-Turkey The number of employees of the Group at 31 December 2007 is approximately 20,395 (2006: 17,996). 2 Basis of preparation (a) Statement of compliance Doğuş Group entities operating in Turkey maintain their books of account and prepare their statutory financial statements in New Turkish Lira ( YTL ) in accordance with the Accounting Practice Regulations as promulgated by the Banking Regulatory and Supervision Agency ( BRSA ) applicable to Türkiye Garanti Bankası Anonim Şirketi ( Garanti Bank ), Turkish insurance legislation and accounting principles applicable to insurance business, and accounting principles per Turkish Uniform Chart of Accounts and per Capital Market Board of Turkey applicable to entities operating in other businesses. Doğuş Group s foreign entities maintain their books of account and prepare their statutory financial statements in accordance with the generally accepted accounting principles and the related legislation applicable in the countries they operate. The accompanying consolidated financial statements are based on these statutory records with adjustments and reclassifications for the purpose of fair presentation in accordance with International Financial Reporting Standards ( IFRS ) after giving retroactive effect to the Social Security Law No. 5754 enacted 8 May 2008. 6
2 Basis of preparation (continued) (b) Basis of measurement (c) The consolidated financial statements have been prepared on the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the following: derivative financial instruments are measured at fair value, available-for-sale financial assets are measured at fair value, financial instruments at fair value through profit and loss are measured at fair value, investment property is measured at fair value, certain tangible assets are measured at fair value The methods used to measure the fair values are discussed further in note 4. Functional and presentation currency These consolidated financial statements are presented in YTL which is Doğuş Holding s functional currency. All financial information presented in YTL has been rounded to the nearest thousand. (d) Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in notes 4, 16, 23, 24, 26, 30, 39 and 40. 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. Certain comparative amounts have been reclassified to conform with the current year s presentation as summarised below: As at 31 December 2006, the factoring payables reflected under accounts payable amounting to YTL 45,658 thousand were netted off with the same amount of factoring receivables reflected under accounts receivable. As at 31 December 2006, the Group s payable to Garanti Bank amounting to YTL 147,616 thousand and 12,554 thousand have been reclassified from accounts payable and other noncurrent liabilities, respectively to due to related parties. As at 31 December 2007, it was decided to reclassify the balances reflected under other current assets, other non-current assets, other current liabilities and other non-current liabilities regarding the interests in joint ventures in the construction segment into the related items of assets and liabilities on a line-by-line basis. 7
3 Significant accounting policies (continued) (a) Accordingly, the balances regarding the interests in joint ventures as at 31 December 2006 previously reported under other current assets, other non-current assets, other current liabilities and other non-current liabilities were also reclassified to the related items of assets and liabilities on a line-by-line basis to conform to the current period s presentation. Accordingly, the reclassifications are summarised as follows: Reported balances as at 31 December 2006 Reclassifications Adjusted balances as at 31 December 2006 Property and equipment 1,908,008 58,234 1,966,242 Intangible assets 169,030 911 169,941 Other non-current assets 899,286 (59,145) 840,141 Inventories 476,002 10,673 486,675 Accounts receivable 783,057 (16,380) 766,677 Due from related parties 5,717 8,269 13,986 Other current assets 259,963 (59,810) 200,153 Cash and cash equivalents 1,629,848 11,590 1,641,438 Long-term bank borrowings 1,597,554 5,127 1,602,681 Other non-current liabilities 113,405 (17,681) 95,724 Short-term bank borrowings 816,675 5,637 822,312 Short-term portion of long-term bank borrowings 446,715 1,755 448,470 Accounts payable 876,550 (190,244) 686,306 Due to related parties 6,881 170,225 177,106 Other current liabilities 806,101 (20,477) 785,624 Basis of consolidation (i) (ii) The accompanying consolidated financial statements include the accounts of the parent company, Doğuş Holding, its subsidiaries, joint ventures and associates on the basis set out in sections below. The financial statements of the entities included in the consolidation have been prepared as of the date of the consolidated financial statements. Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Special purpose entities The Group has established a number of special purpose entities ( SPEs ) to accomplish a narrow and well defined objective such as securitisation of particular assets, or the execution of a specific borrowing or lending transactions. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPEs risks and rewards, the Group concludes that it controls the SPE. SPEs controlled by the Group were established under terms that impose strict limitations on the decision-making powers of the SPEs management and that result in the Group receiving the majority of the benefits related to the SPEs operations and net assets, being exposed to risks incident to the SPEs activities, and retaining the majority of the residual or ownership risks related to the SPE or its assets. 8
3 Significant accounting policies (continued) (a) (iii) Basis of consolidation (continued) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The consolidated financial statements include the Group s share of the income and expenses and equity movements of associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. (iv) Joint ventures Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the proportionate consolidation method. The consolidated financial statements include the Group s proportionate share of the enterprises assets, liabilities, revenues and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. (v) Transactions eliminated on consolidation Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Accounting in hyperinflationary economies The financial statements of the Turkish entities have been restated for the changes in the general purchasing power of the New Turkish Lira based on International Accounting Standard ( IAS ) No. 29 Financial Reporting in Hyperinflationary Economies as at 31 December 2005. IAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date, and that corresponding figures for previous periods be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three-year inflation rate approaching or exceeding 100 percent. The cumulative three-year inflation rate in Turkey has been 35.61 percent as at 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by the Turkish Statistical Institute ( TURKSTAT ). By taking this into consideration, together with the sustained positive trend in quantitative factors, such as the stabilisation in financial and monetary markets, decrease in interest rates and the appreciation of YTL against American Dollar ( USD ) and other hard currencies, it was declared that Turkey should be considered a non-hyperinflationary economy under IAS 29 from 1 January 2006. 9
3 Significant accounting policies (continued) (b) Accounting in hyperinflationary economies (continued) Therefore, IAS 29 has not been applied to the accompanying consolidated financial statements for the years ended 31 December 2007 and 2006. (c) (i) (ii) (iii) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments or a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognised directly in equity (see (iii) below). Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to YTL at exchange rates at the reporting date. The income and expenses of foreign operations are translated to YTL at average exchange rates at the dates. Foreign currency differences are recognised directly in equity. Such differences are recognised in the translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss. Foreign currency gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the translation reserve. Hedge of net investment in foreign operation Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in foreign operation are recognised directly in equity, in the translation reserve, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged net investment is disposed of, the cumulative amount in equity is transferred to profit or loss as an adjustment to the profit or loss on disposal. 10
3 Significant accounting policies (continued) (d) (i) Financial instruments Non-derivative financial instruments Non derivative financial instruments comprise investments in debt and equity securities, accounts receivable, due from related parties, banking loans and advances to customers and banks, financial assets at fair value through profit or loss, cash and cash equivalents, accounts payable, bank borrowings, banking deposits from banks, banking deposits from customers, obligations under repurchase agreements, due to related parties, certain purchased loans and derivative contracts that are not designated as effective hedging instruments, liabilities from short-term sales of financial instruments. In general, the fair values of financial instruments are based on their quoted market prices at the balance sheet date without any deduction for transaction cost. If a quoted market price is not available, fair value of an instrument is estimated using the available market information and the appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to develop the estimated fair value. Accordingly, the estimates made are not necessarily indicative of the amounts that could be realised in current market exchange. The fair values of derivatives that are not exchange-traded are estimated amounts that the Group would receive or pay to terminate the contracts at the balance sheet date taking into account current market conditions and the current creditworthiness of the counter parties. Non-derivative financal instruments are recognised initially at fair value plus, directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below: Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, balances with Central Bank of Turkey ( CBT ) and other central banks and other liquid assets. Money market placements are classified in banking loans and advances to banks. Accounting for interest income and expenses for banking and finance segment is discussed in note 3 (q). Accounting for finance income and expenses for segments other than banking and finance is discussed in note 3 (t). Held to maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to-maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Premiums and discounts, including initial transaction costs are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. These include certain banking loans and advances to banks and customers and certain debt instruments. Available-for-sale financial assets The Group s certain debt and equity instruments are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein are recognised directly in equity, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at amortised cost. When an instrument is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. 11
3 Significant accounting policies (continued) (d) Financial instruments (continued) Financial assets at fair value through profit or loss An instrument is classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. These include investments, certain purchased loans and derivative contracts that are not designated as effective hedging instruments, and liabilities from short-term sales of financial instruments. Financial instruments are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. Upon the initial recognition attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as trading assets. All trading derivatives in a net payable position (negative fair value), as well as option written, are reported as trading liabilities. Banking loans and receivables Banking loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the banking and finance segment jointly controlled entity and its subsidiaries provide money, goods and services directly to a debtor with no injection of trading the receivable. Banking loans and advances comprise banking loans and advances to banks and customers. Banking loans and receivables advances are measured at amortised cost less impairment losses. Banking loans and receivables provided by the banking and finance segment jointly controlled entities are classified as banking loans and advances, and reported net of allowances to reflect the estimated recoverable amounts. Amortised cost is calculated on the effective interest rate method. Premium discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. Financial lease receivable Leases where the entire risks and rewards incident to ownership of an asset are substantially transferred to the lessee are classified as financial leases. A receivable at an amount equal to the present value of the lease payments, including any guaranteed residual value, is recognised. The difference between the gross receivable and the present value of the receivable is unearned finance income and is recognised over the term of the lease using the effective interest rate method. Financial lease receivables are included in banking loans and advances to customers. Other Other non derivative financial instruments are measured at amortised cost using the effective interest rate method, less any impairment losses. (see accounting policy 3m) Gains and losses on subsequent measurement Gains and losses arising from changes in the fair values of financial instruments at fair value are recognised in profit or loss, whereas gains and losses arising from changes in the fair value of cash flow hedges and available-for-sale assets are deferred as a separate component of equity. 12
3 Significant accounting policies (continued) (d) Financial instruments (continued) (ii) (iii) Derecognition A financial asset is derecognised when the control over the contractual rights that comprise that asset is lost. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Available-for-sale assets and assets held for trading that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Group commits to sell the assets. The specific identification method is used to determine the gain or loss on derecognition. Held-to-maturity instruments and banking loans and advances are derecognised on the day they are transferred by the Group. Derivative financial instruments held for risk management purposes The Group holds derivative financial instruments to hedge its certain risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash flow hedges Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss. Economic hedges Hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies. Changes in the fair value of such derivatives are recognised in profit or loss as part of foreign currency gains and losses. Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. 13
3 Significant accounting policies (continued) (d) Financial instruments (continued) Repurchase of share capital (Treasury shares) When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is net off any tax effects, and is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and resulting surplus or deficit on the transaction is transferred to/from retained earnings. (e) (i) Property and equipment Recognition and measurement The costs of items of property and equipment purchased before 31 December 2005 are restated for the effects of inflation in YTL units current at 31 December 2005 pursuant to IAS 29. Property and equipment purchased after this date are recorded at their historical costs. Accordingly, property and equipment are carried at cost, less accumulated depreciation and accumulated impairment losses (see accounting policy 3m), except as explained below: In the first year of application of IAS 29, the construction machineries owned by a consolidated entity, Doğuş İnşaat ve Ticaret Anonim Şirketi ( Doğuş İnşaat ), were reflected at their replacement costs on the basis of publicly available information on their quoted prices or on the prices of the comparable items as of 31 December 1997; and since then such replacement costs are restated for the effects of inflation in YTL units current at 31 December 2005 pursuant to IAS 29. In 2006, Doğuş İnşaat has assigned a third party appraisal company to count and evaluate the market prices of its construction machineries and motor vehicles. Based on the report of the appraisal company Doğuş İnşaat has adjusted its construction machineries and motor vehicles. In 2001, the Group started to reflect the land and buildings at their fair values as appraised by independent third party appraisers. Any increase arising on the revaluation of such land and buildings is credited to the properties revaluation surplus account under equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to profit or loss to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation surplus relating to a previous revaluation of that asset. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. 14
3 Significant accounting policies (continued) (e) Property and equipment (continued) (ii) (iii) (iv) Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognised net with in other operating income, net in profit or loss. When revalued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings. Reclassification to investment property Property that is being constructed for future use as investment property is accounted for as property and equipment until construction or development is complete, at which time it is remeasured to fair value and reclassified as investment property. Any gain or loss arising on remeasurement is recognised in profit or loss. When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on remeasurement is recognised directly in the equity. Any loss is recognised immediately in profit or loss. Subsequent costs The cost of replacing part of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Description Year Buildings 50 Furniture and equipment 4-20 Motor vehicles 5-10 Leasehold improvements are amortised over the periods of the respective leases, also on a straight-line basis. Depreciation methods, useful lives and residual values are reassessed at each reporting date. Tangible assets purchased before 2005 at Garanti Bank and its subsidiaries are depreciated over their estimated useful lives on a straight line basis from the date of their acquisition. Assets acquired after this date are depreciated based on the declining balance method, one of the accelerated depreciation methods. 15
3 Significant accounting policies (continued) (f) (i) Intangible assets Goodwill Goodwill (negative goodwill) arises on the acquisition of subsidiaries, associates and joint ventures. Goodwill represents the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of minority interests (ii) (iii) Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses (see accounting policy 3m). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment. Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses (see accounting policy 3m). Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. (iv) (g) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. Securities borrowing and lending business Investments lent under securities lending arrangements continue to be recognised in the consolidated balance sheet and are measured in accordance with the accounting policy for the related assets as appropriate. Cash collateral received in respect of securities lent is recognised as liabilities to either banks or customers. Investments borrowed under securities borrowing agreements are not recognised. Cash collateral placements in respect of securities borrowed are recognised under banking loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognised on an accrual basis over the period of the transactions and are included in interest Revenues or Cost of revenues. 16
3 Significant accounting policies (continued) (h) Repurchase and resale agreements over investments (i) The Group enters into purchases of investments under agreements to resell ( reverse repo ) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised in banking loans to either banks or customers. The receivables are shown as collateralised by the underlying security. Investments sold under repurchase agreements ( repo ) continue to be recognised in the consolidated balance sheet and are measured in accordance with the accounting policy for the related assets as appropriate. The proceeds from the sale of the investments are reported as obligations under repurchase agreements, a liability account. Income and expenses arising from the repurchase and resale agreements over investments are recognised on an accrual basis over the period of the transactions and are included in Revenues or Cost of revenues. Investment property Investment property is property held either to earn rental income or for capital appreciation or for both but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at fair value with any change therein recognised in profit or loss. When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. (j) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Lease liabilities are reduced through repayments of principal, while the finance charge component of the lease payment is charged directly to profit or loss. Other leases are operating leases and, except for investment property, the leased assets are not recognised on the Group s consolidated balance sheet. Investment property held under an operating lease is recognised on the Group s consolidated balance sheet at its fair value. (k) Inventories Inventories are measured at the lower of cost and net realisable value. Except as discussed in the following paragraphs, the cost of inventories is mainly based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories cost includes an appropriate share of production overheads based on normal operating capacity. Cost of trading goods and trading properties are determined on specific identification basis by the entities operating in automotive and construction businesses. Trading properties comprised land and buildings that are held for trading purposes. 17
3 Significant accounting policies (continued) (k) Inventories (continued) Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (l) Construction work in progress Construction work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognised to date less progress billings and recognised losses. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group s contract activities based on normal operating capacity. Construction work in progress is presented as part of accounts receivable in the consolidated balance sheet. If payments received from customers exceed the income recognised, then the difference is presented as deferred income in the consolidated balance sheet. The asset, Due from customers for contract work represents revenues recognised in excess of amounts billed. The liability, Due to customers for contract work represents billings in excess of revenues recognised. (m) (i) Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an availablefor-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity. (ii) Loans and receivables and held-to-maturity investments The recoverable amounts of banking loans and receivables and held-to-maturity instruments are calculated as the present values of the expected future cash flows discounted at the instrument s original effective interest rate. Short-term balances are not discounted. 18
3 Significant accounting policies (continued) (m) Impairment (continued) Loans and receivables are presented net of specific and portfolio basis allowances for uncollectibility. Specific allowances are made against the carrying amounts of loans and receivables that are identified as being impaired based on regular reviews of outstanding balances to reduce these banking loans and receivables to their recoverable amounts. In assessing the recoverable amounts of banking loans and receivables, the estimated future cash flows are discounted to their present value. Portfolio basis allowances are maintained to reduce the carrying amount of portfolios of similar banking loans and receivables to their estimated recoverable amounts at the balance sheet date. The expected cash flows for portfolios of similar assets are estimated based on previous experience and considering the credit rating of the underlying customers and late payments of interest or penalties. Increases in the allowance account are recognised in profit or loss. When a banking loan is known to be uncollectible, all the necessary legal procedures have been completed, and the final loss has been determined, the loan is written off directly. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after the write down, the writedown or allowance is reversed through profit or loss. (iii) (iv) Financial assets remeasured to fair value The recoverable amount of an equity instrument is its fair value. The recoverable amount of debt instruments and purchased loans remeasured to fair value is calculated as the present value of the expected future cash flows discounted at the current market rate of interest. Where an asset remeasured to fair value is impaired, the write-down is recognised in profit or loss. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through profit or loss. Non-financial assets The carrying amounts of the Group s non-financial assets, other than investment property, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets ( the cash generating unit ). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. 19