Annual / Quarterly Financial Statement • Apr 26, 2017
Annual / Quarterly Financial Statement
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Ericsson Nikola Tesla d.d.
Consolidated Financial Statements and Auditor's report 31 December 2016
| Page | |
|---|---|
| Profile of the Parent Company and its subsidiaries (the Group) | 1 to 2 |
| Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual consolidated financial statements |
3 |
| Independent Auditors' Report. | 4 to 9 |
| Consolidated statement of comprehensive income | 10 |
| Consolidated statement of financial position | 11 to 12 |
| Consolidated statement of changes in equity | 13 |
| Consolidated statement of cash flows | 14 to 15 |
| Notes to the consolidated financial statements | 16 to 61 |
Ericsson Nikola Tesla d.d. (the Parent Company) is a Croatian company with over sixty five years of continuous operations. It is a leading supplier and exporter of specialized telecommunications equipment, ICT solutions, software and services in Central and Eastern Europe.
The Parent Company was founded as a result of the privatisation of the enterprise Nikola Tesla - Poduzeće za proizvodnju telekomunikacijskih sistema i uređaja, po.
Ericsson Nikola Tesla d.d. has prepared these consolidated financial statements for the Parent Company, its four active subsidiaries (of which two are domiciled in Croatia, one in Bosnia and Herzegovina and one in Kosovo), and two inactive subsidiaries domiciled in Croatia.
The principal activities of the Group are research and development of telecommunications software and services, design, testing and integration of total communications solutions, managed services, and supply and maintenance of communications solutions and systems, primarily to customers in the Republic of Croatia, and Bosnia and Herzegovina, and several customers in Central and Eastern Europe as well as towards companies within the Ericsson Group.
Ericsson Nikola Tesla d.d. is a joint stock company incorporated in Croatia. The headquarters of the Parent Company are in Zagreb, Krapinska 45.
The Supervisory Board members during 2016 and up to the release of these consolidated statements were:
| Roland Nordgren | Reappointed on 31 May 2016 | Chairman |
|---|---|---|
| Ignac Lovrek | Reappointed on 2 June 2015 | Member; Vice-Chairman |
| Vidar Mohammar | Appointed on 2 June 2015 | Member |
| Dubravko Radošević | Reappointed on 27 May 2014 | Member |
| Zvonimir Jelić | Reappointed on 8 July 2014 | Member and employees' representative |
| The Management Board | ||
| The Management Board has one member: | ||
| Gordana Kovačević | Reappointed on 1 January 2015 | President |
As at 31 December 2016, the executive management comprised:
| Gordana Kovačević | President |
|---|---|
| Branko Dronjić | Head, ITTE OPS Croatia |
| Damir Bušić | Director, Commercial Management (including Legal) |
| Dario Runje | Head, RAN Competence Domain |
| Dragan Fratrić | Director, General Services |
| Goran Ožbolt | Director, Sales and Marketing for Tele2 and Alternative Operators |
| Grga Mrkonjić | Director, Sales and Marketing for HT |
| Hrvoje Benčić | Director, Engagement Practices and ETK Customer Operations |
| Ivan Barać | Director, Sales & Marketing for CIS Market |
| Jagoda Barać | Director, Sales and Marketing for Neighboring Countries |
| Marijana Đuzel | Director, HR |
| Milan Živković | Director, Strategy and Business Development |
| Miroslav Kantolić | Director, Sales and Marketing for VIPnet |
| Patrick Gerard Martin | Director, Research and Development Center |
| Patrik Wahlgren | Director, Finance |
| Snježana Bahtijari | Director, Communication |
| Tihomir Šicel | Business Excellence Manager |
Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual consolidated financial statements
The Management Board is required to prepare consolidated financial statements for each financial year which give a true and fair view of the financial position of the Group and of the results of its operations and cash flows, in accordance with applicable accounting standards, and is responsible for maintaining proper accounting records to enable the preparation of such consolidated financial statements at any time. It has a general responsibility for taking such steps as are reasonably available to it to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Management Board is responsible for selecting suitable accounting policies to conform with applicable accounting standards and then apply them consistently; make judgements and estimates that are reasonable and prudent; and prepare the consolidated financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.
The Management Board is responsible for the submission to the Supervisory Board of its annual report on the business situation of the Group together with the annual consolidated financial statements, following which the Supervisory Board is required to approve the annual consolidated financial statements which will be presented to the General Assembly of Shareholders.
The consolidated financial statements set out on pages 10 to 61 were authorised by the Management Board on 21 April 2017 for issue to the Supervisory Board and are signed below.
Gordana Kovačević President Ericsson Nikola Tesla d.d. Krapinska 45 10000 Zagreb Croatia
ERICSSON
Ericsson Nikola Tesla d.d. Krapinska 45 HR-10 000 Zagreb 39 CROATIA
3 Ericsson Nikola Tesla d.d.
To the Shareholders and Management Board of Ericsson Nikola Tesla d.d.:
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Ericsson Nikola Tesla d.d. (the "Company") and its subsidiaries (together - the "Group") as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted in European Union ("IFRS").
The Group's consolidated financial statements comprise:
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code.
PricewaterhouseCoopers d.o.o., Ulica kneza Ljudevita Posavskog 31, 10000 Zagreb, Croatia T: +385 (1) 6328 888, F: +385 (1)6111 556, www.pwc.hr
Commercial Court in Zagreb, no. Tt-99/7257-2, Reg. No.: 080238978; Company ID No.: 81744835353; Founding capital: HRK 1,810,000.00, paid in full; Management Board: J. M. Gasparac, President; S.
Dusic, Member; T. Macasovic
. . . . . . . . . . . . . . . . . . . .
Overview
We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the consolidated financial statements as a whole.
| Overall materiality for consolidated financial statements as a whole |
HRK 12 million (2015: HRK $8.5$ million) |
|---|---|
| How we determined it | 0.75% of total revenues |
| Rationale for the materiality benchmark applied |
We consider revenue to be the benchmark against which the performance of the Group is most commonly measured by the shareholders. In addition, majority of the sales and purchases are realised from internal Ericsson Group transactions and are subject to transfer pricing arrangements. |
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
| Key audit matter | How our audit addressed the Key audit matter |
|---|---|
| Recognition of revenue from sale of goods | |
| $Defon to Meta \rightarrow f_1$ , $C_1, \ldots, C_n$ | We assessed the consistency of the application of |
Refer to Note 1 of the financial statements under heading "Recognition of revenues" and Note 24 (Accrued charges and deferred revenue).
We focused on revenue recognition because the customer payments set in the contracts usually do not align with timing of revenue recognition criteria. Revenue from delivery of goods is mostly recognised upon approved acceptance test by a customer.
We assessed the consistency of the application of the revenue recognition policy by performing following procedures:
We tested the design and operating effectiveness of the controls (including IT controls) over revenue systems across the Group to determine the extent of reliance on the automated controls and overall IT environment.
We checked that revenue had been recognised at the correct time by testing a sample of transactions and contracts, and comparing the timing of revenue recognition to approved client acceptance tests.
We also tested on a sample basis the appropriateness of deferred revenue transactions by reference to the delivery status of the related contracts and timing of invoices.
No exceptions were noted from our testing.
See note $2(b)$ of the financial statements under heading "De-recognition of receivables with off-balance sheet financing"
In 2016, the Group entered into several new customer contracts in the foreign market with total revenue amount of HRK 141 million.
We focused on this area because of the significance and complexity of these contracts. The contracts include long-term payment terms, securing related receivable through a separate insurance contract, and a supplier credit financing structure. As part of such contracts, the Group also issued guarantees to the financing bank for risk of non-performance by the insurance company.
Based on a detail analysis of the related accounting criteria, management of the Group concluded it was appropriate to de-recognize a portion of related receivables, and reflect the financing component as an off-balance sheet transaction.
We performed the following testing in respect of these transactions:
We considered each transaction separately by carefully reading the specific contract terms.
We obtained external confirmations on a sample basis from the customer and the financing bank related to the Group's initial receivables and the de-recognised proportion which confirmed the outstanding receivables and payables arising from these transactions.
We assessed and formed our own view on management's analysis of the de-recognition criteria of financial assets. We considered whether there was transfer to third parties of contractual rights to receive cash flows and transfer of risk (primarily consisting of late payment risk and credit risk). We determined that these transactions were recorded and presented consistently with the related requirements of the accounting standards (IFRS).
Management is responsible for the other information. The other information comprises the Consolidated Annual Report of the Group, which includes the General Report and Social Report, comprising Corporate Governance Statement, but does not include the consolidated financial statements and our independent auditor's report thereon.
Our opinion on the consolidated financial statements does not cover the other information, including the General Report and Social Report, comprising Corporate Governance Statement.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
With respect to the General Report and Social Report, comprising Corporate Governance Statement, we also performed procedures required by the Accounting Act in Croatia. Those procedures include considering whether the General Report and Social Report include the disclosures required by Article 21 and 24 of the Accounting Act, and whether the Corporate Governance Statement includes the information specified in Article 22 of the Accounting Act.
Based on the work undertaken in the course of our audit, in our opinion:
In addition, in light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we are also required to report if we have identified material misstatements in the General Report and Social Report, comprising Corporate Governance Statement. We have nothing to report in this respect.
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted in the European Union, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group's financial reporting process.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an independent auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our independent auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor's report is Tamara Maćašović.
Ulica kneza Ljudevita Posavskog 31, Zagreb 21 April 2017
for the year ended 31 December 2016
| Notes | 2016 | 2015 | |
|---|---|---|---|
| HRK '000 | HRK '000 | ||
| Sales revenue | 3, 4 | 1,591,602 | 1,364,258 |
| Cost of sales | (1,401,797) __ |
(1,187,023) __ |
|
| Gross profit | 189,805 | 177,235 | |
| Selling expenses | (44,153) | (49,066) | |
| Administrative expenses | (33,548) | (33,121) | |
| Other operating income | 4,658 | 4,489 | |
| Other operating expenses | (3,179) __ |
(8,168) __ |
|
| Operating profit | 113,583 __ |
91,369 __ |
|
| Finance income | 7 | 5,826 | 1,761 |
| Finance expense | 7 | (582) __ |
(199) __ |
| Finance income – net | 5,244 __ |
1,562 __ |
|
| Profit before tax | 118,827 | 92,931 | |
| Income tax | 8 | (8,083) __ |
(1,582) __ |
| Profit for the year | 110,744 __ |
91,349 __ |
|
| Other comprehensive income - items that may be | |||
| subsequently reclassified to profit or loss: | |||
| Currency translation differences | (49) __ |
(17) __ |
|
| Total comprehensive income for the year | 110,695 __ |
91,332 __ |
|
| Earnings per share (HRK) | 9 | 83,34 __ |
68,74 __ |
as at 31 December 2016
| Notes | 2016 HRK '000 |
2015 HRK '000 |
|
|---|---|---|---|
| ASSETS | |||
| Non-current assets | |||
| Property, plant and equipment | 10 | 122,897 | 137,667 |
| Intangible assets | 11 | 7,285 | 6,532 |
| Loans and receivables | 12 | 81,160 | 19,235 |
| Deferred tax assets | 8 | 14,250 | - |
| Other non-current assets | 40 __ |
40 __ |
|
| Total non-current assets | 225,632 __ |
163,474 __ |
|
| Current assets | |||
| Inventories | 13 | 9,796 | 21,187 |
| Trade receivables | 14 | 174,952 | 131,800 |
| Receivables from related parties | 25(c) | 88,858 | 113,949 |
| Other receivables | 15 | 14,325 | 3,396 |
| Income tax receivables | 1,172 | 1,204 | |
| Financial assets at fair value through profit or loss | 16 | 62,993 | 53,917 |
| Prepayments and accrued income | 5,671 | 1,744 | |
| Cash and cash equivalents | 17 | 224,725 __ |
233,195 __ |
| Total current assets | 582,492 __ |
560,392 __ |
|
| TOTAL ASSETS | 808,124 __ |
723,866 __ |
as at 31 December 2016
| Notes | 2016 HRK '000 |
2015 HRK '000 |
|
|---|---|---|---|
| EQUITY AND LIABILITIES | |||
| Equity | |||
| Share capital | 18(a) | 133,165 | 133,165 |
| Treasury shares | (1,630) | (3,434) | |
| Legal reserves | 18(c) | 6,658 | 6,658 |
| Retained earnings | 148,686 __ |
171,539 __ |
|
| Total equity | 286,879 __ |
307,928 __ |
|
| Non-current liabilities | |||
| Interest-bearing borrowings | 19 | 8,962 | - |
| Other non-current liabilities | 20 | 24,288 | 12,345 |
| Employee benefits | 21(a) | 8,560 __ |
9,060 __ |
| Total non-current liabilities | 41,810 __ |
21,405 __ |
|
| Current liabilities | |||
| Payables to related parties | 25(c) | 73,215 | 40,087 |
| Interest-bearing borrowings | - | 32 | |
| Trade and other payables | 22 | 156,413 | 164,477 |
| Income tax payable | 21,659 | - | |
| Provisions | 23 | 16,011 | 10,003 |
| Accrued charges and deferred revenue | 24 | 212,137 __ |
179,934 __ |
| Total current liabilities | 479,435 __ |
394,533 __ |
|
| Total liabilities | 521,245 __ |
415,938 __ |
|
| TOTAL EQUITY AND LIABILITIES | 808,124 __ |
723,866 __ |
| Share capital HRK '000 |
Treasury shares HRK '000 |
Legal reserves HRK '000 |
Retained earnings HRK '000 |
Total HRK '000 |
|
|---|---|---|---|---|---|
| Note 18 (b) | |||||
| As at 1 January 2015 | 133,165 | (8,462) | 6,658 | 204,105 | 335,466 |
| Changes in equity for 2015 | |||||
| Total comprehensive income | - __ |
- __ |
- __ |
91,332 __ |
91,332 __ |
| Dividend distribution for 2015, Note 18 (d) |
- | - | - | (119,593) | (119,593) |
| Purchases of treasury shares, Note 18 (b) |
- | (4,062) | - | - | (4,062) |
| Share-based payments, Note 21 (b) | - | 6,840 | - | (6,840) | - |
| Sale of treasury shares, Note 21 (b) | 2,250 | (398) | 1,852 | ||
| Equity-settled transactions, Note 21 (b) | - __ |
- __ |
- __ |
2,933 __ |
2,933 __ |
| Total contributions by and distributions to owners of the parent recognised |
|||||
| directly in equity | - __ |
5,028 __ |
- __ |
(123,898) __ |
(118,870) __ |
| As at 31 December 2015 | 133,165 __ |
(3,434) __ |
6,658 __ |
171,539 __ |
307,928 __ |
| As at 1 January 2016 | - | - | - | - | |
| Changes in equity for 2016 | |||||
| Total comprehensive income | - __ |
- __ |
- __ |
110,695 __ |
110,695 __ |
| Dividend distribution for 2015, Note 18(d) |
- | - | - | (132,846) | (132,846) |
| Purchases of treasury shares, Note 18(b) |
- | (1,140) | - | - | (1,140) |
| Share-based payments, Note 21 (b) | - | 2,087 | - | (2,087) | - |
| Sale of treasury shares, Note 21 (b) | - | 857 | - | 123 | 980 |
| Equity-settled transactions, Note 21 (b) | - __ |
- __ |
- __ |
1,262 __ |
1,262 __ |
| Total contributions by and distributions | - | 1,804 | - | (133,548) | (131,744) |
| to owners of the parent recognised | |||||
| directly in equity | __ | __ | __ | __ | __ |
| As at 31 December 2016 | 133,165 __ |
(1,630) __ |
6,658 __ |
148,686 __ |
286,879 __ |
for the year ended 31 December 2016
| Notes | 2016 HRK '000 |
2015 HRK '000 |
|
|---|---|---|---|
| Cash flows from operating activities | |||
| Profit before tax | 118,827 _ |
92,931 _ |
|
| Adjustments for: | |||
| Depreciation and amortisation | 5,10,11 | 48,734 | 51,851 |
| Impairment losses and reversals | 16,398 | 2,748 | |
| Net increase in provisions | 23 | 18,999 | 10,560 |
| Gain on sale of property, plant and equipment | (102) | (240) | |
| Net (gain)/loss on remeasurement of financial assets | (2,033) | 21 | |
| Amortisation of discount | (657) | (69) | |
| Interest income | (3,346) | (3,833) | |
| Interest expense | 7 | 582 | 199 |
| Unrealised foreign exchange (gains)/losses, net | (5,322) | 2,073 | |
| Equity-settled transactions | 6 | 1,262 _ |
2,933 _ |
| 193,342 | 159,174 | ||
| Changes in working capital: | |||
| In receivables | (75,303) | 23,799 | |
| In inventories | 11,391 | 9,759 | |
| In payables | 60,289 _ |
52,793 _ |
|
| Cash generated from operations | 189,719 _ |
245,525 _ |
|
| Interest paid | (582) | (198) | |
| Income taxes paid | (2,100) _ |
(2,181) _ |
|
| Net cash from operating activities | 187,037 _ |
243,146 _ |
|
| Cash flows from investing activities | |||
| Interest received | 2,753 | 2,945 | |
| Dividends received | 212 | - | |
| Proceeds from sale of property, plant and equipment | 83 | 355 | |
| Purchases of property, plant and equipment, and intangible assets | (37,488) | (64,212) | |
| Deposits with financial institutions - net | (19,846) | 66 | |
| Purchases of financial assets at fair value through profit and loss | (89,000) | (92,000) | |
| Proceeds from sale of financial assets at fair value through profit and loss | 81,745 _ |
82,142 _ |
|
| Net cash used in investing activities | (61,541) _ |
(70,704) _ |
for the year ended 31 December 2016
| Notes | 2016 HRK '000 |
2015 HRK '000 |
|
|---|---|---|---|
| Cash flows from financing activities | |||
| Purchase of treasury shares | 18(b) | (1,140) | (4,062) |
| Dividends paid | 18(d) | (132,846) _ |
(119,715) _ |
| Net cash used in financing activities | (133,986) _ |
(123,777) _ |
|
| Effects of exchange rate changes on cash and cash equivalents | 20 _ |
(2,433) _ |
|
| Net (decrease)/increase in cash and cash equivalents | (8,470) | 46,232 | |
| Cash and cash equivalents at the beginning of the year | 233,195 _ |
186,963 _ |
|
| Cash and cash equivalents at the end of the year | 17 | 224,725 _ |
233,195 _ |
Ericsson Nikola Tesla d.d. (the Parent Company) is a joint stock company incorporated and domiciled in Croatia. The address of its registered office is Krapinska 45, 10000 Zagreb, the Republic of Croatia. The Parent Company's shares are listed on the Public Joint Stock Company listing on the Zagreb Stock Exchange. Ericsson Nikola Tesla d.d. has prepared these consolidated financial statements as at 31 December 2016 and for the year then ended for the Parent Company, its four active subsidiaries (of which two are domiciled in Croatia, one in Bosnia and Herzegovina and one in Kosovo), and two inactive subsidiaries domiciled in Croatia (together "the Group"). A summary of the Group's principal accounting policies is set out below.
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (IFRS). These consolidated financial statements also comply with the Croatian Accounting Act in effect on the date of issue of these consolidated financial statements. These consolidated financial statements are a translation of the official statutory IFRS consolidated financial statements.
The consolidated financial statements are prepared on the historical cost basis, with the exception of financial instruments which are carried at fair value. These comprise derivative financial instruments and financial assets and liabilities at fair value through profit or loss. The accounting policies have been consistently applied to all periods presented in these consolidated financial statements.
The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The 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 if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Judgements made by executive management in the application of IFRSs that have significant effect on the consolidated financial statements and estimates are discussed in Note 2.
The executive management have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.
(a) New and amended standards adopted by the Group
The Group has adopted the following amended standards for their annual reporting period commencing 1 January 2016 which were endorsed by the European Union and which are relevant for the Group's financial statements:
The adoption of the improvements did not have any impact on the current period or any prior period and is not likely to affect future periods.
Certain new standards and interpretations have been published that are not mandatory for 31 December 2016 reporting periods and have not been early adopted by the Group. None of these is expected to have a significant effect on the Group's financial statements, except for the following standards:
IFRS 9 Financial instruments and associated amendments to various other standards (effective for annual periods beginning on o rafter 1 January 2018)
IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities and introduces new rules for hedge accounting.
The Management Board of the Group assessed the impact of the new standard IFRS 9 on its financial statements as follows:
The Management Board plans to adopt the standard on its effective date.
IFRS 15 Revenue from contracts with customers and associated amendments to various other standards (effective for annual periods beginning on or after 1 January 2018)
The IASB has issued a new standard for the recognition of revenue. This will replace IAS 18 which covers contracts for goods and services and IAS 11 which covers construction contracts.
The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards.
Key changes to current practice are:
Entities will have a choice of full retrospective application, or prospective application with additional disclosures.
At this stage, the Group is not able to estimate the impact of the new rules on the Group's financial statements; it will make more detailed assessments of the impact over the next twelve months. The Management Board plans to adopt the standard on its effective date.
IFRS 16 Leases (effective for annual periods beginning on or after 1 January 2019, early adoption is permitted only if IFRS 15 is adopted at the same time)
IFRS 16 will affect primarily lessee accounting and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. An optional exemption exists for short-term and low-value leases.
The income statement will also be affected because the total expense is typically higher in the earlier years of a lease and lower in later years. Additionally, operating expense will be replaced with interest and depreciation, so key metrics like EBITDA will change.
Operating cash flows will be higher as cash payments for the principal portion of the lease liability are classified within financing activities. Only the part of the payments that reflects interest can continue to be presented as operating cash flows.
Lessor accounting will not change significantly. Some differences may arise as a result of the new guidance on the definition of a lease. In accordance with IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
At this stage, the Group is not able to estimate the impact of the new standard on the Group's financial statements; it will make more detailed assessments of the impact over the next twelve months. The Management Board plans to adopt the standard on its effective date and when endorsed by the European Union.
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment where the entity operates ('the functional currency'). The consolidated financial statements are presented in Croatian kuna (HRK), which is the Parent Company's functional and the Group's presentation currency.
Items of property, plant and equipment are shown at cost or deemed cost, less accumulated depreciation and impairment losses.
The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure on repairs and maintenance is expensed as incurred. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
Land is not depreciated. Depreciation on other assets is provided on a straight-line basis to allocate their cost over the estimated economic useful life of the assets. The estimated useful lives are as follows:
| Useful lives | |
|---|---|
| Buildings | 5 - 30 years |
| Plant and equipment | 2 - 10 years |
| Other | 5 - 7 years |
The depreciation method, useful lives and residual values are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount, and are included in the consolidated statement of comprehensive income.
Intangible assets are stated on initial recognition at cost and subsequently at cost less accumulated amortisation and impairment losses.
Amortisation is provided on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets include acquired computer software, and are amortised on a straight-line basis over their useful life of 2 - 4 years. Cost associated with maintaining computer software is recognised as an expense as incurred.
Assets that have an indefinite useful life (such as goodwill) are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cashgenerating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired.
A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The Group classifies its financial assets in the following categories: loans and receivables, and at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance
sheet date. These are classified as non-current assets. The Group's loans and receivables comprise 'trade and other receivables', 'deposits' and 'cash and cash equivalents' in the balance sheet.
Loans and receivables are carried at amortised cost using the effective interest method.
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are categorised as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non-current.
Regular way purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions and references to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs.
Receivables are initially recognised at the fair value of consideration given and are carried at amortised cost, using the effective interest rate. Receivables are written down to their estimated realisable value through an impairment allowance.
Service contract work-in-progress is stated at cost plus profit recognised to date less a provision for foreseeable losses and less progress billings on long-term contracts. 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 budgeted capacity.
Cash comprises cash held at banks and on hand. Cash equivalents include demand deposits and time deposits with maturities up to three months.
Trade and other payables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate.
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of other inventories is based on the First In First Out (FIFO) principle and includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In case of manufactured inventories the cost includes materials, labour and related overhead, and expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Slow-moving and obsolete inventories have been written down to their estimated realisable value.
Share capital is stated in HRK at nominal value.
Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Parent Company purchases its own equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the equity holders.
The tax expense for the period is based on taxable profit for the year and comprises current and deferred tax. Income tax is recognised in the consolidated statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Parent Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognised by using the balance sheet liability method on temporary differences arising between tax basis of assets and liabilities and their carrying amount in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction does not affect either accounting or taxable profit or loss. Deferred tax assets and liabilities are not discounted and are classified as non-current assets and/or liabilities in the balance sheet. Deferred tax assets are recognised when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilised. At each balance sheet date, the Group reassesses unrecognised deferred tax assets and the carrying amount of deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured by using the tax rates expected to apply to taxable profit in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the balance sheet date.
The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the enterprise expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.
Transactions denominated in foreign currencies are translated into functional currency at the rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency at the balance sheet date have been translated to functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising from translation are included in the consolidated statement of comprehensive income. Nonmonetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to functional currency at foreign exchange rates ruling at the dates the values were determined. Non-monetary assets and items that are measured in terms of "historical cost of a foreign currency" are not retranslated.
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment where the entity operates ('the functional currency'). The consolidated financial statements are presented in Croatian kuna (HRK), which is the Parent Company's functional and the Group's presentation currency.
The results and financial position of all Group entities with a functional currency different from the presentation currency are translated into the presentation currency as follows:
On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken into other comprehensive income. When a foreign operation is sold, exchange differences that were recorded in equity are reclassified from other comprehensive income to the income statement as part of the gain or loss on sale.
Sales revenue represents the value of goods and services supplied to customers during the period, excluding value added taxes, trade discounts and rebates. Revenue is recognized with reference to all significant contractual terms when the product or service has been delivered, when transfer of risk has occurred, when the revenue amount is fixed or determinable, and when collection is reasonably assured. Specific contractual performance and acceptance criteria may impact the timing and amounts of revenue recognized.
The Group uses 3 main contract types with end customers as follows:
Delivery-type contracts: Contracts for delivery of a product or a combination of products to form a whole or a part of a network as well as delivery of stand-alone products. Medium-size and large delivery type contracts generally include multiple elements. Such elements are normally standardized types of equipment or software as well as services such as network rollout.
Revenue is recognized when risks and rewards have been transferred to the customer, normally stipulated in the contractual terms of trade. For delivery-type contracts that have multiple elements, revenue is allocated to each element based on relative fair values.
Construction-type contracts: Contracts where the Group supplies to a customer a complete network, which to a large extent is based upon new technology or includes major components which are specifically designed for the customer.
Revenues from construction-type contracts are recognized according to the stage of completion, using either the milestone output method or cost incurred method. Long-term construction contracts are assessed on a contract by contract basis and reflected in the consolidated statement of comprehensive income by recording revenue and related costs in line with contract activity.
Service contracts: Contracts for various services such as: training, consulting, engineering, installation, and multiyear managed services.
Revenue is generally recognized when the services have been provided. Revenue for fixed price service contracts covering longer periods is recognized pro rata over the contract period.
The majority of the Group's products and services are sold under delivery-type contracts including multiple elements, such as base stations, base station controllers, mobile switching centers, routers, microwave transmission links, various software products and related installation and integration services. Such contract elements generally have individual item prices in agreed price lists per customer.
The profitability of individual contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable.
The Group provides employees with jubilee and one-off retirement awards. The obligation and costs of these benefits are determined by using the Projected Unit Credit Method. The Projected Unit Credit Method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. The obligation is measured at the present value of estimated future cash flows using a discount rate that is similar to the interest rate on government bonds where the currency and terms of the government bonds are consistent with the currency and estimated terms of the benefit obligation.
The Group operates an equity-settled, share-based compensation plan allowing the employees to receive shares according to internal policy. The fair value of the employee services received in exchange for the grant of the shares is recognised as an expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the shares. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares granted. At each balance sheet date, the Parent Company revises its estimates of the number of shares that are expected to become granted. It recognises the impact of the revision of original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to equity. When distributed upon vesting date, treasury shares are credited at average purchase cost and recorded against retained earnings.
The Group recognises a liability and an expense for bonuses as a provision where contractually obliged or where there is past practice that has created a constructive obligation.
A provision is recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. The most significant provisions in the consolidated financial statements are provisions for warranty claims, penalty claims and litigation. If the effect is material and if the obligation is expected to be settled in a period of over 12 months, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. The increase in the provision due to passage of time is recognised as interest expense.
Interest income is recognised using the effective interest method. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loan and receivables is recognised using the original effective interest rate.
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board that makes strategic decisions.
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statement of comprehensive income over the period of the borrowings using the effective interest method.
Grants from the government are recognised at their fair value where there is reasonable assurance that the grant will be received and the group will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the statement of comprehensive income over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of comprehensive income on a straight-line basis over the expected lives of the related assets and presented within "other income".
Leases on terms in 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 type of asset, although the depreciation period must not exceed the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases, and the leased assets under such contracts are not recognized on the balance sheet. Payments made under operating leases (net of any incentives received from the lessor) are recognized in the consolidated statement of comprehensive income on a straight-line basis over the term of the lease.
Dividend distribution to the shareholders is recognized as a liability in the consolidated financial statements in the period in which the dividends are approved by the shareholders.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of identifiable acquiree's net assets.
Goodwill is initially measured as excess of the aggregate of the consideration transferred and the fair value of noncontrolling interest in the acquiree and acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the identifiable net assets acquired. If this is lower than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated statement of comprehensive income.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Accounting estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
The Group reviews its receivables to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans and receivables before the decrease can be identified with an individual loan or receivable in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Group, or national or local economic conditions that correlate with parameters relevant to assets in the Group.
(b) Derecognition of receivables with off-balance sheet financing
In 2016, the Group entered into several new customer contracts in the foreign market. The contracts include delivery of equipment and sale of services with 15% up-front payment while remaining 85% have deferred payment terms up to 54 months.
The Group financed the sale of equipment through a Supplier credit arrangement. The arrangement includes:
i) matching cash receipts from customer with payments to the bank, ii) assignation of insurance policy to the bank, and iii) ceding future cash receipts from the customer to the bank through special purpose accounts secured by special purpose deposits (Note 12).
By transferring to the bank its contractual right to receive the cash flows, the Group transferred the financial asset to the bank. In terms of de-recognition criteria, the Group analysed transfer of risk and rewards of the receivable, specifically related to credit risk and late payment risk.
The Credit risk is shifted from international customer to the risk from domestic insurance company default which is considered as significant transfer in credit risk. The Group issued guarantees to the financing bank for risk of nonperformance by the insurance company which is disclosed in Note 20. The issued guarantee for non-performance of the insurance company is recognized initially at fair value and subsequently at the higher of the unamortized balance of the initial fair value and the best estimate of expenditure required to settle the obligation under the guarantee.
Late payment risk was transferred based on the fact that the special purpose deposit covers the late payment charges and/or history of payments with the customer do not historically evidence late payment risk as substantial to the agreement.
Having transferred the right to cash flows and substantially all the risk and rewards relating to 90% of receivables, management concluded that it was appropriate to de-recognize 90% of the related receivables from the balance sheet. The remaining 10% of the receivables remain on the balance sheet as long term receivables from the customer (Note 12) and a 10% of the related financing liability to the bank is recorded as borrowings (Note 19).
Following de-recognition, the residual difference between interest receivable from the customer and interest payable to the bank represents separate liability recognized at fair value and is disclosed in Note 20.
The Group recognises revenues upon delivery of goods or service which may not always align with the timing of issuing invoices to customer since their timing is set in the contract. Revenues are recognised upon approved acceptance test by the customer. Consequently, the Group recognises deferred revenue (Note 24) and unbilled revenue (Note 14).
| 2016 HRK '000 |
2015 HRK '000 |
|
|---|---|---|
| Sales revenue from products | 410,030 | 304,580 |
| Sales revenue from services | 1,181,572 | 1,059,678 |
| _ 1,591,602 _ |
___ 1,364,258 __ |
The Group has determined the operating segments based on the reports reviewed by the Management Board that are used to make strategic decisions. The Management Board assesses the performance of the operating segments based on a measure of adjusted Operating profit. The measurement basis excludes the effects of gains/losses on operating exchange rate differences and administration expenses.
When determining the operating segments, the Group has looked at which market and to what type of customers the Group's products are aimed, and through what distribution channels they are sold, as well as to commonality regarding technology, research and development.
To best reflect the business focus and to facilitate comparability with Ericsson Group, three operating segments are reported:
The Group management does not monitor assets and liabilities by segments and therefore this information is not disclosed.
Revenues determined based on the geographic location of customers are disclosed in this note. The Group's assets are located in Croatia and Bosnia & Herzegovina.
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Sales revenue in domestic market | 268,842 | 293,513 |
| Sales revenue in Russia, Belarus, Kazakhstan, Georgia, Moldova and Armenia | 283,801 | 58,173 |
| Sales revenue to Ericsson, Note 25 (a) | 872,369 | 821,428 |
| Sales revenue in Bosnia and Herzegovina, Montenegro and Kosovo | 149,338 | 176,685 |
| Other export sales revenue | 17,252 ___ |
14,459 ___ |
| 1,591,602 ___ |
1,364,258 __ |
| Networks | Professional services |
Support solutions | Unallocated | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Sales revenue -- net | 776,480 _ |
613,439 _ |
779,259 _ |
705,134 _ |
35,863 _ |
45,685 _ |
- _ |
_ | - 1,591,602 1,364,258 _ |
_ |
| Operating profit/(loss) | 47,210 _ |
33,260 _ |
91,888 _ |
85,533 _ |
1,169 _ |
4,489 _ |
(26,684) _ |
(31,913) _ |
113,583 _ |
91,369 _ |
| Finance income | 5,826 | 1,761 | ||||||||
| Finance expense | (582) _ |
(199) _ |
||||||||
| Profit before tax | 118,827 | 92,931 | ||||||||
| Income tax | (8,083) _ |
(1,582) _ |
||||||||
| Profit for the year | 110,744 | 91,349 _ _ |
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Changes in contract work in progress (Note 13) | 11,353 | 9,782 |
| Material and external services (1) | 662,329 | 508,944 |
| Personnel expenses (Note 6) | 753,260 | 716,765 |
| Depreciation and amortisation (Notes 10,11) | 48,734 | 51,851 |
| Less reclassifications in material and external services: | ||
| (Other income)/other operating expenses | 3,822 __ |
(18,132) __ |
| 1,479,498 __ |
1,269,210 __ |
1) Including audit fee expenses of HRK 597 thousand (2015: HRK 567 thousand).
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Net salaries | 393,455 | 371,445 |
| Taxes and contributions | 316,954 | 296,104 |
| Other payroll-related costs | 41,589 | 46,283 |
| Equity-settled transactions (Note 21 (b)) | 1,262 __ |
2,933 ___ |
| 753,260 __ |
716,765 __ |
Personnel expenses include HRK 118,376 thousand (2015: HRK 108,419 thousand) of defined pension contributions paid or payable into obligatory pension plans. Contributions are calculated as a percentage of employees' gross salaries (Gross I).
Other payroll-related costs mainly relate to termination benefits in the amount of HRK 10,562 thousand (2015: HRK 13,411 thousand), and to transportation expenses and vacation accrual cost.
As at 31 December 2016, the total number of employees was 2,949 (2015: 2,789).
Finance income
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Interest income (Note 7 (a)) | 3,346 | 3,833 |
| Net gains from remeasurement of financial assets at fair value through | ||
| profit or loss (Note 7 (b)) | 2,283 | 99 |
| Amortization of discount | - | 69 |
| Net foreign exchange gain/(loss) | 197 ___ |
(2,240) ___ |
| 5,826 ___ |
1,761 ___ |
|
| Finance expense | ||
| 2016 | 2015 | |
| HRK '000 | HRK '000 | |
| Interest expense | 582 ___ |
199 ___ |
| 582 ___ |
199 ___ |
87 (a)
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Interest income | ||
| - on loans to customers | 1,320 | 665 |
| - on debt securities | - | 210 |
| - on term deposits | 95 | 734 |
| - on other receivables | 1,931 __ |
2,224 ___ |
| 3,346 ___ |
3,833 __ |
|
| 7 (b) | 2016 HRK '000 |
2015 HRK '000 |
|---|---|---|
| Net gains from remeasurement of financial assets at fair value through | ||
| profit or loss | ||
| - Equity securities | 1,908 | 34 |
| - Investment in investment funds | 346 | 201 |
| - Debt securities | 29 __ |
(136) __ |
| 2,283 __ |
99 __ |
Income tax has been calculated on the taxable income at statutory tax rates applicable to profits in the respective countries.
Income tax expense recognised in the consolidated statement of comprehensive income comprises:
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Current income tax expense | (22,333) _ |
(1,582) _ |
| Total deferred tax expense | ||
| 14,250 _ |
- _ |
|
| Total income tax expense | (8,083) __ |
(1,582) __ |
Deferred income tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred income tax assets of HRK 337 thousand (2015: HRK 8,450 thousand) in respect of cumulative tax losses amounting to HRK 1,872 thousand (2015: HRK 42,251 thousand) that can be carried forward against future taxable income.
Tax incentives included in the tax returns from 2011 till 2014 were inspected by the Ministry of Science and Education and consequently tax loss adjusted.
A tax loss may be carried forward for five years subsequent to the year in which it was incurred. The availability of tax losses against future periods, subject to review by the Ministry of Finance, is as follows:
| HRK '000 | |
|---|---|
| Tax loss for 2012 – expires 31 December 2017 | 147 |
| Tax loss for 2015 – expires 31 December 2020 | 65 |
| Tax loss for 2016 – expires 31 December 2021 | 1,660 __ |
| 1,872 __ |
The tax on the profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:
| 2016 HRK '000 |
2015 HRK '000 |
|
|---|---|---|
| Profit before tax | 118,827 __ |
92,931 __ |
| Tax calculated at domestic tax rates applicable to profits in the respective | ||
| countries | 24,080 | 18,510 |
| Tax effects of: | ||
| Expenses not deductible for tax purposes | 7,628 | 1,913 |
| Recognition of previously unrecognized temporary differences | (14,250) | - |
| Tax incentives | (856) | (750) |
| Utilisation of tax losses | (8,519) __ |
(18,091) __ |
| Tax charge | 8,083 __ |
1,582 __ |
| Effective tax rate | 5.3% __ |
1.7% __ |
Ministry of Science and Education has not accepted the requests submitted in 2016 for Research and Development Tax incentives, since the legal basis for the allocation of the previous program for Research and Development Tax incentives, expired on 31 December 2015. The new program of Tax incentives for research and development projects for the period up to the year 2020 has not yet entered into force. As soon as the program is approved, the Ministry of Science and Education plans to notify users.
Tax incentives include only part of additional tax allowances for certain expenditure totalling HRK 856 thousand (2015: HRK 750 thousand) which meets research and development incentives definitions under Croatian tax legislation. The underlying research and development expenditure is included in cost of sales.
The Croatian Income Tax Act is subject to different interpretations and changes in respect of certain expenses which reduce the tax base. The Management Board's interpretation of the law relating to these transactions and activities of the Company may be disputed by the relevant authorities. The Tax Authority may take a different view in interpreting the laws and judgments, and it is possible that those transactions and activities that have not been disputed in the past may be disputed now. The Tax Authority may carry out a tax audit within three years from the year in which the income tax liability for a certain financial period was established.
During 2016, the Group re-evaluated the potential for utilization of certain existing temporary differences for which deferred tax assets had not been previously recognized based on the uncertainty of their utilization. In view of the changed circumstances, the Group recognized deferred tax assets in the amount of HRK 14,250 thousand relating to temporary differences arising from:
| Impairments, provisions and accrued expenses HRK '000 |
|
|---|---|
| As at 31 December 2015 | - |
| Tax credited to the Income statement | 14,250 |
| Tax charged to the Income statement | - _ |
| As at 31 December 2016 | 14,250 _ |
| 2016 | 2015 | |
|---|---|---|
| Profit for the year (HRK '000) | 110,744 | 91,349 |
| Weighted Average Number of Shares Outstanding at the year-end | 1,328,809 __ |
1,328,811 __ |
| Earnings per share (HRK) | 83,34 __ |
68,74 __ |
Basic and fully diluted earnings per share are the same since the Parent Company does not have any dilutive potential ordinary shares.
| Land and buildings |
Plant and equipment |
Other | Total | |
|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January 2015 | ||||
| Cost or valuation | 158,598 | 349,148 | 328 | 508,074 |
| Accumulated depreciation | (112,968) _ |
(259,162) _ |
(229) _ |
(372,359) _ |
| Net book amount | 45,630 _ |
89,986 _ |
99 _ |
135,715 _ |
| Year ended 31 December 2015 | ||||
| Opening net book amount | 45,630 | 89,986 | 99 | 135,715 |
| Additions | 1,769 | 50,756 | - | 52,525 |
| Disposals | - | (61) | - | (61) |
| Depreciation charge | (2,998) _ |
(47,506) _ |
(8) _ |
(50,512) _ |
| Closing net book amount | 44,401 _ |
93,175 _ |
91 _ |
137,667 _ |
| As at 31 December 2015 | ||||
| Cost or valuation | 160,367 | 378,541 | 328 | 539,236 |
| Accumulated depreciation | (115,966) _ |
(285,366) _ |
(237) _ |
(401,569) _ |
| Net book amount | 44,401 _ |
93,175 _ |
91 _ |
137,667 _ |
| Year ended 31 December 2016 | ||||
| Opening net book amount | 44,401 | 93,175 | 91 | 137,667 |
| Additions | 1,797 | 31,259 | - | 33,056 |
| Disposals | - | (40) | - | (40) |
| Depreciation charge | (2,955) _ |
(44,823) _ |
(8) _ |
(47,786) _ |
| Closing net book amount | 43,243 _ |
79,571 _ |
83 _ |
122,897 _ |
| As at 31 December 2016 | ||||
| Cost or valuation | 162,164 | 389,183 | 328 | 551,675 |
| Accumulated depreciation | (118,921) _ |
(309,612) _ |
(245) _ |
(428,778) _ |
| Net book amount | 43,243 _ |
79,571 _ |
83 _ |
122,897 _ |
As at 31 December 2016, the Group had contracts totalling HRK 2,673 thousand (2015: HRK 7,171 thousand) related to future equipment purchases.
Depreciation expense of HRK 45,276 thousand (2015: HRK 47,241 thousand) has been charged in cost of sales, HRK 1,426 thousand (2015: HRK 1,953 thousand) in selling expenses and HRK 1,084 thousand (2015: HRK 1,318 thousand) in administrative expenses.
The Group acts as a lessor under operating leases, mainly in respect of land and buildings. Property leased to others with a carrying value of HRK 12,786 thousand (2015: HRK 14,548 thousand) is included within land and buildings. These assets are depreciated at the same depreciation rates as other buildings. Subsequent renewals are negotiated with the lessee. No contingent rents are charged. Portions of the property which is held for rental could not be sold separately or leased out separately under finance lease. Consequently, the IAS 40 criteria for separate investment property recognition are not met.
Future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periods are:
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Less than one year | 3,271 | 3,320 |
| Between one and five years | 1,635 _ |
1,660 _ |
| 4,906 _ |
4,980 _ |
The movement on intangible assets in the year ended 31 December 2016 may be analysed as follows:
| Application software |
Goodwill | Total | |
|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January 2015 | |||
| Cost or valuation | 7,973 | 4,173 | 12,146 |
| Accumulated amortization | (6,665) _ |
- _ |
(6,665) _ |
| Net book amount | 1,308 _ |
4,173 _ |
5,481 _ |
| Year ended 31 December 2015 | |||
| Opening net book amount | 1,308 | 4,173 | 5,481 |
| Additions | 2,390 | - | 2,390 |
| Amortization charge | (1,339) _ |
- _ |
(1,339) _ |
| Closing net book amount | 2,359 _ |
4,173 _ |
6,532 _ |
| As at 31 December 2015 | |||
| Cost or valuation | 10,363 | 4,173 | 14,536 |
| Accumulated amortization | (8,004) _ |
- _ |
(8,004) _ |
| Net book amount | 2,359 _ |
4,173 _ |
6,532 _ |
| Year ended 31 December 2016 | |||
| Opening net book amount | 2,359 | 4,173 | 6,532 |
| Additions | 1,701 | - | 1,701 |
| Amortization charge | (948) _ |
- _ |
(948) _ |
| Closing net book amount | 3,112 _ |
4,173 _ |
7,285 _ |
| As at 31 December 2016 | |||
| Cost or valuation | 12,064 | 4,173 | 16,237 |
| Accumulated amortization | (8,952) _ |
- _ |
(8,952) _ |
| Net book amount | 3,112 _ |
4,173 _ |
7,285 _ |
Amortisation of HRK 898 thousand (2015: HRK 1,252 thousand) has been charged in cost of sales, HRK 28 thousand (2015: HRK 52 thousand) in selling expenses and HRK 22 thousand (2015: HRK 35 thousand) in administrative expenses.
In September 2014, Group signed business unit transfer agreements by which the Group acquired a business from Hrvatski Telekom d.d. The agreements included transfer of 641 employees, supplier contracts, organisational structure, activities and operational processes. The business comprises of acquired assets and assumed liabilities to employees.
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Deposits with financial institutions, denominated in foreign currency | 28,117 | 7,316 |
| Non-current receivables from foreign customers, denominated in foreign | ||
| currency | 42,889 | 4,213 |
| Loans given, Note 2b | 10,119 | - |
| Non-current receivables from domestic customers, denominated in HRK | 2,922 | 4,384 |
| Receivables for sold apartments | ||
| - denominated in foreign currency | - | 5,178 |
| - denominated in HRK | 606 _ |
632 _ |
| Total loans and receivables | 84,653 | 21,723 |
| Impairment allowance on loans and receivables | (3,493) _ |
(2,488) _ |
| 81,160 _ |
19,235 _ |
Deposits with financial institutions in the amount of HRK 23,959 thousands (2015: nil) are used as a collateral for Supplier credit arrangement disclosed in note 2b), with interest rate from 0.75% to 2% and maturing in year 2022.
The rest of the deposits with financial institutions of HRK 4,159 thousand (2015: HRK 7,316 thousand) are placed as guarantee deposits for housing loans provided to the employees with a remaining maturity of over three years.
Loans and receivables from customers are partially secured with bank guarantees and letters of credit. The current portion of the non-current receivables is classified under current assets.
| Due | 2016 | 2015 |
|---|---|---|
| HRK '000 | HRK '000 | |
| 2017 | - | 1,200 |
| 2018 | 33,661 | 5,003 |
| 2019 | 9,214 | 2,394 |
| 2020 | 8,017 | - |
| 2021 | 5,038 __ |
- __ |
| 55,930 __ |
8,597 __ |
Receivables for sold apartments are shown net of amounts due from the Croatian state, which was collected in 2016. Housing loans to employees are linked to the counter value of euro, repayments are made by deduction from monthly salary and the loans are secured with collateral on the house or apartment. Receivables for sold apartments and housing loans provided to a limited number of employees bear fixed interest rates of up to 5% per annum.
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Raw materials | 466 | 539 |
| Contract work in progress | 9,788 _ |
21,141 _ |
| Total inventories | 10,254 | 21,680 |
| Impairment allowance | (458) _ |
(493) _ |
| 9,796 _ |
21,187 _ |
Slow-moving or obsolete inventories have been written down to their estimated realisable value through an impairment allowance. The impairment allowance is included within other operating expenses in the consolidated statement of comprehensive income.
| 2016 | 2015 |
|---|---|
| HRK '000 | HRK '000 |
| 102,847 | 52,114 |
| 18,452 _ |
4,750 _ |
| 121,299 _ |
56,864 _ |
| 64,088 | 77,596 |
| - _ |
- _ |
| 64,088 _ |
77,596 _ |
| (10,435) _ |
(2,660) _ |
| 174,952 | 131,800 _ |
| _ |
Included in trade receivables is HRK 7,841 thousand (2015: HRK 9,526 thousand) of unbilled revenue.
Movements in impairment allowance on loans and receivables were as follows:
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| As at 1 January | 7,477 | 10,053 |
| Provision for receivables impaired during the year | 21,571 | 5,438 |
| Impact of discounting non current receivables | 3,135 | - |
| Receivables written off during the year as uncollectible | (11,112) | (5,129) |
| Unused amounts reversed | (4,901) | (2,816) |
| Amortisation of discount | (657) _ |
(69) _ |
| As at 31 December (1) | 15,513 _ |
7,477 _ |
1) Including impairment provision for receivables from related parties of HRK 1,585 thousand (2015: HRK 2,330 thousand)
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Receivables from employees | 944 | 1,172 |
| Accrued interest receivable | 103 | 248 |
| Advances given | 11,976 | - |
| Other receivables | 1,302 _ |
1,976 _ |
| 14,325 _ |
3,396 _ |
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Financial assets at fair value through profit or loss | ||
| - Equity securities | 1,951 | 251 |
| - Investment in open-ended investment funds | 61,042 _ |
53,666 _ |
| 62,993 _ |
53,917 _ |
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Cash and demand deposits | 224,725 | 118,669 |
| Term deposits originated by the Group, with original maturity up to 3 months | - _ |
114,526 _ |
| 224,725 _ |
233,195 _ |
As at 31 December 2016, the share capital is represented by 1,331,650 (2015: 1,331,650) of authorised, issued and fully paid ordinary shares, with a total registered value of HRK 133,165 thousand (2015: HRK 133,165 thousand). The nominal value of one share is HRK 100 (2015: HRK 100). The holders of the ordinary shares are entitled to receive dividends as declared at the General Assembly and are entitled to one vote per share at the General Assembly.
The shareholders as at 31 December are:
| 2016 | 2016 | 2015 | 2015 | |
|---|---|---|---|---|
| Number of shares |
% held | Number of shares |
% held | |
| Telefonaktiebolaget LM Ericsson | 653,473 | 49,07 | 653,473 | 49,07 |
| Small shareholders | 676,682 | 50,82 | 674,795 | 50,68 |
| Treasury shares | 1,495 ___ |
0,11 ___ |
3,382 ___ |
0,25 ___ |
| 1,331,650 ___ |
100,00 ___ |
1,331,650 ___ |
100,00 ___ |
These shares are initially held as "treasury shares" and are regularly granted to key management and other employees as a part of the share-based program established during 2004, as described in Note 21 (b). During 2016, the Parent Company acquired 1,000 (2015: 4,022) of its own shares, for a total amount of HRK 1,140 thousand (2015: HRK 4,062 thousand), paid from the 2008 net income as decided by the General Assembly held on 26 May 2009.
Movements in treasury shares are as follows:
| 2016 Number of shares |
2015 Number of shares |
|
|---|---|---|
| As at 1 January (Note 18 (a)) | 3,382 | 3,080 |
| Purchased during the year | 1,000 | 4,022 |
| Distributed during the year | (2,887) __ |
(3,720) _ |
| As at 31 December (Note 18 (a)) | 1,495 _ |
3,382 _ |
A legal reserve in the amount of 5% of total share capital was formed during previous periods by appropriation of 5% of net profit per annum up to a cap of 5% of share capital. The legal reserve may be used to cover losses if the losses are not covered by current net profit or if other reserves are not available. The Group recorded the required level of legal reserves in 2000 and no further allocation to legal reserves is required. Legal reserves up to 5% of total share capital are not distributable.
Dividends payable are not accounted for until they have been ratified at the General Assembly of shareholders. On 31 May 2016, the General Assembly approved a regular dividend in respect of 2015 of HRK 20.00 per share, and additional extraordinary dividend of HRK 80.00 per share, totalling HRK 132,846 thousand.
Cash dividends authorised and paid for previous years were as follows:
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| HRK 100.00 per share for 2015 | 132,846 | - |
| HRK 90.00 per share for 2014 | - | 119,593 |
| Prior year dividend pay out | - __ |
122 _ |
| 132,846 _ |
119,715 _ |
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Borrowings, Note 2b) | 8,954 | - |
| Other long-term loans | 8 _ |
- _ |
| 8,962 _ |
- _ |
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Accounts payable | 2,400 | 3,600 |
| NPV discount | (358) _ |
(513) _ |
| Total accounts payable /i/ | 2,042 | 3,087 |
| Deferred revenue /i/ | 14,341 | 9,258 |
| Liabilities for issued guarantee, Note 2b) | 782 | - |
| Other non-current liabilities, Note 2b) | 7,123 _ |
- _ |
| 24,288 _ |
12,345 _ |
/i/ The non-current portion of deferred revenue of HRK 14,341 thousand (2015: HRK 9,258 thousand) from Ericsson Services d.o.o. (ESK) relates to the five-year managed services contract with Hrvatski Telekom.
The Group does not operate any pension schemes or other retirement benefit schemes for the benefit of any of its employees or management. In respect of all of the personnel, such social payments as required by the authorities are paid. These contributions form the basis of social benefits payable out of the Croatian Pension Insurance Institute to the Croatian employees upon their retirement. Additionally, during 2001 the Parent Company signed an Annex to the Union Agreement based on which employees are entitled to a benefit upon early retirement.
However, the Group pays a one-time benefit amounting to HRK 8,000 for each employee who retires. Additionally, the Group pays jubilee awards in respect of each 5 years of service, of an employee, starting from the 10th year and ending in the 40th year. The principal actuarial assumptions used to determine retirement and jubilee obligations as at 31 December 2016 were a 6% discount rate (2015: 6%) and a 4.17% (2015: 3.97%) rate of average employment turnover.
Movements in long-term service benefits were as follows:
| 2016 | 2016 | 2016 | 2015 | 2015 | 2015 | |
|---|---|---|---|---|---|---|
| Jubilee awards |
Retirement | Total | Jubilee awards |
Retirement | Total | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January | 7,308 _ |
1,752 __ |
9,060 _ |
4,945 _ |
678 __ |
5,623 _ |
| Obligation created during the year | 933 | 338 | 1,271 | 4,061 | 1,171 | 5,232 |
| Obligation fulfilled during the year | (917) | (33) | (950) | (1,188) | (40) | (1,228) |
| Obligation reversed during the year | (253) _ |
(568) __ |
(821) _ |
(510) _ |
(57) __ |
(567) _ |
| As at 31 December | 7,071 _ |
1,489 __ |
8,560 __ |
7,308 _ |
1,752 __ |
9,060 __ |
During 2004, the Parent Company established its Loyalty program, a share-based scheme under which management and other employees are entitled to receive the shares conditional on the employee completing certain years of service (the vesting period) from the grant date.
In addition, the Parent Company also grants treasury shares to senior management and other employees as a bonus arrangement under its Award program.
The treasury shares are distributed to eligible employees upon ratification at the General Assembly.
Part of share based programme from 2014 relate to the right of employee to purchase certain shares, which are settled according to fair value relevant at the date of the purchase. Based on this programme, the Parent Company sold to its employees 841 shares (2015: 1,605) and received compensation in the amount of HRK 980 thousands (2015: HRK 1,852 thousand). The difference between the purchase price of the shares and selling price received from the employee in the amount of HRK 123 thousand (2015: HRK 398 thousand) has been recognised within retained earnings.
Movements in shares under the Award and Loyalty programs are as follows:
| 2016 Number of shares |
2015 Number of shares |
|
|---|---|---|
| As at 1 January | 4,557 | 9,016 |
| Granted | - | - |
| Exercised | (2,887) | (4,320) |
| Expired | (373) _ |
(139) _ |
| As at 31 December | 1,297 _ |
4,557 _ |
Vesting conditions for shares granted under Loyalty program are two to five years of service.
The fair value of service received in return for shares granted is measured by reference to the observable market price of shares at the grant date.
| Number of granted shares |
Weighted average fair value per share at grant date |
|
|---|---|---|
| HRK | ||
| Reversal in 2015 of shares granted in 2011-2013 | 139 | 1,373,20 |
| Reversal in 2016 of shares granted in 2011-2013 | 373 | 1,373,20 |
During 2016, the Group recognised HRK 1,262 thousand (2015: HRK 2,933 thousand) of expenses in respect of sharebased payments, which are included in personnel expenses as disclosed in Note 6.
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Trade payables | 33,707 | 33,048 |
| Liabilities to employees | 92,982 | 95,707 |
| Other current liabilities | 29,724 _ |
35,722 _ |
| 156,413 _ |
164,477 _ |
Movements in provisions were as follows:
| Warranty reserve |
Penalty reserve |
Termination benefits |
Other reserve |
Total | |
|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK'000 | HRK'000 | HRK '000 | |
| As at 1 January 2015 | 4,789 _ |
4,632 _ |
1,652 _ |
- _ |
11,073 _ |
| Additional provisions | 2,082 | 519 | 11,091 | - | 13,692 |
| Unused provisions reversed | (229) | (2,903) | - | - | (3,132) |
| Provisions used during the year | (1,214) | (463) | (9,953) | - | (11,630) |
| As at 31 December 2015 | _ 5,428 _ |
_ 1,785 _ |
_ 2,790 _ |
_ - _ |
_ 10,003 _ |
| As at 1 January 2016 | 5,428 _ |
1,785 _ |
2,790 _ |
- _ |
10,003 _ |
| Additional provisions | 8,568 | - | 10,471 | 497 | 19,536 |
| Unused provisions reversed | (129) | (408) | - | - | (537) |
| Provisions used during the year |
(2,322) | (902) | (9,767) | - | (12,991) |
| As at 31 December 2016 | _ 11,545 _ |
_ 475 _ |
_ 3,494 _ |
_ 497 _ |
_ 16,011 _ |
The warranty reserve is established to cover the expected warranty claims on products sold during the year. The penalty reserve is created to cover the expected claims from customers in respect of delays in deliveries of products and services having occurred during the year. Reversal of warranty reserves relates to expired warranties and reversal of penalty reserve relates to waived or expired obligations.
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Advances from domestic customers | 96 | 3,995 |
| Advances from foreign customers | 19,780 | 12,808 |
| Deferred revenue | 104,905 | 87,928 |
| Accrued charges for unused holidays | 21,933 | 25,069 |
| Accrued charges in respect of service contracts | 31,337 | 21,315 |
| Other accrued charges | 34,086 _ |
28,819 _ |
| 212,137 _ |
179,934 _ |
Deferred revenue represents amounts due to customers under contracts for work not performed but invoices issued or cash received and thus present a liability to perform a service or delivery.
Accrued charges in respect of service contracts mainly represent costs incurred for which no invoice has been received from supplier or other external contractor at the balance sheet date.
For the purposes of these consolidated financial statements, parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
The Group is a related party to the Ericsson Group via the 49.07% (2015: 49.07%) shareholding by Telefonaktiebolaget LM Ericsson, which is also the ultimate parent of the Ericsson Group.
The Group has related-party relationships with Telefonaktiebolaget LM Ericsson, Ericsson Group subsidiaries and associates, the Supervisory Board, the Management Board and other executive management.
Major transactions with the Ericsson Group companies may be summarised as follows:
| Telefonaktiebolaget LM Ericsson |
Other Ericsson Group consolidated companies |
Total | ||||
|---|---|---|---|---|---|---|
| 2016 HRK |
2015 | 2016 | 2015 | 2016 | 2015 | |
| '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Sales of goods and services | ||||||
| Sales revenue | - | - | 872,369 | 821,428 | 872,369 | 821,428 |
| Other income | - _ |
- _ |
22,526 _ |
47,099 _ |
22,526 _ |
47,099 _ |
| - _ |
- _ |
894,895 _ |
868,527 _ |
894,895 _ |
868,527 _ |
|
| Purchases of goods and services | ||||||
| Licences | 3,523 | 2,688 | 20,890 | 15,687 | 24,413 | 18,375 |
| Technical cooperation fee | - | - | - | - | - | - |
| Cost of sales | - _ |
- _ |
372,459 _ |
234,932 _ |
372,459 _ |
234,932 _ |
| 3,523 _ |
2,688 _ |
393,349 _ |
250,619 _ |
396,872 _ |
253,307 _ |
The sales of goods and services transactions have been directly negotiated between the involved parties and agreed on an individual basis. The Group pays licence fees on sales of wireline products, sales of services, corporate trade mark licences and technical cooperation fees. The licence fee is paid as a percentage of sales of wireline products and solutions, and sales of services, per product sold.
The key management include the executive management listed on page 2, comprising the Management Board member and directors of the main organisational units.
| 2016 | 2015 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Salaries and other short-term employee benefits | 22,619 | 22,222 |
| Other long-term benefits | 17 _ |
4 _ |
| 22,636 _ |
22,226 _ |
The members of the executive management and the Supervisory Board held 4,627 ordinary shares at the year-end (2015: 4,540 shares).
In addition, the Group paid remuneration totalling HRK 357 thousand (2015: HRK 337 thousand) to the Supervisory Board during 2016.
Year-end balances arising from key transactions with Ericsson Group companies may be summarised as follows:
| Receivable | Payable | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Main shareholder | ||||
| Telefonaktiebolaget LM Ericsson (LME) | - | - | 1,699 | - |
| Ericsson Group consolidated companies | ||||
| Ericsson AB (EAB) | 35,648 | 54,430 | 67,106 | 33,520 |
| Ericsson Services d.o.o. (ESK) | 23,934 | 34,158 | 10 | - |
| Ericsson GMBH Group (EDD) | 7,648 | 2,439 | 990 | 1,302 |
| Ericsson Ltd. Madrid, Spain (ETL) | 2,805 | 4,429 | - | - |
| Ericsson AG, Switzerland (EAS) | 2,123 | 394 | - | - |
| Ericsson Communications Co. Ltd., China (CBC) | 2,015 | 173 | 182 | 165 |
| Ericsson Inc, USA (EUS) | 1,869 | 834 | 154 | - |
| Ericsson Telecom S.S.De C.V.(TEM) | 1,433 | 997 | - | - |
| Ericsson AB (ESE) | 1,225 | 1,362 | - | - |
| Ericsson Telecomunicazioni SPA, Italy (TEI) | 1,175 | 474 | 52 | - |
| Other Ericsson Group companies | 8,983 _ |
14,259 _ |
3,022 _ |
5,100 _ |
| 88,858 _ |
113,949 _ |
73,215 _ |
40,087 _ |
The Group recorded a non-current receivable (Note 12) of HRK 2,042 thousand (2015: HRK 3,086 thousand) and a non-current portion of deferred revenue of HRK 14,341 thousand (2015: HRK 9,258 thousand) and current portion of deferred revenue of HRK 1,700 thousand (2015: HRK 3,380 thousand) from Ericsson Services d.o.o. (ESK) relating to the five-year managed services contract with Hrvatski Telekom.
The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, and price risk), credit risk and liquidity risk. Exposure to currency, interest rate and credit risk arises in the normal course of the Group's business. Risk management is carried out by a treasury department and its principal role is to actively manage investment of excess liquidity as well as financial assets and liabilities, and to manage and control financial risk exposures. The Group also has a customer finance function with the main objective to find suitable third-party financing solutions for customers and to minimize recourse to the Group. Risk management policies that relate to financial instruments can be summarised as follows:
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group is exposed to US dollars and to the euro, as a substantial proportion of receivables and foreign revenues are denominated in these currencies. Risk management relies on attempts to match, as much as possible, revenues in each currency with the same currency expenditure. The Group may enter into foreign currency forward contracts to hedge economically its exposure to currency risk arising on operating cash flows.
As at 31 December 2016, if the euro and US dollar had weakened/strengthened by 1% (2015: 1%) against the Croatian kuna, with all other variables held constant, the net result after tax for the reporting period would have been HRK 2,730 thousand higher/lower (2015: HRK 1,633 thousand), mainly as a result of foreign exchange losses/gains on translation of cash, cash equivalents, deposits, trade payables, customer receivables and customer financing denominated in euro.
The Group continues to focus on securing natural hedges and active currency management and to minimise impacts from currency moves. The Group's exposure to foreign currencies is shown in the following table.
The tables below present the currency analysis and resulting gap.
| Total foreign | ||||||
|---|---|---|---|---|---|---|
| EUR | USD | Other currency |
currencies | HRK | Total | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 4,159 | 73,831 | - | 77,990 | 3,170 | 81,160 |
| Trade and other receivables | 118,336 | 72,935 | 1,876 | 193,147 | 86,160 | 279,307 |
| Financial assets at fair value through profit or loss |
- | - | - | - | 62,993 | 62,993 |
| Cash and cash equivalents | 124,313 __ |
37,844 __ |
166 __ |
162,323 __ |
62,402 __ |
224,725 __ |
| 246,808 -------------- |
184,610 -------------- |
2,042 -------------- |
433,460 -------------- |
214,725 -------------- |
648,185 -------------- |
|
| Interest-bearing borrowings | - | 8,954 | - | 8,954 | 8 | 8,962 |
| Trade and other payables | 62,825 __ |
18,700 __ |
284 __ |
81,809 __ |
193,766 __ |
275,575 __ |
| 62,825 _ _ |
27,654 _ _ |
284 _ _ |
90,763 _ _ |
193,774 _ _ |
284,537 _ _ |
|
| Currency gap | 183,983 __ |
156,956 __ |
1,757 __ |
342,696 __ |
20,951 __ |
363,648 __ |
2015
| Total foreign | ||||||
|---|---|---|---|---|---|---|
| EUR | USD | Other currency |
currencies | HRK | Total | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 11,151 | 4,213 | - | 15,364 | 3,871 | 19,235 |
| Trade and other receivables | 141,465 | 8,914 | 2,171 | 152,550 | 97,799 | 250,349 |
| Financial assets at fair value through profit or loss |
- | - | - | - | 53,917 | 53,917 |
| Cash and cash equivalents | 157,497 __ |
28,116 __ |
5,676 __ |
191,289 __ |
41,906 __ |
233,195 __ |
| 310,113 -------------- |
41,243 -------------- |
7,847 -------------- |
359,203 -------------- |
197,493 -------------- |
556,696 -------------- |
|
| Interest-bearing borrowings | 39 | - | - | 39 | - | 39 |
| Trade and other payables | 38,865 __ |
6,558 __ |
115 __ |
45,538 __ |
171,371 __ |
216,909 __ |
| 38,904 _ _ |
6,558 _ _ |
115 _ _ |
45,577 _ _ |
171,371 _ _ |
216,948 _ _ |
|
| Currency gap | 271,209 __ |
34,685 __ |
7,732 __ |
313,626 __ |
26,122 __ |
339,748 __ |
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. As the Group mainly has its customer financing at a fixed interest rate and only a small portion of customer financing is affected by possible changes in market interest rates, the risk of fluctuating market interest rates is considered low. The Group also has deposits in financial institutions at a variable interest rate.
The following table presents the annual average interest rates exposure of financial assets and liabilities.
| 2016 | 2015 | |
|---|---|---|
| Average | Average | |
| interest rates | interest rates | |
| % | % | |
| Loans and receivables | 2.60 | 2.78 |
| Trade and other receivables | - | 0.19 |
| Financial assets at fair value through profit or loss | - | - |
| Cash and cash equivalents | 0.21 | 0.61 |
The tables below present the interest rate repricing analysis and resulting gap.
2016
| Non-interest bearing |
Up to 1 month |
1 - 3 months |
3 - 12 months |
1 - 5 years |
Over 5 years |
Total | Fixed interest |
|
|---|---|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 48,447 | - | 1,023 | 1,812 | 1,155 | 4,765 | 57,202 | 23,958 |
| Trade and other receivables | 279,327 | (20) | - | - | - | - | 279,307 | - |
| Financial assets at fair value through profit or loss |
62,993 | - | - | - | - | - | 62,993 | - |
| Cash and cash equivalents | - __ |
224,725 __ |
- __ |
- __ |
- __ |
- __ |
224,725 __ |
- __ |
| 390,767 __ |
224,705 __ |
1,023 __ |
1,812 __ |
1,155 __ |
4,765 __ |
624,227 __ |
23,958 __ |
|
| Interest-bearing borrowings | 8,962 | - | - | - | - | - | 8,962 | - |
| Trade and other payables | 275,575 __ |
- __ |
- __ |
- __ |
- __ |
- __ |
275,575 __ |
- __ |
| 284,537 _ _ |
- _ _ |
- _ _ |
- _ _ |
- _ _ |
- _ _ |
284,537 _ _ |
- _ _ |
|
| Interest rate gap | 106,230 __ |
224,705 __ |
1,023 __ |
1,812 __ |
1,155 __ |
4,765 __ |
339,690 __ |
29,958 __ |
2015
| Non-interest bearing |
Up to 1 month |
1 - 3 months |
3 - 12 months |
1 - 5 years |
Over 5 years |
Total | Fixed interest |
|
|---|---|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 3,087 | - | - | - | 8,832 | 7,316 | 19,235 | - |
| Trade and other receivables | 245,117 | - | 1,285 | 2,828 | 1,119 | - | 250,349 | 3,463 |
| Financial assets at fair value through profit or loss |
53,917 | - | - | - | - | - | 53,917 | - |
| Cash and cash equivalents | 6,543 __ |
112,126 __ |
114,526 __ |
- __ |
- __ |
- __ |
233,195 __ |
68,953 __ |
| 308,664 __ |
112,126 __ |
115,811 __ |
2,828 __ |
9,951 __ |
7,316 __ |
556,696 __ |
72,416 __ |
|
| Interest-bearing borrowings* | - | - | - | 39 | - | - | 39 | - |
| Trade and other payables | 216,909 __ |
- __ |
- __ |
- __ |
- __ |
- __ |
216,909 __ |
- __ |
| 216,909 _ _ |
- _ _ |
- _ _ |
39 _ _ |
- _ _ |
- _ _ |
216,948 _ _ |
- _ _ |
|
| Interest rate gap | 91,755 __ |
112,126 __ |
115,811 __ |
2,789 __ |
9,951 __ |
7,316 __ |
339,748 __ |
72,416 __ |
* include interest payable of HRK 7 thousand
The Group has insignificant exposure to debt securities price risk due to low investments and all classified on the balance sheet at fair value through profit or loss (investments funds).
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Significant risk is associated with high level of customer finance receivables.
The internal directives to manage the credit risks have been tightened during 2015 with the implementation of updated credit management framework and implementation of credit evaluation tools to manage credit risks.
Credit Management function within the Group Treasury has been established to further assist the Group in managing its credit risk exposure. New customers are only accepted on satisfactory completion of a detailed credit check of the customer and a review of the related country risk. Outstanding credit arrangements are monitored on a quarterly or annual basis depending on risk category. Impairment losses are calculated by discounting of receivables. Additionally, there is credit concentration risk as the Group has a significant portion of receivables outstanding from a small number of customers. As at 31 December 2016, the five largest customers represent 48% of total net trade receivables (2015: 65%). The Group considers that its maximum exposure to credit risk is reflected in the amount of trade receivables (Notes 12 and 14) and other receivables (Note 15), net of provision for doubtful receivables. Ageing analysis of these receivables is within the maturity analysis table shown further in this note.
Letters of credit are used as a method for securing payments from customers operating in certain markets, in particular in markets with unstable political and/or economic environments. By having banks confirming the letters of credit, the political and commercial credit risk exposures are mitigated.
Prior to the approval of new facilities reported as customer finance, an internal credit risk assessment is conducted in order to assess the credit rating (for political and commercial risk) of each transaction. A reassessment of the credit rating for each customer finance facility is made on a regular basis.
The Group defines customer financing as any credit period longer than 179 days. According to Group's policies and directives, the customer financing needs to be approved by the Supervisory Board. The Group is working closely with Croatian Bank for Reconstruction and Development (HBOR) and partnership banks to secure risk mitigation.
Provisions related to customer finance risk exposures are only made when they are reliably measurable and where, after the financing arrangement has become effective, certain events occur which are expected to have a significant adverse impact on the borrower's ability and/or willingness to service the outstanding debt. These events can be political (normally outside the control of the borrower) or commercial, e.g. the borrower's deteriorating creditworthiness. Security arrangements for customer finance facilities normally include pledges of equipment and pledges of certain of the borrower's assets. If available, third-party risk coverage may also be arranged. "Third-party risk coverage" means that a financial payment guarantee covering the credit risk has been issued by a bank, an export credit agency or other financial institution. It may also be a credit risk transfer under the so-called "sub-participation arrangement" with a bank, whereby the credit risk and the funding is taken care of by the bank for the part covered by the bank. A credit risk cover from a third party may also be issued by an insurance company.
The following tables provide an ageing detail of current and overdue amounts in respect of all customer loans and receivables as at 31 December 2016.
| Table 1 | Payment due date for total customer loans and receivables | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Due balance | Up to 3 months |
3 months to 1 year |
1 to 3 years | Over 3 years | Total | ||||
| 2016 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |||
| Foreign receivables | 2,848 | 62,407 | 56,044 | 43,065 | 9,943 | 174,307 | |||
| Domestic receivables | 1,761 | 59,450 | 2,877 | 523 | - | 64,611 | |||
| Receivables from related parties * | 8,027 __ |
77,588 __ |
4,827 __ |
2,400 __ |
- __ |
92,842 __ |
|||
| 12,636 __ |
199,445 __ |
63,748 __ |
45,988 __ |
9,943 __ |
331,760 __ |
||||
| *include non-current portion of domestic receivables in the amount of HRK 2,400 thousand | |||||||||
| 2015 | |||||||||
| Foreign receivables | 1,056 | 49,625 | 6,182 | - | 4,213 | 61,076 | |||
| Domestic receivables | 1,383 | 64,568 | 10,064 | 783 | - | 76,798 | |||
| Receivables from related parties | 10,324 __ |
101,448 __ |
8,030 __ |
3,600 __ |
- __ |
123,402 __ |
|||
| 12,763 | 215,641 | 24,276 | 4,383 | 4,213 | 261,276 |
________ ________ ________ ________ ________ ________
*include non-current portion of domestic receivables in the amount of HRK 3,600 thousand
| Table 2 | Ageing of total due customer loans and receivables | |||||
|---|---|---|---|---|---|---|
| Up to 3 months |
3 months to 1 year |
1 to 3 years | Over 3 years | Total | ||
| 2016 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Foreign receivables | 2,656 | 192 | - | - | 2,848 | |
| Domestic receivables | 1,677 | 84 | - | - | 1,761 | |
| Receivables from related parties | 6,750 __ |
1,040 __ |
120 __ |
117 __ |
8,027 __ |
|
| 11,083 __ |
1,316 __ |
120 __ |
117 __ |
12,636 __ |
||
| 2015 | ||||||
| Foreign receivables | 881 | 164 | 11 | - | 1,056 | |
| Domestic receivables | 384 | 115 | - | 884 | 1,383 | |
| Receivables from related parties | 7,567 __ |
1,839 __ |
252 __ |
667 __ |
10,325 __ |
|
| 8,832 __ |
2,117 __ |
263 __ |
1,552 __ |
12,764 __ |
Table 3
| Payment due date for total customer loans and receivables (in respect of accounts with any portion falling due) |
||||||
|---|---|---|---|---|---|---|
| Due balance | Up to 3 months | 3 months to 1 year |
1 to 3 years | Total | ||
| 2016 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Foreign receivables | 2,848 | 19,357 | 624 | - | 22,829 | |
| Domestic receivables | 1,761 | 13,145 | 2,007 | - | 16,913 | |
| Receivables from related parties | 8,027 __ |
68,745 __ |
4,827 __ |
- __ |
81,599 __ |
|
| 12,636 __ |
101,247 __ |
7,458 __ |
- __ |
121,341 __ |
||
| 2015 | ||||||
| Foreign receivables | 1,056 | 28,475 | 5,875 | - | 35,406 | |
| Domestic receivables | 1,383 | 6,586 | - | - | 7,969 | |
| Receivables from related parties | 10,324 __ |
92,360 __ |
1,200 __ |
6,830 __ |
110,714 __ |
|
| 12,763 __ |
127,421 __ |
7,075 __ |
6,830 __ |
154,089 __ |
| Table 4 | Past due but not impaired customer loans and receivables | ||||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | 3 months to 1 year | 1 to 3 years | Over 3 years | Total | |||
| 2016 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||
| Foreign receivables | 2,656 | 192 | - | - | 2,848 | ||
| Domestic receivables | 1,677 | 84 | - | - | 1,761 | ||
| Receivables from related parties | 3,635 __ |
294 __ |
84 __ |
- __ |
4,013 __ |
||
| 7,968 __ |
570 __ |
84 __ |
- __ |
8,622 __ |
|||
| 2015 | |||||||
| Foreign receivables | 870 | 174 | - | - | 1,044 | ||
| Domestic receivables | 384 | 115 | - | - | 499 | ||
| Receivables from related parties | 4,175 __ |
924 __ |
- __ |
87 __ |
5,186 __ |
||
| 5,429 __ |
1,213 __ |
- __ |
87 __ |
6,729 __ |
Liquidity risk, also referred to as funding risk, is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. As the Group has no significant commitments in financial instruments, the risk lies only in its daily operations. The Group has a strong focus on its cash flow with daily updates on actual development and monthly updated forecasts. The Group's maturity profile demonstrates the strong liquidity position of the Group and therefore the risk is considered low. The table below presents the maturity analysis and resulting gap.
The Group has a revolving credit facility with our core banks should an extraordinary liquidity need arise. At 31 December 2016, the facility remained untapped.
| 2016 | Up to 1 month |
1 - 3 months |
3 - 12 months | 1 - 5 years | Over 5 years |
Total |
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 10 | 5,070 | 13,853 | 57,947 | 4,280 | 81,160 |
| Trade and other receivables | 142,599 | 43,166 | 92,758 | 784 | - | 279,307 |
| Current financial assets | 62,993 | - | - | - | - | 62,993 |
| Cash and cash equivalents | 224,725 __ |
- __ |
- __ |
- __ |
- __ |
224,725 __ |
| 430,327 __ |
48,236 __ |
106,611 __ |
58,731 __ |
4,280 __ |
648,185 __ |
|
| Interest-bearing borrowings | - | - | - | 8,962 | - | 8,962 |
| Trade and other payables | 164,134 __ |
83,373 __ |
3,780 __ |
24,288 __ |
- __ |
275,575 __ |
| 164,134 _ _ |
83,373 _ _ |
3,780 _ _ |
33,250 _ _ |
- _ _ |
284,537 _ _ |
|
| Maturity gap | 266,193 __ |
(35,137) __ |
102,831 __ |
25,481 __ |
4,280 __ |
363,648 __ |
| 2015 | Up to 1 month |
1 - 3 months |
3 - 12 months | 1 - 5 years | Over 5 years |
Total |
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | - | - | - | 11,919 | 7,316 | 19,235 |
| Trade and other receivables | 129,830 | 97,987 | 20,624 | 1,908 | - | 250,349 |
| Current financial assets | 53,917 | - | - | - | - | 53,917 |
| Cash and cash equivalents | 233,195 __ |
- __ |
- __ |
- __ |
- __ |
233,195 __ |
| 416,942 __ |
97,987 __ |
20,624 __ |
13,827 __ |
7,316 __ |
556,696 __ |
|
| Interest-bearing borrowings | - | - | 39 | - | - | 39 |
| Trade and other payables | 184,658 __ |
18,262 __ |
4,044 __ |
9,945 __ |
- __ |
216,909 __ |
| 184,658 _ _ |
18,262 _ _ |
4,083 _ _ |
9,945 _ _ |
- _ _ |
216,948 _ _ |
|
| Maturity gap | 232,284 __ |
79,725 __ |
16,541 __ |
3,882 __ |
7,316 __ |
339,748 __ |
*include interest payable of HRK 7 thousand
Financial assets at fair value through profit and loss are carried at fair value at the balance sheet date. The fair value is estimated by reference to their quoted active market price at the balance sheet date which represents Level 1 input (Note 17).
A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held by the Group is the current bid price. There are no financial assets derived from level 2 inputs which represent different valuation techniques based on observable market data or from level 3 inputs which represent different valuation techniques based on no observable market data.
The Group's principal financial instruments not carried at fair value are cash and cash equivalents, trade receivables, other receivables, non-current loans and receivables, trade and other payables and interest-bearing borrowings. The fair values of financial instruments together with carrying amounts as shown in the balance sheet are as follows:
| Carrying | Unrecognised | Carrying | Unrecognised | |||
|---|---|---|---|---|---|---|
| amount | Fair value | gain/(loss) | amount | Fair value | gain/(loss) | |
| 2016 | 2016 | 2016 | 2015 | 2015 | 2015 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 81,160 | 82,617 | 1,457 | 19,235 | 18,290 | (945) |
| Trade and other receivables | 279,307 | 279,275 | (32) | 250,348 | 250,257 | (91) |
| Financial assets at fair value through profit or loss |
62,993 | 62,993 | - | 53,917 | 53,917 | - |
| Cash and cash equivalents | 224,725 | 224,725 | - | 233,195 | 233,195 | - |
| Interest-bearing borrowings | (8,962) | (8,962) | - | (32) | (39) | (7) |
| Trade and other payables | (275,575) __ |
(275,575) __ |
- __ |
(216,909) __ |
(216,909) __ |
- __ |
| 363,648 __ |
365,073 __ |
1,425 __ |
339,754 __ |
338,711 __ |
(1,043) __ |
The fair value of loans and receivables and the fair value of interest-bearing borrowings are calculated based on the Management's best estimate of discounted expected future principal and interest cash flows, using the market-related rate for a similar instrument at the balance sheet date as a discount rate. Fair values and carrying amounts are not significantly different as the loans and receivables were granted at market rates, which were not substantially different from market rates at the end of the reporting year. Current financial assets are stated at fair value that is based on quoted prices at the balance sheet date without any deduction for transaction costs.
The carrying amount of cash and cash equivalents and of bank deposits reflects fair value due to the short-term maturity of these financial instruments. Similarly, the amortised cost carrying amounts of trade receivables and payables with remaining life of less than one year and which are all subject to normal trade credit terms reflect fair values. The following interest rates were used for determining fair values, which are based on available market rates for similar financial instruments:
| 2016 | 2015 | |
|---|---|---|
| Loans and receivables | 1.40% | 1.50% |
The Group's objectives when managing capital are:
The Group is generating sufficient cash from operations to fund liabilities as they become due, finance customers when required and budgeted investments, and pay dividends.
The Group monitors capital using the statutory minimum capital requirement. Shareholders' equity is disclosed in Note 18 to the consolidated financial statements
ANNUAL REPORT ON GROUP PERFORMANCE Gordana Kovačević. President of Ericsson Nikola Tesla d.d.
Dear readers,
Information Communication Technology (ICT) continues to contribute to transformation processes in our society more strongly and rapidly than ever. The digital economy, digital society and digital transformation have become common topics for discussion. Digitalization has become the synonym for development, and the Networked Society's potential lies in transformation, primarily through mobility. In its business strategy, Ericsson recognized not only the importance of technological development, but also the need to use it to benefit society at large.
The digital infrastructure of modern society implies constant investment in research and development, fast implementation of the fifth generation of mobile networks (5G), connecting everything that benefits from being connected (Internet of things - IoT), and using a large number of data present in digital space (Big Data). The above mentioned infrastructure is the technological foundation required, but it is not the only prerequisite for the Networked Society we are building. More precisely, it is important to combine technology leadership with motivated and creative experts who responsibly contribute to mutual goals.
Ericsson Nikola Tesla Group takes an active part in the technological development and is a relevant partner in the digital transformation of society through innovative ICT products, solutions and services. We apply the highest global standards in our day to day operations, as well as the principles of corporate governance and responsibility. Our sustainable development is based on sound relations, trust and collaboration among all our stakeholders (customers/partners, employees, society and shareholders).
In 2016 Ericsson Nikola Tesla Group continued its series of successful business years. Sales revenue increased by 16.7% year-on-year, due to strong revenue growth in CIS market and continued revenue growth in Ericsson market.
2016 will be particularly remembered by our signing of important contracts in export markets with three new customers: beCloud in Belarus, Ucom in Armenia. and the Ministry of Healthcare in Kazakhstan. All three are demanding projects in the areas of LTE technology and healthcare digitalization. We also continued our collaboration with the operator IDC (Moldova) by signing a contract for LTE network build.
The quality and added value that we deliver have been recognized by the Ericsson Corporation and customers worldwide as demonstrated by newly gained responsibilities in the global organization for our Research and Development Center and the Global and Regional Expert Centers for solutions and services. In line with that, we added 318 experts during 2016. We remain the largest R&D center in Croatia, currently employing over 1200 employees, while Ericsson Nikola Tesla Group has almost 3000 employees. We retained the position as the largest ICT exporter and are surely the largest exporter of knowledge in Croatia.
In the markets of Southeastern Europe, we recorded a decrease in sales revenue, due to negative economic trends and political turmoil slowing down operators' investment dynamics. The main challenges we face in the domestic market are consolidation and centralization of procurement by global customers/operators, postponed strategic investments and growing competition.
I am pleased that we have kept our strong position and our customers' trust in Croatia and the region during 2016, primarily by continuing quality collaboration with our traditional partners, such as Vipnet, Hrvatski Telekom (HT), HT Mostar, BH Telecom, Crnogorski Telekom and Ipko.
Furthermore, I would like to highlight the growth in the business segment ICT Solutions for Industry & Society in the domestic market. Among key projects in this area, we should mention the continuing activities with the Ministry of Healthcare of the Republic of Croatia on implementing new functionalities, such as eHealth Record and the Portal for Patients. We are proud of the Joint Information System of Land Registry and Cadaster project, which was fully
implemented at the end of 2016, connecting all land-registry and cadaster offices in Croatia into a single information system. A strategically important project in the public safety area was among the last projects that we signed for at the close of 2016. The project concerned the building of the state border control system of the Republic of Croatia and was completed in record time in mid-January 2017.
Our subsidiary, Ericsson Nikola Tesla Servisi d.o.o., records solid business results. In the past two years, the company went through demanding transformation processes, whilst implementing complex projects in network build and maintenance for Hrvatski Telekom.
Risk Management is one of our key priorities, and we consider it an important element of stability of our operations. In order to mitigate business, market and financial risks in the export business, we have successfully expanded cooperation with the Croatian Bank for Reconstruction and Development (HBOR) and commercial banks. In this way, we meet our customers' needs for financing and, at the same time, significantly reduce long-term receivables.
Taking into consideration the above mentioned, we estimate that the Group's main business risks are:
Negative foreign exchange impact on business results given the greater part of our revenue is generated in EUR and USD
Retaining of highly qualified/top performing employees in order to stay competitive.
Ericsson Nikola Tesla Group business results are as follows (the information in brackets refers to 2015):
Strong business results were achieved in 2016 primarily due to professionalism and knowledge of our leaders and experts, which is increasingly being recognized as our competitive advantage. A high level of satisfaction among our largest customers/partners was confirmed yet again by our annual survey.
All other key performance indicators grouped in four Scorecard perspectives (Customer, Employee, Society and Shareholder) were excellent.
By opening of the innovation incubator "Ericsson Garage Croatia", we became one of several global sites for agile and fast innovations oriented towards the needs of both existing and new customers.
All business entities, irrespective of industry they belong to, use ICT as their basic infrastructure. Our customers in Croatia, the region, as well as globally, are embarking on digital transformation projects. In the operator segment, these are primarily telecom network virtualization projects and implementation of Cloud solutions. In these projects a special focus is placed on Operations Support Systems (OSS) and Business Support Systems (BSS) transformation, which results in organizational efficiency, as well as in new market and end user approaches.
In the course of 2016, we have started a new strategic planning cycle for the period up to 2019, based on facts that describe the current status in all business and technology segments and on analysis of future trends in the ICT market. Our aim is to strengthen business performance in strategic segments through transformation programs (4G/5G, Managed Services, OSS and BSS, Cloud solutions, Industry & Society) and the Ericsson's internal market. Risk management, effective cost management and efficiency have important roles in our strategy.
Significant transformation is taking place throughout the Ericsson Corporation. our company included. I believe that the results we achieved in 2016, as well as our ongoing strategic transformation initiatives, represent a strong and vital foundation for the Company's future development.
All other data comprising the annual company report pursuant to Article 250a of the Companies Act can be found in the enclosed 2016 Annual Report, consisting of the General Report, the Social Report and Consolidated Financial Statements as at December 31, 2016.
Gordana Kovačević
Men - ~
Ericsson Nikola Tesla d.d. ERICSSON
Ericsson Nikola Tesla d.d. Krapinska 45 HR-10 000 Zagreb $01$ CROATIA
$1 - 132311$
Pursuant to provisions of the Croatian Companies Act and Ericsson Nikola Tesla d.d. Statute, the Supervisory Board of Ericsson Nikola Tesla d.d. has reviewed the Company's business, taking respective decisions and conclusions in four regular and four extraordinary Board meetings held during 2016.
In 2016, the members of the Supervisory Board were as follows: Klas Roland Nordgren (Chairman) Ignac Lovrek (Deputy Chairman) Vidar Mohammar (Member) Dubravko Radošević (Member) Zvonimir Jelić (Member and Employee representative).
The Company Management regularly informed the Supervisory Board on all important business activities and the course of the Company business performance.
At the meetings, the Supervisory Board discussed in detail the financial results, situation in the domestic and export markets and ICT industry trends. Further topics of discussions were as follows: business plans and strategic projects, business risks, investments, and issues regarding human resources and shareholders. Moreover, the Supervisory Board continuously monitored business development and responsibilities of the Research & Development Centre, Solutions& Services Centre and IT & Test Environment Unit (ITTE). The Supervisory Board analyzed and approved the Ericsson Nikola Tesla Group's Business Strategy 2016 – 2019, as well as transformation programs focused on business development.
At extraordinary Board meetings, the members discussed dividend payment, 2015 annual financial reports, 2016 targets and establishment of local company in Belarus.
Analyzing the Managing Director's reports and the key financial indicators, the Supervisory Board evaluated that Ericsson Nikola Tesla Group had a successful business performance in 2016, and achieved excellent financial result, along with a healthy balance sheet and a solid cash position. Ericsson Nikola Tesla Group gained new responsibilities in global corporation, primarily in research and development, and strengthen business in CIS markets. Due to the challenging market environment, the Group continues to be focused on cost and operational effectiveness to enhance profitability, and on addressing customers' needs.
In 2016 there were no changes in the composition of the Supervisory Board. As his mandate expired, Klas Roland Nordgren, the chairman of the Supervisory Board, was re-elected for another term in office, at the Ericsson Nikola Tesla Annual General Meeting held on 31 May 2016.
The Audit Committee held four meetings in 2016. During these meetings, the Audit Committee discussed financial performance during the year, annual financial statements, 2016 audit plan, audit findings, internal control and risk management system, and performed other tasks pursuant to new EU audit regulations. The Audit Committee
regularly informed other Supervisory Board members of its findings and recommendations. In 2016, member of the Audit committee where: Ignac Lovrek, Chairman and Vidar Mohammar, Member.
Based on the review of financial and other relevant business documents, the Managing Director's report and the report provided by auditors, the Supervisory Board concluded the following:
Pursuant to the Companies Act, art. 300d the following documents are enclosed with this report:
$1.$ Decision by the Managing Director on the established consolidated and non-consolidated annual financial statements;
$2.$ Decision by the Supervisory Board on the established consolidated and non-consolidated annual financial statements:
For the Supervisory Board $\sqrt{ }$ Roland Nordgren, Chairman
Ericsson Nikola Tesla d.d. Zagreb Krapinska 45 OIB: 84214771175
Zagreb, 21. travnja 2017.
Subject: Managing Director Decision
društvima, a nakon primitka suglasnosti Nadzornog and subsequent to the approval of the Supervisory odbora dioničkog društva Ericsson Nikola Tesla d.d. Board of the Joint Stock Company Ericsson Nikola Zagreb donosim slijedeću ODLUKU:
Ericsson Nikola Tesla d.d. Zagreb Uprava
Gordana Kovačević
YLoran
ERICSSON Ericsson Nikola Tesla d.d. Krapinska 45 HR-10 000 Zagreb O+ CROATIA
Temeljem članka 300.d Zakona o trgovačkim In accordance with the Company Act, Article 300.d Tesla d.d. Zagreb, I herewith forward the following DECISION:
Ericsson Nikola Tesla d.d. Zagreb Managing Director
Gordana Kovačević
ERICSSON
Ericsson Nikola Tesla d.d. Krapinska 45 HR-10 000 Zagreb OBOATIA $H1$ Ericsson Nikola Tesla d.d. Zagreb Krapinska 45 OIB: 84214771175
Zagreb, 21. travnja 2017.
Temeljem članka 300.d Zakona o trgovačkim Pursuant to the Company Act, Article 300.d the društvima. Ericsson Nikola Tesla d.d. Zagreb donosi slijedeće:
Ericsson Nikola Tesla d.d. Zagreb Za Nadzorni odbor Roland Nordgren Predsjednik
Subiect: Supervisory Board Decision
Nadzorni odbor dioničkog društva Supervisory Board of the Joint Stock Company Ericsson Nikola Tesla d.d. Zagreb, hereby confirms that-
Ericsson Nikola Tesla d.d. Zagreb For Supervisory Board
Roland Nordgren Chairman
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