Ericsson Nikola Tesla d.d.

Annual Report • Apr 21, 2016

Financial Statements and Auditor's report 31 December 2015

Contents

	Page
Company profile	1 to 2
Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements	3
Independent Auditors' Report	4
Statement of comprehensive income	5
Statement of financial position	6 to 7
Statement of changes in equity	8
Statement of cash flows	9 to 10
Notes to the financial statements	11 to 54

Company profile

History and incorporation

Ericsson Nikola Tesla d.d. (the 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 Company was founded as a result of the privatisation of the enterprise Nikola Tesla - Poduzeće za proizvodnju telekomunikacijskih sistema i uređaja, po.

According to the ownership structure as at 31 December 2015, Telefonaktiebolaget LM Ericsson (Ericsson) holds 49.07% of the Company's share. Other shareholders own the remaining 50.68% of the Company's shares and 0.25% is held as treasury shares.

Principal activities

The principal activities of the Company are: the research and development of telecommunications software and services, design, testing and integration of total communications solutions, and supply and maintenance of communications solutions and systems primarily 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 Company are in Zagreb, Krapinska 45.

Company profile (continued)

Supervisory Board, Management Board and executive management

The Supervisory Board

The Supervisory Board members during 2015 and up to the release of these statements were:

Roland Nordgren	Reappointed on 5 June 2012	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

Executive management

As at 31 December 2015, the Company's executive management comprised:

Gordana Kovačević	Company 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

Statement of comprehensive income for the year ended 31 December 2015

	Notes	2015 HRK '000	2014 HRK '000
Sales revenue	3, 4	1,329,114	1,279,279
Cost of sales		(1,157,127) __	(1,108,688) __
Gross profit		171,987	170,591
Selling expenses		(48,298)	(55,070)
Administrative expenses		(32,119)	(32,850)
Other operating income		4,666	3,871
Other operating expenses		(8,168) __	(11,488) __
Operating profit		88,068 __	75,054 __
Finance income	7	1,738	7,698
Finance expense	7	(166) __	(2) __
Finance income – net		1,572 __	7,696 __
Profit before tax		89,640	82,750
Income tax	8	- __	- __
Profit for the year		89,640 __	82,750 __
Other comprehensive income		- __	- __
Total comprehensive income for the year		89,640 __	82,750 __
Earnings per share (HRK)	9	67.46 __	62.32 __

Statement of financial position as at 31 December 2015

	Notes	2015 HRK '000	2014 HRK '000
ASSETS
Non-current assets
Property, plant and equipment	10	126,282	129,752
Intangible assets	11	814	1,296
Loans and receivables	12	19,235	19,153
Investments in subsidiaries	13	73 __	73 __
Total non-current assets		146,404 __	150,274 __
Current assets
Inventories	14	19,761	21,128
Trade receivables	15	130,219	178,883
Receivables from related parties	26(c)	117,472	84,860
Other receivables	16	3,062	15,119
Financial assets at fair value through profit or loss	17	53,917	44,080
Prepayments and accrued income		1,837	1,932
Cash and cash equivalents	18	218,499 __	182,106 __
Total current assets		544,767 __	528,108 __
TOTAL ASSETS		691,171 __	678,382 __

Statement of financial position (continued) as at 31 December 2015

	Notes	2015 HRK '000	2014 HRK '000
EQUITY AND LIABILITIES
Equity
Share capital	19(a)	133,165	133,165
Treasury shares		(3,434)	(8,462)
Legal reserves	19(c)	6,658	6,658
Retained earnings		164,038 __	198,296 __
Total equity		300,427 __	329,657 __
Non-current liabilities
Employee benefits	22(a)	5,623	5,336
Other non-current liabilities		3,087 __	4,133 __
Total non-current liabilities		8,710 __	9,469 __
Current liabilities
Payables to related parties	26(c)	74,544	62,755
Trade and other payables	23	130,508	126,106
Provisions	24	9,783	10,001
Accrued charges and deferred revenue	25	167,199 __	140,394 __
Total current liabilities		382,034 __	339,256 __
Total liabilities		390,744 __	348,725 __
TOTAL EQUITY AND LIABILITIES		691,171 __	678,382 __

Statement of changes in equity for the year ended 31 December 2015

	Share capital	Treasury shares	Legal reserves	Retained earnings	Total
	HRK '000	HRK '000 Note 19 (b)	HRK '000	HRK '000	HRK '000
As at 1 January 2014 Changes in equity for 2014	133,165	(9,571)	6,658	539,752	670,004
Total comprehensive income	- __	- __	- __	82,750 __	82,750 __
Dividend distribution for 2013, Note 20	-	-	-	(424,897)	(424,897)
Purchases of treasury shares, Note 19 (b) Share-based payments, Note 22 (b)	- -	(2,768) 3,877	- -	- (3,877)	(2,768) -
Equity-settled transactions, Note 22 (b)	- __	- __	- __	4,568 __	4,568 __
Total contributions by and distributions to owners recognised directly in equity	- __	1,109 __	- __	(424,206) __	(423,097) __
As at 31 December 2014	133,165 __	(8,462) __	6,658 __	198,296 __	329,657 __
As at 1 January 2015 Changes in equity for 2015	133,165	(8,462)	6,658	198,296	329,657
Total comprehensive income	__	__	__	89,640 __	89,640 __
Dividend distribution for 2014, Note 20	-	-	-	(119,593)	(119,593)
Purchases of treasury shares, Note 19 (b)	-	(4,062)	-	-	(4,062)
Share-based payments, Note 22 (b)	-	6,840	-	(6,840)	-
Sale of treasury shares, Note 22 (b)	-	2,250	-	(398)	1,852
Equity-settled transactions, Note 22 (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 __	164,038 __	300,427 __

Statement of cash flows

for the year ended 31 December 2015

	Notes	2015	2014
		HRK '000	HRK '000
Cash flows from operating activities
Profit before tax		89,640 _	82,750 _
Adjustments for:
Depreciation and amortisation	10,11	49,528	45,742
Impairment losses and reversals		2,739	16,656
Net increase in provisions		3,916	2,598
Gain on sale of property, plant and equipment		(231)	(178)
Net loss/(gain) on re-measurement of financial assets		21	(356)
Amortisation of discount		(69)	(330)
Interest income		(3,811)	(7,254)
Interest expense	7	166	2
Foreign exchange losses, net		2,446	832
Equity-settled transactions	6	2,933 _	4,568 _
		147,278	145,030
Changes in working capital:
In receivables		25,670	33,699
In inventories		1,367	23,551
In payables		45,684 _	(23,773) _
Cash generated from operations		219,999 _	178,507 _
Interest paid		(165) _	(2) _
Net cash from operating activities		219,834 _	178,505 _
Cash flows from investing activities
Interest received		2,936	5,951
Proceeds from sale of property, plant and equipment		355	193
Purchases of property, plant and equipment, and intangible assets		(50,729)	(45,185)
Deposits collected with financial institutions - net		66	999
Purchases of financial assets at fair value through profit and loss		(92,000)	(45,900)
Proceeds from sale of financial assets at fair value through profit and loss		82,142 _	112,000 _
Net cash (used in)/from investing activities		(57,230) _	28,058 _

Statement of cash flows (continued)

for the year ended 31 December 2015

	Notes	2015 HRK '000	2014 HRK '000
Cash flows from financing activities
Purchase of treasury shares	19(b)	(4,062)	(2,768)
Dividends paid	20	(119,715) _	(424,933) _
Net cash used in financing activities		(123,777) _	(427,701) _
Effects of exchange rate changes on cash and cash equivalents		(2,434) _	(1,025) _
Net increase/(decrease) in cash and cash equivalents		36,393	(222,163)
Cash and cash equivalents at the beginning of the year		182,106 _	404,269 _
Cash and cash equivalents at the end of the year	18	218,499 _	182,106 _

Notes to the financial statements

1 Significant accounting policies

Reporting entity

Ericsson Nikola Tesla d.d. (the 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 Company's shares are listed on the Public Joint Stock Company listing on the Zagreb Stock Exchange. These financial statements were authorised for issue by the Management Board on 13 April 2016 for approval by the Supervisory Board. A summary of the Company's principal accounting policies is set out below.

Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (IFRSs). These financial statements also comply with the Croatian Accounting Act in effect on the date of issue of these financial statements. These financial statements are a translation of the official statutory IFRS financial statements.

Basis of preparation

The 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 financial statements and are consistent with those used in the previous year.

The preparation of 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 on-going 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 the executive management in the application of IFRSs that have significant effect on the financial statements and estimates are discussed in Note 2.

The Company has issued these separate financial statements in accordance with Croatian regulations. The Company has also prepared consolidated financial statements as at 31 December 2015 and for the year then ended in accordance with IFRS for the Company and its subsidiaries (the Group), which were approved by the Management Board on 13 April 2016. In the consolidated financial statements, subsidiary undertakings (listed in Note 13) and those companies in which the Group indirectly has an interest of more than half of the voting rights or otherwise has power to exercise control over the operations have been fully consolidated. Users of these non-consolidated financial statements should read them together with the Group's consolidated financial statements as at and for the year ended 31 December 2015 in order to obtain full information on the financial position, results of operations and changes in financial position of the Group as a whole.

Going concern

The executive management have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The Company therefore continues to adopt the going concern basis in preparing its financial statements.

1 Significant accounting policies (continued)

Changes in accounting policies and disclosures

(a) New and amended standards adopted by the Company

The Company has adopted the following new and amended standards for their annual reporting period commencing 1 January 2015 which were endorsed by the European Union and which are relevant for the Company's financial statements:

• Annual Improvements to IFRSs 2010 2012 Cycle comprising changes to seven standards (IFRS 1, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 38 and IAS 24).
• Annual Improvements to IFRSs 2011 2013 Cycle comprising changes to four standards (IFRS 2, IFRS 3, IFRS 13 and IAS 40).
• Defined Benefit Plans: Employee Contributions Amendments to IAS 19

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.

(b) Standards and interpretations issued but not yet effective

Certain new standards and interpretations have been published that are not mandatory for 31 December 2015 reporting periods and have not been early adopted by the Company. None of these is expected to have significant effect on the Company'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. In December 2014, the IASB made further changes to the classification and measurement rules and also introduced a new impairment model. With these amendments, IFRS 9 is now complete.

The Management of the Company assessed the impact of the new standard IFRS 9 on its financial statements as follows:

• Following the changes approved by the IASB in July 2014, the Company no longer expects any impact from the new classification, measurement and derecognition rules on the Company's financial assets and financial liabilities.
• While the Company has yet to undertake a detailed assessment of the debt instruments currently classified as available-for-sale financial assets, it would appear that they would satisfy the conditions for classification as at fair value through other comprehensive income (FVOCI) based on their current business model for these assets. Hence there will be no change to the accounting for these assets.
• There will also be no impact on the Company's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Company does not have any such liabilities.
• The new hedging rules align hedge accounting more closely with the Company's risk management practices. As a general rule it will be easier to apply hedge accounting going forward as the standard introduces a more principles-based approach. The new standard also introduces expanded disclosure requirements and changes in presentation.

1 Significant accounting policies (continued)

Changes in accounting policies and disclosures (continued)

(b) Standards and interpretations issued but not yet effective (continued)

• The new impairment model is an expected credit loss (ECL) model which may result in the earlier recognition of credit losses.
• The Company has not yet assessed how its own hedging arrangements and impairment provisions would be affected by the new rules.

The Management plans to adopt the standard on its effective date and when endorsed by the European Union.

IFRS 15 Revenue from contracts with customer 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:

• Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements;
• Revenue may be recognised earlier than under current standards if the consideration varies for any reasons (such as for incentives, rebates, performance fees, royalties, success of an outcome, etc.) – minimum amounts must be recognised if they are not at significant risk of reversal;
• The point at which revenue is able to be recognised may shift: some revenue which is currently recognised at a point in time at the end of a contract may have to be recognised over the contract term and vice versa;
• There are new specific rules on licenses, warranties, non- refundable upfront fees and, consignment arrangements, to name a few; and
• As with any new standard, there are also increased disclosures.

Entities will have a choice of full retrospective application, or prospective application with additional disclosures.

Management is currently assessing the impact of the new rules of IFRS 15 and has identified the following areas that are likely to be affected:

• Extended warranties, which will need to be accounted for as separate performance obligations, which will delay the recognition of a portion of the revenue;
• Consignment sales where recognition of revenue will depend on the passing of control rather than the passing of risks and rewards;
• IT consulting services where the new guidance may result in the identification of separate performance obligations which could again affect the timing of the recognition of revenue; and
• The balance sheet presentation of rights of return, which will have to be grossed up in the future (separate recognition of the right to recover the goods from the customer and the refund obligation).

At this stage, the Company is not able to estimate the impact of the new rules on the Company's financial statements, it will make more detailed assessments of the impact over the next twelve months. The Management plans to adopt the standard on its effective date and when endorsed by the European Union.

1 Significant accounting policies (continued)

Changes in accounting policies and disclosures (continued)

(b) Standards and interpretations issued but not yet effective (continued)

IFRS 16 "Leases" (issued in January 2016 and effective for annual periods beginning on or after 1 January 2019)

The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases of finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognize: a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value, and b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Company is currently assessing the impact of the amendments on its financial statements.

1 Significant accounting policies (continued)

Functional and presentational currency

The Company's financial statements have been prepared in Croatian kuna (HRK), which is the currency of the primary economic environment in which the entity operates (the functional currency) and the presentation currency, and are rounded to the nearest thousand. The closing exchange rate as at 31 December 2015 was HRK 6.99180 per USD 1 (2014: HRK 6.30211) and HRK 7.63505 per EUR 1 (2014: HRK 7.66147).

Property, plant and equipment

Items of property, plant and equipment are shown at cost or deemed cost, less accumulated depreciation and impairment losses.

The Company 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 Company 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 statement of comprehensive income.

1 Significant accounting policies (continued)

Intangible assets

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.

Impairment of assets

Property, plant and equipment, intangible assets, financial instruments and receivables are reviewed for impairment at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its estimated recoverable amount, an impairment loss is recognised in the statement of comprehensive income for items of property, plant and equipment, intangible assets, financial instruments and receivables.

The recoverable amount of property, plant and equipment and intangible assets is the higher of an asset's fair value less costs to sell or value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit. Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised.

The recoverable amount of receivables carried at amortised cost is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

1 Significant accounting policies (continued)

Impairment of assets (continued)

For loans and receivables category, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Company may measure impairment on the basis of an instrument's fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in the statement of comprehensive income.

Short-term receivables are not discounted. The recoverable amount of financial assets is the higher of the asset's net selling price and its value in use.

An impairment loss in respect of held-to-maturity investments and receivables is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

Financial instruments

The Company classifies its financial instruments in the following categories: financial assets and financial liabilities at fair value through profit or loss, loans and receivables, available-for-sale financial assets or held-to-maturity investments. The classification depends on the purpose for which the financial instruments were acquired. Executive management determines the classification of its financial instruments at initial recognition and re-evaluates this at every reporting date.

Financial instruments at fair value through profit or loss category have two sub-categories: "financial instruments held for trading", and those designated by management at fair value through profit or loss at inception. Financial instruments acquired principally for the purpose of generating a short-term profit are classified as held for trading and included in current assets. These include derivative financial instruments, which do not qualify for hedge accounting. Financial instruments at fair value through profit or loss include debt and equity securities and investments in investment funds.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Company intends to sell immediately or in the near term, which are designated at fair value through profit or loss or as available for sale. These include non-current receivables and deposits with financial institutions.

1 Significant accounting policies (continued)

Financial instruments (continued)

Financial instruments with fixed or determinable payments and fixed maturity that the Company has positive intent and ability to hold to maturity are classified as held-to-maturity investments. All other financial instruments are classified as available for sale. Financial instruments at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets are recognised on the trade date, which is the date that the Company commits to purchase or sell the instrument. Loans and receivables and other financial liabilities are recognised on the day they are transferred to the Company.

Financial assets are initially measured at the fair value of the consideration given for them, including transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets and financial liabilities at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the statement of comprehensive income. All financial assets and financial liabilities at fair value through profit or loss and available-forsale financial assets are subsequently carried at fair value without any deduction for transaction costs that the Company may incur on sale or other disposal. Available-for-sale financial assets for which fair value cannot be reliably measured are stated at cost, including transaction costs, less impairment losses.

The fair value of financial instruments at fair value through profit or loss or available for sale is based on their quoted market price at the balance sheet date, without any deduction for transaction costs. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Company would receive or pay to terminate the contract at the balance sheet date. Realised and unrealised gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognised in the statement of comprehensive income in the period in which they arise.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available for sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences are recognised in profit or loss, and other changes in carrying amount are recognised in equity. Changes in the fair value of other monetary securities classified as available for sale and non-monetary securities classified as available for sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the statement of comprehensive income as 'realised gains and losses from available-for-sale securities'.

Interest on available-for-sale securities calculated using the effective interest method is recognised in the statement of comprehensive income. Dividends on available-for-sale equity instruments are recognised in the statement of comprehensive income when the Company's right to receive payments is established.

1 Significant accounting policies (continued)

Financial instruments (continued)

A financial asset is derecognised when the Company loses the contractual rights that comprise that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Financial instruments at fair value through profit or loss, available-for-sale financial assets and held-to-maturity investments are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Company commits to sell the assets. The Company uses the specific identification method to determine the gain or loss on de-recognition. Loans and receivables are derecognised on the day they are transferred by the Company. Other financial liabilities are derecognised when the Company's contractual obligations are discharged, cancelled or expire.

The Company uses derivative financial instruments to hedge economically its exposure to foreign exchange risk arising from operational activities. Hedge accounting has not been applied and those derivative instruments are accounted for as financial instruments held for trading. Derivative instruments are measured initially at fair value and the related transaction costs are recognised in the statement of comprehensive income and subsequent to initial recognition, are stated at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss. The fair value of a forward exchange contract is its quoted price at the balance sheet date, being the present value of the quoted forward price.

Trade and other receivables

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 Company's contract activities based on budgeted capacity.

Cash and cash equivalents

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

Trade and other payables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate.

1 Significant accounting policies (continued)

Inventories

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

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 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 Company's 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 Company's equity holders.

Income tax

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 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 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 Company reassesses unrecognised deferred tax assets and the carrying amount of deferred tax assets.

1 Significant accounting policies (continued)

Income tax (continued)

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.

Foreign currencies

Transactions denominated in foreign currencies are translated into HRK 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 HRK at the foreign exchange rate ruling at that date. Foreign exchange differences arising from translation are included in the statement of comprehensive income. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to HRK 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.

Recognition of revenues

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 Company 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 Company 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 statement of comprehensive income by recording revenue and related costs in line with the contract activity.

1 Significant accounting policies (continued)

Recognition of revenues (continued)

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 Company's products and services are sold under delivery-type contracts including multiple elements, such as base stations, base station controllers, mobile switching centres, 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.

Employee benefits

a) Long-term service benefits

The Company 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.

b) Share-based payments

The Company operates an equity-settled, share-based compensation plan allowing the Company's employees to receive shares. The fair value of the employee services received in exchange for the grant of the Company's 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 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 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.

c) Bonus plans

The Company 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.

1 Significant accounting policies (continued)

Provisions

A provision is recognised when the Company 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 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.

Net financial income

Interest income is recognised using the effective interest method. When a loan and receivable is impaired, the company 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.

Segment reporting

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

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 statement of comprehensive income over the period of the borrowings using the effective interest method.

1 Significant accounting policies (continued)

Leases

Leases on terms in which the Company 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 statement of comprehensive income on a straight-line basis over the term of the lease.

Dividend distribution

Dividend distribution to the Company's shareholders is recognized as a liability in the Company's financial statements in the period in which the dividends are approved by the Company's shareholders.

Investments in subsidiaries

Investments in subsidiaries in which the Company has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations are recorded at cost less impairment losses, if any. Impairment is tested annually whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Investments in subsidiaries for which an impairment loss has been recorded are tested at each reporting date for a potential reversal of impairment.

Dividend income is recognised when the right to receive payment is established.

Government grants

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 noncurrent 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".

2 Critical accounting estimates and judgements

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 Company 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.

(a) Impairment losses on loans and receivables

The Company reviews its receivables to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Company 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) Deferred income tax asset recognition

Deferred tax assets represent income taxes recoverable through future deductions from taxable profits. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. In determining future taxable profits and the amount of tax benefits that are probable in the future, management makes judgements and applies estimation based on previous years taxable profits and expectations of future income that are believed to be reasonable under the existing circumstances. Due to the fact that the Company utilises research expenditure tax relief which is higher than taxable profits, no deferred tax assets are recognised in the financial statements.

(c) Service contracts

The Company has entered into several service contracts combining features and elements of other contracts for which management has had to use judgement to determine appropriate accounting treatment. Certain service contracts under which the Company also provides financing to the contracts are separated into sales revenue and financial income. The financial income is recognised using the effective interest over the life of the contract.

3 Sales revenue

	2015 HRK '000	2014 HRK '000
Sales revenue from products	278,901	396,417
Sales revenue from services	1,050,213	882,862
	_ 1,329,114 _	___ 1,279,279 __

4 Segment reporting

The Company 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 Company has looked at which market and to what type of customers the Company's products are aimed, and through what distribution channels they are sold, as well as to commonality regarding technology, research and development. Segment results and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

To best reflect the business focus and to facilitate comparability with Ericsson Group, three operating segments are reported:

• Networks include products and solutions for mobile and fixed broadband access, core networks, and transmission.
• Professional Services include managed services, consulting and systems integration, customer support and network rollout services.
• Support Solutions provide enablers and applications for operators.

Revenues determined based on the geographic location of customers are disclosed in this note. All the Company's assets are located in Croatia.

	2015	2014
	HRK '000	HRK '000
Sales revenue in domestic market	292,938	333,685
Sales revenue in Russia, Belarus, Kazakhstan, Georgia, Moldova, Uzbekistan and
Armenia	58,173	138,366
Sales revenue to Ericsson, Note 26 (a)	821,946	628,029
Sales revenue in Bosnia and Herzegovina, Montenegro and Kosovo	141,599	172,023
Other export sales revenue	14,458 __	7,176 __
	1,329,114 ___	1,279,279 __

4 Segment reporting (continued)

	Networks		Professional services		Support solutions		Unallocated		Total
	2015	2014	2015	2014	2015	2014	2015	2014	2015	2014
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
Sales revenue	590,282 _	676,645 _	695,670 _	564,935 _	43,162 _	37,699 _	- _	_	- 1,329,114 1,279,279 _	_
Operating profit/(loss)	32,649 _	38,388 _	81,678 _	67,896 _	4,654 _	763 _	(30,913) _	(31,993) _	88,068 _	75,054 _
Finance income									1,738	7,698
Finance expense									(166) _	(2) _
Profit before tax									89,640	82,750
Income tax									- _	- _
Profit for the year									89,640	82,750 _ _

Revenues of approximately HRK 821,502 thousand (2014: HRK 583,711 thousand) are derived from customers for which revenues from transactions have exceeded 10% of the Company's sales revenues, and they are realised in all three segments.

5 Expenses by nature

	2015	2014
	HRK '000	HRK '000
Changes in contract work in progress (Note 14)	1,379	30,214
Material and external services (1) (2)	641,020	598,907
Personnel expenses (Note 6)	561,736	528,710
Depreciation and amortisation (Notes 10, 11)	49,528 __	45,742 __
	1,253,663 __	1,203,573 __

1) Including audit fee expenses of HRK 370 thousand (2014: HRK 385 thousand).

2) Material and external services costs do not include the effect reclassifying other income and other operating expenses to material and external services, amounting to HRK 16,119 thousand (2014: HRK 6,965 thousand).

6 Personnel expenses

	2015	2014
	HRK '000	HRK '000
Net salaries	290,027	253,128
Taxes and contributions	241,857	248,014
Other payroll-related costs	26,919	23,000
Equity-settled transactions (Note 22 (b))	2,933 ___	4,568 ___
	561,736 ___	528,710 __

Other payroll-related costs mainly relate to transportation expenses and vacation accrual cost.

Personnel expenses include HRK 87,164 thousand (2014: HRK 84,972 thousand) of defined pension contributions paid or payable into obligatory pension plans. Contributions are calculated as a percentage of employees' gross salaries (Gross I).

In addition, Personnel expenses include HRK 3,482 thousand (2014: HRK 2,046 thousand) in respect of termination benefit costs. The movements in provisions related to these costs are described in Note 24, Provisions.

As at 31 December 2015, total number of employees was 1,933 (2014: 1,807).

7 Finance income and expense

Finance income

	2015	2014
	HRK '000	HRK '000
Interest income (Note 7 (a))	3,811	6,771
Net gains from re-measurement of financial assets at fair value through
profit or loss (Note 7 (b))	99	374
Amortization of discount	69	330
Net foreign exchange (loss)/gain	(2,241) ___	223 ___
	1,738 ____	7,698 __
Finance expense
	2015	2014
	HRK '000	HRK '000
Interest expense	166 ___	2 ___
	166 ___	2 __

7 Finance income and expense (continued)

	97 (a)
--	--------

	2015	2014
	HRK '000	HRK '000
Interest income
- on loans to customers	665	830
- on debt securities	210	210
- on term deposits	734	2,399
- on other receivables	2,202 ___	3,332 ___
	3,811 ___	6,771 ___
7 (b)
	2015	2014
	HRK '000	HRK '000
Net gains from re-measurement of financial assets at fair value through

profit or loss
- Equity securities	34
- Investment in investment funds	201	551
- Debt securities	(136) __	(177) __
	99 __	374 __

8 Income tax expense

Income tax has been calculated on the taxable income at statutory tax rate of 20% (2014: 20%). No income tax expense has been recognised in the statement of comprehensive income.

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 Company did not recognise deferred income tax assets of HRK 8,408 thousand (2014: HRK 57,049 thousand) in respect of tax losses amounting to HRK 42,039 thousand (2014: HRK 285,244 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, Education and Sports 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 2011 – expires 31 December 2016	11,843
Tax loss for 2013 – expires 31 December 2018	30,196 __
	42,039 __

No deferred tax assets are recognised in the financial statements for the year ending 31 December, 2015 and 2014.

8 Income tax expense (continued)

The reconciliation between tax expense and accounting profit is shown as follows:

	2015 HRK '000	2014 HRK '000
Profit before tax	89,640 __	82,750 __
Income tax at 20% (2014: 20%)	17,928	16,550
Tax effects of:
Expenses not deductible for tax purposes	915	4,896
Tax incentives	(750)	(20,517)
Tax carry forward used	(18,093) __	(929) __
Tax charge	- __	- __
Effective tax rate	0.0% __	0.0% __

Ministry of Science, Education and Sports has not accepted the requests submitted in 2015 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 2014. 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, Education and Sports plans to notify users.

Tax incentives include only part of additional tax allowances for certain expenditure totalling HRK 750 thousand (2014: HRK 20,517 thousand) which meets research and development incentives definitions under Croatian tax legislation. The underlying research and development expenditure is included in cost of sales.

In accordance with local regulations, the Tax Authority may inspect books and records of the Company at any time within 3 years following the end of the year in which the tax liability is reported and may impose additional tax assessments and penalties. The Company's management is not aware of any circumstances, which may give rise to a potential material liability in this respect.

9 Earnings per share

	2015	2014
Profit for the year (HRK '000)	89,640	82,750
Weighted Average Number of Shares Outstanding at the year-end	1,328,811 __	1,327,917 __
Earnings per share (HRK)	67.46 __	62.32 __

Basic and fully diluted earnings per share are the same since the Company does not have any dilutive potential ordinary shares.

10 Property, plant and equipment

	Land and	Plant and	Other	Total
	buildings HRK '000	equipment HRK '000	HRK '000	HRK '000
As at 1 January 2014
Cost or valuation	158,422	331,951	328	490,701
Accumulated depreciation	(109,567) _	(249,587) _	(221) _	(359,375) _
Net book amount	48,855 _	82,364 _	107 _	131,326 _
Year ended 31 December 2014
Opening net book amount	48,855	82,364	107	131,326
Additions	175	42,948	-	43,123
Disposals	-	(165)	-	(165)
Depreciation charge	(3,401) _	(41,123) _	(8) _	(44,532) _
Closing net book amount	45,629 _	84,024 _	99 _	129,752 _
As at 31 December 2014
Cost or valuation	158,598	341,535	328	500,461
Accumulated depreciation	(112,969) _	(257,511) _	(229) _	(370,709) _
Net book amount	45,629 _	84,024 _	99 _	129,752 _
Year ended 31 December 2015
Opening net book amount	45,629	84,024	99	129,752
Additions	1,769	43,320	-	45,089
Disposals	-	(51)	-	(51)
Depreciation charge	(2,997) _	(45,503) _	(8) _	(48,508) _
Closing net book amount	44,401 _	81,790 _	91 _	126,282 _
As at 31 December 2015
Cost or valuation	160,367	363,505	328	524,200
Accumulated depreciation	(115,966) _	(281,715) _	(237) _	(397,918) _
Net book amount	44,401 _	81,790 _	91 _	126,282 _

Included in the cost of property, plant and equipment is HRK 281,880 thousand (2014: HRK 251,084 thousand) of fully depreciated property, plant and equipment that is still used by the Company.

As at 31 December 2015, the Company had contracts totalling HRK 3,391 thousand (2014: HRK 6,948 thousand) related to future equipment purchases.

Depreciation expense of HRK 45,356 thousand (2014: HRK 41,260 thousand) has been charged in cost of sales, HRK 1,893 thousand (2014: HRK 2,049 thousand) in selling expenses and HRK 1,259 thousand (2014: HRK 1,223 thousand) in administrative expenses.

10 Property, plant and equipment (continued)

The Company acts as a lessor under operating leases, mainly in respect of land and buildings. Property leased to others with a carrying value of HRK 14,548 thousand (2014: HRK 13,528 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:

	2015	2014
	HRK '000	HRK '000
Less than one year	3,320	3,518
Between one and five years	1,660 _	1,759 _
	4,980 _	5,277 _

11 Intangible assets

The movement on intangible assets in the year ended 31 December 2015 may be analysed as follows:

	Application software HRK '000
As at 1 January 2014
Cost or valuation	9,456
Accumulated amortization	(7,344) _
Net book amount	2,112 _
Year ended 31 December 2014
Opening net book amount	2,112
Additions	394
Amortization charge	(1,210) _
Closing net book amount	1,296 _
As at 31 December 2014
Cost or valuation	7,932
Accumulated amortization	(6,636) _
Net book amount	1,296 _
Year ended 31 December 2015
Opening net book amount	1,296
Additions	538
Amortization charge	(1,020) _
Closing net book amount	814 _
As at 31 December 2015
Cost or valuation	8,470
Accumulated amortization	(7,656) _
Net book amount	814 _

Included in cost of intangible assets is HRK 7,252 thousand (2014: HRK 4,685 thousand) of fully amortised intangible assets that are still used by the Company.

Amortisation of HRK 953 thousand (2014: HRK 1,121 thousand) has been charged in cost of sales, HRK 40 thousand (2014: HRK 56 thousand) in selling expenses and HRK 26 thousand (2014: HRK 33 thousand) in administrative expenses.

12 Loans and receivables

	2015	2014
	HRK '000	HRK '000
Deposits with financial institutions, denominated in foreign currency	7,316	7,364
Non-current receivables from foreign customers, denominated in foreign
currency	4,213	2,518
Non-current receivables from domestic customers, denominated in HRK	4,384	5,634
Receivables for sold apartments
- denominated in foreign currency	5,178	5,634
- denominated in HRK	632 _	714 _
Total loans and receivables	21,723	21,864
Impairment allowance on loans and receivables	(2,488) _	(2,711) _
	19,235 _	19,153 _

Deposits with financial institutions of HRK 7,316 thousand (2014: 7,341 thousand) are placed as guarantee deposits for housing loans provided to the Company's employees, at 25% 12M EUR LIBOR rate earning interest of HRK 38 (2014: HRK 14 thousand), and 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.

Non-current portion of foreign and domestic loans and receivables

Due	2015	2014
	HRK '000	HRK '000
2016	-	2,653
2017	3,020	2,265
2018	1,193	2,034
2019	- __	1,200 __
	4,213 __	8,152 __

Receivables for sold apartments are shown net of amounts due to the Croatian state. 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 mortgages 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. A discount in the amount of HRK 1,975 thousand (2014: HRK 2,044 thousand) is recognised in respect of these loans and amortised through the statement of comprehensive income, using the effective interest rate method at a rate of 7% per annum (2014: 7% per annum).

13 Investments in subsidiaries

	Ownership	2015 HRK '000	2014 HRK '000
Ericsson Tesla SoftLab d.o.o.	100%	20	20
ETK poslovna rješenja d.o.o.	100%	20	20
Ericsson Nikola Tesla Servisi d.o.o.	100%	20	20
Libratel d.o.o	100%	5	5
Ericsson Nikola Tesla BH d.o.o	100%	7	7
Ericsson Nikola Tesla d.d. – Branch office of Kosovo	100%	1 _	1 _
		73 _	73 _

The subsidiaries Ericsson Tesla SoftLab d.o.o. and ETK poslovna rješenja d.o.o. are inactive, while others listed above are active and fully consolidated in the consolidated financial statements.

The new subsidiary Ericsson Nikola Tesla Servisi d.o.o. was founded in 2014 as a result of the transfer of the managed services segment from the company Hrvatski Telekom (HT). The subsidiary provides maintenance services of the HT fixed and mobile network over a five-year contract.

14 Inventories

	2015	2014
	HRK '000	HRK '000
Raw materials	528	1,176
Contract work in progress	19,726 _	21,105 _
Total inventories	20,254	22,281
Impairment allowance	(493) _	(1,153) _
	19,761 _	21,128 _

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 statement of comprehensive income.

15 Trade receivables

	2015	2014
	HRK '000	HRK '000
Foreign trade receivables	52,114	63,181
Current portion of non-current foreign receivables	4,750 _	9,711 _
Total current foreign receivables	56,864 _	72,892 _
Domestic trade receivables	76,015	113,333
Current portion of non-current domestic receivables	- _	- _
Total current domestic receivables	76,015 _	113,333 _
Impairment allowance on receivables	(2,660) _	(7,342) _
	130,219 _	178,883 _

Included in trade receivables is HRK 9,526 thousand (2014: HRK 3,845 thousand) of contract work in progress. Movements in impairment allowance on loans and receivables were as follows:

	2015	2014
	HRK '000	HRK '000
As at 1 January	10,053	32,824
Provision for receivables impaired during the year	5,438	20,913
Receivables written off during the year as uncollectible	(5,129)	(29,723)
Unused amounts reversed	(2,816)	(13,717)
Amortisation of discount	(69) _	(244) _
As at 31 December (1)	7,477 _	10,053 _

1) Including impairment provision for receivables from related parties of HRK 2,330 thousand (2014: HRK 3,549 thousand)

Receivables are written down to their estimated realisable value through an impairment allowance. Of the total HRK 7,477 thousand (2014: HRK 10,053 thousand) of impairment allowances as at 31 December 2015, HRK 4,990 thousand (2014: HRK 7,342 thousand) relates to customer loans and receivables.

16 Other receivables

	2015	2014
	HRK '000	HRK '000
Receivables from employees	1,172	708
Accrued interest receivable	212	986
Loans receivable - related parties (Note 26c))	-	12,519
Other receivables	1,678 _	906 _
	3,062 _	15,119 _

17 Financial assets at fair value through profit or loss

	2015	2014
	HRK '000	HRK '000
Financial assets at fair value through profit or loss
- Debt securities, Ministry of Finance	-	4,129
- Equity securities	251	224
- Investment in open-ended investment funds	53,666 _	39,727 _
	53,917 _	44,080 _

18 Cash and cash equivalents

	2015	2014
	HRK '000	HRK '000
Cash and demand deposits	103,974	113,153
Term deposits originated by the Company, with original maturity up to 3 months	114,525 _	68,953 _
	218,499 _	182,106 _

19 Equity

(a) Share capital

As at 31 December 2015, the share capital of the Company is represented by 1,331,650 (2014: 1,331,650) of authorised, issued and fully paid ordinary shares, with a total registered value of HRK 133,165 thousand (2014: HRK 133,165 thousand). The nominal value of one share is HRK 100 (2014: 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 Company's shareholders as at 31 December 2015 are:

	2015	2015	2014	2014
	Number of shares	% held	Number of shares	% held
Telefonaktiebolaget LM Ericsson	653,473	49.07	653,473	49.07
Small shareholders	674,795	50.68	675,097	50.57
Treasury shares	3,382 ___	0.25 ___	3,080 ___	0.36 ___
	1,331,650 ___	100.00 ___	1,331,650 ___	100.00 ___

(b) Treasury shares

These shares are held initially 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 22 (b). During 2015, the Company acquired 4,022 (2014: 2,000) of its own shares, for a total amount of HRK 4,062 thousand (2014: HRK 2,768 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:

	2015 Number of shares	2014 Number of shares
As at 1 January (Note 19 (a))	3,080	4,808
Purchased during the year	4,022	2,000
Distributed during the year	(3,720) _	(3,728) _
As at 31 December (Note 19 (a))	3,382 _	3,080 _

(c) Legal reserves

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 Company 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.

20 Proposed dividends

Dividends payable are not accounted for until they have been ratified at the General Assembly of shareholders. On 2 June 2015, the General Assembly approved a regular dividend in respect of 2014 of HRK 20.00 per share, and an additional extraordinary dividend of HRK 70.00 per share, totalling HRK 119.593 thousand. At a meeting held on 15 March 2016, the Management Board proposed a regular dividend in respect of 2015 in the amount of HRK 20.00 per share, and an additional extraordinary dividend of HRK 80 per share. The dividend will be paid from the retained earnings and other reserves as well as a portion of profit realized in 2015, after approval by the General Assembly, which will be held on 31 May 2016.

Cash dividends authorised and paid for previous years were as follows:

	2015	2014
	HRK '000	HRK '000
HRK 90.00 per share for 2014	119,593	-
HRK 320.00 per share for 2013	-	424,897
Prior year dividend pay out	122 _	36 _
	119,715 _	424,933 _

21 Capital management

The Company's objectives when managing capital are:

• To safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;
• To provide adequate requirements for capital resources, as far as possible, by the retention of profit; and
• To maintain a prudent balance sheet with adequate component of cash and short-term assets, as well as equity and other investments; and
• To secure adequate back-up funding facilities should a need arise.

The Company is generating sufficient cash from operations to fund liabilities as they become due, finance customers when required and budgeted investments, and pay dividends.

The Company monitors capital using the statutory minimum capital requirement. Shareholders' equity is disclosed in Note 19 to the financial statements.

22 Employee benefits

(a) Long-term service benefits

The Company 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 Company's 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 Company signed an Annex to the Union Agreement based on which employees are entitled to a benefit upon early retirement.

However, the Company pays a one-time benefit amounting to HRK 8,000 for each employee who retires. Additionally, the Company 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 2015 were a 6% discount rate (2014: 6%) and a 3.97% (2014: 3.5%) rate of average employment turnover.

Movements in long-term service benefits were as follows:

	2015	2015	2015	2014	2014	2014
	Jubilee awards	Retirement	Total	Jubilee awards	Retirement	Total
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
As at 1 January	4,946 _	390 __	5,336 _	4,377 _	320 __	4,697 _
Obligation created during the year	944	746	1,690	976	86	1,062
Obligation fulfilled during the year	(1,306)	(97)	(1,403)	(407)	(16)	(423)
Obligation reversed during the year	- _	- __	- _	- _	- __	- _
As at 31 December	4,584 _	1,039 __	5,623 __	4,946 _	390 __	5,336 __

(b) Share-based payments

During 2004, the Company established its Loyalty program, a share-based scheme under which management and other employees are entitled to receive the Company's shares conditional on the employee completing certain years of service (the vesting period) from the grant date.

In addition, the 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 Company sold to its employees 1,605 shares and received compensation in the amount of 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 398 thousand has been recognised within retained earnings.

22 Employee benefits (continued)

(b) Share-based payments (continued)

Movements in shares under the Award and Loyalty programs are as follows:

	2015 Number of shares	2014 Number of shares
As at 1 January	9,016	15,145
Granted	-	-
Exercised	(4,320)	(3,106)
Expired	(139) _	(3,023) _
As at 31 December	4,557 _	9,016 _

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 2014 of shares granted in 2011-2013	139	1,373.20
Reversal in 2015 of shares granted in 2011-2013	3,023	1,373.20

During 2015, the Company recognised HRK 2,933 thousand (2014: HRK 4,568 thousand) of expenses in respect of share-based payments, which are included in personnel expenses as disclosed in Note 6. During 2014, share-based payment options per Loyalty program were modified with the intention to reduce the share grant liability from the original Loyalty programs. Shares granted under previous programs to employees who left the Company before vesting date expired.

23 Trade and other payables

	2015	2014
	HRK '000	HRK '000
Trade payables	29,376	35,194
Liabilities to employees	78,543	67,949
Other current liabilities	13,466	15,513
Net liability for VAT	9,123 _	7,450 _
	130,508 _	126,106 _

24 Provisions

Movements in provisions were as follows:

	2015 Warranty reserve HRK '000	2015 Penalty reserve HRK '000	2015 Termination benefits HRK '000	2015 Total HRK '000	2014 Warranty reserve HRK '000	2014 Penalty reserve HRK '000	2014 Termination benefits HRK'000	2014 Total HRK '000
As at 1 January	4,789 _	4,632 __	580 __	10,001 _	6,507 _	5,962 __	989 __	13,458 _
Additional provisions	2,005	519	4,524	7,048	3,009	1,319	610	4,938
Unused provisions reversed	(230)	(2,903)	-	(3,133)	(363)	(1,977)	-	(2,340)
Provisions used
during the year	(1,214) _	(463) __	(2,456) __	(4,133) _	(4,364) _	(672) __	(1,019) __	(6,055) _
As at 31 December	5,350 _	1,785 __	2,648 __	9,783 _	4,789 _	4,632 __	580 __	10,001 __

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.

25 Accrued charges and deferred revenue

	2015	2014
	HRK '000	HRK '000
Advances from domestic customers	3,927	3,504
Advances from foreign customers	12,808	5,816
Deferred revenue	87,928	80,287
Accrued charges for unused holidays	19,026	16,504
Accrued charges for legal claims	846	825
Accrued charges in respect of service contracts	21,315	21,138
Other accrued charges	21,349 _	12,320 _
	167,199 _	140,394 _

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 material.

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.

26 Balances and transactions with related parties

For the purposes of these 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 Company is a related party to the Ericsson Group via the 49.07% (2014: 49.07%) shareholding by Telefonaktiebolaget LM Ericsson, which is also the ultimate parent of the Ericsson Group.

The Company has related-party relationships with Telefonaktiebolaget LM Ericsson, Ericsson Group subsidiaries and associates, the Supervisory Board, the Management Board and other executive management.

(a) Key transactions with the related parties

Major transactions with the Ericsson Group companies may be summarised as follows:

	Telefonaktiebolaget LM Ericsson		Other Ericsson Group consolidated companies		Subsidiaries		Total
	2015	2014	2015	2014	2015	2014	2015	2014
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
Sales of goods and services
Sales revenue	-	-	821,946	628,030	6,092	13,536	828,038	641,566
Other income	- _	- _	62,544 _	1,740 _	200 _	1,666 _	62,744 _	3,406 _
	- _	- _	884,490 _	629,770 _	6,292 _	15,202 _	890,782 _	644,972 _
Purchases of goods and services
Licences	2,489	3,196	15,687	23,111	-	-	18,176	26,307
Technical cooperation fee	-	-	-	-	-	-	-	-
Cost of sales	-	-	251,007	327,050	196,437	41,085	447,444	368,135
Other expenses	- _	- _	- _	- _	25 _	- _	25 _	- _
	2,489 _	3,196 _	266,694 _	350,161 _	196,462 _	41,085 _	465,645 _	394,442 _

The Company recorded interest income of HRK 266 thousand (2014: HRK 799 thousand) relating to loan granted to a subsidiary company Ericsson Nikola Tesla BH d.o.o. disclosed in Note 16.

The sales of goods and services transactions have been directly negotiated between the involved parties and agreed on an individual basis. The Company 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.

26 Balances and transactions with related parties (continued)

(b) Key management compensation

The Company's key management include the executive management listed on page 2, comprising the Management Board member and directors of the main organisational units.

	2015	2014
	HRK '000	HRK '000
Salaries and other short-term employee benefits	22,222	26,905
Other long-term benefits	4 _	8 _
	22,226 _	26,913 _

The members of the executive management and the Supervisory Board held 4,540 ordinary shares at the year-end (2014: 4,342 shares).

In addition, the Company paid remuneration totalling HRK 337 thousand (2014: HRK 323 thousand) to the Supervisory Board during 2015.

26 Balances and transactions with related parties (continued)

(c) Year-end balances arising from sales and purchases of goods and services

Year-end balances arising from key transactions with Ericsson Group companies may be summarised as follows:

	Trade receivable		Trade payable
	2015	2014	2015	2014
	HRK '000	HRK '000	HRK '000	HRK '000
Main shareholder:
Telefonaktiebolaget LM Ericsson (LME)	-	-	-	471
Ericsson Group consolidated companies:
Ericsson AB (EAB)	54,430	33,513	33,132	33,793
Ericsson Services d.o.o. (ESK)	34,130	20,467	-	-
Ericsson Ltd. Madrid, Spain (ETL)	4,429	3,176	-	371
Ericsson GMBH Group (EDD)	2,439	4,762	1,302	1,383
Ericsson D.O.O. (EVN)	1,779	176	-	-
Ericsson South Africa Ltd. (ESA)	1,389	118	-	-
LM Ericsson Ltd. (LMI)	1,367	1,427	150	434
Ericsson AB (ESE)	1,362	1,117	-	-
Ericsson Japan K.K. (NRJ)	1,283	236	-	-
Ericsson Telecom S.A.De C.V.(TEM)	997	1,595	-	-
Other	10,343	15,262	3,931	3,138
Subsidiaries:
Ericsson Nikola Tesla BH d.o.o.	2,670	2,048	472	589
Ericsson Nikola Tesla Servisi d.o.o.	760	958	35,557	22,576
Ericsson Nikola Tesla d.d. – Branch office of Kosovo	89	-	-	-
Libratel d.o.o.	5 _	5 _	- _	- _
	117,472 _	84,860 _	74,544 _	62,755 _

The Company recorded a non-current receivable (Note 12) and deferred revenue (within other non-current liabilities) of HRK 3,087 thousand (2014: HRK 4,800 thousand) from Ericsson Services d.o.o. (ESK) relating to the five-year managed services contract with Hrvatski Telekom.

In 2014, The Company recorded a loan receivable in the amount of HRK 12,519 thousand relating to the loan granted to the subsidiary company Ericsson Nikola Tesla BH d.o.o. disclosed in Note 16.

27 Financial risk management

The Company'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 Company'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 Company 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 Company. Risk management policies that relate to financial instruments can be summarised as follows:

(a) Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company 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 Company may enter into foreign currency forward contracts to hedge economically its exposure to currency risk arising on operating cash flows.

As at 31 December 2015, if the euro and US dollars had weakened/strengthened by 1% (2014: 1%) against the Croatian kuna, with all other variables held constant, the net result after tax for the reporting period would have been HRK 1,437 thousand lower/higher for the Company (2014: HRK 1,521 thousand), mainly as a result of foreign exchange losses/gains on translation of significant cash, cash equivalents, deposits, trade payables, customer receivables and customer financing denominated in euro.

The Company continues to focus on securing natural hedges and active currency management and to minimise impacts from currency moves. The Company's exposure to foreign currencies is shown in the following table.

(a) Currency risk (continued)

The tables below present the currency analysis and resulting gap.

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	131,723	8,914	62	140,699	110,054	250,753
Financial assets at fair value through profit or loss	-	-	-	-	53,917	53,917
Cash and cash equivalents	155,757 __	28,116 __	872 __	184,745 __	33,754 __	218,499 __
	298,631 __	41,243 __	934 __	340,808 __	201,596 __	542,404 __
Trade and other payables	38,104 __	7,266 __	35 __	45,405 __	162,734 __	208,139 __
	38,104 _ _	7,266 _ _	35 _ _	45,405 _ _	162,734 _ _	208,139 _ _
Currency gap	260,527 __	33,977 __	899 __	295,403 __	38,862 __	334,265 __

2014

				Total foreign
	EUR	USD	Other currency	currencies	HRK	Total
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
Loans and receivables	11,645	2,541	-	14,186	4,967	19,153
Trade and other receivables	132,308	11,727	(7)	144,028	134,834	278,862
Financial assets at fair value through profit or loss	-	-	-	-	44,080	44,080
Cash and cash equivalents	157,527 __	4,103 __	2,436 __	164,066 __	18,040 __	182,106 __
	301,480 __	18,371 __	2,429 __	322,280 __	201,921 __	524,201 __
Trade and other payables	42,606 __	18,076 __	115 __	60,797 __	128,064 __	188,861 __
	42,606 _ _	18,076 _ _	115 _ _	60,797 _ _	128,064 _ _	188,861 _ _
Currency gap	258,874 __	295 __	2,314 __	261,483 __	73,857 __	335,340 __

(b) Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. As the Company 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 Company also has borrowings and deposits in financial institutions at a variable interest rate, as well as investments in money investment funds that are sensitive to market interest rate movements on short-term deposits and treasury bills.

As at 31 December 2015:

• if the effective EUR interest rate on EUR deposits had increased/decreased by 1% (2014: 1%) on an annual level, the net result due to changes in EUR deposits after tax for the reporting period would have been HRK 59 thousand higher/lower (2014: HRK 59 thousand);
• if the effective HRK interest rate on HRK deposits had increased/decreased by 1% (2014: 1%) on an annual level, the net result due to changes in investment funds after tax for the reporting period would have been HRK 429 thousand higher/lower (2014: HRK 552 thousand).

The following table presents the annual average interest rates exposure of financial assets and liabilities.

	2015	2014
	Average	Average
	interest rates	interest rates
	%	%
Loans and receivables	2.78	2.44
Trade and other receivables	0.19	0.57
Financial assets at fair value through profit or loss	-	0.49
Cash and cash equivalents	0.64	1.32
Interest-bearing borrowings	-	-

27 Financial risk management (continued)

(b) Interest rate risk (continued)

The tables below present the interest rate re-pricing analysis and resulting gap.

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	245,521	-	1,285	2,828	1,119	-	250,753	3,463
Financial assets at fair value through profit or loss	53,917	-				-	53,917	-
Cash and cash equivalents	-	103,973	114,526	-	-	-	218,499	-
	__	__	__	__	__	__	__	__
	302,525	103,973	115,811	2,828	9,951	7,316	542,404	3,463
	__	__	__	__	__	__	__	__
Trade and other payables	208,139	-	-	-	-	-	208,139	-
	__	__	__	__	__	__	__	__
	208,139	-	-	-	-	-	208,139	-
	__	__	__	__	__	__	__	__
	__	__	__	__	__	__	__	__
Interest rate gap	94,386	103,973	115,811	2,828	9,951	7,316	334,265	3,463
	__	__	__	__	__	__	__	__

2014

	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	4,133	-	-	-	7,656	7,364	19,153	-
Trade and other receivables	257,217	1,041	3,274	16,622	708	-	278,862	8,419
Financial assets at fair value through profit or loss	39,952	-	-	-	4,128	-	44,080	-
Cash and cash equivalents	- __	113,153 __	68,953 __	- __	- __	- __	182,106 __	68,953 __
	301,302 __	114,194 __	72,227 __	16,622 __	12,492 __	7,364 __	524,201 __	77,372 __
Trade and other payables	188,861 __	__	- __	- __	- __	- __	188,861 __	- __
	188,861 _ _	- _ _	- _ _	- _ _	- _ _	- _ _	188,861 _ _	- _ _
Interest rate gap	112,441 __	114,194 __	72,227 __	16,622 __	12,492 __	7,364 __	335,340 __	77,372 __

(c) Price risk

The Company 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 (debt securities and investments funds). All the securities are actively traded on the Zagreb Stock Exchange and movements of CROBEX and CROBIS indices may have an impact on operating results.

(d) Credit risk

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 a 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.

A new Credit Management function within the Treasury has been established to further assist the Company 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 Company has a significant portion of receivables outstanding from a small number of customers. As at 31 December 2015, the five largest customers represent 65% of total net trade receivables (2014: 65%). The Company considers that its maximum exposure to credit risk is reflected in the amount of trade receivables (Notes 12 and 15) and other receivables (Note 16), 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 Company defines customer financing as any credit period longer than 179 days. According to Company's policies and directives, the customer financing needs to be approved by the Supervisory Board.. The Company is working closely with Hrvatska banka za obnovu i razvitak (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.

As at 31 December 2015, total outstanding exposure related to customer finance was HRK 13 million (2014: HRK 17million).

(d) Credit risk (continued)

The following tables provide an ageing detail of current and overdue amounts in respect of all customer loans and receivables as at 31 December 2015.

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
2015	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
Foreign receivables	2,299	46,622	8,263	3,893	-	61,077
Domestic receivables	1,383	64,568	9,251	94	1,502	76,798
Receivables from related parties*	10,324 __	101,448 __	1,200 __	- __	10,430 __	123,402 __
	14,006 __	212,638 __	18,714 __	3,987 __	11,932 __	261,277 __
*include non-current portion of domestic receivables in the amount of HRK 3,600 thousand
2014
Foreign receivables	5,556	55,607	11,929	2,318	-	75,410
Domestic receivables	3,627	103,722	4,950	94	1,774	114,167
Receivables from related parties	16,037 __	66,124 __	2,700 __	2,399 __	2,400 __	89,660 __

25,220 225,453 19,579 4,811 4,174 279,237 ________ ________ ________ ________ ________ ________

*include non-current portion of domestic receivables in the amount of HRK 4,800 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
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
2015
Foreign receivables	870	174	11	1,244	2,299
Domestic receivables	384	115	-	884	1,383
Receivables from related parties	7,567 __	1,838 __	252 __	667 __	10,324 __
	8,821 __	2,127 __	263 __	2,795 __	14,006 __
2014
Foreign receivables	3,907	97	1,320	232	5,556
Domestic receivables	1,961	6	775	885	3,627
Receivables from related parties	8,476 __	3,313 __	3,187 __	1,061 __	16,037 __
	14,344 __	3,416 __	5,282 __	2,178 __	25,220 __

(d) Credit risk (continued)

Table 3	Payment due date for total customer loans and receivables (in respect of accounts with any portion falling due) 3 months to 1
	Due balance	Up to 3 months	year	1 to 3 years	Total
2015	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
Foreign receivables	2,299	28,475	5,875	-	36,649
Domestic receivables	1,383	6,586	-	-	7,969
Receivables from related parties	10,324 __	92,360 __	1,200 __	6,830 __	110,714 __
	14,006 __	127,421 __	7,075 __	6,830 __	155,332 __
2014
Foreign receivables	5,556	38,504	9,405	2,286	55,751
Domestic receivables	3,627	45,741	-	-	49,368
Receivables from related parties	16,037 __	62,629 __	2,700 __	- __	81,366 __
	25,220 __	146,874 __	12,105 __	2,286 __	186,485 __

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
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
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 __
2014
Foreign receivables	3,660	95	45	-	3,800
Domestic receivables	1,961	6	-	-	1,967
Receivables from related parties	5,692 __	2 __	38 __	64 __	5,796 __
	11,313 __	103 __	83 __	64 __	11,563 __

(e) Liquidity risk

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 Company has no commitments in financial instruments, the risk lies only in its daily operations. The Company has a strong focus on its cash flow with daily updates on actual development and monthly updated forecasts. The Company's maturity profile demonstrates the strong liquidity position of the Company and therefore the risk is considered low. The table below presents the maturity analysis and resulting gap.

The Company has a revolving credit facility with our core banks should an extraordinary liquidity need arise. At 31 December 2015, the facility remained untapped.

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	126,754	96,151	25,940	1,908	-	250,753
Current financial assets	53,917	-	-	-	-	53,917
Cash and cash equivalents	218,499	-	-	-	-	218,499
	__	__	__	__	__	__
	399,170	96,151	25,940	13,827	7,316	542,404
	__	__	__	__	__	__
Trade and other payables	174,793	21,963	9,496	1,887	-	208,139
	__	__	__	__	__	__
	174,793	21,963	9,496	1,887	-	208,139
	__	__	__	__	__	__
	__	__	__	__	__	__
Maturity gap	224,377	74,188	16,444	11,940	7,316	334,265
	__	__	__	__	__	__

Up to 1 month	1 - 3 months	3 - 12 months	1 - 5 years	Over 5 years	Total
					HRK '000
-	-	-	11,812	7,341	19,153
154,983	88,999	33,138	1,742	-	278,862
39,952	-	-	4,128	-	44,080
142,379 __	39,727 __	- __	- __	- __	182,106 __
337,314 __	128,726 __	33,138 __	17,682 __	7,341 __	524,201 __
144,633 __	40,107 __	4,121 __	- __	- __	188,861 __
144,633 __	40,107 __	4,121 __	- __	- __	188,861 _ _
192,681	88,619	29,017	17,682	7,341	335,340 __
	HRK '000 _ _	HRK '000 _ _	HRK '000 _ _	HRK '000 _ _	HRK '000 _ _

(f) Fair value estimation

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 Company 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 Company'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 as amounts shown in the balance sheet are as follows:

	Carrying		Unrecognised	Carrying		Unrecognised
	amount	Fair value	gain/(loss)	amount	Fair value	gain/(loss)
	2015	2015	2015	2014	2014	2014
	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000	HRK '000
Loans and receivables	19,235	18,290	(945)	19,153	18,362	(791)
Trade and other receivables	250,754	250,663	(91)	278,861	278,826	(35)
Financial assets at fair value through profit or loss	53,917	53,917	-	44,080	44,080	-
Cash and cash equivalents	218,500	218,500	-	182,106	182,106	-
Trade and other payables	(217,922) __	(217,922) __	- __	(188,861) __	(188,861) __	- __
	324,484 __	323,448 __	(1,036) __	335,339 __	334,513 __	(826) __

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 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 to 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:

	2015	2014
Loans and receivables	1,50%	4,82%

ANNUAL REPORT ON GROUP PERFORMANCE

Dear readers,

We live in an exciting time of fast development of Networked Society, in which ICT has a key role in transformation processes. In the Networked Society, industries and individuals have the opportunity to give their full creative contribution. Through networking, due to fast flow of information and knowledge, innovation potentials are increased to great extensions. Ericsson actively encourages and gives its contribution to the realization of Networked Society vision, through its Networked Society strategy.

PARTNER FOR DIGITAL TRANSFORAMTION OF SOCIETY

The technological foundations of the future Networked Society include the fifth generation of mobile networks (5G), connecting anything that benefits from being connected (Internet of things - IoT) and cloud computing as virtual space for sharing ICT resources. Through technological leadership, innovative company culture and social responsibility, our long term goal is to enable further development of the society of equal individuals and preserve environment.

Ericsson Nikola Tesla Group actively contributes to global technological development and represents a relevant partner in the digital transformation of society through innovative ICT products, solutions and services. We base our sustainable development on collaboration and trust with all stakeholders (customers/partners, employees, society and shareholders). In our processes and activities, we apply the highest global standards of work and business, as well as principles of corporate governance.

The energy and the effort invested in creating innovation climate and encouraging innovations in Ericsson Nikola Tesla is reflected through the development of new products and solutions in line with the Network Society Strategy and numerous awards to individuals and teams. At the Ericsson Global Network Design and Optimization forum, as the best innovation, the idea SNACK (Social Network Application Coverage Kit) was awarded. SNACK addresses the problem of optimizing the telecom network settings, bearing in mind the end use experience. The solution for Automated Aerial Radio frequency measurement by using drone for radio access network measurement and optimization was also awarded.

BUSINESS SITUATION IN MAJOR MARKETS

In 2015 Ericsson Nikola Tesla Group continued to show stable business results. During the year we continued to work on a number of strategic projects and initiatives relying on

technology leadership, knowledge of our employees and partnerships with customers. A significant increase in revenue was recorded in Ericsson market, due to new responsibilities within global corporation in our research and development center, global and regional services centers, and customer solutions centers as well as increased volume in managed services. This neutralized the revenue decrease in other markets. We have maintained the position as the Croatia's leading ICT exporter and the leading exporter of knowledge. In 2015 we continued hiring and employed a total of 434 experts in Ericsson Nikola Tesla Group. The number of employees working in research and development surpassed 1,000 and at the end of 2015 Ericsson Nikola Tesla Group had a total of 2,789 employees.

In other markets, sales revenue decreased as some projects and contracts have been postponed. The factors that slowed down certain processes are slow economic development and, in some markets, political uncertainty. An additional challenge for our business performance is strong competition and global customers/operators centralized procurement & consolidation.

On the other hand, new business opportunities are created through the convergence of operators and industry, and their transformation through mobility, broadband and cloud. Our markets recognize an increasing importance and role ICT has on transformation processes in business and society. Our significant advantage is a strong position and customers' trust we enjoy in local and export markets, thus empowering us to be the leading ICT transformation partner to our customers.

Summarizing mentioned above, Ericsson Nikola Tesla Group main operational risks are:

• impact of negative economic trends and political uncertainty on demand and prices of our products and services
• reduction and a slow-down in capital investments of operators and the delays in strategic investments in the public and private sectors
• dependence on telecommunication market trends (the number of users, the use of new services)
• industry consolidation
• strong competition and the entry of new IT companies in the telecommunications market
• negative impact of exchange rate fluctuations on business results, given that most of our revenue is in euro and US dollars.

KEY PERFORMANCE INDICATORS

Almost all key performance indicators in 2015 showed a positive trend. Sales revenue increased by 3.8% year-over-year and amounts to MHRK 1,364.3. Operating profit increased

by 12.2% year-over-year, while net profit increased by 4.6%. Gross margin is slightly lower year-over-year, as a result of change in business mix and a continuous price pressure. Our continuous focus on cost efficiency has brought solid cost savings. A strong cash flow from operating activities, allowed build-up of the total cash balances, including short term financial assets to MHRK 287.1.

In 2015, the annual Employee Engagement Survey (Dialog) confirmed the Company's motivating culture and strong employee engagement. Furthermore, the annual Customer Satisfaction Survey confirmed a high level of satisfaction among our key customers/partners.

OUR STRATEGIC INITIATIVES

In line with our strategy, we have worked on various projects and initiatives focused on business development in all markets and profitability improvement through cost efficiency and business excellence.

Through the initiative that focuses on business growth in the domestic and export markets (without the internal Ericsson market), we focused on key deals, strategic areas and competence development.

During the year, we realized several key deals. In mobile network segment, these are business deals/contracts with Vipnet and Kosovo operator IPKO, which allowed us to keep strong vendor position for these operators. In ICT solutions for Industry and Society segment, I would like to highlight contracts regarding the upgrade and expansion of Joint Information System of Land Registry and Cadaster, and maintenance and upgrade of the Republic of Croatia Central Healthcare Information System (CEZIH). For the Ministry of the Interior of the Republic of Croatia for Operational and Communication Center we implemented the solution for assistance in emergency situations. In CIS market, new business opportunities emerged in operators' segment and in eHealth segment, with two new customers in Armenia and Kazakhstan.

An initiative focused on business growth in internal Ericsson market resulted in increase in business volume and new responsibilities. We took over the responsibility and also became the largest development center for the CUDB (Centralized User Data Base) node design. Our experts had an important role in developing one of the most significant Ericsson projects in 2015, HDS 8000 (Hyperscale Datacenter System) and became the Ericsson competence hub for this solution. Radio Development Unit gained responsibility for LTE development. In Services organizations, new global responsibilities were obtained for RAN, OSS and Cloud as well as global responsibilities for GRAN (GSM radio access network) network design & optimization and BSP (Blade Server Platform) customer support.

As regards the projects co-financed by the European Union, during 2015 we completed one project and have been working on implementation of five projects. All projects are in line with our strategy related to development of new products and technologies with the aim of approaching the market needs.

2016 STRATEGIC FOCUS

Our Networked Society strategy remains unchanged. We want to be the leading ICT transformation partner for our customers, recognised as a company that attracts, develops and retains talented employees, leads and drives positive changes in the society and creates value for shareholders. Our aim is to strengthen the position / sales in core business (Radio, Core and Transmission, Telecom Services) and establish leadership in targeted growth areas (IP Networks, Cloud, TV and Media, OSS and BSS, and selected areas in Industry and Society segment - health, public safety, transport, state-owned companies).

We continued partnership with universities and research institutions by implementing joint projects. During the last 15 years, more than 600 students from universities in the country and abroad participated in the Ericsson Nikola Tesla Summer Camp, working on more than 400 innovative projects. In this way, we will continue to find top talents and strengthen our position in the demanding global market.

Considering the business results, in combination with our ongoing strategic initiatives, we are well positioned to create future value for our customers/partners, shareholders, employees and society.

The long-term fundamentals in the industry remain attractive and we are ready for another challenging year with full focus on transformation, performance and value generation.

All other data, which are required to be an integral part of the annual company report, pursuant to Article 250a of the Companies Act, can be found in the enclosed 2015 Annual Report, comprising of the General Report, Social Report and Consolidated Financial Statements as at December 31, 2015.

Gordana Kovačević

President

Ericsson Nikola Tesla d.d.

Ericsson Nikola Tesla d.d. Zagreb Krapinska 45 OIB: 84214771175

Zagreb, 13. travnja 2016.

Predmet: Odluka Uprave Društva

Subject: Managing Director Decision

Temeljem članka 300.d Zakona o trgovačkim društvima, a nakon primitka suglasnosti Nadzornog odbora dioničkog društva Ericsson Nikola Tesla d.d. Zagreb donosim slijedeću ODLUKU:

• Utvrđuju se godišnja financijska izvješća Društva za 2015.g.
• Utvrđuju se godišnja konsolidirana financijska izvješća Društva i njegovih podružnica ("Grupa") za 2015.g.

Ericsson Nikola Tesla d.d. Zagreb Uprava

Gordana Kovačević

In accordance with the Company Act, Article 300.d and subsequent to the approval of the Supervisory Board of the Joint Stock Company Ericsson Nikola Tesla d.d. Zagreb, I herewith forward the following DECISION:

• The Annual Financial Reports of the Company for 2015 have been submitted and approved.
• The Annual Consolidated Financial Statements of the Company and its subsidiaries (the "Group") for 2015 have been submitted and approved.

Ericsson Nikola Tesla d.d. Zagreb Managing Director

Gordana Kovačević