Annual Report • Apr 30, 2020
Annual Report
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Annual report 31 December 2019
| Contents | Page |
|---|---|
| Management | 2 |
| report | to 34 |
| Consolidated Financial Statements and Auditor's report | 35 |
| 31 December 2019 | to 98 |
| Separate Financial Statements and Auditor's report | 99 |
| 31 December 2019 | to 162 |
Ericsson Nikola Tesla d.d.
Provider of modern information and communications products, solutions, software and services Address
Krapinska 45, PO Box 93, HR-10 002 Zagreb Poljička cesta 39, HR-21 000 Split Ulica Hrvatske Republike 29, HR-31 000 Osijek
Zagreb / +385 1 36 53 535 Split / +385 21 20 58 00 Osijek / +385 1 36 53 535
Zagreb / +385 1 36 53 156 Split / +385 21 43 58 34 Osijek / +385 1 36 53 156
E-Mail: [email protected]
Web: www.ericsson.hr/en/homepage
Personal identification number (OIB): 84214771175
Commercial court registration number (MBS): 080002028
Statistical number (MB): 03272699
Share capital: HRK 133,165,000
Number of shares: 1,331,650 registered shares
Ownership structure: Ericsson 49.07 percent, other shareholders 50.91 percent, treasury shares 0.02 percent (as at 31 December 2019)
Share trading: Ericsson Nikola Tesla shares (ERNT-R-A) are traded in the Regular Market of the Zagreb Stock Exchange (ZSE).
IBAN:
RBA HR7624840081100331673 ZABA HR8423600001101235687 PBZ HR2223400091110012058 ERSTE HR8824020061100414168
Management Board / Managing Director: Gordana Kovačević, MSc Chairman of the Supervisory Board: Franck Pierre Roland Bouétard
• Ericsson Nikola Tesla Servisi d.o.o.
Core business: Provider of network infrastructure build and maintenance services Address: Krapinska 45, HR-10 002 Zagreb Telephone: +385 1 30 38 503 Fax: +385 1 30 38 601 E-mail: [email protected] Web: www.ericsson.hr/en/ericsson-nikola-tesla-servisi-doo Personal identification number (OIB): 47445593925 Commercial court registration number (MBS): 080921748 Ownership structure: Ericsson Nikola Tesla d.d. 100 percent IBAN: RBA HR2124840081107008882 Director: Dario Runje Chairperson of the Supervisory Board: Gordana Kovačević, MSc
• Ericsson Nikola Tesla BH d.o.o.
Provider of modern information and communications products, solutions, software and services Address: Kralja Petra Krešimira IV, Lamela B-bb, Mostar, Bosnia and Herzegovina Telephone: +387 36 446 492 Fax: +387 36 446 494 Web: www.ericsson.hr/en/ericsson-nikola-tesla-bh-en Unique identification number (JIB): 4201717070003 Tax number (VAT id): 201717070003 Registration number: 65-01-0996-11 Ownership structure: Ericsson Nikola Tesla d.d. 100 percent IBAN: UniCredit Bank BA393386904896538387 Raiffeisen Bank BA391611000002324857
Director: Jagoda Barać Chairperson of the Supervisory Board: Gordana Kovačević, MSc
• Branch office Sarajevo
Address: Fra Anđela Zvizdovića 1, Sarajevo, Bosnia and Herzegovina Telephone: +387 33 252 260 Fax: +387 33 209 419 Unique identification number (JIB): 4201717070011 Director: Adnan Halimić
• Libratel d.o.o
Core business: Provider of telecom services; installation, putting into service and upgrading telecom equipment (core and access network) Address: Selska 93, HR-10 002 Zagreb Telephone: +385 1 36 54 035 Fax: +385 1 36 54 038 E-mail: [email protected] Web: www.libratel.hr/eng/ Personal identification number (OIB): 97566215530 Commercial court registration number (MBS): 080300404 Ownership structure: Ericsson Nikola Tesla d.d. 100 percent IBAN: ZABA HR7623600001101211096 Director: Branko Dronjić
• Ericsson Nikola Tesla d.d. - Branch office Kosovo
Address: Vicianum Arbëria 3 Veranda C2.7 LI.II Lok.5, Pristina, Republic of Kosovo Telephone: +381 38 749 080 Tax number (VAT id): 600411235 Registration number: 70633647 Ownership structure: Ericsson Nikola Tesla d.d. 100 percent Director: Besar Spahija
• Ericsson Nikola Tesla BY d.o.o
Address: 2 Zybitskaya St., administrative room 17, room 5, 220030 Minsk, Republic of Belarus Registration number: 192753195 Ownership structure: Ericsson Nikola Tesla d.d. 100 percent Director: Mario Lovreković
In 2019, Ericsson Nikola Tesla celebrated 70 years of its operations. During this long period, we have always been focusing on the future and creation of new opportunities and we have been continuously investing to integrate our experts into global technological development processes. We have transformed by timely reacting to the needs of our customers and end users. Teamwork, partnership with our customers and suppliers and care for our employees, were, and remain, the foundations on which we build our future. We have been proactively working and have positioned ourselves within the Ericsson Corporation. At our own initiative and in an innovative way, we have also been developing our own solutions that fit into the concept of a connected world. Owing to all the above mentioned, Ericsson Nikola Tesla Group has its place among the renowned Croatian companies and largest Croatian exporters of high value-added products. An important part of our activities takes place in Research and Development Center in Zagreb, Split and Osijek, where our experts participate in the development of 5G technology, among other.
Namely, the leading global operators started intensive activities on 5G networks implementation. The leading operators in the domestic market have been following those global technology trends and are modernizing their networks to be 5G-ready, once the Croatian Regulatory Authority for Network Industries (HAKOM) announces the conditions and allocates the radio-frequency spectrum. With numerous contracts and 5G networks in operation in four continents, Ericsson Corporation is the global leader in 5G implementation, of which we are especially proud.
5G technology will enable high speed data transfer, low latency and better network safety. By implementing 5G, we are creating a new platform for innovations that will improve business and society at large, and enable new revenue streams for our customers, whilst at the same time optimizing their business performance. The technological possibilities of 5G seem like science fiction - data is exchanged in real time among people and connected devices with an increased efficiency and reliability. According to expectations presented in Ericsson Mobility Report from November 2019), digital transformation will significantly increase the number of 5G technology users, and it is expected that in 2025, there will be more than 2.6 billion of 5G subscribers and 5 billion of mobile IoT connections.
In 2019, Ericsson Nikola Tesla Group total sales revenue amounted to MHRK 1,779.3, up by 14.2% year-over-year, with sales revenue growth in all markets.
As per requirements of our strategic customer, Hrvatski Telekom (HT), we have successfully modernized their network, which is now fully 5G-ready. The realization of this project improved and evened the quality of mobile services for users of HT's network, in the entire territory of the Republic of Croatia. During project implementation, almost 500 experts worked daily across 40 locations in Croatia. Radio equipment was replaced in 1960 locations, and 1469 rooftop antenna mounts or towers have been replaced or modernized. Our strategic customer A1 Hrvatska, has been cooperating with our company and using Ericsson technology ever since it was founded 20 years ago. We have continued our long-term successful cooperation with A1 Hrvatska by signing a framework agreement that encompasses additional modernization and expansion of their radio access network by using the latest technology solutions from Ericsson Radio System (ERS) portfolio, which allows A1 Hrvatska to have a flexible 5G-ready solution at their disposal. In the domestic market, in the ICT Industry & Society segment, we have continued to deliver services on projects in the fields of e-Health, e-Business (Land Registry and Cadaster) and Public Safety (State Border Control).
In the export markets, we continued a good cooperation with the operators HT Eronet (Bosnia and Herzegovina), Crnogorski Telekom (Montenegro), Ipko (Kosovo), and beCloud (Belarus), on the modernization, expansion and maintenance of telecommunication networks. I would like to highlight the activities with HT Eronet, our strategic customer, on the expansion of LTE network across the entire territory of Bosnia and Herzegovina. With the operator beCloud, we have continued the activities on the project of LTE network expansion (turn-key) in four Belarus regions. In the segment of ICT solutions for Industry & Society, within the project of healthcare system informatization in Kazakhstan, in cooperation with the Ministry of Healthcare of the Republic of Kazakhstan, we have successfully completed the managed services phase and started the system maintenance phase.
Business in Ericsson market continued to grow in 2019. In addition to new responsibilities for the development of 4G and 5G, our R&D Center was selected as the consolidation point for 2G and 3G radio access network services, and we also gained new responsibilities within Cloud platform. Along with the global projects related to Unified Data Management (UDM), the Center has also been working on development of demo systems for key customers in USA, Japan, and Europe, and worked on virtualization and modernization projects for Mobile Switching Centre (MSC). Networks Services and Solutions Center has been working on complex activities of expert analytics, creation of new innovative solutions, optimization and upgrading of the existing networks, and consultancy services. Experts from Digital Services and Solutions Center have been working on complex projects of introducing 5G technology, Operations and Business Support Systems (OSS/BSS), as well as numerous projects of introducing core solutions in Cloud. Furthermore, our teams from IT&Engineering Services and Industry and Society achieved good results on projects of Test environment management, IT Operations management, IoT platform and Connected Urban Transport solutions.
Our daughter company, Ericsson Nikola Tesla Servisi d.o.o. successfully provided the services of monitoring, maintenance and build of telecommunication network of Hrvatski Telekom. The goals on optical distribution networks rollout were realized, and during the year optical access for 37,374 users was enabled.
Year-over-year, gross profit increased by 16%, amounting to MHRK 164.5, while gross margin remained almost the same amounting to 9.2%. Operating profit amounted to MHRK 102.6, down by 14.5%, primarily due to lack of incentives based on the Investment Promotion Act, although positive impacts of this Act in 2019 are visible in the decrease of tax liability, i.e. effective tax rate. Operating profit was lower also due to increased selling expenses for activities related to seizing new business opportunities. Net profit amounted to MHRK 102.6, while return on sales (ROS) was 5.8%. We concluded the year with a lean balance sheet and an equity ratio of 33%. A positive cash flow from operating activities was also realized amounting to MHRK 68.9, primarily as a result of quality realization of strategic projects. At the end of 2019, total cash and cash equivalents, including shortterm financial assets, amounted to MHRK 135.8. Group's Working Capital efficiency, expressed in Working Capital Days (WCD), was 41 days, and if we exclude services to Ericsson, working capital efficiency was 110 days as a result of increased engagement on network modernization projects, primarily in the domestic market. Cash conversion rate was 36 percent.
COVID-19 pandemic, which spread throughout the world, and is also present in Croatia, could significantly impact the Company's business performance. We estimate that, currently, the biggest negative impact on our business realization, could come from the reduced possibility of business travels and field work of our employees, including posted workers, who are currently in risk countries. Furthermore, we expect that our customers could slow down or postpone the realization of already signed contracts. Should the COVID-19 pandemic persist, the realization of several export deals could be obstructed due to movement restrictions and care for health of our employees. Nevertheless, with a strong focus on cost and operating efficiency, the Group believes that it has sufficient funds and external financing possibilities and that, combined with the corresponding measures taken by the government to relieve business performance in these circumstances, it can adequately address the challenges and continue its business performance. In addition, the business results can be significantly impacted by managed services, the delivery of which significantly
depends on automation and development of software tools, as well as the transformation process of our customers and Ericsson Nikola Tesla Group, and the limited possibility for realization of field services by Ericsson Nikola Tesla Group and our subcontractors related to COVID-19 pandemic in Croatia.
Considering the demanding market environment, some business risks which marked the previous years remain present. The economic environment and the political situation in certain markets remain challenging. The demand for customer financing continues, as well as the exposure to an increased credit and commercial risk, should our customers face adverse financial conditions. A challenging global environment, as well as consolidation among the manufacturers of products and services, and new ICT companies entering the telecommunication markets leads to an increased competition, which impacts the demand and prices of our products and services. Given that a great part of Ericsson Nikola Tesla Group's revenue is export generated in EUR and USD, the exposure to financial impact on foreign exchange differences continues.
Considering the uncertainty of impact that COVID-19 will have on Group's business performance in 2020 as well as other mentioned risks, Management Board and Supervisory Board propose to the Annual General Meeting to make a decision that the Company's net profit for 2019 is allocated into retained earnings.
The sustainable development of our business performance is based on partnership with customers, continuous cooperation with employees, care for health and safety of our employees, customers and partners, excellence in everything we do, and technology leadership. The market has recognized us as an innovative company, whose products, solutions and services have a positive impact on people's lives, business, environment and society development. We strengthen our competitiveness by continuously improving business performance and by good change management, achieved primarily by investment into the development of human resources, innovation culture, and new ways of working and management. Our company culture is implemented throughout the entire organization, and our employees apply the principles of company values and show respect towards colleagues, customers and partners in their daily activities.
Our company is doing business with customers in different markets and wherever we are doing business, we are devoted to developing transparent and long-term relationships. In Croatia, we are the leaders in building a smart, sustainable economy, with a high rate of employment, productivity, social connectivity and inclusion. Here I would like to highlight the energy efficiency project encompassing one part of the Company's plants and buildings at the Company's headquarters in Krapinska 45, Zagreb, co-funded by the EU. We started the project in 2017, and the completion is expected by end of 2020. Once the project is completed, the Company will realize annual energy savings of more than 4.6 million kWh, with the simultaneous reduction of CO2 emissions by almost 1400 tones. This project is in line with the conclusions of Ericsson Nikola Tesla's Action Plan to reduce its carbon footprint, which was earlier created within the European LIFE Clim'Foot project, in which the Company also participated.
At Ericsson Nikola Tesla Group, we believe that ICT has a great impact on achieving all of 17 UN's Sustainable Development (SDGs), and we are also encouraged by the fact that an increasing number of relevant factors in Croatia share the same opinion.
I am satisfied with our achievements in the area of sustainability and corporate responsibility in 2019. Aiming for excellence, we shall continue to act in all the segments of sustainable business development in the future, as well. Integration of sustainability and corporate social responsibility into our business practice is crucial to our long-term progress and growth. Therefore, I will continue to encourage all employees to contribute to sustainability and corporate responsibility goals as the strategic topics of our business.
The Non-financial report of this Annual Report presents numerous projects realized in the field of corporate social responsibility.
The corporate culture and strategy of Ericsson Nikola Tesla Group are based on responsible business performance. The Group is continuously working on strengthening its business practice in the field of Ethics and Compliance, highlighting trust, transparency and integrity. In order for the Group to continuously do business in line with the highly set goals to conduct business responsibly, the Management Board, the Executive Management and all employees are obliged to act in line with the Code of Conduct for Business Partners and Code of Business Ethics in their everyday activities. This is also a requirement for all other stakeholders who are in a contractual relation with the Group. Pursuant to the Whistleblower Protection Act, the Group has, along with all the previously established systems and ways of reporting irregularities, prepared a Rulebook on internal reporting of irregularities, in order to additionally encourage employees to report, in good faith, any reasonable doubt in breaching the law and Company's policies regarding business performance.
The Management Board and Executive Management have zero tolerance on corruption and promote fair market competition. Such messages, along with a comprehensive set of rules, processes and targeted trainings, are communicated to all the Group's employees through daily operations and to all other stakeholders.
In line with our strategy, we remain focused on developing solutions and providing services, as well as sales in the field of mobile broadband Internet access (4G/5G mobile solutions), digital transformation, managed services and Industry & Society segment (healthcare, public safety, e-Business, etc.), in the domestic and export markets. We have been intensively working on strategic contracts and have been investing in 5G and new business models, which will impact our margins short term, but should also strengthen our market position in the long term.
Furthermore, we continue to strengthen our position providing services for Ericsson through activities of our R&D Center as well as our expert centers for services and solutions, by focusing on high quality, innovation and cost efficiency. In 2020, we shall continue to implement the Digital Transformation program at Ericsson Nikola Tesla Group level, with the aim to further simplify the Company's key processes and introduce additional automation.
In aggravated conditions to business performance that we expect related to the COVID-19 pandemic, the Management Board and Executive Management are monitoring the situation, analyzing risks and reaching concrete decisions in line with the instructions and recommendations from the competent state authorities, with the aim to ensure the health and safety of employees, customers and partners, and further sustainable development of Ericsson Nikola Tesla Group.
In order to keep the successful business performance in a demanding environment and be competitive, we shall continue to focus on cost efficiency and responsible risk management.
All other data comprising the annual company report pursuant to Article 250a of the Companies Act can be found in the enclosed 2019 Annual Report, consisting of General Report, Non-financial report, and Consolidated and Non-Consolidated Financial Statements as at December 31, 2019.
Gordana Kovačević, president of Ericsson Nikola Tesla d.d.
In a constantly changing and diverse business environment, we use an agile and efficient business model to offer our customers leading, high performing and sustainable solutions. Our business model is built to manage changing market requirements and capture new business opportunities. Customer focus and motivated employees drive our business to create new value for our stakeholders.
ICT solutions play a key role in the digital transformation of all industries and are essential to society and people. Our company's purpose is in empowering an intelligent, sustainable and connected world by offering innovative ICT solutions that are easy to adopt, use and scale. With
communication service providers having a key role in a connected world and where everyone and everything is connected, our mission is to enable the full value of connectivity for service providers and lead digital transformation in the selected industries through ICT experience.
Our focused strategy is based on four pillars – technology leadership by leading Ericsson Nikola Tesla, Ericsson and 3PP portfolio, innovative I&S solutions, cost-effectiveness and highly competent resources and strong local presence.
We will secure a successful implementation of our strategy by being:
Our way of working
Purpose & vision: Empowering an intelligent, sustainable and connected world Mission: Enabling the full value of connectivity for service providers and lead digital transformation in selected industries
Our customers' needs
Relentless efficiency End-customer experience New revenue streams
Highly scalable and modular platforms offering based on Ericsson Nikola Tesla, Ericsson and 3PP portfolio; leadership in 5G; digitalize service providers through cloud and automation; lead datadriven Managed Services
Innovative platform-based offering for Industry&Society that increase efficiency, reduce costs and enable new services
Top delivery performance, efficiency, agility; permanent focus on innovations, quality and cost Professional services
Services based on leading edge technical expertise, data analytics, automation, optimization and AIdriven operations
Technology leadership by leading edge Ericsson Nikola Tesla, Ericsson and 3PP portfolio Innovative I&S solutions
Cost efficiency
Highly competent resources & strong local presence
5G enables digital transformation 4th Industrial revolution enabled by ICT
Ericsson Nikola Tesla is the leading provider of communication products and services in the operator segment, as well as a provider of innovative ICT solutions related to health care, national and public safety, state administration, transport, utilities and multimedia communication. Through innovation and leadership, we reflect on and encourage business opportunities and a profitable sales growth. By combining technology leadership, excellence in services, regional presence and e2e abilities, the employees in collaboration with the customers create added value. As an associated member of Ericsson corporation, our company operates in the Market Area Europe and Latin America (MELA).
The company's main activities encompass the following:
Ericsson Nikola Tesla:
Ericsson Nikola Tesla Servisi's core business is providing services related to the monitoring, build and maintenance of telecommunications network infrastructure.
The company's activities are the following:
With regard to the services portfolio and the experience in managing telecommunications projects, the company can offer a service on a turnkey basis, meeting the most complex market and technology requirements and delivering high-quality services.
The company operates on the market of Bosnia and Herzegovina and delivers products and services offered by Ericsson Nikola Tesla Group.
Libratel's core activity is providing telecom services; installation, putting into service, and telecom equipment upgrade (core and access network).
The company operates on the market of Kosovo and delivers products and services offered by Ericsson Nikola Tesla Group.
The company operates on the Belarusian market and delivers products and services offered by Ericsson Nikola Tesla Group.
Ericsson Nikola Tesla Group provides its customers and partners with an entire portfolio of both Ericsson's and other selected providers' communication products, solutions and services in the following segments:
The domestic market accounted for 28%, services to Ericsson accounted for 57.7% (out of which Managed Services in Croatia accounted for 10.4%) of the total sales revenue, while other export markets accounted for 14.3%.
In the domestic market, sales revenue amounted to MHRK 497.0 (2018: MHRK 372.5), up by 33.4% year-over-year.
Radio Access Network Modernization project, i.e. the replacement of Hrvatski Telekom's (HT) equipment with the latest Ericsson solutions in the segment of mobile telecommunication networks, contracted with HT in H1 2018, was successfully completed within the planned timeline during Q4 2019. The project's key performance indicators include a significantly increased capacity of HT's radio network with better population coverage of the overall HT's 4G network, amounting to 98% in outdoor coverage. The cooperation between Ericsson Nikola Tesla and HT in the field of radio access network continues with the aim to secure further capacity increase. In addition, by completion of this project, the prerequisites have been made in HT's network infrastructure for the commercial introduction of 5G technology once the necessary radio-frequency spectrum has been allocated.
Ericsson Nikola Tesla supported HT in noncommercial testing of 5G network in 3.5 GHz band in Zagreb, Samobor, Krk and Osijek with the aim of analyzing 5G technology operation in live networks.
In addition to the mobile telecommunication network, we have continued the long-term successful cooperation in the segments of fixed telecommunication network, as well as delivering services of rollout and maintenance of HT's telecommunication infrastructure.
We have been successfully cooperating with A1 Hrvatska for 20 years now, ever since they entered the Croatian market. A1 Hrvatska crowned their anniversary with a prestigious P3 certificate for the best network in Croatia, relying on Ericsson technology and partnership with Ericsson Nikola Tesla since the beginning of their operation in Croatia. This successful partnership will continue within a multi-year framework agreement (until the end of 2023) for additional modernization and expansion of radio access network signed in September 2019. A1 Hrvatska will have a flexible 5G - ready solution based on ERS (Ericsson Radio System) portfolio at their disposal.,
Furthermore, A1 Hrvatska put into operation NB-IoT (Narrowband Internet of Things) service for business users, based on Ericsson solution in the segment of radio access network. This technology enables secure and reliable wireless connectivity of a large number of devices and is considered 5G technology due to its advanced characteristics.
During 2019, 5G test network, based on commercially available Ericsson products, was also put into operation and integrated with other network elements, which placed A1 Hrvatska among the most advanced operators in Europe and worldwide. Furthermore, we have continued the cooperation in the field of core network and transport telecommunication network, which contributes to an increased network quality and new services for end users.
With the mobile operator Tele2, we have been working on the database capacity increase with 4G user information and upgrade of the entire core network to the latest software release. We have continued to provide support services for voice core network and software solution for data traffic shaping. During 2019, we also delivered the equipment for microwave transport network expansion.
With the company RUNE Crow, the activities are ongoing on preparing project documentation related to the implementation of the ultra-fast broadband fiberoptic infrastructure for users in Croatian rural areas (Istria County and Primorje-Gorski Kotar County).
In ICT Industry & Society segment, we have delivered a range of new functionalities in the upgrade of the Central Healthcare Information System of the Republic of Croatia (CEZIH). Furthermore, an Annex to the agreement for the project of upgrade of the Central Healthcare Information System of the Republic of Croatia (CEZIH) for 2020 was also signed. We have delivered an IT solution for the exchange of "Patient Summary" within the Connected Europe Facility (CEF) for the Croatian Health Insurance Fund (HZZO). We have continued the upgrade of the Central Information System of Land Registry and Cadaster (JIS). The final phase of the delivery of the project of State Border Control was completed, as well as the delivery of the solution for the integration of 112-192 system, i.e. the improvement in the operations of the Operational and Communications Center (OKC) of the Ministry of the Interior.
In export markets (excluding Ericsson market) sales revenue increased by 10.8% year-over-year to MHRK 254.6 (2018: MHRK 229.8).
In the neighboring market of Bosnia and Herzegovina, 2019 was marked by the issuing of the longawaited licenses for the introduction of the fourth generation of mobile communications. With the operator HT Eronet, we have been working on the expansion of LTE network across Bosnia and Herzegovina. We have continued to cooperate on the modernization and maintenance of telecommunication networks with the operators Crnogorski Telekom (Montenegro) and IPKO (Kosovo). In the market of Belarus, we have continued our cooperation with the operator beCloud on the project of LTE network expansion.
In ICT for Industry & Society segment we signed an agreement on the continuation of healthcare system maintenance for the Ministry of Healthcare of Armenia. Within the project of healthcare system informatization in Kazakhstan, in cooperation with the Ministry of Healthcare of the Republic of Kazakhstan, we successfully completed the managed services phase and started the maintenance of the national information healthcare system.
In Ericsson market, sales revenue amounted to MHRK 1,027.8 (2018: MHRK 955.8), up by 7.5% year-over-year. The contribution of Ericsson Nikola Tesla Servisi d.o.o., a daughter company of Ericsson Nikola Tesla d.d., to the revenue in this market segment amounts to MHRK 188.5 (2018: MHRK 178.0).
Ericsson Nikola Tesla's R&D Center was focused on expansion of responsibilities for the development
of 5G network systems, competence strengthening and technology transfer. The major part of activities concerns radio development within the business segment Networks. It should be noted that the Center is especially recognized within Ericsson's global R&D community for its end2end competencies and advanced knowledge in software development on Multi Standard Ericsson Radio Base Station. In addition, the Center has responsibilities for some of the key Ericsson R&D projects. Ericsson Nikola Tesla's R&D Center realized a range of significant functionalities for 5G and the evolution of 4G systems, which were implemented in Ericsson's global customers' networks. Furthermore, our experts have been working on virtualization and modernization projects for Mobile Switching Centre (MSC). In addition to global projects related to Unified Data Management (UDM) systems, we note the development of demo systems for multiple operators. For the development unit Cloud, we have been working on verification and quality control of new platform solutions. Along with all these activities, the focus on the quality of the deliveries continued, which led to another important achievement: the year was concluded with excellent results and evaluations of our R&D Center.
Experts from Services and Solutions Center for Networks, along with projects for the customers of Ericsson Nikola Tesla Group, have worked on projects for Ericsson customers in Germany, Switzerland, the United Kingdom, France, Qatar, Saudi Arabia, Pakistan, Egypt, the Republic of South Africa, Brazil, Mexico and elsewhere. There is still a great demand for Ericsson Nikola Tesla's experts by Ericsson global/regional organizations. Our experts are included in activities of integration and optimization of various technologies, with an increasing focus on 5G in key markets (USA, Japan, China). We have continued to work on the development and implementation of software tools for mobile networks management and optimization.
Experts from Services and Solutions Center for Digital Services and Operations (including Media), along with working on projects for our customers, were engaged on projects for Ericsson customers in Austria, Germany, Sweden, Switzerland, United Kingdom, the Netherlands, Belgium, Denmark, France, Ireland, Norway, Greece, Italy, Luxembourg, Slovenia, Czech Republic, Moldova, Albania, Serbia, Qatar, Libya, Mexico, USA and elsewhere. Their activities include complex projects of 5G technology introduction, operational and business support systems, as well as projects of introduction of core solutions in Cloud.
The teams working in the unit for IT& Engineering Services have achieved excellent results on projects of test environment management and IT operations management and have been recognized within Ericsson for the quality of services delivered. Industry & Society segment records good results on projects in the fields of IoT platforms and Connected Urban Traffic.
Ericsson Nikola Tesla Servisi have been successfully realizing the services of monitoring, maintenance and rollout of telecommunication network of Hrvatski Telekom. The planned targets for optical distribution networks rollout have been realized and optical access for 37,374 users was enabled. Modernization of mobile infrastructure comprised nearly 1,500 locations that are enabled for new technology introduction.
Scientific and research activities at Ericsson Nikola Tesla are in line with long-term strategic goals of business development. They are based on applied research for the development of new products, research of new processes and technologies, as well as the application of new functionalities for the needs of our products.
The driving force behind scientific and research activities in our company is Ericsson Nikola Tesla's Research Unit. Moreover, this unit is responsible for Ericsson Nikola Tesla's Institute which virtually connects all the scientists in the company. Research work implies collaboration on joint projects with R&D centers in the corporation as well as universities, institutes and companies in Croatia and abroad.
A very important part of research activities refers to participating in projects funded by the European Union. Early in 2018, the implementation of LIVING INNOVATIONS project began, as part of Horizon 2020 – the biggest EU Research and Innovation program ever – in which we participate as an industry partner. The project aims at developing methods for the implementation of responsible research and development with the purpose of improving people's lives by applying technology. The project's duration is three years, and all the activities are being carried out as planned.
The activities on the URBAN INNO project from HORIZON 2020 - REGPOT program were completed mid-2019. The aim of these activities was to improve the creation of innovation systems in the regions of the European Union. We cooperate in the ERASMUS++ BENEFIT project, which aims at improving telecommunication study programs in the region. Mid-2019, we started a new HORIZON 2020 project called INSULAE, which will last for four years. The purpose of this project is to apply technology to improve lives on the European islands. Our company participates particularly in the case for the island Unije in Croatia. At the end of 2019, we started another 4-year HORIZON 2020 project called PHArA-ON, which aims to test and consolidate platforms that can make life easier for the elderly and infirm. Our role in the project is to ensure the integration of various solutions for providing services, as well as to support various pilot projects in Europe.
The company continued its very successful collaboration in the field of research with the Faculty of Electrical Engineering and Computing (University of Zagreb) in the field of research. A prominent position was given to the project of researching into the communication between different devices in the overall machine communication. The research of the system for the optimization of radio signal transmission was continued. Special focus was placed on research of new radio elements in the build of antenna systems for multiple sending and receiving of signal, as well as the elaboration of support for radio signal arraying. With the Faculty of Electrical Engineering, Mechanical Engineering and Naval Architecture (University of Split), we worked on the project of optimum service positioning in complex networks. There was research in the project of defining access networks reliability to connecting a large number of nodes for the Internet of Things, with special attention being paid to communication-critical use cases and decision-making, as well as multiple sensors application.
Traffic and Logistics Data Science Lab at the Faculty of Transport and Traffic Science (University of Zagreb) was founded.
The research team continued with analyzing Big Data and continued with a great number of projects in the field of machine learning and artificial intelligence. Activities were resumed on the analysis and creation of systems for automated recognition of events that may cause irregularities in industrial plant operations by applying a robot hand model. We continued with activities in IoT application in the domain of environment control with a specific case of testing drinking water. Collaboration with educational institutions was continued through the joint organization of the 19th Ericsson Nikola Tesla's Summer Camp, in which 54 students and 28 mentors from our company and universities participated. This student activity was organized in collaboration with the Faculty of Electrical Engineering and Computing, University of Zagreb (FER), the Faculty of Electrical Engineering, Mechanical Engineering and Naval Architecture, University of Split (FESB), the Faculty of Electrical Engineering, Computer Science and Information Technology, Josip Juraj Strossmayer University of Osijek (FERIT), the Faculty of Electrical Engineering in Podgorica, University of Montenegro, the Faculty of Humanities and Social Sciences, University of Zagreb (FFZG), the
Faculty of Mechanical Engineering and Computing, University of Mostar (FSRE), the Faculty of Transport and Traffic Sciences, University of Zagreb (FPZ), the Faculty of Science, University of Split (PMFST), the Faculty of Organization and Informatics, University of Zagreb (FOI), and through cooperation with the faculties from the region on the ERASMUS+ project BENEFIT. Participants from neighboring countries in the project were: Faculty of Electrical Engineering, University of Tuzla, Faculty of Electrical Engineering, University of Sarajevo, Faculty of Electrical Engineering, University of Banja Luka, University of Belgrade, Faculty of Electrical Engineering, University of Niš, and Faculty of Electrical Engineering, University of Novi Sad. During the Summer Camp, the students worked on the company's premises in Zagreb and the premises equipped with computers at the Faculty of Electrical Engineering, Mechanical Engineering and Naval Architecture, University of Split.
Students' activities were aimed at studying selected research and development issues that are important to Ericsson Nikola Tesla and at developing prototype apps:
During the year, we continued to collaborate with our partners in the framework of Scientific Center for Data Science and Cooperative Systems, whose member is our company. We participated in preparing projects that aim at encouraging research, development and innovations in the Republic of Croatia: in one project as the holder, and in two projects as partners.
Furthermore, we supported presentations of the solution that was realized through a garage project "Smart Habits" for the application of non-invasive analytics in taking care of elderly and infirm people living alone. This analyzes the changes in the situations of standard behavior and reports to people who are taking care of them. In addition, we used the results of our research project to estimate environmental parameters in a prototype for predicting fires, as a use case for commercial presentations.
We have continued the project from the "garage" in Split. The project researched analytics methods for connecting various types of data with the aim of better prediction and creation of artificial intelligence in the field of enriching available sensor data, with the aim to be more precise and faster in concluding and reduce the number of required physical sensors. New methods for data correlation, and a prototype new platform for fast searching and reaching conclusions from various available data types were also researched into.
The signing of contracts with selected contractors in the project "Improvement of energy efficiency and the use of renewable energy sources at Ericsson Nikola Tesla d.d." marked the completion of the first phase.
In the project of swapping our customer Hrvatski Telekom's base stations with Ericsson's equipment, the thousandth swapped base station was put into operation at St John's Fortress in Šibenik.
• A consortium consisting of Ericsson Nikola Tesla and KING ICT signed with the Ministry of the Interior of the Republic of Croatia a Frame Agreement for a three-year period and a supply agreement for the year 2019 for the integration of the 112-192 system.
The Group is recognized in the wider community for advanced practices and knowledge, and very often it is perceived as a point of reference for particular areas and activities.
Being aware of our own values and responsibilities as well as driven by the desire to contribute to the growth and development of the society in which we operate, with our own involvement in numerous professional associations, and sharing our knowledge and experience, we initiate positive changes in society and the economy. Through memberships in various professional organizations, associations, bodies of scientific institutions, etc., the Group and its experts make their valuable contributions, while expanding their own competences and potential.
In addition to compulsory memberships in umbrella institutions prescribed by law, such as the Croatian Chamber of Economy and its bodies (Croatian International Chamber of Commerce – ICC Croatia, etc.), the Group is also a regular member of the following organizations:
Ericsson Nikola Tesla participates in the following socially important initiatives and platforms:
| ETK Group | ETK | |||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |
| Income statement and cash flow items (in HRK million) | ||||||
| Sales revenue | 1.779 $-82$ |
1.558 $-73$ |
1.482 $-80$ |
1.545 $-75$ |
1.374 $-66$ |
1.465 $-78$ |
| Selling and Administration expenses Operating profit |
103 | 120 | 76 | 94 | 117 | 71 |
| Profit for the year | 103 | 114 | 68 | 96 | 112 | 64 |
| Operating cash flow | 69 | 75 | 108 | 40 | 81 | 103 |
| Year-end position (in HRK million) | ||||||
| Total assets | 955 | 840 | 822 | 897 | 819 | 795 |
| Cash, cash equivalents and liquid financial assets | 136 | 236 | 244 | 121 | 231 | 230 |
| Capital employed | 395 | 326 | 266 | 352 | 305 | 244 |
| Equity | 315 | 305 | 236 | 294 | 291 | 223 |
| Per share indicators | ||||||
| Earnings per share (EPS) in HRK | 77 | 85 | 51 | 72 | 84 | 48 |
| Dividends per share | 70.6 | 32.5 | 70.6 | 32.5 | ||
| Number of shares outstanding, average (in millions) | 1.331 | 1.332 | 1.330 | 1331 | 1.331 | 1.330 |
| Other information (in HRK million) | ||||||
| Additions to property, plant and equipment | 68 | 40 | 26 | 65 | 39 | 26 |
| Depreciation of property, plant and equipment | 36 | 34 | 40 | 37 | 29 | 36 |
| Alternative Performance Measures (APMs) | ||||||
| Gross margin | 9.2% | 9.1% | 10,2% | 10% | 10% | 9.9% |
| Operating margin | 5.8% | 7.7% | 5.1% | 6.1% | 9% | 4.8% |
| EBITDA Margin | 9.0% | 9.9% | 7.9% | 8.7% | 10.7% | 7.3% |
| Cash conversion | 35,9% | 38.9% | 68.2% | 25% | 44% | 69.4% |
| Return on equity (ROE) | 33.1% | 42.0% | 26,0% | 32.7% | 43.5% | 25.5% |
| Return on capital employed (ROCE) | 28.5% | 38.4% | 22,9% | 29.1% | 40.7% | 23.4% |
| Return on sales (ROS) | 5.8% | 7.3% | 4.6% | 6.2% | 8.1% | 4.4% |
| Equity ratio | 33.0% | 36,3% | 28,7% | 32.8% | 35.5% | 28.1% |
| Capital turnover | 4.9 | 5.3 | 5.0 | 4.7 | 5.0 | 5.4 |
| Current ratio | 1.2 | 1.3 | 1.1 | 1.2 | 1.2 | 1.1 |
| P/E ratio | 18,2 | 11,8 | 23,6 | 19.5 | 12.0 | 24,9 |
Business results for 2019 are the result of the Company's focus on several key areas: network modernization for our customers in Croatia and abroad; research and development with a special focus on 5G technology, and activities in the Industry & Society segment. In 2019, we have justified the position of a recognizable brand in ICT area and a technology leader in Croatia and in our export markets. The start of 5G networks implementation by the leading European and global operators opens a new chapter in ICT industry worldwide, and Ericsson Nikola Tesla Group is a part of a success story of Ericsson as a global leader in 5G technology.
In 2019, the business in Ericsson market continued to grow and support the Group's overall financial stability. Such position in Ericsson market is a result of our strong focus on high quality, innovativeness and cost efficiency of our Research and Development Center, and Services and Solutions Expert Centers. The domestic and foreign customers carefully monitor industry trends. The result of such interest is an increasing number of requests for operators' networks modernization as the preparation for the introduction of 5G, and the development of new solutions in numerous ICT areas. Such market development led to a total increase of sales by 14% compared to 2018, and growth in all markets: Croatian, export, and Ericsson.
Once again, we concluded the year with a lean balance sheet which was at the same level as the previous year. In order to successfully balance an increased pressure on material assets and human resources, the Company continued to invest additional efforts in cost and operating efficiency, capital efficiency, and especially managing risks , with the ultimate goal to keep the balance sheet lean, the result positive, and all the stakeholders satisfied.
The level of effort and complexity of modernization projects is visible in the Group's balance sheet in the increased amounts of working capital engagement during 2019, and thus the focus remains on keeping high performance, quality and savings in the areas where this is optimal and necessary.
In line with the improvement of its own business performance, the Group started the Digital Transformation program with the aim to simplify the Company's key processes, especially targeting the sales process, monitoring production and services processes, and business reporting. In line with the above, we continue to invest in Group's assets, and the development of strategic knowledge and skills, required for quality work in all areas.
Despite long, complex, and financially demanding investments in projects, as well as increased investments in its own assets and resources, the Company managed to maintain a satisfying level of cash and cash equivalents for further business with minimum borrowing for the needs of the energy efficiency project of a part of the Company's plants and buildings.
Increasing the value of assets in the balance sheet is significantly impacted by the effects of adopting IFRS 16 - Accounting of operating leases used by the Group for a significant number of immovable assets and vehicles, and the application of which started on January 1, 2019.
Along with all the activities undertaken, the Company is ready for new and different challenges that 2020 brings, along with the announced new chapter in the development of ICT industry.
Shares of Ericsson Nikola Tesla d.d. are traded in the Regular Market of the Zagreb Stock Exchange under the ticker symbol ERNT-R-A.
In 2019, share price increased by 38.61%. At the end of 2019, Ericsson Nikola Tesla's market capitalization was MHRK 1,864.3 (end of 2018: MHRK 1,345.0). As regards the free float market capitalization, Ericsson Nikola Tesla is ranked ninth on the Zagreb Stock Exchange, with MHRK 949.1, representing 2.7 percent of the total free float market capitalization. At the end of 2019, Ericsson Nikola Tesla's share weight in CROBEX Index was 9.1 percent.
| Share price and turnover |
2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| Highest (HRK) | 1,390 | 1,177.99 | 1,444.00 | 1,240 | 1,415 |
| Lowest (HRK) | 930 | 940 | 1,066.51 | 976 | 972 |
| Last - end of year (HRK) |
1,045 | 1,164 | 1,203.99 | 1,010 | 1,400 |
| Turnover (in MHRK) | 79.4 | 53.2 | 55.1 | 39.3 | 58.0 |
| Trade volume | 68,888 | 49,628 | 43,312 | 36,116 | 49,652 |
| Dividend per share (HRK) - regular - extraordinary |
20 80 |
20 70 |
32.5 | 70.6 | 0* |
* The decision proposed to Ericsson Nikola Tesla Annual General Meeting that the Company's net profit for 2019 is allocated into retained earnings
At the Zagreb Stock Exchange, 2019 was marked by mainly volatile trade statistics, with the second half of 2019 mostly showing a positive trend.
All trade indicators recorded positive movements: turnover within the orderbook was up by +9%, with share turnover increasing by 38%. To conclude - total turnover in 2019 was almost up by +5% compared to 2018.
Market value, measured in market capitalization, increased by 13% in total, while the share market capitalization increased by 11.5%. Some of the indices were corrected (CROBEXkonstrukt, CROBEXturist and CROBEXtransport), however other indicies grew at double-digits: the highest growth was recorded by CROBEXnutris (+38.18), followed by CROBEXtr (+19.42%), followed by CROBEX10 (+18%), CROBEXplus (+17%), CROBEXprime (+16.42%), and CROBEX (+15.36%). As well as in the previous years, liquidity was mostly concentrated in a smaller number of shares; approximately 75% of the total turnover is creditable to 10 shares with the biggest turnover.
Ericsson Nikola Tesla d.d. major shareholders as at 31 December 2019.
| shareholders | Number of shares |
% of share capital |
|---|---|---|
| Telefonaktiebolaget LM Ericsson | 653,473 | 49.07 |
| Addiko Bank d.d. / Raiffeisen mandatory pension fund, B category | 123,514 | 9.28 |
| OTP banka d.d. / Erste Plavi mandatory pension fund, B category | 56,013 | 4.21 |
| Addiko Bank d.d. / PBZ Croatia osiguranje mandatory pension fund, B category |
16,810 | 1.26 |
| PBZ d.d. / The Bank of New York as custodian | 12,728 | 0.96 |
| OTP banka d.d. /OTP Index fund - open-end alternative investment fund with public offering |
9,827 | 0.74 |
| PBZ d.d. / custodian client account | 9,736 | 0.73 |
| Zagrebačka banka d.d. / Harding Loevner Frontier Emerging markets portfolio |
9,318 | 0.70 |
| Zagrebačka banka d.d. / State Street and Trust Company, Boston | 8,630 | 0.65 |
| Addiko Bank d.d. / Raiffeisen voluntary pension fund | 8,094 | 0.61 |
| Other shareholders | 423,507 | 31.80 |
As at 31 December 2019, Ericsson Nikola Tesla joint-stock company had share capital amounting to HRK 133,165,000 distributed in 1,331,650 ordinary registered Class A shares. Each share carries one vote at the Annual General Meeting. The total number of treasury shares at the end of 2019 was 211, representing 0.016% of the share capital. The shares were owned by 6,639 shareholders.
Ericsson Nikola Tesla d.d. was among the first companies in Croatia to adopt its own Code of Corporate Governance (in April 2005), based on the legislation of the Republic of Croatia and recommendations published in OECD Corporate Governance Working Papers. The mentioned documents accurately describe and define the rights and obligations of the Management Board, Supervisory Board and shareholders (https://www.ericsson.hr/en/corporate-governance).
The company also applies the Zagreb Stock Exchange Code of Corporate Governance and meets the obligations derived therefrom, with the exception of provisions whose application is not practical at a given moment.
Hanfa and Zagreb Stock Exchange adopted the new Code of Corporate Governance on 15 October 2019. The new Code replaced the previous edition of the Code, which was published in 2010, and those who published it started complying with it on 1 January 2020.
Derogations from the Zagreb Stock Exchange Code of Corporate Governance which was applied by the end of 2019 are as follows:
Shareholders and their proxies shall be allowed to vote at the Annual General Meeting using modern communication technologies. However, for the time being, it is not possible to remotely participate in the Annual General Meeting using modern communication technologies.
The company's Supervisory Board is not composed primarily of independent members. Out of a total of five members, two members are elected on the largest shareholder's proposal, one member is the representative of employees, and the remaining two members are independent.
Members of the Supervisory Board receive a monthly remuneration amounting to one half of the average monthly gross salary of the company's employees. Representatives of the largest shareholder Ericsson do not receive remuneration in accordance with the corporate policy. Information on compensations and other emoluments from the company or company-related persons to the members of the Supervisory Board is not published individually for every member, but in the Annual Report as the total amount.
The Supervisory Board does not have an established appointment committee and remuneration committee.
Other members of the Supervisory Board gave their consent to the Chairman of the Supervisory Board to determine the way of remuneration of the company's Management Board and to take care of appointing new members and monitoring the work of the company's Supervisory Board and Management Board.
Remuneration of the Management Board is regulated by an individual employment contract, which is concluded between the Management Board and the Supervisory Board. Remuneration for the work of the Supervisory Board is determined by the decision of the Annual General Meeting. Statement on the remuneration policy for the Management and Supervisory Board was not published.
Information regarding emoluments and other ways of remuneration of the company's Executive Leadership is published in the Annual Report, in the total amount for all members.
Consolidated Financial Statements and Auditor's report 31 December 2019
Ericsson Nikola Tesla d.d. (the Parent Company) is a Croatian company with overseventy years of continuous operations. It is a leading supplier and exporter ofspecialized telecommunications equipment, ICT solutions,software and servicesin Central and Eastern Europe.
The Parent Company wasfounded as a result of the privatization of the enterprise Nikola Tesla - Poduzeće za proizvodnju telekomunikacijskih sistema i uređaja, po.
Ericsson Nikola Tesla d.d. has prepared these consolidated financial statements for the Parent Company and its five active subsidiaries(of which two are domiciled in Croatia, one in Bosnia and Herzegovina, one in Kosovo and one in Belarus).
The principal activities of the Group are research and development of telecommunications software and services, design, testing and integration of total communications solutions, managed services, supply and maintenance of communications solutions and ICT solutions, towards customers within the Ericsson Group, customers in the Republic of Croatia, and Bosnia and Herzegovina, and several customers in Central and Eastern Europe.
Ericsson Nikola Tesla d.d. is a joint-stock company incorporated in Croatia. The headquarters of the Parent Company are in Zagreb, Krapinska 45.
The Group appliesthe Code of Corporate Governance of the Zagreb Stock Exchange and meetsthe obligations derived therefrom, with the exception of provisions whose application is not practical at the moment.
The Supervisory Board members during 2019 and up to the release of these consolidated statements were:
| Franck Pierre Roland Bouétard | Chairman | Appointed on 20 June 2018 |
|---|---|---|
| Dubravko Radošević | Member, Vice-Chairman | Reappointed on 20 June 2018, elected for Vice Chairman of Supervisory board on 13 June 2019 |
| Ignac Lovrek | Member; Vice-Chairman | Mandate expired on 2 June 2019 |
| Vidar Mohammar | Member | Reappointed on 13 June 2019 |
| Olgica Spevec | Member | Appointed on 13 June 2019 |
| Vladimir Filipović | Member and employees' representative |
Appointed on 29 November 2018 |
The Audit Committee members during 2019 and up to the release of these consolidated statements were:
| Dubravko Radošević | Chairman | Appointed on 26 April 2019 |
|---|---|---|
| Ignac Lovrek | Chairman | Chairman / member until 26 April 2019 |
| Vidar Mohammar | Member | Reappointed on 13 June2019 |
| Vesna Vašiček | Member | Appointed on 21 February 2017 |
The Management Board has one member:
Gordana Kovačević President Reappointed on 17 December 2019
As at 31 December 2019, the executive management comprised:
| Gordana Kovačević | President |
|---|---|
| Branka Vučemilo Elezović | Director, Legal |
| Branko Dronjić | Director, IT&Test Environment Operations |
| Damir Bušić | Director, Finance, Sourcing and Commercial Management |
| Dario Runje | Director, Networks |
| Darko Huljenić | Director, Research |
| Dragan Fratrić | Director, General Services |
| Goran Ožbolt | Director, Sales and Marketing for Tele2 and AlternativeOperators |
| Hrvoje Benčić | Director, Digital Services, Media and Operations |
| Ivan Barać | Director, Sales and Marketing for Hrvatski Telekom and Crnogorski Telekom |
| Jagoda Barać | Director, Sales and Marketing for Export markets for Op. Seg. |
| Marijana Đuzel | Director, Human Resources |
| Milan Živković | Director, Strategy and Business Development & GIR |
| Miroslav Kantolić | Director, Sales and Marketing for A1 Croatia |
| Patrick Gerard Martin | Director, R&D Center |
| Snježana Bahtijari | Director, Marketing, Communications & Corporate Social Responsibility |
We have audited the consolidated financial statements of Ericsson Nikola Tesla d.d. ("the Company") and its subsidiaries (together referred to as "the Group"), which comprise the consolidated statement of financial position of the Group as at 31 December 2019, and its consolidated statements of comprehensive income, cash flows and changes in equity for the year then ended, and notes, comprising significant accounting policies and other explanatory information (further referred to as "the financial statements").
In our opinion, the accompanying financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union ("EU IFRS").
We conducted our audit in accordance with International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in Croatia and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Sales revenue in 2019: HRK 1,779,306 thousand (2018: HRK 1,558,155 thousand). As at 31 December 2019: trade receivables: HRK 215,437 thousand; contract assets: HRK 3,239 thousand; contract liabilities: HRK 149,375 thousand (31 December 2018: trade receivables: HRK 160,724 thousand; contract assets: HRK 3,335 thousand; contract liabilities: HRK 171,645 thousand).
Please refer to the Note 1 Revenue recognition of Significant accounting policies, Note 4 c) Revenue recognition of Critical accounting estimates and judgements, Note 5 Sales revenue and Note 6 Segment reporting in the financial statements.
In the year ended 31 December 2019, the Group's principal revenue streams included sales of products and software, as well as provision of services, including installation and integration services, maintenance and support.
Application of revenue recognition principles of the relevant financial reporting standards is complex and requires making significant assumptions and judgments. Particular complexity is associated with the following factors:
Our audit procedures in this area included, among others:
| Key audit matter (continued) | How our audit addressed the matter (continued) |
|---|---|
| — Although contracts with customers are usually agreed with fixed transaction price, significant judgement is required in allocating the transaction price to the performance obligations. The transaction price, which is the consideration the Group expects to receive for the transfer of products and services to the customer, is allocated to the performance obligations based on its relative standalone selling price; In the wake of the above factors, we considered revenue recognition to be associated with a significant risk of material misstatement in the consolidated financial statements. Therefore, the area required our increased attention in the audit and as such was determined to be a key audit matter. |
Determination of total contract consideration, o by reference to contracts with customers and any subsequent modifications to the frame agreement, if any; Allocation of the contract consideration to o each of the identified performance obligations, based on their estimated stand alone selling prices, also by reference to the sales department's data and the analysis of current transaction prices; Determination of the timing of the transfer of o control, the resulting pattern of revenue recognition and revenue amounts, by reference to sales invoices, inventory and shipping documents, customer acceptance forms and other documents as appropriate. For a sample of customers, obtaining confirmations of the amounts receivable outstanding as at the reporting date, and challenging any significant differences between confirmations received and the Group's records by inspecting the underlying documentation such as contracts with customers, invoices, shipping documents and customer acceptance forms; |
| Examining whether the Group's revenue recognition-related disclosures in the financial statements appropriately include and describe the relevant quantitative and qualitative information required by the applicable financial reporting framework. |
The consolidated financial statements of the Group as at and for the year ended 31 December 2018 were audited by another auditor who expressed an unmodified opinion on those statements on 30 April 2019.
Management is responsible for the other information. The other information comprises the Management Report and the Corporate Governance Statement included in the Annual Report of the Group, but does not include the financial statements and our auditor's report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
With respect to the Management Report and the Corporate Governance Statement, we also performed procedures required by the Accounting Act in Croatia ("Accounting Act"). Those procedures include considering whether:
Based solely on the work required to be undertaken in the course of the audit of the financial statements and procedures above, in our opinion:
In addition, in light of the knowledge and understanding of the entity and its environment obtained in the course of the audit, we are also required to report if we have identified material misstatements in the Management Report and the Corporate Governance Statement. We have nothing to report in this respect.
Management is responsible for the preparation of the financial statements that give a true and fair view in accordance with EU IFRS, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group's financial reporting process.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
We were appointed by those charged with governance on 13 June 2019 to audit the consolidated financial statements of Ericsson Nikola Tesla d.d. for the year ended 31 December 2019. Our total uninterrupted period of engagement is one year, covering the year ended 31 December 2019.
We confirm that:
The engagement partner on the audit resulting in this independent auditors' report is Domagoj Hrkać.
KPMG Croatia d.o.o. za reviziju 28 April 2020 Croatian Certified Auditors Eurotower, 17th floor Ivana Lučića 2a 10000 Zagreb Domagoj Hrkać
Croatia Director, Croatian Certified Auditor
| 2019 | 2018 (restated) | ||
|---|---|---|---|
| Notes | HRK '000 | HRK '000 | |
| Sales revenue | 5, 6 | 1,779,306 | 1,558,155 |
| Cost of sales | 7 | (1,614,851) | (1,416,432) |
| Gross profit | 164,455 | 141,723 | |
| Selling expenses | 7 | (47,107) | (40,209) |
| Administrative expenses | 7 | (34,721) | (32,672) |
| Other operating income | 7 | 19,934 | 51,152 |
| Operating profit | 102,561 | 119,994 | |
| Finance income/(expense), net | 9 | 5,668 | 638 |
| Profit before tax | 108,229 | 120,632 | |
| Income tax | 10 | (5,750) | (6,988) |
| Profit for the year | 102,479 | 113,644 | |
| Other comprehensive income | - | - | |
| Currency translation differences | 90 | (68) | |
| Total comprehensive income for the year | 102,569 | 113,576 | |
| Earnings per share (HRK) | 11 | 76.97 | 85.34 |
| 2019 | 2018 | ||
|---|---|---|---|
| Assets | Notes | HRK '000 | HRK '000 |
| Non-current assets | |||
| Property, plant and equipment | 12 | 143,776 | 114,654 |
| Right of use assets | 28 | 51,920 | - |
| Intangible assets | 13 | 4,412 | 5,070 |
| Loans and receivables | 14 | 53,772 | 51,657 |
| Deferred tax assets | 10 | 16,200 | 21,358 |
| Total non-current assets | 270,080 | 192,739 | |
| Current assets | |||
| Inventories | 15 | 173,311 | 110,695 |
| Trade receivables | 16 | 215,437 | 160,724 |
| Contract assets | 27 | 3,239 | 3,335 |
| Receivables from related parties | 29 (c) | 112,861 | 109,900 |
| Other receivables | 17 | 18,123 | 14,170 |
| Income tax receivables | 14,323 | 472 | |
| Prepayments and accrued income | 11,654 | 12,086 | |
| Financial assets at fair value through profit or loss | 18 | 37,892 | 48,490 |
| Cash and cash equivalents | 19 | 97,906 | 187,888 |
| Total current assets | 684,746 | 647,760 | |
| Total assets | 954,826 | 840,499 |
| 2019 | 2018 | ||
|---|---|---|---|
| Equity and liabilities | Notes | HRK '000 | HRK '000 |
| Equity | |||
| Share capital | 20 (a) | 133,165 | 133,165 |
| Treasury shares | 20 (b) | (240) | (240) |
| Legal reserves | 20 (c) | 6,658 | 6,658 |
| Reserve for treasury shares | 20 (d) | 14,873 | 14,873 |
| Reserve of currency conversion | (176) | (86) | |
| Retained earnings | 160,473 | 150,609 | |
| Total equity | 314,753 | 304,979 | |
| Non-current liabilities | |||
| Borrowings | 21 | 27,362 | 5,734 |
| Lease liabilities | 28 | 33,584 | - |
| Other non-current liabilities | 22 | 8,704 | 6,520 |
| Employee benefits | 23 (a) | 10,314 | 8,662 |
| Total non-current liabilities | 79,964 | 20,916 | |
| Current liabilities | |||
| Payables to related parties | 29 (c) | 90,579 | 33,306 |
| Borrowings | 34 | 36 | |
| Trade and other payables | 24 | 188,460 | 178,908 |
| Income tax payable | 315 | 270 | |
| Provisions | 25 | 16,376 | 16,971 |
| Accrued charges and deferred revenue | 26 | 95,913 | 113,468 |
| Contract liabilities | 27 | 149,375 | 171,645 |
| Lease liabilities | 28 | 19,057 | - |
| Total current liabilities | 560,109 | 514,604 | |
| Total liabilities | 640,073 | 535,520 | |
| Total equity and liabilities | 954,826 | 840,499 |
for the year ended 31 December 2019
| Share capital |
Treasury shares |
Legal reserves |
Reserve for treasury shares(1) |
Translation reserve |
Retained earnings |
Total | |
|---|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January 2018 Changes in equity for 2018 |
133,165 | (280) | 6,658 | 14,873 | (18) | 80,232 | 234,630 |
| Total comprehensive income | - | - | - | - | (68) | 113,644 | 113,576 |
| Dividend distribution for 2017, Note 20 (e) | - | - | - | - | - | (43,272) | (43,272) |
| Share-based payments, Note 23 (b) | - | 23 | - | - | - | (23) | - |
| Sale of treasury shares, Note 23 (b) | - | 17 | - | - | - | 28 | 45 |
| Total contributions by and distributions to owners of the parent recognized directly in equity |
- | 40 | - | - | - | (43,267) | (43,227) |
| As at 31 December 2018 | 133,165 | (240) | 6,658 | 14,873 | (86) | 150,609 | 304,979 |
| As at 1 January 2019 Changes in equity for 2019 |
133,165 | (240) | 6,658 | 14,873 | (86) | 150,609 | 304,979 |
| Total comprehensive income | - | - | - | - | (90) | 102,749 | 102, 659 |
| Dividend distribution for 2018, Note 20 (e) | - | - | - | - | - | (94,000) | (94,000) |
| Equity-settled transactions, Note 23 (b) | - | - | - | - | - | 1,114 | 1,114 |
| Total contributions by and distributions to owners of the parent recognized directly in equity |
- | - | - | - | - | (92.886) | (92.886) |
| As at 31 December 2019 | 133,165 | (240) | 6,658 | 14,873 | (176) | 160,473 | 314,753 |
(1) In comparison with prior year financial statements Company has disclosed separately Reserve for treasury shares in amount of HRK 14,873 thousand in order to improve presentation in financial statements.
for the year ended 31 December 2019
| 2019 | 2018 | ||
|---|---|---|---|
| Notes | HRK '000 | HRK '000 | |
| Cash flows from operating activities | |||
| Profit before tax | 108,320 | 120,632 | |
| Adjustments for: | |||
| Depreciation and amortization | 7, 12, 13 | 57,534 | 34,872 |
| Impairment losses and reversals | 4,052 | 9,408 | |
| Net increase in provisions | 25 | 33,671 | 39,110 |
| Gain on sale of property, plant and equipment | (2,323) | (58) | |
| Net loss on remeasurement of financial assets | (497) | 121 | |
| Interest income | (5,832) | (1,498) | |
| Interest expense | 1,565 | 19 | |
| Foreign exchange gain/losses, net | (2,702) | (6,876) | |
| Equity-settled transactions | 8 | (846) | - |
| Other | (1,023) | (2,550) | |
| 191,919 | 193,180 | ||
| Changes in working capital: | |||
| In receivables | (55,924) | 85,358 | |
| In inventories | (62,638) | (91,823) | |
| In payables | 1,590 | (109,898) | |
| Cash generated from operations | 74,946 | 76,817 | |
| Interest paid | (1,474) | (19) | |
| Income taxes paid | (4,526) | (1,622) | |
| Net cash from operating activities | 68,946 | 75,176 | |
| Cash flows from investing activities | |||
| Interest received | 1,734 | 2,218 | |
| Dividends received | 70 | 70 | |
| Disposal of subsidiaries | - | 40 | |
| Proceeds from sale of property, plant and equipment | 2,360 | 143 | |
| Purchases of property, plant and equipment, and intangible assets |
(82,414) | (41,115) | |
| Deposits given to financial institutions - net | 1,354 | - | |
| Net change of financial assets at fair value through profit and loss | 10,956 | 35,909 | |
| Net cash used in investing activities | (65,940) | (2,735) |
for the year ended 31 December 2019
| 2019 | 2018 | ||
|---|---|---|---|
| Notes | HRK '000 | HRK '000 | |
| Cash flows from financing activities | |||
| Dividends paid | 20 (e) | (94,000) | (43,291) |
| Loans received | 21,656 | - | |
| Lease liabilities paid | (21,203) | - | |
| Net cash used in financing activities | (93,547) | (43,291) | |
| Effects of exchange rate changes on cash and cash equivalents | 560 | (523) | |
| Net increase/(decrease) in cash and cash equivalents | (89,982) | 28,627 | |
| Cash and cash equivalents at the beginning of the year | 187,888 | 159,261 | |
| Cash and cash equivalents at the end of the year | 19 | 97,906 | 187,888 |
Ericsson Nikola Tesla d.d. (the Parent Company) is a joint-stock company incorporated and domiciled in Croatia. The address of its registered office is Krapinska 45, 10000 Zagreb, the Republic of Croatia. The Parent Company's shares are listed on the Public Joint Stock Company listing on the Zagreb Stock Exchange. Ericsson Nikola Tesla d.d. has prepared these consolidated financial statements as at 31 December 2019 and for the year then ended for the Parent Company, its five active subsidiaries of which two are domiciled in Croatia, one in Bosnia and Herzegovina, one in Kosovo and one in Belarus (together "the Group"). A summary of the Group's principal accounting policies is set out below.
The consolidated financialstatements ofthe Group have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (IFRS). These consolidated financial statements also comply with the Croatian Accounting Act in effect on the date of issue of these consolidated financial statements. These consolidated financial statements are a translation of the official statutory IFRS consolidated financial statements.
The consolidated financialstatements 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. Apart from the accounting policy changes resulting from the adoption of IFRS 16 effective from 1 January 2019, these policies have been consistently applied to all the periods presented, unless otherwise stated (referto Notes 3 and 28). The principal accounting policiesin respect of leases applied till 31 December 2018 are presented in Note 31.
The preparation of consolidated financialstatementsin conformity with IFRSsrequiresmanagementtomake 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 otherfactorsthat are believed to be reasonable underthe circumstances,the results of which form the basis of making the judgements about carrying values of assets and liabilitiesthat are notreadily apparent from othersources. Actualresults may differfrom these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Judgements made by executive management in the application of IFRSsthat have significant effect on the consolidated financialstatements and estimates are discussed in Note 2.
The executivemanagement have a reasonable expectation thatthe Group has adequate resourcesto continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.
Itemsincluded in the financialstatements of each of the Group's entities are measured using the currency of the primary economic environment where the entity operates('the functional currency'). The consolidated financialstatements are presented in Croatian kuna (HRK), which isthe Parent Company'sfunctional and the Group's presentation currency.
IFRS 15 "Revenue from Contracts with Customers" is a principle-based model ofrecognizing revenue from customer contracts. It has a five-step model that requiresrevenue to be recognized when control over goods and services are transferred to the customer.
The following paragraphs describes the types of contracts, when performance obligations are satisfied, and the timing of revenue recognition. They also describe the normal payment terms associated with such contracts and the resulting impact on the balance sheet overthe duration of the contracts. The vast majority of Ericsson's business isforthe sale ofstandard products and services.
Products and services are classified as standard solutions if they do not require significant installation and integration servicesto be delivered. Installation and integration services are generally completed within a short period of time,from the delivery of the related products.
These products and services are viewed as separate distinct performance obligations. This type of customer contract is usually signed as a frame agreement and the customerissuesindividual purchase ordersto commit to purchases of products and services over the duration of the agreement.
Revenue forstandard productsshall be recognized when control overthe equipment istransferred to the customer at a point in time. This assessmentshall be viewed from a customer's perspective considering indicators such astransfer of titles and risks, customer acceptance, physical possession, and billing rights. Control of an asset therefore refersto the ability to direct use of and obtain substantially all of the remaining benefits from theasset.
Furthermore, control includesthe ability to prevent other entitiesfrom using and obtaining the benefitsfrom an asset. The benefits of an asset are the potential cash flows(inflows orsavingsin outflows)that can be obtained directly orindirectly. For hardware sales, transfer of control is usually deemed to occur when the equipment arrives at the customer site and for software sales, when the licenses aremade available to the customer. Software licensesmay be provided to the customer at a point in time, activated orready to be activated by the customer at a laterstage, therefore revenue isrecognized when customer obtains control of the software. Contractualterms may vary; therefore judgment will be applied when assessing the indicators oftransfer of control. Revenue for installation and integration services is recognized upon completion of the service. Costs incurred in delivering standard products and services are recognized as costs ofsales when the related revenue is recognized in the Income Statement. Costs incurred relating to performance obligations not yet fully delivered are recognized as inventories.
Transaction prices underthese contracts are usually fixed, and mostly billed upon delivery of the hardware orsoftware and completion of installation services. Customerfinance agreements may be agreed separately with some customers where payment terms exceed 179 days.
Revenue forrecurring servicessuch as customersupport and managed servicesisrecognized asthe services are delivered, generally pro-rata over time. Costs incurred in delivering recurring services are recognized as cost of sales as they are incurred. Transaction prices under these contracts are billed over time, often on a quarterlybasis.
Contract liabilities orreceivables may arise depending on whetherthe quarterly billing isin advance orin arrears. Contract for standard products and services applies to business in allsegments.
Some products and services are sold together as part of a customized solution to the customer. Thistype of contract requires significant installation and integration services to be delivered within the solution, normally over a period of more than 1 year. These products and services are viewed together as a combined performance obligation. Thistype of contract is usually sold as a firm contract in which the scope of the solution and obligations of both parties are clearly defined for the duration of the contract.
Revenue recognition (continued)
Revenue for the combined performance obligation shall be recognized over time if progress of completion can be reliably measured and enforceable right to payment exists overthe duration of the contract. The progress of completion is estimated by reference to the output delivered such as achievement of contract milestones and customer acceptance. This method determinesrevenue milestones overthe duration of the contract, and it is considered appropriate as it reflectsthe nature of the customized solution and how integration service is delivered in these projects. If the criteria above are not met, then all revenue shall be recognized upon the completion of the customized solution, when final acceptance is provided by the customer. Costs incurred in delivering customized solutions are recognized as costs ofsales when the related revenue milestone isrecognized in the Income Statement. Costsincurred relating to future revenue milestones are recognized as Inventories and assessed for recoverability on a regularbasis.
Transaction price underthese contractsis usually a fixed fee,split into a number of progress payments or billing milestones as defined in the contract. In most cases, revenue recognized is limited to the progress payments or unconditional billing milestones overthe duration of the contract, therefore no contract asset or contract liability arises on these contracts. Customerfinance agreements may be agreed separately with some customers where payment terms exceed 365 days. Contractfor customized solution appliesto the Industry and Society business, Business Support Systems(BSS) business, within the segment Digital Services, and the Media Solutions business within the segment Emerging Business andOther.
The nature of Ericsson's promise isto provide a right to use Ericsson's IP as it exists(in terms of form and functionality) at the point in time at which the license is granted to the customer. This means that the customer can direct the use of, and obtain substantially all the remaining benefits from, the license at the point in time at which the license transfers.
Trade receivables include amounts that have been billed in accordance with customer contract terms and amounts that the Group has an unconditionalright to, with only passage of time before the amounts can be billed in accordance with the customer contract terms.
Customer finance credits arise from credit terms exceeding 179 days in the customer contract or a separate financing agreement signed with the customer. Customer finance is a class of financial assets that is managed separately from receivables. See note 30(d) forfurtherinformation on creditrisk management of trade receivables and customerfinance credits.
In accordance with IFRS 15, where significant financing is provided to the customer, revenue is adjusted to reflect the impact of the financing transaction. These transactions could arise fromthe customerfinance credits above ifthe contracted interest rate is below the marketrate orthrough implied financing transactions due to payment terms of more than one yearfrom the date of transfer of control.
Contract asset is unbilled sales amount relating to performance obligation that has been satisfied under customer contract but is conditional on terms other than only the passage of time before payment of the consideration is due. Under previous standards these unbilled sales balances have been included within tradereceivables.
Contract liability relatesto amountsthat are paid by or due from customersfor which performance obligations are unsatisfied or partially satisfied. Under previous standardsthese balances have been disclosed as deferred revenue within other current liabilities, and the Group concluded that the balances meet the definition of contract liability underIFRS 15. Advancesfrom customers are also included in the contract liability balance.
Items of property, plant and equipment are shown at cost or deemed cost, less accumulated depreciation and impairment losses.
The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part ofsuch an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure on repairs and maintenance is expensed asincurred. 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 assetsis provided on a straight-line basisto allocate their cost overthe estimated economic useful life of the assets. The estimated useful lives are as follows:
| Usefullives | |
|---|---|
| Buildings | 5–30years |
| Plant and equipment | 2–10years |
| 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 itsrecoverable amount if the asset's carrying amount is greaterthan its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the consolidated statement of comprehensive income.
Intangible assets are stated on initial recognition at cost and subsequently at cost less accumulated amortization and impairment losses.
Amortization is provided on a straight-line basis overtheestimated useful lives ofintangible assets.Intangible assets include acquired computer software and are amortized on a straight-line basis over their useful life of 2–4 years. Cost associated with maintaining computer software is recognized as an expense as incurred.
Assets that have an indefinite useful life (such as goodwill) are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment lossisrecognized for the amount by which the asset's carrying amount exceedsitsrecoverable amount. The recoverable amount isthe higher of an asset'sfair value less coststo sell and value in use. Forthe purposes of assessing impairment, assets are grouped at the lowest levelsfor which there are separately identifiable cash flows(cash-generating units).Non-financial assets otherthan goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
Financial assets are classified as amortized cost if the contractual terms give rise to payments that are solely payments of principal and interest on the principal amount outstanding and the financial asset is held in a business model whose objective is to hold financial assets in order to collect contractual cash flows. These assets are subsequently measured at amortized cost using the effective interest method, minusimpairment allowances. Interest income and gains and lossesfrom financial assets at amortized cost are recognized in financial income.
A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near term. Derivatives are classified as held fortrading, unlessthey are designated as hedging instrumentsforthe purpose of hedge accounting. Assets held fortrading are classified as current assets. Debt instruments classified as FVTPL, but not held for trading, are classified on the balance sheet based on their maturity date (i.e. those with a maturity longerthan one year are classified as non-current). Investmentsin shares and participations are classified as FVTPL and classified as non-current financial assets. Gains or losses arising from changes in the fair values of the FVTPL category (excluding derivatives and customerfinancing) are presented in the income statement within financial income in the period in which they arise. Gains and losses on derivatives are presented in the income statement as follows. Gains and losses on derivatives that hedge operating assets or liabilities, financial assets and financial liabilities are presented as cost of sales, financial income and financial expense, respectively. Gains and losses on customer financing are presented in the income statement as selling expenses. Dividends on equity instruments are recognized in the income statement as part of financial income when the Group's right to receive payments is established.
Cash comprises cash held at banks and on hand. Cash equivalents include demand deposits and time deposits with maturities up to three months. Cash and cash equivalents are carried at amortized cost because: (i) they are held for collection of contractual cash flows and those cash flowsrepresentsolely payments of principal and interest, and (ii) they are not designated at fair value through profit and loss.
Financial assets affected by the new model are cash and cash equivalents, deposits,trade receivables and contract assets. Two unified models were developed forrelatable financial assets. Cash equivalents and deposits are assessed forimpairment under one unified model and trade receivables and contract assets are assessed forimpairment under another unified model. Cash equivalents and deposits are assessed based on probability of default as well as Group exposure to certain financial institution at the time of default. To determine probability of default, country credit rating of financial institution is used, as well as the rating of future outlook is used.
Expected loss on cash, cash equivalents and depositsfor each financial institution givesthe total expected credit loss. There were no significant changes to the model during the year. The Group has determined that credit risk largely depends on both the payment pattern of the customer as well as the risk in the country where the customer resides (e.g. ability to make cross-border payments).
Therefore, expected credit losses (ECLs) are calculated using a provision matrix that specifies a fixed rate depending both on the number of days past due and the country risk rating. The country risk ratings depend on the ratings used by all Export Credit Agencies within the OECD. The rates defined in the provision matrix are based on historical loss patternsfor certain portfolio of customers. Each customer isregulatory monitored and these rates are adjusted for current conditions as well as management expectationsfor changesto politicalrisks and payment patterns of certain customerin the future. There were no significant changes to the model during the year.
Trade and other payables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate.
Financial liabilities are recognized when the Group becomes bound to the contractual obligations ofthe instrument. Financial liabilities are derecognized when they are extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expires.
Inventories are stated at the lower of cost and net realizable value. Net realizable value isthe 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 expendituresincurred in acquiring the inventories and bringing them to their existing location and condition. In case of manufactured inventories, the cost includes materials, labor 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 realizable value.
Share capital is stated in Croatian kuna at nominal value.
Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Parent Company purchases its own equity share capital (treasury shares),the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the equity holders untilthe shares are cancelled orreissued. Where such ordinary shares are subsequently
reissued, any consideration received, net of any directly attributable incrementaltransaction costs and the related income tax effects, is included in equity attributable to the equity holders.
The tax expense forthe period is based on taxable profit forthe year and comprises current and deferred tax. Income tax is recognized in the consolidated statement of comprehensive income exceptto the extent that itrelatesto itemsrecognized directly in equity, in which case it is recognized in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Parent Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positionstaken in tax returns
with respectto situationsin which applicable tax regulation issubject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax isrecognized by using the balance sheet liability method on temporary differences arising between tax basis of assets and liabilities and their carrying amount in the financialstatements. However, the deferred income tax is not accounted forif it arisesfrom initialrecognition of an asset or liability in a transaction otherthan a business combination that at the time of the transaction does not affect either accounting ortaxable 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
recognized when it is probable thatsufficient taxable profits will be available against which the deferred tax assets can be utilized. At each balance sheet date, the Group reassesses unrecognized deferred tax assets and the carrying amount of deferred tax assets. Deferred income taxesreflect the nettax effects oftemporary differences between the carrying amounts of assets and liabilitiesforfinancialreporting 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 yearsin which those temporary differences are expected to be recovered orsettled based on tax rates enacted orsubstantially enacted at the balance sheet date.
The measurement of deferred tax liabilities and deferred tax assetsreflectsthe tax consequencesthat would follow from the manner in which the enterprise expects, at the balance sheet date, to recover orsettle the carrying amount of its assets and liabilities.
Transactions denominated in foreign currencies are translated into functional currency at the rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency at the balance sheet date have been translated to functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising
from translation are included in the consolidated statement of comprehensive income. Non-monetary assets and liabilities denominated in foreign currenciesthat are stated atfair value are translated to functional currency at foreign exchange rates ruling at the datesthe values were determined. Non-monetary assets and itemsthat are measured in terms of "historical cost of a foreign currency" are not retranslated.
Itemsincluded in the financialstatements of each of the Group's entities are measured using the currency of the primary economic environment where the entity operates('the functional currency'). The consolidated financialstatements are presented in Croatian kuna (HRK), which isthe Parent Company'sfunctional and the Group's presentation currency.
The results and financial position of allthe Group's entities with a functional currency different from the presentation currency are translated into the presentation currency asfollows:
On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken into other comprehensive income. When a foreign operation issold, exchange differencesthat were recorded in equity are reclassified from other comprehensive income to the income statement as part of the gain or loss on sale.
The Group provides employees with jubilee and one-off retirement awards. The obligation and costs of these benefits are determined by using the Projected Unit Credit Method. The Projected Unit Credit Method considers each period ofservice as giving rise to an additional unit of benefit entitlement and measures each unitseparately to build up the final obligation. The obligation is measured at the present value of estimated future cash flows using a discountrate that issimilarto the interest rate on government bonds where the currency and terms of the government bonds are consistent with the currency and estimated terms of the benefit obligation.
The Group operates an equity-settled,share-based compensation plan allowing the employeesto receive shares according to internal policy. The fair value of the employee servicesreceived in exchange forthe grant of the sharesisrecognized as an expense with a corresponding increase in equity. The fair value is measured at grant date and spread overthe period during which the employees become unconditionally entitled to the shares. The total amount to be expensed overthe vesting period is determined by reference to the fair value of the shares granted. At each balance sheet date, the Parent Company revisesits estimates of the number ofsharesthat are expected to become granted. It recognizesthe impact of the revision of original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to equity. When distributed upon vesting date,treasury shares are credited at average purchase cost and recorded againstretained earnings.
The Group recognizes a liability and an expense for bonuses as a provision where contractually obliged or where there is past practice that has created a constructive obligation.
A provision isrecognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. The most significant provisions in the consolidated financial statements are provisionsfor 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 risksspecific to the liability. A provision for warrantiesisrecognized when the underlying products orservices are sold. The provision is based on historical warranty data and a weighting of all possible outcomes againsttheir associated probabilities. The increase in the provision due to passage of time is recognized as interest expense.
Interest income isrecognized using the effective interest method. When a loan and receivable isimpaired,the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount asinterest income. Interest income on impaired loan and receivables is recognized using the original effective interestrate.
Operating segments are reported in a manner consistent with the internalreporting provided to the chief operating decisionmaker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board that makes strategic decisions.
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds(net of transaction costs) and the redemption value isrecognized in the consolidated statement of comprehensive income overthe period ofthe borrowings using the effective interest method. Borrowings are classified as current liabilities unlessthe Group has an unconditionalright to defersettlement of the liability for at least 12 months after the balance sheet date.
Grantsfrom the government are recognized within "Other operating income" attheirfair value where there isreasonable assurance that the grant will be received, and the Group will comply with all attached conditions.
Government grants relating to costs are deferred and recognized overthe period necessary to match them with the coststhat they are intended to compensate.
Grants relating to property, plant and equipment are recognized in profit or loss over the periods and in the proportions in which depreciation on those assets is recognized. In statement of financial position, government grant is deducted in arriving at the carrying amount of the underlying asset and is recognized in the profit or loss over the useful life of depreciable asset by way of a reduced depreciation charge.
Dividend distribution to the shareholdersisrecognized as a liability in the consolidated financialstatementsin the period in which the dividends are approved by the shareholders.
Subsidiaries are all entities(including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or hasrights to, variable returnsfrom its involvement with the entity and hasthe ability to affect those returns through its power overthe entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary isthe fair values of the assetstransferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement.Acquisition-related costs are expensed asincurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially attheirfair values at the acquisition date. On an acquisition-byacquisition basis, the Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the recognized amounts of identifiable acquiree's net assets.
Goodwill is initially measured as excess of the aggregate of the consideration transferred and the fair value of non-controlling interest in the acquiree and acquisition-date fair value of any previous equity interest in the acquiree overthe fair value of the Group's share of the identifiable net assets acquired. If this is lowerthan the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference isrecognized directly in the consolidated statement of comprehensive income.
Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated. Accounting policies ofsubsidiaries have been changed where necessary to ensure consistency with the policies adopted by theGroup.
The Group initially applied IFRS 16 Leases from 1 January 2019. A number of other new standards are also effective from 1 January 2019, but they do not have a material effect on the Group's financial statements.
The Group applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognized in retained earnings as at 1 January 2019. Accordingly, the comparative information presented for 2018 is not restated i.e. it is presented, as previously reported, under IAS 17 and related interpretations. The details of the changes in accounting policies are disclosed below. Additionally, the disclosure requirements in IFRS 16 have not generally been applied to comparative information.
Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining whether an Arrangement Contains a Lease. The Group now assesses whether a contract is or contains a lease based on the definition of a lease, as explained in Note 28.
On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Group applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease under IFRS 16. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered or changed on or after 1 January 2019.
As a lessee, the Group leases property and vehicles. The Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16, the Group recognizes right‑of‑use assets and lease liabilities for most of these leases – i.e. these leases are on‑balance sheet.
At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component based on its relative stand‑alone price.
However, for leases of property the Group has elected not to separate non‑lease components and account for the lease and associated non‑lease components as a single lease component.
Previously, the Group classified property leases as operating leases under IAS 17. On transition, for these leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019 (see Note 28). Right-of-use assets are measured at either:
their carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the Group's incremental borrowing rate at the date of initial application: the Group applied this approach to its largest property lease; or
an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments: the Group applied this approach to all other leases.
The Group has tested its right-of-use assets for impairment on the date of transition and has concluded that there is no indication that the right-of-use assets are impaired.
The Group used a number of practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17. In particular, the Group:
did not recognize right-of-use assets and liabilities for leases for which the lease term ends within 12 months of the date of initial application;
did not recognize right-of-use assets and liabilities for leases of low value assets; and
excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application.
Adoption of IFRS 16, Leases (continued)
The Company leases out its own property and The Company has classified these leases as operating leases.
The Company is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor, except for a sub-lease.
The Company sub-leases some of its properties. Under IAS 17, the head lease and sub-lease contracts were classified as operating leases. On transition to IFRS 16, the right-of-use assets recognized from the head leases are presented in investment property and measured at fair value at that date. The Company assessed the classification of the sub-lease contracts with reference to the rightof-use asset rather than the underlying asset and concluded that they are operating leases under IFRS 16.
The Company has applied IFRS 15 Revenue from Contracts with Customers to allocate consideration in the contract to each lease and non-lease component.
On transition to IFRS 16, the Company recognized additional right‑of‑use assets, including investment property, and additional lease liabilities, recognizing the difference in retained earnings. The impact on transition is summarized below.
| IFRS 16 adjustment HRK '000 |
|
|---|---|
| Right-of-use asset | 63,135 |
| Lease liabilities, current | 19,559 |
| Lease liabilities, non-current | 43,576 |
When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its incremental borrowing rate at 1 January 2019. The weighted average rate applied is 2.5%.
Difference between minimum lease payments for operating lease contracts at 31 December 2018 and initial recognition of right of use asset as at 1 January 2019 is shown below:
| 1 January 2019 HRK '000 |
|
|---|---|
| Operating lease commitments as at 31 December 2018 | 9,598 |
| Recognition exemption for leases of low-value assets | (3,630) |
| Extension options reasonably certain to be exercised | 61,103 |
| Adjustments for discounting at initial recognition date | (3,936) |
| Lease liabilities recognized as at 1 January 2019 | 63,135 |
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2019 reporting periods and have not been early adopted by the group. These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.
Accounting estimates and judgements are continually evaluated and are based on historical experience and otherfactors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition,seldom equalthe related actualresults. The estimates and assumptionsthat have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
The Group reviews its receivables to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans and receivables before the decrease can be identified with an individual loan or receivable in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with parameters relevant to assets in the Group.
In 2016, the Group entered into several new customer contracts in the foreign market. The contracts include delivery of equipment and sale of services with 15% up-front payment while remaining 85% have deferred payment terms up to 54 months.
The Group financed the sale of equipment through a Supplier credit arrangement.
The arrangement includes: (i) matching cash receipts from customer with payments to the bank, (ii) assignation of insurance policy to the bank, and (iii) ceding future cash receipts from the customer to the bank through special purpose accounts secured by special purpose deposits (Note 14).
By transferring to the bank its contractual right to receive the cash flows, the Group transferred the financial asset to the bank. In terms of derecognition criteria, the Group analyzed transfer of risk and rewards of the receivable, specifically related to credit risk and late payment risk.
The Credit risk is shifted from international customer to the risk from domestic insurance company default, which is considered as significant transfer in credit risk. The Group issued guarantees to the financing bank for risk of non-performance by the insurance company which is disclosed in Note 22. The issued guarantee for non-performance of the insurance company is recognized initially at fair value and subsequently at the higher of the unamortized balance of the initial fair value and the best estimate of expenditure required to settle the obligation under the guarantee.
Late payment risk was transferred based on the fact that the special purpose deposit covers the late payment charges and/or history of payments with the customer do not historically evidence late payment risk as substantial to the agreement.
Having transferred the right to cash flows and substantially all the risk and rewards relating to 90% of receivables, the management concluded that it was appropriate to derecognize 90% of the related receivables from the balance sheet. The remaining 10% of the receivables remain on the balance sheet as long-term receivables from the customer (Note 14) and a 10% of the related financing liability to the bank is recorded as borrowings (Note 21).
Following derecognition, the residual difference between interest receivable from the customer and interest payable to the bank represents separate liability recognized at fair value and is disclosed in Note 21.
The Group uses estimates and judgments in determining the amount and timing of revenue under IFRS 15, particularly when determining the transaction price and its allocation to performance obligations identified under the contract.
Transaction price may consist of variable elements such as discounts and contract penalties. Transaction price, including variable considerations, is estimated at the commencement of the contract (and periodically thereafter). Judgment is used in the estimation process based on historical experience with the type of business and customer.
IFRS 15 also requires revenue to be allocated to each performance obligations by reference to their stand-alone selling prices. The Group considers that an adjusted market assessment approach should be used to estimate stand-alone selling prices for its products and services for the purposes of allocating transaction price. These estimates are comprised of prices set for similar customer and circumstances, adjusted to reflect appropriate profit margins for the market. Estimates are used to determine discounts that relate specifically to each performance obligations, thus impacting their stand-alone selling prices.
The management applies judgment when assessing the customer's ability and intention to pay in a contract. The assessment is based on the latest customer credit standing and the customer's past payment history. This assessment may change during the contract execution, and if there is evidence of deterioration in the customer's ability or intention to pay, then under IFRS 15 no further revenue shall be recognized until the collectability criteria is met. Conversely, this assessment may also change favorably over time, upon which revenue shall now be recognized on a contract that did not initially meet the collectability criteria.
Revenue for standard products shall be recognized when control over the equipment is transferred to the customer at a point in time. This assessment shall be viewed from a customer's perspective considering indicators such as transfer of titles and risks, customer acceptance, physical possession, and billing rights.
Control of an asset therefore refers to the ability to direct use of and obtain substantially all the remaining benefits from the asset. Control includes the ability to prevent other entities from using and obtaining the benefits from an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly.
Judgment may be applied in determining whether risk and rewards have been transferred to the customer and whether the customer has accepted the products. In a sale of software license, judgment may also be applied to determine when the software is made available to the customer by considering when they can direct the use of, and obtain substantially all the benefits of, the license. Often all indicators of transfer of control are assessed together and an overall judgment formed as to when transfer of control has occurred in a customer contract.
Revenue for customized solutions shall be recognized over time if progress of completion can be reliably measured and enforceable right to payment exists over the duration of the contract. The progress of completion is estimated by reference to the output delivered such as achievement of contract milestones and customer acceptance. Judgments are applied when determining the appropriate revenue milestones that best reflect the progress of completion and are aligned with key acceptance stages within the contract.
Analysis of revenue by category:
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 At a point in time |
HRK '000 Over time |
HRK '000 | HRK '000 At a point in time |
HRK '000 Over time |
|
| Sales revenue from products | 459,315 | 409,552 | 49,763 | 388,989 | 315,027 | 73,962 |
| Sales revenue from services | 1,319,991 | 1,195,517 | 124,474 | 1,169,166 | 1,020,671 | 148,495 |
| 1,779,306 | 1,605,069 | 174,237 | 1,558,155 | 1,335,698 | 222,457 |
The Group has determined the operating segments based on the reports reviewed by the Management Board that are used to make strategic decisions. The Management Board assessesthe performance of the operating segments based on a measure of adjustedOperating profit. The measurement basis excludesthe effects of gains/losses on operating exchange rate differences and administration expenses.
When determining the operating segments,the Group haslooked at which market and to what type of customersthe Group's products are aimed, and through what distribution channelsthey are sold, as well asto commonality regarding technology, research and development.
To bestreflect the businessfocus and to facilitate comparability with the Ericsson Group, four operating segments are reported:
– Networks include radio and transport solutions with supporting services, based on industry standards and offered via scalable modular platforms. The portfolio enables customersto evolve theirtelecom networks across generationsto 5G.
– Digital Services include products and services providing solutions for our Telecom and Industry & Society customers' digitaltransformation journeys acrossthe supportsystems BSS and OSS, Telecom Core, and IT Cloud domainsthrough a combination of products, technology and expertise in networks, software, cloud, and business processes.
– Managed Services are offered in three main areas: Networks, IT, and Network Design & Optimization.
– Other includes products and services that enable content owners, broadcasters, TV service providers and network operatorsto efficiently deliver, manage and monetize new TV experiences. In addition,segment Otherincludes iconectiv and emerging business such as Internet of Things and Unified Delivery Network (UDN).
The Management Board does not monitor assets and liabilities by segments and therefore this information is not disclosed.
Revenues determined based on the geographic location of customers are disclosed in this note. The Group's assets are located in Croatia and Bosnia and Herzegovina.
| HRK '000 | HRK '000 At a point in time |
2019 HRK '000 Overtime |
HRK '000 | HRK '000 At a point in time |
2018 HRK '000 Over time |
|
|---|---|---|---|---|---|---|
| Sales revenue in domestic market |
497,706 | 389,304 | 108,402 | 372,523 | 247,640 | 124,883 |
| Sales revenue in Russia, Belarus, Kazakhstan, Georgia, Moldova, Ukraine and Armenia |
92,977 | 68,527 | 24,450 | 92,629 | 52,299 | 40,330 |
| Sales revenue to Ericsson | 1,027,055 | 1,027,055 | - | 955,802 | 955,802 | - |
| Sales revenue in Bosnia and Herzegovina, Montenegro and Kosovo |
136,757 | 98,336 | 38,421 | 21,803 | 68,191 | 53,612 |
| Other export sales revenue | 24,811 | 21,847 | 2,964 | 15,398 | 11,766 | 3,632 |
| 1,779,306 | 1,605,069 | 174,237 | 1,558,155 | 1,335,698 | 222,457 |
| Networks | Digital services | Managed services | Other | Unallocated | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||
| Sales revenue | 1,011,967 | 939,831 | 570,812 | 439,809 | 189,327 | 177,087 | 7,200 | 1,428 | - | - | 1,779,306 | 1,558,155 |
| Timing of revenue recognition: |
||||||||||||
| At a point in time | 905,945 | 820,256 | 502,597 | 337,540 | 189,327 | 177,087 | 7,200 | 815 | - | - | 1,605,069 | 1,335,698 |
| Over time | 106,022 | 119,575 | 68,215 | 102,269 | - | - | - | 613 | - | - | 174,237 | 222,457 |
| Operating profit | 86,305 | 108,025 | 41,937 | 38,705 | 5,639 | 5,090 | 158 | 247 (31,479) | (32,072) | 102,561 | 119,994 | |
| Finance income/ (expense), net |
5,668 | 638 | ||||||||||
| Profit before tax | 108,229 | 120,632 | ||||||||||
| Income tax | (5,750) | (6,988) | ||||||||||
| Profit for the year | 102,479 | 113,644 |
Cost of sales, selling expenses and administrative expenses consist of the following expenses by nature:
| 2019 | 2018 (restated) | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Changes in contract work in progress (Note 15) | (62,616) | (91,824) |
| Material and external services (1) | 804,063 | 733,810 |
| Personnel expenses (Note 8) | 895,451 | 802,996 |
| Depreciation and amortization (Notes 12, 13, 28) | 57,534 | 34,872 |
| Value adjustments | 2,247 | 9,459 |
| 1,696,679 | 1,489,313 |
In accordance with the new classification, the Company has restated the comparative information for 2018 in comparison with the prior year financial statements. The cost of sales increased by HRK 19,703 thousand, selling expenses increased by HRK 2,707 thousand, administrative expenses increased by HRK 2,198 thousand compared to prior year financial statements. Other operating expenses were reduced by HRK 534 thousand, other operating income increased by HRK 25,777 thousand while net finance result decreased by HRK 1,703 thousand.
Aforementioned restatements did not have impact on the result for 2018.
Other operating income consists of rent income in total amount of HRK 13,963 thousand (2018: HRK 15,843 thousand), government grants total amount HRK nil (2018: HRK 24,184 thousand) and other in total amount of HRK 5,971 thousand (2018: HRK 11,125 thousand).
(1) Including fees to auditors of HRK 636 thousand (2018: HRK 659 thousand). Fees to auditors mainly relate to statutory audit services.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Net salaries | 489,644 | 444,805 |
| Taxes and contributions | 333,988 | 313,347 |
| Other payroll-related costs | 70,705 | 44,844 |
| Equity-settled transactions (Note 23 (b)) | 1,114 | - |
| 895,451 | 802,996 | |
Personnel expensesinclude HRK 139,851 thousand (2018: HRK 126,919 thousand) of defined pension contributions paid or payable into obligatory pension plans. Contributions are calculated as a percentage of employees' grosssalaries(Gross I). Other payroll-related costs mainly relate to termination benefitsin the amount of HRK 4,696 thousand (2018: HRK 7,762 thousand), and to transportation expenses and vacation accrual cost.
As at 31 December 2019, the total number of employees was 3,224 (2018: 3,173)
.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Interest income | 4,637 | 810 |
| Net foreign exchange rate result | 1,152 | (1,652) |
| Interest expense | (1.507) | (58) |
| Net change in fair value of financial assets at fair value through profit and loss | 471 | 36 |
| Other | 915 | 1,502 |
| 5,668 | 638 |
Income tax has been calculated on the taxable income atstatutory tax rates applicable to profitsin the respective countries. Income tax expense recognized in the consolidated statement of comprehensive income comprises:
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Current income tax expense | (592) | (13,445) |
| Total deferred tax income/(expense) | (5,158) | 6,457 |
| Total income tax expense | (5,570) | (6,988) |
The Group did not recognize deferred income tax assets of HRK 721 thousand (2018: HRK 570 thousand) in respect of cumulative tax losses amounting to HRK 7,208 thousand (2018: HRK 5,698 thousand) that can be carried forward against future taxable income.
A tax loss may be carried forward forfive yearssubsequent to the yearin which it wasincurred. The availability of tax losses against future periods, subject to review by the Ministry of Finance, is as follows:
| 2019 | 2018 | |
|---|---|---|
| Tax loss for 2016 – expires 31 December 2021 | 1,577 | 1,577 |
| Tax loss for 2017 – expires 31 December 2022 | 1,543 | 1,543 |
| Tax loss for 2018 – expires 31 December 2023 | 2,578 | 2,578 |
| Tax loss for 2019 – expires 31 December 2024 | 1,510 | - |
| 7,208 | 5,698 |
The tax on the profit before tax differsfrom the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities asfollows:
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Profit before tax | 108,229 | 120,632 |
| Tax calculated at domestic tax rates applicable to profits in the respective countries | 19,143 | 22,073 |
| Tax effects of: | ||
| Permanent non-deductible expenses | 433 | 347 |
| Effects of temporary differences | (309) | 113 |
| Tax incentives | (13,517) | (15,523) |
| Utilization of tax losses | - | (22) |
| Tax charge | 5,750 | 6,988 |
| Effective tax rate | 5.3% | 5.8% |
Tax incentives totaling HRK 13,517 thousand (2018: HRK 15,523 thousand) include tax allowances for certain expenditure, as employment and education and training, as defined by Croatian tax legislation. The underlying expenditure is included in cost of sales.
The Croatian Income TaxAct issubject to different interpretations and changesin respect of certain expenses which reduce the tax base. The Management Board's interpretation of the law relating to these transactions and activities of the Group may be disputed by the relevant authorities. The Tax Authority may take a different view in interpreting the laws and judgments, and it is possible that those transactions and activitiesthat have not been disputed in the past may be disputed now. The Tax Authority may carry out a tax audit within three years from the year in which the income tax liability for a certain financial period was established.
The Group recognized deferred tax assetsin the amount of HRK 16,200 thousand (2018: HRK 21,358 thousand) relating to temporary differences arising from:
| Impairments, provisions and accrued expenses | HRK '000 |
|---|---|
| As at 1 January 2018 | 14,901 |
| Tax credited to the Income statement | 10,087 |
| Tax charged to the Income statement | (3,630) |
| As at 31 December 2018 | 21,358 |
| As at 1 January 2019 | 21,358 |
| Tax credited to the Income statement | 10,776 |
| Tax charged to the Income statement | (15,934) |
| As at 31 December 2019 | 16,200 |
| 2019 | 2018 | |
|---|---|---|
| Profit for the year (HRK '000) | 102,479 | 113,644 |
| Weighted Average Number of Shares Outstanding at the year-end | 1,331,439 | 1,331,640 |
| Earnings per share (HRK) | 76.97 | 85.34 |
Basic and fully diluted earnings pershare are the same since the Parent Company does not have any dilutive potential ordinary shares.
| Land and | Plant and | Asset under | |||
|---|---|---|---|---|---|
| buildings | equipment | construction | Other | Total | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January 2018 | |||||
| Cost or valuation | 167,664 | 386,541 | 1,734 | 328 | 556,267 |
| Accumulated depreciation | (121,987) | (325,315) | - | (253) | (447,555) |
| Net book amount | 45,677 | 61,226 | 1,734 | 75 | 108,712 |
| Year ended 31 December 2018 | |||||
| Opening net book amount | 45,677 | 61,226 | 1,.734 | 75 | 108,712 |
| Transfer of asset under construction | - | 1,734 | (1,734) | - | - |
| Additions | 3,754 | 35,232 | 832 | - | 39,818 |
| Disposals | - | (65) | - | - | (65) |
| Depreciation charge | (3,296) | (30,508) | - | (7) | (33,811) |
| Closing net book amount | 46,135 | 67,619 | 832 | 68 | 114,654 |
| As at 31 December 2018 | |||||
| Cost or valuation | 171,418 | 392,420 | 832 | 327 | 564,997 |
| Accumulated depreciation | (125,283) | (324,801) | - | (259) | (450,343) |
| Net book amount | 46,135 | 67,619 | 832 | 68 | 114,654 |
| Year ended 31 December 2019 | |||||
| Opening net book amount | 46,135 | 67,619 | 832 | 68 | 114,654 |
| Transfer of asset under construction | - | 832 | (832) | - | - |
| Additions | 6,742 | 32,256 | 28,853 | - | 67,851 |
| Disposals | - | (2,348) | - | - | (2,348) |
| Depreciation charge | (3,619) | (32,755) | - | (7) | (36,381) |
| Closing net book amount | 49,258 | 65,604 | 28,853 | 61 | 143,776 |
| As at 31 December 2019 | |||||
| Cost or valuation | 175,163 | 387,879 | 28,853 | 328 | 592,223 |
| Accumulated depreciation | (125,905) | (322,275) | - | (267) | 448,447 |
| Net book amount | 49,258 | 65,604 | 28,853 | 61 | 143,776 |
As at 31 December 2019, the Group had contractstotaling HRK 1,417 thousand (2018: HRK 5,622 thousand) related to future equipment purchases. Asset under construction mostly relates to building energy reconstruction in Krapinska 45, Zagreb.
The Group acts as a lessor under operating leases, mainly in respect of land and buildings. Property leased to others with a carrying value of HRK 7,434 thousand (2018: HRK 9,942 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.
The movement on intangible assets in the year ended 31 December 2019 may be analyzed as follows:
| Application software |
Goodwill (i) | Total | |
|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January 2018 | |||
| Cost or valuation | 7,776 | 4,173 | 11,949 |
| Accumulated amortization | (5,789) | - | (5,789) |
| Net book amount | 1,987 | 4,173 | 6,160 |
| Year ended 31 December 2018 | |||
| Opening net book amount | 1,987 | 4,173 | 6,160 |
| Additions | 6 | - | 6 |
| Amortization charge | (1,096) | - | (1,096) |
| Closing net book amount | 897 | 4,173 | 5,070 |
| As at 31 December 2018 | |||
| Cost or valuation | 5,388 | 4,173 | 9,561 |
| Accumulated amortization | (4,491) | - | (4,491) |
| Net book amount | 897 | 4,173 | 5,070 |
| Year ended 31 December 2019 | |||
| Opening net book amount | 897 | 4,173 | 5,070 |
| Amortization charge | (658) | - | (658) |
| Closing net book amount | 239 | 4,173 | 4,412 |
| As at 31 December 2019 | |||
| Cost or valuation | 5,047 | 4,173 | 9,220 |
| Accumulated amortization | (4,808) | - | (4,808) |
| Net book amount | 239 | 4,173 | 4,412 |
(i) In September 2014,the Group signed business unit transfer agreements by which the Group acquired a businessfrom Hrvatski Telekom d.d. The agreementsincluded transfer of 641 employees,supplier contracts, organizationalstructure, activities and operational processes. The business comprises acquired assets and assumed liabilitiesto employees.
Goodwill is tested annually for impairment as stated in Note 1.
The recoverable amount of cash generating units is determined based on value-in-use calculations. These calculations use cash flow projections from financial budgets approved by the management covering a five-year period. The present value of future cash flows is calculated using a discount rate of 12.17%, based on the Group's weighted average cost of capital.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Deposits with financial institutions, denominated in foreign currency | 13,826 | 15,804 |
| Deposits with financial institutions, denominated in HRK | 18,160 | 12,360 |
| Non-current receivables from foreign customers, denominated in foreign currency | 14,381 | 19,682 |
| Loans given, Note 4 (b) | 9,119 | 6,833 |
| Receivables for sold apartments | 478 | 512 |
| Total loans and receivables | 55,964 | 55,191 |
| Impairment allowance on loans and receivables | (2,192) | (3,534) |
| 53,772 | 51,657 |
Deposits with financial institutionsin the amount of HRK 30,210 thousand (2018: 24,082) are used as a collateral for Supplier credit arrangement disclosed in Note 4 (b), with interest rate from 0.75% to 2% and maturing in year 2022.
The rest of the deposits with financial institutions of HRK 1,777 thousand (2018: HRK 4,081 thousand) are placed as guarantee deposits for housing loans provided to the employees with a remaining maturity of over three years.
Loans and receivablesfrom customers are partially secured with bank guarantees and letters of credit. The current portion of the non-current receivables is classified under current assets.
Receivables for sold apartments are linked to the counter value of euro,repayments are made by deduction from monthly salary and the loans are secured with collateral on the house or apartment. Receivables for sold apartments and housing loans provided to a limited number of employees bear fixed interest rates of up to 5% per annum.
| 2019 | 2018 | |
|---|---|---|
| Due | HRK '000 | HRK '000 |
| 2020 | - | 12,562 |
| 2021 | 14,851 | 10,082 |
| 2022 | 8,650 | 3,871 |
| 23,501 | 26,515 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Raw materials | - | 10 |
| Contract work in progress | 173,333 | 110,694 |
| Total inventories | 173,333 | 110,704 |
| Impairment allowance | (22) | (9) |
| 173,311 | 110,695 |
Slow-moving or obsolete inventories have been written down to their estimated realizable value through an impairment allowance. The impairment allowance is included within other operating expenses in the consolidated statement of comprehensive income.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Foreign trade receivables | 59,366 | 55,862 |
| Current portion of non-current foreign receivables | 12,678 | 10,954 |
| Total current foreign receivables | 72,044 | 66,816 |
| Domestic trade receivables | 143,976 | 109,518 |
| Total current domestic receivables | 143,976 | 109,518 |
| Impairment allowance on receivables | (583) | (15,610) |
| 215,437 | 160,724 |
Impairment allowance on receivables in 2018 relate to one off impairments recognized in prior years.
Movements in impairment allowance on loans and receivables were as follows:
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| As at 1 January | 20,006 | 13,582 |
| Impact of discounting non-current receivables | (1.389) | (1,089) |
| Receivables written off during the year as uncollectible | (16.338) | (2,949) |
| Impairment on receivables | 2,188 | 10,462 |
| As at 31 December (1) | 4.467 | 20,006 |
1) Including impairment provision for receivables from related parties of HRK 1,686 thousand (2018: HRK 862 thousand).
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Advances given | 9,535 | 6,107 |
| Net VAT receivables | 1,020 | 7,332 |
| Other receivables | 7,568 | 731 |
| 18,123 | 14,170 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Financial assets at fair value through profit or loss | ||
| - Equity securities | 1,612 | 1,316 |
| - Investment in open-ended investment funds | 36,280 | 47,174 |
| 37,892 | 48,490 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Cash and demand deposits | 98,333 | 188,724 |
| Impairment loss (Note 30(d)) | (427) | (836) |
| 97,906 | 187,888 |
As at 31 December 2019, the share capital isrepresented by 1,331,650 (2018: 1,331,650) of authorized, issued and fully paid ordinary shares, with a totalregistered value of HRK 133,165 thousand (2018: HRK 133,165 thousand). The nominal value of one share is HRK 100 (2018: HRK 100). Holders of the ordinary shares are entitled to receive dividends as declared at the General Assembly and are entitled to one vote per share at the General Assembly.
The shareholders as at 31 December are:
| Number of shares | % held | Number of shares | % held | |
|---|---|---|---|---|
| 2019 | 2018 | |||
| Telefonaktiebolaget LM Ericsson | 653,473 | 49.07 | 653,473 | 49.07 |
| Other shareholders | 677,966 | 50.91 | 677,966 | 50.91 |
| Treasury shares | 211 | 0.02 | 211 | 0.02 |
| 1,331,650 | 100.00 | 1,331,650 | 100.00 |
These shares are initially held as "treasury shares" and are regularly granted to key management and other employees as a part of the share-based program established in 2004, as described in Note 23 (b). During 2019, the Parent Company did not purchase its own shares.
Movements in treasury shares are as follows:
| Number of shares | Number of shares | |
|---|---|---|
| 2019 | 2018 | |
| As at 1 January (Note 20 (a)) | 211 | 246 |
| Purchased during the year | - | |
| Distributed during the year | - | (35) |
| As at 31 December (Note 20 (a)) | 211 | 211 |
A legal reserve in the amount of 5% of totalshare capital wasformed during previous periods by appropriation of 5% of net profit per annum up to a cap of 5% of share capital. The legalreserve may be used to cover losses if the losses are not covered by current net profit orif otherreserves are not available. The Group recorded the required level of legalreserves in 2000 and no further allocation to legal reserves is required. Legal reserves up to 5% of total share capital are not distributable.
Reserve for own shares are separated by decision of General Assembly of the Group.
Dividends payable are not accounted for until they have been ratified at the General Assembly ofshareholders. On 13 June 2019, the General Assembly approved a regular dividend in respect of 2018 of HRK 20.00 pershare, and an additional extraordinary dividend of HRK 50.60 per share, totaling HRK 94,000 thousand.
Cash dividends authorized and paid for previous years were as follows:
| 2019 | 2018 | ||
|---|---|---|---|
| HRK '000 | HRK '000 | ||
| HRK 32.50 per share for 2017 | - | 43,272 | |
| HRK 70.60 per share for 2018 | 94,000 | - | |
| Prior year dividend payout | - | 19 | |
| 94,000 | 43,291 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Loans | 21,694 | 66 |
| Borrowings, Note 4 (b) | 5,668 | 5,668 |
| Total liabilities for borrowings | 27.362 | 5.734 |
| Changes in liabilities from financing activities | ||
| Year ended 31 December 2018 | HRK '000 | |
| Opening net book amount | 8,378 | |
| Foreign exchange differences | 294 | |
| Release of obligations (Note 4(b)) | (3,004) | |
| Closing net book amount | 5,668 | |
| Year ended 31 December 2019 | ||
| Opening net book amount | 5,668 | |
| Foreign exchange differences | 171 | |
| Release of obligations (Note 4(b)) | (171) | |
| Closing net book amount | 5,668 | |
Loan is taken due to the Energy Efficiency project for premises in Zagreb (Krapinska 45). Loan is taken with fixed interest rate
.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Accounts payable | - | 171 |
| NPV discount | - | (93) |
| Total accounts payable | - | 78 |
| Deferred revenue | 3,025 | 3,614 |
| Liabilities for issued guarantee, Note 4 (b) | 903 | 692 |
| Contract liabilities – Long-term | - | 52 |
| Other non-current liabilities, Note 4 (b) | 4,776 | 2,084 |
| 8,704 | 6,520 |
The Group does not operate any pension schemes or otherretirement benefitschemesforthe benefit of any of its employees or management. In respect of all of the personnel, such social payments as required by the authorities are paid. These contributions form the basis of social benefits payable out of the Croatian Pension Insurance Institute to the Croatian employees upon theirretirement. Additionally, in 2001 the Parent Company signed an Annex to the Union Agreement based on which employees are entitled to a benefit upon earlyretirement.
However,the Group pays a one-time benefit amounting to HRK 8,000 for each employee who retires. Additionally,the Group pays jubilee awards in respect of each 5 years ofservice 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 2019 were a 2.76% discount rate (2018: 6%) and a 6.26% (2018: 4.89%) rate of average employment turnover.
Jubilee awards Retirement Total Jubilee awards Retirement Total 2019 2018 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 As at 1 January 7,461 1,201 8,662 7,273 1,303 8,576 Obligation created during the year 2,650 9,946 12,596 1,038 172 1,210 Obligation fulfilled during the year (848) (9,911) (10,759) (817) (24) (841) Obligation reversed during the year - (185) (185) (32) (251) (283) As at 31 December 9,263 1,051 10,314 7,462 1,200 8,662
Movements in long-term service benefits were as follows:
In 2004,the Parent Company established its Loyalty program, a share-based scheme under key employees are entitled to receive the Parent Company´sshares conditional on the employee completing certain years of service (the vesting period) from the grant date.
The treasury shares are distributed to eligible employees upon ratification at the General Assembly.
Part of the share-based program from 2014 relatesto 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 program, the Parent Company didn't sold to its employees shares (2018: 15 shares) and accordingly didn't receive compensation (2018: HRK 45 thousand). In 2018 the difference between the purchase price of the shares and selling price received from the employee in the amount of 28 thousand has been recognized within retained earnings.
Movements in shares under the Award and Loyalty programs are as follows:
| 2019 | 2018 | |
|---|---|---|
| Number of shares | Number of shares | |
| As at 1 January | - | 35 |
| Granted | 7,915 | - |
| Exercised | - | (35) |
| As at 31 December | 7,915 | - |
Vesting conditions for shares granted under Loyalty program are two to five years of service.
The fair value ofservice received in return forshares granted is measured by reference to the observable market price of shares at the grant date.
During 2019,the Group had HRK 1,114 thousand expenses(2018: HRK zero) in respect ofshare-based payments, which are included in personnel expenses as disclosed in Note 8.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Trade payables | 54,360 | 63,380 |
| Liabilities to employees | 108,583 | 92,120 |
| VAT liabilities | 1,323 | - |
| Other current liabilities | 24,194 | 23,408 |
| 188,460 | 178,908 |
Movements in provisions were as follows:
| Warranty reserve HRK '000 |
Termination benefits HRK '000 |
Other reserve HRK '000 |
Total HRK '000 |
|
|---|---|---|---|---|
| As at 1 January 2018 Additional provisions |
8,775 1,373 |
2,340 11,195 |
16,452 30,661 |
27,567 43,229 |
| Unused provisions reversed Provisions used during the year As at 31 December 2018 |
(4,119) (2,516) 3,513 |
- (12,286) 1,249 |
- (34,904) 12,209 |
(4,119) (49,706) 16,971 |
| As at 1 January 2019 | 3,513 | 1,249 | 12,209 | 16,971 |
| Additional provisions | 1,661 | 23,567 | 8,626 | 33,854 |
| Unused provisions reversed | (182) | - | - | (182) |
| Provisions used during the year | (2,441) | (13,514) | (18,312) | (34,267) |
| As at 31 December 2019 | 2,551 | 11,302 | 2,523 | 16,376 |
The warranty reserve is established to cover the expected warranty claims on products sold during the year. Reversal of warranty reservesrelatesto expired warranties.
Followed by the prudence principle and based on the circumstances and other factors, including expectations of future events, a provision in the amount of HRK 8,626 thousand (2018: HRK 11,261 thousand) was made to a complex project on domestic market.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Deferred revenue | 8,330 | 4,725 |
| Accrued charges for unused holidays | 25,593 | 24,885 |
| Accrued charges in respect of service contracts | 32,106 | 33,353 |
| Other accrued charges | 29,884 | 50,505 |
| 95,913 | 113,468 |
Deferred revenue represents amounts due to customers under contractsfor work not performed but invoicesissued or cash received and thus present a liability to perform a service ordelivery.
Accrued chargesin respect ofservice contracts mainly represent costsincurred for which no invoice has been received from supplier or other external contractor at the balance sheet date.
The Group has recognized the following assets and liabilities arising from contracts with customers:
| 31 December 2019 | 31 December 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Contract assets from contracts with customers | 3,239 | 3,335 |
| Loss allowance | - | - |
| Total current contract assets | 3,239 | 3,335 |
| Contract liabilities – advances from customers | 6,611 | 2,088 |
| Contract liabilities – deferred revenue | 142,764 | 169,557 |
| Total current contract liabilities | 149,375 | 171,645 |
As at 31 December 2019 the Group recognized HRK 3,239 thousand of contract assets net of impairment loss provisions (refer to Note 29) in respect of managed services contracts that relate to future service performance (as at 31 December 2018: HRK 3,335 thousand) and will be realized when contract conditions are met.
As at 31 December 2019 the Group recognized HRK 149,375 thousand of contract liabilities in respect of the following contracts related to modernization of mobile and fixed network, project-related services and support activities, e-Health Information Systems and other (as at 31 December 2018: HRK 171,645 thousand).
The following table presentsinformation on unsatisfied performance obligationsresulting from long-term contracts with customers.
| 31 December 2019 | 31 December 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Aggregate amount of the transaction price allocated to long-term contracts that are fully unsatisfied as at 1 January and 31 December |
22,639 | 4,972 |
| Aggregate amount of the transaction price allocated to long-term contracts that are partially unsatisfied as at 1 January and 31 December |
81,647 | 72,442 |
| 104,286 | 77,414 |
The Group expects to recognize approximately 58% of the transaction price allocated to the remaining performance obligations as revenue in financial year 2020, 38% as revenue in financial year 2021 and 4% as revenues in financial year 2022.
All other contracts are for periods of one year or less or are billed based on time incurred. As permitted by IFRS 15, the transaction price allocated to these unsatisfied contracts is not disclosed.
The Group leases warehouse, office premises and parking lots. The leases typically run for a period of 5 years, with an option to renew the lease after that date. For certain leases, the Group is restricted from entering into any sub‑lease arrangements.
The warehouse, office premises and parking lots were entered many years ago as combined leases of land and buildings. Previously, these leases were classified as operating leases under IAS 17.
The Group leases vehicles under a number of leases, which were classified as operating leases under IAS 17. The leases typically run for a period of 3 to 5 years.
Information about leases for which the Group is a lessee is presented below.
Right‑of‑use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment
| Property, plant and equipment |
|
|---|---|
| HRK '000 | |
| Balance as at 1 January 2019 | 63,135 |
| Depreciation charge for the year | (20,495) |
| Increase of right‑of‑use assets | 9,280 |
| Balance as at 31 December 2019 | 51,920 |
| Property, plant and | |
|---|---|
| equipment | |
| HRK '000 | |
| 2019 – Leases under IFRS 16 | |
| Interest on lease liabilities | 1,447 |
| Income from sub-leasing right-of-use assets presented in 'other revenue' | - |
| Expenses relating to short-term leases Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets |
3,630 - |
| 2018 – Operating leases under IAS 17 | |
| Lease expense | 16,545 |
Some property leases contain extension options exercisable by the Group up to one year before the end of the non-cancellable contract period. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility.
The Group assesses at lease commencement date whether it is reasonably certain to exercise the extension options. The Group reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant changes in circumstances within its control.
The Group leases out its property consisting of its owned commercial properties. All leases are classified as operating leases from a lessor perspective.
The Company leases out its owned commercial properties. The Group has classified these leases as operating leases, because they do not transfer substantially all of the risks and rewards incidental to the ownership of the assets.
Rental income recognized by the Group during 2019 was HRK 13,925 thousand (2018: HRK 15,858 thousand).
The following table sets out a maturity analysis of lease payments to be received after the reporting date.
| Property plant and | |
|---|---|
| equipment | |
| HRK '000 | |
| 2019 – Operating leases under IFRS 16 | |
| Less than one year | 10,051 |
| Between one and three years | 4,939 |
| Between three and five years | 4,354 |
| More than five years | 8,537 |
| Total | 27,881 |
Forthe purposes of these consolidated financialstatements, 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 overthe 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 legalform.
The Group is a related party to the Ericsson Group via the 49.07% (2018: 49.07%)shareholding by Telefonaktiebolaget LM Ericsson, which is also the ultimate parent of the EricssonGroup.
TheGroup hasrelated-party relationships with Telefonaktiebolaget LM Ericsson, EricssonGroup subsidiaries and associates, the Supervisory Board, the Management Board and other executivemanagement.
Major transactions with the Ericsson Group companies may be summarized as follows:
| Telefonaktiebolaget LM Ericsson |
Other Ericsson Group consolidated companies |
Total | |||||
|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||
| Sales of goods and services | |||||||
| Sales revenue | - | - | 1,027,055 | 955,802 | 1,027,055 | 955,802 | |
| Other income | - | - | 7,964 | 17,897 | 7,964 | 17,897 | |
| - | - | 1,035,019 | 973,699 | 1,035,019 | 973,699 | ||
| Purchases of goods and services | |||||||
| Licenses | 3,688 | 2,945 | 19,401 | 20,688 | 23,089 | 23,633 | |
| Cost of sales | - | - | 436,860 | 390,081 | 436,860 | 390,081 | |
| 3,688 | 2,945 | 456,261 | 410,769 | 459,949 | 413,714 |
The sales of goods and servicestransactions have been directly negotiated between the involved parties and agreed on an individual basis. The Group pays: (i) license fees on sales ofservices and wireline products, (ii) corporate trademark licenses, (iii)supportservices, (iv) R&D tools and (v) IS/IT fee. The license fee is paid as a percentage ofsales ofservices and sales of wireline products.
The keymanagement include the executive management listed on page 37, comprising the Management Board member and directors of main organizational units.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Salaries and other short-term employee benefits | 22,173 | 19,364 |
| Other long-term benefits | 1,114 | - |
| 23,287 | 19,364 |
The members of the executive management and the Supervisory Board held 5,090 ordinary shares atthe year-end (2018: 4,971 shares).
In addition,the Group paid remuneration totaling HRK 349 thousand (2018: HRK 331 thousand) to the Supervisory Board and Audit Committee members during 2019.
Year-end balances arising from key transactions with Ericsson Group companies may be summarized as follows:
| Receivable | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | ||||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | |||
| Telefonaktiebolaget LM Ericsson (LME), largest individual | ||||||
| shareholder | - | - | 728 | 643 | ||
| Other Ericsson Group companies | 112,861 | 109,900 | 89,851 | 32,663 | ||
| 112,861 | 109,900 | 90,579 | 33,306 |
The Group recorded a non-currentreceivable (Note 14) of HRK nil thousand (2018: HRK 0 thousand) and a non-current portion of deferred revenue (Note 22) of HRK 3,025 thousand (2018: HRK 3,614 thousand) and current portion of deferred revenue
of HRK 1,833 thousand (2018: HRK 3,487 thousand) from Ericsson Services d.o.o. (ESK) relating to the five-year managed services contract with Hrvatski Telekom.
The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, and price risk), credit risk and liquidity risk. Exposure to currency, interest rate and credit risk arises in the normal course of the Group's business. Risk management is carried out by a treasury department and its principal role is to actively manage investment of excessliquidity as well asfinancial assets and liabilities, and to manage and control financialrisk exposures. The Group also has a customerfinance function with the main objective to find suitable third-party financing solutionsfor customers and to minimize recourse to the Group. Risk management policies that relate to financial instruments can be summarized as follows:
Currency risk isthe risk that the value of a financial instrument will fluctuate due to changesin foreign exchange rates. The Group is exposed to US dollars and to the euro, as a substantial proportion of receivables and foreign revenues are denominated in these currencies. Risk managementrelies on attemptsto match, as much as possible, revenuesin each currency with the same currency expenditure. The Group may enterinto foreign currency forward contractsto hedge economically its exposure to currency risk arising on operating cashflows.
As at 31 December 2019, if the euro and US dollar had weakened/strengthened by 1% (2018: 1%) against the Croatian kuna, with all other variables held constant, the net result aftertax forthe reporting period would have been HRK 297thousand higher/lower(2018: HRK 1,649 thousand), mainly as a result of foreign exchange losses/gains on translation of cash, cash equivalents, deposits, trade payables, customerreceivables and customerfinancing denominated in euro.
Other currencies to which the Group is exposed are: SEK, BAM, PLN, GBP.
The Group continuesto focus on securing natural hedges and active currency management and tominimize impactsfrom currency moves. The Group's exposure to foreign currencies is shown in the table below.
The tables below present the currency analysis and the resulting gap.
| 2019 | EUR | USD | Other currency |
Total foreign currencies |
HRK | Total |
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 16,426 | 31,633 | - | 48,059 | 5,713 | 53,772 |
| Trade and other receivables | 147,375 | 12,398 | 8,097 | 167,870 | 196,113 | 363,983 |
| Financial assets at fair value through profit or loss | - | - | - | - | 37,892 | 37,892 |
| Cash and cash equivalents | 22,211 | 4,220 | 11,757 | 38,188 | 59,718 | 97,906 |
| 186,012 | 48,251 | 19,854 | 254,117 | 299,436 | 553,553 | |
| Borrowings | (14,002) | (3,450) | - | (17,452) | (62,585) | (80,037) |
| Trade and other payables | (86,807) | (13,025) | (32) | (99,864) | (188,194) | (288,058) |
| (100.809) | (16,475) | (32) | (117,316) | (250,779) | (368,095) | |
| Currency gap | 85,203 | 31,776 | 19,822 | 136,801 | 48,657 | 185,458 |
| 2018 | EUR | USD | Other currency |
Total foreign currencies |
HRK | Total |
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 7,850 | 43,807 | - | 51,657 | - | 51,657 |
| Trade and other receivables | 116,465 | 28,442 | 9,709 | 154,616 | 133,985 | 288,601 |
| Financial assets at fair value through profit or loss | - | - | - | - | 48,490 | 48,490 |
| Cash and cash equivalents | 60,246 | 6,548 | 9,065 | 75,859 | 112,029 | 187,888 |
| 184,561 | 78,797 | 18,774 | 282,132 | 294,504 | 576,636 | |
| Borrowings | - | (5,668) | - | (5,668) | (102) | (5,770) |
| Trade and other payables | (49,687) | (6,282) | (418) | (56,387) | (162,617) | (219,004) |
| (49,687) | (11,950) | (418) | (62,055) | (162,719) | (224,772) | |
| Currency gap | 134,874 | 66,847 | 18,356 | 220,077 | 131,785 | 351,862 |
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. As the Group mainly has its customerfinancing at a fixed interest rate and only a small portion of customerfinancing is affected by possible changesin market interestrates,the risk of fluctuating market interestratesis considered low. The Group also has deposits in financial institutions at a variable interestrate.
As at 31 December 2019:
– ifthe effective EUR interestrate on EUR deposits had increased/decreased by 1% (2018: 1%) on an annual level,the net result due to changes in EUR deposits after tax for the reporting period would have been HRK 15 thousand higher/lower (2018: HRK 33 thousand);
– ifthe effective HRK interestrate on HRK deposits had increased/decreased by 1% (2018: 1%) on an annual level,the net result due to changes in HRK deposits after tax for the reporting period would have been HRK 297 thousand higher/lower (2018: HRK nil thousand);
– if the effective USD interest rate on USD deposits had increased/decreased by 1% (2018: 1%) on an annual level, the net result due to changes in USD deposits after tax for the reporting period would have been HRK 99 thousand higher/lower (2018: HRK nil thousand).
The following table presents the annual average interest rates exposure of financial assets.
| Average interest rates |
Average interest rates |
|
|---|---|---|
| 2019 | 2018 | |
| % | % | |
| Loans and receivables | 0.84 | 0.82 |
| Cash and cash equivalents | 0.03 | 0.08 |
The tables below present the interest rate repricing analysis and the resulting gap.
| 2019 | 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 | 21,785 | - | - | - | 30,210 | 1,777 | 53,772 | 30,210 |
| Trade and other receivables Financial assets at fair value |
363,983 | - | - | - | - | - | 363,983 | - |
| through profit or loss | 37,892 | - | - | - | - | - | 37,892 | - |
| Cash and cash equivalents | - | 97,906 | - | - | - | - | 97,906 | - |
| 423,660 | 97,906 | - | - | 30,210 | 1,777 | 553,553 | 30,210 | |
| Borrowings | (80,037) | - | - | - | - | - | (80,037) | - |
| Trade and other payables | (288,058) | - | - | - | - | - | (288,058) | - |
| (368,095) | - | - | - | - | - | (368,095) | - | |
| Interest rate gap | 55,565 | 97,906 | - | - | 30,210 | 1,777 | 185,458 | 30,210 |
| 2018 | 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 | 23,495 | - | - | - | 24,082 | 4,081 | 51,658 | 24,082 |
| Trade and other receivables | 288,601 | - | - | - | - | - | 288,601 | - |
| Financial assets at fair value through profit or loss |
48,490 | - | - | - | - | - | 48,490 | - |
| Cash and cash equivalents | 187,888 | - | - | - | - | - | 187,888 | - |
| 548,474 | - | - | - | 24,082 | 4,081 | 576,637 | 24,082 | |
| Borrowings | (5,770) | - | - | - | - | - | (5,770) | - |
| Trade and other payables | (216,227) | - | - | - | (2,777) | - | (219,004) | - |
| (221,997) | - | - | - | (2,777) | - | (224,774) | - | |
| Interest rate gap | 326,477 | - | - | - | 21,305 | 4,081 | 351,863 | 24,082 |
The Group hasinsignificant exposure to debtsecurities price risk due to low investments and all classified on the balance sheet at fair value through profit or loss (investmentsfunds).
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Significant risk is associated with high level of customer finance receivables. The internal directives to manage the credit risks have been tightened during 2015 with the implementation of updated credit management framework and implementation of credit evaluation tools to manage credit risks.
Credit Management function within the Group Treasury has been established to further assist the Group in managing its credit risk exposure. New customers are only accepted on satisfactory completion of a detailed credit check of the customer and a review of the related country risk. Outstanding credit arrangements are monitored on a quarterly or annual basis depending on risk category. Impairment losses are calculated by discounting receivables. Additionally, there is credit concentration risk as the Group has a significant portion of receivables outstanding from a small number of customers. As at 31 December 2019, the five largest customers represent 66% of total net trade receivables (2018: 51%). The Group considers that its maximum exposure to credit risk is reflected in the amount of trade receivables (Notes 14 and 16) and other receivables (Note 17), not impaired as doubtful. Ageing analysis of these receivables is within the maturity analysis table shown further in this note.
Letters of credit are used as a method for securing payments from customers operating in certain markets, in particular in markets with unstable political and/or economic environments. By having banks confirming the letters of credit, the political and commercial credit risk exposures are mitigated.
Prior to the approval of new facilities reported as customer finance, an internal credit risk assessment is conducted in order to assess the credit rating (for political and commercial risk) of each transaction. A reassessment of the credit rating for each customer finance facility is made on a regular basis.
The Group defines customer financing as any credit period longer than 179 days. The Group is working closely with Croatian Bank for Reconstruction and Development (HBOR) and partnership banks to secure risk mitigation. Provisions related to customer finance risk exposures are only made when they are reliably measurable and where, after the financing arrangement has become effective, certain events occur which are expected to have a significant adverse impact on the borrower's ability and/or willingness to service the outstanding debt. These events can be political (normally outside the control of the borrower) or commercial, e.g. the borrower's deteriorating creditworthiness.
Security arrangements for customer finance facilities normally include pledges of equipment and pledges of certain of the borrower's assets. If available, third-party risk coverage may also be arranged. "Third-party risk coverage" means that a financial payment guarantee covering the credit risk has been issued by a bank, an export credit agency or other financial institution. It may also be a credit risk transfer under the so-called "sub-participation arrangement" with a bank, whereby the credit risk and the funding is taken care of by the bank for the part covered by the bank. A credit risk cover from a third party may also be issued by an insurance company.
Cash equivalents amounted to HRK 97,906 thousand as at 31 December 2019 (31 December 2018: HRK 187.888 thousand). Provisions for expected credit losses on cash and deposits amounted to HRK 427 thousand as at 31 December 2019 (31 December 2018: HRK 835 thousand). The Group's write-offs have historically been low.
Trade receivables, receivables from related party and contract assets together amounted to HRK 331,537 thousand as at 31 December 2019 (31 December 2018: HRK 273,959 thousand). Provisions for expected credit losses on trade receivables, receivables from related party and contract assets amounted to HRK 2,269 thousand as at 31 December 2019 (31 December 2018: HRK 1,707 thousand). The Group's write-offs have historically been low.
The following tables provide an ageing detail of current and overdue amountsin respect of all customerloans and receivables as at 31 December 2019.
| Table 1 | Payment due date for total customer loans and receivables | |||||||
|---|---|---|---|---|---|---|---|---|
| Due balance | Up to 3 months |
3 monthsto 1 year |
1 to 3 years | Over 3 years | Total | |||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |||
| 2019 | ||||||||
| Foreign receivables | 200 | 31,780 | 39,929 | 23,543 | 93 | 95,545 | ||
| Domestic receivables | 2,681 | 139,002 | 2,293 | - | - | 143,976 | ||
| Receivables from related parties * | 7,033 | 83,301 | 24,213 | - | - | 114,547 | ||
| Contract assets | - | 3.239 | - | - | - | 3,239 | ||
| 9,914 | 257,322 | 66,435 | 23,543 | 93 | 357,307 | |||
| * excluding impairment allowance in the amount of HRK 1,686 thousand | ||||||||
| 2018 | ||||||||
| Foreign receivables | 17,267 | 41,338 | 8,210 | 25,009 | 1,589 | 93,413 | ||
| Domestic receivables | 3,210 | 104,467 | 1,840 | - | - | 109,517 | ||
| Receivables from related parties * | 8,545 | 95,381 | 6,837 | - | - | 110,763 | ||
| Contract assets | - | 3,335 | - | - | - | 3,335 | ||
| 29,022 | 244,521 | 16,887 | 25,009 | 1,589 | 317,028 |
* include non-current portion of domestic receivables in the amount of HRK 862 thousand
| Table 2 | Ageing of total due customer loans and receivables | |||||||
|---|---|---|---|---|---|---|---|---|
| Up to 3 months |
3 monthsto 1 year |
1 to 3 years | Over 3 years | Total | ||||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||||
| 2019 | ||||||||
| Foreign receivables | 200 | - | - | - | 200 | |||
| Domestic receivables | 2,442 | 144 | 95 | - | 2,681 | |||
| Receivables from related parties | 6,240 | 49 | 607 | 137 | 7,033 | |||
| 8,882 | 193 | 702 | 137 | 9,914 | ||||
| 2018 | ||||||||
| Foreign receivables | 5,635 | 11,632 | - | - | 17,267 | |||
| Domestic receivables | 2,576 | 592 | 42 | - | 3,210 | |||
| Receivables from related parties | 7,005 | 1,295 | 192 | 53 | 8,545 | |||
| 15,216 | 13,519 | 234 | 53 | 29,022 |
| Due balance | Up to 3 3 months months to 1 year |
1 to 3 years | Total | |||
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||
| 2019 | ||||||
| Foreign receivables | 200 | 1,042 | - | - | 1,242 | |
| Domestic receivables | 2,681 | 75,377 | 2,293 | - | 80,351 | |
| Receivables from related parties | 7,033 | 87,034 | - | - | 94,067 | |
| 9,914 | 163,453 | 2,293 | - | 175,660 | ||
| 2018 | ||||||
| Foreign receivables | 17,267 | 7,439 | 74 | - | 24,780 | |
| Domestic receivables | 3,210 | 48,717 | 1,831 | - | 53,758 | |
| Receivables from related parties | 8,545 | 87,034 | - | - | 95,579 | |
| 29,022 | 143,190 | 1,905 | - | 174,117 |
| 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 | ||
| 2019 | ||||||
| Foreign receivables | 200 | - | - | - | 200 | |
| Domestic receivables | 856 | 90 | - | - | 946 | |
| Receivables from related parties | 5,873 | 391 | 1,276 | 96 | 7,636 | |
| 6,929 | 481 | 1,276 | 96 | 8,782 | ||
| 2018 | ||||||
| Foreign receivables | 2,935 | 260 | - | - | 3,195 | |
| Domestic receivables | 2,539 | 539 | - | - | 3,078 | |
| Receivables from related parties | 6,955 | 226 | - | - | 7,181 | |
| 12,429 | 1,025 | - | - | 13,454 |
Liquidity risk, also referred to asfunding risk, is the risk that an enterprise will encounter difficulty in raising fundsto meet commitments associated with financial instruments. Asthe Group has no significant commitmentsin financial instruments, the risk lies only in its daily operations. The Group has a strong focus on its cash flow with daily updates on actual development andmonthly updated forecasts. The Group'smaturity profile demonstratesthe strong liquidity position ofthe Group and therefore the risk is considered low. The table below presentsthe maturity analysis and the resulting gap.
The Group has a revolving credit facility with our core banksshould an extraordinary liquidity need arise. As at 31 December 2019, the facility remained untapped.
| 2019 | 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 | |
| 916 | 1,668 | 10,287 | 38,647 | 2,254 | 53,772 | |
| Loans and receivables | ||||||
| Trade and other receivables | 255,859 | 105,235 | 2,705 | 184 | - | 363,983 |
| Current financial assets | 37,892 | - | - | - | - | 37,892 |
| Cash and cash equivalents | 97,906 | - | - | - | - | 97,906 |
| 392,573 | 106,903 | 12,992 | 38,831 | 2,254 | 553,553 | |
| Borrowings | (34) | - | - | (27,328) | - | (27,362) |
| Lease liabilities | - | - | (19,057) | (33,584) | - | (52,641) |
| Trade and other payables | (279,354) | - | - | (8,704) | - | (288,058) |
| (279,388) | - | (19,057) | (69,616) | - | (368,061) | |
| Maturity gap | 113,185 | 106,903 | (6,065) | (30,785) | 2,254 | 185,492 |
| 2018 | 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 | 387 | 2,250 | 8,184 | 36,756 | 4,080 | 51,657 | |
| Trade and other receivables | 218,728 | 60,199 | 9,540 | 134 | - | 288,601 | |
| Current financial assets | 48,490 | - | - | - | - | 48,490 | |
| Cash and cash equivalents | 187,641 | - | - | 247 | - | 187,888 | |
| 455,246 | 62,449 | 17,724 | 37,137 | 4,080 | 576,636 | ||
| Borrowings | - | - | - | (5,770) | - | (5,770) | |
| Trade and other payables | (65,577) | (146,461) | (444) | (6,522) | - | (219,004) | |
| (65,577) | (146,461) | (444) | (12,292) | - | (224,774) | ||
| Maturity gap | 389,669 | (84,012) | 17,280 | 24,845 | 4,080 | 351,862 | |
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 18). Amarket isregarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, orregulatory agency, and those pricesrepresent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used forfinancial assets held by the Group isthe current bid price. There are no financial assets derived from level 2 inputs which represent different valuation techniques based on observable market data or from level 3 inputs which represent different valuation techniques based on no observable market data.
The Group's principal financial instruments not carried atfair value are cash and cash equivalents,trade receivables, other receivables, non-current loans and receivables, trade and other payables and borrowings. The fair values of financial instruments together with carrying amounts as shown in the balance sheet are as follows:
| Carrying amount |
Fair value | recognized gain/(loss) |
Carrying amount |
Fair value | recognized gain/(loss) |
|
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 53,772 | 53,364 | (408) | 51,657 | 51,804 | 146 |
| Trade and other receivables | 363,983 | 363,753 | (230) | 288,601 | 288,702 | 101 |
| Financial assets at fair value through profit or loss |
37,892 | 37,892 | - | 48,490 | 48,490 | - |
| Cash and cash equivalents | 97,906 | 97,906 | - | 187,888 | 187,888 | - |
| Borrowings | (80,037) | (80,037) | - | (5,770) | (5,770) | - |
| Trade and other payables | (288,056) | (288,056) | - | (219,004) | (219,004) | - |
| 185,460 | 184,822 | (638) | 351,862 | 352,110 | 247 |
The fair value of loans and receivables and the fair value of 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 notsignificantly different as the loans and receivables were granted at marketrates, which were notsubstantially different from marketrates at the end of the reporting year. Current financial assets are stated at fair value that is based on quoted prices at the balance sheet date without any deduction for transaction costs.
The carrying amount of cash and cash equivalents and of bank depositsreflects fair value due to the short-term maturity of these financial instruments. Similarly,the amortized cost carrying amounts oftrade receivables and payables with remaining life of lessthan one year and which are allsubject to normaltrade credit termsreflect fair values. The following interest rates were used for determining fair values, which are based on available market rates forsimilar financial instruments:
The Group'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 returnsfor shareholders and benefits for otherstakeholders;
– To provide adequate requirements for capital resources, as far as possible, by the retention of profit;
– Tomaintain 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 Group is generating sufficient cash from operationsto fund liabilities asthey become due, finance customers when required and budgeted investments, and pay dividends.
The Group monitors capital using the statutory minimum capitalrequirement. Shareholders' equity is disclosed in Note 20 to the consolidated financial statements.
Accounting policies applicable to the comparative period ended 31 December 2018 that were amended by IFRS 16.
Leases on terms in which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period must not exceed the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases, and the leased assets under such contracts are not recognized on the balance sheet. Payments made under operating leases (net of any incentives received from the lessor) are recognized in the statement of comprehensive income on a straight-line basis over the term of the lease.
Ericsson Nikola Tesla Group is a large local exporter and the largest Croatian exporter of knowledge with more than 3,200 employees. Our business is partly related to activities in countries around the globe that are significantly hit by the pandemics of the novel Coronavirus COVID – 19. The closing of borders of some countries and travel bans, disturbances in delivery of equipment and raw materials at the global level, deferred investment projects in Croatia and abroad and, consequently, reduced demand for some of our activities, could have certain negative effects on some segments of our business. Due to global presence, the Group has already felt disturbances in the flow of people and goods that, provided they persist, will have an effect on the scale of some areas of our business and on current projects that engage our experts in the country and abroad. The Group estimates that, for the moment, the largest impact on business could be due to reduced mobility related to travel and field work of our employees, including those posted abroad for longer periods, in risk countries.
If the situation with the pandemics of the novel Coronavirus persists, the execution/realization of several export deals that have been contracted recently could be obstructed precisely due to geographical and healthcare limitations to our activities. The Group holds that it has sufficient means and opportunities in the financial market that, combined with the appropriate measures taken by the government to relieve business in these circumstances, it can adequately address all challenges and continue its business.
Due to the fact that we have no means of predicting further developments regarding the novel Coronavirus COVID – 19, at present, we cannot provide you with more detailed information on its concrete financial impacts on our business.
The Management and the Executive Board continue to monitor the situation and will implement required measures related to health of people and sustainable business continuity of the Group, in line with guidelines and recommendations by the relevant government authorities and bodies.
Ericsson Nikola Tesla d.d. (the Company) is a Croatian company with overseventy years of continuous operations. It is a leading supplier and exporter ofspecialized telecommunications equipment, ICT solutions,software and servicesin Central and Eastern Europe.
The Company wasfounded as a result of the privatization of the enterprise Nikola Tesla - Poduzeće za proizvodnju telekomunikacijskih sistema i uređaja, po.
According to the ownership structure as at 31 December 2019, Telefonaktiebolaget LM Ericsson (Ericsson) holds 49.07% of the Company'sshares. Othershareholders own the remaining 50.91% of the Company'sshares and 0.02% is held astreasury shares.
The principal activities of the Company are research and development of telecommunications software and services, design, testing and integration of total communications solutions, and supply and maintenance of communications solutions and ICT solutions towards customers within the Ericsson Group, customers in the Republic of Croatia, and Bosnia and Herzegovina, and several customers in Central and Eastern Europe.
Ericsson Nikola Tesla d.d. is a joint-stock company incorporated in Croatia. The headquarters of the Company are in Zagreb, Krapinska 45.
The Company appliesthe Code of Corporate Governance of the Zagreb Stock Exchange and meetsthe obligations derived therefrom, with the exception of provisions whose application is not practical at the moment.
The Supervisory Board members during 2019 and up to the release of these statements were:
| Franck Pierre Roland Bouétard | Chairman | Appointed on 20 June 2018 |
|---|---|---|
| Dubravko Radošević | Member, Vice-Chairman | Reappointed on 20 June 2018, elected for Vice Chairman of Supervisory board on 13 June 2019 |
| Ignac Lovrek | Member; Vice-Chairman | Mandate expired on 2 June 2019 |
| Vidar Mohammar | Member | Reappointed on 13 June 2019 |
| Olgica Spevec | Member | Appointed on 13 June 2019 |
| Vladimir Filipović | Member and employees' representative | Appointed on 29 November 2018 |
The Audit Committee members during 2019 and up to the release of these statements were:
| Dubravko Radošević | Chairman | Appointed on 26 April 2019 |
|---|---|---|
| Ignac Lovrek | Chairman | Chairman / member until 26 April 2019 |
| Vidar Mohammar | Member | Reappointed on 13 June2019 |
| Vesna Vašiček | Member | Appointed on 21 February 2017 |
Management Board
The Management Board has one member:
Gordana Kovačević President Reappointed on 17 December 2019
As at 31 December 2019, the Company's executive management comprised:
| Gordana Kovačević | Company President |
|---|---|
| Branka Vučemilo Elezović | Director, Legal |
| Branko Dronjić | Director, IT&Test Environment Operations |
| Damir Bušić | Director, Finance, Sourcing and CommercialManagement |
| Dario Runje | Director, Networks |
| Darko Huljenić | Director, Research |
| Dragan Fratrić | Director, General Services |
| Goran Ožbolt | Director, Sales and Marketing for Tele2 and AlternativeOperators |
| Hrvoje Benčić | Director, Digital Services, Media and Operations |
| Ivan Barać | Director, Sales and Marketing for Hrvatski Telekom and Crnogorski Telekom |
| Jagoda Barać | Director, Sales and Marketing for Export markets for Op.Seg. |
| Marijana Đuzel | Director, Human Resources |
| Milan Živković | Director, Strategy and Business Development & GIR |
| Miroslav Kantolić | Director, Sales and Marketing for A1 Croatia |
| Patrick Gerard Martin | Director, R&D Center |
| Snježana Bahtijari | Director, Marketing, Communications & Corporate Social Responsibility |
We have audited the separate financial statements of Ericsson Nikola Tesla d.d. ("the Company"), which comprise the separate statement of financial position of the Company as at 31 December 2019, and its separate statements of comprehensive income, cash flows and changes in equity for the year then ended, and notes, comprising significant accounting policies and other explanatory information (further referred to as "the financial statements").
In our opinion, the accompanying financial statements give a true and fair view of the unconsolidated financial position of the Company as at 31 December 2019 and of its unconsolidated financial performance and its unconsolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union ("EU IFRS").
We conducted our audit in accordance with International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Croatia and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Sales revenue in 2019: HRK 1,545,299 thousand (2018: HRK 1,373,684 thousand). As at 31 December 2019: trade receivables: HRK 207,009 thousand; contract assets: HRK 3,239 thousand; contract liabilities: HRK 149,375 thousand (31 December 2018: trade receivables: HRK 158,224 thousand; contract assets: HRK 3,335 thousand; contract liabilities: HRK 171,645 thousand).
Please refer to the Note 1 Revenue recognition of Significant accounting policies, Note 4 c) Revenue recognition of Critical accounting estimates and judgements, Note 5 Sales revenue and Note 6 Segment reporting in the financial statements.
In the year ended 31 December 2019, the Company's principal revenue streams included sales of products and software, as well as provision of services, including installation and integration services, maintenance and support.
Application of revenue recognition principles of the relevant financial reporting standards is complex and requires making significant assumptions and judgments. Particular complexity is associated with the following factors:
Our audit procedures in this area included, among others:
The separate financial statements of the Company as at and for the year ended 31 December 2018 were audited by another auditor who expressed an unmodified opinion on those statements on 30 April 2019.
Management is responsible for the other information. The other information comprises the Management Report and the Corporate Governance Statement included in the Annual Report of the Company, but does not include the financial statements and our auditor's report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
With respect to the Management Report and the Corporate Governance Statement, we also performed procedures required by the Accounting Act in Croatia ("Accounting Act"). Those procedures include considering whether:
Based solely on the work required to be undertaken in the course of the audit of the financial statements and procedures above, in our opinion:
In addition, in light of the knowledge and understanding of the entity and its environment obtained in the course of the audit, we are also required to report if we have identified material misstatements in the Management Report and the Corporate Governance Statement. We have nothing to report in this respect.
Management is responsible for the preparation of the financial statements that give a true and fair view in accordance with EU IFRS, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
We were appointed by those charged with governance on 13 June 2019 to audit the separate financial statements of Ericsson Nikola Tesla d.d. for the year ended 31 December 2019. Our total uninterrupted period of engagement is one year, covering the year ended 31 December 2019.
We confirm that:
The engagement partner on the audit resulting in this independent auditors' report is Domagoj Hrkać.
KPMG Croatia d.o.o. za reviziju 28 April 2020 Croatian Certified Auditors Eurotower, 17th floor Ivana Lučića 2a 10000 Zagreb Domagoj Hrkać
Croatia Director, Croatian Certified Auditor
for the year ended 31 December 2019
| 2019 | 2018 (restated) | ||
|---|---|---|---|
| Notes | HRK '000 | HRK '000 | |
| Sales revenue | 5, 6 | 1,545,299 | 1,373,684 |
| Cost of sales | 7 | (1,392,796) | (1,237,342) |
| Gross profit | 152,503 | 136,342 | |
| Selling expenses | 7 | (43,663) | (36,459) |
| Administrative expenses | 7 | (31,589) | (29,659) |
| Other operating income | 7 | 16,326 | 47,251 |
| Operating profit | 93,577 | 117,475 | |
| Finance income/(expense), net | 9 | 6,796 | 466 |
| Profit before tax | 100,373 | 117,941 | |
| Income tax | 10 | (4,821) | (6,093) |
| Profit for the year | 95,552 | 111,848 | |
| Other comprehensive income | - | - | |
| Total comprehensive income for the year | 95,552 | 111,848 | |
| Basic and diluted earnings per share (HRK) | 11 | 71.77 | 83.99 |
| 2019 | 2018 | ||
|---|---|---|---|
| Assets | Notes | HRK '000 | HRK '000 |
| Non-current assets | |||
| Property, plant and equipment | 12 | 138,436 | 107,516 |
| Right of use assets | 29 | 27,572 | - |
| Intangible assets | 13 | 226 | 690 |
| Loans and receivables | 14 | 53,772 | 51,659 |
| Investments in subsidiaries | 15 | 1,053 | 1,053 |
| Deferred tax assets | 10 | 15,449 | 20,743 |
| Total non-current assets | 236,508 | 181,661 | |
| Current assets | |||
| Inventories | 16 | 170,522 | 108,720 |
| Trade receivables | 17 | 207,009 | 158,224 |
| Receivables from related parties | 30(c) | 121,316 | 111,057 |
| Contract assets | 28 | 3,239 | 3,335 |
| Other receivables | 18 | 12,472 | 13,763 |
| Income tax receivable | 13,870 | 52 | |
| Financial assets at fair value through profit or loss | 19 | 38,899 | 48,490 |
| Prepayments and accrued income | 11,057 | 11,382 | |
| Cash and cash equivalents | 20 | 81,833 | 182,443 |
| Total current assets | 660,217 | 637,466 | |
| Total assets | 896,725 | 819,127 |
| 2019 | 2018 | ||
|---|---|---|---|
| Equity and liabilities | Notes | HRK '000 | HRK '000 |
| Equity | |||
| Share capital | 21(a) | 133,165 | 133,165 |
| Treasury shares | 21(b) | (240) | (240) |
| Legal reserves | 21(c) | 6,658 | 6,658 |
| Reserve for treasury shares | 21(d) | 14,873 | 14,873 |
| Retained earnings | 139,344 | 136,678 | |
| Total equity | 293,800 | 291,134 | |
| Non-current liabilities | |||
| Borrowings | 22 | 27,324 | 5,668 |
| Employee benefits | 24 (a) | 7,080 | 5,580 |
| Lease liabilities | 29 | 17,830 | - |
| Other non-current liabilities | 23 | 5,679 | 2,907 |
| Total non-current liabilities | 57,913 | 14,155 | |
| Current liabilities | |||
| Payables to related parties | 30(c) | 104,505 | 62,311 |
| Trade and other payables | 25 | 162,425 | 154,996 |
| Provisions | 26 | 13,104 | 16,874 |
| Accrued expense and deferred revenue | 27 | 105,552 | 108,012 |
| Contract liabilities | 28 | 149,375 | 171,645 |
| Lease liabilities | 29 | 10,051 | - |
| Total current liabilities | 545,012 | 513,838 | |
| Total liabilities | 602,925 | 527,993 | |
| Total equity and liabilities | 896,725 | 819,127 |
for the year ended 31 December 2019
| Share capital HRK '000 |
Treasury shares HRK '000 |
Legal reserves HRK '000 |
Reserve for treasury shares(1) HRK '000 |
Retained earnings HRK '000 |
Total HRK '000 |
|
|---|---|---|---|---|---|---|
| As at 1 January 2018 | 133,165 | (280) | 6,658 | 14,873 | 68,096 | 222,512 |
| Changes in equity for 2018 | ||||||
| Profit for the year | - | - | - | - | 111,848 | 111,848 |
| Dividend distribution for 2017, Note 21 (e) | - | - | - | - | (43,272) | (43,272) |
| Share-based payments, Note 24 (b) | - | 23 | - | - | (23) | - |
| Sale of treasury shares, Note 24 (b) | - | 17 | - | - | 29 | 46 |
| Total contributions by and distributions to owners recognized directly in equity |
- | 40 | - | - | (43,266) | (43,226) |
| As at 31 December 2018 | 133,165 | (240) | 6,658 | 14,873 | 136,678 | 291,134 |
| As at 1 January 2019 Changes in equity for 2019 |
133,165 | (240) | 6,658 | 14,873 | 136,678 | 291,134 |
| Profit for the year | - | - | - | - | 95,552 | 95,552 |
| Dividend distribution for 2018, Note 21 (e) | - | - | - | - | (94,000) | (94,000) |
| Equity settled transactions, Note 24 (b) | - | - | - | - | 1,114 | 1,114 |
| Total contributions by and distributions to owners of the parent recognized directly in equity |
- | - | - | - | (92,886) | (92,886) |
| As at 31 December 2019 | 133,165 | (240) | 6,658 | 14,873 | 139,344 | 293,800 |
(1) In comparison with prior year financial statements Company has disclosed separately Reserve for treasury shares in amount of HRK 14,873 thousand in order to improve presentation in financial statements.
for the year ended 31 December 2019
| 2019 | 2018 | ||
|---|---|---|---|
| Notes | HRK '000 | HRK '000 | |
| Cash flows from operating activities | |||
| Profit before tax | |||
| 100,372 | 117,941 | ||
| Adjustments for: | |||
| Depreciation and amortization | 7,12,13,29 | 41,590 | 29,708 |
| Impairment losses and reversals | 4,050 | 9,408 | |
| Net increase in provisions | 26 | 30,494 | 39,111 |
| Gain on sale of property, plant and equipment | (2,322) | (58) | |
| Net loss on remeasurement of financial assets | (497) | 121 | |
| Interest income | (5,831) | (1,487) | |
| Interest expense | 669 | 53 | |
| Foreign exchange gain/losses | (5,597) | (6,800) | |
| Equity-settled transactions | 8 | 846 | - |
| Other | (1,019) | (2,550) | |
| Changes in working capital: | 162,755 | 185,447 | |
| In receivables | (53,090) | 90,680 | |
| In inventories | (61,824) | (91,372) | |
| In payables | (3,245) | (101,960) | |
| Cash generated from operations | 44,596 | 82,795 | |
| Interest paid | (656) | (53) | |
| Income taxes paid | (3,968) | (1,333) | |
| Net cash from operating activities | 39,972 | 81,409 | |
| Cash flows from investing activities | |||
| Interest received Dividends received |
1,734 70 |
2,207 70 |
|
| Investments in subsidiaries | 15 | - | 40 |
| Proceeds from sale of property, plant and equipment | 2,360 | 134 | |
| Purchases of property, plant and equipment, and intangible assets | (78,142) | (38,598) | |
| Deposits given to financial institutions - net | 1,354 | - | |
| Net change of financial assets at fair value through profit and loss | 10,955 | 35,909 | |
| Net cash used in investing activities | (71,669) | (238) |
for the year ended 31 December 2019
| 2019 | 2018 | ||
|---|---|---|---|
| Notes | HRK '000 | HRK '000 | |
| Cash flows from financing activities | |||
| Dividends paid | 21 (e) | (94,000) | (43,291) |
| Loans received | 23,716 | - | |
| Lease liabilities paid | (9,190) | - | |
| Net cash used in financing activities | (79,474) | (43,291) | |
| Effects of exchange rate changes on cash and cash equivalents | 560 | (523) | |
| Net increase (decrease) in cash and cash equivalents | (100,610) | 37,357 | |
| Cash and cash equivalents at the beginning of the year | 182,443 | 145,086 | |
| Cash and cash equivalents at the end of the year | 20 | 81,833 | 182,443 |
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'sshares are listed on the Public Joint-Stock Company listing on the Zagreb Stock Exchange. A summary ofthe Company's principal accounting policiesisset out below.
The financialstatements have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (IFRSs). These financialstatements also comply with the Croatian Accounting Act in effect on the date of issuing of these financialstatements. These financialstatements are a translation of the officialstatutory IFRS financial statements.
The financial statements are prepared on the historical cost basis, with the exception of financial instruments which are carried atfair value. These comprise derivative financial instruments and financial assets and liabilities atfair value through profit or loss. Apart from the accounting policy changes resulting from the adoption of IFRS 16 effective from 1 January 2019,these policies have been consistently applied to allthe periods presented, unless otherwise stated (referto Notes 3 and 29). The principal accounting policy in respect of leases applied until 31 December 2018 are presented in Note 32.
The preparation of financialstatementsin conformity with IFRSsrequires managementtomake judgements, estimates and assumptionsthat 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 otherfactorsthat are believed to be reasonable underthe 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 othersources. Actual results may differfrom these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate isrevised if the revision affects only that period or in the period of revision and future periodsif 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 financialstatements and estimates are discussed in Note 4.
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 2019 and for the year then ended in accordance with IFRS forthe Company and itssubsidiaries(the Group), which were approved by the Management Board on 28 April 2020. In the consolidated financialstatements,subsidiary undertakings(listed in Note 15) and those companiesin which the Group indirectly has an interest of more than half of the voting rights or otherwise has powerto exercise control overthe 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 forthe year ended 31 December 2019 in orderto obtain full information on the financial position, results of operations and changes in financial position of the Group as a whole.
The executive management have a reasonable expectation that the Company has adequate resources to continue in operational existence forthe foreseeable future. The Company therefore continuesto adopt the going concern basisin preparing its financial statements.
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 have been rounded to the nearest thousand. The closing exchange rate as at 31 December 2019 was HRK 6.649911 per USD 1 (2018: HRK 6.469192) and HRK 7.442580 per EUR 1 (2018: HRK7.417575)
IFRS 15 "Revenue from Contracts with Customers" is a principle-based model ofrecognizing revenue from customer contracts. It has a five-step model that requiresrevenue to be recognized when control over goods and services are transferred to the customer.
The following paragraphs describesthe types of contracts, when performance obligations are satisfied, and the timing of revenue recognition. They also describe the normal payment terms associated with such contracts and the resulting impact on the balance sheet overthe duration of the contracts. The vast majority of Ericsson's business isforthe sale ofstandard products and services.
Products and services are classified as standard solutions if they do not require significant installation and integration servicesto be delivered. Installation and integration services are generally completed within a short period of time,from the delivery of the related products.
These products and services are viewed as separate distinct performance obligations. This type of customer contract is usually signed as a frame agreement and the customerissuesindividual purchase ordersto commit to purchases of products and services over the duration of the agreement.
Revenue forstandard productsshall be recognized when control overthe equipment istransferred to the customer at a point in time. This assessmentshall be viewed from a customer's perspective considering indicators such astransfer of titles and risks, customer acceptance, physical possession, and billing rights. Control of an asset therefore refersto the ability to direct use of and obtain substantially all of the remaining benefits from theasset.
Furthermore, control includesthe ability to prevent other entitiesfrom using and obtaining the benefitsfrom an asset. The benefits of an asset are the potential cash flows(inflows orsavings in outflows) that can be obtained directly or indirectly. For hardware sales, transfer of control is usually deemed to occur when the equipment arrives at the customersite and for software sales, when the licenses are made available to the customer. Software licenses may be provided to the customer at a point in time, activated or ready to be activated by the customer at a later stage, therefore revenue is recognized when customer obtains control of the software.
Contractual terms may vary; therefore, judgment will be applied when assessing the indicators of transfer of control. Revenue for installation and integration services is recognized upon completion of the service. Costs incurred in delivering standard products and services are recognized as costs of sales when the related revenue is recognized in the Income Statement. Costs incurred relating to performance obligations not yet fully delivered are recognized as inventories.
Transaction prices under these contracts are usually fixed, and mostly billed upon delivery of the hardware or software and completion of installation services. Customer finance agreements may be agreed separately with some customers where payment terms exceed 179 days.
Revenue for recurring services such as customer support and managed services is recognized as the services are delivered, generally pro-rata over time. Costs incurred in delivering recurring services are recognized as cost of sales as they are incurred. Transaction prices under these contracts are billed over time, often on a quarterly basis.
Contract liabilities or receivables may arise depending on whether the quarterly billing is in advance or in arrears. Contract for standard products and services applies to business in all segments.
Some products and services are sold together as part of a customized solution to the customer. Thistype of contract requires significant installation and integration services to be delivered within the solution, normally over a period of more than 1 year. These products and services are viewed together as a combined performance obligation. Thistype of contract is usually sold as a firm contract in which the scope of the solution and obligations of both parties are clearly defined for the duration of the contract.
Revenue for the combined performance obligation shall be recognized over time if progress of completion can be reliably measured and enforceable right to payment exists overthe duration of the contract. The progress of completion is estimated by reference to the output delivered such as achievement of contract milestones and customer acceptance. This method determinesrevenue milestones overthe duration of the contract, and it is considered appropriate as it reflectsthe nature of the customized solution and how integration service is delivered in these projects. If the criteria above are not met,then all revenue shall be recognized upon the completion of the customized solution, when final acceptance is provided by the customer. Costsincurred in delivering customized solutions are recognized as costs ofsales when the related revenue milestone isrecognized in the Income Statement. Costsincurred relating to future revenue milestones are recognized as Inventories and assessed for recoverability on a regularbasis.
Transaction price underthese contractsis usually a fixed fee,split into a number of progress payments or billing milestones as defined in the contract. In most cases, revenue recognized is limited to the progress payments or unconditional billing milestones overthe duration of the contract, therefore no contract asset or contract liability arises on these contracts. Customerfinance agreements may be agreed separately with some customers where payment terms exceed 365 days. Contractfor customized solution appliesto the Industry and Society business, Business Support Systems(BSS) business, within the segment Digital Services, and the Media Solutions business within the segment Emerging Business andOther.
The nature of Ericsson's promise isto provide a right to use Ericsson's IP as it exists(in terms of form and functionality) at the point in time at which the license is granted to the customer. This means that the customer can direct the use of, and obtain substantially all the remaining benefits from, the license at the point in time at which the license transfers.
Tradereceivablesinclude amountsthat have been billed in accordancewith customer contractterms and amountsthatthe Company has an unconditionalright to, with only passage of time before the amounts can be billed in accordance with the customer contract terms.
Customer finance credits arise from credit terms exceeding 179 days in the customer contract or a separate financing agreement signed with the customer. Customer finance is a class of financial assets that is managed separately from receivables. See note 31 (d) forfurtherinformation on creditrisk management of trade receivables and customerfinance credits.
In accordance with IFRS 15, where significant financing is provided to the customer,revenue is adjusted to reflect the impact of the financing transaction. These transactions could arise from the customerfinance credits above ifthe contracted interest rate is below the market rate or through implied financing transactions due to payment terms of more than one year from the date of transfer of control. The Company has elected to use the practical expedient not to adjust revenue fortransactions with payment terms, measured from the date of transfer of control, of one year or less.
Contract asset is unbilled sales amount relating to performance obligation that has been satisfied under customer contract but is conditional on terms other than only the passage of time before payment of the consideration is due. Under previous standards these unbilled sales balances have been included within tradereceivables.
Contract liability relatesto amountsthat are paid by or due from customersfor which performance obligations are unsatisfied or partially satisfied. Under previous standardsthese balances have been disclosed as deferred revenue within other current liabilities, and the Company concluded that the balances meet the definition of contract liability under IFRS 15. Advances from customers are also included in the contract liability balance.
Items of property, plant and equipment are shown at cost or deemed cost, less accumulated depreciation and impairment losses.
The Company recognizes 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 asincurred. 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 assetsis provided on a straight-line basisto allocate their cost overthe estimated economic useful life of the assets. The estimated useful lives are as follows:
| Usefullives | |||||
|---|---|---|---|---|---|
| Buildings 5–30years | |||||
| Plant and equipment | 2–10years | ||||
| 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 comprehensiveincome.
Intangible assets are stated on initial recognition at cost and subsequently at cost less accumulated amortization and impairment losses.
Amortization is provided on a straight-line basis overthe estimated useful lives ofintangible assets.Intangible assetsinclude acquired computer software and are amortized on a straight-line basis over their useful life of 2-4 years. Cost associated with maintaining computer software is recognized as an expense asincurred.
Assets that have an indefinite useful life (such as goodwill) are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment lossisrecognized for the amount by which the asset's carrying amount exceedsitsrecoverable amount. The recoverable amount isthe higher of an asset'sfair value less coststo sell and value in use. Forthe purposes of assessing impairment, assets are grouped at the lowest levelsfor which there are separately identifiable cash flows(cash-generating units).Non-financial assets otherthan goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date
.
Financial assets are classified as amortized cost if the contractual terms give rise to payments that are solely payments of principal and interest on the principal amount outstanding and the financial asset is held in a business model whose objective is to hold financial assets in order to collect contractual cash flows. These assets are subsequently measured at amortized cost using the effective interest method, lessimpairment allowances. Interest income and gains and lossesfrom financial assets at amortized cost are recognized in financial income.
A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near term. Derivatives are classified as held fortrading, unlessthey are designated as hedging instrumentsforthe purpose of hedge accounting. Assets held fortrading are classified as current assets. Debt instruments classified as FVTPL, but not held for trading, are classified on the balance sheet based on their maturity date (i.e. those with a maturity longerthan one year are classified as non-current). Investmentsin shares and participations are classified as FVTPL and classified as non-current financial assets. Gains or losses arising from changes in the fair values of the FVTPL category (excluding derivatives and customerfinancing) are presented in the income statement within financial income in the period in which they arise. Gains and losses on derivatives are presented in the income statement as follows. Gains and losses on derivatives that hedge operating assets or liabilities, financial assets and financial liabilities are presented as cost of sales, financial income and financial expense, respectively. Gains and losses on customer financing are presented in the income statement as selling expenses. Dividends on equity instruments are recognized in the income statement as part of financial income when the Company's right to receive payments is established.
Cash comprises cash held at banks and on hand. Cash equivalents include demand deposits and time deposits with maturities up to three months. Cash and cash equivalents are carried at amortized cost because: (i) they are held for collection of contractual cash flows and those cash flowsrepresentsolely payments of principal and interest, and (ii) they are not designated at fair value through profit and loss.
Financial assets affected by the new model are cash and cash equivalents, deposits, trade receivables and contract assets. Two unified models were developed forrelatable financial assets. Cash equivalents and deposits are assessed forimpairment under one unified model and trade receivables and contract assets are assessed for impairment under another unified model. Cash equivalents and deposits are assessed based on probability of default as well asthe Company's exposure to certain financial institution at the time of default. To determine probability of default, country creditrating of financial institution is used, as well as the rating of future outlook.
Expected loss on cash, cash equivalents and depositsfor each financial institution givesthe total expected credit loss. There were no significant changesto the model during the year. The Company has determined that credit risk largely depends on both the payment pattern of the customer as well asthe risk in the country where the customerresides(e.g. ability to make cross-border payments).
Therefore, expected credit losses (ECLs) are calculated using a provision matrix that specifies a fixed rate depending both on the number of days past due and the country risk rating. The country risk ratings depends on the ratings used by all Export Credit Agencies within the OECD. The rates defined in the provision matrix are based on historical loss patterns for certain portfolio of customers. Each customer is regulatory monitored and these rates are adjusted for current conditions as well as management expectations for changes to political risks and payment patterns of certain customer in the future. There were no significant changes to the model during the year.
Trade and other payables are initially recognized at fair value and subsequently measured at amortised cost using the effective interest rate.
Financial liabilities are recognized when the Company becomes bound to the contractual obligations of the instrument. Financial liabilities are derecognized when they are extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expires.
Inventories are stated at the lower of cost and net realizable value. Net realizable 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, labor and related overhead, and expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Slowmoving and obsolete inventories have been written down to their estimated realizable value.
Share capital is stated in HRK at nominal value.
Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the 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.
The tax expense for the period is based on taxable profit for the year and comprises current and deferred tax. Income tax is recognized in the statement of comprehensive income except to the extent that it relates to items recognized directly in equity, in which case it is recognized 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 isrecognized by using the balance sheet liability method on temporary differences arising between tax basis of assets and liabilities and their carrying amount in the financialstatements. However, the deferred income tax is not accounted forif it arisesfrom initialrecognition of an asset or liability in a transaction otherthan a business combination that at the time of the transaction does not affect either accounting ortaxable 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 recognized when it is probable thatsufficient taxable profits will be available against which the deferred tax assets can be utilized. At each balance sheet date,the Company reassesses unrecognized deferred tax assets and the carrying amount of deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities forfinancialreporting purposes and the amounts used forincome tax purposes. Deferred tax assets and liabilities are measured by using the tax rates expected to apply to taxable profit in the yearsin which those temporary differences are expected to be recovered orsettled based on tax rates enacted orsubstantially enacted at the balance sheet date.
The measurement of deferred tax liabilities and deferred tax assetsreflectsthe tax consequencesthat would follow from the manner in which the enterprise expects, at the balance sheet date, to recover orsettle the carrying amount of its assets and liabilities.
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 atthat date. Foreign exchange differences arising from translation are included in the statement of comprehensive income.Non-monetary assets and liabilities denominated in foreign currenciesthat 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.
The Company provides employees with jubilee and one-offretirement awards. The obligation and costs ofthese benefits are determined by using the Projected Unit Credit Method. The Projected Unit Credit Method considers each period ofservice as giving rise to an additional unit of benefit entitlement and measures each unitseparately to build up the final obligation. The obligation is measured at the present value of estimated future cash flows using a discount rate that issimilarto the interest rate on government bonds where the currency and terms of the government bonds are consistent with the currency and estimated terms of the benefit obligation.
The Company operates an equity-settled,share-based compensation plan allowing the Company's employeesto receive shares. The fair value of the employee servicesreceived in exchange forthe grant of the Company's shares isrecognized as an expense with a corresponding increase in equity. The fair value is measured at grant date and spread overthe period during which the employees become unconditionally entitled to the shares. The total amount to be expensed overthe 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 sharesthat are expected to become granted. It recognizesthe 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.
The Company recognizes a liability and an expense for bonuses as a provision where contractually obliged or where there is past practice that has created a constructive obligation.
A provision isrecognized 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 warrantiesisrecognized when the underlying products orservices 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 recognized as interest expense.
Interest income isrecognized using the effective interest method. When a loan and receivable isimpaired,the company reduces the carrying amount to itsrecoverable 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 recognized using the original effective interest rate.
Operating segments are reported in a manner consistent with the internalreporting provided to the chief operating decisionmaker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board that makes strategic decisions.
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds(net of transaction costs) and the redemption value isrecognized in the statement of comprehensive income over the period of the borrowings using the effective interest method.
Grantsfrom the government are recognized within "Other operating income" attheirfair value where there isreasonable assurance that the grant will be received, and the Company will comply with all attached conditions.
Government grants relating to costs are deferred and recognized over the period necessary to match them with the costs that they are intended to compensate.
Grants relating to property, plant and equipment are recognized in profit or loss over the periods and in the proportions in which depreciation on those assets is recognized. In statement of financial position, government grant is deducted in arriving at the carrying amount of the underlying asset and is recognized in the profit or loss over the useful life of depreciable asset by way of a reduced depreciation charge.
Dividend distribution to the Company'sshareholdersisrecognized as a liability in the Company'sfinancialstatementsin the period in which the dividends are approved by the Company'sshareholders.
Investmentsin 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 changesin circumstancesindicate thatthe carrying amount may not be recoverable. Investmentsin subsidiariesfor which an impairment loss has been recorded are tested at each reporting date for a potential reversal of impairment.
Dividend income is recognized when the right to receive payment is established.
The Company initially applied IFRS 16 Leases from 1 January 2019. A number of other new standards have also been effective from 1 January 2019 but they do not have a material effect on the Company's financial statements.
The Company applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognized in retained earnings as at 1 January 2019. Accordingly, the comparative information presented for 2018 is not restated, i.e. it is presented, as previously reported, under IAS 17 and related interpretations. The details of the changes in accounting policies are disclosed below. Additionally, the disclosure requirements in IFRS 16 have not generally been applied to comparative information.
Previously, the Company determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining whether an Arrangement contains a Lease. The Company now assesses whether a contract is or contains a lease based on the definition of a lease, as explained in Note 29.
On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Company applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease under IFRS 16. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered or changed on or after 1 January 2019.
As a lessee, the Company leases property and vehicles. The Company previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all the risks and rewards incidental to ownership of the underlying asset to the Company. Under IFRS 16, the Company recognizes right‑of‑use assets and lease liabilities for most of these leases – i.e. these leases are on‑balance sheet.
At commencement or on modification of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component based on its relative stand‑alone price.
However, for leases of property the Company has elected not to separate non‑lease components and account for the lease and associated non‑lease components as a single lease component.
Previously, the Company classified property leases as operating leases under IAS 17. On transition, for these leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Company's incremental borrowing rate as at 1 January 2019 (see Note 29). Right-of-use assets are measured at either:
their carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the Company's incremental borrowing rate at the date of initial application: the Company applied this approach to its largest property lease; or
an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments: the Company applied this approach to all other leases.
The Company has tested its right-of-use assets for impairment on the date of transition and has concluded that there is no indication that the right-of-use assets are impaired.
The Company used a number of practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17. In particular, the Company:
did not recognize right-of-use assets and liabilities for leases for which the lease term ends within 12 months of the date of initial application;
did not recognize right-of-use assets and liabilities for leases of low value assets; and
The Company leases out its own property and the Company has classified these leases as operating leases.
The Company is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor, except for a sub-lease.
The Company sub-leases some of its properties. Under IAS 17, the head lease and sub-lease contracts were classified as operating leases. On transition to IFRS 16, the right-of-use assets recognized from the head leases are presented in investment property and measured at fair value at that date. The Company assessed the classification of the sub-lease contracts with reference to the right-of-use asset rather than the underlying asset and concluded that they are operating leases under IFRS 16.
The Company has applied IFRS 15 Revenue from Contracts with Customers to allocate consideration in the contract to each lease and non-lease component.
On transition to IFRS 16, the Company recognized additional right‑of‑use assets, and additional lease liabilities. The impact on transition is summarized below.
| IFRS 16 adjustment HRK '000 |
|
|---|---|
| Right-of-use asset | 27,909 |
| Lease liabilities, current | 8,686 |
| Lease liabilities, non-current | 19,223 |
When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its incremental borrowing rate as at 1 January 2019. The weighted‑average rate applied is 2.5%.
Difference between minimum lease payments for operating lease contracts as at 31 December 2018 and initial recognition of right of use asset as at 1 January 2019 is shown below:
| 1 January 2019 HRK '000 |
|
|---|---|
| Operating lease commitments as at 31 December 2018: | 4,685 |
| Recognition exemption for leases of low-value assets | (687) |
| Extension options reasonably certain to be exercised | 26,123 |
| Adjustments for discounting at initial recognition date | (2,212) |
| Lease liabilities recognized as at 1 January 2019 | 27,909 |
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2019 reporting periods and have not been early adopted by the group. These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.
Accounting estimates and judgements are continually evaluated and are based on historical experience and otherfactors, including expectations of future eventsthat are believed to be reasonable underthe circumstances. The Companymakes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition,seldom equalthe related actualresults. The estimates and assumptionsthat have a significantrisk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
The Company reviewsitsreceivablesto assessimpairment on a monthly basis. In determining whether an impairment loss should be recorded in the statement of comprehensive income,the Companymakesjudgements asto whetherthere is any observable data indicating that there is a measurable decrease in the estimated future cash flowsfrom a portfolio of loans and receivables before the decrease can be identified with an individual loan orreceivable 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 Company.
In 2016,the Company entered into several new customer contractsin the foreign market. The contractsinclude delivery of equipment and sale ofservices with 15% up-front payment while remaining 85% have deferred payment terms up to 54 months.
The Company financed the sale of equipment through a Supplier credit arrangement. The arrangement includes:
(i) matching cash receiptsfrom customer with paymentsto the bank, (ii) assignation of insurance policy to the bank, and (iii) ceding future cash receipts from the customer to the bank through special purpose accounts secured by special purpose deposits (Note 14).
By transferring to the bank its contractualright to receive the cash flows, the Company transferred the financial asset to the bank. In terms of derecognition criteria, the Company analyzed transfer of risk and rewards of the receivable, specifically related to credit risk and late payment risk.
The creditrisk isshifted from international customerto the risk from domestic insurance company default which is considered as significant transferin credit risk. The Company issued guarantees to the financing bank forrisk of non-performance by the insurance company which is disclosed in Note 23. The issued guarantee for non-performance of the insurance company is recognized initially at fair value and subsequently at the higher of the unamortized balance of the initial fair value and the best estimate of expenditure required to settle the obligation under the guarantee.
Late paymentrisk wastransferred based on the fact that the special purpose deposit coversthe late payment charges and/or history of payments with the customer do not historically evidence late payment risk as substantial to the agreement.
Having transferred the right to cash flows and substantially all the risk and rewards relating to 90% of receivables, management concluded that it was appropriate to derecognize 90% ofthe related receivablesfrom the balance sheet. The remaining 10% of the receivablesremain on the balance sheet aslong-term receivablesfrom the customer(Note 14) and a 10% of the related financing liability to the bank is recorded as borrowings (Note 22).
Following derecognition,the residual difference between interestreceivable from the customer and interest payable to the bank represents separate liability recognized at fair value and is disclosed in Note 22.
The Company uses estimates and judgmentsin determining the amount and timing of revenue underIFRS 15, particularly when determining the transaction price and its allocation to performance obligations identified underthe contract.
Transaction price may consist of variable elementssuch as discounts and contract penalties. Transaction price, including variable considerations, is estimated atthe commencement ofthe contract(and periodically thereafter).Judgment is used in the estimation process based on historical experience with the type of business and customer.
IFRS 15 also requires revenue to be allocated to each performance obligations by reference to their stand-alone selling prices. The Company considers that an adjusted market assessment approach should be used to estimate stand-alone selling pricesforits products and servicesforthe purposes of allocating transaction price. These estimates are comprised of pricesset forsimilar customer and circumstances, adjusted to reflect appropriate profit marginsforthe market. Estimates are used to determine discountsthatrelate specifically to each performance obligations,thusimpacting theirstand-alone selling prices.
The Management appliesjudgment when assessing the customer's ability and intention to pay in a contract. The assessment is based on the latest customer creditstanding and the customer's past payment history. This assessment may change during the contract execution, and if there is evidence of deterioration in the customer's ability or intention to pay, then under IFRS 15 no further revenue shall be recognized until the collectability criteria is met. Conversely, this assessment may
also change favorably overtime, upon which revenue shall now be recognized on a contract that did not initially meet the collectability criteria.
Revenue forstandard productsshall be recognized when control overthe equipment istransferred to the customer at a point in time. This assessmentshall be viewed from a customer's perspective considering indicatorssuch astransfer of titles and risks, customer acceptance, physical possession, and billingrights.
Control of an asset therefore refers to the ability to direct use of and obtain substantially all the remaining benefits from the asset. Control includes the ability to prevent other entities from using and obtaining the benefits from an asset. The benefits of an asset are the potential cash flows(inflows orsavings in outflows) that can be obtained directly or indirectly. Judgment may be applied in determining whetherrisk and rewards have been transferred to the customer and whetherthe customer has accepted the products. In a sale of software license, judgment may also be applied to determine when the software is made available to the customer by considering when they can direct the use of, and obtain substantially all the benefits of,the license. Often all indicators of transfer of control are assessed together and an overall judgment formed as to when transfer of control has occurred in a customercontract.
Revenue for customized solutions shall be recognized over time if progress of completion can be reliably measured and enforceable right to payment exists overthe duration ofthe contract. The progress of completion is estimated by reference to the output delivered such as achievement of contract milestones and customer acceptance. Judgment are applied when determining the appropriate revenue milestones that best reflect the progress of completion and are aligned with key acceptance stages within the contract.
Analysis of revenue by category:
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 At a point in time |
HRK '000 Over time |
HRK '000 | HRK '000 At a point in time |
HRK '000 Over time |
|
| Sales revenue from products | 420,776 | 373,230 | 47,546 | 382,767 | 313,839 | 68,928 |
| Sales revenue from services | 1,124,523 | 999,688 | 124,835 | 990,917 | 845,697 | 145,220 |
| 1,545,299 | 1,372,918 | 172,381 | 1,373,684 | 1,159,536 | 214,148 |
The Company has determined the operating segments based on the reportsreviewed by the Management Board that are used to make strategic decisions. The Management Board assessesthe performance of the operating segments based on a measure of adjustedOperating profit. The measurement basis excludesthe 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 customersthe Company's products are aimed, and through what distribution channelsthey are sold, as well asto commonality regarding technology, research and development.
To bestreflect the businessfocus and to facilitate comparability with the Ericsson Group, four operating segments are reported:
The Management Board does not monitor assets and liabilities by segments and therefore this information is not disclosed.
Revenues determined based on the geographic location of customers are disclosed in this note. Allthe Company's assets are located in Croatia.
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 At a point in time |
HRK '000 Overtime |
HRK '000 | HRK '000 At a point in time |
HRK '000 Over time |
|
| Sales revenue in domestic market |
496,993 | 388,591 | 108,402 | 372,456 | 247,573 | 124,883 |
| Sales revenue in Russia, Belarus, Kazakhstan, Georgia, Moldova, Ukraine and Armenia |
92,977 | 68,527 | 24,450 | 92,629 | 52,299 | 40,330 |
| Sales revenue to Ericsson | 841,480 | 841,480 | - | 780,345 | 780,345 | - |
| Sales revenue in Bosnia and Herzegovina, Montenegro and Kosovo |
89,038 | 52,472 | 36,566 | 112,856 | 67,553 | 45,303 |
| Other export sales revenue | 24,811 | 21,848 | 2,963 | 15,398 | 11,766 | 3,632 |
| 1,545,299 | 1,372,918 | 172,381 | 1,373,684 | 1,159,536 | 214,148 |
| Networks | Digital services | Managed services | Other | Unallocated | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||
| Sales revenue | 971,110 | 935,825 | 563,321 | 434,037 | 3,668 | 2,394 | 7,200 | 1,428 | - | - | 1,545,299 | 1,373,684 |
| Timing of revenue recognition |
||||||||||||
| At a point in time | 866,195 | 819,525 | 495,855 | 336,802 | 3,668 | 2,394 | 7,200 | 815 | - | - | 1,372,918 | 1,159,536 |
| Over time | 104,915 | 116,300 | 67,466 | 97,235 | - | - | - | 613 | - | - | 172,381 | 214,148 |
| Operating profit | 82,569 | 107,917 | 38,692 | 37,914 | 2,612 | 2,657 | 158 | 247 | (30,454) | (31,261) | 93,577 | 117,475 |
| Finance income/ (expense), net |
6,796 | 466 | ||||||||||
| Profit before tax | 100,373 | 117,941 | ||||||||||
| Income tax | (4,821) | (6,093) | ||||||||||
| Profit for the year | 95,552 | 111,848 |
Cost of sales, selling expenses and administrative expenses consist of the following expenses by nature:
| 2019 | 2018 (restated) | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Changes in contract work in progress (Note 16) | (61,802) | (91,372) |
| Material and external services (1) | 743,631 | 698,305 |
| Personnel expenses (Note 8) | 742,382 | 657,360 |
| Depreciation and amortization (Notes 12, 13, 29) | 41,590 | 29,708 |
| Value adjustments | 2,247 | 9,459 |
| 1,468,048 | 1,303,460 |
In accordance with the new classification, the Company has restated the comparative information for 2018 in comparison with the prior year financial statements. The cost of sales increased by HRK 20,411 thousand compared to prior year financial statements. Other operating expenses were reduced by HRK 534 thousand, other operating income increased by HRK 21,649 thousand while net finance result decreased by HRK 1,772 thousand.
Aforementioned restatements did not have impact on the result for 2018.
Other operational income consists of rent income in total amount of HRK 15,348 thousand (2018: HRK 17,269 thousand), government grants in total amount of HRK nil (2018: HRK 24,184 thousand) and other in total amount of HRK 978 thousand (2018: HRK 5,798 thousand).
(1) Including feesto auditors of HRK 543 thousand (2018: HRK 531 thousand). Feesto auditors mainly relate to statutory audit services.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Net salaries | 407,320 | 361,094 |
| Taxes and contributions | 285,469 | 262,350 |
| Other payroll-related costs | 48,479 | 33,916 |
| Equity-settled transactions (Note 24 (b)) | 1,114 | - |
| 742,382 | 657,360 |
Personnel expensesinclude HRK 117,914 thousand (2018: HRK 104,436 thousand) of defined pension contributions paid or payable into obligatory pension plans. Contributions are calculated as a percentage of employees' grosssalaries(Gross I). Other payroll-related costsrelate to transportation expenses, vacation accrual cost and other personnel provisions as well as to termination benefitsthat amount HRK 3,633 thousand (2018: HRK 7,051 thousand).
As at 31 December 2019, total number of employees was 2,515 (2018: 2,402).
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Interest income | 4,663 | 799 |
| Net foreign exchange result | 1,419 | (1,741) |
| Interest expense | (670) | - |
| Net change in fair value of financial assets at fair value through profit and loss |
471 | 36 |
| Other | 913 | 1,372 |
| 6,796 | 466 |
Income tax has been calculated on the taxable income atstatutory tax rate of 18% (2018: 18%). Income tax expense recognized in the consolidated statement of comprehensive incomecomprises:
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Current income tax expense | 473 | (12,500) |
| Total deferred tax income/(expense) | (5,294) | 6,407 |
| Total income tax expense | (4,821) | (6,093) |
The reconciliation between tax expense and accounting profit is shown as follows:
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Profit before tax | 100,373 | 117,941 |
| Income tax at 18% (2018: 18%) | 18,067 | 21,229 |
| Tax effects of: | ||
| Permanent non-deductible expenses | 273 | 246 |
| Effects of temporary differences | (14) | 112 |
| Tax incentives | (13,505) | (15,494) |
| Utilization of tax losses | - | - |
| Tax charge | 4,821 | 6,093 |
| Effective tax rate | 4,8% | 5.2% |
Tax incentives totaling HRK 13,505 thousand (2018: HRK 15,494 thousand) include tax allowances for certain expenditure, as employment and education and training, as defined by Croatian tax legislation. The underlying expenditure is included in cost of sales.
The Croatian Income TaxAct issubject to different interpretations and changesin respect of certain expenses which reduce the tax base. The Management Board'sinterpretation of the law relating to these transactions and activities ofthe Company may be disputed by the relevant authorities. The Tax Authority may take a different view in interpreting the laws and judgments, and it is possible that those transactions and activitiesthat have not been disputed in the past may be disputed now. The Tax Authority may carry out a tax audit within three years from the year in which the income tax liability for a certain financial period was established.
The Company recognized deferred tax assetsin the amount of HRK 15,448 thousand (2018: HRK 20,743 thousand) relating to temporary differences arising from:
| Impairments, provisions and accrued expenses HRK '000 |
|
|---|---|
| As at 1 January 2018 | 14,336 |
| Tax credited to the Income statement | (4,148) |
| Tax charged to the Income statement | 10,555 |
| As at 31 December 2018 | 20,743 |
| As at 1 January 2019 | 20,743 |
| Tax credited to the Income statement | 10,566 |
| Tax charged to the Income statement | (15,860) |
| As at 31 December 2019 | 15,449 |
| 2019 | 2018 | |
|---|---|---|
| Profit for the year (HRK '000) | 95,552 | 111,848 |
| Weighted Average Number of Shares Outstanding at the year-end | 1,331,439 | 1,331,640 |
| Earnings per share (HRK) | 71,77 | 83,99 |
Basic and fully diluted earnings pershare are the same since the Company does not have any dilutive potential ordinary shares.
| Land and buildings HRK '000 |
Plant and equipment HRK '000 |
Asset under construction HRK '000 |
Other HRK '000 |
Total HRK '000 |
|
|---|---|---|---|---|---|
| As at 1 January 2018 | |||||
| Cost or valuation | 167,664 | 363,970 | 1,722 | 328 | 533,684 |
| Accumulated depreciation | (121,987) | (313,433) | - | (253) | (435,673) |
| Net book amount | 45,677 | 50,537 | 1,722 | 75 | 98,011 |
| Year ended 31 December 2018 | |||||
| Opening net book amount | 45,677 | 50,537 | 1,722 | 75 | 98,011 |
| Transfer of asset under construction | - | 1,722 | (1,722) | - | - |
| Additions | 3,730 | 34,949 | 2 | - | 38,681 |
| Disposals | - | (65) | - | - | (65) |
| Depreciation charge | (3,272) | (25,832) | - | (7) | (29,111) |
| Closing net book amount | 46,135 | 61,311 | 2 | 68 | 107,516 |
| As at 31 December 2018 | |||||
| Cost or valuation | 171,394 | 369,848 | 2 | 327 | 541,571 |
| Accumulated depreciation | (125,259) | (308,537) | - | (259) | (434,055) |
| Net book amount | 46,135 | 61,311 | 2 | 68 | 107,516 |
| Year ended 31 December 2019 | 107,516 | ||||
| Opening net book amount | 46,135 | 61,311 | 2 | 68 | |
| Transfer of asset under construction | - | 2 | (2) | - | - |
| Additions | 6,742 | 30,008 | 28,292 | - | 65,042 |
| Disposals | - | (2,345) | - | - | (2,345) |
| Depreciation charge | (3,619) | (28,150) | - | (8) | (31,777) |
| Closing net book amount | 49,258 | 60,826 | 28,292 | 60 | 138,436 |
| As at 31 December 2019 | |||||
| Cost or valuation | 175,140 | 364,869 | 28,292 | 327 | 568,628 |
| Accumulated depreciation | (125,882) | (304,043) | - | (267) | (430,192) |
| Net book amount | 49,258 | 60,826 | 28,292 | 60 | 138,436 |
As at 31 December 2019,the Company had contractstotaling HRK 1,417 thousand (2018: HRK 5,600 thousand)related to future equipment purchases. Asset under construction relates to building energy reconstruction in Krapinska 45, Zagreb.
The Group acts as a lessor under operating leases, mainly in respect of land and buildings. Property leased to others with a carrying value of HRK 7,434 thousand (2018: HRK 9,942 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.
The movement on intangible assets in the year ended 31 December 2019 may be analyzed as follows:
| Application | |
|---|---|
| software | |
| HRK '000 | |
| As at 1 January 2018 | |
| Cost or valuation | 5,726 |
| Accumulated amortization | (4,439) |
| Net book amount | 1,287 |
| Year ended 31 December 2018 | |
| Opening net book amount | 1,287 |
| Amortization charge | (597) |
| Closing net book amount | 690 |
| As at 31 December 2018 | |
| Cost or valuation | 3,332 |
| Accumulated amortization | (2,642) |
| Net book amount | 690 |
| Year ended 31 December 2019 | |
| Opening net book amount | 690 |
| Amortization charge | (464) |
| Closing net book amount | 226 |
| As at 31 December 2019 | |
| Cost or valuation | 2,991 |
| Accumulated amortization | (2,765) |
| Net book amount | 226 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Deposits with financial institutions, denominated in foreign currency | 13,826 | 15,804 |
| Deposits with financial institutions, denominated in HRK | 18,160 | 12,360 |
| Non-current receivables from foreign customers, denominated in foreign currency | 14,381 | 19,682 |
| Loans given, Note 4 (b) | 9,119 | 6,833 |
| Receivables for sold apartments | 477 | 512 |
| Total loans and receivables | 55,963 | 55,191 |
| Impairment allowance on loans and receivables | (2,191) | (3,532) |
| 53,772 | 51,659 |
Deposits with financial institutionsin the amount of HRK 30,209 thousand (2018: 24,083 thousand) are used as a collateral for Supplier credit arrangement disclosed in Note 4 (b), with interest rate from 0.75% to 2% and maturing in year 2022.
The remainder of the deposits with financial institutionsin the amount of HRK 1,777 thousand (2018: HRK 4,081 thousand) are placed as guarantee depositsfor housing loans provided to the employees, and with a remaining maturity of overthree years.
Loans and receivablesfrom customers are partially secured with bank guarantees and letters of credit. The current portion of the non-current receivables is classified under current assets.
Receivables for sold apartments are linked to the counter value of euro,repayments are made by deduction from monthly salary and the loans are secured with collateral on the house or apartment. Receivables for sold apartments and housing loans provided to a limited number of employees bear fixed interest rates of up to 5% per annum.
| 2019 | 2018 | |
|---|---|---|
| Due | HRK '000 | HRK '000 |
| 2020 | - | 12,562 |
| 2021 | 14,850 | 10,082 |
| 2022 | 8,650 | 3,871 |
| 23,500 | 26,515 |
| 2019 | 2018 | ||
|---|---|---|---|
| Ownership | HRK '000 | HRK '000 | |
| Ericsson Nikola Tesla BY d.o.o. | 100% | 1,020 | 1,020 |
| 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 |
| 1,053 | 1,053 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Raw materials | - | 8 |
| Contract work in progress | 170,544 | 108,720 |
| Total inventories | 170,544 | 108,728 |
| Impairment allowance | (22) | (8) |
| 170,522 | 108,720 |
Slow-moving or obsolete inventories have been written down to their estimated realizable value through an impairment allowance. The impairment allowance is included within other operating expenses in the statement of comprehensive income.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Foreign trade receivables | 59,366 | 55,862 |
| Current portion of non-current foreign receivables | 12,678 | 10,954 |
| Total current foreign receivables | 72,044 | 66,816 |
| Domestic trade receivables | 135,548 | 107,018 |
| Impairment allowance on receivables | (583) | (15,610) |
| 207,009 | 158,224 |
Impairment allowance on receivables in 2018 relate to one-off impairments recognized in prior years.
Movements in impairment allowance on loans and receivables were as follows:
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| As at 1 January | 20,006 | 13,582 |
| Impact of discounting non-current receivables | (1,389) | (1,089) |
| Receivables written off during the year as uncollectible | (16,338) | (2,949) |
| Impairment on receivables | 2,188 | 10,462 |
| As at 31 December (1) | 4,467 | 20,006 |
(1) Including impairment provision for receivables from related parties of HRK 1,686 thousand (2018: HRK 862 thousand)
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Receivables from employees | 69 | 157 |
| Net VAT receivables | 2,497 | 7,194 |
| Accrued interest receivable | 451 | 469 |
| Advances given | 9,455 | 5,943 |
| 12,472 | 13,763 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Financial assets at fair value through profit or loss | ||
| - Equity securities | 1,612 | 1,316 |
| - Investment in open-ended investment funds | 36,280 | 47,174 |
| - Other financial asset | 1,007 | - |
| 38,899 | 48,490 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Cash and demand deposits | 82,260 | 183,278 |
| Impairment loss (Note 31 (d)) | (427) | (835) |
| 81,833 | 182,443 |
As at 31 December 2019, the share capital of the Company is represented by 1,331,650 (2018: 1,331,650) of authorized, issued and fully paid ordinary shares, with a total registered value of HRK 133,165 thousand (2018: HRK 133,165 thousand). The nominal value of one share is HRK 100 (2018: 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 are:
| Number of shares | % held | Number of shares | % held | |
|---|---|---|---|---|
| 2019 | 2018 | |||
| 2019 | 2018 | |||
| Telefonaktiebolaget LM Ericsson | 653,473 | 49.07 | 653,473 | 49.07 |
| Other shareholders | 677,966 | 50.91 | 677,966 | 50.91 |
| Treasury shares | 211 | 0.02 | 211 | 0.02 |
| 1,331,650 | 100.00 | 1,331,650 | 100.00 |
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 24 (b). During 2019, the Company did not purchase its own shares.
Movements in treasury shares are as follows:
| Number of shares | Number of shares | ||
|---|---|---|---|
| 2019 | 2018 | ||
| As at 1 January (Note 21 (a)) | 211 | 246 | |
| Distributed during the year | - | (35) | |
| As at 31 December (Note 21 (a)) | 211 | 211 |
A legalreserve in the amount of 5% of totalshare capital was formed during previous periods by appropriation of 5% of net profit per annum up to a cap of 5% ofshare capital. The legalreserve may be used to cover losses if the losses are not covered by current net profit or if otherreserves are not available. The Company recorded the required level of legal reserves in 2000 and no further allocation to legal reserves isrequired. Legal reserves up to 5% of totalshare capital are not distributable.
Reserve for own shares are separated by decision of General Assembly of the Company.
Dividends payable are not accounted for until they have been ratified at the General Assembly of shareholders. On 13 June 2019, the General Assembly approved a regular dividend in respect of 2018 of HRK 20.00 per share, and an additional extraordinary dividend of HRK 50.60 per share in amount of HRK 94,000 thousand.
Cash dividends authorized and paid for previous years were as follows:
| 2019 HRK '000 |
2018 HRK '000 |
|
|---|---|---|
| HRK 32.50 per share for 2017 | - | 43,272 |
| HRK 70.60 per share for 2018 | 94,000 | - |
| Prior year dividend payout | - | 19 |
| 94,000 | 43,291 |
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Loans | 21,656 | - |
| Borrowings, Note 4 (b) | 5,668 | 5,668 |
| Total liabilities for borrowings | 27.324 | 5,668 |
| Changes in liabilities from financing activities | ||
| Year ended 31 December 2018 | HRK '000 | |
| Opening net book amount | 8,378 | |
| Foreign exchange differences | 294 | |
| Release of obligations (Note 4(b)) | (3,004) | |
| Closing net book amount | 5,668 | |
| Year ended 31 December 2019 | ||
| Opening net book amount | 5,668 | |
| Foreign exchange differences | 171 | |
| Release of obligations (Note 4(b)) | (171) | |
| Closing net book amount | 5,668 |
Loan is taken due to the Energy Efficiency project for premises in Zagreb (Krapinska 45). Loan has fixed interest rate.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Accounts payable | - | 173 |
| NPV discount | - | (94) |
| Total accounts payable | - | 79 |
| Liabilities for issued guarantee, Note 4 (b) | 902 | 692 |
| Other non-current liabilities, Note 4 (b) | 4,777 | 2,136 |
| 5,679 | 2,907 |
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 asrequired by the authorities are paid. These contributionsform the basis ofsocial benefits payable out of the Croatian Pension Insurance Institute to the Croatian employees upon theirretirement. Additionally, in 2001 the Company signed an Annex to the Union Agreement based on which employees are entitled to a benefit upon earlyretirement.
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 ofservice, 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 2019 were a 2.76% discount rate (2018: 6%) and a 6.26% (2018: 5.13%) rate of average employment turnover.
Movements in long-term service benefits were as follows:
| Jubilee | Jubilee | |||||
|---|---|---|---|---|---|---|
| awards | Retirement | Total | awards | Retirement | Total | |
| 2019 | 2018 | |||||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January | 4,758 | 822 | 5,580 | 4,537 | 742 | 5,279 |
| Obligation created during the year | 2,048 | 43 | 2.091 | 654 | 172 | 826 |
| Obligation fulfilled during the year | (479) | (8) | (487) | (433) | (24) | (457) |
| Obligation reversed during the year | - | (104) | (104) | - | (68) | (68) |
| As at 31 December | 6,327 | 753 | 7,080 | 4,758 | 822 | 5,580 |
In 2004, the Company established its Loyalty program, a share-based scheme under which key employees are entitled to receive the Company'sshares conditional on the employee completing certain years ofservice (the vesting period) from the grant date.
The treasury shares are distributed to eligible employees upon ratification at the General Assembly.
Part of the share-based program from 2014 relatesto 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 program,the Company did not sell to its employees shares in 2019 (2018: 15 shares) and accordingly did not receive compensation (2018: HRK 46 thousand). In 2018,the difference between the purchase price of the shares and selling price received from the employee in the amount of HRK 28 thousand has been recognized within retainedearnings.
Movements in shares under the Award and Loyalty programs are as follows:
| 2019 | 2018 | |
|---|---|---|
| Number of shares | Number of shares | |
| As at 1 January | - | 35 |
| Granted | 7,915 | - |
| Exercised | - | (35) |
| As at 31 December | 7,915 | - |
Vesting conditions for shares granted under Loyalty program are one to four years of service.
The fair value ofservice received in return forshares granted is measured by reference to the observable market price of shares at the grant date.
During 2019,the Company had HRK 1,114 thousand expenses(2018: HRK zero) in respect ofshare-based payments, which would be included in personnel expenses as disclosed in Note 8.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Trade payables | 47,258 | 56,428 |
| Liabilities to employees | 94,323 | 78,801 |
| Other current liabilities | 20,844 | 19,767 |
| 162,425 | 154,996 |
Movements in provisions were as follows:
| Warranty reserve |
Termination benefits |
Other reserve | Total | |
|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| As at 1 January 2018 | 8,775 | 2,340 | 16,355 | 27.470 |
| Additional provisions | 1,373 | 11,195 | 30,661 | 43,229 |
| Unused provisions reversed | (4,119) | - | - | (4,119) |
| Provisions used during the year | (2,516) | (12,286) | (34,904) | (49,706) |
| As at 31 December 2018 | 3,513 | 1,249 | 12,112 | 16,874 |
| As at 1 January 2019 | 3,513 | 1,249 | 12,112 | 16,874 |
| Additional provisions | 1,544 | 10,298 | 8,626 | 20,468 |
| Unused provisions reversed | (183) | - | - | (183) |
| Provisions used during the year | (2,441) | (3,306) | (18,308) | (24,055) |
| As at 31 December 2019 | 2,433 | 8,241 | 2,430 | 13,104 |
The warranty reserve is established to cover the expected warranty claims on products sold during the year. Reversal of warranty reservesrelatesto expired warranties.
Followed by the prudence principle and based on the circumstances and other factors, including expectations of future events, provision in the amount of HRK 8,626 thousand (2018: HRK 11,261 thousand) was made to a complex project on domestic market.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Deferred revenue | 8,330 | 4,725 |
| Accrued charges for unused holidays | 21,428 | 20,484 |
| Accrued charges in respect of service contracts | 52,276 | 39,892 |
| Other accrued charges | 23,518 | 42,911 |
| 105,552 | 108,012 |
Deferred revenue represents amounts due to customers under contractsfor work not performed but invoicesissued, or cash received, and thus present a liability to perform a service ordelivery.
Accrued chargesin respect ofservice contracts mainly represent costsincurred for which no invoice has been received from supplier or other external contractor at reporting date.
The Company has recognized the following assets and liabilities arising from contracts with customers:
| 31 December 2019 | 31 December 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Contract assets from contracts with customers | 3,239 | 3,335 |
| Loss allowance | - | - |
| Total current contract assets | 3,239 | 3,335 |
| Contract liabilities – advances from customers | 6,611 | 2,088 |
| Contract liabilities – deferred revenue | 142,764 | 169,557 |
| Total current contract liabilities | 149,375 | 171,645 |
As at 31 December 2019, the Company recognized HRK 3,239 thousand of contract asset net of impairment loss provisions (referto Note 30) in respect of managed services contractsthatrelatesto future service performance (as at 31 December 2018: HRK 3,335 thousand) and will be realized when contract conditions aremet.
As at 31 December 2019 the Company recognized HRK 149,375 thousand of contract liabilitiesin respect of the following contractsrelated to modernization of mobile and fixed network, project-related services and support activities, e-Health Information Systems and other (as at 31 December 2018: HRK 171,645 thousand).
The following table presentsinformation on unsatisfied performance obligationsresulting from long-term contracts with customers.
| 31 December 2019 | 31 December 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Aggregate amount of the transaction price allocated to long-term contracts that are fully unsatisfied as at 1 January and 31 December |
22,248 | 4,688 |
| Aggregate amount of the transaction price allocated to long-term contracts that are partially unsatisfied as at 1 January and 31 December |
75,766 | 70,662 |
| 98,014 | 75,350 |
The Company expectsto recognize approximately 30% ofthe transaction price allocated to the remaining performance obligations as revenue in financial year 2020, 18% as revenues in the financial year 2021, and 2% as revenues in the financial year 2022.
All other contracts are for periods of one year or less or are billed based on time incurred.
The Company leases warehouse, office premises and parking lots. The leases typically run for a period of 5 years, with an option to renew the lease after that date. For certain leases, the Company is restricted from entering into any sub‑lease arrangements.
The warehouse, office premises and parking lots were entered many years ago as combined leases of land and buildings. Previously, these leases were classified as operating leases under IAS 17.
The Company leases vehicles under a number of lease contracts, which were classified as operating leases under IAS 17. The leases typically run for a period of 3 to 5 years.
Information about leases for which the Company is a lessee is presented below.
Right‑of‑use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment.
| Property, plant and equipment |
|
|---|---|
| HRK '000 | |
| Balance as at 1 January 2019 | 27,909 |
| Depreciation charge for the year | (9,349) |
| Increase of right‑of‑use assets | 9,012 |
| Balance as at 31 December 2019 | 27,572 |
| Property, plant and equipment |
|
|---|---|
| HRK '000 | |
| 2019 – Leases under IFRS 16 | |
| Interest on lease liabilities | 656 |
| Income from sub-leasing right-of-use assets presented in 'other revenue' | - |
| Expenses relating to short-term leases Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets |
687 - |
| 2018 – Operating leases under IAS 17 | |
| Lease expense | 9,422 |
Some property leases contain extension options exercisable by the Company up to one year before the end of the noncancellable contract period. Where practicable, the Company seeks to include extension options in new leases to provide operational flexibility.
The Company assesses at lease commencement date whether it is reasonably certain to exercise the extension options. The Company reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant changes in circumstances within its control.
The Company leases out its property consisting of its owned commercial properties. All leases are classified as operating leases from a lessor perspective.
The Company leases out its owned commercial properties. The Company has classified these leases as operating leases, because they do not transfer substantially all of the risks and rewards incidental to the ownership of the assets.
Rental income recognized by the Company during 2019 was HRK 15,348 thousand (2018: HRK 17,269 thousand).
The following table sets out a maturity analysis of lease payments to be received after the reporting date.
| Property, plant and equipment |
|---|
| HRK '000 |
| 10,051 |
| 4,939 |
| 4,354 |
| 8,537 |
| 27,881 |
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% (2018: 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.
Major transactions with the Ericsson Group companies may be summarized as follows:
| Telefonaktiebolaget LM Ericsson |
Other Ericsson Group consolidated companies |
Subsidiaries | Total | |||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Sales of goods and services | ||||||||
| Sales revenue | - | - | 841,480 | 780,345 | 17,304 | 1,149 | 858,784 | 781,494 |
| Other income | - | - | 5,586 | 27,961 | 243 | 237 | 5,829 | 28,198 |
| - | - | 847,066 | 808,306 | 17,547 | 1,386 | 864,613 | 809,692 | |
| Purchases of goods and | ||||||||
| services | ||||||||
| Licenses | 3,454 | 2,912 | 19,255 | 20,688 | - | - | 22,709 | 23,600 |
| Cost of sales | - | - | 607,902 | 399,554 | 24,061 | 196,360 | 631,963 | 595,914 |
| Other expenses | - | - | - | - | 26 | (291) | 26 | (291) |
| 3,454 | 2,912 | 627,157 | 420,242 | 24,087 | 196,069 | 654,698 | 619,223 |
The sales of goods and services transactions have been directly negotiated between the involved parties and agreed on an individual basis. The Company pays: (i) license fees on sales ofservices and wireline products, (ii) corporate trademark licenses, (iii)support services, (iv) R&D tools and (v) IS/IT fee. The license fee is paid as a percentage ofsales ofservices and sales of wireline products.
The Company's keymanagement include the executivemanagementlisted on page 101, comprising the Management Board member and directors of the main organizational units.
| 2019 | 2018 | |
|---|---|---|
| HRK '000 | HRK '000 | |
| Salaries and other short-term employee benefits | 19,054 | 19,365 |
| Other long-term benefits | 1,114 | - |
| 20,168 | 19,365 |
The members of the executive management and the Supervisory Board held 5,090 ordinary shares atthe year-end (2018: 4,971 shares).
In addition,the Company paid remuneration totaling HRK 349 thousand (2018: HRK 331 thousand)to the Supervisory Board and Audit Committee members during 2019.
Year-end balances arising from key transactions with Ericsson Group companies may be summarized as follows:
| Trade receivable | ||||
|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Telefonaktiebolaget LM Ericsson (LME), largest individual shareholder |
- | - | 728 | 660 |
| Other Ericsson Group companies | 112,862 | 109,901 | 89,431 | 32,551 |
| Subsidiaries: | ||||
| Ericsson Nikola Tesla BH d.o.o | 682 | 65 | 345 | 105 |
| Ericsson Nikola Tesla Servisi d.o.o. | 7,696 | 1,020 | 13,620 | 27,953 |
| Ericsson Nikola Tesla d.d. – Branch office of Kosovo | 76 | 71 | - | - |
| Libratel d.o.o. | - | - | - | 676 |
| Ericsson Nikola Tesla BY | - | - | 381 | 366 |
| 121,316 | 111,057 | 104,505 | 62,311 |
The Company recorded a non-currentreceivable (Note 14) and deferred revenue (within other non-current liabilities) of HRK nil thousand (2018: HRK 79 thousand) from Ericsson Services d.o.o. (ESK) relating to the five-year managed services contract with Hrvatski Telekom.
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 asfinancial assets and liabilities, and to manage and control financialrisk exposures. The Company also has a customerfinance function with the main objective to find suitable thirdparty financing solutionsfor customers and to minimize recourse to the Company. Risk management policies that relate to financial instruments can be summarized as follows:
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 enterinto foreign currency forward contractsto hedge economically its exposure to currency risk arising on operating cashflows.
As at 31 December 2019, if the euro and US dollar had weakened/strengthened by 1% (2018: 1%) against the Croatian kuna, with all other variables held constant, the net result after tax for the reporting period would have been HRK 284 thousand higher/lowerforthe Company (2018: HRK 1,391 thousand), mainly as a result of foreign exchange losses/gains on translation of cash, cash equivalents, deposits,trade payables, customerreceivables and customerfinancing denominated in euro.
Other currencies to which The Group is exposed are: SEK, BAM, PLN, GBP.
The Company continuesto focus on securing natural hedges and active currency management and to minimize impacts from currency moves. The Company's exposure to foreign currencies is shown in the table below.
The tables below present the currency analysis and the resulting gap.
| Total | ||||||
|---|---|---|---|---|---|---|
| 2019 | EUR | USD | Other currency |
foreign currencies |
HRK | Total |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 16,426 | 31,633 | - | 48,059 | 5,713 | 53,772 |
| Trade and other receivables | 139,336 | 12,529 | 14,036 | 165,901 | 192,005 | 357,906 |
| Financial assets at fair value through | ||||||
| profit or loss | 1,008 | - | - | 1,008 | 37,891 | 38,899 |
| Cash and cash equivalents | 16,821 | 4,220 | 7,209 | 28,250 | 53,583 | 81.833 |
| 173,591 | 48,382 | 21,245 | 243,218 | 289,192 | 532,410 | |
| Borrowings | (15,414) | (3,450) | - | (18,864) | (36,341) | (55,205) |
| Trade and other payables | (89,249) | (56,094) | (57) | (145,400) | (127,209) | (272,609) |
| (104,663) | (59,544) | (57) | (164,264) | (163,550) | (327,814) | |
| Currency gap | 68,928 | (11,162) | 21,188 | 78,954 | 125,642 | 204,596 |
| 2018 | EUR | USD | Other currency |
Total foreign currencies |
HRK | Total |
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 7,850 | 43,809 | - | 51,659 | - | 51,659 |
| Trade and other receivables | 115,274 | 28,306 | 9,759 | 153,339 | 133,091 | 286,430 |
| Financial assets at fair value through | ||||||
| profit or loss | - | - | - | - | 48,490 | 48,490 |
| Cash and cash equivalents | 55,739 | 6,547 | 8,229 | 70,515 | 111,928 | 182,443 |
| 178,863 | 78,662 | 17,988 | 275,513 | 293,509 | 569,022 | |
| Borrowings | - | (5,668) | - | (5,668) | - | (5,668) |
| Trade and other payables | (49,773) | (6,288) | (418) | (56,479) | (163,735) | (220,214) |
| (49,773) | (11,956) | (418) | (62,147) | (163,735) | (225,882) | |
| Currency gap | 129,090 | 66,706 | 17,570 | 213,366 | 129,774 | 343,140 |
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 deposits in financial institutions at a variable interest rate.
As at 31 December 2019:
The following table presents the annual average interest rates exposure of financial assets and liabilities:
| Average interest | Average interest | |
|---|---|---|
| rates | rates | |
| 2019 | 2018 | |
| % | % | |
| Loans and receivables | 0.84 | 0.82 |
| Cash and cash equivalents | 0,03 | 0.08 |
The tables below present the interest rate repricing analysis and the resulting gap.
| Non-interest | Up to 1 | 1–3 | 3–12 | 1–5 | Over 5 | Fixed | ||
|---|---|---|---|---|---|---|---|---|
| 2019 | bearing | month | months | months | years | years | Total | interest |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 21,786 | - | - | - | 30,209 | 1,777 | 53,772 | 30,209 |
| Trade and other receivables | 357,906 | - | - | - | - | - | 357,906 | - |
| Financial assets at fair value through profit or loss |
38,999 | - | - | - | - | - | 38,899 | - |
| Cash and cash equivalents | - | 81,833 | - | - | - | - | 81,833 | - |
| 418,691 | 81,833 | - | - | 30,209 | 1,777 | 532,510 | 30,209 | |
| Borrowings | (55,205) | - | - | - | (55,205) | |||
| Trade and other payables | (266,930) | - | - | - | (5,679) | - | (272,609) | - |
| (322,135) | - | - | - | (5,679) | - | (327,814) | - | |
| Interest rate gap | 96,556 | 81,833 | - | - | 24,530 | 1,777 | 204,696 | 30,209 |
| 2018 | 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 | 23,495 | - | - | - | 24,083 | 4,081 | 51,659 | 24,083 |
| Trade and other receivables | 286,430 | - | - | - | - | - | 286,430 | - |
| Financial assets at fair value through profit or loss |
48,490 | - | - | - | - | - | 48,490 | - |
| Cash and cash equivalents | 182,443 | - | - | - | - | - | 182,443 | - |
| 540,858 | - | - | - | 24,083 | 4,081 | 569,022 | 24,083 | |
| Borrowings | (5,668) | - | - | - | - | - | (5,668) | - |
| Trade and other payables | (217,437) | - | - | - | (2,777) | - | (220,214) | - |
| (223,105) | - | - | - | (2,777) | - | (225,882) | - | |
| Interest rate gap | 317,754 | - | - | - | 21,306 | 4,081 | 343,140 | 24,083 |
The Company hasinsignificant exposure to debtsecurities price risk due to low investments and all classified on the balance sheet at fair value through profit or loss (investmentsfunds).
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.
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 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 2019, the five largest customers represent 66% of total net trade receivables (2018: 51%). The Company considers that its maximum exposure to credit risk is reflected in the amount of trade receivables (Notes 14 and 17) and other receivables (Note 18), not impaired as 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. The Company is working closely with Croatian Bank for Reconstruction and Development (HBOR) and partnership banks to secure risk mitigation.
Provisions related to customer finance risk exposures are only made when they are reliably measurable and where, after the financing arrangement has become effective, certain events occur which are expected to have a significant adverse impact on the borrower's ability and/or willingness to service the outstanding debt. These events can be political normally outside the control of the borrower or commercial, e.g. the borrower's deteriorating creditworthiness.
Security arrangements for customer finance facilities normally include pledges of equipment and pledges of certain of the borrower's assets. If available, third-party risk coverage may also be arranged. "Third-party risk coverage" means that a financial payment guarantee covering the credit risk has been issued by a bank, an export credit agency or other financial institution. It may also be a credit risk transfer under the so-called "sub-participation arrangement" with a bank, whereby the credit risk and the funding is taken care of by the bank for the part covered by the bank. A credit risk cover from a third party may also be issued by an insurance company.
Cash equivalents amounted to HRK 81,833 thousand as at 31 December 2019 (31 December 2018: HRK 182,443 thousand). Provisions for expected credit losses on cash and deposits amounted to HRK 427 thousand as at 31 December 2019 (31 December 2018: HRK 835 thousand). The Company's write-offs have historically been low.
Trade receivables, receivables from related party and contract assets together amounted to HRK 331,564 thousand as at 31 December 2019 (HRK 272,616 as at 31 December 2018). Provisions for expected credit losses on trade receivables, receivables from related party and contract assets amounted to HRK 2,269 thousand as at 31 December 2019 (HRK 1,707 as at 31 December 2018). The Company's write-offs have historically been low.
The following tables provide an ageing detail of current and overdue amountsin respect of all customerloans and receivables as at 31 December 2019.
Table 1 Payment due date for total customer loans and receivables
| Table 1 | Payment due date for total customer loans and receivables | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Due balance | Up to 3 months |
3 monthsto 1 year |
1 to 3 years | Over 3 years | Total | |||||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |||||
| 2019 | ||||||||||
| Foreign receivables | 200 | 31,780 | 39,929 | 23,543 | 93 | 95,545 | ||||
| Domestic receivables | 1,109 | 132,146 | 2,293 | - | - | 135,548 | ||||
| Receivables from related parties* | 7,637 | 91,151 | 24,213 | - | - | 123,001 | ||||
| Contract asset | - | 3,239 | - | - | - | 3,239 | ||||
| 8,946 | 258,316 | 66,435 | 23,543 | 93 | 357,333 | |||||
| *excluding impairment allowance in the amount of HRK 1.686 thousand |
| 29,141 | 243,089 | 16,887 | 25,009 | 1,589 | 315,685 | |
|---|---|---|---|---|---|---|
| Contract asset | - | 3,335 | - | - | - | 3,335 |
| Receivables from related parties* | 8,664 | 96,418 | 6,837 | - | - | 111,919 |
| Domestic receivables | 3,210 | 101,968 | 1,840 | - | - | 107,018 |
| Foreign receivables | 17,267 | 41,338 | 8,210 | 25,009 | 1,589 | 93,413 |
| 2018 |
* excluding impairment allowance in the amount of HRK 862 thousand
| Up to 3 months |
3 monthsto 1 year |
1 to 3 years | Over 3 years | Total | ||
|---|---|---|---|---|---|---|
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | ||
| 2019 | ||||||
| Foreign receivables | 200 | - | - | - | 200 | |
| Domestic receivables | 870 | 144 | 95 | - | 1,109 | |
| Receivables from related parties | 5,873 | 391 | 1,277 | 96 | 7,637 | |
| 6,943 | 535 | 1,372 | 96 | 8,946 | ||
| 2018 | ||||||
| Foreign receivables | 5,635 | 11,632 | - | - | 17,267 | |
| Domestic receivables | 2,576 | 592 | 42 | - | 3,210 | |
| Receivables from related parties | 7,124 | 1,295 | 192 | 53 | 8,664 | |
| 15,335 | 13,519 | 234 | 53 | 29,141 |
| Table 3 | Payment due date for total customer loans and receivables (in respect of accounts with | any portion falling due) | ||||
|---|---|---|---|---|---|---|
| Due balance | Up to 3 months |
3 months to 1 year |
1 to 3 years | Over 3 years | Total | |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| 2019 | ||||||
| Foreign receivables | 200 | 1,042 | - | - | - | 1,242 |
| Domestic receivables | 1,109 | 75,377 | 2,293 | - | - | 78,779 |
| Receivables from related parties | 7,637 | 73,922 | 6,982 | - | - | 88,541 |
| 8,946 | 150,341 | 9,275 | - | - | 168,562 | |
| 2018 | ||||||
| Foreign receivables | 17,267 | 7,439 | 74 | - | - | 24,780 |
| Domestic receivables | 3,210 | 48,717 | 1,831 | - | - | 53,758 |
| Receivables from related parties | 8,664 | 86,133 | - | - | - | 94,797 |
| 29,141 | 142,289 | 1,905 | - | - | 173,335 |
| 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 | |
| 2019 | |||||
| Foreign receivables | 200 | - | - | - | 200 |
| Domestic receivables | 856 | 90 | - | - | 946 |
| Receivables from related parties | 5,873 | 391 | 1,276 | 96 | 7,636 |
| 6,929 | 481 | 1,276 | 96 | 8,782 | |
| 2018 | |||||
| Foreign receivables | 2,935 | 260 | - | - | 3,195 |
| Domestic receivables | 2,539 | 539 | - | - | 3,078 |
| Receivables from related parties | 6,955 | 226 | - | - | 7,181 |
| 12,429 | 1,025 | - | - | 13,454 |
Liquidity risk, also referred to asfunding risk, is the risk that an enterprise will encounter difficulty in raising fundsto meet commitments associated with financial instruments. Asthe Company has no commitmentsin 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 demonstratesthe strong liquidity position ofthe 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 banksshould an extraordinary liquidity need arise. As at 31 December 2019, the facility remained untapped.
| Up to 1 | 1–3 | 3–12 | 1–5 | Over 5 | ||
|---|---|---|---|---|---|---|
| 2019 | month | months | months | years | years | Total |
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 914 | 1,668 | 10,287 | 39,126 | 1,777 | 53,772 |
| Trade and other receivables | 242,776 | 111,522 | 3,424 | 184 | - | 357,906 |
| Current financial assets | 38,899 | - | - | - | - | 38,899 |
| Cash and cash equivalents | 81,833 | - | - | - | - | 81,833 |
| 364,422 | 113,190 | 13,711 | 39,310 | 1,777 | 532,410 | |
| Borrowings | - | - | - | (27,324) | - | (27,324) |
| Lease liabilities | - | - | (10.051) | (17,830) | - | (27,881) |
| Trade and other payables | (138,944) | (124,098) | (3,888) | (5,679) | - | (272,609) |
| (138,944) | (124,098) | (13,939) | (50,833) | - | (327,814) | |
| Maturity gap | 225,478 | (10,908) | 228 | (11,523) | 1,777 | 204,596 |
| 2018 | 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 | 388 | 2,250 | 8,184 | 36,756 | 4,081 | 51,659 |
| Trade and other receivables | 221,530 | 54,069 | 10,697 | 134 | - | 286,430 |
| Current financial assets | 48,490 | - | - | - | - | 48,490 |
| Cash and cash equivalents | 182,197 | - | 246 | - | - | 182,443 |
| 452,605 | 56,319 | 19,127 | 36,890 | 4,081 | 569,022 | |
| Borrowings | - | - | - | (5,668) | - | (5,668) |
| Trade and other payables | (61,294) | (146,303) | (9,710) | (2,907) | - | (220,214) |
| (61,294) | (146,303) | (9,710) | (8,575) | - | (225,882) | |
| Maturity gap | 391,311 | (89,984) | 9,417 | 28,315 | 4,081 | 343,140 |
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 19).
Amarket isregarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, orregulatory agency, and those pricesrepresent actual and regularly occurring markettransactions 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 orfrom 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, otherreceivables, non-current loans and receivables,trade and other payables and borrowings. The fair values of financial instruments together with carrying as amounts shown in the balance sheet are as follows:
| Unrecogniz | ||||||
|---|---|---|---|---|---|---|
| Carrying amount |
Fair value | Unrecognized loss/(gain) |
Carrying amount |
Fair value | ed gain/(loss) |
|
| 2019 | 2018 | |||||
| HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | HRK '000 | |
| Loans and receivables | 53,772 | 53,364 | (408) | 51,659 | 51,805 | 146 |
| Trade and other receivables | 357,906 | 357,676 | (230) | 286,430 | 286,531 | 101 |
| Financial assets at fair value through profit or loss |
38,899 | 38,899 | - | 48,490 | 48,490 | - |
| Cash and cash equivalents | 81,833 | 81,833 | - | 182,443 | 182,443 | - |
| Borrowings | (55,205) | (55,205) | - | (5,668) | (5,668) | - |
| Trade and other payables | (272,609) | (272,609) | (220,214) | (220,214) | - | |
| 204,596 | 203,958 | (638) | 343,140 | 343,387 | 247 |
The fair value of loans and receivables and the fair value of borrowings are calculated based on the Management's best estimate of discounted expected future principal and interest cash flows, using the marketrelated rate for a similar instrument at the balance sheet date as a discountrate. Fair values and carrying amounts are not significantly different as the loans and receivables were granted at marketrates, which were not substantially different from marketrates 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 depositsreflectsfair value due to the short-term maturity of these financial instruments. Similarly,the amortized cost carrying amounts oftrade receivables and payables with remaining life of lessthan one year and which are allsubject to normal trade credit termsreflect fair values. The following interest rates were used for determining fair values, which are based on available market rates forsimilar financial instruments:
| 2019 | 2018 | ||
|---|---|---|---|
| Loans and receivables | 0,59% | 1.70% |
(g) Capital management
The Company's objectives when managing capital are:
The Company is generating sufficient cash from operationsto fund liabilities asthey become due, finance customers when required and budgeted investments, and pay dividends.
The Company monitors capital using the statutoryminimum capitalrequirement. Shareholders' equity is disclosed in Note 21 to the financial statements.
Accounting policies applicable to the comparative period ended 31 December 2018 that were amended by IFRS 16 are as follows.
Leases on termsin which the Company assumessubstantially all the risks and rewards of ownership are classified asfinance leases. Upon initialrecognition, the leased asset is measured at an amount equal to the lower of itsfair 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 undersuch contracts are notrecognized on the balance sheet. Payments made under operating leases(net of any incentivesreceived from the lessor) are recognized in the statement of comprehensive income on a straight-line basis over the term of the lease.
Ericsson Nikola Tesla company is a large local exporter and the largest Croatian exporter of knowledge with more than 2,500 employees. Our business is partly related to activities in countries around the globe that are significantly hit by the pandemics of the novel Coronavirus COVID–19. The closing of borders of some countries and travel bans, disturbances in delivery of equipment and raw materials at the global level, deferred investment projects in Croatia and abroad and, consequently, reduced demand for some of our activities, could have certain negative effects on some segments of our business.
Due to global presence, the Company has already felt disturbances in the flow of people and goods that, provided they persist, will have an effect on the scale of some areas of our business and on current projects that engage our experts in the country and abroad. The Company estimates that, for the moment, the largest impact on business could be due to reduced mobility related to travel and field work of our employees, including those posted abroad for longer periods, in risk countries. If the situation with the pandemics of the novel Coronavirus persists, the execution/realization of several export deals that have been contracted recently could be obstructed precisely due to geographical and healthcare limitations to our activities. The Company holds that it has sufficient means and opportunities in the financial market that, combined with the appropriate measures taken by the government to relieve business in these circumstances, it can adequately address all challenges and continue its business.
Due to the fact that we have no means of predicting further developments regarding the novel Coronavirus COVID–19, at present, we cannot provide you with more detailed information on its concrete financial impacts on our business.
The Management and the executive management continue to monitor the situation and will implement required measures related to health of people and sustainable business continuity of the Company, in line with guidelines and recommendations by the relevant government authorities and bodies.
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