Home Credit B.V. Annual report
for the year ended 31 December 2008 (consolidated)
TABLE OF CONTENTS
TABLE OF CONTENTS ...... 2
1. INFORMATION ABOUT THE ISSUER...... 4
1.1. Basic data on the Issuer ...... 4 1.2. Floating rate bonds...... 5 1.3. Principal activities of the Issuer ...... 5 1.4. Position of the Issuer and its subsidiaries against the competition...... 7 1.5. Solvency of the Issuer...... 9 1.6. History and development of the Issuer ...... 9 1.7. The most important events in the year 2008 ...... 11 1.8. Business policy and strategy in 2009...... 12
2. ORGANIZATIONAL STRUCTURE...... 12
2.1. Home Credit Group...... 12 2.2. Organization chart – the key companies ...... 13 2.3. Home Credit a.s., Czech Republic...... 13 2.4. Home Credit Slovakia, a.s., Slovak Republic ...... 14 2.5. LLC Home Credit & Finance Bank, Russian Federation ...... 14 2.6. JSC Home Credit Kazakhstan, Kazakhstan...... 14 2.7. CJSC Home Credit Bank and LLC Home Credit Finance, Ukraine ...... 14 2.8. OJSC Home Credit Bank, Belarus ...... 15 2.9. Home Credit International a.s., Czech Republic ...... 15 2.10. Ownership interests of the Issuer...... 16
3. MANAGING AND SUPERVISORY BODIES ...... 16
3.1. Alexander Labak...... 17 3.2. Declan McSweeney ...... 17 3.3. Ladislav Chvátal ...... 17 3.4. Sonia Mihaylova Slavtcheva ...... 18 3.5. Ivan Svitek...... 18 3.6. Conflicts of interest...... 18
4. THE MOST SIGNIFICANT CONTRACTS ...... 18
5. FINANCIAL INFORMATION...... 21
5.1. Consolidated financial information of the Issuer ...... 21 5.2. Separate financial information of the Issuer ...... 21 5.3. Financial investments...... 22
2 6. OTHER INFORMATION...... 23
6.1. Audit fees...... 23 6.2. Monetary and non-monetary income of statutory bodies ...... 23 6.3. Remuneration principles ...... 23 6.4. Legal, administrative and arbitration procedure ...... 24 6.5. Information on shares and owners’ rights...... 24 6.6. Information on other significant contracts ...... 24
DIRECTORS’ REPORT ...... 25
INFORMATION ABOUT THE PERSONS RESPONSIBLE FOR THE ANNUAL REPORT 26
Declaration...... 26
APPENDIX Consolidated Financial Statements for the year ended 31 December 2008
3 1. INFORMATION ABOUT THE ISSUER
1.1. Basic data on the Issuer
Issuer: Home Credit B.V. Legal form: Besloten Vennootschap (Private Limited Liability Company) Registered office: The Netherlands, Strawinskylaan 933, Tower B, Level 9, 1077XX Amsterdam Place of registration: The Netherlands, Chamber of Commerce and Industries in Amsterdam (Kamer van Koophandel Amsterdam) Registration No.: 34126597 VAT number: NL 8086.95.976.B01 Date of incorporation: 28 December 1999 Length of life: Incorporated for an indefinite period of time Governing law: Laws of the Netherlands Country of incorporation: The Netherlands Issued capital: EUR 1,156,174,806 Paid up capital: EUR 1,156,174,806 Authorized capital: EUR 1,250,000,000 Contact address: Home Credit B.V. c/o Jacobus Wilhelmus Meyberg / Brenda Gierman- Beijlsmit Strawinskylaan 933, Tower B, Level 9 1077 XX Amsterdam, The Netherlands Tel: +31 (0)20 88 13 120 Fax: +31 (0)20 88 13 121 Email: [email protected] / [email protected] Contact address in the Lukáš Rakušan Czech Republic: Finance Controller Home Credit International a.s. Evropská 2690/17 P.O.Box 177 160 41 Prague 6 Tel.: +420 224 174 459 E-mail: [email protected] Contact for investors: Dana Knežević Tel.: +420 224 174 214 Issuer’s web page: www.homecredit.net
4 1.2. Floating rate bonds
ISIN: CZ0000000203 Issue date: 21 June 2006 Aggregate principal CZK 3,000,000,000 amount: Denomination of each CZK 10,000,000 Note: Redemption of 21 June 2009 principal amount: Interest rate: 6M PRIBOR + the margin 6 % Interest paid: semiannually in arrears as of 21 June and 21 December of each year Other information: book-entry securities in bearer form, in accordance with Czech law
1.3. Principal activities of the Issuer
Article 3 Chapter II of the Issuer’s Articles of Association state that the subject of the Issuer’s activity is: − acquisition of shares or other interest in legal entities, companies and enterprises, cooperation with them and their management; − acquisition and management of property – including rights following from intellectual property, and investing capital; − lending capital in particular, not exclusively though, to subsidiaries, subjects from the group and/or those with ownership interest in the company – all that observing Article 9 Section 5 of the Issuer’s Statutes, and also acquisition of means in the form of a loan/credit or provision of the means acquisition; − conclusion of contracts, in which the Issuer as a provider of security or a joint and several debtor guaranteeing or binding itself with or for a third party, enters into an engagement in particular but not exclusively in relation to legal entities and companies specified in subsection c) above;
5 Home Credit B.V. is a member (holding company) of Home Credit Group, operating in the Central and Eastern European and Central Asia consumer loan markets. In 2008, Home Credit Group granted loans in the combined principal of EUR 3.6 billion. Home Credit maintains leading position in the consumer finance markets of the Czech Republic (entered in 1997), the Slovak Republic (1999), the Russian Federation (2002), and the Republic of Kazakhstan (2005). In 2006 Home Credit Group entered the Ukrainian and in 2007 Belorussian market.
The main products offered by these companies are:
a) Purpose Consumer Loans The purpose consumer loans are intended to finance purchases of consumer goods (for example electronics, computers and office electronics, furniture, building material, sports equipment and other assorted items) by consumers. Such loans may also be provided for the purpose of purchasing holidays or to afford above- standard medical care. The loan may be provided only to a person who meets the set requirements, among which there are generally the following: − regular income in certain ratio to the principal amount of the provided loan, − regular employment, − positive payment of formerly provided loans, − possibly other guarantees or provision of a security, − citizenship of the given state and postal address in the given state, − minimum age limit, − not over the set maximum age limit. In order to prove the above-mentioned issues, the applicant must present relevant evidence (for example a passport, identity card or similar evidence of identity and a confirmation of income from his/her employer, which must include the determined information).
6 b) Revolving Loans A revolving loan is a long-term, repeatable and renewable credit line. A client of a revolving loan has available financial means in the amount of a stipulated credit limit. By each purchase, the available balance, which the customer may use from their credit limit, is reduced. By each installment, on the other hand, the financial means for purchase of further goods on loan increases.
c) Non-purpose Cash Loans These loans are not conditioned by the purchase of goods or services. The basic difference from the product Purpose Consumer Loans is that cash loans offer more flexibility to the customer because the principal amount is provided in cash and can be used for any purpose.
The long-standing operation of the Home Credit Group on the consumer finance market has provided this group with wide-ranging experience, that it has used when developing its sophisticated system of loan application approval and its system of loan collection from clients who fail to provide loan installments in a due and timely manner. The system of loan collection is divided into a several stage process, which includes specific steps to be taken in accordance with a precise schedule, the steps of which include: a payment reminder, a deduction request, the whole loan becoming due and, as a last resort, enforcement at civil court. Only if it is impossible to recover the due amount using this complex procedure, will the collection process stop.
1.4. Position of the Issuer and its subsidiaries against the competition
The main activity of the Issuer is as the holding company. Business activities of the Issuer are, therefore, performed by the companies of the Home Credit Group, i.e. companies operating on markets in the Czech Republic, the Slovak Republic, the Russian Federation, Kazakhstan (since 2005), Ukraine (since 2006) and Belarus (since 2007). The competitive position of the Issuer therefore depends on the market position of the individual subsidiaries against the competition in specific markets.
7 Market shares of subsidiaries (estimates): 2008 2007 a) Home Credit a.s. (Czech Republic) POS Loans (31%) (35%) Revolving Loans (12%) (9%) Cash loans (4.3%) (3.4) Total share on credit market* (7.9%) (7%)
b) Home Credit Slovakia, a.s. POS Loans (27%) (26%) Revolving Loans (10%) (9%) Cash loans (6.5%) (7%) Total share on credit market* (10.9%) (10%)
c) LLC Home Credit & Finance Bank (Russia) POS Loans (27.2%) (29.3%) Car loans (0.4%) (0.1%) Mortgage Loans (0.7%) (0.6%) Revolving Loans (10.4%) (11.1%) Cash loans (0.8%) (0.6%) Total share on credit market (2%) (2.3%)
d) JSC Home Credit Kazakhstan POS Loans (50%) (38.4%) Revolving Loans (2.5%) (1.2%) Cash loans (2%) (0.3%)
e) CJSC Home Credit Bank and LLC Home Credit Finance (Ukraine) POS Loans (3.6%) (6.6%) Revolving Loans (0.1%) (0.4%) Cash loans (0.2%) (0%) Mortgage Loans (0.2%) (0.3%) Car loans (0.2%) (0.3%) Other (0.5%) (0.9%) Total share on credit market (0.2%) (0.1%)
f) OJSC Home Credit Bank (Belarus) POS Loans (31.2%) (0.7%) * without mortgage loans
8
1.5. Solvency of the Issuer
At 31 December 2008 the share capital of the Issuer comprised 1,250,000,000 ordinary shares at a par value of EUR 1, from which 1,156,174,806 shares were issued and fully paid. All issued shares bear equal voting rights. The issued shares in the share capital of the Issuer were held as of 31 December 2008 as follows: − HC SE, a Societas Europaea (SE) company incorporated under the laws of the Netherlands, with corporate seat in Amsterdam, the Netherlands, and address at Amsterdam, Strawinskylaan 933, Tower B, 1077XX, the Netherlands, registered at the Dutch Trade Register under number 34253863, is the holder of 533,876,747 shares, numbered 1 up to and including 533,876,747, therefore of 46.18% of the issued share capital of the Issuer; and − PPF Group N.V., a limited liability company incorporated under the laws of the Netherlands, with corporate seat in Amsterdam, the Netherlands, and address at Amsterdam, Strawinskylaan 933, Tower B, 1077XX, the Netherlands, registered at the Dutch Trade Register under number 33264887, is the holder of 622,298,059 shares, numbered 533,876,748 up to and including 1,156,174,806, therefore of 53.82% of the issued share capital of the Issuer.
1.6. History and development of the Issuer
The Issuer was incorporated under Dutch law on 28 December 1999. It was recorded in the commercial register maintained by the Chamber of Commerce and Industries in Amsterdam (Kamer van Koophandel Amsterdam) on 10 January 2000. The Issuer was incorporated as a private limited liability company (in the B.V. legal form in accordance with Dutch law), the main subject of its activities are to manage, to finance and to participate in other companies. The Issuer is a holding company of the Home Credit Group, which is made up of companies active in the consumer finance markets in the Czech Republic, the Slovak Republic, the Russian Federation, Ukraine, Belarus and Kazakhstan. The key business entities forming this group are: Home Credit a.s. (Czech Republic), Home Credit Slovakia, a.s., LLC Home Credit & Finance Bank (Russia), LLC HOME CREDIT FINANCE, CJSC HOME CREDIT BANK, PCJSB “Privatinvest” (Ukraine), OJSC Home
9 Credit Bank (Belarus), JSC Home Credit Kazakhstan and Home Credit International a.s. (Czech Republic) acting as service company for the entire Home Credit Group. The Issuer gained its ownership interest in these companies gradually: In 2003, the Issuer was the owner of the only company in the group, namely Home Credit International a.s. In November 2004, the Issuer became the owner of 100 % shares of the company Home Credit Slovakia, a.s. In 2005, the company JSC Home Credit Kazakhstan was established. The Issuer had an interest of 90 % in this company. The remaining 10 % was owned by the company Home Credit International a.s. On 30 January 2006, the Issuer purchased a 10 % interest in the company JSC Home Credit Kazakhstan for USD 36 thousand, thus becoming the only shareholder of this company. In December 2005, Česká pojišťovna a.s. assigned its interest in the company Home Credit a.s. (i.e. 100 % shares of this company) to the Issuer. In 2005, the Issuer acquired also a 99.99 % interest in the company LLC Home Credit & Finance Bank. On 4 August 2006, the split-off of Česká pojišťovna a.s. came into force and thus apart from Česká pojišťovna a.s. a new company "Home Credit Grand Holding a.s." was established. The most significant consequence of this is that from this date on, Home Credit Group is not owned by Česká pojišťovna a.s., but by Home Credit Grand Holding a.s. The company Home Credit Grand Holding a.s. (with registered office in the Czech Republic) was owned directly by the holding company PPF Group N.V. In December 2006, Home Credit Group completed the acquisition of two of Ukraine’s financial services companies – Bank Agrobank (later renamed to CJSC Home Credit Bank) and PrivatKredit (later renamed to LLC Home Credit Finance) – by obtaining all necessary approvals from the Ukrainian Antimonopoly Office, as well as the National Bank of Ukraine. Both companies are ultimately owned by the Issuer. In February 2007, the Issuer acquired 95.94% of new shares in OJSC Lorobank (later renamed to OJSC Home Credit Bank) which was a small financial institution in Belarus, with assets totaling BYR 6.4 billion (EUR 2.4 million) as of 30 September 2006 (in accordance with local accounting standards). The share in the amount of 4.06% in OJSC Lorobank acquired Home Credit a.s. In February 2007, the Issuer acquired from Home Credit a.s. further 2.02% of OJSC Lorobank which brought its total shareholding at 97.96%. In March 2007, the Issuer’s shareholders HC Holding a.s. and Home Credit Grand Holding a.s. notified of the intention to merge together with the company HCES N.V. (Amsterdam, the Netherlands).
10 In May 2007, PPF Group and Nomos-Bank have announced their plans to join forces in the Russian Federation, following the regulatory and antitrust approvals. During 2007, PPF Group gradually acquired up to 15.67% stake in Nomos via Russia Finance Corporation B.V., company controlled by Home Credit B.V. In November 2007, the Issuer acquired 99.61% share in PCJSB “Privatinvest”, bank registered in Ukraine. As of December 17, 2007 two direct shareholders of the Issuer, Home Credit Grand Holding a.s. and HC Holding a.s. as the dissolving companies merged with a company HCES N.V., as the successor company. The merger has been accomplished under the conditions set forth in the Draft Terms of Merger and in compliance with the Community Law (acquis communitaire) in particular with Article 17, para. 2, letter a) and Article 29, para 1 of the Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE), as amended by Council Regulation (EC) No. 885/2004 of 26 April 2004 (“SE Regulation”) and to the extent applicable in compliance with the Law of the Netherlands and the Law of the Czech Republic. As a result of such merger the companies Home Credit Grand Holding a.s. and HC Holding a.s. ceased to exist and all their assets and liabilities were transferred by universal succession of title to the HCES N.V., which adopted the legal form of so called Societas Europaea (SE), a company established pursuant to the SE Regulation.
1.7. The most important events in the year 2008
In January 2008, the Issuer acquired 2.02% stake in NOMOS-BANK JSC. After this transaction the Issuer’s total stake in NOMOS-BANK JSC was 17.69%. In January 2008, the Issuer disposed of its participations in HC Fin1 B.V., Russia Finance Corporation B.V. and NOMOS-BANK JSC (the latter two participations held through HC Fin1 B.V.) to PPF Group N.V. for 257,576 thousand EUR. The transfer from the Issuer to PPF Group is neutral from the Issuer perspective. The participation interest 17.69% in NOMOS-BANK was acquired in 2007 and in January 2008 due to the intention of PPF Group N.V. to create a partnership with the shareholders of NOMOS-BANK JSC. In June 2008 the Issuer increased the share capital of OJSC Home Credit Bank (Belarus) by 16,548 MBYR through the additional issue of shares which brought its total shareholding at 98.69%. During 2008, the Issuer did not expand its business into new territories and focused on growth and consolidation within the existing countries of operation.
11 In the last quarter of 2008, as a response to the worldwide financial crisis, the Issuer launched a wide ranging cost management programme in its subsidiaries - reduced staffing levels, negotiated with retailers over the level of commissions, and have increased yields on majority of loan products. Duration of loans was shortened and potentially higher risk products such as car loans and mortgages in its Russia´s operations, were stopped. Late in 2008, the Issuer made a decision to freeze lending operations in Ukraine and focused on the collection of existing loans and gathering deposits through branch network (see 2.7).
1.8. Business policy and strategy in 2009
The Issuer enters 2009 with a solid performance track record. In the current environment the Issuer will continue to use capital in a very disciplined way focusing on high margin products with shorter durations. The ongoing support of Issuer’s parent company PPF Group N.V. continues to provide the Issuer with a robust financial platform to help sustain market leading positions in key CEE and CIS countries.
2. ORGANIZATIONAL STRUCTURE
2.1. Home Credit Group
The Issuer is a holding company of the Home Credit Group (companies operating on the consumer finance market in the Czech Republic, the Slovak Republic, the Russian Federation, in Kazakhstan, in Ukraine and in Belarus). The following text includes data on these companies, which belong to the same concern as the Issuer and which are important in terms of the business activity of the Issuer. The Issuer acquired the information on these companies as well as the data on their membership in the concern from available public sources. The extent of the data stated on individual companies is determined either by the opportunity to acquire the relevant information on the specific company and also by the significance which the relevant company has within the Issuer’s business. The main holding company, which covers the entire structure of the relevant concern, is the company PPF Group N.V. (the Netherlands). The ultimate owners of the company PPF Group N.V. are Mr. Petr Kellner with an interest amounting to 94.36%, Mr. Jiří Šmejc with the interest amounting to 5.00% and Mr. Ladislav Bartoníček with the interest amounting to 0.64%.
12 As of 31 December 2008, the Issuer was owned by PPF Group N.V. and HC SE. The interest of the company PPF Group N.V. in the Issuer represented 53.82%; the interest of the company HC SE represented 46.18%.
2.2. Organization chart – the key companies
2.3. Home Credit a.s., Czech Republic
The company Home Credit a.s. is registered in Brno, Moravské náměstí 249/8, district of Brno-City, Post Code: 602 00, Identification No. 269 78 636 and was established by a division of the company Home Credit Finance a.s., Identification No. 255 36 613, registered in Brno, Moravské náměstí 249/8, district of Brno-City, Post Code: 602 00, Identification No. 255 36 613. The registered capital of the company amounts to CZK 300 million. As of its establishment, this company, being a legal successor of the company Home Credit Finance a.s., continues in the business activities of its predecessor focusing on the provision of consumer finance services. The main
13 products offered by this company are specific consumer loans, revolving loans and non-purpose cash loans.
2.4. Home Credit Slovakia, a.s., Slovak Republic
Home Credit Slovakia, a.s. is registered at Piešťany, Winterova 7, Post Code: 921 22, the Slovak Republic, Identification No. 362 34 176. The main activity of this company is the provision of purpose and non-purpose financing through consumer and revolving loans on the market in the Slovak Republic. The registered capital of the company amounts to SKK 101 million.
2.5. LLC Home Credit & Finance Bank, Russian Federation
LLC Home Credit & Finance Bank was established in the Russian Federation as a limited liability company. The company is registered at Moscow, Zelenograd 317a, the Russian Federation, Identification No. 1027700280937. The registered capital of the company amounts to RUB 4,173 million. The main activity of the company is the provision of purpose and non-purpose financing through consumer loans provided at the point-of-sale (POS loans), revolving loans and cash-loans on the market in the Russian Federation. The Issuer owns an interest of 99.99% in this company.
2.6. JSC Home Credit Kazakhstan, Kazakhstan
JSC Home Credit Kazakhstan is registered at Almaty, Dostyk 310, Medeu District 050020, the Republic of Kazakhstan. The main activity of this company is the provision of purpose and non-purpose financing through customer and revolving loans on the market of Kazakhstan. The registered capital of the company amounts to KZT 4,918 million. The Issuer has taken a decision to transfer all operations of the Company to JSC Home Credit Bank (formerly JSC International Bank Alma Ata), in which the Issuer owns 9.99 %.
2.7. CJSC Home Credit Bank and LLC Home Credit Finance, Ukraine
CJSC Home Credit Bank (formerly CJSC AGROBANK), is located at Dnepropetrovsk, 24 Kursantska Street, 49051, Ukraine. CJSC Home Credit Bank provides commercial and retail banking services through 40 branches throughout Ukraine. The registered capital of the company amounts to UAH 307 million.
14
LLC Home Credit Finance (formerly LLC PrivatKredit) has its registered office at Dnepropetrovsk, 49 Pushkina street, 49000, Ukraine. The registered capital of the company as at 31 December 2008 amounts to UAH 64,892 thousand. The Company is operating under the Home Credit brand and facilitates granting the consumer loans to individuals by Home Credit Bank. Due to the liquidity crisis the Company reduced the number of sales points to 300 by the end of 2008. Management intends to cease the operations and liquidate the Company in 2009.
2.8. OJSC Home Credit Bank, Belarus
OJSC Home Credit Bank (formerly OJSC Lorobank) has its registered office at Minsk, 25 Inzhenernaya street, 220 175, Belarus. The registered capital of the company as at 31 December 2008 amounts to BYR 46,635 million. The principal activity of the Bank is the provision of consumer financing to private individual customers in the Republic of Belarus.
2.9. Home Credit International a.s., Czech Republic
Home Credit International a.s, Identification No. 601 92 666, with its registered office at Prague 6, Evropská 2690/17, Post Code: 160 41 has its registered capital in the amount of CZK 170 million. This company conducts business in the area of data processing, databank service, administration of networks, provision of software and consulting in the area of hardware and software and its main activity is the provision of Core Business operations for the IS/IT system infrastructure of the above-mentioned companies.
15 2.10. Ownership interests of the Issuer
Participating interests in group companies (separate)
(in %, TEUR) 31.12.2008 31.12.2007 31.12.2008 31.12.2007
Home Credit International Czech 100.0% 100.0% 6,738 2,553 a.s. Republic LLC Inko Technopolis Russia 100.0% 100.0% 1 1 Home Credit Slovakia a.s. Slovakia 100.0% 100.0% 44,921 41,198 LLC Home Credit & Russia 99.9% 99.9% 430,406 374,050 Finance Bank JSC Home Credit Kazakhstan 100.0% 100.0% 3,333 28,832 Kazakhstan Czech Home Credit a.s. 100.0% 100.0% 232,016 232,016 Republic PCJSB Privatinvest Ukraine 99.7% 99.7% 9,823 11,357 LLC Redlione Cyprus 100.0% 100.0% 0 62,076 CJSC Home Credit Bank Ukraine 100.0% 100.0% 57,538 75,084 OJSC Home Credit Bank Belarus 98.7% 98.0% 17,198 10,480 HC Fin3 NV Netherlands 100.0% 100.0% 195 45 HC Fin1 BV Netherlands 0.0% 100.0% - 257,576 HC Fin2 BV Netherlands 100.0% 100.0% 168 18 HC Kazakh Holdings BV Netherlands 100.0% 100.0% 163 113 LLC Homer Software House Ukraine 100.0% 100.0% 0 286 LLC Donmera Cyprus 100.0% 100.0% 1 1 PPF Home Credit IFN SA Romania 99.0% 0.0% 748 - JSC International bank Kazakhstan 10.0% 0.0% 18,105 - Alma Ata
Total 821,354 1,095,686
The detailed specifications of the consolidated subsidiaries are listed in the appendix “Consolidated Financial Statements for the year ended 31 December 2008”.
3. MANAGING AND SUPERVISORY BODIES
The Group management was changed with effect from 1 January 2009. Strategic management of individual Home Credit companies is overseen by a group of top managers of the Home Credit Group. The centralization of some of its functions helps to increase the efficiency of Home Credit's expansion, and facilitates sharing of knowledge and expertise in all markets Home Credit is present in. Board of Directors: − Alexander Labak (Chairman) − Declan McSweeney (until 31 December 2008) − Ladislav Chvátal (until 31 December 2008) − Sonia Mihaylova Slavtcheva (since 1 January 2009) − Ivan Svitek (since 1 January 2009)
16 3.1. Alexander Labak
− Chairman of the Board of Directors, Home Credit B.V. Mr. Alexander Labak has been with the Home Credit Group since October 2006. Before joining Home Credit Mr. Labak held executive positions in leading financial services companies such as President, MasterCard Europe and as Chief Marketing Officer, Deutsche Bank. Further he built up a distinct consumer centric profile working for Johnson & Johnson and Henkel. Throughout his career Mr. Labak had European and global business responsibilities complemented by direct operating market experience in the United States, Canada, Germany, Italy, Belgium and Austria. Mr. Labak is a Fulbright Scholar holding an MBA from the Wharton Business School and a Ph.D. from the Vienna University of Economics & Business Administration. He was born in 1962 and is an Austrian national.
3.2. Declan McSweeney
− Member of the Board of Directors until 31 December 2008, Home Credit B.V. Mr. Declan McSweeney has been with the Home Credit Group since August 2007 and was also from January until May 2007. Mr. McSweeney has approximately 30 years of experience in banking gained from a distinguished career at Allied Irish Banks plc where he held a number of key and influential positions in the financial management areas of AIB both in Ireland and the United Kingdom, including the position of Chief Financial Office – a role which he held for over eight years. Prior to joining AIB, Mr. McSweeney worked for KPMG in the US and Ireland. Mr. McSweeney graduated from the Institute of Chartered Accountants as well as from the Wharton Management Program, and earned his degree with Honours in the area of Commerce from the University College, Dublin. He was born in 1953 and is of Irish origin.
3.3. Ladislav Chvátal
− Member of the Board of Directors until 31 December 2008, Home Credit B.V. Mr. Ladislav Chvátal has been with the PPF Group since 1994. Within PPF Group and later Home Credit Group Mr. Chvátal held a number of key managerial positions. On 1st June 2005 Mr. Chvátal became Executive Director for Retail Banking and Consumer Finance at the PPF Group. In January 2007 Mr. Chvátal was appointed Member of the Board of Directors, Home Credit B.V. Mr. Chvátal graduated from the University of Economics in Prague. He was born in 1963 and is Czech national.
17 3.4. Sonia Mihaylova Slavtcheva
− Member of the Board of Directors since 1 January 2009, Home Credit B.V. Ms. Sonia Slavtcheva joined Home Credit Group as the Group Chief Financial Officer in July 2008 from GE after a distinguished career spanning 10 years where she was regarded as one of the firm’s top financial professionals. Ms. Slavtcheva has considerable experience in finance operations, including product profitability management, investment and real estate portfolio optimization as well as funding, treasury & hedging strategies. She had worked for a number of leading financial institutions in the US and CEE countries.
3.5. Ivan Svitek
− Member of the Board of Directors since 1 January 2009, Home Credit B.V. Mr. Ivan Svitek has been with Home Credit Group since 2008 as CEO of Home Credit and Finance Bank (Russia). He has a distinguished career at GE with years of strategic and operational experience in financial services and consumer products. His background covers the FMCG industry, public service sector as well as banking and consumer finance. He has worked across 19 diverse markets across Europe and Latin America and his proven track record includes re- organizational and change management programs.
3.6. Conflicts of interest
The Issuer represents that it is not aware of any conflicts of interest between the duties of the persons referred to in Articles 3.1., 3.2., 3.3., 3.4., 3.5. towards the Issuer and their private interests or other duties.
4. THE MOST SIGNIFICANT CONTRACTS
In 2008, the Issuer entered into the following significant agreements: - With Home Credit a.s., Identification No. 269 78 636, registered at Czech Republic, Brno, Moravské náměstí 249/8, district of Brno-City, Post Code: 602 00 • Contract on Provision of Services dated 2 January 2008 - With OJSC Home Credit Bank, registered at Belarus, Minsk, Inzhenernaya str., 25, Post Code: 220 075 • Loan Facility Agreement dated 25 April 2008 • Loan Facility Agreement dated 14 July 2008
18 - With CJSC Home Credit Bank, registered at Ukraine, Dnipropetrovsk, Kursantskaya str., 24 • Non-returnable financial support agreement dated 25 June 2008 • Amendment No.1 to Agreement on Providing Non- returnable Financial Support dated 22 December 2008 - With LLC Home Credit and Finance Bank, Identification No. 1027700280937, registered at Russia, Moscow, 317 A Zelenograd, Post Code: 124 482 • Loan facility agreement dated 6 June 2008 - With Home Credit International a.s, Identification No. 601 92 666, registered at Czech Republic, Prague 6, Evropská 2690/17, Post Code: 160 41 • Contract on Provision of Services dated 1 January 2008 • Amendment No.1 to the Contract on Provision of Services dated 1.1.2008 dated 18 January 2008 • Loan agreement dated 29 January 2008 • Amendment No.2 to the Contract on Provision of Services dated 1.1.2008 dated 15 February 2008 • Loan facility agreement dated 6 June 2008 - With Home Credit Slovakia, a.s., Identification No. 362 34 176, registered at Slovak Republic, Piešťany, Winterova 7, Post Code: 921 22 • Contract on Provision of Services dated 2 January 2008 • Loan agreement dated 21 February 2008 • Amendment No. 2 to Loan agreement 18-12-2007 dated 30 May 2008 - With PPF Banka, a.s., Identification No. 47116129, registered at Czech Republic, Prague 6, Evropská 2690/17, Post Code: 160 41 • Agreement on Pledge of Receivables – 2006660244 dated 6 May 2008 • Agreement on Pledge of Receivables from Bank Account - No.90006606-TR5-P dated 14 August 2008 • Agreement on pledge of Receivables from Bank Account No. 90004708/T1 dated 30 October 2008 • Amendment No. 1 to Pledge Agreement October 30, 2008 dated 18 December 2008
19 - With PPF Group N.V., Identification No: 33264887, registered at Netherlands, Amsterdam, Strawinskylaan 933, Tower B, Level 9, Post Code: 1077XX • Loan agreement dated 15 April 2008 • Loan agreement dated 12 June 2008 • Amendment to the Loan agreement dated 12 August 2008 • Amendment No.2 to the Loan Agreement dated 1 October 2008 • Amendment No.3 to the Loan Agreement dated 24 October 2008 - With LLC Redlione, Identification No. 178059, registered at Cyprus, Nicosia, Pindarou, 27, Alfa Business Center 2nd floor, Post Code: 1060 • Loan agreement dated 11 February 2008 • Master Agreement dated 18 February 2008 • Loan Agreement dated 18 August 2008 • Loan Agreement dated 29 August 2008 • Amendment to the Loan Agreement dated 11.2.2008 dated 23 September 2008 • Loan Agreement dated 10 October 2008 - With Russia Finance Corporation B.V., Identification No. 33180424, registered at Netherlands, Amsterdam, Strawinskylaan 933, Post Code: 1077XX • Loan agreement dated 13 March 2008 - Shares Agreements • Share purchase agreement with Bekir Okan regarding 9.99% shares acquisition of JSC International Bank Alma Ata dated 26 April 2008
20 5. FINANCIAL INFORMATION
5.1. Consolidated financial information of the Issuer
The consolidated figures are included in the appendix “Consolidated Financial Statements for the year ended 31 December 2008”.
5.2. Separate financial information of the Issuer
The separate balance sheet and income statement of the Issuer: 31 Dec 2008 31 Dec 2007 TEUR TEUR ASSETS
Cash and cash equivalents 66,257 247,251 Due from banks and other financial institutions 137,005 106,201 Financial assets at fair value through profit or loss 95,958 544 Financial assets available for sale 18,105 - Investments in subsidiaries and associates 803,248 1,095,686 Other assets 21,154 24,073
Total assets 1,141,727 1,473,755
LIABILITIES
Due to banks and other financial institutions 465 235,712 Debt securities issued 112,998 113,012 Financial liabilities at fair value through profit or loss 9,247 363 Other liabilities 4,253 4,082
Total liabilities 126,963 353,169
EQUITY
Share capital 1,156,175 1,156,175 Other reserves (141,411) (35,589)
Total equity 1,014,764 1,120,586
Total liabilities and equity 1,141,727 1,473,755
Investments in subsidiaries and associates are stated at cost less impairment losses.
21 2008 2007 TEUR TEUR
Interest income 34,331 11,203 Interest expense (14,688) (11,173)
Net interest income/(expense) 19,643 30
Fee and commission expense (326) (321)
Net fee and commission expense (326) (321)
Other operating income 39,537 29,977
Operating income 58,854 29,686
Impairment losses (123,123) (4,095) General administrative expenses (41,553) (44,137)
Operating expenses (164,676) (48,232)
Loss before tax (105,822) (18,546)
Income tax expense - -
Loss for the year (105,822) (18,546)
5.3. Financial investments
In January 2008, the Issuer acquired a 2.02% stake in NOMOS-BANK JSC. After this transaction the Issuer’s total stake in NOMOS-BANK JSC was 17.69%. In January 2008, the Issuer disposed of its participations in HC Fin1 B.V., Russia Finance Corporation B.V. and NOMOS-BANK JSC (the latter two participations held through HC Fin1 B.V.) to PPF Group N.V. for 257,576 thousand EUR. The transfer from the Issuer to PPF Group is neutral from the Issuer perspective. The participation interest 17.69% in NOMOS-BANK was acquired in 2007 and in January 2008 due to the intention of PPF Group N.V. to create a partnership with the shareholders of NOMOS-BANK JSC.
22 6. OTHER INFORMATION
6.1. Audit fees
Audit fees paid In TEUR 2008 2007 HC BV Audit services 406 201 Other services 24 -
430 201 CONSOLIDATED Audit services 1 671 942 Other services 42 54
1 713 996
6.2. Monetary and non-monetary income of statutory bodies
Overall consolidated monetary income of statutory bodies in 2008 was EUR 19,186 thousand (2007: EUR 14,940 thousand) and for HC BV only in 2008 was EUR 4,882 thousand (2007: EUR 3,570 thousand). There was no other significant non-monetary income in 2008. Monetary income means the total monetary earnings provided by the Issuer and the subjects controlled by the Issuer to the members of the body, i.e. remuneration for membership in the bodies of a company, an income from employment including remuneration and bonuses. Non-monetary income means the total value of all non-monetary income provided by the Issuer and the subjects controlled by the Issuer to the members of the body, i.e. a company car, pension insurance and other benefits.
6.3. Remuneration principles
Remuneration of the members of the statutory body of the Issuer consists of the fixed part, the variable part and benefits. − Fixed part - Basic salary is defined in contract and paid monthly. − Variable part: o Performance bonuses - paid yearly based on fulfilling evaluation criteria o Long-term bonuses – paid at the end of contract based on Home Credit Group long-term performance
23
6.4. Legal, administrative and arbitration procedure
The Issuer has no legal, administrative and arbitration proceedings on the date of publication of this report, which could have a negative influence on the financial situation and business of the company.
6.5. Information on shares and owners’ rights
There are no restrictions imposed on transferability of securities and voting rights. There are no agreements between shareholders that may result in complications when transferring shares or voting rights. Owners do not have any special rights. There are no special rules for appointing and discharging members of the board of directors and changing the articles of association of the company. There are no special competences and authorities of members of the board of directors.
6.6. Information on other significant contracts
The Issuer has not entered into any significant contracts, which will enter in force, change or expire in the event of change of control of the Issuer as a result of a take-over bid. The Issuer has entered into the contract with one of its directors, on the basis of which it would be obliged to provide to such personnel a consideration in connection with a termination of his/her office or employment in the event of change of control of the Issuer as a result of a take-over bid. The Issuer has no program, based on which the employees and directors are eligible to acquire shares of the Issuer, share options or any other rights to them under advantageous conditions.
24
Home Credit B.V.
Consolidated Financial Statements for the year ended 31 December 2008 Home Credit B.V. Consolidated Financial Statements for the year ended 31 December 2008
Contents
Independent Auditor’s Report 3
Consolidated Balance Sheet 5
Consolidated Income Statement 6
Consolidated Statement of Changes in Equity 7
Consolidated Statement of Cash Flows 9
Notes to the Consolidated Financial Statements 10
- 2 -
To: The Directors of Home Credit B.V.
Auditor’s report
Report on the financial statements We have audited the accompanying consolidated financial statements of Home Credit B.V., which comprise the consolidated balance sheet as at 31 December 2008, the profit and loss account, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes.
Management’s responsibility Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of Home Credit B.V. as at 31 December 2008, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
Amstelveen, 18 March 2009
KPMG ACCOUNTANTS N.V.
M. Frikkee RA
Home Credit B.V. Consolidated Balance Sheet as at 31 December 2008
2008 2007 Note TEUR TEUR
ASSETS
Cash and cash equivalents 8 575,955 390,085 Due from banks and other financial institutions 9 134,116 121,417 Loans to customers 10 2,537,448 2,407,581 Financial assets at fair value through profit or loss 11 242,181 19,259 Financial assets available-for-sale 12 18,105 215,640 Assets classified as held for sale 6 - 7,360 Current income tax receivables 21,949 568 Deferred tax assets 13 20,553 21,716 Investments in associates 14 494 42 Investment property 526 - Intangible assets 15 58,585 90,582 Property and equipment 16 178,145 192,338 Other assets 17 52,831 81,673
Total assets 3,840,888 3,548,261
LIABILITIES
Current accounts and deposits from customers 18 274,038 325,629 Due to banks and other financial institutions 19 866,317 779,436 Debt securities issued 20 1,713,494 1,413,227 Financial liabilities at fair value through profit or loss 21 13,788 24,853 Liabilities classified as held for sale 6 - 2,582 Current income tax liabilities 3,694 10,165 Deferred tax liabilities 13 1,875 304 Other liabilities 22 88,629 70,330
Total liabilities 2,961,835 2,626,526
EQUITY
Equity attributable to equity holders of the parent Share capital 23 1,156,175 1,156,175 Statutory reserves 23 2,378 2,126 Foreign currency translation 23 (98,361) (13,950) Revaluation reserve 23 (1) (1) Other reserves (181,179) (222,648)
879,012 921,702
Minority interest 41 33
Total equity 879,053 921,735
Total liabilities and equity 3,840,888 3,548,261
- 5 -
Home Credit B.V. Consolidated Statement of Changes in Equity for the year ended 31 December 2008
Attributable to equity holders of the parent
Foreign Share Statutory currency Fair value Other Minority Total capital reserves translation reserve reserves Total interest equity TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR
Balance as at 1 January 2008 1,156,175 2,126 (13,950) (1) (222,648) 921,702 33 921,735
Transfers - 252 - - (252) - - -
Total 1,156,175 2,378 (13,950) (1) (222,900) 921,702 33 921,735
Currency translation - - (84,411) - - (84,411) - (84,411)
Profit for the year - - - - 41,721 41,721 8 41,729
Total recognized income and expense for the year - - (84,411) - 41,721 (42,690) 8 (42,682)
Total changes - 252 (84,411) - 41,469 (42,690) 8 (42,682)
Balance as at 31 December 2008 1,156,175 2,378 (98,361) (1) (181,179) 879,012 41 879,053
- 7 - Home Credit B.V. Consolidated Statement of Changes in Equity for the year ended 31 December 2008
Attributable to equity holders of the parent
Foreign Share Share Statutory currency Fair value Other Minority Total capital premium reserves translation reserve reserves Total interest equity TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR
Balance as at 1 January 2007 213,216 336,034 910 7,790 - (27,564) 530,386 30 530,416
Capital contribution 381,000 - - - - - 381,000 - 381,000
Transfers 561,959 (336,034) 1,216 - - (227,141) - - -
Total 1,156,175 - 2,126 7,790 - (254,705) 911,386 30 911,416
Currency translation - - - (21,740) - - (21,740) (3) (21,743)
Revaluation of available-for-sale - - - - (1) - (1) - (1) financial assets
Profit for the year - - - - - 32,057 32,057 6 32,063
Total recognized income and - - - (21,740) (1) 32,057 10,316 3 10,319 expense for the year
Total changes 942,959 (336,034) 1,216 (21,740) (1) (195,084) 391,316 3 391,319
Balance as at 31 December 2007 1,156,175 - 2,126 (13,950) (1) (222,648) 921,702 33 921,735
- 8 - Home Credit B.V. Consolidated Statement of Cash Flows for the year ended 31 December 2008
2008 2007 Note TEUR TEUR Operating activities Profit before tax 98,155 61,953 Adjustments for: Interest expense 24 224,290 149,923 Net loss/(gain) on disposal of property, equipment and intangible assets 1,799 2,606 Net unrealized foreign exchange gain (48,219) (3,854) Impairment losses 346,759 245,872 Depreciation and amortization 32 32,359 19,428
Net operating cash flow before changes in working capital 655,143 475,928
Change in due from banks and other financial institutions (12,699) 18,981 Change in loans to customers (431,551) (1,164,162) Change in financial assets at fair value through profit or loss (222,922) 11,292 Change in other assets 28,842 (29,959) Change in current accounts and deposits from customers (51,591) 123,355 Change in financial liabilities at fair value through profit or loss (11,065) 19,956 Change in other liabilities 39,741 8,849
Cash flows used in the operations (6,102) (535,760)
Interest paid (212,023) (149,854) Income tax paid (84,456) (46,840)
Cash flows used in operating activities (302,581) (732,454)
Investing activities Proceeds from sale of property, equipment and intangible assets 20,021 802 Acquisition of property, equipment and intangible assets (79,535) (94,464) Acquisition of assets and liabilities classified as held for sale - (11,358) Net proceeds from/(acquisition of) available-for-sale financial assets 197,535 (215,640) Acquisition of investment in subsidiary, net of cash acquired (526) 216
Cash flows used in investing activities (137,495) (320,444)
Financing activities Proceeds from the issue of share capital - 381,000 Proceeds from the issue of debt securities 641,510 371,928 Proceeds from due to banks and other financial institutions 818,221 1,104,439 Repayment of debt securities issued (341,243) (37,530) Repayment of due to banks and other financial institutions (731,340) (715,474)
Cash flows from financing activities 387,148 1,104,363
Net increase in cash and cash equivalents 222,062 51,465
Cash and cash equivalents at 1 January 390,075 346,491
Effects of exchange rate changes on cash and cash equivalents (36,192) (7,871)
Cash and cash equivalents at 31 December 8 575,955 390,085
- 9 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
1. Description of the Group
Home Credit B.V. (the “Company”) was incorporated on 28 December 1999 in the Netherlands.
Registered office Stravinskylaan 933 1077 XX Amsterdam The Netherlands
Shareholders Country of incorporation Ownership interest (%) 2008 2007
PPF Group N.V. Netherlands 53.82 53.82 HC S.E. Netherlands 46.18 46.18
The ultimate controlling entity is PPF Group N.V. registered in the Netherlands.
Consolidated subsidiaries Country of incorporation Ownership interest (%) 2008 2007
Donmera (LLC) 5) Cyprus 100.00 100.00 Redlione (LLC) Cyprus 100.00 100.00 Home Credit (JSC) Czech Republic 100.00 100.00 Home Credit International (JSC) Czech Republic 100.00 100.00 Eurasia Capital S.A. 9) Luxemburg 0.00 0.00 Eurasia Structured Finance No.1 S.A. 9) Luxemburg 0.00 0.00 HC Fin1 B.V. 4,6) Netherlands - 100.00 HC Fin2 B.V. 4) Netherlands 100.00 100.00 HC Fin3 B.V. 4) Netherlands 100.00 100.00 HC Kazakh Holdings B.V. 5) Netherlands 100.00 100.00 HCF Funding No.1 B.V. 9) Netherlands 0.00 0.00 Home Credit Finance B.V. 9) Netherlands 0.00 0.00 Home Credit Finance 1 B.V. 9) Netherlands 0.00 0.00 Russia Finance Corporation B.V. 3, 5,6) Netherlands - 100.00 Home Credit Bank (OAO) 5) Republic of Belarus 100.00 100.00 Home Credit Kazakhstan (JSC) Republic of Kazakhstan 100.00 100.00 PPF Home Credit IFN S.A. 7) Romania 100.00 - Home Credit and Finance Bank (LLC) Russian Federation 99.99 99.99 Financial Innovations (LLC) 1) Russian Federation 99.99 99.99 Global Credit Bureau (LLC) 1) Russian Federation - 99.99 Infobos (LLC) 1) Russian Federation 99.99 99.99 Inko Technopolis (LLC) Russian Federation 100.00 100.00 Liko – Technopolis (LLC) 1) Russian Federation 99.99 99.99 Home Credit Slovakia (JSC) Slovak Republic 100.00 100.00 Home Credit Bank (CJSC) Ukraine 100.00 100.00 Home Credit Finance (LLC)2) Ukraine 100.00 100.00 Homer Software House (LLC)4) Ukraine 100.00 100.00 Privatinvest (PCJSB) 8) Ukraine 99.74 -
1) subsidiaries of Home Credit and Finance Bank (LLC) 2) subsidiary of Redlione (LLC) 3) subsidiary of HC Fin1 B.V. 4) subsidiaries incorporated during 2007 5) subsidiaries acquired during 2007 6) subsidiaries disposed of during 2008 7) subsidiaries incorporated during 2008 8) refer to note 6 9) special purpose entities established to facilitate the Group’s issues of debt securities (refer to Note 20)
- 10 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 1. Description of the Group (continued)
Country of incorporation Ownership interest (%) Associates 2008 2007
Equifax Credit Services (LLC) Russian Federation 42.00 50.00
Board of Directors Alexander Labak Chairman Ladislav Chvatal Member (until December 2008) Declan McSweeney Member (until December 2008) Sonia Mihaylova Slavtcheva Member (since January 2009) Ivan Svitek Member (since January 2009)
Principal activities
The principal activity of the Company and its subsidiaries and associates is the provision of consumer financing to private individual customers in the Central European and CIS countries.
2. Basis of preparation
The consolidated financial statements for the year ended 31 December 2008 comprise the Company and its subsidiaries (together referred to as the “Group”).
These financial statements do not constitute financial statements for statutory purposes. For statutory purposes financial statements prepared in accordance with Dutch GAAP are filed with the Chamber of Commerce in Amsterdam.
(a) Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), including International Accounting Standards (IASs), promulgated by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB as adopted by the European Union.
(b) Basis of measurement
The consolidated financial statements are prepared on the historic cost basis except for financial instruments at fair value through profit or loss and financial assets available-for-sale that are measured at fair value. Financial assets and liabilities and non financial assets and liabilities which are valued at historic cost are stated at amortized cost or historic cost, as appropriate, net of any relevant impairment.
(c) Presentation and functional currency
These financial statements are presented in Euro (EUR), which is the Company’s functional currency and Group’s reporting currency. Financial information presented in EUR has been rounded to the nearest thousand (TEUR).
(d) Comparative figures
The comparative figures have been regrouped or reclassified, where necessary, on a basis consistent with the current period.
- 11 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 2. Basis of preparation (continued)
(e) Use of estimates and judgments
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historic experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgments about the carrying values of assets and liabilities that cannot readily be determined from other sources. The actual values may differ from 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 and in any future periods affected.
In particular, information about significant areas of estimation, uncertainty and critical judgments made by management in preparing these consolidated financial statements in respect of impairment recognition is described in Note 3c(vii), Note 3h, Note 10 and Note 15.
(f) Basis of consolidation
(i) Subsidiaries
Subsidiaries are those enterprises controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.
Legal restructuring and mergers involving companies under common control are accounted for using consolidated net book values, consequently no adjustment is made to carrying amounts in the consolidated accounts and no goodwill arises on such transactions.
(ii) Associates
Associates are those enterprises in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognized gains and losses of associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Group’s share of losses exceeds the Group’s interest in the associate, that interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.
(iii) Special purpose entities
The Group has established a number of special purpose entities (SPEs) for the purpose of raising finance. The Group does not have any direct or indirect shareholdings in these entities. These SPEs are controlled by the Group through the predetermination of the activities of SPEs, having rights to obtain the majority of benefits of the SPEs, and retaining the majority of the residual risks related to the SPEs.
(iv) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealized gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the enterprise. Unrealized gains arising from transactions with associates are eliminated against the investment in the associate. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
- 12 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies
(a) Foreign currency
(i) Foreign currency transactions
A foreign currency transaction is a transaction that is denominated in or requires settlement in a currency other than the functional currency. The functional currency is the currency of the primary economic environment in which an entity operates. For initial recognition purposes, a foreign currency transaction is translated into the functional currency using the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to EUR at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to EUR at the foreign exchange rate ruling at the date of the transaction. Foreign exchange differences arising on retranslation are recognized in profit or loss.
(ii) Financial information of foreign operations
The Group’s foreign operations are not considered an integral part of the Company’s operations. Accordingly, the assets and liabilities of foreign operations are translated to EUR at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to EUR at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on translation are recognized directly in equity as a foreign currency translation.
(b) Cash and cash equivalents
The Group considers cash on hand, unrestricted balances with central banks and balances with banks and other financial institutions due within one month to be cash and cash equivalents. The minimum reserve deposit with the Central Bank of Russian Federation (the”CBR”), with the National Bank of Ukraine (the “NBU”) and with the National Bank of the Republic of Belarus (the “NBRB”) is not considered to be a cash equivalent due to restrictions on its withdrawal.
(c) Financial assets and liabilities
(i) Classification
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Group intends to sell immediately or in the near term, those that the Group upon initial recognition designates as at fair value through profit or loss, or those where its initial investment may not be substantially recovered, other than because of credit deterioration.
When the Group is a lessor in a lease agreement that transfers substantially all of the risk and rewards incidental to ownership of an asset to the lessee, the arrangement is presented within loans and receivables.
Financial assets and liabilities at fair value through profit or loss are financial assets or liabilities that are classified as held for trading or those which are upon initial recognition designated by the entity as at fair value through profit or loss. Trading instruments include those that the Group principally holds for the purpose of short-term profit taking and derivative contracts that are not designated as effective hedging instruments. The Group designates financial assets and liabilities at fair value through profit or loss where either the assets or liabilities are managed, evaluated and reported internally on a fair value basis or the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. Financial assets and liabilities at fair value through profit or loss are not reclassified subsequent to initial recognition.
All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as an asset. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as a liability.
Financial assets available-for-sale are those financial assets that are designated as available-for-sale or are not classified as loans and receivables or financial instruments at fair value through profit or loss.
- 13 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(ii) Recognition
Financial assets and liabilities are recognized in the balance sheet when the Group becomes a party to the contractual provisions of the instrument. For regular purchases and sales of financial assets, the Group’s policy is to recognize them using settlement date accounting. Any change in the fair value of an asset to be received during the period between the trade date and the settlement date is accounted for in the same way as if the Group used trade date accounting.
(iii) Measurement
A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability.
Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for loans and receivables which are measured at amortized cost less impairment losses and investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost less impairment losses.
All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost.
Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument.
(iv) Fair value measurement principles
The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques.
Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date.
The fair value of debt securities available for sale as well as foreign currency futures is based on their quoted market price. The other derivative contracts are not exchange traded and their fair value is estimated using arbitrage pricing model where key parameters are relevant foreign exchange rates and interbank interest rates ruling at the balance sheet date.
(v) Amortized cost measurement principles
The amortized cost of a financial asset or liability is the amount in which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, net of any relevant impairment.
- 14 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(vi) Gains and losses on subsequent measurement
Gains and losses on financial instruments classified as at fair value through profit or loss are recognized in the income statement.
Gains and losses on available-for-sale financial assets are recognized directly in equity (except for impairment losses and foreign exchange gains and losses) until the asset is derecognized, at which time the cumulative gain or loss previously recognized in equity is recognized in the income statement.
For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in the income statement when the financial asset or liability is derecognized or impaired, and through the amortization process.
(vii) Identification and measurement of impairment
The Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired on a regular basis. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets, and that the loss event as an impact on the future cash flows on the asset that can be estimated reliably.
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial assets, whether significant or not, it includes the assets in a group of financial assets with similar risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on a financial asset has been incurred, the amount of the loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the financial asset’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. Financial assets with a short duration are not discounted.
In some cases the observable data required to estimate the amount of an impairment loss on a financial asset may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgment to estimate the amount of any impairment loss.
All impairment losses in respect of financial assets are recognized in the income statement and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount of the asset that would have been determined, net of amortization, if no impairment loss had been recognized.
(viii) Derecognition
The Group derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized separately as asset or liability.
The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
- 15 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(ix) Offsetting
Financial assets and liabilities are set off and the net amount presented in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions.
(x) Repurchase and reverse repurchase agreements
Securities sold under sale and repurchase agreements are accounted for as secured financing transactions, with the securities retained in the balance sheet and the counterparty liability included in amounts due to other banks or to customers, as appropriate. The difference between the sale and repurchase price represents interest expense and is recognized in the income statement over the terms of the agreement.
Securities purchased under agreements to resell are recorded as due from banks or customers as appropriate. The difference between the sale and repurchase considerations is recognized on an accrual basis over the period of the transaction and is included in interest.
(xi) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risk arising from financing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. No hedge accounting is applied and any gain or loss on the hedging instrument is recognized immediately in the income statement as foreign exchange income/(expense) or interest income/(expense).
(xii) Net investment in finance lease
When the Group provides finance under a finance lease, the present value of the lease payments is recognized as net investment in finance leases in the balance sheet. Lease payments include repayment of the finance lease principal and interest income. The recognition of the interest is based on a variable interest rate, which is applied to the net investment (principal) outstanding in respect of the finance lease. Income from finance leases is allocated over the lease term on a systematic basis.
(d) Non-current assets held for sale
Non-current assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before being classified as held for sale, the assets are measured in accordance with the Group’s accounting policies. Thereafter generally the assets are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group is allocated to assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets and deferred tax assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognized in the income statement. Gains are not recognized in excess of any cumulative impairment loss.
- 16 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(e) Intangible assets
(i) Goodwill and negative goodwill
Goodwill arising on an acquisition represents the excess of the cost of the acquisition over the Group’s interest in the fair value of the net identifiable assets and liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognized immediately in profit and loss. Goodwill is stated at cost less accumulated impairment losses (refer to Note 3(h) below).
In respect of associates, the carrying amount of any goodwill is included in the carrying amount of the investment in the associate.
(ii) Other intangible assets
Intangible assets, which are acquired by the Group, are stated at cost less accumulated amortization and accumulated impairment losses (refer to Note 3(h) below). Expenditure on internally generated goodwill and brands is recognized in the income statement as an expense as incurred.
(iii) Amortization
Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Goodwill is not amortized; other intangible assets are amortized from the date the asset is available for use. The depreciation methods, useful lives and residual values, if not insignificant, are reassessed annually. If a material technical improvement is made to an asset during the year, its useful life and a residual value is reassessed at the time a technical improvement is recognized. The estimated useful lives are as follows:
Software 1-5 years Licenses 5 years
(f) Property and equipment
(i) Owned assets
Items of property and equipment are stated at cost less accumulated depreciation (refer below) and accumulated impairment losses (refer to Note 3(h) below). Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost for self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads.
Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.
(ii) Leased assets
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation (refer below) and accumulated impairment losses (refer to Note 3(h) below).
Property and equipment used by the Group under operating leases, whereby the risks and benefits relating to ownership of the assets remain with the lessor, are not recorded in the Group’s balance sheet. Payments made under operating leases to the lessor are charged to the income statement over the period of the lease.
(iii) Subsequent expenditure
Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment and its cost can be measured reliably. All other expenditure is recognized in the income statement as an expense as incurred.
- 17 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(iv) Depreciation
Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of the individual assets. Leased assets are depreciated over the shorter of the lease term and their useful lives. Property and equipment are depreciated from the date the asset is available for use. The depreciation methods, useful lives and residual values, if not insignificant, are reassessed annually. If a material technical improvement is made to an asset during the year, its useful life and a residual value is reassessed at the time a technical improvement is recognized. The estimated useful lives are as follows:
Computers and equipment 4-12 years Vehicles 4-6 years Furniture 4-6 years Leasehold improvement 5 years Buildings 17 – 50 years
(g) Inventories
Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to complete the sale. Where the net realizable value is below cost, inventories are written down to the lower value, and the impairment loss is recorded in the income statement.
Cost of merchandise is determined using the “first-in first-out” method and include expenditures incurred in acquiring the inventories and bringing them to their existing condition and location.
(h) Impairment of non-financial assets
The carrying amounts of Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated.
For the purpose of impairment testing, goodwill is allocated to cash-generating units. The recoverable amount of goodwill is estimated at each reporting date based on cash flow projections for specific cash generating units. Key assumptions are those regarding the expected business volumes, loss rates, budgeted expenses as well as discount rates for subsequent periods. Management estimates discount rates using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the cash generating unit. If the recoverable amount of the cash-generating unit is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount of goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
The recoverable amount of other non-financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount
All impairment losses in respect of non financial assets are recognized in the income statement and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. An impairment loss in respect of goodwill is not reversed. On disposal of a subsidiary, the amount of goodwill that is attributable to the subsidiary is included in the determination of the profit or loss on disposal.
- 18 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(i) Provisions
A provision is recognized in the balance sheet if, as a result of a past event, the Group has a present or legal obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, 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.
(j) Other payables
Accounts payable arise when the Group has a contractual obligation to deliver cash or another financial asset. Accounts payable are measured at amortized cost, which is normally equal to their nominal or repayment value.
(k) Financial guarantees
A financial guarantee is a contract that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.
A financial guarantee liability is recognized initially at fair value net of associated transaction costs, and the initial fair value is amortized over the life of the financial guarantee. The guarantee liability is subsequently carried at the higher of this amortized amount and the present value of any expected payment (when a payment under the guarantee has become probable).
Financial guarantee liabilities are included within other liabilities.
(l) Equity
Share capital represents the nominal value of shares issued by the Company. To the extent such shares remain unpaid as of the balance sheet date a corresponding receivable is presented as an other asset.
Dividends on share capital are recognized as a liability provided they are declared before the balance sheet date. Dividends declared after the balance sheet date are not recognized as a liability but are disclosed in the notes.
Minority interests consist of the minority shareholders’ proportion of the fair values of a subsidiary’s net assets, at the date of the original combination, plus or minus their share of changes in the subsidiary’s equity since that date.
(m) Interest income and expense
Interest income and expense are recognized in the income statement using the effective interest method. The effective interest rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition and is not revised subsequently.
The calculation of the effective interest rate includes all fees and point paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.
Interest income and expense include also fair value changes on other derivatives held for risk management purposes and related hedged items when interest rate risk is the hedged risk.
- 19 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(n) Fee and commission income and expenses
Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.
Other fees and commission income and expense relate mainly to transaction and service fees, which are expensed as the services are received.
(o) Penalty fees
Penalty income is recognized in the income statement when penalty is charged to a customer, taking into account its collectability.
(p) Revenue from sale of goods
Revenue from sale of goods is recognized when the significant risks and rewards of ownership have been transferred to the buyer, and no significant uncertainties remain regarding the recovery of consideration, associated costs or the possible return of goods.
(q) Operating lease payments
Payments made under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Granted lease incentives are recognized as an integral part of the total lease expense.
(r) Pensions
The governments of the countries the Group operates in are responsible for providing pensions and retirement benefits to the Group's employees. A regular contribution linked to employees’ salaries is made by the Group to the governments to fund the national pension plans. Payments under these pension schemes are charged as expenses as they fall due.
(s) Taxation
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries, branches and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
- 20 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 3. Significant accounting policies (continued)
(t) Net profit allocated to minority interests
Net profit allocated to minority interests is that part of the net results of the Group attributable to interests which are not owned, directly, or indirectly through subsidiaries, by the equity holders of the Parent Company.
(u) Segment reporting
A segment is a distinguishable component of the Group that is engaged in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
Segment revenues include interest income, fee and commission income and other operating income.
(v) New standards and interpretations not yet adopted
A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2008, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group’s operations. The Group plans to adopt these pronouncements when they become effective. The Group has not yet analyzed the likely impact of these new standards on its consolidated financial statements.
IFRS 8 Operating Segments introduces the “management approach” to segment reporting. IFRS 8, which becomes mandatory for the Group’s 2009 financial statements, will require a change in the presentation and disclosure of segment information based on the internal reports that are regularly reviewed by the Group’s “chief operating decision maker” in order to assess each segment’s performance and to allocate resources to them.
Revised IAS 1 Presentation of Financial Statements introduces the term “total comprehensive income,” which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the income statement and all non-owner changes in equity in a single statement), or in an income statement and a separate statement of comprehensive income. Revised IAS 1 becomes mandatory for the Group’s 2009 financial statements.
Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Revised IAS 23 will become mandatory for the Group’s 2009 financial statements. In accordance with the transitional requirements, the Group will apply the revised IAS 23 to qualifying assets for which capitalization of borrowing costs commences on or after the effective date.
Amendments to IAS 32 and IAS 1 Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation require puttable instruments and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation to be classified as equity if certain conditions are met. The amendments become mandatory for the Group’s 2009 financial statements and will be applicable retrospectively.
IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate or otherwise participate in customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13 becomes mandatory for the Group’s 2009 financial statements and will be applicable retrospectively.
The International Accounting Standards Board made certain amendments to existing standards as part of its first annual improvements project. The effective dates for these amendments vary by standard and most will be applicable to the Group’s 2009 financial statements.
- 21 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 4. Financial risk management
The Group has exposure to the following risks from its use of financial instruments:
• credit risk • liquidity risk • market risks • operational risks.
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has established the Asset Liability Committee (ALCO) and the Group Credit Risk Department, which are responsible for developing and monitoring risk management policies in their specified areas. Both bodies report regularly to the Board of Directors on their activities.
The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.
(a) Credit risk
Credit risk is the risk of financial loss occurring as a result of default by a borrower or counterparty on their obligation to the Group. The majority of the Group’s exposure to credit risk arises in connection with the provision of consumer financing to private individual customers, which is the Group’s principal business. The Group classifies the loans to individual customers into several classes where the significant ones are consumer loans, revolving loans, cash loans, car loans and mortgage loans. As the Group’s loan portfolio consists of large amount of loans with relatively low outstanding amounts, the loan portfolio does not comprise any significant individual items. The remaining part of Group’s exposures to credit risk is related to due from banks and other financial institutions, financial assets at fair value through profit or loss and financial assets available-for-sale.
The Board of Directors has delegated responsibility for the management of credit risk to the Group Credit Risk Department. The department is responsible for oversight of the Group’s credit risk, including:
• Formulating credit policies in consultation with business units covering credit assessment, underwriting policies, collection policies and risk reporting by business units and loan classes; • Establishing the authorization structure for the approval and renewal of credit facilities. Authorization limits are allocated to business units management, large exposures and new types of exposures require Group approval. The Group uses one central loan administration system to facilitate loan underwriting; • Continuous monitoring of performance of individual Group’s credit exposures by countries, product classes and distribution channels; • Limiting concentrations of credit exposures by countries, product classes and distribution channels; • Approving counterparty limits for financial institutions • Reviewing compliance of business units with agreed exposure limits; • Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of credit risk.
The Group continuously monitors the performance of individual credit exposures both on business units and Group level using number of criteria including delinquency rates, default rates or collection efficiency measures. The Group has an active fraud prevention and detection program. Credit risk developments are reported by the Group Credit Risk Department to the Board of Directors on regular basis.
As a result of recent negative development on financial markets credit environment in some of the countries the Group operates in has deteriorated. The Group has taken strict measures in its underwriting and collection policies in order to limit the negative impact of such market changes.
- 22 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 4. Financial risk management (continued)
Exposure to credit risk
Loans to customers Note 2008 2007 TEUR TEUR Individually impaired Gross amount 1,923 4,785
Allowance for impairment 10 (694) (819)
Carrying amount 1,229 3,966
Not impaired 25,794 23,617
Collectively impaired Gross amount 2,866,724 2,747,619 Current 2,166,286 2,094,406 Past due 1 – 90 days 359,334 301,197 Past due 91 – 360 days 241,478 211,103 Past due more than 360 days 99,626 140,913
Allowance for impairment 10 (356,299) (367,621)
Carrying amount 2,510,425 2,379,998
Total carrying amount 10 2,537,448 2,407,581
From the beginning of 2002 the Group has insurance policies to cover the credit risk arising from loans to customers originated in respect of the Czech and Slovak operations of the Group. There are specific conditions for loans to qualify for this insurance and, consequently, certain loans remain uninsured.
The balance of insured receivables amounts to TEUR 210,897 (31 December 2007: TEUR 164,205).
Analysis of collateral
The following table provides the analysis of gross loan portfolio by types of collateral as at 31 December 2008:
2008 2007 Portfolio % of loan Portfolio % of loan TEUR portfolio TEUR portfolio
Pledged assets 337,464 11.7 270,853 9.8 Guarantees 212 0.0 15,390 0.6 Deposits with banks 1,576 0.1 2,970 0.1 Unsecured (no collateral) 2,555,189 88.2 2,486,808 89.5
Total 2,894,441 2,776,021
The amounts shown in the table above represent the gross amount of the loans, and do not necessarily represent the fair value of the collateral.
Mortgage loans are secured by underlying housing real estate. Car loans are secured by underlying cars. Loans to corporations are secured by third parties guarantees. Small part of consumer loan portfolio is secured by consumer goods. Revolving loans and cash loans are not secured.
- 23 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 4. Financial risk management (continued)
(b) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial liabilities.
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. All liquidity policies and procedures as well as liquidity position projections are subject to review and approval by ALCO.
The Group’s Treasury Department collects information from business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Portfolio of short-term liquid assets is maintained to ensure sufficient liquidity. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The individual scenarios focus on liquidity available on markets, the nature of related risks and magnitude of their impact on the Group’s business, management tools available as well as preventive actions.
The Group has access to a diverse funding base. Funds are raised using a broad range of instruments including deposits, bank loans, loans from CBR, bond issues, securitizations, inter-company loans and contributions by shareholders (refer to Notes 19, 20 and 23). Shareholder’s support enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. Management strives to maintain a balance between continuity of funding and flexibility through use of liabilities with a range of maturities.
The liquidity risk analysis as at 31 December 2008 stated below indicates several facilities maturing in 2009 (refer also to Notes 19 and 20). The management is currently in the process of negotiating refinancing of these facilities.
- 24 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 4. Financial risk management (continued)
Exposure to liquidity risk The following table shows assets and liabilities by remaining contractual maturity dates.
2008 2007 TEUR Less than 1 to 3 3 months More than Less than 1 to 3 3 months More than 1 month months to 1 year 1 to 5 years 5 yearsNo maturity Total 1 month months to 1 year 1 to 5 years 5 yearsNo maturity Total
Cash and cash equivalents 575,955 - - - - - 575,955 390,085 ----- 390,085 Due from financial institutions 55,608 - 74,123 1,367 - 3,018 134,116 14,09234,167 66,421 - 136 6,601 121,417 Loans to customers 159,816 353,573 1,021,595 790,565 211,899 - 2,537,448 110,892 167,477 1,063,619 900,936 164,657 - 2,407,581 Financial assets at fair value 79,527 20,828 141,654 172 - - 242,181 1,178 190 17,891 - - - 19,259 through profit or loss Financial assets available-for------18,105 18,105 953 1,348 - - - 213,339 215,640 sale Assets classified as held for sale------7,360--- 7,360 Current income tax receivables 554 3 21,391 1 - - 21,949 564 - 4 - - - 568 Deferred tax assets 2 - - 20,551 - - 20,553 - - - 2,052 19,664 - 21,716 Investments in associates - - - - - 494 494 - ----42 42 Investment property - - - - - 526 526 ------Intangible assets - - ---58,58558,585 -----90,582 90,582 Property and equipment - - - - - 178,145 178,145 - ----192,338 192,338 Other assets 26,514 5,069 18,333 768 62 2,085 52,831 11,339 46,885 18,707 1,074 908 2,760 81,673
Total assets 897,976 379,473 1,277,096 813,424 211,961 260,958 3,840,888 529,103 250,067 1,174,002 904,062 185,365 505,662 3,548,261
Current accounts and deposits from customers 140,761 95,418 36,739 1,120 - - 274,038 262,595 14,628 47,973 433 - - 325,629 Due to financial institutions 174,009 190,109 500,817 1,382 - - 866,317 315,631 38,413 425,371 21 - - 779,436 Debt securities issued* - - 378,889 1,133,304 201,301 - 1,713,494 15,543 101,662 186,674 883,535 225,813 - 1,413,227 Financial liabilities at fair value 3,552 656 9,370 210 - - 13,788 5,501 8,368 10,984 - - - 24,853 through profit or loss Liabilities classified as held for ------2,582--- 2,582 sale Current income tax liabilities - 1,332 2,297 65 - - 3,694 6 337 9,822 - - - 10,165 Deferred tax liabilities 1 2 413 1,253 206 - 1,875 - - 304 - - - 304 Other liabilities 52,709 12,589 22,328 876 127 - 88,629 42,203 11,072 15,898 1,157 - - 70,330
Total liabilities 371,032 300,106 950,853 1,138,210 201,634 - 2,961,835 641,479 174,480 699,608 885,146 225,813 - 2,626,526
Net position 526,944 79,367 326,243 (324,786) 10,327 260,958 879,053 (112,376) 75,587 474,394 18,916 (40,448) 505,662 921,735 * Debt securities are classified based on their contractual maturity regardless of redemption rights (refer to Note 20).
- 25 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
4. Financial risk management (continued)
(c) Market risk
Market risk is the risk that changes in market prices, such as interest rates or foreign exchange rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters.
The majority of the Group’s exposure to market risk arises in connection with the funding of the Group’s operations with liabilities denominated in foreign currencies, and to the extent the term structure of interest bearing assets differs from that of liabilities.
Exposure to interest rate risk The principal risk to which the Group is exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands. The ALCO is the monitoring body for compliance with these limits. As part of its management of this position, the Group uses interest rate derivatives (refer to Note 34). A summary of the Group’s interest rate gap position is provided below.
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered include a 100 basis point parallel fall or rise in all yield curves worldwide. In such case, the net interest income for the year ended 31 December 2008 would be approximately TEUR 20,751 higher/lower (the year ended 31 December 2007: TEUR 16,437). The above sensitivity analysis is based on amortized costs of assets and liabilities.
Exposure to foreign currency risk The Group has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecast assets in a foreign currency are either greater or less than the liabilities in that currency. Foreign currency risk is managed principally through monitoring foreign currency mismatches in the structure of assets and liabilities in the individual Group’s country operations. It is the Group’s policy to hedge such mismatches by derivative financial instruments to eliminate the foreign currency exposure (refer to Note 34). Net investments in foreign operations are not hedged. The ALCO is the monitoring body for compliance with this rule. A summary of the Group’s foreign currency position is provided below.
The recent negative development on financial markets lead to depreciation of local currencies of some of the countries the Group’s operates in. The impact of such exchange rate changes on the Group’s net investment in foreign operations is presented as currency translation in the consolidated statement of changes in equity.
- 26 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 4. Financial risk management (continued)
Interest rate gap position
2008 2007 TEUR Effective More Effective More interest Less than 3 to 12 1 to 2 2 to 5 than interest Less than 3 to 12 1 to 2 2 to 5 than rate 3 months months years years 5 years Total rate 3 months months years years 5 years Total Interest bearing financial assets
Cash and cash equivalents 12.6% 575,955 ----575,955 3.6% 288,203 - - - - 288,203
Due from financial institutions 2.2% 55,608 74,123 - 1,367 - 131,098 8.3% 44,461 66,421 - - 136 111,018
Loans to customers, net* 35.4% 513,014 1,021,595 554,374 263,438 184,506 2,536,927 36.7% 277,906 1,063,147 550,599 349,834 164,657 2,406,143
Financial assets at fair value 10.9% 68,754 - - - - 68,754 ------through profit or loss
Financial assets ------10.0% 2,301 - - - 10 2,311 available-for-sale
Total interest bearing 29.6% 1,213,331 1,095,718 554,374 264,805 184,506 3,312,734 32.1% 612,871 1,129,568 550,599 349,834 164,803 2,807,675 financial assets
Interest bearing financial liabilities
Current accounts and deposits 3.4% 236,179 36,739 1,120 - - 274,038 2.8% 277,208 47,973 433 - - 325,614 from customers
Due to banks and other 9.7% 369,426 495,509 - 1,382 - 866,317 6.7% 356,999 422,437 - - - 779,436 financial institutions
Debt securities issued 11.9% 666,631 680,141 366,545 177 - 1,713,494 8.5% 724,945 356,070 194,757 137,455 - 1,413,227
Total interest bearing 10.4% 1,272,236 1,212,389 367,665 1,559 - 2,853,849 7.2% 1,359,152 826,480 195,190 137,455 - 2,518,277 financial liabilities
Effect of interest rate - 60,558 (60,558) - - - - - 102,202 (102,202) - - - - derivatives (RUB)
*These assets bear interest at a fixed rate.
- 27 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
4. Financial risk management (continued)
Foreign currency position
2008 2007 TEUR Other Other RUB CZK SKK USD currencies Total RUB CZK SKK USD currencies Total
Cash and cash equivalents 464,436 21,506 1,071 51,007 37,935 575,955 181,856 30,786 2,070 122,249 53,124 390,085 Due from banks and other financial institutions 39,256 49,132 - - 45,728 134,116 8,135 96,394 - 8,730 8,158 121,417 Loans to customers 1,655,891 431,826 162,607 177,198 109,926 2,537,448 1,640,420 362,768 122,338 149,526 132,529 2,407,581 Financial assets at fair value through profit or loss 172,982 - - 62,124 7,075 242,181 18,715 - - - 544 19,259 Financial assets available-for-sale - - - - 18,105 18,105 135,245 - - 77,075 3,320 215,640 Assets classified as held for sale ------7,360 7,360 Current income tax receivables 20,782 592 - - 575 21,949 - - - - 568 568 Deferred tax assets 15,001 2,002 3,548 - 2 20,553 19,664 190 1,504 - 358 21,716 Investments in subsidiaries and associates - - - - 494 494 42 - - - - 42 Investment property - - - - 526 526 ------Intangible assets 7,995 9,671 55 - 40,864 58,585 7,759 6,272 70 73,641 2,840 90,582 Property and equipment 163,086 6,442 821 0 7,796 178,145 177,553 4,683 439 - 9,663 192,338 Other assets 23,106 11,805 2,203 938 14,779 52,831 42,821 9,855 2,934 481 25,582 81,673
Total assets 2,562,535 532,976 170,305 291,267 283,805 3,840,888 2,232,210 510,948 129,355 431,702 244,046 3,548,261
Current accounts and deposits from customers 145,379 - - 106,477 22,182 274,038 216,996 - - 49,444 59,189 325,629 Due to banks and other financial institutions 418,885 110,253 150,083 63,046 124,050 866,317 31,349 54,064 106,847 22,870 564,306 779,436 Debt securities issued 521,398 378,889 - 687,856 125,351 1,713,494 477,175 381,993 - 430,020 124,039 1,413,227 Financial liabilities at fair value through profit or loss 4,208 - - - 9,580 13,788 24,490 - - - 363 24,853 Liabilities classified as held for sale ------2,582 2,582 Current income tax liabilities - 2,232 1,317 - 145 3,694 4,195 4,470 726 - 774 10,165 Deferred tax liabilities - 152 - - 1,723 1,875 - - - - 304 304 Other liabilities 33,893 41,796 7,311 166 5,463 88,629 21,393 32,492 5,655 526 10,264 70,330
Total liabilities 1,123,763 533,322 158,711 857,545 288,494 2,961,835 775,598 473,019 113,228 502,860 761,821 2,626,526
Effect of foreign currency derivatives (943,234) 25,144 - 923,993 (5,903) - (915,539) 31,006 (8,914) 272,513 620,934 -
Net position 495,538 24,798 11,594 357,715 (10,592) 879,053 541,073 68,935 7,213 201,355 103,159 921,735
- 28 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
4. Financial risk management (continued)
(d) Operational risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group’s operations and are faced by all business entities.
The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management of the Group. This responsibility is supported by the development of standards for the management of operational risk in the following areas:
• requirements for appropriate segregation of duties, including the independent authorization of transactions; • requirements for the reconciliation and monitoring of transactions; • compliance with regulatory and other legal requirements; • documentation of controls and procedures; • requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; • requirements for the reporting of operational losses and proposed remedial action; • development of contingency plans; • training and professional development; • ethical and business standards; • risk mitigation, including insurance where this is effective.
(e) Capital management
The Company considers share capital, share premium, statutory reserves and other reserves as a part of the capital. The Company’s policy is to maintain capital base adequate to its investments in subsidiaries so as to maintain investor, creditor and market confidence, sustain future development of the business and meet the capital requirements related to its funding operations. There are no regulatory capital requirements for the Company and there have been no material changes in the Company’s management of capital during the period.
Some of the Company’s subsidiaries maintain capital adequacy in compliance with local regulatory requirements which require the respective entities to maintain the ratio of total capital to total risk- weighted assets at or above certain minimum level. The ratios are calculated based on financial statements prepared in accordance with local accounting standards. Some of the subsidiaries also operate its capital adequacy in compliance with the methodology set out by the BIS in connection with commitments arising from funding operations. The Group’s policy in this respect is to support the subsidiaries with capital as necessary in order to maintain the subsidiaries’ full compliance with capital regulations described above.
- 29 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
4. Financial risk management (continued)
(f) Fair values of financial instruments
The fair values of the following financial instruments differ from their carrying amounts shown in the balance sheet:
Carrying Fair Carrying Fair Note amount Value amount Value 2008 2008 2007 2007 TEUR TEUR TEUR TEUR
Loans to customers 10 2,537,448 2,485,029 2,407,581 2,407,581 Current accounts and deposits 18 (274,038) (271,500) (325,629) (325,629) from customers Due to banks and other financial 19 (866,317) (865,508) (779,436) (779,436) institutions Debt securities issued 20 (1,713,494) (1,592,193) (1,413,227) (1,412,768)
The Group has performed an assessment of fair values of its financial instruments, as required by IFRS 7, to determine whether it is practicable within the constraints of timeliness and cost to determine their fair values with sufficient reliability.
The Group’s estimates of fair values of its other financial assets and liabilities are not materially different from their carrying values.
Fair value has been determined either by reference to the market value at the balance sheet date or by discounting the relevant cash flows using current interest rates for similar instruments. Fair value estimates are based on judgments regarding future expected cash flows, current economic conditions, risk characteristics of various financial instruments and other factors.
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities not considered financial instruments. In addition, tax ramifications related to the realization of the unrealized gains and losses can have an effect on fair value estimates and have not been considered.
5. Acquisition of subsidiaries
In 2007, the Group acquired the following subsidiaries:
Donmera (LLC) registered in Cyprus for TEUR 1, satisfied in cash;
Handelsmaatschappij Vroom B.V. registered in the Netherlands (subsequently renamed to HC Kazakh Holdings B.V.) for TEUR 113, satisfied in cash;
Luka Holdings B.V. registered in the Netherlands (subsequently renamed to Russia Finance Corporation B.V.) for TEUR 124,547. TEUR 50 were satisfied in cash and TEUR 124,497 were settled by means of an assumption of the debt;
Lorobank (OAO) registered in the Republic of Belarus (subsequently renamed to Home Credit Bank) for TEUR 5,245, satisfied in cash.
In 2008, no subsidiaries were acquired.
The acquisitions were accounted for using the purchase method of consolidation. Any excess of the cost of the acquisition over the fair value of the identifiable assets and liabilities acquired in a subsidiary as at the date of the exchange transaction is described as goodwill and recognized as an asset.
- 30 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008 5. Acquisition of subsidiaries (continued)
The acquisitions had the following effect on the Group’s assets and liabilities:
2008 2007 TEUR TEUR
Cash and cash equivalents - 5,625 Due from banks and other financial institutions - 113 Loans to customers - 40 Current income tax receivable - 2 Deferred tax asset - 3 Intangible assets - 1 Property and equipment - 33 Other assets - 2 Current accounts and deposits from customers - (25) Debt securities issued - (261) Other liabilities - (6)
Net identifiable assets and liabilities - 5,527
Goodwill on acquisition - (118)
Consideration paid - 5,409
Cash and cash equivalents acquired - 5,625
Net cash (inflow)/outflow - (216)
6. Non-current assets held for sale
In November 2007 the Group acquired Privatinvest (LLC) registered in Ukraine for TEUR 11,358. The control over the entity was intended to be temporary as the subsidiary was acquired exclusively with a view to its disposal. Net income attributable to this participation was presented as net profit from discontinued operations in 2007. As the disposal of the company was not successfully finalized until 31 December 2008, the company became fully consolidated subsidiary and its results of operations were included in income from continuing operations. Goodwill of TEUR 4,446 was recognized in this respect and fully impaired as of 31 December 2008 (refer to Note 15).
- 31 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
7. Segment reporting
Segment information is presented in respect of the Group’s geographical segments based on the Group’s management and internal reporting structure. Segment information in respect of the Group’s business segments is not presented as the Group’s operations are concentrated in one main business segment only, consumer lending products.
The Group operates in six principal geographical areas, the Czech Republic, the Slovak Republic, the Russian Federation, the Republic of Kazakhstan, Ukraine and in Republic of Belarus. The geographical segments are based on the geographical location of assets which corresponds to the geographical location of customers at the same time.
Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Inter-segment pricing is determined on an arm’s length basis.
Increases in income and expense reflect the growth of the group until the third calendar quarter, thereafter the growth leveled due to measures taken as described in Note 4.
Czech Slovak Russian Republic of Republic Republic Federation Kazakhstan Ukraine Other Unallocated* Eliminations Consolidated 2008 2008 2008 2008 2008 2008 2008 2008 2008 TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR
Revenue from external customers 137,061 45,469 984,575 35,237 52,964 7,465 20,625 - 1,283,396 Inter-segment revenue 38,891 - 126 - 4,562 5,325 30,005 (78,909) -
Total revenue 175,952 45,469 984,701 35,237 57,526 12,790 50,630 (78,909) 1,283,396
Segment result 38,751 196 142,242 (5,815) (73,415) (1,429) (2,375) - 98,155
Depreciation and amortization (5,859) (352) (22,328) (344) (3,080) (396) - - (32,359) Other significant non-cash expenses** (10,306) (15,042) (238,262) (15,279) (67,076) (434) - - (346,399) Capital expenditure (11,938) (878) (55,710) - (3,963) (2,739) - - (75,228)
Segment assets 511,406 166,948 2,712,294 3,003 180,545 103,307 1,173,025 (1,052,142) 3,798,386
Investments in associates - - 494 - - - - - 494
Segment liabilities 429,033 158,329 2,249,131 224 163,445 83,775 91,647 (219,318) 2,956,266
Segment equity 82,583 10,850 498,946 3,333 16,352 19,478 1,081,397 (833,886) 879,053
* Unallocated items represent items of revenue, operating expense, assets and liabilities which cannot be reasonably allocated to the geographical segments.
** Other significant non-cash expenses are represented by impairment losses on financial and non-financial assets.
- 32 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
7. Segment reporting (continued)
Czech Slovak Russian Republic of Republic Republic Federation Kazakhstan Ukraine Other Unallocated* Eliminations Consolidated 2007 2007 2007 2007 2007 2007 2007 2007 2007 TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR TEUR
Revenue from external customers 108,014 32,762 639,633 31,615 30,545 1,447 25,099 - 869,115 Inter-segment revenue 32,000 66 (569) 56 8,243 177 18,734 (58,707) -
Total revenue 140,014 32,828 639,064 31,671 38,788 1,624 43,833 (58,707) 869,115
Segment result 27,962 995 75,317 (4,868) (13,193) 40 (24,300) - 61,953
Depreciation and amortization (4,151) (301) (11,113) (275) (3,561) (27) - - (19,428) Other significant non-cash expenses (11,028) (8,533) (209,028) (9,509) (7,768) (6) - - (245,872) Capital expenditure (11,430) (235) (80,475) (675) (7,395) (915) - - (101,125)
Segment assets 434,123 127,850 2,242,140 79,182 188,814 23,038 1,994,659 (1,563,829) 3,525,977
Investments in associates - - 42 - - - - - 42
Segment liabilities 360,124 122,616 1,842,461 67,500 149,407 4,611 353,318 (283,980) 2,616,057
Segment equity 69,719 6,012 415,148 11,958 39,291 18,450 1,641,006 (1,279,849) 921,735
* Unallocated items represent items of revenue, operating expense, assets and liabilities which cannot be reasonably allocated to the geographical segments.
** Other significant non-cash expenses are represented by impairment losses on financial and non-financial assets.
- 33 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
8. Cash and cash equivalents 2008 2007 TEUR TEUR
Cash 20,518 24,241 Current accounts 126,957 87,799 Current accounts with central banks 63,896 34,398 Placements with financial institutions due within one month 364,584 243,647
575,955 390,085
9. Due from banks and other financial institutions 2008 2007 TEUR TEUR
Term deposits with financial institutions due after one month 98,856 111,018 Loans and advances provided under repo operations 32,243 - Minimum reserve deposits with central banks 3,018 10,399
134,116 121,417
The minimum reserve deposits are mandatory non-interest bearing deposits calculated in accordance with regulations issued by the CBR, the NBU and the NBRB and whose withdrawability is restricted.
Term deposits of TEUR 74,123 (2007: TEUR 95,401) were pledged as security for bank loan facility drawn by the Group as described in Note 19.
10. Loans to customers 2008 2007 TEUR TEUR Gross amount Consumer loan receivables 994,344 1,219,330 Revolving loan receivables 964,367 925,189 Cash loan receivables 574,973 402,777 Mortgage loan receivables 223,824 132,023 Car loan receivables 73,549 23,113 Loans to corporations 39,057 42,762 Secured personal loans 22,611 28,936 Other 1,716 1,891
2,894,441 2,776,021
Collective allowances for impairment Revolving loan receivables (151,372) (149,838) Consumer loan receivables (106,275) (171,883) Cash loan receivables (77,901) (39,357) Mortgage loan receivables (9,914) (885) Car loan receivables (5,280) (1,151) Secured personal loans (2,945) (2,737) Loans to corporations (2,214) (1,349) Other (398) (421)
(356,299) (367,621)
Specific allowances for impairment to loans to corporations (694) (819)
2,537,448 2,407,581
- 34 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
10. Loans to customers (continued)
Consumer loan receivables and cash loan receivables of TEUR 223,485 (2007: TEUR 198,217) and revolving loan receivables of TEUR 76,038 (2007: TEUR 67,290) were pledged as security for a bank loan facilities (refer to Note 19). Furthermore, revolving loan receivables of TEUR 464,528 (2007: TEUR 477,921) and consumer loan receivables of TEUR 92,919 (2007: TEUR 136,977) were collateralized in relation to the notes issued as a part of securitization transactions (refer to note 20).
2008 2007 Analysis of movements in allowances for impairment Note TEUR TEUR
Balance as at 1 January 368,440 235,743 Translation difference (40,973) (6,893) Impairment losses recognized in the income statement 29 301,684 244,923 Amount related to loans disposed of (157,731) (46,842) Amount related to loans written off (114,427) (58,491)
Balance as at 31 December 356,993 368,440
The Group has estimated the impairment on loans to customers in accordance with the accounting policy described in Note 3c(vii). Changes in collection estimates could significantly affect the impairment losses recognized.
11. Financial assets at fair value through profit or loss
2008 2007 TEUR TEUR
Positive fair value of derivative instruments 173,427 19,259 Debt securities 68,754 -
242,181 19,259
The fair value of derivative instruments has been determined by reference to the market value or based on a valuation model using market data inputs.
12. Financial assets available-for-sale 2008 2007 TEUR TEUR
Equity securities 18,105 213,329 Debt securities - 2,311
18,105 215,640
The equity securities stated above represent the Group’s 9.99% share in Home Credit Bank (LLC), a bank incorporated in the Republic of Kazakhstan (the “Bank”). In September 2008, the Group transferred its operations in the Republic of Kazakhstan including net assets of TEUR 84,825 to the Bank.
As of 31 December 2007, the equity securities represented the Group’s participation in NOMOS-BANK JSC, a bank registered in the Russian Federation, which was disposed of in January 2008.
- 35 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
13. Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following items (netted for all jurisdictions):
Assets Liabilities Net 2008 2007 2008 2007 2008 2007 TEUR TEUR TEUR TEUR TEUR TEUR
Due from financial institutions - - (2) (84) (2) (84) Loans to customers 22,506 30,514 (553) (7,093) 21,953 23,421 Fair value of derivative financial instruments 677 90 (6,643) (298) (5,966) (208) Carrying value of property and equipment 111 472 (4,826) (13,172) (4,715) (12,700) Other assets 6,723 20,192 (1,855) - 4,868 20,192 Debt securities issued 240 - (1,569) (990) (1,329) (990) Tax-loss carry forward 292 - - - 292 - Other 6,554 915 (2,977) (9,134) 3,577 (8,219)
Deferred tax assets/(liabilities) 37,103 52,183 (18,425) (30,771) 18,678 21,412
Net deferred tax assets 18,678 21,412
14. Investment in associates
At 31 December 2008 the Group has the following investments in associates:
Country of Ownership Carrying Income from
Incorporation interest amount associate 2008 2008 2008 (%) TEUR TEUR
Russian Equifax Credit Services (LLC) 42.00 494 - Federation
494 -
At 31 December 2007 the Group has the following investments in associates:
Country of Ownership Carrying Income from
Incorporation interest amount associate 2007 2007 2007 (%) TEUR TEUR
Russian Equifax Credit Services (LLC) 50.00 42 - Federation
42 -
- 36 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
15. Intangible assets
Other 2008 intangible Goodwill Software assets Total TEUR TEUR TEUR TEUR Acquisition cost Balance at 1 January 2008 73,641 19,567 5,437 98,645 Transfer from held for sale 4,446 46 - 4,492 Additions - 10,434 1,171 11,605 Disposals - (1,944) (204) (2,148) Translation difference - (1,742) (362) (2,104)
Balance at 31 December 2008 78,087 26,361 6,042 110,490
Accumulated amortization Balance at 1 January 2008 - 6,932 1,131 8,063 Transfer from held for sale - 44 - 44 Additions - 4,013 584 4,597 Disposals - (181) - (181) Translation difference - (514) 134 (380)
Balance at 31 December 2008 10,294 1,849 12,143
Impairment Balance at 1 January 2008 - - - - Impairment losses recognized 39,762 - - 39,762
Balance at 31 December 2008 39,762 - - 39,762
Carrying amount
at 1 January 2008 73,641 12,635 4,306 90,582 at 31 December 2008 38,325 16,067 4,193 58,585
- 37 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
15. Intangible assets (continued)
Other 2007 intangible Goodwill Software assets Total TEUR TEUR TEUR TEUR Acquisition cost Balance at 1 January 2007 73,641 15,578 4,860 94,079 Subsidiaries acquired - 2 - 2 Additions - 8,914 997 9,911 Disposals - (4,932) (100) (5,032) Transfers - 8 (8) - Translation difference - (3) (312) (315)
Balance at 31 December 2007 73,641 19,567 5,437 98,645
Accumulated amortization Balance at 1 January 2008 - 5,666 301 5,967 Subsidiaries acquired - 1 - 1 Additions - 2,452 983 3,435 Disposals - (1,345) (100) (1,445) Translation difference - 158 (53) 105
Balance at 31 December 2007 - 6,932 1,131 8,063
Carrying amount
at 1 January 2007 73,641 9,912 4,559 88,112 at 31 December 2007 73,641 12,635 4,306 90,582
The amount of goodwill of TEUR 73,641 is allocated to the Group’s business in Ukraine. The current economic downturn in this country resulted in restriction of the Group’s activities in this region. As a consequence, the Group revised the recoverable amount of this cash-generating unit assuming significant decline of related revenues in 2009-10 with gradual recovery expected in 2011-2013. The growth rate used to extrapolate cash flow projections beyond 2013 was 10%, the discount rate applied to the cash flow projections was 20%. As a result, impairment loss of TEUR 35,316 was recognized.
The amount of goodwill of TEUR 4,446 relates to the Group acquisition of Privatinvest (LLC) registered in Ukraine (refer to Note 6).
- 38 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
16. Property and equipment
Other 2008 tangible Buildings Equipment Vehicles assets Total TEUR TEUR TEUR TEUR Acquisition cost Balance at 1 January 2008 152,801 65,031 7,995 4,297 230,124 Transfer from held for sale - 198 - 2 200 Additions 28,136 16,689 1,787 17,011 63,623 Disposals - (10,617) (1,394) (15,862) (27,873) Translation difference (23,175) (6,570) (1,142) (316) (31,183)
Balance at 31 December 2008 157,762 64,751 7,246 5,132 234,891
Accumulated depreciation Balance at 1 January 2008 3,361 30,268 3,525 632 37,786 Transfer from held for sale - 141 - - 141 Additions 12,500 13,455 1,807 - 27,762 Disposals - (6,628) (1,259) (632) (8,519) Translation difference (1,913) (2,214) (338) - (4,465)
Balance at 31 December 2008 13,948 35,022 3,735 - 52,705
Impairment Balance at 1 January 2008 - - - - - Impairment losses recognized 4,090 614 - 609 5,313 Disposals - (614) - - (614) Translation difference (482) - (176) (658)
Balance at 31 December 2008 3,608 - - 433 4,041
Carrying amount
at 1 January 2008 149,440 34,763 4,470 3,665 192,338 at 31 December 2008 140,206 29,729 3,511 4,699 178,145
- 39 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
16. Property and equipment (continued)
Other 2007 tangible Buildings Equipment Vehicles assets Total TEUR TEUR TEUR TEUR TEUR Acquisition cost Balance at 1 January 2007 98,061 52,665 5,741 950 157,417 Subsidiaries acquired 4 54 - - 58 Additions 60,376 22,111 2,992 5,735 91,214 Disposals (471) (7,680) (628) (2,195) (10,974) Transfers - (15) - 15 - Translation difference (5,169) (2,104) (110) (208) (7,591)
Balance at 31 December 2007 152,801 65,031 7,995 4,297 230,124
Accumulated depreciation Balance at 1 January 2007 186 27,580 2,320 507 30,593 Subsidiaries acquired - 26 - - 26 Additions 3,277 10,869 1,701 146 15,993 Disposals (7) (7,458) (467) (34) (7,966) Transfers - 3 (4) 1 - Translation difference (95) (752) (25) 12 (860)
Balance at 31 December 2007 3,361 30,268 3,525 632 37,786
Carrying amount
at 1 January 2007 97,875 25,085 3,421 443 126,824 at 31 December 2007 149,440 34,763 4,470 3,665 192,338
17. Other assets
2008 2007 TEUR TEUR
Settlements with suppliers 29,925 51,378 Prepaid expenses 9,003 9,661 Other taxes receivable 4,055 2,248 Goods held for resale, supplies and other inventories 2,085 3,428 Insurance receivable, net - 648 Other 8,833 16,231
53,901 83,594
Specific allowances for impairment on settlement with suppliers (677) (1,236) Specific allowances for impairment on goods held for resale (28) (685) Specific allowances for impairment on other assets (365) -
(1,070) (1,921)
52,831 81,673
- 40 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
17. Other assets (continued)
2008 2007 Analysis of movements in allowances for impairment Note TEUR TEUR
Balance as at 1 January 1,921 934 Translation difference (187) 52 Impairment losses recognized in the income statement 32 (360) 949 Amount related to loans written off (304) (14)
Balance as at 31 December 1,070 1,921
18. Current accounts and deposits from customers
2008 2007 TEUR TEUR
Term deposits 142,558 168,859 Current accounts and demand deposits 131,480 156,770
274,038 325,629
19. Due to banks and other financial institutions
2008 2007 TEUR TEUR
Unsecured loans 602,255 617,391 Secured loans 249,997 153,223 Other balances 14,065 8,822
866,317 779,436
Out of the secured loans stated above the amount of TEUR 163,015 (2007: TEUR 81,082) was secured by pledge of consumer loan receivables and cash loan receivables, the amount of TEUR 53,818 (2007: TEUR 42,056) was secured by pledge of revolving loan receivables and the amount of TEUR 33,164 (2007: TEUR 93,200) was collateralized by a cash deposit.
In November 2008, Home Credit and Finance Bank (LLC) became eligible for unsecured credit facilities granted by CBR. The available credit limit is recalculated on monthly basis based on the company’s equity calculated in accordance with the Russian Banking Accounting Standards, and as of 31 December 2008 amounted to TEUR 465,204. As at the balance sheet date TEUR 377,900 (2007: TEUR 0) were outstanding and included in the unsecured loans above. These outstanding facilities had final maturity in March to June 2009 and born interest at a fixed rate.
- 41 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
20. Debt securities issued
Amount outstanding Interest Final rate maturity 2008 2007 TEUR TEUR
USD loan participation notes 4 of TUSD 500,000 Variable June 2011 339,657 -
USD loan participation notes 5 of TUSD 300,912 Variable August 2011 202,939 -
RUB loan participation notes of TRUB 8,200,000 Variable March 2014 201,301 226,985
USD loan participation notes 3 of TUSD 200,000 Fixed April 2010 145,428 137,532
CZK senior variable loan notes of MCZK 5,000 Variable April 2009 131,372 132,546
Unsecured CZK bond issue 1 of MCZK 3,000 Variable July 2009 115,298 115,767
Unsecured CZK bond issue 2 of MCZK 3,000 Variable June 2009 111,735 113,012
Unsecured RUB bond issue 5 of MRUB 4,000 Variable April 2013 98,914 -
Class A1 loan note of TEUR 100,000 Variable May 2012 98,573 98,025
Unsecured RUB bond issue 4 of MRUB 3,000 Variable October 2011 74,618 84,849
Unsecured RUB bond issue 2 of MRUB 3,000 Variable May 2010 73,572 81,745
Unsecured RUB bond issue 3 of MRUB 3,000 Variable September 2010 73,001 83,597
CZK junior variable loan notes of TCZK 779,221 Variable April 2009 20,484 20,668
Class A2 loan note of TEUR 13,500 Variable May 2012 13,552 13,244
Class B loan note of TEUR 13,000 Variable May 2012 13,050 12,770
USD loan participation notes 2 of TUSD 275,000 Fixed June 2008 - 186,719
USD loan participation notes 1 of TUSD 150,000 Fixed February 2008 - 105,768
1,713,494 1,413,227
The USD loan participation notes were issued by the Group through Eurasia Capital S.A. (refer to Note 1).
The CZK denominated variable loan notes were issued by the Group through HCF Funding No.1 B.V. (refer to Note 1). The proceeds from the issue were used to finance revolving loan receivables purchases under receivables sale agreement between the entity and the Group.
The EUR denominated consumer loan receivables backed notes were issued by the Group in December 2005 through Eurasia Structured Finance No.1 S.A. (refer to Note 1). The proceeds from the issue were used to finance consumer loan receivable purchases under receivables purchase agreement between the entity and the Group. The notes were fully redeemed on 10 February 2009.
The RUB denominated bonds 5 were issued by the Group in April 2008 with a fixed coupon rate valid for the subsequent twelve months. Coupon rates for the subsequent period (or periods) and the maturity of the period (or periods) will be set by the Group in April 2009. Bondholders are entitled to require early redemption of the bond issue at par in April 2009.
The RUB denominated bonds 4 were issued by the Group in October 2006 with a fixed coupon rate valid for the subsequent twenty four months. Coupon rates were reset for the subsequent twelve month period by the Group in October 2008. Bondholders are entitled to require early redemption of the bond at par in October 2009.
The RUB denominated bonds 3 were issued by the Group in September 2005 with a fixed coupon rate valid for the subsequent eighteen months. Coupon rates for the remaining period were reset by the Group in March 2007 and September 2008 respectively. Bondholders are entitled to require early redemption of the bond issue at par in March 2009.
- 42 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
20. Debt securities issued (continued)
The RUB denominated bonds 2 were issued by the Group in May 2005 with a fixed coupon rate. Bondholders are entitled to require early redemption of the bond issue at par in May 2009.
The RUB denominated credit revolving loan receivables backed notes were issued by the Group in August 2007 through Eurasia Credit Card Funding I S.A. and Eurasia Credit Card Company S.A. (refer to Note 1). The proceeds from the issue were used to finance revolving loan receivable purchases under receivables purchase agreement between the entity and the Group. The notes will be redeemed in full by Eurasia Credit Card Company S.A. at par in March 2014.
The RUB, CZK and EUR denominated loan notes are secured by the securitized pool of receivables (refer to note 10).
21. Financial liabilities at fair value through profit or loss
2008 2007 TEUR TEUR
Negative fair value of derivative instruments 13,788 24,853
13,788 24,853
The fair value of derivative instruments has been determined by reference to the market value or based on a valuation model using market data inputs.
22. Other liabilities 2008 2007 TEUR TEUR
Settlements with suppliers 39,091 38,471 Accrued employee compensation 13,899 12,108 Insurance liability, net 13,356 107 Other taxes payable 6,950 5,596 Other 15,333 14,048
88,629 70,330
23. Equity
At 31 December 2008 the share capital of the Group comprised 1,250,000 (2007: 1,250,000) ordinary shares at a par value of EUR 1,000, from which 1,156,175 (2007: 1,156,175) shares were issued and fully paid. All issued shares bear equal voting rights. The holders of shares are entitled to receive dividends when declared. No dividends can be distributed if distributable reserves are negative.
The creation and use of the statutory reserves is limited by legislation and the articles of each company within the Group. The legal reserve fund is not available for distribution to the shareholders.
The translation reserve comprises foreign exchange differences arising from translation of the financial statements of companies within Group with a functional currency other than the presentation currency. The translation reserve is not available for distribution to the shareholders.
Fair value reserve represents the revaluation surplus, net of deferred tax, recognized on changes in the fair value of financial assets available for sale. The fair value reserve is not available for distribution to the shareholders.
- 43 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
24. Interest income and interest expense
2008 2007 TEUR TEUR Interest income Consumer loan receivables 423,994 273,674 Revolving loan receivables 313,757 261,103 Cash loan receivables 221,727 98,043 Mortgage loan receivables 26,340 7,572 Due from banks and other financial institutions 24,049 20,243 Car loan receivables 12,427 2,043 Other 10,750 14,121
1,033,044 676,799
Interest expense Debt securities issued 157,522 100,176 Balances from banks and other financial institutions 55,555 38,058 Current accounts and deposits from customers 11,156 11,662 Finance leases 57 27
224,290 149,923
25. Fee and commission income
2008 2007 TEUR TEUR
Penalty fees 90,286 67,077 Insurance commissions 75,601 42,712 Cash transactions 41,677 20,822 Customer payment processing and account maintenance 13,303 11,486 Retailers commissions 6,506 18,628 Other 1,038 1,983
228,411 162,708
26. Fee and commission expense
2008 2007 TEUR TEUR
Commissions to retailers 54,393 36,365 Cash transactions 13,305 12,250 Payment processing and account maintenance 4,732 4,327 Other 1,015 229
73,445 53,171
27. Net gains/(losses) on financial assets
2008 2007 TEUR TEUR
Net trading gains/(losses) on derivatives 174,297 (22,534) Net trading gains/(losses) on other financial assets 163 6,750
174,460 (15,784)
- 44 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
28. Other operating income
2008 2007 TEUR TEUR
Sale of goods 14,119 19,057 Cost of goods sold (13,358) (17,679) Storage of goods and distribution expenses (176) (548) Other 21,356 33,122
21,941 33,952
29. Impairment losses on financial assets
2008 2007 TEUR TEUR
Consumer loan receivables 110,798 132,305 Cash loan receivables 86,926 35,043 Revolving loan receivables 82,589 73,551 Mortgage loan receivables 12,289 745 Car loan receivables 5,490 1,005 Other financial assets 3,592 2,274
301,684 244,923
30. Net expense related to credit risk insurance
2008 2007 TEUR TEUR
Cash loan receivables 21,371 10,467 Consumer loan receivables 17,584 14,326 Revolving loan receivables 489 1,214 Commission income for collecting defaulted receivables (20,287) (16,011)
19,157 9,996
31. General administrative expenses
2008 2007 TEUR TEUR
Employee compensation 223,084 130,550 Payroll related taxes (including pension contributions) 39,607 25,336 Telecommunication and postage 56,186 42,118 Occupancy 55,977 30,932 Professional services 38,831 42,434 Information technologies 20,307 11,960 Advertising and marketing 16,935 14,392 Travel expenses 9,738 11,641 Taxes other than income tax 4,062 2,770 Other 16,483 16,663
481,210 328,796
- 45 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
32. Other operating expenses
2008 2007 TEUR TEUR
Net foreign exchange expense/(income) 180,854 (13,944) Impairment losses on goodwill 39,762 - Depreciation and amortization 32,359 19,428 Impairment losses on property, plant and equipment 5,313 - Loss on disposal of property, plant, equipment, and intangible assets 1,987 2,606 Impairment losses on other assets (360) 823
259,915 8,913
33. Income tax expense
2008 2007 TEUR TEUR
Current tax expense 56,604 40,319 Deferred tax benefit (178) (10,429)
Total income tax expense in the income statement 56,426 29,890
Reconciliation of effective tax rate 2008 2007 TEUR TEUR
Profit before tax 98,155 61,953
Income tax using the domestic tax rate of 25.5% (2007: 22.2%) (25,030) (13,754) Effect of tax rates in foreign jurisdictions 22 (3,584) Effect of deferred tax assets not recognized (2,583) (1,548) Non-deductible costs and non-taxable income (28,834) (11,025) Effect of income taxed at lower tax rates - 21
Total income tax expense (56,426) (29,890)
- 46 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
34. Derivative financial instruments
At 31 December 2008 the following derivative contracts were outstanding:
Contract type Sell/Buy Maturity Notional amount Fair value (in thousands of purchased currency) TEUR
Foreign currency forward contracts RUB/USD 1 to 3 months 108,603 14,947 RUB/USD 3 months to 1 year 670,049 131,730
Foreign currency futures contracts RUB/USD 3 months to 1 year 14,234 -
Foreign currency swap contracts RUB/EUR less than 1 month 111,205 6,378 USD/EUR less than 1 month 8,896 4 RUB/USD 1 to 3 months 24,909 3,241 RUB/USD 3 months to 1 year 14,234 1,907 USD/EUR 3 months to 1 year 73,289 6,370 USD/CZK 3 months to 1 year 25,144 (4,283) USD/EUR 3 months to 1 year 23,707 (1,215) EUR/USD 3 months to 1 year 223,000 (3,749) EUR/BYR 3 months to 1 year 6,500 150 EUR/BYR more than 1 year 9,400 (38)
Interest rate swap contracts Fixed/Floating (RUB) less than 1 month 191,392 1,723 Fixed/Floating (RUB) 1 to 3 months 248,703 1,916 Fixed/Floating (RUB) 3 months to 1 year 121,115 1,373 Floating/Fixed (RUB) less than 1 month 492,953 (883) Floating/Fixed (RUB) 1 to 3 months 94,073 68
159,639
- 47 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
34. Derivative financial instruments (continued)
At 31 December 2007 the following derivative contracts were outstanding:
Contract type Sell/Buy Maturity Notional amount Fair value (in thousands of purchased currency) TEUR
Foreign currency forward contracts RUB/USD less than 1 month 155,400 (4,307) USD/RUB less than 1 month 4,500 (7) USD/EUR less than 1 month 9,022 193 RUB/USD 1 to 3 months 366,000 (7,083) RUB/USD 3 months to 1 year 288,000 (5,575)
Foreign currency futures contracts RUB/USD 1 to 3 months 20,000 (152)
Foreign currency swap contracts RUB/EUR less than 1 month 123,078 230 RUB/USD less than 1 month 30,000 (393) USD/CZK less than 1 month 625,625 (259) EUR/CZK less than 1 month 200,000 (104) RUB/USD 1 to 3 months 104,000 (538) USD/EUR 1 to 3 months 223,000 350 SKK/EUR 1 to 3 months 8,914 1 RUB/USD 3 months to 1 year 176,000 (4,909) USD/EUR 3 months to 1 year 360,781 17,758
Interest rate swap contracts Fixed/Floating (RUB) less than 1 month 28,738,450 (27) Fixed/Floating (RUB) 1 to 3 months 21,153,009 (405) Fixed/Floating (RUB) 3 months to 1 year 17,617,823 (367)
(5,594)
35. Commitments
The Group has outstanding commitments to extend credit. These commitments take the form of approved credit limits related to customer’s revolving loan accounts, consumer loan facilities, cash loan facilities, overdraft facilities and term loan facilities.
2008 2007 TEUR TEUR
Revolving loan commitments 1,040,125 821,765 Consumer loan commitments 436,048 68,827 Term loan facilities 14,857 - Undrawn overdraft facilities 8,111 1,128 Cash loan commitments 2,942 7,585 Bank guarantees - 9,542
1,502,083 908,847
The total outstanding contractual commitments to extend credit indicated above do not necessarily represent future cash requirements, as many of these commitments will expire or terminate without being funded.
- 48 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
36. Operating leases
Non-cancellable operating lease rentals are payable as follows: 2008 2007 TEUR TEUR
Less than one year 15,200 27,741 Between one and five years 39,320 62,337 More than five years 3,959 6,648
58,479 96,726
The Group leases a number of premises and equipment under operating lease. Lease payments are usually increased annually to reflect market rentals. None of the leases includes contingent rentals.
During the year TEUR 41,454 (2007: TEUR 26,742) was recognized as an expense in the income statement in respect of operating leases.
37. Contingencies
Taxation contingencies
The taxation systems in the Russian Federation, in the Republic of Kazakhstan, in the Republic of Belarus and in Ukraine are relatively new and are characterized by frequent changes in legislation which are subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during several subsequent calendar years. Recent events within the Russian Federation, the Republic of Kazakhstan, the Republic of Belarus and Ukraine suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation.
The facts mentioned above may create tax risks in respective countries that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian, Kazakhstan, Belarussian and Ukrainian tax legislation, official pronouncements and court decisions.
There is a risk that the Ukrainian tax authorities could assert that the taxable income of Home Credit Bank (“HCB”) was understated by TEUR 27,994. As a consequence, HCB may be exposed to additional current profit tax liabilities in the amount of TEUR 6,999 (plus penalties of up to 100%) aggregately amounting up to TEUR 13,997. HCB provided the request to the Tax Inspection in Dnepropetrovsk City asking for clarification on the tax treatment of this transaction. Further, such request was transferred to the Ukrainian State Tax Authority (i.e., the highest office of Ukrainian tax authorities) where it is currently a subject to consideration.
- 49 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
38. Related party transactions
The Group has a related party relationship with its ultimate parent company PPF Group N.V. and its subsidiaries.
(a) Transactions with the parent
Amounts included in the balance sheet in relation to transactions with the parent are as follows:
2008 2007 TEUR TEUR
Other assets 25 9,218
Debt securities issued (1,658) -
Other liabilities - (66)
(1,633) 9,152
Amounts included in the income statement in relation to transactions with the parent are as follows:
2008 2007 TEUR TEUR
Interest expense (1,085) -
Other operating income - 9,218
General administrative expenses - (66)
(1,085) 9,152
(b) Transactions with fellow subsidiaries
Amounts included in the balance sheet in relation to transactions with fellow subsidiaries are as follows:
2008 2007 TEUR TEUR
Cash and cash equivalents 26,288 90,951
Due from banks and other financial institutions 91,749 96,394
Loans to customers - 306
Financial assets at fair value through profit or loss 21,842 17,975
Other assets 15,787 26,761
Due to banks and other financial institutions (33,623) (513,150)
Debt securities issued (25,474) (136,254)
Financial liabilities at fair value through profit or loss (11,333) (872)
Other liabilities (34,792) (4,287)
50,444 (422,176)
- 50 - Home Credit B.V. Notes to the Consolidated Financial Statements for the year ended 31 December 2008
38. Related party transactions (continued)
Amounts included in the income statement in relation to transactions with fellow subsidiaries are as follows:
2008 2007 TEUR TEUR
Interest income 10,853 10,279
Interest expense (19,558) (21,918)
Fee and commission income 1,298 42,504
Fee and commission expense - (289)
Net gain /loss on financial assets 17,794 -
Other operating income 15,991 26,203
Net expense related to credit risk insurance - 1,633
General administrative expenses (10,560) (8,663)
15,818 49,749
(c) Transactions with key management personnel
Amounts included in the income statement in relation to transactions with members of key management are short-term benefits comprising salaries and bonuses in amount of TEUR 19,186 (2007: TEUR 14,940). The members of Board of Directors of the Company and key management of its subsidiaries are considered as the key management of the Group.
- 51 -