Annual Report 2009

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T-Mobile Macedonia AD Skopje Financial Statements

For the year ended 31 December 2009 With the Report of the Auditor Thereon
Contents
Independent Auditors Report Financial Statements Balance sheet Income statement Cash flows statement Statement of changes in equity Notes to the financial statements
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T-Mobile Macedonia AD Skopje Financial statements
Consolidated financial statements

Balance Sheet
In thousands of denars Assets Current assets Cash and cash equivalents Deposits with banks Trade and other receivables Current income tax receivable Inventories Total current assets Non-current assets Property, plant and equipment Intangible assets Advances for property, plant and equipment Other investments Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Current income tax liability Provision for other liabilities and charges Total current liabilities Non-current liabilities Trade and other payables Provision for other liabilities and charges Total non-current liabilities Total liabilities Equity Share capital Statutory reserves Retained earnings Total equity Total equity and liabilities Note 2009
As at 31 December 2008
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1,390,715 1,533,209 1,456,976 20,074 395,604 4,796,578 1,931,356 2,355,946 10,901 305 4,298,508 9,095,086
581,744 3,234,395 1,544,842 241,267 5,602,248 1,749,103 2,301,011 305 4,050,419 9,652,667
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1,243,059 381,209 1,624,268 96,596 5,347 101,943 1,726,211 2,791,453 558,291 4,019,131 7,368,875 9,095,086
1,632,051 58,266 431 1,690,748 256,861 256,861 1,947,609 2,791,453 558,291 4,355,314 7,705,058 9,652,667
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The financial statements set out on pages 1 to 37 were authorised for issue on 18 February 2010 by the Management of T-Mobile Macedonia M AD Skopje, S and are subject to review and approval by the Board of directors on 25 February 2010 and by the shareholders on date that will be subsequently agreed. ag
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Income Statement
In thousands of denars Revenues Other operating income Depreciation and amortisation Gross salaries Other operating expenses Profit from operations Finance expenses Finance income Net finance income Profit before income tax Income tax expense Net profit for the year Earnings per share (EPS) information: Basic and diluted earnings per share (MKD) 19 Note 14 15 Year ended 31 December 2009 10,256,313 295,422 (1,249,139) (399,298) (4,960,512) 3,942,786 (152) 159,823 159,671 4,102,457 (83,326) 4,019,131 438.33 2008 10,655,942 208,275 (1,203,738) (348,822) (4,553,135) 4,758,522 (59) 155,888 155,829 4,914,351 (559,037) 4,355,314 474.99
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Cash flows statement

In thousands of denars Operating activities Profit before tax Adjustments for: Depreciation and amortisation Write down/(back) of inventories to net realisable value Impairment losses on trade and other receivables Write off of inventories Provisions for liabilities and charges Interest expense Interest income Net gain on disposal of property, plant and equipment Other non cash adjustments Effect of foreign exchange rate changes on cash and cash equivalents Cash generated from operations before changes in working capital Increase in inventories Increase in receivables (Decrease)/increase in payables (Decrease)/increase of provision Cash generated from operations Interest paid Income taxes paid Cash flows from operating activities Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Loan repayment received Deposits drown from banks Deposits placed with banks Proceeds from sale of property, plant and equipment Interest received Cash flows from investing activities Financing activities Dividends paid Cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Effect of foreign exchange rate changes on cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Note
Year ended 31 December 2009 4,102,457 16 16 16 16 17 18 1,249,139 22,406 231,579 4,148 96,547 152 (127,144) (6,054) 17,441 1,687 5,592,358 (180,975) (161,251) (212,926) (95,685) 4,941,521 (152) (161,667) 4,779,702 (714,646) (743,715) 3,199,753 (1,507,384) 16,302 135,960 386,270 (4,355,314) (4,355,314) 810,658 (1,687) 581,744 1,390,715 2008 4,914,351 1,203,738 (6,854) 154,651 10,226 70,929 59 (138,600) (192) 22,839 11,009 6,242,156 (34,536) (342,968) 647,637 22,974 6,535,263 (59) (700,565) 5,834,639 (704,226) (1,204,890) 1,123,000 300,084 (3,199,753) 12,015 233,736 (3,440,034) (3,946,745) (3,946,745) (1,552,140) (11,009) 2,144,893 581,744
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Statement of changes in equity

In thousands of denars Balance at 1 January 2008 Net profit for the year Dividends paid Balance at 31 December 2008 Balance at 1 January 2009 Net profit for the year Dividends paid Balance at 31 December 2009 Note Share capital 2,791,453 2,791,453 2,791,453 2,791,453 Statutory reserve 558,291 558,291 558,291 558,291 Retained earnings 3,946,745 4,355,314 (3,946,745) 4,355,314 4,355,314 4,019,131 (4,355,314) 4,019,131 Total 7,296,489 4,355,314 (3,946,745) 7,705,058 7,705,058 4,019,131 (4,355,314) 7,368,875
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Notes to the financial statements
1. General Information 1.1. About the Company

T-Mobile Macedonia AD Skopje (hereinafter The Company) is a joint stock company incorporated and domiciled in Republic of Macedonia, for provision of telecommunication services. The Companys immediate parent company is Makedonski Telekom AD Skopje (hereinafter MKT) with 100% share, registered in Republic of Macedonia. The ultimate parent company is Deutsche Telekom AG registered in Federal Republic of Germany. T-Mobile Macedonia AD is the leading mobile service provider in Macedonia. The Macedonian telecommunications sector is regulated by the Electronic Communications Law (ECL) enacted in March 2005. With the changes of the ECL published on 4 August 2008, the existing Concession Contracts of the Company and immediate parent company ceased to be valid as of 5 August 2008. On 5 September 2008 the Agency for Electronic Communications (The Agency or AEC), ex officio, has issued a notification to the Company for those public electronic communication networks and/ or services which have been allocated thereto under the Concession Contracts. The licence for the radiofrequencies previously granted with the Concession Contract was also issued by the Agency. The Agency on 29 June 2007 has published the first draft analysis conducted on Market 16 (Call termination services in public mobile communication networks) and based on it on 26 November 2007 has brought a decision by which TMobile Macedonia and Cosmofon (competitor of T-Mobile Macedonia, which was rebranded to ONE in November 2009) wr designated with Significant Market Power (SMP) position in the market and several obligations were imposed (interconnection and access, non-discrimination in interconnection and access, accounting separation and price control and cost accounting). T-Mobile Macedonia published a Referent Interconnection Offer (RIO) with regulated termination rate effective from 1 August 2008. T-Mobile Macedonia was obliged to submit financial reports for 2008 based on accounting separation by 31 May 2009 and submitted them on 1 June 2009. Second round analysis of Mar-
ket 16 was concluded by AEC and draft analyzes published for public debate on 21 January 2010, by which VIP Operator (subsidiary of Mobilkom Austria) is to be designated as a SMP operator. The Agency is also conducting market analysis on relevant markets defined in the Decision on relevant market determination of 17 August 2005. The Agency has engaged expert consultancy services for calculation of WACC for SMP designated operators (fixed and mobile). In September 2009, the Agency requested data for calculation of WACC to SMP operators (T-Mobile Macedonia, Cosmofon (rebranded to ONE in November 2009) and Makedonski Telekom). It has also engaged expert consultancy services for Long run incremental costs methodology (LRIC) bottom-up model development as means for price control of SMP operators. The Agency published draft Price squeeze guideline on public debate for which T-Mobile Macedonia submitted comments and remarks to this Guideline. On 30 June 2009 the Agency brought a Decision for setting the maximum amount of the one-time fee for number portability service. Prior to the decision the price was established individually by the operators. T-Mobile Macedonia initiated a procedure before the Administrative Court to dispute the decision of the Agency. The administrative procedure has not started yet. The Agency in November 2007 has published a public tender for granting one license for 3G radiofrequencies utilization. Cosmofon at that time (now ONE) won the tender and started the 3G commercial operations from 12 August 2008. On 2 September 2008 a decision for granting three 3G licences for EUR 10 million one off fee each was published. On 15 September 2008 a new tender for additional three 3G licenses was published. The Company won one license which was granted to it on 17 December 2008 and paid MKD 613,837 thousand, equivalent to EUR 10 million as one-off fee. T-Mobile Macedonia started commercial operations of the 3G services on 11 June 2009. The validity of the license is 10 years i.e. 17 December 2018, with a possibility for extension for 20 years in accordance to the ECL. Since the beginning of 2009 three attempts have been made to award additional two licences for 3G radiofrequencies. On 27 January 2009 a public tender for granting two licences for 3G radiofrequencies was published with a minimum
one-off fee set at EUR 5 million each. No bids were received and no license was awarded. On 16 July 2009 the tender was repeated under the same conditions and experienced the same outcome in August 2009. On 21 December 2009 the tender was published again under the same conditions which outcome is expected in 2010. On 10 January 2009 a public tender for awarding two licences for 2G radiofrequencies in the 1800 MHz band was published. T-Mobile Macedonia was awarded one license on 6 June 2009. TMobile Macedonia paid EUR 2 million or MKD 122,812 thousand as one-off fee for the 2G license in the 1800 MHz band. The validity period is 10 years, with a possibility for extension for 20 years in accordance to the ECL. Also, on 10 January, 2009 a tender for one license in the 1800-1805 MHz for broadband wireless access on the whole territory of Republic of Macedonia was published. The one-off fee was set at EUR 30 thousand. On 5 May 2009 the Agency brought a Decision pronouncing Mobik Telekomunikacii a best bidder on the tender. In July 2009, the Agency put several secondary electronic communication legislation acts on public debate. Upon the completed public debates, the new acts were brought and the enactment of these regulations is expected to improve the regulatory framework. The Companys registered address is Orce Nikolov Street bb, 1000, Skopje, Republic of Macedonia. The number of employees as at 31 December 2009 was 469 (2008: 444).
1.2. Investigation into certain consultancy contracts 1.2.1 Summary of the Investigation
On 13 February 2006, Magyar Telekom Plc., the controlling owner of the Company, announced that it was investigating certain contracts entered into by another subsidiary of Magyar Telekom Plc. to determine whether the contracts were entered into in violation of Magyar Telekom Plc. policy or applicable law or regulation. Magyar Telekoms Audit Committee retained White & Case, as its independent legal counsel to conduct the internal investigation. Subsequent to this on 19 February 2007, the Board of Directors of the Company, based on the recommendation of the Audit Committee of Makedonski Telekom AD, Skopje and the Audit Committee of Magyar Telekom Plc., adopted a resolution to conduct
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an independent internal investigation regarding these contracts. For further information about the internal investigation, please refer to the financial statements of the Company for the year ended 31 December 2008. According the information provided to the Company by Magyar Telekom Plc., on 2 December 2009, the Audit Committee of Magyar Telekom Plc. provided the Magyar Telekoms Board of Directors with a Report of Investigation to the Audit Committee of Magyar Telekom Plc. dated 30 November 2009 (the Final Report). The Audit Committee indicated that it considers that, with the preparation of the Final Report based on currently available facts, White & Case has completed its independent internal investigation. According the information provided to the Company by Magyar Telekom Plc., the Final Report includes the following findings and conclusions related to Magyar Telekoms Macedonian affiliates, based upon the evidence available to the Audit Committee of Magyar Telekom Plc. and its counsel: tracts were also illegitimate and created a pool of funds available for purposes other than those stated on the face of the agree ments. However, the Magyar Telekom Audit Committees counsel did not have access to evidence that would allow it to identify the ultimate beneficiaries of these expenditures. party legal and tax expertise for assessment of the potential accounting and tax implications arising from the transactions conducted by MKT and Company subject to the Final Report. The external experts prepared reports (the Reports) on their assessment and submitted the Reports to the Chairman of the BoD of MKT and the Management of the Company. As a result, based on the analysis of the Tax and Legal experts and information available to the Management related to the transactions subject of the Final Report, amount of MKD 31,802 thousand has been identified as potential tax impact (together with related penalty interest) arising from the transactions conducted by the Company subject to the Final Report (see note 1.2.2). The contracts that were identified by the Final Report and the reports of the tax and legal experts related to transactions undertaken by the Company were expensed in the related periods (2001-2007), which require no restatements (see note 1.2.2). Furthermore, the Chairman of the BoD of MKT and the Companys Management has received information that the content of the Final Report has also been made available to the Macedonian Public Prosecution Office. The Companys Management cannot foresee whether the Macedonian Public Prosecution Office will initiate any legal procedure or the type and scope of legal actions on the basis of the information contained in the Final Report. We have become aware of no information as a result of a request from any regulators or other external parties, from which we have concluded that the financial statements may be misstated, including from the effects of a possible illegal act.
In entering into these contracts and appro-
ving expenditures under them, the former senior executives knowingly caused, structured, or approved transactions that shared most or all of the following characteristics: - intentional circumvention of internal controls; - false and misleading corporate documents and records; - lack of due diligence concerning, and failure to monitor performance of, contractors and agents in circumstances carrying a high risk of corruption; lack of evidence of performance; and - expenditures that were not for the purposes stated in the contracts under which they were made, but rather were intended to obtain benefits for the Magyar Telekom subsidiaries that could only be conferred by government action. on did not uncover evidence showing receipt of payments by any Macedonian government officials or political party officials.
As previously disclosed, there is evidence
that certain former employees intentionally destroyed documents relating to activities undertaken in Macedonia by Magyar Telekom Plc. and its affiliates.
The Final Report states that the Investigati
former senior executives at Magyar Telekom and Magyar Telekoms Macedonian affiliates, authorized the expenditure of approximately EUR 24 million through over twenty suspect consultancy, lobbying, and other contracts (including certain contracts between Magyar Telekom and its subsidiaries on one hand, and affiliates of a Cyprus-based consulting company on the other hand). The Final Re port concludes that the available evidence does not establish that the contracts under which these expenditures were made were legitimate. terms, a number of these contracts were undertaken to obtain specific regulatory and other benefits from the government of Macedonia. The Companies generally received the benefits sought and then made expenditures under one or more of the suspect contracts. There is evidence that the remaining con-
Between 2000 and 2006 a small group of
The evidence shows that, contrary to their
As previously disclosed, Magyar Telekom has taken remedial steps to address issues previously identified by the independent investigation, including steps designed to revise and enhance the Magyar Telekom Groups internal controls. According the information provided to the Company by Magyar Telekom, the Audit Committee of Magyar Telekom has not made recommendations relating to Magyar Telekoms compliance program or internal controls in connection with the issuance of the Final Report and Magyar Telekom is considering, in consultation with its Audit Committee, whether and to what extent the Final Report warrants additional remedial actions, including any personnel actions and/or changes in internal control policies and procedures at Magyar Telekom or its subsidiaries that have been or will be implemented to address the findings of the Final Report. In relation to the issuance of the Final Report and the information provided to the Company by Magyar Telekom, in January 2010 the Chairman of the Board of Directors of MKT requested third
1.2.2. Accounting implications of the findings of the Investigation

The total amount of MKD 31,802 thousand identified as impact arising from the transactions conducted by the Company subject to the Final Report, are recognized in Income statement (Other operating expenses) against Provisions for other liabilities and charges.
2. Significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1. Basis of preparation

These financial statements are prepared, in all material respects, in accordance with the Law on Trade Companies (Official Gazette No. 28/2004) and Rule Books for Accounting (Official Gazette No. 40/1997, 73/1999, 94/2004, 11/2005 and 116/2005). The financial statements are presented in Macedonian denars rounded to the nearest thousand. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Companys accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. Actual results may differ from those estimated.
2.3. Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets include, in particular, cash and cash equivalents, deposits with banks, trade receivables and other non-derivative financial assets. Financial liabilities generally substantiate claims for repayment in cash or another financial asset. In particular, financial liabilities include trade and other payables.
2.3.1. Financial assets

The Company classifies its financial assets in the following categories: (a) Financial assets at fair value through profit or loss (b) loans and receivables (c) available-for-sale financial assets (AFS) The classification depends on the purpose for which the financial asset was acquired. Management determines the classification of financial assets at their initial recognition. Regular way purchases and sales of financial assets are recognized on the trade-date, the date on which the Company commits to purchase or sell the asset. Investments, if any, are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss, if any, are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. (a) Financial assets at fair value through profit or loss This category comprises those financial assets designated at fair value through profit or loss at inception, if any. A financial asset is classified in this category if the Company manages such asset and makes purchase and sale decisions based on its fair value in accordance with the Company investment strategy for keeping investments within portfolio until there are favourable market conditions for their sale. Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are recognized in the income statement (Finance income/expense) in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognized in the income statement when the Companys right to receive payments is established and inflow of economic benefits is probable.
2.2. Foreign currency translations 2.2.1. Functional and presentation currency

The financial statements are presented in thousands of Macedonian denars, which is the Companys functional and presentation currency.
2.2.2. Transactions and balances

Transactions in foreign currencies are translated to denars at 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 denars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement (finance income and expenses). Non-monetary financial assets and liabilities denominated in foreign currency are translated to denars at the foreign exchange rate ruling at the date of transaction. The foreign currencies deals of the Company are predominantly Euro (EUR), United States Dollars (USD) and Swiss Francs (CHF) based. The exchange rates used for translation at 31 December 2009 and 31 December 2008 were as follows: 2009 MKD 61.17 42.67 41.12 2008 MKD 61.41 43.56 41.04
1 EUR 1 USD 1 CHF
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(b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except those with maturities over 12 months after the balance sheet date. These are classified as non-current assets. The following items are assigned to the loans and receivables measurement category. cash and cash equivalents deposits with bank receivables and loans to third parties trade receivables employee loans other receivables (e.g. interest receivables) Loans and receivables are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents include cash on hand, call deposits held with banks and other short-term highly liquid investments with original maturities of three months or less. Trade and other receivables Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial assets original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the Income statement (Other operating expenses Impairment losses on trade and other receivables). The Companys policy for collective assessment of impairment is based on the aging of the receivables due to the large number of relatively similar type of customers. Individual valuation is carried out for customers under liquidation; bankruptcy proceedings and for the total receivables of customers with overdue receivables. Itemized valuation should also be performed in special circumstances. When a trade receivable is established to be uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against the recognized loss in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtors credit rating), the previously recognized impairment loss shall be reversed by adjusting an allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal shall be recognized in the income statement. Amounts due to, and receivable from, other network operators are shown net where a right of set-off exists and the amounts are settled on a net basis (such as receivables and payables related to international traffic). Employee loans Employee loans, if any, are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Difference between the nominal value of the loan granted and the initial fair value of the employee loan is recognized as prepaid employee benefits. Interest income on the loan granted calculated by using the effective interest method is recognized as finance income, while the prepaid employee benefits are amortized to Personnel expenses evenly over the term of the loan. (c) Available-for-sale financial assets (AFS) Available-for-sale financial assets, if any, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of investments are recognised on the trade-date the date on which the Company commits to purchase or sell the asset. Subsequent to initial recognition all available-forsale financial assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses. The intention of the Company is to dispose these assets when there are favourable market conditions for their sale. Changes in the fair value of financial assets classified as available for sale are recognised in equity. When financial assets classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. There is objective evidence of impairment if as a result of loss events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Loss events can be the followings: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; the lender, for economic or legal reasons relating to the borrowers financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties.
If any such evidence exists for AFS financial assets, the cumulative unrealised gain (if any) is reclassified from equity to income statement, and any remaining difference is recognized in the income statement (Finance income). Impairment losses recognised on equity instruments shall not be reversed through the income statement. When AFS financial assets are sold or redeemed, therefore derecognized, the fair value adjustments accumulated in equity are reclassified from equity to income statement (Finance income).
placement cost. The net effect of revaluation is recorded against revaluation reserves. The last revaluation of property, plant and equipment was made in year 2000. Subsequent costs are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. When assets are sold, the cost and accumulated depreciation are removed from the accounts and any related gain or loss, determined by comparing proceeds with carrying amount, is recognized in the income statement (Other operating income). Depreciation is charged to the income statement on a straight-line basis over the prescribed useful lives of items of property, plant and equipment. Assets are not depreciated until they are available for use. Land is not depreciated. The depreciation is calculated using the following annual rates of depreciation, which are also tax allowable: 2009 % 25 25 2.5 25 25 20 25 2008 % 25 25 2.5 25 25 20 25
2.3.2. Financial liabilities

Trade and other payables Trade and other payables (including accruals) are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. The carrying values of trade and other payables approximate their fair values due to their short maturity.
2.4. Inventories
Inventories are stated at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated selling expenses. The cost of inventories is based on weighted average cost formula and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Phone sets are often sold for less than cost in connection with promotions to obtain new subscribers with minimum commitment periods. Such loss on the sale of equipment is only recorded when the sale occurs as they are sold as part of a profitable service agreement with the customer.
2.5. Property, plant and equipment (PPE)

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an item of PPE comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located is also included in the costs if the obligation incurred can be recognized as a provision according to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The cost of self-constructed assets includes the cost of materials and direct labour. Items of property, plant and equipment are revaluated at the year-end using official revaluation coefficients based on the general manufactured goods price increase index. Such coefficients have been applied to historical cost or later valuation and to accumulated depreciation as to approximate re-
Exchanges / Switches Base stations Buildings Computers Electronic devices Furniture and other office equipment Truck vehicles
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2.6. Intangible assets
Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses. Items of intangible assets are revaluated at the year-end using official revaluation coefficients based on the general manufactured goods price increase index. Such coefficients have been applied to historical cost or later valuation and to accumulated depreciation as to approximate replacement cost. The net effect of revaluation is recorded against revaluation reserves. The last revaluation of intangible assets was made in year 2000. Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. The amortisation is calculated using the following annual rates of amortisation, which are also tax allowable: 2009 % 20 10 2008 % 20 10
2.8. Provisions and contingent liabilities

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are measured and recorded as the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The provision charge is recognized in the income statement within the expense corresponding to the nature of the provision. No provision is recognized for contingent liabilities. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability.
Software and licences 3G Licence and 2G 1800 MHz Licence
2.9. Share capital

Ordinary shares are classified as equity.
Amortisation is charged to the income statement on a straight-line basis over the prescribed useful lives of intangible assets. Intangible assets are amortised from the date they are available for use. In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 - Property, Plant and Equipment or as an intangible asset under IAS 38 Intangible Assets, management uses judgment to assess which element is more significant and recognizes the assets accordingly.
2.10. Statutory reserves

Under local statutory legislation, the Company is required to set aside 15 percent of its net statutory profit for the year in a statutory reserve until the level of the reserve reaches 1/5 of the share capital. These reserves are used to cover losses and are not distributed to shareholders except in the case of bankruptcy of the Company. Statutory reserves can be distributed at the approval of the shareholders meeting.
2.7. Impairment of property, plant and equipment and intangible assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortization or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the assets fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units - CGUs). Impairment losses are recognized in the income statement. Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
2.11. Dividends
Dividends are recognised as a liability in the Companys financial statements in the period in which they are approved by the Companys shareholders.
2.12. Revenues
Revenue is primarily derived from services provided to customer subscribers and other third parties using telecommunications network, and equipment sales. Revenues for all services and equipment sales (Note 14) are shown net of VAT and discounts. Revenue is recognized when the amount of the revenue can be reliably measured, and when it is probable that future economic benefits will flow to the Company and specific criteria of IAS18 on the sale of goods and rendering of services are met for the provision of each of the Companys services and sale of goods described below. Customer subscriber arrangements typically include an activation fee, equipment sale, subscription fee and monthly charge for the actual airtime used. The Company considers the various elements of these arrangements to be separate earnings processes and recognizes the revenue for each of the deliverables using the residual method.
Service revenues are recognized when the services are provided in accordance with contractual terms and conditions. Airtime revenue is recognized based upon minutes of use and contracted fees less credits and adjustments for discounts, while subscription and flat rate revenues are recognized in the period it relates to. Revenue and expenses associated with the sale of telecommunications equipment and accessories are recognized when the products are delivered, provided there are no unfulfilled company obligations that affect the customers final acceptance of the arrangement. Revenues from operating leases are recognized on a straight line basis over the period the services are provided. Value added services mostly include SMS, MMS, WAP and other similar services. The Company acts as a principal in such transactions and consequently, those revenues are included in this category on a gross basis. Revenues from premium rate services are also included in this category, recognized on a gross basis as the delivery of the service over the network is the responsibility of the Company; the Company establishes the prices of these services and bears substantial risks of these services. Value added services, where the Company does not act as a principal in the transaction, if any, are stated on a net basis. Customers may also purchase prepaid cards which allow those customers to use the telecommunication network for a selected amount of time. Customers must pay for such services at the date when the card is purchased. Third parties using the telecommunications network include roaming customers of other service providers and other telecommunications providers which terminate or transit calls on network. These wholesale (incoming) traffic revenues are recognized in the period of related usage. A proportion of the revenue received is often paid to other operators (interconnect) for the use of their networks, where appropriate. The revenues and costs of these terminate or transit calls are stated gross in these financial statements and recognized in the period of related usage.
2.13. Employee benefits 2.13.1. Short term employee benefits and pensions
The Company, in the normal course of business, makes payments on behalf of its employees for pensions, health care, employment and personnel tax which are calculated according to the statutory rates in force during the year, based on gross salaries and wages. Food allowances, travel expenses and holiday allowances are also calculated according to the local legislation. The Company makes these contributions to the Governmental and private funds. The cost is charged to the income statement in the same period as the related salary cost. No provision is created for holiday allowances for non-used holidays as according the local legislation the employer is obliged to provide condition for usage, and the employee to use the annual holiday within one year. This is also exercised as Company policy and according the historical data employees use their annual holiday within the one year legal limit. The Company does not operate any other pension scheme or post retirement benefits plan and consequently, has no obligation in respect of pensions. The Company has legal obligation to pay to employees two average monthly salaries in Republic of Macedonia at their retirement date, for which appropriate liability is recognized in these financial statements measured at the present value of two average monthly salaries together with adjustments incorporated in the actuarial calculation. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality bonds that are denominated in the currency in which the benefits will be paid. In addition, the Company is not obligated to provide further benefits to current and former employees.
2.13.3. Termination benefits

Termination benefits are payable whenever an employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognises termination benefits when it is demonstrably committed either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
2.14. Marketing expenses

Marketing costs are expensed as incurred. Marketing expenses are disclosed in Note 16.
2.15. Corporate Income tax

In 2008, corporate income tax is recognised in the income statement. Corporate income tax was the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. From 2009 the Company do not have to pay corporate income tax on the profit before tax (earned since 1 January 2009) until that profit is distributed in a form of dividend or other forms of profit distributions. If dividend is paid, 10% corporate income tax is payable on the paid dividend. Tax is still payable on the non-deductible expenses in the year the expenses are incurred, regardless of distribution of dividends (decreased by the amount of tax credits).
2.16. Leases
Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease Company as lessee Costs in respect of operating leases are charged to the income statement on a straight-line basis over the lease term.
2.13.2. Bonus plans

The Company recognises a liability and an expense for bonuses taking into consideration the financial and operational results. The Company recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.
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2.17. Earnings per share
Basic earnings per share is calculated by dividing profit attributable to the equity holders of the Company for the period by the weighted average number of common stocks outstanding. of hypothetical changes of relevant risk variables on profit or loss and shareholders equity. The periodic effects are determined by relating the hypothetical changes in the risk variables to the balance of financial instruments at the balance sheet date. The balance at the balance sheet date is representative for the year as a whole. a) Foreign currency risk The Companys functional currency is the Macedonian denar. The foreign exchange risk exposure of the Company is related to holding foreign currency cash balances, and operating activities through revenues from and payments to international telecommunications carriers as well as capital expenditure contracted with vendors in foreign currency. The currencies giving rise to this risk are primarily EUR and USD. The Company uses cash deposits in foreign currency, predominantly in EUR and USD, and cash deposits in denars linked to foreign currency, to economically hedge its foreign currency risk as well as local currency risk in accordance with the available banks offers. The Company manages the foreign exchange risk exposure through maintaining higher amount of deposits in EUR as proven stable currency and by striving to lower the number of contracts with foreign operators in USD as relatively unstable currency in the period and by executing payments in USD from cash reserves in that currency. The foreign currency risk sensitivity information required by IFRS 7 is limited to the risks that arise on financial instruments denominated in currencies other than the functional currency in which they are measured. The Company accumulated more cash in EUR and USD than its trade payables in EUR and USD. At 31 December 2009, if EUR would have been 1% (for the year ended 31 December 2008: 5 %) weaker or stronger against MKD profit for the year ended 31 December 2009 would have been MKD 14,546 thousand (2008: 57,007 MKD thousand) after tax in net balance higher or lower, respectively. At 31 December 2009, if USD would have been 1% (2008: 5 %) weaker or stronger against MKD profit would have been MKD 47 thousand (2008: 23,083 MKD thousand) after tax in net balance higher or lower, respectively. b) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Change in the interest rates and interest margins may influence financing costs and returns on financial investments. The Company has no interest bearing liabilities, while it incurs interest rate risk on cash deposits with banks. No policy to hedge the interest rate risk is in place. Changes in market interest rates affect the interest income on deposits with banks. The Company had MKD 3,816,065 thousand deposits (including call deposits) as of 31 December 2008, 1% rise in market interest rate would have caused (ceteris paribus) the interest received to increase with approx. MKD 34,345 thousand annually after tax, while similar decrease would have caused the same decrease in interest received. Amount of deposits is MKD 2,912,120 thousand (including call deposits) as of 31 December 2009, therefore 1% rise in market interest rate would have caused (ceteris paribus) the interest received to increase with approx. MKD 26,209 thousand annually after tax, while similar decrease would have caused the same decrease in interest received. c) Other price risk As of 31 December 2008 and 2009, the Company do not hold investments or other financial instruments, which could be affected by risk variables such as stock exchange prices.
2.18. Comparative information

In order to maintain consistency with the current year presentation, where appropriate certain items have been reclassified for comparative purpose. Such reclassifications, however, have not resulted in significant changes of the content and format of the financial information as presented in these financial statements and are disclosed in the relevant notes, if any.
3. Financial risk management 3.1. Financial risk factors

The Company does not apply hedge accounting for its financial instruments, all gains and losses are recognized in the income statement, except financial assets classified as available for sale, if any, that are recognised in equity. The Company is exposed in particular to risks from movements in exchange rates, interest rates, and market prices that affect its assets and liabilities. Financial risk management aims to limit these market risks through ongoing operational and finance activities. The detailed descriptions of risks, the management thereof as well as sensitivity analyses are provided below. Sensitivity analyses include potential changes in profit before tax. The impacts disclosed below are post tax figures, calculated using a 10% tax rate. The potential impacts disclosed (less tax) are also applicable to the Companys equity.
3.1.1. Market risk

Market risk is defined as the risk that the fair value or value or future cash flows of a financial instrument will fluctuate because of changes in market prices and includes interest rate risk, currency risk and other price risk. As the vast majority of the revenues and expenses of the Company arise in MKD, the functional currency of the Company is MKD, and as a result, the Company objective is to minimize the level of its financial risk in MKD terms. For the presentation of market risks, IFRS 7 requires sensitivity analyses that show the effects
3.1.2. Credit risk

Credit risk is defined as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company is exposed to credit risk from its operating activities and certain financing activities. Counterparty limits are determined based on the provided Letter of guarantees in accordance with the market conditions of those banks willing to issue a bank guarantee. The total amount of bank guarantees that will be provided should cover the amount of the projected free cash of the Company.
With regard to financing activities, transactions are primarily concluded with counterparties (banks) that have at least a credit rating of BBB+ (or equivalent) or where the counterparty has provided a guarantee where the guarantor has to be at least BBB+ (or equivalent). In cases where Companys available funds are exceeding the total amount of the provided bank guarantees, the financial investment of the available free cash is to be performed in accordance to the evaluation of the bank risk based on CAEL methodology ratings as an off site rating system. The depositing decisions are made based on the following priorities:
The Companys procedures ensure on a permanent basis that sales are made to customers with an appropriate credit history and not exceed an acceptable credit exposure limit. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. Consequently, the Company considers that its maximum exposure is reflected by the amount of debtors net of provisions for impairment recognized and the amount of cash deposits in banks at the balance sheet date. The following table represents Company exposure to credit risk in 2009 and 2008: In thousands of denars Deposits with banks Cash and cash equivalents Trade debtors domestic Trade debtors foreign Receivables from related parties Other financial assets 2009 1,533,209 1,378,911 1,117,240 61,340 161,177 2,361 4,254,238 2008 3,234,395 581,670 1,198,770 92,132 160,648 19,906 5,287,521
To deposit in banks (Deutsche Telekom core banks, if possible) with
provided bank guarantee from the banks with the best rating and the best quality wording of the bank guarantee. To deposit in banks with provided bank guarantee from the banks with lower rating and poorer quality wording of the bank guarantee. If the total amount of deposits can not be placed in banks covered with bank guarantees with at least BBB+ rating (or equivalent credit rating), than depositing will be performed in local banks without bank guarantee. In this case, the determination of counterparty limits per banks shall be performed in accordance with CAEL methodology (evaluation of bank risk components capital, assets, earning and liquidity). CAEL methodology evaluates banks financial ratios as an integral part of the four CAEL components - Capital, Assets, Earnings and Liquidity. The final score of the banks (on a scale from 1 to 5) is related to the banks operations and performance for the analysed period. The Company policy is to invest in banks, which final score varies within following 3 ranges:
Cash and cash equivalents in the table above exclude cash on hand as no credit risk exists for this category. Largest amount of one deposit as at 31 December 2009 is MKD 401,113 thousand (2008: MKD 660,000 thousand) and the Company has deposits with 6 domestic banks (2008: 8 domestic banks).
A - Banks with evaluation from 1.84 to 2.45 investments not exceeding B - Banks with evaluation from 2.46 to 3.07 investments not exceeding
80% from the bank shareholders capital; 70% from the bank shareholders capital; C - Banks with evaluation from 3.08 to 3.69 investments not exceeding 60% from the bank shareholders capital. The process of managing the credit risk from operating activities includes preventive measures such as creditability checking and prevention barring, corrective measures during legal relationship for example reminding and disconnection activities, collaboration with collection agencies and collection after legal relationship as litigation process, court proceedings and involvement of the executive unit. The overdue payments are followed through a debt escalation procedure based on customers type, credit class and amount of debt. The credit risk is controlled through credibility checking (which determines that the customer is not indebted) thought the customers credit worthiness and through preventive barring (which determinates the credit limit based on the customers previous traffic revenues). The Company has no significant concentration of credit risk with any single counter party or Company of counter parties having similar characteristics.
3.1.3. Liquidity risk

Liquidity risk is the risk that an entity may encounter difficulty in meeting obligations associated with financial liabilities. The Companys policy is to maintain sufficient cash and cash equivalents to meet its commitments in the foreseeable future. Any excess cash is mostly deposited in commercial banks. The Companys liquidity management process includes projecting cash flows by major currencies and considering the level of necessary liquid assets, considering business plan, historical collection and outflow data. Monthly, semi-annually and annually cash projections are prepared and updated on a daily basis by the Accounts Payable Department. Any excess cash is mostly deposited in commercial banks. All trade payables have maturity within one year.
3.2. Capital risk management

The Companys objectives when managing capital are to safeguard the Companys ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The total amount of equity managed by the Company as at 31 December 2009 is MKD 7,368,875 thousand as per local GAAP (2008: MKD 7,705,058 thousand).
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Out of this amount MKD 2,791,453 thousand (2008: MKD 2,791,453 thousand) represent share capital and MKD 558,291 thousand (2008: MKD 558,291 thousand) represent statutory reserves, which are not distributable. According to the local legal requirements dividends can be paid out to the shareholders in amount that shall not exceed the net profit for the year as presented in the financial statements of the Company, increased for the undistributed net profit from previous years or increased for the other distributable reserves, i.e. reserves that exceed the statutory reserves and other reserves defined by the Companys statute. The Company is in compliance with all statutory capital requirements.
4.3. Provisions
Provisions in general are highly judgmental, especially in the case of legal disputes. The Company assesses the probability of an adverse event as a result of a past event and if the probability of an outflow of economic benefits is evaluated to be more than fifty percent, the Company fully provides for the total amount of the estimated liability. As the assessment of the probability is highly judgemental, in some cases the evaluation may not prove to be in line with the eventual outcome of the case.
4.4. Subscriber acquisition costs

Subscriber acquisition costs primarily include the loss on the equipment sales (revenues and costs disclosed separately) and fees paid to subcontractors that act as agents to acquire new customers. The Companys agents also spend a portion of their agent fees for marketing the Companys products, while a certain part of the Companys marketing costs could also be considered as part of the subscriber acquisition costs. No such costs or revenues are capitalized or deferred. These acquisition costs (losses) are recognized immediately as they are not accurately separable from other marketing costs.
3.3. Fair value estimation

Cash and cash equivalents, trade receivables and other current financial assets mainly have short term maturity. For this reason, their carrying amounts at the reporting date approximate their fair values.
4. Critical Accounting Estimates and Judgments

The Company makes estimates and assumptions concerning the future. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The most critical estimates and assumptions are discussed below.
5. Cash and cash equivalents

In thousands of denars Call deposits Cash on hand 2009 1,378,911 11,804 1,390,715 2008 581,670 74 581,744
4.1. Estimated impairment of property, plant and equipment, and intangible assets
We assess the impairment of identifiable property, plant, equipment and intangibles whenever there is a reason to believe that the carrying value may materially exceed the recoverable amount and where impairment in value is anticipated. The recoverable amounts are determined by value in use calculations, which use a broad range of estimates and factors affecting those. Among others, we typically consider future revenues and expenses, technological obsolescence, discontinuance of services and other changes in circumstances that may indicate impairment. If impairment is identified using the value in use calculations, we also determine the fair value less cost to sell (if determinable), to calculate the exact amount of impairment to be charged (if any). As this exercise is highly judgmental, the amount of potential impairment may be significantly different from that of the result of these calculations. Management has performed an impairment test based on a 10 years cash flow projections and used a perpetual growth rate of 1% to determine the terminal value after 10 years. The discount rate used was 10.71%. No impairment was identified in 2009.
In order to maintain consistency with the current year presentation the cash presented as Cash equivalents in 2008 in the amount of MKD 1,822 thousand was reclassified and now are shown as Call deposits. The reclassification had no impact on equity or net profit. The interest rate on call deposits ranged from 3.30% p.a. to 4.00% p.a. (2008: from 1.80% p.a. to 5.00%). These deposits have maturities of less than 3 months. The carrying amounts of the cash and cash equivalents are denominated in the following currencies: In thousands of denars MKD EUR USD Other 2009 1,364,201 21,838 4,676 1,390,715 2008 562,465 11,722 7,556 1 581,744
4.2. Estimated impairment of trade and other receivables

We calculate impairment for doubtful accounts based on estimated losses resulting from the inability of our customers to make required payments. For customers in bankruptcy and liquidation, impairment is calculated on an individual basis, while for other customers it is estimated on a portfolio basis, for which we base our estimate on the aging of our account receivables balance and our historical write-off experience, customer credit-worthiness and recent changes in our customer payment terms. These factors are reviewed periodically, and changes are made to calculations when necessary (see note 2.3.1). If the financial condition of our customers were to deteriorate, actual write-offs of currently existing receivables may be higher than expected and may exceed the level of the impairment losses recognized so far.
Following is the breakdown of call deposits by categories (see note 3.1.2): In thousands of denars A B Credit rating of the Guarantor : A Credit rating of the Guarantor : ACredit rating of the Guarantor : BBB+ 2009 251,317 602,695 524,899 1,378,911 2008 529,244 52,426 581,670
7. Trade and other receivables

In thousands of denars Trade debtors - Domestic Less: allowance for impairment Trade debtors - domestic-net Trade debtors - Foreign Receivables from related parties Other Financial assets Prepayments and accrued income Advances paid Less allowance for impairment Advances paid net Other receivables 2009 1,945,657 (828,417) 1,117,240 61,340 161,177 2,361 1,342,118 40,051 74,912 (105) 74,807 114,858 1,456,976 2008 1,816,986 (618,216) 1,198,770 92,132 160,648 19,906 1,471,456 32,024 41,467 (105) 41,362 73,386 1,544,842
6. Deposits with banks

Deposits with banks represent cash deposits in the reputable domestic banks with interest rates in range from 3.00% p.a. to 4.50 % p.a. (2008: 2.83% p.a. to 6.15 % p.a.) with maturity between 3 and 12 months. The carrying amounts of deposits with banks are denominated in the following currencies: In thousands of denars MKD EUR USD 2009 100,428 1,432,781 1,533,209 2008 1,651,877 1,128,418 454,100 3,234,395
Receivables from related parties represent receivables from Makedonski Telekom AD, Magyar Telekom Plc. Group and Deutsche Telekom AG Group (refer note 23). As of 31 December 2009, domestic trade debtors of MKD 1,083,145 thousand (2008: MKD 871,111 thousand) are impaired. The ageing of these receivables is as follows: In thousands of denars Less than 30 days Between 31 and 180 days Between 181 and 360 days More than 360 days 2009 196,904 208,466 129,037 548,738 1,083,145 2008 177,381 190,177 72,724 430,829 871,111
Following is the breakdown of deposits with banks by categories (see note 3.1.2): In thousands of denars A Credit rating of the Guarantor : A+ Credit rating of the Guarantor : A Credit rating of the Guarantor : ACredit rating of the Guarantor : BBB+ 2009 308,584 55,463 622,314 546,848 1,533,209 2008 3,234,395 3,234,395
Out of the total amount of the allowance for impairment MKD 538,771 thousand (2008: MKD 505,653 thousand) represent allowance calculated on a portfolio bases. The rest of MKD 269,205 thousand (2008: MKD 106,764 thousand) represents specific allowance for impairment calculated for receivables from customers under liquidation and charged penalties, which are fully impaired. In addition, the Company has a specific provision calculated in respect of a certain group of customers in amount to MKD 20,441 thousand (2008: 5,799 thousand). The amount of impairment compared to the gross value of the domestic trade receivables is mainly a result of receivables which are overdue more than 360 days and charged penalties. The total amount of fully impaired receivables is MKD 672,200 thousand (2008 MKD 469,199 thousand).
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The fair values of trade and other receivables are as follows: In thousands of denars Trade debtors - domestic-net Trade debtors - Foreign Receivables from related parties Other Financial assets Prepayments and accrued income Advances paid-net 2009 1,117,240 61,340 161,177 2,361 1,342,118 40,051 74,807 1,456,976 2008 1,198,770 92,132 160,648 19,906 1,471,456 32,024 41,362 1,544,842 There are no other past due but not impaired receivables except above mentioned. The Company has renegotiated domestic trade receivables in carrying amount of MKD 15,387 thousand (2008: 15,838 thousand). The carrying amount of loans and receivables, which would otherwise be past due, whose terms have been renegotiated is not impaired if the collectability of the renegotiated cash flows are considered ensured. Following are the credit quality categories of neither past due nor impaired domestic trade receivables: In thousands of denars Group 1 Group 2 Group 3 2009 781,195 64,337 16,980 862,512 2008 816,395 115,159 14,321 945,875
Movement in allowance for impairment of domestic trade debtors In thousands of denars Impairment losses at 1 January Charged to expense Write off Impairment losses at 31 December 2009 (618,216) (231,579) 21,378 (828,417) 2008 (468,905) (154,651) 5,340 (618,216)
The credit quality of trade receivables that are neither past due nor impaired is assessed based on historical information about counterparty default rates. Following is the credit quality categories of neither past due nor impaired foreign trade receivables:
Movement in allowance for impairment for advances paid In thousands of denars Impairment losses at 1 January Charged to expense Impairment losses at 31 December 2009 (105) (105) 2008 (105) (105)
In thousands of denars Group 1 Group 2 Group 3
2009 32,407 32,407
2008 58,735 1,299 102 60,136
Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. There are no individually significant impaired receivables. As of 31 December 2009, foreign trade receivables in amount of MKD 28,933 thousand (2008: MKD 31,996 thousand) were past due but not impaired. These relate to a number of international customers assessed on individual basis in accordance with past Company experience and current expectations. The analysis of these past due foreign trade receivables is as follows: In thousands of denars Less than 30 days Between 31 and 60 days Between 61 and 90 days Between 91 and 180 days More than 181 days 2009 13,015 10,294 3,261 2,069 294 28,933 2008 21,870 3,941 1,799 3,969 417 31,996
Group 1 customers with no disconnections in the last 12 months; Group 2 customers with up to 3 times disconnections in the last 12 months; Group 3 customers with more than 3 times disconnections in the last 12 months. The carrying amounts of the Companys trade and other receivables are denominated in the following currencies: In thousands of denars MKD EUR USD Other 2009 1,419,300 30,840 6,791 45 1,456,976 2008 1,462,983 52,140 29,713 6 1,544,842
8. Inventories
In thousands of denars Materials Spare parts Inventories for resale Petty inventory Write down of inventories to net realisable value 2009 23,983 25,713 376,905 6,020 (37,017) 395,604 2008 25,806 30,218 194,124 5,730 (14,611) 241,267
Movement in allowance for inventories to net realizable value In thousands of denars Allowance at 1 January (Charged) /write back to expense Allowance at 31 December 2009 (14,611) (22,406) (37,017) 2008 (21,465) 6,854 (14,611)
Materials mainly comprise of smaller spare parts for telecommunication equipment, office materials etc. Allowance for inventory mainly relates to obsolete inventories for resale.
9. Property, plant and equipment

In thousands of denars Cost At 1 January 2008 Additions Transfer from assets under construction (see note 10) Disposals At 31 December 2008 Depreciation At 1 January 2008 Charge for the year Transfers Disposals At 31 December 2008 Carrying amount At 1 January 2008 At 31 December 2008 Land and buildings 149,196 10,361 180 159,737 43,987 3,789 (11,416) 36,360 105,209 123,377 Equipment Other Assets under construction 195,418 380,514 (286,064) (1,384) 288,484 195,418 288,484 Total
6,745,001 134,903 274,983 (105,563) 7,049,324 5,779,675 449,172 (105,447) 6,123,400 965,326 925,924
1,202,834 247,434 (197,404) 1,252,864 903,135 114,080 11,416 (187,085) 841,546 299,699 411,318
8,292,449 773,212 (10,901) (304,351) 8,750,409 6,726,797 567,041 (292,532) 7,001,306 1,565,652 1,749,103
In thousands of denars Cost At 1 January 2009 Additions Transfer from assets under construction (see note 10) Disposals At 31 December 2009 Depreciation At 1 January 2009 Charge for the year Disposals At 31 December 2009 Carrying amount At 1 January 2009 At 31 December 2009
Land and buildings 159,737 2,064 161,801 36,360 4,021 40,381 123,377 121,420
Equipment
Other
Assets under construction 288,484 487,972 (540,914) (1,599) 233,943 288,484 233,943
Total
7,049,324 108,941 471,161 (111,686) 7,517,740 6,123,400 455,161 (111,510) 6,467,051 925,924 1,050,689
1,252,864 195,916 69,753 (163,723) 1,354,810 841,546 143,287 (155,327) 829,506 411,318 525,304
8,750,409 794,893 (277,008) 9,268,294 7,001,306 602,469 (266,837) 7,336,938 1,749,103 1,931,356
Operating lease rentals amounting to MKD 122,488 thousand (2008: MKD 130,544 thousand) relating to the lease of property and equipment are included in the income statement.
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10. Intangible assets
In thousands of denars Cost At 1 January 2008 Additions Disposals Transfer from assets under construction (see note 9) At 31 December 2008 Amortisation At 1 January 2008 Charge for the year Disposals At 31 December 2008 Carrying amount At 1 January 2008 At 31 December 2008 Software and licences 3G license Other Assets under construction 11,879 11,879 11,879 Total
4,509,483 686,380 (108,122) 10,901 5,098,642 2,948,441 620,903 (108,122) 3,461,222 1,561,042 1,637,420
613,837 613,837 613,837
142,204 12,529 (3,952) 150,781 101,061 15,794 (3,949) 112,906 41,143 37,875
4,651,687 1,324,625 (112,074) 10,901 5,875,139 3,049,502 636,697 (112,071) 3,574,128 1,602,185 2,301,011
In thousands of denars Cost At 1 January 2009 Additions Disposals Transfer from assets under construction (see note 9) At 31 December 2009 Amortisation At 1 January 2009 Charge for the year Disposals At 31 December 2009 Carrying amount At 1 January 2009 At 31 December 2009
Software and licences
3G license
Other
Assets under construction 11,879 150,991 (141,651) 21,219 11,879 21,219
Total
5,098,642 416,876 (1,493,673) 137,054 4,158,899 3,461,222 595,636 (1,493,597) 2,563,261 1,637,420 1,595,638
613,837 122,812 736,649 38,448 38,448 613,837 698,201
150,781 11,002 (69,755) 4,597 96,625 112,906 12,586 (69,755) 55,737 37,875 40,888
5,875,139 701,681 (1,563,428) 5,013,392 3,574,128 646,670 (1,563,352) 2,657,446 2,301,011 2,355,946
11. Trade and other payables

In thousands of denars Trade payables - Domestic - Foreign Liabilities to related parties Other financial liabilities Financial liabilities Other payables VAT and social security payable Advances received Deferred revenue Accrued liabilities Other liabilities Total trade and other payables Less non-current portion: Deferred revenue Current portion of trade and other payables 2009 156,791 497,190 170,696 16,022 840,699 87,848 1,359 292,191 117,558 498,956 1,339,655 (96,596) 1,243,059 2008 261,771 614,504 132,275 5,055 1,013,605 71,549 833 240,415 305,649 618,446 1,632,051 1,632,051
The carrying amounts of the trade and other payables are denominated in the following currencies: 2008 In thousands of denars 2009 MKD EUR USD Other 1,078,184 252,039 9,213 219 1,339,655 1,257,899 368,987 4,976 189 1,632,051
12. Provisions for other liabilities and charges

In thousands of denars January 1, 2008 Additional provision Used during period December 31, 2008 In thousands of denars January 1, 2009 Additional provision Used during period December 31, 2009 Legal cases 183,009 70,929 (1,025) 252,913 Legal cases 252,913 96,547 (53) 349,407 Other 4,379 4,379 Other 4,379 32,770 37,149 Total 183,009 75,308 (1,025) 257,292 Total 257,292 129,317 (53) 386,556
Non-current deferred revenues have maturity up to 10 years from the balance sheet date. In order to maintain consistency with the current year presentation, provisions recognized for customer loyalty programs in previous years were reclassified from provisions and now are presented as deferred revenue, included in Trade and other payables. In addition, in order to maintain consistency with the current year presentation the deferred revenue presented as Accrued liabilities in 2008 in the amount of MKD 112,013 thousand was reclassified and now is shown as deferred revenue. The reclassification had no impact on equity or net profit. Liabilities to related parties represent liabilities to Makedonski Telekom AD, Magyar Telekom Plc. Group and Deutsche Telekom AG Group (refer note 23). The ageing analysis of domestic and foreign trade payables are as follows: In thousands of denars Less than 90 days Between 90 and 180 days More than 181 days 2009 637,604 3,533 12,844 653,981 2008 866,866 1,757 7,652 876,275
In order to maintain consistency with the current year presentation, provisions recognized for customer loyalty programs in previous years were reclassified from provisions and now are presented as deferred revenue, included in Trade and other payables. As a result of the findings of the Investigation, the identified impact in amount of MKD 31,802 thousand has been recognized in other current provisions (see note 1.2.2). Analysis of total provisions: In thousands of denars Non current (legal cases and other) Current 2009 5,347 381,209 386,556 2008 256,861 431 257,292
The table above does not represent a contractual maturity but rather an aging analysis where the major part of the payables are within 90 days which is the Companys regular term for payment to suppliers.
The major part of the provisions for legal cases, refer to legal case for charging of voice mail services. Based on the external legal advices in 2007, the Company recognised a provision of MKD 182,118 thousands in 2007 financial statements. After the decision was received from Commission for protection of Competition on 25 February 2008, the Company recorded additional provision for this legal case in the amount of MKD 69,625 thousands. In 2009, based on internal and external legal opinion, the Company recorded provision for possible initiation of tort/criminal procedure against the Company for base stations without appropriate documentation in the amount of MKD 96,042 thousand.
22 23
The rest of provisions for legal cases relates to other legal and regulatory claims brought against the Company, which are individually not significant, therefore not disclosed. Based on appropriate legal advice, the management does not expect that the outcome of these legal claims will give rise to any significant loss beyond the amounts provided at 31 December 2009.
16. Other operating expenses

In thousands of denars Cost of goods sold Transportation/Interconnection Advertising, marketing and sponsorship Payments to foreign operators Leased lines Other personnel expenses Impairment losses on trade and other receivables Maintenance Radiofrequency, numeration and surveillance Rent Provisions for liabilities and charges Raw materials, materials and energy Billing postage Consultancy Agent commissions Write down/(back) inventories to net realisable value Cost of petty inventory Write down of PPE to net realisable value Write off of inventories Other 2009 1,345,126 671,875 549,125 377,510 351,121 251,181 231,579 205,279 133,834 122,488 96,547 96,425 75,671 43,326 23,019 22,406 13,349 10,248 4,148 336,255 4,960,512 2008 967,054 771,878 609,777 457,993 350,879 202,306 154,651 192,205 74,863 130,544 70,929 109,712 47,468 14,104 98,838 (6,854) 5,915 11,609 10,226 279,038 4,553,135
13. Capital and reserves

Share capital consists of the following: Share capital Ordinary shares 2009 9,169,244 9,169,244 2008 9,169,244 9,169,244
Share capital consists of 9,169,244 ordinary shares with a nominal value of 5.00 EUR held by Makedonski Telekom AD Skopje. Dividend During 2009, the Company has paid dividends to the owner in the amount of MKD 4,355,314 thousand for 2008. Up to date of issuing of these financial statements, no dividends have been declared for 2009.
14. Revenues
In thousands of denars Domestic market sales Foreign market sales 2009 2008
9,781,157 10,123,087 532,855 475,156 10,256,313 10,655,942
17. Finance expenses

In thousands of denars Interest expense Finance expenses 2009 (152) (152) 2008 (59) (59)
15. Other operating income

In thousands of denars Penalty charged Income from installation and maintenance of mini links Income from own product used Income from FGSM Rental income Gain on disposal of property plant and equipment Extinguishment of liabilities Re-branding income Other 2009 146,683 37,307 33,444 25,750 25,283 16,301 182 10,472 295,422 2008 79,995 34,697 23,025 29,823 13,430 12,015 498 3,495 11,297 208,275
18. Finance income

In thousands of denars Interest income Net foreign exchange transaction gain Finance income 2009 127,144 32,679 159,823 2008 138,600 17,288 155,888
Interest income is generated from financial assets classified as loans and receivables.
19. Income tax expense

Reconciliation of effective tax rate In thousands of denars Profit before tax Income tax Non-deductible expenses Tax incentives not recognised in the income statement 0.0% 2.2% (0.2%) 2.0% 2009 4,102,457 2008 4,914,351
20. Disclosures of financial assets and liabilities

Categorisation of financial assets and liabilities Financial assets The table below shows the categorisation of financial assets as at 31 December 2008: Assets (in thousands of denars) Financial assets Carrying Loans and amount 2008 receivables 581,744 3,234,395 1,471,456 305 5,287,900 581,744 3,234,395 1,471,456 305 5,287,900
- 10.0% 491,435 91,530 1.5% 70,182 (8,204) (0.1%) (2,580) 83,326 11.4% 559,037
Fair value 2008 581,744 3,234,395 1,471,456 305 5,287,900
Commencing from 1 January 2009 The Government of Republic of Macedonia has introduced several modifications and changes in the Profit Tax Law. According these changes the base for computation of profit tax are non-deductible expenses incurred during the fiscal year. In addition, the profit tax shall apply at the moment of the distribution of the profits in a form of dividends. Subsequently, as long as the undistributed profits are retained within the company the profit tax would not be applied (see note 2.15). Up to the date of approval of these financial statements, the tax authorities carried out a full-scope tax audit at the Company for 2001 and 2002. No issues have been identified in the performed tax audits. The tax authorities may at any time inspect the books and records within 5 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. In a case of tax evasion or tax fraud the statute of limitations may be extended up to 10 years. The Companys management is not aware of any circumstances, which may give rise to a potential material liability in this respect other than those provided for in these financial statements. The Government enacted new income tax rates on 30 December 2006 for 2007 and 2008. The applicable tax rate for 2008 and the years after is 10%.
Cash and cash equivalents Bank deposits with original maturity over 3 months Trade and other receivables Other non-current financial assets Total
The table below shows the categorisation of financial assets as at 31 December 2009: Assets (in thousands of denars) Financial assets Carrying Loans and receivables amount 2009 1,390,715 1,533,209 1,342,118 305 4,266,347 1,390,715 1,533,209 1,342,118
Fair value 2009 1,390,715 1,533,209 1,342,118
Cash and cash equivalents Bank deposits with original maturity over 3 months Trade and other receivables Other non-current financial assets Total
305 305 4,266,347 4,266,347
All financial instruments are recognised initially at fair value. Cash and cash equivalents, trade receivables, other current financial assets and loans to related parties mainly have short times to maturity. For this reason, their carrying amounts at the reporting date approximate the fair values.
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21. Commitments
Capital commitments The amount authorized for capital expenditure as at 31 December 2009 was MKD 62,420 thousand (2008: MKD 76,686 thousand). Operating lease commitments where the Company is the lessee Operating lease commitments were mainly in respect in the lease of buildings, business premises, and locations for base telecommunication stations and other telecommunications facilities. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: In thousands of denars Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years 2009 87,375 243,358 116,774 447,507 2008 72,271 229,428 82,954 384,653 The receivables and payables with the Companys related parties are as follows: In thousands of denars 2009 2008 Receivables Payables Receivables Payables 191,074 (1,947) (962) (1,283) 2,879 (125) (129) (500) (2,077) (758) (3,695) (21,675) (391) 337 (214) 655 (12) 161,177 159,848 3,733 15,978 (3,512) (461) (6,558) (89) (85) (211) 1,324 1,457 (1) (546) (867) 1,233 (210) (852) (270) (147) 180 140 612 170,696 176,772 128,234 -
22. Contingencies
The Company has contingent liabilities in respect to routine legal proceedings arising in the ordinary course of business. Out of the total contingent liabilities, MKD 978,661 thousand relate to legal case with Newsphone S DOO Skopje for possible damage compensation with regards to lost future profits as a result of termination of contract by the Company. Also, the other major contingent liability relates to invoices issued from Agency for Electronic Communication for surcharge on radiofrequency fee for 2004 and 2005 in the amount of MKD 150,790 thousand or MKD 177,932 thousand including VAT. Based on legal advice, the Management of the Company expects that it is not probable that an outflow of resources embodying economic benefits will be required to settle these obligations.
Parent Company Makedonski Telekom AD Ultimate Parent Company Deutsche Telekom Subsidiaries of Ultimate Parent Company Magyar Telekom IQSYS Magyar Telekom T-Mobile Crna Gora T-Mobile Hungary T-Mobile Croatia T-Mobile Slovakia PTC Poland T-Mobile Czech Republic T-Mobile Germany T-Mobile Austria T-Mobile UK T-Mobile USA T-Mobile International T-Systems T-Mobile Netherlands AMC Albanian OTE Cosmo Bulgaria OTE Cosmote S.A OTE Cosmote Romania OTE International UK Detecon
6,148 - 10,901 (288) (1,920) 381 814 (4,153) (8,695) 58 168 232 39 574 141 6,890 4,965 2,246 3,511 547 223 479 1,491 (25,452) (15,372) 709 1,607 863 810 160,648 132,275
23. Related party transactions

All transactions with related parties arise in the normal course of business and their value is not materially different from the terms and conditions that would prevail in arms-length transactions. Transactions with related parties Transactions with related parties include provision and supply of telecommunication services and equipment, loans granted and supply of consultancy services. The amounts receivable and payable are disclosed in the appropriate notes (see notes 7 and 11).
The revenues and expenses with the Companys related parties are as follows: In thousands of denars 2009 Revenues Expenses 984,022 902 4,740 18,575 1,179 1,697 2,126 37,314 16,768 2,187 8,406 (21,675) 5,561 2,974 1,909 6,382 59 1,073,126 677,060 2008 Revenues Expenses 1,151,977 749,581 6,148 3,137 11,392 4,587 18,228 914 1,542 3,493 29,008 14,267 4,137 1,478 7,853 (11,040) 2,321 2,707 849,753
The remuneration of the members of the Companys Board of Directors for the 2009 amounted to MKD 6,345 thousand (2008: MKD 6,238 thousand) included in short-term employee benefits. These are included in other operating expenses (refer note 16). In order to maintain consistency with current year presentation, for 2008, we have added state contribution on short-term employee benefits in the total key management compensation. The share-based payments represent compensation of key management from the Parent Company as part of a Mid Term Incentive Plan (MTIP) launched in 2004 by Magyar Telekom Plc., whereby the targets to be achieved are based on the performance of the Magyar Telekom Plc. share. Participants include top and senior managers of the Magyar Telekom Group. The MTIP is operated by Magyar Telekom Plc. while the compensation of key management from the Parent Company related to the MTIP is incurred by the Parent Company and is included in personal expenses recognized against Other provisions.
Parent Company Makedonski Telekom AD Subsidiaries of Ultimate Parent Company Magyar Telekom Telemakedonija T-Mobile Crna Gora T-Mobile Hungary T-Mobile Croatia T-Mobile Slovakia PTC Poland T-Mobile Czech Republic T-Mobile Germany T-Mobile Austria T-Mobile UK TULIP T-Mobile USA T-Mobile International T-Systems T-Mobile Netherlands AMC Albanian OTE Cosmo Bulgaria OTE Cosmote S.A OTE Cosmote Romania OTE International UK Detecon
7,747 6,793 1,939 4,477 5,485 16,189 12,182 920 1,154 1,193 1,312 2,690 2,004 47,442 33,108 13,783 20,886 2,369 2,978 1,090 5,445 12,174 5,865 (25,452) 2,678 3,734 4,495 3,533 1,672 6,336 613 1,004 4,894 816,437 1,225,332
24. Events after financial statement date

No material transactions have occurred after financial statement date which requires disclosure in these financial statements.
Key management compensation The compensation of key management from the Company, including taxation charges and contributions, is presented below: In thousands of denars Short-term employee benefits (including taxation) State contributions on short-term employee benefits Termination benefits Share-based payments 2009 63,370 2,250 12,604 1,008 79,232 2008 55,700 15,170 3,516 74,386
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00 01

T-Mobile Macedonia AD Skopje Financial Statements

T-Mobile Macedonia AD Skopje Financial statements

Consolidated financial statements

T-Mobile Macedonia AD Skopje Financial statements

Cash flows statement

T-Mobile Macedonia AD Skopje Financial statements

Statement of changes in equity

Notes to the financial statements

1. General Information 1.1. About the Company

T-Mobile Macedonia AD Skopje Financial statements

In entering into these contracts and appro-

As previously disclosed, there is evidence

The Final Report states that the Investigati

Between 2000 and 2006 a small group of

The evidence shows that, contrary to their

1.2.2. Accounting implications of the findings of the Investigation

2. Significant accounting policies

Notes to the financial statements

2.1. Basis of preparation

2.3. Financial instruments

2.3.1. Financial assets

2.2. Foreign currency translations 2.2.1. Functional and presentation currency

2.2.2. Transactions and balances

1 EUR 1 USD 1 CHF

T-Mobile Macedonia AD Skopje Financial statements

Notes to the financial statements

2.3.2. Financial liabilities

2.5. Property, plant and equipment (PPE)

T-Mobile Macedonia AD Skopje Financial statements

2.8. Provisions and contingent liabilities

Software and licences 3G Licence and 2G 1800 MHz Licence

2.9. Share capital

2.10. Statutory reserves

2.7. Impairment of property, plant and equipment and intangible assets

Notes to the financial statements

2.13.3. Termination benefits

2.14. Marketing expenses

2.15. Corporate Income tax

2.13.2. Bonus plans

T-Mobile Macedonia AD Skopje Financial statements

2.18. Comparative information

3. Financial risk management 3.1. Financial risk factors

3.1.1. Market risk

3.1.2. Credit risk

Notes to the financial statements

To deposit in banks (Deutsche Telekom core banks, if possible) with

3.1.3. Liquidity risk

3.2. Capital risk management

T-Mobile Macedonia AD Skopje Financial statements

4.4. Subscriber acquisition costs

3.3. Fair value estimation

4. Critical Accounting Estimates and Judgments

5. Cash and cash equivalents

4.2. Estimated impairment of trade and other receivables

Notes to the financial statements

7. Trade and other receivables

6. Deposits with banks

T-Mobile Macedonia AD Skopje Financial statements

In thousands of denars Group 1 Group 2 Group 3